1) Driscoll Company purchased equipment on January 1, 2010 for $26,000. Driscoll
uses straight-line depreciation for the asset, which has a five year estimated useful life
and a salvage value estimated at $4,000. The asset was sold on January 1, 2012 for
$12,000 cash. Indicate whether each of the following items related to Driscoll Company
is true or false.
1>A gain or loss on a sale of equipment is reported on the balance sheet
2>Book value on January 1, 2012 was $21,600
3>On the date of the sale, Driscoll would record a loss of $800
4>Accumulated depreciation on January 1, 2012 was $8,800
5>Annual depreciation for Driscoll’s equipment was $5,200
2) 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.
Dent Company received $1,200 cash in advance for magazine subscriptions that the
company agreed to send to subscribers in the future.
3) Indicate whether each of the following statements about stockholders’ equity is true
or false.
1>Preferred stockholders generally have a preference to assets when the company is
liquidated
2>The amount of dividends paid on preferred stock usually is limited to a specified
amount
3>Preferred stockholders generally have a preference as to dividends
4>Preferred stockholders generally have a preference as to voting on corporate policies
5>Preferred stockholders generally have a preference as to selecting directors of the
board
4) Indicate whether each of the following statements about stockholders’ equity is true
or false.
1>A 2-for-1 stock split probably will double the monetary value of an investor’s
holdings on the date the split takes effect
2>The declaration and distribution of a stock dividend reduces retained earnings
3>The balance in the treasury stock account increases total stockholders’ equity
4>If treasury stock that had been acquired by a company for $50 per share is resold for
$60 per share, total assets and stockholders’ equity will increase
5>Preferred stock of some corporations can be converted into common stock
5) Northwest Company is seeking a short-term loan from its local bank. The banker
needs assurance that the company will be able to repay the loan. Describe three
financial ratios the banker should consider including in the loan approval process. What
information does each of your selected ratios provide?
6) What is the relationship or connection between a company’s pro forma financial
statements and the end-of-period financial statements reported to stockholders and other
external users?