Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.
 

 1. 

The overriding criterion by which accounting information can be judged is that of

a. usefulness for decision making.
b. freedom from bias.
c. timeliness.
d. comparability.

ANSWER: A
POINTS:  1 / 1
 

 2. 

Accounting information is considered to be relevant when it

a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

ANSWER: B
POINTS:  0 / 1
 

 3. 
The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful
representation is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.

ANSWER: B
POINTS:  1 / 1
 

 4. 

According to Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance
and reliability?
a. Materiality
b. Understandability
c. Usefulness
d. All of these

ANSWER: D
POINTS:  0 / 1
 

 5. 

According to Statement of Financial Accounting Concepts No. 2,timeliness is an ingredient of the primary quality
of
       Relevance        Reliability
a. Yes                Yes
b. No                 Yes
c. Yes                No
d. No                 No

ANSWER: C
POINTS:  0 / 1
 

 6. 

According to Statement of Financial Accounting Concepts No. 2, verifiability is an ingredient of the primary
quality of

       Relevance        Reliability

a. Yes                No
b. Yes                Yes
c. No                 No
d. No                 Yes

ANSWER: D
POINTS:  0 / 1
 

 7. 
According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the primary quality
of

       Relevance      Reliability

a. Yes                Yes
b. No                 Yes
c. Yes                No
d. No                 No

ANSWER: B
POINTS:  1 / 1
 

 8. 

Information is neutral if it
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time.
c. would have no impact on a decision maker.
d. is free from bias toward a predetermined result.

ANSWER: D
POINTS:  0 / 1
 

 9. 

The characteristic that is demonstrated when a high degree of consensus can be secured among independent
measurers using the same measurement methods is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.

ANSWER: C
POINTS:  1 / 1
 

 10. 

According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of the primary
quality of

       Relevance     Reliability

a. Yes                No
b. Yes                Yes
c. No                 No
d. No                 Yes

ANSWER: A
POINTS:  0 / 1
 

 11. 

Under Statement of Financial Accounting Concepts No. 2,representational faithfulness is an ingredient of the
primary quality of
      Reliability       Relevance
a. Yes                Yes
b. No                 Yes
c. Yes                No
d. No                 No

ANSWER: C
POINTS:  0 / 1
 

 12. 

Financial information does not demonstrate consistency when

a. firms in the same industry use different accounting methods to account for the same type of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the value of the measuring unit.
d. a company changes its inventory method every few years in order to maximize reported income.

ANSWER: D
POINTS:  0 / 1
 

 13. 

Financial information exhibits the characteristic of consistency when

a. expenses are reported as charges against revenue in the period in which they are paid.
b. accounting entities give accountable events the same accounting treatment from period to period.
c. extraordinary gains and losses are not included on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.

ANSWER: B
POINTS:  0 / 1
 

 14. 

Information about different entities and about different periods of the same entity can be prepared and presented in
a similar manner. Comparability and consistency are related to which of these objectives?

    Comparability   Consistency

a. Entities       Entities
b. Entities       Periods
c. Periods        Entities
d. Periods        Periods

ANSWER: B
POINTS:  0 / 1
 

 15. 

When information about two different enterprises has been prepared and presented in a similar manner, the
information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency.
d. comparability.
ANSWER: D
POINTS:  0 / 1
 

 16. 

In classifying the elements of financial statements, the primary distinction between revenues and gains is
a. the materiality of the amounts involved.
b. the likelihood that the transactions involved will recur in the future.
c. the nature of the activities that gave rise to the transactions involved.
d. the costs versus the benefits of the alternative methods of disclosing the transactions involved.

ANSWER: C
POINTS:  0 / 1
 

 17. 

The elements of financial statements include investments by owners. These are increases in an entity's net assets
resulting from owners'
a. transfers of assets to the entity.
b. rendering services to the entity.
c. satisfaction of liabilities of the entity.
d. all of these.

ANSWER: D
POINTS:  0 / 1
 
 18. 

A decrease in net assets arising from peripheral or incidental transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.

ANSWER: C
POINTS:  0 / 1
 

 19. 

One of the elements of financial statements is comprehensive income. As described in Statement of Financial
Accounting Concepts No. 6,"Elements of Financial Statements," comprehensive income is equal to
a. revenues minus expenses plus gains minus losses.
b. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to
owners.
c. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to
owners plus assets minus liabilities.
d. change in equity of an entity during a period from transactions and other events and circumstances from
nonowner sources.

ANSWER: D
POINTS:  0 / 1
 
 20. 

Which of the following elements of financial statements is not a component of comprehensive income?
a. Revenues
b. Distributions to owners
c. Losses
d. Expenses

ANSWER: B
POINTS:  0 / 1
 

 21. 

The economic entity assumption

a. is inapplicable to unincorporated businesses.
b. recognizes the legal aspects of business organizations.
c. requires periodic income measurement.
d. is applicable to all forms of business organizations.

ANSWER: D
POINTS:  0 / 1
 

 22. 

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance
with which basic accounting concept?
a. Cost/benefit constraint
b. Periodicity assumption
c. Conservatism constraint
d. Matching principle

ANSWER: B
POINTS:  0 / 1
 

 23. 

What accounting concept justifies the usage of accruals and deferrals?

a. Going concern assumption
b. Materiality constraint
c. Consistency characteristic
d. Monetary unit assumption

ANSWER: A
POINTS:  0 / 1
 

 24. 

The assumption that a business enterprise will not be sold or liquidated in the near future is known as the
a. economic entity assumption.
b. monetary unit assumption.
c. conservatism assumption.
d. going concern assumption.

ANSWER: D
POINTS:  0 / 1
 

 25. 

Which of the following is an implication of the going concern assumption?

a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and significant.
d. All of these.

ANSWER: D
POINTS:  0 / 1
 

 26. 

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general
purpose financial reporting, statements prepared using historical costs are more
a. reliable.
b. relevant.
c. indicative of the entity's purchasing power.
d. conservative.

ANSWER: A
POINTS:  0 / 1
 

 27. 
Valuing assets at their liquidation values rather than their cost is inconsistent with the
a. periodicity assumption.
b. matching principle.
c. materiality constraint.
d. historical cost principle.

ANSWER: D
POINTS:  0 / 1
 

 28. 

Revenue is generally recognized when realized or realizable and earned. This statement describes the
a. consistency characteristic.
b. matching principle.
c. revenue recognition principle.
d. relevance characteristic.

ANSWER: C
POINTS:  1 / 1
 

 29. 

Generally, revenue from sales should be recognized at a point when

a. management decides it is appropriate to do so.
b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer and there remains no further warranty
liability.
d. An exchange has taken place and the earnings process is complete or virtually complete.

