During the closing process, expenses are transferred to the debit side of the Income
Summary account.
The Sarbanes-Oxley Act requires a company to guarantee that its financial statements
are 100 percent accurate.
Partner A purchases partner B’s $3,000 interest from partner B for $5,000. The entry to
record the transaction is for $3,000.
Profitability is best determined from cash flow information.
The heading of a work sheet might contain the line “As of February 28, 20×5.”
When a partner leaves a partnership, it is possible that total assets will be unaffected.
The use of rule-of-thumb measures is superior to comparison of financial measures or
ratios of the same company over a period of time.
Cost of goods sold would not be found on a single-step income statement.
A dividend that represents a return to the stockholders of a part of their paid-in capital
rather than a distribution out of retained earnings is called a liquidating dividend.
To understand accounting information, users must be familiar with the accounting
conventions, or rules of thumb, used in preparing financial statements.
If management wants specific information on individual items, a subsidiary ledger can
be used for Notes Receivable and Equipment.
When preparing financial statements, the accountant assumes that the business will
continue to operate for at least 5 years, unless there is evidence to the contrary.
Financial statements are often audited by management to increase confidence in the
statements’ reliability.
The Income Summary account appears in the income statement.
Days’ sales uncollected cannot be calculated without first knowing the receivables
turnover.
Fair value is the exchange price of an actual or potential business transaction between
market participants.
The amount placed opposite the Land account in the Balance Sheet columns of the
work sheet is the amount to be reflected for Land on the balance sheet.
Two major goals of business are to achieve profitability and to achieve liquidity.
The perpetual inventory system provides an up-to-date amount of inventory on hand.
Direct materials and direct labor are components of manufacturing overhead.
The two parts of a corporation’s stockholders’ equity section are contributed capital and
retained earnings.
Cost of goods sold is a type of expense.
Profitability means having enough cash on hand to pay bills when they become due.
When there is no direct connection between revenues and costs, the costs are
systematically allocated among the periods benefited.
Net income results when expenses exceed revenues.
A purchase requisition is a document sent by a company to a vendor.
The call feature of bonds is useful if a company wants to retire a bond issue.
Financing a business with common stock is more risky than financing it with bonds.
Cash is another term for owner’s equity.
An adjusted trial balance proves the balance of the ledger accounts after the adjusting
entries have been posted.
The average-cost method produces an ending inventory figure that is somewhere
between the figures produced by FIFO and LIFO.
There is no income tax imposed on a partnership.
A common measure of long-term solvency is the
A. receivable turnover.
B. asset turnover.
C. debt to equity ratio.
D. current ratio.
Use the following adjusted trial balance to answer the question below.
The entry to close the expense accounts is
A. All Expenses 100,000
John Clair, Capital 100,000
B. Income Summary 100,000
All Expenses 100,000
C. John Clair, Withdrawals 100,000
All Expenses 100,000
D. All Expenses 100,000
Which of the following is one of the conditions for recognition of an expense?
A. There is a reasonable expectation that cash will be paid.
B. The expense will be recognized only when cash is paid.
C. The goods will be delivered or the services will be provided within the accounting
cycle.
D. The goods or services are used to produce revenue.
Which of the following would not affect the balance of the Retained Earnings account?
A. Stock split
B. Net loss
C. Cash dividend declared
D. Stock dividend declared
Executive officers’ compensation is typically comprised of all of the following except
A. incentive bonuses.
B. declared dividends.
C. stock option awards.
D. annual base salaries.
Assume that a company received $1,200 in advance for one year membership fee in the
fitness center. The entry that would be made to record the recognition of revenue at the
end of first month is
A. Revenue 1,200
Cash 1,200
B. Cash 100
Revenue 100
C. Unearned Revenue 100
Revenue 100
D. Revenue 100
In preparing adjustments on the work sheet, which of the following accounts most
likely would be added to the Account Name column?
A. Telephone Expense
B. Owner’s Capital
C. Property Taxes Payable
D. Accumulated Depreciation–Buildings
Use this information to answer the following question.
The transactions below pertain to Dunhill Company, whose fiscal year ends April 30.
The entry to record the April 10 transaction (amounts rounded) is:
A. Cash 1,480
Notes Payable 1,480
B. Cash 48,520
Accounts Receivable 48,520
C. Cash 48,520
Notes Payable 48,520
D. Cash 50,000
Wages Payable was $350 at the end of October and $280 at the end of November.
Wages Expense for November was $2,000. How much cash was paid for wages during
November?
A. $1,930
B. $2,630
C. $2,070
D. $1,370
Use this information to answer the following question.
