For 2016, The Oscar Company records depreciation expense of $12,000 on its income
statement and $9,000 of MACRS depreciation on its tax return. Which of the following
answers is correct regarding the difference between the two figures?
A.Net income is understated by $3,000 on the 2016 income statement.
B.Deferred taxes of $3,000 are subtracted from taxable income of 2016.
C.The difference in depreciation expense is caused by differences between GAAP and
the tax code.
D.The amount of depreciation recorded on the income tax return must be incorrect.
Duluth Co. collected a $6,000 cash advance from a customer on November 1, 2016 for
work to be performed over a six-month period beginning on that date. If the year-end
adjustment is properly recorded, what will be the effect of the adjusting entry on
Duluth’s 2016 financial statements?
A.Increase assets and decrease liabilities
B.Increase assets and increase revenues
C.Decrease liabilities and increase revenues
D.No effect
Which of the following is not a generally recognized internal control procedure?
A.Establishment of clear lines of authority.
B.Having employees covered by a fidelity bond.
C.Requiring regular vacations for certain employees.
D.Customer service comment cards.
Thurston Company started its business on January 1, 2016 by issuing $15,000 of
common stock. On January 1, the company purchased equipment for $10,500. The
equipment is estimated to have a 3-year useful life and a $1,500 salvage value. On
March 1, Thurston issued a $27,000, 6% 5-year note to Community Bank. Customers
paid Thurston $54,000 for services performed in 2016. The company paid $33,000 for
operating expenses, and paid a $900 dividend to the stockholders. At year-end,
Thurston recognized interest expense on the note and depreciation expense on the
computer.
Required:
a) What is the amount of interest expense Thurston will recognize in 2016?
b) What is the book (carrying) value of the computer at the end of 2016?
c) What is the net income for 2016?
d) Prepare a balance sheet for 2016.
Indicate whether each of the following statements about lines of credit is true or false.
_____ a) Line-of-credit agreements generally involve a fluctuating rate of interest.
_____ b) A line-of-credit agreement allows a company to borrow on an as-needed basis.
_____ c) Interest rates on line-of-credit agreements are often pegged to the consumer
price index.
_____ d) The signing of a line-of-credit agreement is an asset source transaction.
_____ e) The expense recognition for the payment of monthly interest is an asset
exchange transaction.
Chester Company began 2016 with a note payable of $20,000 and interest payable of
$800. During the year, the company accrued an additional $400 of interest expense, and
paid off the note with interest. On the company’s 2016 income statement, cash flows for
financing activities related to the note would be:
A.$1,200 outflow
B.$20,000 outflow
C.$20,400 outflow
D. $21,200 outflow
Explain how the following general journal entry affects the accounting equation.
A.Both assets and equity increase.
B.Both liabilities and assets increase.
C.Assets increase and equity decreases.
D.Liabilities increase and equity decreases.
Kenyon Company experienced a transaction that had the following effect on the
financial statements:
Which transaction would have this effect?
A.Paid for merchandise that had been purchased on account.
B.A loss on land that was sold for cash.
C.Return by a customer of a sale that was made on account.
D.Return to a supplier of merchandise purchased on account.
Jason Company paid $7,200 for one year’s rent in advance beginning on October 1,
2015. Jason’s 2015 income statement would report rent expense, and its statement of
cash flows would report cash outflow for rent, respectively, of
A.$7,200; $7,200
B.$1,800; $1,800
C.$1,800; $7,200
D.$1,200; $7,200
Curtain Co. paid dividends of $6,000; $12,000; and $20,000 during 2014, 2015 and
2016, respectively. The company had 1,000 shares of 5%, $200 par value preferred
stock outstanding that paid a cumulative dividend. The amount of dividends received by
the common shareholders during 2016 would be:
A.$4,000.
B.$6,000.
C.$8,000.
D.$10,000.
Magellan Corporation earned net income of $32,000 and paid cash dividends of $8,500
to its stockholders. Which of the following choices reflects the effect of closing entries
on Magellan’s financial statements?
A.
B.
C.
D.
The purpose of the accrual basis of accounting is to:
A.Report revenue when received.
B.Match assets and liabilities in the proper period.
C.Report expenses when cash disbursements are made.
D.Match revenues and expenses in the proper period.
Giddeon Company’s accounts and their balances as of December 31, 2016 are listed in
alphabetical order below, after having posted the year-end adjusting entries.
Required:
a) Prepare the adjusted trial balance for Giddeon Company as of December 31, 2016.
b) Prepare Giddeon’s 2016 income statement and balance sheet.
