1) At the end of the period, the difference between the total credits and the total debits is
the balance in the account
2) Under the equity method, the investor applies his percentage of ownership in
recording his share of the investee’s net income, but not dividends.
3) When the equity method is used to account for stock investments, the carrying value
of an investment is the fair value as of the balance sheet date.
4) If the stated rate of interest on a bond exceeds the market rate of interest, the bond
will sell at a premium.
5) The total stockholders’ equity remains the same before and after a stock split.
6) Operating income is typically equal to Net Cash Provided by Operating Activities on
the statement of cash flows.
7) All contingent liabilities should be reported as liabilities on the financial statements,
even those that are unlikely to occur.
8) Return on assets measures how profitably management has used its assets.
9) When inventory costs are rising, FIFO allows managers to manipulate net income by
timing the purchases of inventory.
10) For most firms, the gross profit percentage changes significantly from year to year.
11) The bank reconciliation can be used to control cash in a bank account.
12) The consolidation method of accounting is appropriate when an investor controls an
investee by ownership of more than 50% of the investee’s common stock.
13) When common stock is issued for services provided to the corporation, the
corporation usually recognizes an expense for the fair market value of the services
provided.
14) Operating leases are preferred over capital leases because capital leases increase a
company’s debt ratio.
15) Hedging enables an entity to protect itself from losing money in a foreign
transaction by engaging in a counterbalancing transaction.
16) When inventory costs are rising, a company using the LIFO costing method will
generally pay less taxes than if the company had been using the FIFO method.
17) If a company uses LIFO for tax purposes, they must use LIFO for financial
reporting purposes.
18) The basic component of paid-in capital is common stock.
19) An example of a cash equivalent is a money-market account.
20) The gain or loss on the sale of an investment classified as a long-term
available-for-sale-security is calculated by comparing the ________ of the investment
with the ________ of the investment.
A) carrying value; selling price
B) fair value at last balance sheet date; selling price
C) cost; selling price
D) fair value at date of sale; selling price
21) The Nichols Company borrowed $12,000 from the bank and agreed to keep $3,000
on deposit at all times. The stated rate of interest on the loan is 10%. What is the real
rate of interest?
A) 10%
B) 12%
C) 13.3%
D) 14%
22) The cash received from selling available-for-sale investments is reported on the
statement of cash flows as a(n):
A) increase in financing activities
B) decrease in financing activities
C) increase in investing activities
D) decrease in investing activities
23) Mary Magdalene, Inc. had the following transactions:
On a statement of cash flows prepared under the indirect method, Net Cash Provided by
Investing Activities is:
A) $350,000
B) $450,000
C) $500,000
D) $550,000
24) If $400,000 of bonds are issued during the year, but $100,000 of old bonds are
retired during the year, the statement of cash flows(indirect method) will show a(n):
A) net gain on retirement of bonds of $300,000 in the financing activities section
B) increase in cash of $400,000 in the financing activities section and a decrease in cash
of $100,000 in the financing activities section
C) net increase in cash of $300,000 in the operating activities section
D) net decrease in cash of $300,000 in the operating activities section
25) Under the ________ method, ending inventory is based on the costs of the most
recent purchases.
A) average-cost
B) FIFO
C) LIFO
D) specific-identification
26) The following data was extracted from the records of Today Company:
What is the gross profit using the LIFO method?
A) $6,000
B) $7,600
C) $8,000
D) $14,000
27) Bonds with a face value of $200,000 were sold at an effective interest rate of 8% to
yield cash proceeds in excess of $200,000. It is apparent that the bonds had a:
A) stated interest rate less than 8%
B) stated interest rate greater than 8%
C) effective interest rate less than 8%
D) effective interest rate greater than 8%
28) The purchase of equipment involving a cash down payment and a promise to pay
the balance in the future would include:
A) a debit to Cash and a credit to Equipment
B) a debit to Note Payable and a credit to Cash
C) a credit to Cash and a credit to Accounts Payable
D) a debit to Cash and a debit to Note Payable
29) Closing entries:
A) are made at the beginning of each accounting period
B) prepare the accounts for the next period’s transactions
C) cannot be done using a computer
D) are the same as adjusting entries
30) When applying the lower-of-cost-or-market rule to inventories, market value
generally refers to ________ under U.S. GAAP and ________ under IFRS.
A) current replacement cost; historical cost
B) historical cost; net realizable value
C) historical cost; current replacement cost
D) current replacement cost; net realizable value
31) A company’s main source of cash should be:
A) operating activities
B) financing activities
C) investing activities
D) noncash investing and financing activities
32) XYZ Company has an inventory turnover of 20 times per year. The industry
average is 5.0 times per year. What does a high inventory turnover mean?
A) The company has too much inventory on hand
B) The company may have obsolete inventory on hand
C) The company may not be keeping enough inventory on hand which can lead to lost
sales
D) The company is having a difficult time selling the inventory
33) A company has Total Paid-in Capital of $100,000, Retained Earnings of $200,000,
Treasury Stock of $10,000 and Accumulated Other Comprehensive Income of
$200,000. What is the CORRECT statement about listing these accounts on the balance
sheet?
