An estimated liability is not a definite obligation of the firm because the amount cannot
be definitely determined.
Held-to-maturity securities are always debt securities, and never equity securities.
Based on past experience, it should be possible to estimate the amount that a product
warranty will cost the company in the future.
Liabilities are established with credits and eliminated with debits.
A stock dividend will cause an increase in total contributed capital at the date the
dividend is declared.
Book value per share of stock represents the amount the shareholder will receive per
share if the company is sold or liquidated.
Working capital equals current assets divided by current liabilities.
If it takes 45 days to sell inventory, 30 days to collect for the sale, and creditors’
payment terms are 60 days, the financing period is 135 days.
If a 20-year bond pays interest of 8 percent semiannually, the present value of the bond
is calculated based upon (1) 4 percent and 40 periods for the interest, and (2) 8 percent
and 20 periods for the face amount of the bond.
Financial accounting information is used primarily by management.
Natural resources, such as coal mines and oil wells, are classified as intangible assets.
The post-closing trial balance will contain only nominal accounts.
Closing entries can be prepared by referring solely to the Income Statement columns of
the work sheet.
Under tax depreciation, estimated useful life and residual value must be strictly adhered
to.
The higher the receivables turnover, the lower the days’ sales uncollected.
The account Allowance to Adjust Short-Term Investments to Market appears as a
contra-asset on the balance sheet.
The cash basis of accounting is prohibited for income tax purposes.
Under an effective system of internal control, errors occur only as a result of fraud or
dishonesty.
Owner withdrawals are an example of an expense.
The costs of an automated perpetual inventory system are considerable because they
include the costs of automating the system, maintaining the system, and taking a
physical inventory.
An adjusted trial balance must be prepared before the adjusting entries can be recorded.
Most bonds issued today are registered bonds rather than coupon bonds.
A manufacturer’s inventory consists of raw materials, work in process, and finished
goods.
Separation of duties relates to a control activity in the accounting system.
When a new partner invests less than the proportionate share he or she receives in the
partnership, a bonus is recorded to his or her account.
A major criticism of the FIFO method is that it magnifies the effects of the business
cycle on business income.
The balance sheet is also known as the statement of financial position.
The Income Statement columns of the work sheet show all the accounts that need to be
closed.
The annual interest earned on an amount deposited into a bank account will be the same
each year when compound interest is used.
Under the perpetual inventory system, inventory losses can be identified more easily
than under the periodic inventory system.
Under a periodic inventory system, cost of goods sold is not recorded until the end of
the accounting period.
Depreciation refers to the periodic allocation of the cost of a tangible long-lived asset
over its estimated useful life.
A cost-to-retail percentage must be calculated when applying the gross profit method.
Net assets equal owner’s equity.
Accounting for a partnership comes closer to accounting for a corporation than to
accounting for a sole proprietorship.
When discarding equipment, depreciation need not by updated.
Investors and creditors use financial statements to evaluate a company’s ability to pay
dividends and interest.
A small stock dividend normally results in a transfer from Retained Earnings to
Contributed Capital of an amount equal to the market value of the stock.
The intentional preparation of misleading financial statements is referred to as
fraudulent financial reporting.
The interest coverage ratio is expressed as a percentage.
If a company’s free cash flow is $90,000, net cash flows from operating activities total
$220,000, purchases of plant assets total $100,000, and sales of plant assets total zero,
what amount is committed to dividends?
A. $20,000
B. $30,000
C. $60,000
D. Impossible to determine from the facts given.
Which of the following transactions involves an exchange of value?
A. Accumulation of interest
B. Sale of services
C. Fire damage
D. Wear and tear on machinery
Stuart had a $100,000 capital balance for eight months and a $130,000 balance for four
months. Cathy had a $76,000 capital balance for five months and a $100,000 balance
for seven months. If the net income of the year is $160,000, and income is distributed
based on average capital balances, the entry to show the distribution of income to each
partner is:
Use this information to answer the following question.
The following totals for the month of September were taken from the payroll register of
Meadors Company:
The journal entry to record the monthly payroll on September 30 would include a
A. debit to Salaries Expense for $24,000.
B. debit to Salaries Payable for $24,000.
C. credit to Salaries Payable for $24,000.
D. debit to Salaries Expense for $9,000.
Which of the following taxes is not subject to a maximum amount per employee per
year?
A. State unemployment tax
B. Federal unemployment tax
C. Social security tax
D. Medicare tax
The owner’s Capital, Withdrawals, and Income Summary accounts for Harmon Repair
Company for the accounting period are presented below in T account form after the
recording and posting of closing entries:
The total amount of expenses for the period is
A. $500.
B. $700.
C. $400.
D. $100.
The financing period
A. is the time it takes to purchase inventory, sell it, and collect the sales.
B. defines how much additional financing the company must have to support its
operations.