What amount must be deposited today so that $1,200 may be withdrawn at the end of each
year for three years, assuming an APR of 7 percent?
A. $3,148.80
B. $3,148.00
C. $3,366.00
D. $3,850.28
The following selected amounts were extracted from the financial statements of Luca
Corporation.
Compute the following for net sales, cost of goods sold, and gross margin. (Round answers
to the nearest tenth of 1 percent.)
a. The percentage change from Year 1 to Year 2
b. The percentage change from Year 2 to Year 3
c. The percentage change from Year 3 to Year 4
Use this balance sheet and income statement to answer the following question. Use
ending balances whenever average balances are required for computing ratios.
The total amount of working capital for National Textile is
A. $2,000.
B. $6,000.
C. $4,000.
D. $30,000.
How is Accumulated Depletion disclosed in the financial statements?
A. Contra-asset account
B. Expense account
C. Contra-liability account
D. Contra-revenue account
Which of the following does not include net income in its computation?
A. Debt to equity ratio
B. Return on assets
C. Return on equity
D. Profit margin
Suffolk Corporation issued $92,000 of 20-year, 6 percent bonds at 98 on one of its
semiannual interest dates. The straight-line method of amortization is to be used. The
entry to record the bond interest expense on the next interest payment date is: .
A. Bond Interest Expense 2,806
Unamortized Bond Discount 46
Cash 2760
B. Bond Interest Expense 5,520
Unamortized Bond Discount 520
Cash 5000
C. Cash 5,566
Unamortized Bond Discount 5,566
D. Bond Interest Expense 2,760
Which of the following bank reconciliation items would result in a journal entry?
A. Checks outstanding
B. An adjustment for a check recorded for the wrong amount
C. Deposits in transit
D. A bank error on the bank statement
When the cost-adjusted-to-market method is used to account for a long-term investment
in the stock of another company, the carrying value of the investment is directly
affected by
A. the dividend distributions of the investee.
B. the earnings and dividend distributions of the investee.
C. the earnings of the investee.
D. neither the earnings nor the dividends of the investee.
Which of the following accounts is a real account?
A. Building
B. Depreciation Expense–Buildings
C. Interest Expense
D. Service Revenue
A notice appeared in the Grant Street Times stating that Dollar Savings Association of
Texas was issuing $2.9 billion in zero coupon bonds. “The Bonds do not pay interest
periodically. The only scheduled payment to the holder of a Bond will be the amount at
maturity,” the ad read. The details of two components of the issue were as follows:
$500,000,000 Bonds due December 12, 2044, at 3.254; $500,000,000 Bonds due
December 12, 2054, at 1.380; plus accrued amortization, if any, of the original issue
discount from December 12, 2014, to date of delivery.
a. Assuming all the bonds were issued on December 12, 2014, prepare entries in journal
form to record each component shown above.
b. Determine the approximate market interest rate on each of the two components of the
bond issue. Assume that interest is compounded annually. Use Table 3 in the appendix on
future value and present value tables.
c. Prepare entries in journal form to record bond interest expense for each of the first two
years (December 12, 2015 and 2016) on the component of the bond due in 2044 (ignore
effects of fiscal year ends). What advantages or disadvantages are there to Dollar in issuing
zero coupon bonds?
Camp Corporation purchased 8,500 shares of Tent Corporation common stock for $80
per share on January 1, 2014. Tent reported net income of $220,000 for 2014 and paid
dividends of $90,000 during 2014. As of December 31, 2014, the market value of Tent
Corporation common stock was $80 per share. Assuming the shares owned by Camp
represent 30 percent of the total outstanding stock of Tent, Camp Corporation should
report the long-term investment on December 31, 2014, at a carrying value of
A. $641,000.
B. $680,000.
C. $719,000.
D. $810,000.
A work sheet is useful for all except which of the following?
A. Preparing financial statements
B. Recording closing entries
C. Recording adjusting entries
D. Recording transactions from source documents
On June 1, 20×5, Jomax Corporation had 60,000 shares of $10 par value common stock
outstanding. On June 2, 20×5, Jomax declared a 40 percent stock dividend to be
distributed on July 5, 20×5, to shareholders of record on June 15, 20×5. What amount of
retained earnings should be transferred to contributed capital because of this dividend?
A. None
B. Par value per share multiplied by the number of dividend shares
C. Market value of the stock at the date of distribution multiplied by the number of
dividend shares
D. Market value of the stock at the date of declaration multiplied by the number of
dividend shares
Under the allowance method, when a year-end adjustment is made for estimated
uncollectible accounts,
A. total assets decrease.
B. liabilities increase.
C. total assets are unchanged.
D. net income is unchanged.
If net sales total $50,000, beginning accounts receivable was $10,000, and ending
accounts receivable is 16,000, what is the days’ sales collected?