ANSWER: D
POINTS:  0 / 1
 

 30. 

Revenue generally should be recognized

a. at the end of production.
b. at the time of cash collection.
c. when realized.
d. when realized or realizable and earned.

ANSWER: D
POINTS:  0 / 1
 

 31. 

"When products (goods or services), merchandise, or other assets are changed for cash or claims to cash" is a
definition of
a. allocated.
b. realized.
c. realizable.
d. earned.

ANSWER: B
POINTS:  0 / 1
 

 32. 

The accounting principle of matching is best demonstrated by

a. not recognizing any expense unless some revenue is realized.
b. associating effort (expense) with accomplishment (revenue).
c. recognizing prepaid rent received as revenue.
d. establishing an Appropriation for Contingencies account.

ANSWER: B
POINTS:  0 / 1
 

 33. 

Which of the following serves as the justification for the periodic recording of depreciation expense?
a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability

ANSWER: B
POINTS:  0 / 1
 

 34. 

Application of the full disclosure principle

a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b. is violated when important financial information is buried in the notes to the financial statements.
c. is demonstrated by the use of supplementary information presenting the effects of changing prices.
d. requires that the financial statements be consistent and comparable.

ANSWER: C
POINTS:  0 / 1
 

 35. 

Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and
reliability?
a. Cost-benefit constraint
b. Predictive value
c. Verifiability
d. Representational faithfulness

ANSWER: A
POINTS:  0 / 1
 

 36. 

Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when
purchased is an example of the application of the
a. consistency characteristic.
b. matching principle.
c. materiality constraint.
d. historical cost principle.

ANSWER: C
POINTS:  0 / 1
 

 37. 

Which of the following statements about materiality is NOT correct?

a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable
person.
d. All of these are correct statements about materiality.

ANSWER: D
POINTS:  0 / 1
 

 38. 

Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No.
2?
a. Cost-benefit relationship and conservatism
b. Timeliness and feedback value
c. Conservatism and verifiability
d. Materiality and cost-benefit relationship

ANSWER: D
POINTS:  0 / 1
 

 39. 

The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of
understating assets and revenues and overstating liabilities and expenses is known as the
a. conservatism constraint.
b. materiality constraint.
c. substance over form principle.
d. industry practices constraint.

ANSWER: A
POINTS:  0 / 1
 

 40. 

Which of the following best illustrates the accounting concept of conservatism?

a. Use of the allowance method to recognize bad debt losses from credit sales
b. Use of the lower-of-cost-or-market approach in valuing inventories.
c. Use of the same accounting method from one period to the next in computing depreciation expense
d. Utilization of a policy of deliberate understatement of asset values in order to present a conservative net
income figure

ANSWER: B
POINTS:  0 / 1
 

 41. 

Trade-offs between the characteristics that make information useful may be necessary or beneficial.  Issuance of
interim financial statements is an example of a trade-off between
a. relevance and reliability.
b. reliability and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.

ANSWER: A
POINTS:  0 / 1
 

 42. 

Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a
trade-off between
a. verifiability and reliability.
b. relevance and comparability.
c. timeliness and verifiability.
d. neutrality and consistency.

ANSWER: C
POINTS:  0 / 1
 

 43. 
According to the FASB's conceptual framework, predictive value is an ingredient of
    
   Relevance    Reliability
a. Yes           No
b. Yes           Yes
c. No            Yes
d. No            No

ANSWER: A
POINTS:  0 / 1
 

 44. 

According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an
entity is
a. recognition.
b. realization.
c. allocation.
d. matching.

ANSWER: A
POINTS:  0 / 1
 

 45. 
According to the FASB's conceptual framework, which of the following relates to both relevance and reliability?

     Consistency     Verifiability

a. Yes              Yes
b. Yes              No
c. No               Yes
d. No               No

ANSWER: B

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 1. 

Carlton Co. manufactures equipment that is sold or leased. On December 31, 20X1, Carlton leased equipment to
Acme for a five-year period ending December 31, 20X6, at which date ownership of the leased asset will be
transferred to Acme. Equal payments under the lease are $66,000 (including $6,000 executory costs) and are due
on December 31 of each year. The first payment was made on December 31, 20X1. Collectibility of the remaining
lease payments is reasonably assured, and Carlton has no material cost uncertainties. The normal sales price of the
equipment is $231,000, and cost is $180,000. For the year ended December 31, 20X1, what amount of income
should Carlton realize from the lease transaction?
a. $51,000.
b. $66,000.
c. $69,000.
d. $99,000.

ANSWER: A
 

 2. 

In a lease that is recorded as a sales-type lease by the lessor, interest revenue

a. should be recognized in full as revenue at the lease's inception.
b. should be recognized over the period of the lease using the straight-line method.
c. should be recognized over the period of the lease using the effective interest method.
d. does NOT arise.

ANSWER: C
 

 3. 

On January 2, 20X1, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease
stipulated annual payments of $70,000 starting at the end of the first year, with title passing to Hernandez at the
expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful
life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. 
Aggregate lease payments were determined to have a present value of $420,000, based on implicit interest of 10%.

In its 20X1 income statement, what amount of depreciation expense should Hernandez report from this lease
transaction?
a. $70,000.
b. $46,667.
c. $42,000.
d. $28,000.

ANSWER: D
 

 4. 

On December 31, 20X1, Sanford, Inc. leased machinery with a fair value of $420,000 from Cey Rentals Co.  The
agreement is a six-year  noncancelable lease requiring annual payments of $80,000 beginning  December 31,
20X1. The lease is appropriately accounted for by   Sanford as a capital lease. Sanford's incremental borrowing rate
is 11%. Sanford knows the interest rate implicit in the lease payments  is 10%.    
The present value of an annuity due of 1 for 6 years at            10% is 4.7908.  
The present value of an annuity due of 1 for 6 years at            11% is 4.6959.    

In its December 31, 20X1 balance sheet, Sanford should report a  lease liability of
a. $303,264.
b. $340,000.
c. $375,672.
d. $383,264.

ANSWER: A
 

 5. 
A lessee had a ten-year capital lease requiring equal annual  payments.  The reduction of the lease liability in year 2
should  equal
a. the current liability shown for the lease at the end of year 1.
b. the current liability shown for the lease at the end of year 2.
c. the reduction of the lease obligation in year 1.
d. one-tenth of the original lease liability.

ANSWER: A
 

 6. 

