Multiple Choice

1. Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions.

b. Provide information about enterprise resources, claims to those resources, and
changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.

2. The failure to properly record an adjusting entry to accrue an expense will result in an:

a. understatement of expenses and an understatement of liabilities.

b. understatement of expenses and an overstatement of liabilities.
c. understatement of expenses and an overstatement of assets.
d. overstatement of expenses and an understatement of assets.

3. Which of the following statements best describes the purpose of closing entries?

a. To facilitate posting and taking a trial balance.

b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of temporary accounts to zero so that they may be used to
accumulate the revenues, expenses and dividends of the next period.
d. To complete the record of various transactions that were started in a prior period.

4. Roger, Inc. paid $7,200 to renew its insurance policy for three years on March 1, 2011,
the effective date of the policy. At March 31, 2011, Roger's unadjusted trial balance
showed a balance for $7,200 for prepaid insurance and $300 for insurance expense. What
amounts should be reported for prepaid insurance and insurance expense in Roger's
financial statements for the three months ended March 31.

Prepaid Insurance Insurance Expense

a. $7,000 $300
b. $7,000 $500
c. $7,200 $300
d. $7,300 $200

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5. Cara, Inc. purchased a building on January 1, 2011 for $500,000. The useful life of the
building is 10 years. What impact will the appropriate adjusting entry at December 31,
2011 have on its statement of financial position at December 31, 2011?

a. Increase Equity $50,000.

b. Increase Liabilities $50,000.
c. Decrease Assets $50,000.
d. Since the adjusting entry has offsetting debits and credits, there is no impact on
the statement of financial position.

6. A company pays each of its two office employees each Friday at the rate of $100 per day
for each person for a five-day week that begins on Monday. If the monthly accounting
period ends on Tuesday and the employees worked on both Monday and Tuesday, the
month-end adjusting entry to record the salaries earned but unpaid is:

a. Debit Unpaid Salaries $600 and credit Salaries Payable $600

b. Debit Salaries Expense $400 and credit Salaries Payable $400
c. Debit Salaries Expense $600 and credit Salaries Payable $600
d. Debit Salaries Payable $400 and credit Salaries Expense $400
e. Debit Salaries Expense $400 and credit Cash $400

7. Use the following information (in thousands):

Sales revenue ¥150,000
Gain on sale of equipment 45,000
Cost of goods sold 82,000
Interest expense 8,000
Selling & administrative expenses 15,000
Income tax rate 30%

Determine the amount of income from operations.

a. ¥38,000
b. ¥98,000
c. ¥30,000
d. ¥90,000

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8. How much must be invested now to receive $10,000 for 15 years if the first $10,000 is
received today and the rate is 9%?
Present Value of
Periods Ordinary Annuity at 9%
14 7.78615
15 8.06069
16 8.31256
a. $80,607
b. $87,862
c. $150,000
d. $73,125

9. Which of the following methods of determining bad debt expense does not properly match
expense and revenue?

a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts
receivable under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under
the allowance method.
d. Charging bad debts as accounts are written off as uncollectible.

10. What is the normal journal entry when writing-off an account as uncollectible under the
allowance method?

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

11. Rosalie Co. uses the gross method to record sales made on credit. On June 10, 2011, it
made sales of $100,000 with terms 2/10, n/30 to Finley Farms, Inc. On June 19, 2011,
Rosalie received payment for 1/2 the amount due from Finley Farms. Rosalie's fiscal
year end is on June 30, 2011. What amount will be reported in the statement of financial
position for the accounts receivable due from Finley Farms, Inc.?

a. $49,000
b. $50,000
c. $48,000
d. $51,000
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12. Wellington Corp. has outstanding accounts receivable totaling $2.54 million as of
December 31 and sales on credit during the year of $12.8 million. There is also a debit
balance of $6,000 in the allowance for doubtful accounts. If the company estimates that
1% of its net credit sales will be uncollectible, what will be the balance in the allowance
for doubtful accounts after the year-end adjustment to record bad debt expense?

a. $ 25,400.
b. $ 31,400.
c. $122,000.
d. $134,000.

13. Why would a company sell receivables to another company?

a. To improve the quality of its credit granting process.

b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.

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Problem 1

Fill in the blanks below with the accounting principle, assumption, or related item that best
completes the sentence.

a.________________________ and _______________________ are the two primary

qualities that make accounting information useful for decision making.

b. Among the two primary qualities mentioned in (a), information based on accrual basis
accounting provides more __________________while information based on cash basis
accounting provides more __________________.

c. ________________________ enables users to identify the real similarities and differences

in economic phenomena because the information has been measured and reported in a
similar manner for different enterprises.

d._______________________ would allow the expensing of all repair tools when purchased,
even though they have an estimated life of 3 years.

e.____________________ occurs when independent measures using the same methods,

obtain similar results.

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Problem 2

a. At 1/1/2012, Homer Corporation had a balance in accounts receivable of $30,000 and a

credit balance in the allowance for doubtful accounts of $2,000. Total sales revenues for
the year ended 12/31/2012 were $1,800,000, of which 1/3 were credit sales.
Past collection experience has indicated that 1% of credit sales normally are not collected.
Make the adjusting entry, if any, for uncollectible accounts at 12/31/2012.

b. As of 12/31/2012, Marge Co. has a balance of $5,000 in accounts receivable of which

$4,500 are not yet due and $500 is more than 30 days overdue. Marge Co. has a credit
balance of $20 in the allowance for doubtful accounts. Marge Co. estimates its
uncollectible accounts at 1% of accounts receivable that are not yet due and 10% of
accounts receivable over thirty days. What adjusting entry, if any, should Marge Co.
make at 12/31/2012?

c. The direct write-off method is not allowed in GAAP. Compared with the allowance
method, what are the strengths and weaknesses of the direct write-off method?

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Problem 3
On December 31, 2010, Green Company finished consultation services and accepted in
exchange a promissory note with a face value of $400,000, a due date of December 31, 2013,
and a stated rate of 5%, with interest receivable at the end of each year. Under the
circumstances, the note is considered to have an appropriate market rate of interest of 10%.

The following interest factors are provided:

Interest Rate
Table Factors For Three Periods 5% 10%
Future Value of 1 1.15763 1.33100
Present Value of 1 .86384 .75132
Future Value of Ordinary Annuity of 1 3.15250 3.31000
Present Value of Ordinary Annuity of 1 2.72325 2.48685

Instructions
(a) Determine the present value of the note.

(b) Prepare the journal entry to record the second interest payment on December 31, 2012
under the effective interest method. (Round to whole dollars.)