60. On December 31, the trial balance of Cubico Company included the following accounts with debit balances:
Prepaid Advertising
$1,500
Advertising Expense
5,400
If it is determined that the cost of advertising applicable to future periods is $3,300, the correct adjusting entry would
61. Which type of income shows how much a company earns from carrying on its normal operations?
62. Items incurred or earned from activities peripheral to normal operations are classified as
63. Which of the following is NOT a criterion for qualifying as an extraordinary item?
64. Which of the following are reported on the income statement along with their tax effects?
65. Earnings per share is NOT calculated on which of the following amounts?
66. Which of the following items would NOT be classified in the “Other Revenues and Expenses” section of the
income statement?
67. Which of the following items would be classified in the “Other Revenues and Expenses” section of the
income statement?
68. Earnings per share is equal to
69. Which of the following items should be reported as an extraordinary item?
70. What effect does an extraordinary item have on the taxes of a company?
71. Diluted earnings per share includes stock transactions that might occur in the future such as
72. Which of the following events would be considered an extraordinary item?
73. Under which of the following conditions would hurricane damage be considered an extraordinary item for
financial reporting purposes?
74. Dike Corporation incurred the following losses during 2012:
·
Loss of $480,000 was incurred in the abandonment of equipment
·
Accounts receivable of $96,000 were written off as uncollectible
·
Several factories were shut down during a strike at a cost of $768,000
·
Loss of $320,000 was sustained as a result of flood damage, an unusual and infrequent occurrence
Ignoring income taxes, what amount of loss should Dike report as extraordinary on its annual income statement?
75. During the year, Perez Company earned revenues of $113,625 and incurred $98,000 for various operating
expenses. There are 1,250 shares of stock outstanding. Earnings per share is
76. Assante Corporation reported the following data for the period: earnings per share, $4.80; retained earnings,
$54,000; revenues, $150,000; capital stock, $30,000; expenses, $126,000. Given the above information, how
many shares of stock are outstanding?
77. The following information was taken from the records of Elton Corporation for the period ending December
31, 2012:
Advertising expense
$1,200
Equipment
800
Depreciation expense
50
Accounts receivable
1,500
Notes payable
6,000
Retained earnings
8,420
Utilities expense
1,335
Revenues
4,865
Dividends
975
Interest receivable
125
Rent expense
660
Assuming that 6,000 shares of stock are outstanding, earnings per share is approximately
78. The following information is from Everly Corp.’s records at December 31, 2012:
Advertising expense
$ 30,440
Income tax expense
28,250
Accounts payable
26,900
Dividends paid
19,600
Retained earnings (12/1/12)
115,720
Consulting fees revenue
195,350
Rent expense
25,520
Supplies expense
20,900
If Everly has 4,000 shares of stock outstanding, earnings per share is approximately
79. On December 31, 2012, Johnson Corporation reported total revenue of $750,000 and total expenses of
$425,000. Johnson had 4,000 shares of stocks outstanding. Also, as of January 1, 2012, Johnson had issued
stock options that allowed employees to receive 1,000 shares of stock for free at a time of their choosing in the
future. As of December 31, none of these stock options had been exercised. What is basic earnings per share for
Johnson Corporation?
80. Romulus Corporation incurred the following losses during 2012:
·
Loss of $240,000 was incurred in the abandonment of equipment
·
Accounts receivable of $48,000 were written off as uncollectible
·
Several factories were shut down during a strike at a cost of $384,000
·
Loss of $160,000 was sustained as a result of flood damage, an unusual and infrequent occurrence
Assuming that Romulus has a 40% income tax rate, what amount of net loss should Romulus report as extraordinary on its annual income
statement?
81. On December 31, 2012, Johnson Corporation reported total revenue of $750,000 and total expenses of
$425,000. Johnson had 4,000 shares of stocks outstanding. Also, as of January 1, 2012, Johnson had issued
stock options that allowed employees to receive 1,000 shares of stock for free at a time of their choosing in the
future. As of December 31, none of these stock options had been exercised. What is diluted earnings per share
for Johnson Corporation?
82. Amy Tan earns $7,200 per month as the only employee of a small shop. FICA taxes on her salary are 7.65
percent of the first $50,000. Federal income taxes are withheld at the rate of 30 percent and state income taxes
at the rate of 7 percent. Her employer is subject to 0.8 percent FUTA tax and 3.0 percent SUTA tax.
Prepare the journal entries to be made by her employer for the month of January. (Round to the nearest dollar.)
83. John Ackley and Susan Baldwin are employees of Clarion Company. Both John and Susan work 8 hours a
day and are paid monthly on the last day of the month. John is paid at a rate of $15 per hour and Susan is paid
$12 per hour. John and Susan accrue compensated absences throughout the year at a rate of 1.5 days per month.
In March, John missed three days of work due to illness and Susan missed one day of work. Both John and
Susan have payroll withholdings of 25%.
a.
Prepare the journal entries to record the monthly accrual of compensated absences on January 31 and February 28.
b.
Prepare the journal entries for March 31 to record the accrual of compensated absences and the use of John and Susan’s accrued
compensated absences. Use the account Various Taxes Payable for the payroll withholdings.
a.
January 31
Salaries Expense
February 28
Salaries Expense
Sick Days Payable – Susan
March 31
Salaries Expense
Sick Days Payable – Susan
Sick Days Payable – John
Cash
Cash
January 31
Salaries Expense
7,200
Federal Withholding Taxes Payable
2,160
FICA Taxes Payable (employee)
Cash (or Wages Payable)
3,985
FICA Taxes Payable (employer)
Federal Unemployment Taxes Payable
State Unemployment Taxes Payable
84. Bristol Company’s accounting records contained the following information for a current year:
Pension service cost
$ 285,000
Pension fund assets, year-end
3,515,000
Pension related interest cost for the year
304,000
Pension obligation, year-end
3,306,000
Return on pension fund assets for the year
380,000
a.