Included in Stoner Corp.'s liability account balances at  December 31, 20X1, were the following:
    
     14% note payable issued October 1, 20X1, maturing
        September 30, 20X2                                   $250,000
  16% note payable issued April 1, 20X1, payable in
        six equal annual installments of $100,000
        beginning April 1, 20X2                               600,000
    
  Stoner's December 31, 20X1 financial statements were issued on March  31, 20X2. On January 15, 20X2, the
entire $600,000 balance of the  16% note was refinanced by issuance of a long-term obligation  payable in a lump
sum. In addition, on March 10, 20X2, Stoner  consummated a noncancelable agreement with the lender to
refinance  the 14%, $250,000 note on a long-term basis, on readily determinable  terms that have not yet been
implemented. On the December 31, 20X1  balance sheet, the amount of the notes payable that Stoner should 
classify as short-term obligations is
a. $350,000.
b. $250,000.
c. $100,000.
d. $0.

ANSWER: D
 

 7. 

On December 31, 20X1, Gant Co. has $4,000,000 of short-term notes  payable due on February 14, 20X2.  On
January 10, 20X2, Gant  arranged a line of credit with County Bank which allows Gant to  borrow up to
$3,000,000 at one percent above the prime rate for  three years.  On February 2, 20X2, Gant borrowed $2,400,000
from  County Bank and used $1,000,000 additional cash to liquidate  $3,400,000 of the short-term notes payable. 
The amount of the  short-term notes payable that should be reported as current  liabilities on the December 31,
20X1 balance sheet which is issued  on March 5, 20X2 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.

ANSWER: D
 

 8. 

Deltoid Corp. signed a three-month, zero-interest-bearing note on  November 1, 20X1 for the purchase of $40,000
of inventory. The face  value of the note was $40,588. Assuming Deltoid used a "Discount on  Note Payable"
account to initially record the note and that the  discount will be amortized equally over the three-month period,
the  adjusting entry made at December 31, 20X1 will include a
a. debit to Discount on Note Payable for $196.
b. debit to Interest Expense for $392.
c. credit to Discount on Note Payable for $196.
d. credit to Interest Expense for $392.

ANSWER: B
 

 9. 

If a corporation purchases a lot and building and subsequently tears  down the building and uses the property as a
parking lot, the proper  accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in  relation to the combined cost of the
lot and building.
b. the length of time for which the building was held prior to its  demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building  was acquired.

ANSWER: D
 

 10. 

Which of the following statements is correct?

a. A company may exclude a short-term obligation from current  liabilities if the firm intends
 to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current  liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off
after the balance sheet date and subsequently replaced by long-term debt before the
balance sheet  is issued.
d. None of these.

ANSWER: D
 

 11. 

Cotton Hotel Corporation recently purchased Holiday Hotel and the  land on which it is located with the plan to
tear down the Holiday  Hotel and build a new luxury hotel on the site.  The cost of the  Holiday Hotel should be
a. depreciated over the period from acquisition to the date the  hotel is scheduled to be torn
down.
b. written off as an extraordinary loss in the year the hotel is  torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.

ANSWER: C
 

 12. 
Which of the following assets do NOT qualify for capitalization of  interest costs incurred during construction of
the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete  projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to  prepare them for their intended
use.

ANSWER: D
 

 13. 

Which of these is NOT a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.

ANSWER: D
 

 14. 

When computing the amount of interest cost to be capitalized, the  concept of "avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been in-  curred if expenditures for
asset construction had not been made.
d. that portion of average accumulated expenditures on which no  interest cost was incurred.

ANSWER: C
 

 15. 

The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended  use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have begun.

ANSWER: A
 

 16. 

Which of the following statements is true regarding capitalization  of interest?

a. Interest cost capitalized in connection with the purchase of land  to be used as a building
site should be debited to the land  account and not to the building account.
b. The amount of interest cost capitalized during the period should  not exceed the actual
interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are temporarily
invested, any interest earned should be  offset against interest cost incurred when
 determining the amount  of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by  multiplying a
weighted average interest rate by the amount of  average accumulated expenditures on
qualifying assets during the  period.

ANSWER: B
 

 17. 

When funds are borrowed to pay for construction of assets that  qualify for capitalization of interest, the excess
funds not needed  to pay for construction may be temporarily invested in interest-  bearing securities.  Interest
earned on these temporary investments  should be
a. offset against interest cost incurred during construction.
b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the  amount of interest to be
capitalized.
d. recognized as revenue of the period.

ANSWER: D
 

 18. 

For a nonmonetary exchange of plant assets, accounting recognition  should NOT be given to
a. a loss when the transaction is deemed to have economic substance.
b. a gain when the transaction is deemed to have economic substance.
c. a loss when the transaction is deemed not to have economic substance.
d. part of a loss when the transaction is deemed to have economic substance and cash is given
up.

ANSWER: C
 

 19. 

During 2001, Elston Co. incurred average accumulated expenditures of  $300,000 during construction of assets that
qualified for capitali-  zation of interest.  The only debt outstanding during 2001 was a  $400,000, 10%, 5-year note
payable dated January 1, 1999.  What is  the amount of interest that should be capitalized by Elston during  2001?
a. $0.
b. $10,000.
c. $30,000.
d. $40,000.

ANSWER: C
 

 20. 

During 20X1, Allen Corporation constructed assets costing $500,000. The weighted-average accumulated
expenditures on these assets during 20X1 was $300,000.  To help pay for construction, $220,000 was borrowed at
10% on January 1, 20X1, and funds not needed for construction were temporarily invested in short-term securities,
yielding $4,500 in interest revenue.  Other than the construction   funds borrowed, the only other debt outstanding
during the year was a $250,000, 10-year, 9% note payable dated January 1, 1995.  What is the amount of interest
that should be capitalized by Allen during  20X1?
a. $30,000.
b. $15,000.
c. $29,200.
d. $47,200.

ANSWER: C
 

 21. 

Pitt Co. exchanged similar nonmonetary assets with Young Co. No cash was exchanged. The carrying amount of
the asset surrendered by Pitt exceeded both the fair value of the asset received and Young's  carrying amount of
that asset.  Pitt should recognize the difference between the carrying amount of the asset it surrendered and
a. the fair value of the asset it received as a loss.
b. the fair value of the asset it received as a gain.
c. Young's carrying amount of the asset it received as a loss.
d. Young's carrying amount of the asset it received as a gain.

ANSWER: A
 

 22. 

Net realizable value is

a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.

ANSWER: D
 

 23. 