C. is calculated as days’ sales uncollected minus days’ inventory on hand minus days’
payable.
D. measures a company’s short-term debt-paying ability.
Relevance is comprised of all of the following except
A. Neutrality
B. Materiality
C. Predictive value
D. Confirmative value
Major assumptions made in measuring business income include all of the following
except
A. continuity.
B. periodicity.
C. matching.
D. accrual accounting.
All of the following are operating leases except a
A. monthly lease on a building that can be canceled with 90 days’ notice.
B. ten-year lease on a new building.
C. two-year lease on a truck with an option to renew for one more year.
D. five-year lease of a computer with an option to buy for a small amount at the end of
the lease.
Which of the following is a measure of liquidity?
A. Return on equity
B. Return on assets
C. Working capital
D. Profit margin
Equipment is purchased for $40,000. It has an eight-year useful life and a $21,375
residual value. Under the double-declining-balance method, what is the depreciation
expense for year 3?
A. $875
B. $1,125
C. $1,375
D. $5,625
Miner Corporation issued 2,000 shares of its $20 par value common stock for some
land. The land had a fair market value of $62,000.
Prepare the entries in journal form necessary to record the stock issue for the land under
each of the following conditions:
a. The stock was selling for $28 per share on the day of the transaction.
b. Management attempted to place a market value on the common stock but could not
do so.
Determine the interest on the following notes payable:
a. $6,000 at 10 percent for 60 days
b. $600 at 16 percent for 4 months
c. $10,000 at 12 percent for 45 days
d. $900 at 14 percent for 30 days
Office Supplies was $1,800 at the end of January and $2,280 at the end of February.
During February, Office Supplies Expense equaled $560. How much cash was paid for
office supplies during February?
A. $440
B. $2,840
C. $3,440
D. $1,040
Which of the following would not be included in the cost of land?
A. Cost of clearing unneeded building from land
B. Sewer assessment from local government
C. Cost of paving land for parking
D. Commission to real estate agent
Expenses are incurred
A. to generate revenue.
B. to produce liabilities.
C. only during the adjustment process.
D. to produce assets.
The cash payments journal would normally post a
A. debit to Cash.
B. credit to Purchases Discounts.
C. credit to Accounts Payable.
D. credit to Advertising Expense.
A copyright is obtained for what becomes a very successful book. The publisher expects
the book to generate sales for ten years. The copyright should be
A. amortized over the author’s life plus 70 years.
B. expensed immediately.
C. amortized over 10 years.
D. amortized over a reasonable life.
Accounting information should make a difference to the outcome of a decision,
according to the qualitative characteristic of
A. faithful representation.
B. relevance.
C. consistency.
D. understandability.
All of the following statements about partnerships are true except
A. partners must share profits and losses equally.
B. a change in ownership will dissolve the partnership.
C. any partner can enter into a binding agreement with a third party.
D. all partners have unlimited liability.
Which of the following is an application of accrual accounting?
A. Depreciating a building as quickly as allowed by income tax regulations.
B. Recording utilities expense in the accounting period covered by the monthly bill.
C. Expensing a machine in its entirety when purchased.
D. Recording revenue at the time payment is received.
Austin invests $80,000 for a 20 percent interest in a partnership that has capital totaling
$300,000 after admitting Austin. Which of the following is true?
A. The original partners received a bonus of $20,000.
B. Austin received a bonus of $20,000.
C. Austin’s capital is $80,000.
D. The original partners’ capital in the business was $240,000 before admitting Austin.
The convention of consistency refers to consistent use of accounting principles
A. among firms.
B. within a given accounting period.
C. within industries.
D. among accounting periods.
The cost-adjusted-to-market method of accounting for investments is used when the
investment is
A. controlling.
B. influential and noncontrolling.
C. noninfluential and controlling.
D. noninfluential and noncontrolling.
_____________ are liabilities that arise from a contract that requires a company to
make payments to its employees after they retire.
A. Deferred income taxes.
B. Other post-retirement benefits.
C. Capital leases.
D. Pensions.
Which of the following would be considered a revenue expenditure?
A. Cleaning the ink from a printing press
B. Addition of a storeroom
C. Purchase of office furniture
D. Installation of audiovisual equipment in a classroom
A customer is injured using a company’s product. The potential liability that may result
is called a(n)
A. contingent liability.
B. estimated liability.
C. definitely determinable liability.
D. estimated warranty liability.
In the journal provided, prepare year-end adjustments for the following situations. Omit
explanations.
a. Accrued interest on notes receivable is $560.
b. Of the $7,200 received in advance of earning a service, two-thirds was still unearned
by year end.
c. Two years of rent, totaling $24,000, was paid in advance. By year end, six months’
worth had expired.
d. Services totaling $685 had been performed, but not yet billed.
e. Depreciation on trucks totaled $1,700 for the year.
