1) Contribution margin is the amount of revenue remaining after deducting cost of
goods sold.
2) Freight costs incurred by the seller on outgoing merchandise are an operating
expense to the seller.
3) An advantage of the return on investment ratio is that no judgmental factors are
involved.
4) A post-closing trial balance is prepared
a.after closing entries have been journalized and posted
b.before closing entries have been journalized and posted
c.after closing entries have been journalized but before the entries are posted
d.before closing entries have been journalized but after the entries are posted
5) Under accrual-basis accounting
a.cash must be received before revenue is recognized
b.net income is calculated by matching cash outflows against cash inflows
c.events that change a company’s financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received
d.the ledger accounts must be adjusted to reflect a cash basis of accounting before
financial statements are prepared under generally accepted accounting principles
6) The lower-of-cost-or-market basis of valuing inventories is an example of
a.comparability
b.the cost principle
c.conservatism
d.consistency
7) Hermiston Manufacturing Company reported the following year-end information:
beginning work in process inventory, $80,000; cost of goods manufactured, $780,000;
beginning finished goods inventory, $40,000; ending work in process inventory,
$70,000; and ending finished goods inventory, $50,000. How much is Hermistons cost
of goods sold for the year?
a.$770,000
b.$790,000
c.$780,000
d.$800,000
8) A law firm received $3,000 cash for legal services to be rendered in the future. The
full amount was credited to the liability account Unearned Service Revenue. If the legal
services have been rendered at the end of the accounting period and no adjusting entry
is made, this would cause
a.expenses to be overstated
b.net income to be overstated
c.liabilities to be understated
d.revenues to be understated
9) Treasury stock should be reported in the financial statements of a corporation as a(n)
a.investment
b.liability
c.deduction from total paid-in capital
d.deduction from total paid-in capital and retained earnings
10) Victor Corp. reacquired, but did not retire, 20,000 shares of its $2 par common
stock at a cost of $13 per share on April 30, 2014 . The stock was originally issued at
$11 per share. On January 10, 2015, the 20,000 shares were sold at $16 per share. The
sales entry should include a credit to Paid-in Capital from Treasury Stock for:
a.$60,000
b.$100,000
c.$180,000
d.$280,000
11) Each of the following is an example of a significant noncash activity except
a.conversion of bonds into common stock
b.exchanges of plant assets
c.issuance of debt to purchase assets
d.stock dividends
12) Eneri Company’s inventory records show the following data:
UnitsUnit Cost
Inventory, January 110,000$9.20
Purchases:June 189,0008.00
November 86,0007.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units
for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method. If the company uses FIFO, what is the gross profit for the period?
a.$95,000
b.$99,266
c.$99,960
d.$103,800
13) Match the items below by entering the appropriate code letter in the space provided.
A.CPAF.Corporation
B.BudgetingG.Assets
C.SECH.Equities
D.ProprietorshipI.Expenses
E.Economic Entity AssumptionJ.Transaction
1>Activities of an entity must be kept separate from its owners activities.
2>Consumed assets or services.
3>Ownership is limited to one person.
4>Offers expert accounting service to the general public.
5>Creditor and ownership claims against the assets of the business.
6>A separate legal entity under state laws.
7>Government agency that can mandate accounting rules.
8>Quantifying goals and objectives.
9>Future economic benefits.
10>Economic events recorded by accountants.
14) Which statement is false regarding the lower of cost or market (LCM) method of
inventory?
a.Market is defined as current replacement cost, not selling price
b.LCM is an example of the accounting concept of conservatism
c.LCM can be applied to individual items listed on the inventory summary sheets
d.The value of inventory at year end should be the current replacement cost
15) Accounting generally has the responsibility for
a.setting company goals
b.expressing the budget in financial terms
c.enforcing the budget
d.administration of the budget
16) A ratio calculated in the analysis of financial statements
a.expresses a mathematical relationship between two numbers
b.shows the percentage increase from one year to another
c.restates all items on a financial statement in terms of dollars of the same purchasing
power
d.is meaningful only if the numerator is greater than the denominator
17) A lease where the intent is temporary use of the property by the lessee with
continued ownership of the property by the lessor is called
a.off-balance sheet financing
b.an operating lease
c.a capital lease
d.a purchase of property
18) Identify the following expenditures as capital expenditures or revenue expenditures.