Fisher Company exchanged 500 shares of Dolan Company common stock, which Fisher was holding as an
investment, for equipment from West Company.  The Dolan Company common stock, which had been purchased
by Fisher for $50 per share, had a quoted market value of $58 per share at the date of exchange.  The equipment
had a recorded amount on West's books of $26,500.  What journal entry should Fisher make to record this
exchange?
a. Equipment .................................    25,000
           Investment in Dolan Co. Common Stock ...   
25,000
b. Equipment .................................    26,500
           Investment in Dolan Co. Common Stock ...   
25,000
           Gain on Disposal of Investment .........    
1,500
c. Equipment .................................    26,500
Loss on Disposal of Investment ............     2,500
           Investment in Dolan Co. Common Stock ...   
29,000
d. Equipment .................................    29,000
           Investment in Dolan Co. Common Stock ...   
 25,000
           Gain on Disposal of Investment .........    
4,000

ANSWER: D
 

 24. 

When an investment in an available-for-sale security is transferred to trading because the company anticipates 
selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading
portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.

ANSWER: B
 

 25. 

In a period of rising prices, the inventory method which tends to give the highest reported inventory is
a. FIFO.
b. moving average.
c. LIFO.
d. weighted-average.
ANSWER: A
 

 26. 

APB OPINION NO. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the
a. effective interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective interest method of allocation should be used but other  methods can be applied if
there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.

ANSWER: C
 

 27. 

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following
statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless
circumstances indicate that it is unable to exercise "significant influence" over the
investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to
exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
ANSWER: B
 

 28. 

Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. 
Byner Corporation should ordinarily record a cash dividend received from Yount as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.

ANSWER: A
 

 29. 

Sloan Company's trading securities portfolio which is appropriately included in current assets is as follows:
 
                            December 31, 20X1
                                      Fair      Unrealized
                        Cost          Value     Gain (Loss)
      Arlington Corp.  $260,000     $210,000     $(50,000)
      Downs, Inc.      245,000     265,000       20,000
                       $505,000     $475,000     $(30,000)
   
Ignoring income taxes, what amount should be reported as a charge against income in Sloan's 20X1 income
statement if 20X1 is Sloan's first year of operation?
a. $0.
b. $20,000.
c. $30,000.
d. $50,000.

ANSWER: C
 

 30. 

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the
period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial   statements.

ANSWER: D
 
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

    
 1. 

On April 1, 20X9, Ward Corp. issued $750,000 of 10% nonconvertible bonds at 102 that are due in 10 years.  Each
$1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase one
share of Ward $10 par common stock for $25.  On April 1, 20X9, the market value of each warrant was $4.  What
amount of the proceeds from the bond issue should Ward record as an increase in stockholders' equity?
a. $ 15,000
b. $120,000
c. $300,000
d. $750,000

ANSWER: B
POINTS:  0 / 1
 

    

 2. 

On April 1, 20X9, Willard Corp. issued $750,000 of 10% nonconvertible bonds at 102 that are due ten years later. 
Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase
one share of Willard $10 par common stock for $25.  On April 1, 20X9, the market value of the warrants was
$64,000 and the market value of the bonds was $736,000. .  What amount of the proceeds from the bond issue
should Willard record as a bond liability?
a. $ 61,200
b. $ 703,800
c. $ 750,000
d. $ 765,000
ANSWER: B
POINTS:  0 / 1
 

    

 3. 

The following information relates to the 20X7 activity of the defined benefit pension plan of Lepto Corp., a
company whose stock is publicly traded:

Service cost   $150,000

Actual Return on plan assets   40,000
Unexpected gain on plan assets   5,000
Interest cost on projected benefit obligation   82,000
Amortization of experience (actuarial) gain   15,000
Amortization of prior service cost   35,000

Lepto’s 20X7 pension cost is

a. $322,000
b. $287,000
c. $242,000
d. $217,000

ANSWER: D
POINTS:  0 / 1
 
     

 4. 

Johnson Corp., a company whose stock is publicly traded, provides a noncontributory defined benefit pension plan
for its employees.  The company's actuary has provided the following information  20X8:

Projected benefit obligation, January 1   $400,000

Accumulated benefit obligation, January 1   350,000
Plan assets (fair value) January 1   300,000
Service cost for x0X8   120,000
Settlement rate   10%
Expected return on plan assets   8%
Amortization of prior service cost   15,000
                                   
The market-related asset value equals the fair value of plan assets. In its  20X8 income statement, Johnson should
report  pension expense of
a. $151,000
b. $199,000
c. $121,000
d. $  89,000

ANSWER: A
POINTS:  0 / 1
 

    
 5. 

In 1995, May Corp. acquired land by paying $75,000 down and signing a note with a maturity value of
$1,000,000.  On the note's due date, December 31, 2000, May owed $40,000 of accrued interest and $1,000,000
principal on the note.  May was in financial difficulty and was unable to make any payments.  May and the bank
agreed to amend the note as follows:

*The $40,000 of interest due on December 31, 2000, was forgiven.

*The principal of the note was reduced from $1,000,000 to $950,000 and the maturity date extended 1 years to
December 31, 20X1.

*May would be required to make one interest payment totaling $30,000 on December 31, 20X1.

As a result of the troubled debt restructuring, May should report a gain, before taxes, in its 2000 income statement
of
a. $40,000
b. $50,000
c. $60,000
d. $90,000

ANSWER: C
POINTS:  0 / 1
 

    

 6. 
On December 31, 20X6, Evan Company leased a machine from Ryan for a ten-year period expiring December 30,
20X6.  Equal annual payments under the lease are $100,000 and are due on December 31 of each year. The first
payment was made on December 31,20X6, and the second payment was made on December 31, 20X7.  The
present value at December 31, 20X6, of the ten lease payments over the lease term discounted at 10% was
$676,000.  The lease is appropriately accounted for as a capital lease by Evan.  In its December 31, 20X7 balance
sheet, Evan should report a total lease liability of
a. $800,000
b. $643,600
c. $533,600
d. $518,400

ANSWER: C
POINTS:  0 / 1
 

    

 7. 

Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand.  The machine's original
cost was $140,000.  The note's face amount was $110,000.  On the date of the agreement:

- The note's carrying amount was $105,000, and its present value was $96,000.
- The machine's carrying amount was $109,000, and its fair value was $96,000.

What amount of gains (losses) should Nu recognize, and how should these be classified in its income statement?

Gain on troubled   
Debt restructuring    Other
a.     $(4,000)                $ 0
b.     $ 0                   $( 4,000)
c.     $ 5,000            $( 4,000)
d.     $ 9,000           $(13,000)

ANSWER: D
POINTS:  0 / 1
 

    

 8. 

On January l, 20X9, Day Corp. entered into a l0-year lease agreement with Ward, Inc. for industrial equipment. 
Annual lease payments of $l0,000 are payable at the end of each year.  Day knows that the lessor expects a l0%
return on the lease.  Day has a l2% incremental borrowing rate.  The equipment is expected to have an estimated
useful life of l0 years.  In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of
the lease.