A) Retained Earnings should be the last line before Total Stockholders’ Equity
B) Total Paid-in Capital should be the last line before Total Stockholders’ Equity
C) Treasury Stock or Accumulated Other Comprehensive Income should be the last line
before Total Stockholders’ Equity
D) There is no specific order used by Generally Accepted Accounting Principles
34) In 2015, Chen Corporation purchased treasury stock with a cost of $50,000. During
the year, the company declared and paid dividends of $10,000 and issued bonds payable
for $1,000,000. Net Cash Provided by Financing Activities for 2015 is:
A) $940,000
B) $950,000
C) $990,000
D) $1,000,000
35) The journal entry to record the conversion of bonds payable into common stock will
include a:
A) debit to Bonds Payable and a credit to Common Stock
B) debit to Bonds Payable and a credit to Cash
C) debit to Cash and a credit to Common Stock
D) debit to Cash and a credit to Paid-in Capital in Excess of Par
36) The expected cash value of a plant asset at the end of its useful life is known as:
A) scrap value
B) salvage value
C) residual value
D) all of the above
37) The cash received when selling the investment in another company is reported on
the statement of cash flows as a(n):
A) investing cash outflow
B) investing cash inflow
C) financing cash outflow
D) financing cash inflow
38) The New Jewelry Store sells mostly costume jewelry, but it also sells an expensive
watch brand. The owner of the store is concerned about monitoring sales and inventory
of the watches. He decided to perform a quick inventory count of the watches on a daily
basis as a control procedure. The owner counts 58 watches at the end of business on
Thursday. On Friday, a shipment of 23 watches is received. The point-of-sale terminal
for Friday indicates that 7 watches were sold that day. A quick inventory of watches at
the end of business on Friday indicates that 72 watches are on hand. How many, if any,
watches are probably stolen?
A) 0
B) 1
C) 2
D) 4
39) The Brankov Tool and Die Company reports the following for the fiscal year ended
December 31, 2014:
What is comprehensive income for the year ended December 31, 2014?
A) $1,092,500
B) $1,104,500
C) $1,149,500
D) $1,155,000
40) The Houston Mavericks basketball team receives $5,000 for season tickets on
August 1. By December 31, they have earned $2,000 of the revenue. The adjusting
entry to be made on December 31 by the Houston Mavericks includes a:
A) credit to Unearned Revenue of $2,000
B) debit to Unearned Revenue of $2,000
C) debit to Ticket Revenue of $2,000
D) credit to Prepaid Revenue of $3,000
41) The bookkeeper recorded a deposit of $100 as $10. On the bank reconciliation, this
will be a(n):
A) addition of $90 to the balance per bank
B) subtraction from the balance per bank
C) addition of $90 to the balance per books
D) subtraction of $90 to the balance per books
42) If bonds have been issued at a premium, over the life of the bonds, the:
A) carrying value of the bonds will decrease
B) carrying value of the bonds will increase
C) interest expense will increase
D) interest payment will increase
43) Unrealized gains on trading securities are reported on the:
A) statement of cash flows
B) balance sheet
C) income statement as Sales Revenue
D) income statement as Other Revenues and Gains
44) The LIFO Reserve can increase only when:
A) inventory costs are stable
B) inventory costs are falling
C) inventory costs are rising
D) the foreign exchange rate is rising
45) The balance sheet reports:
A) assets, liabilities and stockholders’ equity
B) the changes in retained earnings
C) assets, liabilities, revenues and expenses
D) revenues and expenses
46) When a company sells a short-term available-for-sale security, the Gain on the Sale
of the Investment in Available-for-Sale Securities is reported on the:
A) revenues section of the income statement
B) current assets section of the balance sheet
C) other revenues and gains section of the income statement
D) stockholders’ equity section of the balance sheet
47) Marian Company has the following items for the month of July:
Inventory turnover is:
A) 3.96
B) 4.22
C) 4.53
D) 4.90
48) On May 1, the Santelle Company purchased $700 of inventory on account with
credit terms of 2/10, net 30. Santelle Company uses the perpetual inventory system. On
May 2, the seller gave Santelle Company a $100 allowance due to a product defect.
What journal entry did Santelle Company prepare on May 2?
A) debit Accounts Payable for $100 and credit Purchase Returns and Allowances for
$100
B) debit Accounts Payable for $100 and credit Purchase Discounts for $100
C) debit Cash for $100 and credit Accounts Payable for $100
D) debit Accounts Payable for $100 and credit Inventory for $100
49) Early Years Corporation reports a $17,000 increase in Inventory and a $30,000
increase in Accounts Payable for the year. If the Cost of Goods Sold is $400,000 for the
year, the cash paid to Early Years’ suppliers for inventory is:
A) $353,000
B) $370,000
C) $387,000
D) $447,000
50) Income before depreciation and taxes amounts to $200,000. Using straight-line
depreciation, the current year’s depreciation expense will be $30,000. Using
double-declining-balance depreciation, the current year’s depreciation expense will be
$50,000. Assuming a tax rate of 30%, what is the net cash saved in income taxes by
using double-declining-balance depreciation over straight-line depreciation?