The balance in Accounts Receivable at the beginning of the period amounted to
$16,000. During the period $64,000 of credit sales were made to customers. If the
ending balance in Accounts Receivable amounted to $10,000, and uncollectible
accounts expense amounted to $4,000, then the amount of cash inflow from customers
that would appear in the operating activities section of the cash flow statement would
be:
A.$66,000.
B.$64,000.
C.$80,000.
D.None of these answers are correct.
The credit terms, 2/15, n/30, indicate that a:
A.fifteen percent discount can be deducted if the invoice is paid within two days
following the date of sale.
B.two percent discount can be deducted for a period up to thirty days following the date
of sale.
C.two percent discount can be deducted if the invoice is paid before the fifteenth day
following the date of the sale.
D.two percent discount can be deducted if the invoice is paid after the fifteenth day
following the sale, but before the thirtieth day.
Turner Company reported assets of $20,000 (including cash of $9,000), liabilities of
$8,000, common stock of $7,000, and retained earnings of $5,000. Based on this
information, what can be concluded?
A.25% of Turner’s assets are the result of prior earnings.
B.$5,000 is the maximum dividend that can be paid to shareholders.
C.40% of Turner’s assets are the result of borrowing from creditors.
D.25% of Turner’s assets are from prior earnings, $5,000 is the maximum possible
dividend, and 40% of assets are the result of borrowed resources.
Which of the following accounts is not closed at the end of an accounting cycle?
A.Revenues
B.Retained earnings
C.Dividends
D.Expenses
The party who borrows money in a note payable is known as the
A.Maker.
B.Payee.
C.Issuer.
D.Both A and C.
The term used to describe the ability to generate short-term cash flows is:
A.Profitability
B.Solvency
C.Stockholder’s Equity
D.Liquidity
If a bond is sold at 101, its stated rate of interest would be:
A.equal to the market rate.
B.unrelated to the market rate.
C.higher than the market rate.
D.lower than the market rate.
The following income statement was drawn from the annual report of Newtown
Company:
The amount of cash flow from operating activities is
A.$18,000
B.$18,600
C.$13,000
D.$14,400
Indicate whether each of the following statements is true or false.
_____ a) Loaning cash to another company is considered a financing activity on the
statement of cash flows.
_____ b) The major difference between treating the extension of credit to a customer as
accounts receivable and treating it as notes receivable is the existence of interest.
_____ c) In a promissory note, the payee issues the note to the maker.
_____ d) Interest rates are always stated on an annual basis, regardless of the length of
the note.
_____ e) Accruing interest on a note receivable is considered an asset use transaction.
On June 10, 2016, Burton Builders, Inc., a publicly traded company, announced that it
had been awarded a contract to build a football stadium at a contract price of $500
million. This contract would increase its projected revenues by 20% over the next three
years. Which of the following statements is correct with regard to this announcement?
A.The market price of Burton’s stock will probably be higher on June 11, 2016 than on
June 10th.
B.Burton’s net cash flow from operations will increase by 20% over the next three
years.
C.Burton’s assets should be increased by $500 million on June 10, 2016 to recognize
this contract.
D.Burton’s net income will increase by 20% over the next three years.
Benson Co. purchased land and paid the full purchase price in cash. The journal entry
necessary to record this event includes a:
A.debit to Land and a debit to Cash.
B.debit to Cash and a credit to Land.
C.credit to Land and a credit to Cash.
D.debit to Land and a credit to Cash.
Fern’s Flowers established a $400 petty cash fund. The following expenditures were
made from the fund:
A count of the cash in the fund revealed a balance of $89.00.
Required: a) Show the effect of establishing the fund on the accounting equation.
b) For what amount must the check be written to replenish the fund?
c) Prepare the journal entry to record the recognition of expenditures paid from the fund
and replenishment of the fund.
Which of the following is not considered a “cost” of financing credit sales?
A.The opportunity cost of lost interest.
B.Keeping the records for accounts receivable.
C.The increased sales resulting from the extension of credit.
D.The possibility of unpaid accounts.
Indicate whether each of the following statements is true or false.
_____ a) A common size income statement facilitates comparison between two or more
companies of different size and in the same industry.
_____ b) A common size income statement is prepared by dividing the various amounts
reported on the income statement by the amount of total assets.
_____ c) A common size income statement is helpful in comparing the results of
operations in different time periods.
_____ d) The gross margin percentage is computed by dividing gross margin by net
income.
_____ e) Return on sales is computed by dividing net income by net sales.
Landis Company is preparing its financial statements. Gross margin is normally 40% of
sales. Information taken from the company’s records revealed sales of $25,000;
beginning inventory of $2,500 and purchases of $17,500. The estimated amount of
ending inventory would be:
A.$15,000.
B.$5,000.