The present value of an ordinary annuity of $l at

l2% for l0 years is 5.6502

l0% for l0 years is 6.l446

The present value of $l at

l2% for l0 years is .3220

l0% for l0 years is .3855

In Day's October 3l, 20X9 balance sheet, the principal amount of the lease obligation was
a. $63,374
b. $61,446
c. $58,112
d. $56,502

ANSWER: B
POINTS:  0 / 1
 

    

 9. 

A safety hazard exists for a manufacturing product.  Occurrence of the loss is reasonably possible and the amount
of the loss can be reasonably estimated.  This loss contingency should be

Accrued        Disclosed

a. Yes             Yes
b. Yes             No
c. No              Yes
d. No              No

ANSWER: C
POINTS:  0 / 1
 
     

 10. 

Which of the following components should be included in the calculation of net pension cost recognized for a
period by an employer sponsoring a defined benefit pension plan?

   Actual return        Amortization of

on plan assets,      unrecognized prior
     if any              service cost, if any
a.    No                    Yes
b.    No                    No
c.    Yes                   No
d.     Yes                   Yes

ANSWER: D
POINTS:  0 / 1
 

    

 11. 

The deferred method of tax allocation should be used for

Permanent           Temporary
differences          differences
a. Yes                      No
b. Yes                      Yes
c. No                       Yes
d. No                       No

ANSWER: D
POINTS:  0 / 1
 

    

 12. 

A development stage enterprise

a. Issues an income statement that is the same as an established operating enterprise, and shows cumulative
amounts from the   enterprise's inception as additional information.
b. Issues an income statement that is the same as an established operating enterprise, but does not show
cumulative amounts    from the enterprise's inception as additional information.
c. Issues an income statement that only shows cumulative amounts from the enterprise's inception.
d. Does not issue an income statement.

ANSWER: A
POINTS:  0 / 1
 

    

 13. 
When the occurrence of a gain contingency is probable and its amount can be reasonably estimated, the gain
contingency should be
a. Recognized in the income statement and disclosed.
b. Classified as an appropriation of retained earnings.
c. Disclosed, but not recognized in the income statement.
d. Neither recognized in the income statement nor disclosed.

ANSWER: C
POINTS:  0 / 1
 

    

 14. 

A company's accumulated depreciation for income tax purposes exceeded its accumulated depreciation for
financial statement purposes at December 31, 20X7.  the company's effective income tax rate has been forty
percent over the asset's life.  With respect to this item, which of the following should be reported in the December
31, 20X7, balance sheet?
a. The total amount of the excess as a current deferred income tax credit.
b. Forty percent of the excess as a current deferred income tax credit.
c. The total amount of the excess as a noncurrent deferred income tax credit.
d. Forty percent of the excess as a noncurrent deferred income tax credit.

ANSWER: D
POINTS:  0 / 1
 
     

 15. 

If the payment of employees' compensation for future absences is probable, the amount can be reasonably
estimated, and the obligation relates to rights that vest, the compensation should be
a. Recognized when paid.
b. Accrued if attributable to employees' services whether already rendered or not.
c. Accrued if attributable to employees' services already rendered.
d. Accrued if attributable to employees' services not already rendered.

ANSWER: C
POINTS:  0 / 1
 

    

 16. 

Temporary differences arise when expenses are deductible for tax purposes

After they are        Before they are

recognized in             recognized in
financial income       financial income
a. No                    No
b. No                    Yes
c. Yes                   Yes
d. Yes                   No

ANSWER: C
POINTS:  0 / 1
 
On January 1, 20X8, Kinder Co. has the following balances:

Projected benefit obligation $2,100,000

Fair value of plan assets 1,800,000

The settlement rate is 10%.  Other data related to the pension plan for 20X8 are:

Service cost $180,000

Amortization of unrecognized prior service costs 60,000
Contributions 300,000
Benefits paid 105,000
Actual return on plan assets 237,000
Amortization of unrecognized net gain 18,000
 

    

 17. 

Refer to Kinder data: The balance of the projected benefit obligation at December 31, 20X8 is
a. $2,685,000.
b. $2,385,000.
c. $2,355,000.
d. $2,337,000.
ANSWER: B
POINTS:  0 / 1
 

    

 18. 

The fair value of plan assets at December 31, 20Z8 is

a. $2,430,000.
b. $2,250,000.
c. $2,232,000.
d. $2,214,000.

ANSWER: C

Accounting 221
Exam 1 -- Fall 2003

Multiple Choice (10 points). Select the correct answer for each of the following multiple choice questions.

1. Assets may best be defined as:

a. Economic resources invested by the owners of a business.
b. Tangible economic resources of value.
c. Economic resources invested by the creditors of a business.
d. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or
events.
e. Probable future economic benefits obtained or controlled by a particular entity as the result of future transactions
or events.

2. Which of the following equations is NOT true?

a. Assets - Liabilities - Owners' Equity = Zero
b. Assets = Liabilities + Owners' Equity
c. Assets - Liabilities = Owners' Equity
d. Assets - Owners' Equity = Liabilities
e. Assets + Liabilities = Owners' Equity

3. Which of the following accounts is a liability?

a. Unearned rent revenue.
b. Accounts receivable.
c. Sales.
d. Treasury stock.
e. Retained earnings.

4. The two components of stockholders' equity on a balance sheet for a corporation are:
a. Liabilities and Capital Stock.
b. Assets and Retained Earnings.
c. Assets and Liabilities.
d. Capital Stock and Retained Earnings.
e. Liabilities and Retained Earnings.

5. Which of the following statements is FALSE?

a. Asset accounts are increased with debits.
b. Liability accounts are increased with credits.
c. Asset accounts are decreased with credits.
d. Owners' equity accounts are increased with credits.
e. Liability accounts are increased with debits.

Matching terms (8 points). Presented below are a number of events and practices that have developed over time.
Select the letter that identifies the term best describing the item. (A particular term will only be used once.)

Terms:

a. Conservatism g. Materiality
b. Cost-benefit h. Matching
c. Economic entity assumption i. Monetary unit assumption
d. Full disclosure j. Relevance
e. Going concern assumption k. Reliability
f. Historical cost l. Revenue recognition

Events and Practices:

_____ 6. A building purchased for $40,000 is recorded at that amount even though its tax appraisal is $35,000.

_____ 7. At Pizza King, knowing which employee assembles each pizza might provide useful information to
management. However, keeping track of this information is considered time consuming so it is not done.