(a)Replacement of worn out gears on factory machinery.
(b)Construction of a new wing on an office building.
(c)Painting the exterior of a building.
(d)Oil change on a company truck.
(e)Painting and lettering of a used truck upon acquisition of the truck.
(f)Overhaul of a truck motor. One year extension in useful life is expected.
(g)Purchased a wastebasket at a cost of $10.
19) The bookkeeper for Antony Johnson Auto Repair made a number of errors in
journalizing
and posting, as described below.
1> A credit posting of $500 to Accounts Receivable was omitted.
2> A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.
3> A collection from a customer of $100 in payment of its account owed was
journalized and
posted as a debit to Cash $100 and a credit to Service Revenue $100.
4> A credit posting of $350 to Property Taxes Payable was made twice.
5> A cash purchase of supplies for $250 was journalized and posted as a debit to
Supplies $25
and a credit to Cash $25.
6> A debit of $685 to Advertising Expense was posted as $658
Instructions
For each error:
(a) Indicate whether the trial balance will balance.
(b) If the trial balance will not balance, indicate the amount of the difference.
(c) Indicate the trial balance column that will have the larger total.
Consider each error separately. Use the following form, in which error (1) is given as an
example.
(a) (b) (c)
Error In Balance Difference Larger Column
(1)No $500 debit
20) Frye Company sells 1,000 shares of treasury stock for $42,000. The shares had been
previously acquired for $35,000. The $7,000 received over cost should be credited to:
a.retained earnings
b.an asset account
c.a revenue account
d.a paid-in capital account
21) The Shins, a minor league baseball team, prepare financial statements on a monthly
basis. Their season begins in April, but in March the team engaged in the following
transactions:
(a)Paid $210,000 to Kansas City as advance rent for use of Kansas City Stadium for the
six month period April 1 through September 30 .
(b)Collected $450,000 cash from sales of season tickets for the team’s 20 home games.
This amount was credited to Unearned Ticket Revenue.
During the month of April, the Shins played four home games and five road games.
Instructions
Prepare the adjusting entries required at April 30 for the transactions above.
22) If a corporation declares a dividend based upon paid-in capital, it is known as a
a.scrip dividend
b.property dividend
c.paid dividend
d.liquidating dividend
23) Under the LCM approach, the market value is defined as
a.FIFO cost
b.LIFO cost
c.current replacement cost
d.selling price
24) (a) Distinguish between the two types of cost accounting systems. (b) May a
company use both types of cost accounting systems?
25) Assets normally show
a.credit balances
b.debit balances
c.debit and credit balances
d.debit or credit balances
26) Match the items below by entering the appropriate code letter in the space provided.
A.Incremental analysisF.Cash payback technique
B.Opportunity costG.Hurdle or cutoff rate
C.Discounted cash flow techniqueH.Net present value method
D.Capital budgetingI.Sunk cost
E.Annual rate of return techniqueJ.Internal rate of return method
____1>A cost that cannot be changed by any present or future decision.
____2>A capital budgeting technique that considers both the estimated total cash
inflows from the investment and the time value of money.
____3>A method used in capital budgeting in which cash inflows are discounted to
their present value and then compared to the capital outlay required by the capital
investment.
____4>The process of identifying the financial data that change under alternative
courses of action.
____5>A method used in capital budgeting that results in finding the interest yield of
the potential investment.
____6>The minimum rate of return management requires on an investment.
____7>The determination of the profitability of a capital expenditure by dividing
expected annual net income by the average investment.
____8>The potential benefit that may be lost from following an alternative course of
action.
____9>The process of making capital expenditure decisions in business.
____10>A capital budgeting technique that identifies the time period required to
recover the cost of a capital investment from the annual cash inflow produced by the
investment.