A. 73 days
B. 96 days
C. 118 days
D. 192 days
Use the following adjusted trial balance to answer the question below.
The entry to close the John Clair, Withdrawals account is:
A. John Clair, Withdrawals 40,000
Income Summary 40,000
B. John Clair, Withdrawals 40,000
John Clair, Capital 40,000
C. John Clair, Withdrawals 40,000
Income Summary 40,000
D. John Clair, Capital 40,000
Horshack Mining Company purchases a gravel pit for $5,000,000. It estimates that
10,000,000 tons of gravel can be extracted over the pit’s useful life. If 1,860,000 tons
are extracted and sold during the first year, the entry to record depletion expense will
include
A. debit to Depletion Expense, 930,000; credit to Accumulated Depletion, 930,000.
B. debit to Depletion Expense, 232,500; credit to Accumulated Depletion, 232,500.
C. debit to Accumulated Depletion, 930,000; credit to Depletion Expense, 930,000.
D. debit to Depletion Expense, 465,000; credit to Accumulated Depletion, 465,000.
A very small company would have the most difficulty in implementing which of the
following internal control activities?
A. Sound personnel procedures
B. Periodic independent verification
C. Limited access to assets
D. Separation of duties
Which of the following statements is true about successful efforts accounting?
A. It is a depreciation method
B. All costs are recorded as assets and then depleted over the resource’s useful life.
C. The cost of a dry well would be written off immediately as a loss.
D. The cost of successful exploration is recorded as an asset and is not written off.
Which of the following accounts most likely would have an amount contained in the
Income Statement columns of a work sheet but not in Balance Sheet columns of work
sheet?
A. Office Supplies Expense
B. Property Taxes Payable
C. Owner’s Capital
D. Withdrawals
Use the following adjusted trial balance to answer the question below.
The entry to close the Jet Ski Rentals account is
A. Income Summary 192,000
Jet Ski Rentals 192,000
B. Jet Ski Rentals 192,000
John Clair, Withdrawals 192,000
C. John Clair, Capital 192,000
Jet Ski Rentals 192,000
D. Jet Ski Rentals 192,000
Inventory on hand is considered
A. a current asset.
B. a current liability.
C. a long-term asset.
D. an expense.
Which of the following is a measure of liquidity?
A. payables turnover
B. the current ratio
C. working capital
D. All of these are used to evaluate a company’s liquidity.
The Sarbanes-Oxley Act of 2002 came, in part, as a result of
A. the Enron scandal
B. the WorldCom scandal
C. the Target scandal
D. the Enron and WorldCom scandals
Which of the following would be considered a revenue expenditure?
A. Purchase of a microcomputer
B. Installation of a heating system
C. Addition of a building wing
D. Replacement of a truck’s battery
A quick ratio that is about equal to the current ratio indicates that
A. inventories represent a large portion of current assets.
B. the company has a low inventory turnover.
C. inventories represent a small portion of current assets.
D. the company has a high inventory turnover.
You win the grand prize and can choose between receiving $100,000 today or $20,000
per year for seven years. Ignoring income taxes, how would you go about making your
decision?
Distinguish between profitability and liquidity.
When a company receives a dividend from its investee, what will be the effect on the
financial statements of the investing company if it uses the equity method?
Use the following accounts and information to prepare, in good form, an income
statement, statement of owner’s equity, and balance sheet for Day Industries for the
month ended July 31, 2014.
Comment on the change in both the carrying value and the balance of the Unamortized
Bond Premium account over the life of a bond issue.
How and why is the matching rule applied to the cost of a building?
On a balance sheet, what items normally are included in Cash?
Highland, Inc. entered into the transactions listed below. In the journal provided,
prepare Highland’s entries, assuming use of the perpetual inventory system. Omit
explanations.
For each description, provide the letter of the intangible asset that is being described.
Pearson Company uses the retail method to estimate the cost of ending inventory.
Describe how a dissolution of a partnership is different from a liquidation of a
partnership.
On January 2, 2013, Topanga Company purchased a machine for $90,000.
What is the purpose of adjusting entries?
Contrast the accounting problems presented by definitely determinable liabilities and
those associated with estimated liabilities.
A company establishes a $150 petty cash fund. The fund is replenished in the amount of
$136, after petty cash vouchers of $66 for transportation, $44 for supplies, and $22 for
postage had accumulated. Was there a cash shortage, overage, or neither?