_____ 8. The cost of manufacturing a product is reported as the expense "Cost of Goods Sold" in the period that
the product is sold, not in the period when the cash was paid.
_____ 9. Even though the company has not collected the cash from customers, it shows revenue on its financial
statements because it has delivered the goods to those customers.

_____ 10. Prediction of next month's cash needs calls for information such as last period's sales and the rate of
sales growth.

_____ 11. Accountants have a guideline to use whenever multiple allowable procedures exist. This guideline says,
"When in doubt choose the procedure that will be least likely to overstate assets and income."

_____ 12. Financial accountants prepare the statements assuming that the company will continue to operate in the
future.

_____ 13. Following this principle has lead to voluminous footnotes in annual reports.

14. (15 points). For each of the transactions below, indicate whether the event would change total assets, total
liabilities, or total owners' equity and in what direction. Use these abbreviations:

I - Increase
D - Decrease
U - Unchanged

TOTAL ASSETS - TOTAL LIABILITIES - TOTAL OWNERS' EQUITY

Example: Issued stock for cash ------- I- U -I
a. Borrowed money from the bank.
b. Purchased supplies on account.
c. Purchased equipment with cash.
d. Paid cash for items purchased last month.
e. Received cash for items sold last month.
15. (5 points). For each of the accounts listed below, indicate whether the account is an asset (A), liability (L),
owners' equity (OE), revenue (R), or expense (E).

________ a. Prepaid advertising

________ b. Retained earnings
________ c. Accounts payable
________ d. Cost of good sold
________ e. Equipment

16. Setting: (10 points). You are reviewing the annual report for General Electric, Inc. and want answers to the
questions listed below. Use the following key to indicate the most likely place to find answers to your questions.

Key:

A - Independent Auditor's Report

B - Balance Sheet
C - Statement of Cash Flows
I - Income Statement
N - Notes to the financial statements
R - Statement of Retained Earnings
O - Some other place in the Annual Report
X - Not found in the Annual Report

Some of the above categories may be used more than once and some may not be used at all. Occasionally, the
answer to your question may be found in more than one place. In that case either answer would be acceptable.
Questions:

1. What is the total owners' equity of General Electric Inc.?

2. What amount of dividends were declared during the year?

3. What was General Electric's income from operations for the year?

4. How have the retained earnings changed during the year?

5. The report that expresses whether the company's financial statements are in conformity with GAAP.

17. Stock (8 points). Investors who purchase common stock in a company expect to receive a return from that
investment.

a. List and briefly describe the two components of that expected return.

b. What is "secondary market" trading? Does the company receive money from these trades?

18. (8 points)
a. A particular set of financial statements does not provide adequate disclosure about a lawsuit pending against the
company. The most likely audit opinion would be:

b. The most favorable audit opinion is:

c. The audit firm believes the financial statements are not fairly presented. The type of opinion that it should issue
is a(n):

d. The auditor is unable to gather enough evidence to form an opinion. The auditor would issue a(n):

19. (4 points). Who was the person who wrote about double-entry accounting (and is considered the "father of
accounting")?

20. (6 points). Name the three forms of business organizations.

21. (6 points). Name 3 advantages that the computer lends to the accounting system.

22. (10 points). The Rose Company has the following account balances as of September 30, 2003:

ACCOUNT BALANCE
Accounts payable $ 8,000
Accounts receivable $ 6,000
Bonds payable $ 30,000
Buildings $ 50,000
Capital stock $ 50,000
Cash $ 12,000
Cost of goods sold $ 20,000
Inventory $ 7,500
Land $ 25,000
Retained earnings ?
Sales $ 45,000
Wage expense $ 10,000

REQUIRED: Prepare the classified balance sheet for the Rose Company (in good form).
 

Accounting 221
Exam 1 -- Answers

Multiple Choice.

1. D
2. E
3. A
4. D
5. E

Matching terms.

6. F
7. B
8. H
9. L
10. J
11. A
12. E
13. D

14.

a. I-I-U
b. I-I-U
 c. U-U-U
d. D-D-U
e. U-U-U

15.

a. A
b. OE
c. L
d. E
e. A

16.

1. B
2. C, R
3. I
4. R
5. A

17.

a. (1) Dividends - distribution of earnings and (2) Capital appreciation which is the increase in the value of
the stock held by the investor

b. Secondary market trading occurs when an owner of stock sells the stock to another investor

18.
 a. Qualified
b. Unqualified
c. Adverse
d. Disclaimer

19. Luca Pacioli

20. Sole proprietorship, partnership, corporation

21. (1) accuracy of processing, (2) speed of processing, (3) flexibility of processing

22.

The Rose Company

Balance Sheet

September 30, 2003

Curent Assets:

Cash $12,000

Accts Receivable 6,000

Inventory 7,500

Total Current Assets $25,500

Long-term assets

Buildings 50,000

Land 25,000 75,000

Total Assets $100,500

Current Liabilities

Acct Payable 8,000

Long-term Liab

Bonds Payble 30,000

Total Liab 38,000

Owner's Equity

Capital stock 50,000

Retained earnings 12,500 62,500

Total Liab & O/E $100,500

Chapter 1: The Accounting Equation

Question 1: Define the three components of the Accounting Equation.

Question 2: If a business owns a piece of real estate worth $250,000, and they owe $180,000 on a loan for that real
estate, what is owners’ equity in the property?

Answer to Question 1:

 Assets: All the property owned by a business.

 Liabilities: A company’s outstanding debts.
 Owners’ Equity: The company’s ownership interests in its property after all debts have been repaid.

Answer to Question 2: $70,000

Chapter 2: The Balance Sheet

Question 1: Categorize the following accounts as to whether they’re Asset, Liability, of Owners’ Equity accounts.

 Common Stock
 Accounts Receivable
 Retained Earnings
 Cash
  Notes Payable

Question 2: For each of the following assets or liabilities, state whether it is current or non-current:

 Accounts Payable
 Cash
 Property, Plant, and Equipment
 Note Payable
 Inventory

Answer to Question 1:

 Common Stock: Owners’ Equity

 Accounts Receivable: Asset
 Retained Earnings: Owners’ Equity
 Cash: Asset
 Notes Payable: Liability

Answer to Question 2:

 Accounts Payable: current liability

 Cash: current asset
 Property, Plant, and Equipment: non-current asset
 Note Payable: non-current liability (Though if a portion of the note is due within the next twelve months,
that portion should be shown as a current liability.)
 Inventory: current asset

Chapter 3: The Income Statement

Question 1: Given the following information, calculate ABC Corp’s Net Income:

 Sales: $260,000
 Cost of Goods Sold: $100,000
 Salaries and Wages: $20,000
 Rent Expense: $15,000
 Advertising Expense: $35,000
 Cost of repairs resulting from fire: $50,000

Question 2: Using the above information, calculate ABC Corp’s Operating Income.