27) On January 1, Wellness Corporation issues $3,000,000, 5-year, 12% bonds at 95
with interest payable on July 1 and January 1 . The entry on December 31 to record
accrued bond interest and the amortization of bond discount using the straight-line
method will include a
a.debit to Interest Expense, $180,000
b.debit to Interest Expense, $360,000
c.credit to Discount on Bonds Payable, $15,000
d.credit to Discount on Bonds Payable, $30,000
28) The balance in the supplies account on June 1 was $5,200, supplies purchased
during June were $3,500, and the supplies on hand at June 30 were $3,000. The amount
to be used for the appropriate adjusting entry is
a.$3,500
b.$5,700
c.$6,500
d.$11,700
29) Launy Company planned to produce 20,000 units of product and work 100,000
direct labor hours in 2014. Manufacturing overhead at the 100,000 direct labor hours
level of activity was estimated to be:
Variable manufacturing overhead$ 700,000
Fixed manufacturing overhead 300,000
Total manufacturing overhead$1,000,000
At the end of 2014, 19,000 units of product were actually produced and 98,000 actual
direct labor hours were worked. Total actual overhead costs for 2014 were $953,000.
Instructions
(a)Compute the total overhead variance.
(b)Compute the overhead controllable variance.
(c)Compute the overhead volume variance.
30) A contingent liability is recorded when the likelihood of the contingency is
a.remote
b.reasonably possible
c.probable
d.nil or zero
31) When setting a standard cost for direct materials:
a.the price standard should not include amounts for related costs such as receiving,
storing, and handling
b.the engineering department is the main source of information for the standard price
c.potential waste or spoilage should not be allowed to become part of the standard
d.None of the above
32) Research and development costs
a.are classified as intangible assets
b.must be expensed when incurred under generally accepted accounting principles
c.should be included in the cost of the patent they relate to
d.are capitalized and then amortized over a period not to exceed 40 years
33) Which of the following is an account for which its normal balance is a credit?
a.Prepaid Insurance
b.Accounts Receivable
c.Unearned Service Revenue
d.Rent Expense
34) Casey Kallder has been offered the opportunity of investing $150,075 now. The
investment will earn 8% per year compounded annually and at the end of its life will
return $300,000 to Casey. How many years must Casey wait to receive the $300,000?
a.8
b.9
c.10
d.11
35) Cha Li Lao Company wants to purchase equipment with a 3-year useful life, which
is expected to produce cash inflows of $15,000 each year for two years, and $9,000 in
year 3 . Woods has a 14% cost of capital, and uses the following factors. What is the
present value of these future cash flows?
Present Value of 1
Period14%
1.88
2.77
3.67
a.$26,130
b.$30,780
c.$30,870
d.$34,750
36) Which of the following accounting problems does not involve a present value
calculation?
a.The determination of the market price of a bond
b.The determination of the depreciation expense
c.The determination of the amount to report for long-term notes payable
d.The determination of the amount to report for lease liability
37) During 2014, its first year of operations, Nekos Bakery had revenues of $60,000
and expenses of $35,000. The business had owner drawings of $20,000. What is the
amount of owners equity at December 31, 2014?
a.$0
b.$5,000 credit
c.$25,000 credit
d.$20,000 debit
38) What is a standard cost?
a.The total number of units times the budgeted amount expected
b.Any amount that appears on a budget
c.The total amount that appears on the budget for product costs
d.The amount management thinks should be incurred to produce a good or service
39) Fetherston Company’s goods in transit at December 31 include:
sales madepurchases made
(1)FOB destination(3)FOB destination
(2)FOB shipping point(4)FOB shipping point
Which items should be included in Fetherston’s inventory at December 31?
a.(2) and (3)
b.(1) and (4)
c.(1) and (3)
d.(2) and (4)
40) South Airlines purchased a 747 aircraft on January 1, 2013, at a cost of
$35,000,000. The estimated useful life of the aircraft is 20 years, with an estimated
salvage value of $5,000,000. On January 1, 2016 the airline revises the total estimated
useful life to 15 years with a revised salvage value of $3,500,000.
Instructions
(a)Compute the depreciation and book value at December 31, 2015 using the
straight-line method and the double-declining-balance method.
(b)Assuming the straight-line method is used, compute the depreciation expense for the
year ended December 31, 2016 .
41) Identify the impact on the balance sheet if the following information is not used to
adjust the accounts.
1>Supplies consumed totaled $3,000.