C.$8,000.
D.$10,000.
The entry to recognize depreciation expense incurred on equipment involves which of
the following?
A.A decrease in assets
B.An increase in liabilities
C.An increase in assets
D.A decrease in liabilities
Which of the following statements is not correct in regard to the importance of
inventory turnover to a company’s profitability?
A.Most companies prefer to have a low inventory turnover than a high inventory
turnover.
B.It is sometimes more desirable to sell a large amount of merchandise with a small
amount of gross margin than a small amount of merchandise with a large amount of
gross margin.
C.A company’s profitability is affected by how rapidly inventory sells.
D.A company’s profitability is affected by the spread between cost and selling price.
On January 1, 2016, Ruiz Company spent $850 on a plant asset to improve its quality.
The asset had been purchased on January 1, 2014 for $8,400 and had an estimated
salvage value of $1,200 and a useful life of five years. Owens uses the straight-line
depreciation method. Which of the following correctly shows the effects of the 2016
expenditure on the financial statements?
A.
B.
C.
D.
Indicate whether each of the following statements regarding accounting for long-term
assets is true or false.
_____ a) Other things being equal, the lower a company estimates the salvage value of
a plant asset to be, the higher the company’s net income will be.
_____ b) Depreciation expense is an example of a “non-cash” expense.
_____ c) For tax purposes the most desirable depreciation method is the one that
produces the lowest amount of depreciation expense.
_____ d) The book value of an asset is the amount a company believes it is worth (its
fair value) as of the date of the balance sheet.
_____ e) A company that uses straight-line depreciation for financial statement
reporting and MACRS for tax reporting will show a deferred tax liability in an asset’s
early life.
On January 1, 2016, Friedman Company purchased a truck that cost $48,000. The truck
had an expected useful life of 100,000 miles over 8 years and an $8,000 salvage value.
During 2017, Friedman drove the truck 18,500 miles. The amount of depreciation
expense recognized in 2017 assuming that Friedman uses the units of production
method is:
A.$8,880.
B.$7,400.
C.$6,000.
D.$5,000.
Why are adjusting entries necessary in an accrual accounting system? What are some
common examples?
List three of the five interrelated components of the internal control framework
established by The Committee of Sponsoring Organizations of the Treadway
Commission (COS0) that serve as the standards for Sarbanes-Oxley compliance.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
Carson Company accrued $100 of interest expense.
If Bowman Company is using FIFO, how would the accountant compute cost of goods
sold when recording a sale under the perpetual inventory system?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Use only one letter
for each element. You do not need to enter amounts.
Miller Co. declared and distributed a stock dividend.
Fill in the blanks indicated by the alphabetic letters in the following financial
statements. These financial statements were prepared for the company’s first year in
operation, and all transactions were for cash.
Indicate how each event affects the income statement and the statement of cash flows.
Record the amount of the effect in the box shown below each element. Use the letter “I”
to indicate increase, the letter “D” to indicate decrease, and the letter “N” to indicate no
effect. Use only one letter for each element.
On December 31, 2016, Howard Corporation recorded the expiration of $4,000 of
insurance that was previously recorded as an asset. Show the effects of this transaction
on Howard’s income statement and statement of cash flows.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
A transaction recorded as a debit to Office Supplies and a credit to Accounts Payable.
Explain the difference between the straight-line and the effective interest method of
amortization of bond premiums and discounts.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Use only one letter
for each element. You do not need to enter amounts.
On January 1, 2016, Flagler Corporation borrowed $20,000 on a line-of-credit from
City Bank. Show the effects of this transaction on Flagler’s financial statements.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Use only one letter
for each element. You do not need to enter amounts.
The stock of Atlantic Oil Co. was trading at $14 per share on March 27 when the
company announced that it had recently discovered a large oil reserve. The stock price
immediately went up to $28 per share. The company had 10,000,000 shares
outstanding. Indicate the effects of this discovery on Atlantic’s financial statements.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
An adjusting entry recorded as a debit to Unearned Service Revenue and a credit to
Service Revenue.
Explain how the equity section of a balance sheet differs among sole proprietorships,
partnerships and corporations.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
At the end of the accounting period, Signet Co. recognized accrued salaries.
Why do some say that the GAAP treatment of research and development puts the US at
a competitive disadvantage compared to businesses in other countries?
On April 6, 2016, Gringot Company purchased $140,000 of merchandise inventory.
Terms of the purchase included a discount of 3/20, n/30 and the freight terms were FOB
destination. Freight costs amounted to $4,600. Gringot paid the account payable on
April 24. Gringot sold all inventory for $189,500.
Required: Determine the amount of gross margin Gringot would report on the income
statement.