Question 3:Using the above information, calculate ABC Corp’s Gross Profit.

Answer to Question 1: $40,000 (Sales of $260,000 minus $220,000 of total expenses.)

Answer to Question 2: $90,000 (Operating Income is intended to represent income from typical business
operations.  As a result, expenses resulting from a fire would certainly not be included when calculating Operating
Income.)

Answer to Question 3: $160,000 (Sales minus Cost of Goods Sold)

Chapter 4: The Statement of Retained Earnings

Question 1: Using the following information, calculate the ending balance in Retained Earnings:

 Beginning Retained Earnings: $10,000

 Net Income: $5,000
 Dividends Paid: $4,000
Question 2: Calculate Net Income given the following information:

 Consulting Revenue: $50,000

 Rent Expense: $5,000
 Software Licensing Fees: $3,000
 Dividends Paid: $6,000
 Advertising Expense:$20,000

Question 3: Using the following information, calculate how much was paid out in dividends during the year:

 Beginning Retained Earnings: $40,000

 Net Income: $15,000
 Ending Retained Earnings: $30,000

Answer to Question 1: $11,000

Answer to Question 2: $22,000 (Remember, dividends are not an expense! They are a distribution of net income
rather than a reduction of net income.)

Answer to Question 3: $25,000

Chapter 5: The Cash Flow Statement

Question 1: Calculate cash flow from operating activities using the following information:

 Cash sales: $10,000

 Credit sales: $15,000
 Cash received from prior credit sales: $8,000
 Rent paid: $3,000
  Inventory purchased: $6,000
 Wages paid:$5,000

Question 2: Categorize the following cash flows as to whether they are operating, investing, or financing
activities:

 Taxes paid
 Dividends paid to shareholders
 Interest paid on loans
 Dividends received on investments
 Cash sales
 Purchase of new office furniture

Answer to Question 1: Net cash inflow of $4,000. (Remember not to include the $15,000 of credit sales when
calculating cash flow.)

Answer to Question 2:

 Taxes paid: Operating Activities

 Dividends paid to shareholders: Financing Activities
 Interest paid on loans: Financing Activities
 Dividends received on investments: Investing Activities
 Cash sales: Operating Activities
 Purchase of new office furniture: Investing Activities

Chapter 6: Financial Ratios

Questions 1-3: Use the following income statement and balance sheet to answer the following questions.
 Income Statement
Sales 130,000
Cost of Goods Sold 26,000
Profit Margin 104,000
Salaries and Wages 15,000
Rent Expense 5,000
Licensing Expenses 20,000
Advertising Expense 4,000
Total Expenses 44,000
Net Income 60,000
Balance Sheet
Assets
Cash 10,000
Inventory 15,000
Property, Plant, and Equipment 250,000
Accounts Receivable 5,000
Total Assets 280,000
Liabilities
Accounts Payable 20,000
Notes Payable 40,000
Total Liabilities 60,000
Owners’ Equity
Common Stock 120,000
Retained Earnings 100,000
Total Owners’ Equity 220,000
Question 1: Calculate the company’s current ratio and quick ratio.

Question 2: Calculate the company’s return on assets and return on equity.

Question 3: Calculate the company’s debt ratio and debt to equity ratio.

Answer to Question 1: Current ratio = 1.5 (30,000 current assets ÷ 20,000 current liabilities). Quick ratio = 0.75
(15,000 non-inventory current assets ÷ 20,000 current liabilities).

Answer to Question 2: Return on assets = 21.4% (60,000 net income ÷ 280,000 total assets). Return on equity =
27.3% (60,000 net income ÷ 220,000 shareholders’ equity)

Answer to Question 3: Debt ratio = 21.4% (60,000 liabilities ÷ 280,000 assets). Debt to equity ratio = 27.3%
(60,000 liabilities ÷ 220,000 shareholders’ equity).

Chapter 7: What is GAAP?

Question 1: Who is required to follow GAAP?

Question 2: Who creates the rules for GAAP?

Question 3: What is the purpose of Generally Accepted Accounting Principles (GAAP)?

Answer to Question 1: Publicly-traded companies. (Governmental entities are required to follow GAAP as well,
but the rules that make up GAAP for governmental entities are significantly different from the rules for publicly-
traded companies.)

Answer to Question 2: The Financial Accounting Standards Board (FASB)

Answer to Question 3: To purpose of GAAP is to ensure that companies’ financial statements are prepared using
a similar set of rules and assumptions. This helps to enable meaningful comparisons between the financial
statements of multiple companies.

Chapter 8: Debits and Credits

Questions 1-3: Show how the following transactions would affect the Accounting Equation

Question 1: James purchases a $5,000 piece of equipment.

Question 2: James writes his monthly check for rent: $3,000.

Question 3: James takes out a $25,000 loan with his bank.

Questions 4-6: Create journal entries to record the following transactions

Question 4: James purchases a $5,000 piece of equipment.

Question 5: James writes his monthly check for rent: $3,000.

Question 6: James takes out a $25,000 loan with his bank.

Answer to Question 1:

Assets = Liabilities + Owners’ Equity

-5,000 no change no change
+5,000

Answer to Question 2:
Assets = Liabilities + Owners’ Equity
-3,000 -3,000

Answer to Question 3:

Assets = Liabilities + Owners’ Equity

+25,000 +25,000

Answer to Question 4:

Dr. Equipment 5,000

Cr. Cash 5,000

Answer to Question 5:

Dr. Rent Expense 3,000

Cr. Cash 3,000

Answer to Question 6:

Dr. Cash 25,000

Cr. Note Payable 25,000

Chapter 9: Cash vs. Accrual

Questions 1-5: Prepare journal entries to record each of the following events.

Question 1: Tom’s Tax Prep’s monthly rent is $3,500. At the end of February, they had not yet received their
monthly rent invoice.
Question 2: In early March, Tom’s Tax Prep receives and pays their rent bill for February.

Question 3: Marla, a marketing consultant, performs services for a client. The agree-upon price was $10,000, due
30 days from the date the services were completed.

Question 4: ABC Hardware makes a sale (on credit) for $2,500 worth of lumber. The lumber originally cost them
$1,300.

Question 5: Julie takes out a $10,000 loan for her business. Repayment is due in one year along with $1,200
interest.