2>Interest accrues on notes payable at the rate of $200 per month.
3>Insurance of $450 expired during the month.
4>Plant and equipment are depreciated at the rate of $1,200 per month.
42) Jay Farrar Company is a manufacturing company that specializes in writing
instruments. The past year was a difficult one for the company, as it sought to retain its
share in a market in which the largest competitors were also rapid innovators. Jay Farrar
introduced a new product late in the year, even though testing was not complete. It was
a pen designed with two cartridges: one supplying ink and the other correction fluid. A
person could then switch easily between writing and correcting errors. It was priced
fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the
product was named, was an overwhelming success.
The success of the product has Josh Ritter, the manager of the New Products division,
worried, however. He was concerned that quality problems would begin occurring,
since the longevity of the pen and stability of the correction fluid formulation had not
been tested. He did not want sales personnel to get the bonuses that appeared to be
indicated, since they might aggressively promote a product that would fail in use. He
preferred to complete testing of the pen first, so that more confidence could be placed in
the results.
Top management, however, declined the tests. Mr. Ritter then instructed you, the
accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to
show them as current expenses in total. In this way, the new product would appear to be
only slightly profitable.
Required:
1>Describe the alternatives that you as an accountant would have in this situation.
2>Indicate which alternative is best.
43) Hudson Inc. provided the following information:
AprilMayJune
Projected merchandise purchases$184,000$156,000 $132,000
Hudson pays 40% of merchandise purchases in the month purchased and 60% in the
following month.
General operating expenses are budgeted to be $62,000 per month of which
depreciation is $8,000 of this amount. Hoover pays operating expenses in the month
incurred.
Hudson makes loan payments of $8,000 per month of which $700 is interest and the
remainder is principal.
Instructions
Calculate budgeted cash disbursements for May.
44) Argentina Company gathered the following condensed data for the year ended
December 31, 2014:
Cost of goods sold$ 750,000
Net sales1,200,000
Operating expenses275,000
Interest expense48,000
Dividend revenue38,000
Casualty loss from vandalism125,000
Instructions
1>Prepare a single-step income statement for the year ended December 31, 2014 .
2>Prepare a multiple-step income statement for the year ended December 31, 2014 .
45) During the first year of operations, Lewis Tool accumulated the following
manufacturing costs:
Raw materials purchased on account$12,000
Factory labor accrued7,000
Incurred manufacturing overhead on account5,000
Instructions
Prepare separate journal entries for each manufacturing cost.
46) Deane Company applies manufacturing overhead based on direct labor hours.
Information concerning manufacturing overhead and labor for the year follows:
Actual manufacturing overhead $140,000
Estimated manufacturing overhead$130,000
Direct labor hours incurred6,200
Direct labor hours estimated6,500
Instructions
Compute the predetermined overhead rate.
47) Bonds are frequently issued at amounts greater or less than face value. Describe
how the market interest rate, relative to the contractual interest rate, affects the selling
price of bonds. Also explain the rationale for requiring an investor to pay accrued
interest when a bond is purchased between interest payment dates.
48) Morton Company had the following select transactions.
Apr. 1, 2014Accepted Remington Company’s 1-year, 12% note in settlement of a
$25,000 account receivable.
July 1, 2014Loaned $15,000 cash to Jenny Green on a 9-month, 10% note.
Dec. 31, 2014Accrued interest on all notes receivable.
Apr. 1, 2015Received principal plus interest on the Remington note.
Apr. 1, 2015Jenny Green dishonored its note: Morton expects it will eventually collect.
Instructions
Prepare journal entries to record the transactions. Morton prepares adjusting entries
once a year on December 31 .
49) Atlanta Manufacturing Company has 8,000 machine hours available to use to
produce either Product A or Product B. The cost accounting department developed the
following unit information for each of the products:
Product AProduct B
Sales price$60$71
Direct materials1921
Direct labor1514
Variable manufacturing overhead812
Fixed manufacturing overhead36
Machine hours required.61.2
Management desires to make a decision regarding which product to produce in order to
maximize the company’s income.
Instructions
Taking into consideration the constraint under which the company operates, prepare a
report to show which product should be produced and sold.