A) $6,000
B) $9,000
C) $12,000
D) $15,000
51) The balance in Accounts Receivable was $650,000 at the beginning of the year and
$750,000 at the end of the year. Credit sales for the year totaled $4,100,000. During the
year, $400,000 in customer accounts were written off. How much cash was collected
from customers during the period?
A) $3,600,000
B) $4,000,000
C) $4,400,000
D) $4,800,000
52) Which financial statement reports cash payments and cash receipts over a period of
time?
A) statement of retained earnings
B) income statement
C) balance sheet
D) statement of cash flows
53) Godwin Corporation retires its bonds at 106 on January 1, after the payment of
interest. The face value of the bonds is $600,000. The carrying value of the bonds at
retirement is $619,500. The entry to record the retirement will include a:
A) debit of $36,000 to Premium on Bonds Payable
B) debit of $19,500 to Premium on Bonds Payable
C) credit of $16,500 to Gain on Retirement of Bonds
D) credit of $16,500 to Loss on Retirement of Bonds
54) When compared to the other methods of depreciation, the double-declining-balance
method of depreciation gives depreciation expense that is:
A) less in the earlier periods
B) higher in the earlier periods
C) approximately the same in earlier periods as with other methods
D) the same from year to year
55) Verifiability means that the information:
A) is timely and understandable
B) is understandable
C) must be capable of being checked for accuracy, completeness and reliability
D) is material and relevant
56) The Best Diamond Company purchased mineral rights on a diamond mine in 2014
for a price of $7,000,000. In addition to the purchase price, the Best Diamond Company
paid $100,000 for a geological survey and $20,000 for a license fee to the country
where the mine is located. It is estimated that there will be no residual value when fully
depleted. During the first year of mining, Best Diamond extracted 50,000 carats of
diamonds and in 2015, the company extracted 250,000 carats of diamonds. It is
estimated that the mine contains 1,000,000 carats of diamonds. Assume the diamonds
were not sold after they were extracted.
Required:
Prepare the journal entry without explanations to:
1> Record the purchase of the mineral rights with a note payable.
2> Record depletion for 2014.
3> Record depletion for 2015.
57) Kaley Kaimainn, the controller for Supplies Unlimited has the following accounts:
1>Compute the Current Ratio for 2014 and 2015
2>Did the Current Ratio improve?
3>Compute the Quick Ratio for 2014 and 2015
4>Did the Quick Ratio improve?
5>Compute the Collection Period for 2014 and 2015
6>Did the Collection Period improve?
58) Jerry’s Company is looking at various financing agreements. New Credit Union has
agreed to loan the company $500,000 at 8% interest. Happy Bank has agreed to loan the
company $500,000 at an interest rate of 6%. This is the lowest interest rate the company
has been offered. However, as a condition to the loan, the company must maintain a
compensating balance amount equal to 20% of the loan.
Required:
1> Determine the company’s actual effective interest rate on the bank loan.
2> Which loan has the lowest interest cost?
59) The following data was obtained from the records of Brankovich Tool and Die, Inc.,
for the current year:
Round all calculations to two decimal places. The company sold 200 units during the
year. Sales for the year are $70,000; operating expenses are $20,000; and the tax rate is
40%.
Required:
Using the multiple-step format, prepare the income statement using:
1. FIFO
2. LIFO
3. Average cost
60) Wrobell Company has the following incorrect trial balance available on December
31, 2015:
The following errors in the trial balance were made:
1> Recorded $200 cash revenue received by debiting Accounts Receivable for $200 and
crediting Revenue for $200
2> Posted a $1,000 credit to Accounts Payable as $100
3> Understated Common Stock by $200
4> Omitted a journal entry that debits Insurance Expense for $3,700 and credits Cash
for $3,700
Prepare a correct trial balance at December 31, 2015 A proper heading is not required
61) On February 1, 2015, United Delivery Services reports Common Stock of $1
million, Paid-in Capital in Excess of Par–Common of $9 million and Retained Earnings
of $10 million. On February 2, 2015, United Delivery Services reacquired 10,000
shares of its $10 par value common stock at $50 per share. On February 23, United
Delivery Services sold 1,000 of the reacquired shares at $65 per share. On February 27,
the remaining 9,000 shares were sold at $40 per share.
Required:
1>Prepare the journal entries necessary to record these transactions. Omit explanations.
62) Weaver Motors purchased a machine that will help diagnose problems with engines.
The machine cost $300,000 on January 3, 2014 and had a residual value of $30,000,
with a useful life of 6 years.
Required:
Calculate the depreciation expense and book value as of December 31, 2014 under both
the straight-line and double-declining-balance methods.
63) Complete the following chart to show the required adjusting entries for the
following situations:
64) Carrie Heffernan, Inc., has the following assets at the end of the year:
Prepare the current assets section of the balance sheet for this company.