Answer to Question 1:

Dr. Rent Expense 3,500

Cr. Rent Payable 3,500

Answer to Question 2:

Dr. Rent Payable 3,500

Cr. Cash 3,500

Answer to Question 3:

Accounts Receivable 10,000

Sales 10,000

Answer to Question 4:

Accounts Receivable 2,500

 Sales 2,500
Cost of Goods Sold 1,300
Inventory 1,300

Answer to Question 5:

When the loan is taken out:

Cash 10,000
Note Payable 10,000

At the end of each month during the year:

Interest Expense 100

Interest Payable 100

When the loan is repaid:

Note Payable 10,000

Interest Payable 1,200
Cash 11,200

Chapter 10: Other GAAP Concepts and Assumptions

Question 1: Andy runs a real estate development firm. Five years ago, he purchased a piece of land for $250,000.
This year, an appraiser tells Andy that the land is worth $300,000. At what value should Andy report the land on
his balance sheet? Why?
Question 2: Andy is the sole owner of his firm. In June, he moves $30,000 from his business checking account to
his personal checking account. If Andy wants his financial records to be in accordance with GAAP, should he
record the transaction or not? Why?

Answer to Question 1: Andy should report the land at its original cost: $250,000. Under GAAP’s “Historical
Cost” assumption, assets are reported at their historical cost rather than at their current market value. This is done
in order to remove subjective asset valuations from the reporting process.

Answer to Question 2: Yes, in order to be in compliance with GAAP, Andy must record the transaction. GAAP’s
“Entity Assumption” considers businesses to be separate entities from their owners. As such, transactions between
a business and its owners must be recorded as if they were between the business and an entirely separate party.

Chapter 11: Depreciation of Fixed Assets

Questions 1-6: Prepare journal entries to record each of the following events:

Question 1: Liliana spends $20,000 (cash) on a piece of equipment for use in her restaurant. She plans to use the
straight-line method to depreciate the equipment over 5 years. She expects it to have no value at the end of the 5
years.

Question 2: After 4 years,  Liliana sells the equipment for $4,000.

Question 3: Same as question 2, except she sells the equipment for $6,000.

Question 4: Same as question 2, except she sells the equipment for $2,000.

Question 5: Oscar is a self-employed electrician. He purchases a piece of equipment for $30,000 cash. He plans to
use it for 10 years, at which point he plans to sell it for approximately $4,000.He elects to use the straight-line
method of depreciation.
Question 6: Sandra runs a business making embroidered linens for wedding receptions. She purchases a new piece
of equipment for $15,000 in credit. She plans to use the units of production method of depreciation. The equipment
is expected to produce approximately 5,000 linens, at which point it will be valueless. During the first year after
buying the equipment, Sandra uses it to produce 1,500 linens.

Answer to Question 1:

To record the purchase:

Equipment 20,000
Cash 20,000

To record depreciation every year:

Depreciation Expense 4,000

Accumulated Depreciation 4,000

Answer to Question 2:

Cash 4,000
Accumulated Depreciation 16,000
Equipment 20,000

Answer to Question 3:

Cash 6,000
Accumulated Depreciation 16,000
Gain on Sale of Equipment 2,000
Equipment 20,000
Answer to Question 4:

Cash 2,000
Accumulated Depreciation 16,000
Loss on Sale of Equipment 2,000
Equipment 20,000

Answer to Question 5:

To record the purchase:

Equipment 30,000
Cash 30,000

To record depreciation every year:

Depreciation Expense 2,600

Accumulated Depreciation 2,600

(Depreciable value is $26,000. If depreciated over 10 years, that’s $2,600 depreciation per year.)

Answer to Question 6:

To record the purchase:

Equipment 15,000
Accounts Payable 15,000

When the purchase is eventually paid for:

Accounts Payable 15,000
Cash 15,000

To record depreciation for the first year:

Depreciation Expense 4,500

Accumulated Depreciation 4,500

($15,000 depreciable value ÷ 5,000 units = $3 of depreciation per unit. 1,500 units produce x $3 per unit = $4,500
depreciation expense.)

Chapter 12: Amortization of Intangible Assets

Questions 1-2: Prepare journal entries to record each of the following events.

Question 1: Trent runs a business as an engineering consultant. He invents a new system for preparing bridges to
deal with extreme weather conditions. He spends $28,000 securing a 14-year patent for his invention. He expects
the system to be used for the next few decades at least.

Question 2: Tina runs a business creating medical supplies for surgeries. Her team develops a new tool for
assisting in heart surgery. She spends $42,000 on getting it patented. She receives a 14-year patent, but she only
expects the technology to be used for about 7 years before a newer technology comes along to replace it.

Answer to Question 1:

To record receiving the patent:

Patents 28,000
Cash 28,000
To record amortization expense each year:

Amortization Expense 2,000

Accumulated Amortization 2,000

Answer to Question 2:

To record receiving the patent:

Patents 42,000
Cash 42,000

To record amortization expense each year:

Amortization Expense 6,000

Accumulated Amortization 6,000

Chapter 13: Inventory and Cost of Goods Sold

Question 1: Using the following information, calculate Cost of Goods Sold:

 Beginning Inventory: $3,000

 Ending Inventory: $4,500
 Purchases: $6,000

Question 2-4: Use the following information to answer questions 2-4.

 Beginning Inventory: 1,000 units at $4/unit.

 Purchases: 600 units at $5/unit.
  Ending Inventory: 900 units.

Question 2: Calculate Cost of Goods Sold using First-In-First-Out (FIFO)

Question 3: Calculate Cost of Goods Sold using Last-In-First-Out (LIFO)

Question 4: Calculate Cost of Goods Sold using the Average Cost Method

Answer to Question 1: CoGS = $4,500

Answer to Question 2: CoGS = $2,800

Explanation:

The first thing to calculate is how many units were sold. In this case, 700 units must have been sold. Now we just
have to figure out the cost for each unit of sold inventory.

Using FIFO, we assume that the first units purchased were the first units sold. Therefore, all 700 sold units must
have been from the older ($4 per unit) inventory. 700 units x $4 per unit = $2,800

Answer to Question 3: CoGS =$3,400

Again, we know that 700 units were sold. Under LIFO, we assume that the most recently purchased units are sold
first. Therefore, all 600 of the $5 units must have been sold. The remaining 100 sold units must have been from the
older ($4/unit) inventory.

(600 units x $5 per unit) + (100 units x $4 per unit) = $3,400

Answer to Question 4: CoGS =$3,062.50

Using the Average Cost Method, we have to calculate the average cost per unit of inventory. We know that there
were a total of 1,600 units available for sale and that–in total–they cost $7,000. That gives us an average cost per
unit of $4.38 (or $4.375 to be precise).

To calculate CoGS, we multiply this average cost per unit by the number of units sold. 700 units x $4.375 per unit
= $3,062.50