Which of the following transactions will result in the recognition of an expense?
A. Interest accrued on a bank loan.
B. A cash withdrawal by the owner.
C. Payment on accounts payable.
D. All of these choices.
Dechter Company acquired a mine for $1,800,000 which has an estimated residual
value of $300,000 and contains an estimated 1,500,000 tons of coal. If 230,000 tons of
coal are mined and sold during the first year, the entry to record the depletion charge is:
A. Accumulated Depletion—Coal Deposits 230,000
Depletion Expense—Coal Deposits 230,000
B. Accumulated Depreciation—Asset 276,000
Asset 276,000
C. Depletion Expense—Coal Deposits 230,000
Accumulated Depletion—Coal Deposits 230,000
D. Accumulated Depletion—Coal Deposits 230,000
Fergus Company is considering the purchase of a machine that will save the company
$4,000 per year in operating costs for a period of seven years. The most it should pay
for the machine is equal to
A. $4,000 times the present value of an ordinary annuity for 7 periods.
B. $28,000.
C. $4,000 divided by the future value of a single sum at the end of 7 periods.
D. $4,000 times the future value of an ordinary annuity for 7 periods.
The following lettered items represent a classification scheme for a multistep income
statement. In the blank next to each account, write the letter indicating to which
category it belongs.
Which of the following financial statements is concerned with the enterprise at a point
in time?
A. Statement of owner’s equity
B. Income statement
C. Statement of cash flows
D. Balance sheet
Start-up and organization costs for a corporation that is to operate a retail store would
include the costs of
A. promoters’ fees and printing stock certificates.
B. advertising for a grand opening sale.
C. the initial purchase of inventory.
D. counters and racks to display merchandise.
The following data exist for Sexton Company:
Eva Gomez is considering investing money in the common stock of Casa Corporation.
She has obtained the annual report of the company and calculated the ratios presented
in your text. Eva knows that her calculations are accurate, but does not know if the
ratios indicate favorable or unfavorable things about the company. What three standards
of comparison are available to Eva? What would each of the standards tell her about her
ratios?
Under what circumstances is a contingent liability reflected in the accounting records as
though an actual liability exists?
Assuming that the allowance method is being used, prepare journal entries to record the
following transactions. Omit explanations.
Mar. 15 Sold merchandise to Foster for $12,000 on account.
Apr. 15 Received $6,000 from Foster.
Aug. 15 Wrote off Foster’s account as uncollectible.
Nov. 15 Unexpectedly received payment in full from Foster.
When determining the value of a bond using present value, what are the two
components used in the calculation?
Prepare closing entries for December without explanations from the following Income
Statement columns of the work sheet of Duffy Cleaning Service, assuming that a $250
owner withdrawal was made during the period.
Reynaldo Company has current assets of $115,000 and current liabilities of $75,000 of
which accounts payable are $65,000.
How is the matching rule applied when accounting for merchandise inventory?
Cash and other assets that a company can reasonably expect to convert to cash, sell, or
consume within one year or its normal operating cycle, whichever is longer. Return on
assets.
Rachel and Dillon divide partnership income and losses solely on the basis of their
average capital balances. Rachel had $55,000 invested during all of 20×5; Dillon had
$40,000 invested from January 1 to August 31, and he invested another $15,000 on
September 1. If income was $160,000 during 20×5, how much should each partner
receive?
When fixed mortgage payments are made, in what way does the interest portion change
each month, and why?
Current assets divided by current liabilities.
Paul, Quinn, and Ralph have equities in a partnership of $120,000, $180,000, and
$100,000, respectively, and share income and losses in a ratio of 2:1:2, respectively.
The following facts pertain to Quail Corporation:
On the basis of these facts, compute the amount of net income (loss) for Quail Corporation
for 20×5.
Saybrook Company purchased a machine on January 2, 2014. Under the terms of the
purchase agreement, the company is required to make 14 quarterly installment
payments of $23,000 each, beginning April 1, 2014. Assuming 16 percent interest
compounded quarterly, determine the purchase price of the machine. Use future value
and/or present value tables in calculating your answer.
On December 31, 20×5, the X&Y Partnership had the following assets, liabilities, and
partners’ equity:
When the partners agreed to liquidate the business, the assets were sold for $160,000 and
the liabilities were paid. X and Y share profits and losses in a ratio of 3:1, respectively.
What is the final cash distribution to each partner after liquidation?