Indicate what pension amount Bristol will report in its balance sheet at year-end.
b.
Compute the amount of pension expense shown on the income statement for the year.
85. Fonda Company’s fiscal year is the calendar year. During the month of June 2012, Fonda received a bill for
$46,500 of property tax assessed that is due on July 15, 2012 for the period July 1, 2012 through June 30, 2013.
Prepare journal entries to record
a.
The payment of the property taxes on July 15, 2012.
b.
The adjusting entry for property taxes on December 21, 2012.
a.
Prepaid property tax
46,500
Cash
46,500
b.
Property tax expense
23,250
Prepaid property tax
23,250
86. Gribble’s fiscal year is the calendar year. During the month of July 2012, the following tax related events
occurred at the Gribble Company:
·
Received a property tax summary from the county government for the period July 1, 2011 through June 30, 2012. The property tax for that
period was $7,500. This bill was prepaid on December 30, 2011.
·
Sales of $100,000 were made during the month. The sales tax rate is 6 percent and the sales tax liability was recorded as sales were
recorded.
·
Income before taxes for the second quarter (ended on June 30, 2012) was $70,000 and the income tax rate is 30 percent.
b.
Pension service cost
$285,000
Pension related interest
304,000
Return on fund assets
(380,000)
Pension expense
$209,000
Prepare journal entries to record
a.
The proper amount of property tax expense on June 30, 2012
b.
The payment of the sales tax collected during June
c.
The recognition of the income taxes for the second quarter
87. Gowrie, Inc. began operations on January 1, 2012. At the end of its first year of business, Gowrie reported
$465,000 income before taxes on its income statement. At the end of 2012, Gowrie also had $45,000 of incurred
expenses that were not yet tax deductible according to income tax regulations. Gowrie’s tax rate is 35%.
a.
Compute the amount of income tax expense to be reported on Gowrie, Inc.’s income statement for 2012.
b.
Compute the amount of income tax that Gowrie, Inc. legally owes for taxable income generated during 2012.
c.
Determine the amount of deferred income tax liability or deferred income tax asset that Gowrie, Inc. has as of the end of 2012.
a.
Income tax expense: $465,000 ´ 35% = $162,750
b.
Income tax payable: ($465,000 + $45,000) ´ 35% = $178,500
Deferred income tax asset: $45,000 ´ 35% = $15,750
Property Tax Expense
3,750
Prepaid Property Taxes
3,750
b.
Sales Tax Payable
6,000
Cash
6,000
Income Tax Expense
21,000
Income Taxes Payable
21,000
88. A contingency is an uncertain circumstance involving a potential gain or loss that will not be resolved until
some future event occurs. The following table lists the possible outcomes of a contingency. Complete the table
by filling in the definition and required accounting for each possible outcome.
Term
Definition
Accounting
Probable loss
Reasonably possible loss
Remote loss
Gain
89. Indicate the appropriate accounting treatment for each independent situation shown below.
a.
Assante Corporation is the defendant in an age-discrimination lawsuit for $10 million. The company’s lawyers believe there is a 95 percent
probability that Assante will lose the case and that the loss will more than likely be $9 million.
b.
Otay, Inc. has been accused of violating several federal regulatory laws. If found guilty, the company will incur significant fines and
penalties. The company’s attorneys feel the accusations are baseless and that there is only a 5 percent chance that the company will be
found guilty.
c.
Grammar Company is being accused of fraudulent reporting. The company’s lawyers believe there is a 45 percent chance of losing the
case.
d.
Ortiz Corporation is suing another company for patent infringement. The attorneys for Ortiz feel there is an 80 percent chance that they
will win the case and that the court will award them a $5 million judgment.
a.
A 95 percent probability is likely to be interpreted as probable. The liability and associated loss should be formally recorded in the
accounting records, and a footnote disclosure should be made as well.
A 5 percent chance is likely to be interpreted as remote. No information need be disclosed in the notes to the financial statements.
c.
A 45 percent probability falls somewhere between remote and probable. This would typically be interpreted as reasonably possible. If so, a
footnote disclosure is appropriate.
Gain contingencies are not recognized.
Term
Definition
Accounting
Probable loss
The future event is likely to create a loss.
Estimate the amount of the contingency and
make the appropriate journal entry; provide
Reasonably possible loss
The chance of the future event occurring is
Provide detailed disclosure of the possible
Remote loss
The chance of the future event occurring and
causing a loss is slight.
No disclosure is required.
Gain
The future event will cause a gain for the
company.
No disclosure is required.
90. Accounting rules give specific instructions on whether to expense or capitalize research and development
costs and advertising costs. List the rules associated with these two costs.
91. Indicate whether the following independent expenditures should be capitalized or expensed. Explain your
answers.
a.
Cruz Company spent $500,000 on new equipment. The equipment has an estimated useful life of 12 years.
b.
Carver Corporation spent $5 million researching a new production process. The company expects to reduce operating costs significantly
when the result of the research is implemented next year.
c.
Kids Klothes, Inc. has spent $2 million creating a targeted advertising campaign that will motivate regular customers of the company’s on-
line service to buy new clothes.
d.
Hype.com is paying $400,000 for newspaper advertising on its new product line. The company expects the ad will generate increased sales
for the next 2 years.
a.
Capitalize. This is a depreciable asset whose service will help generate future revenues over its useful life.
b.
Expense. Research and development costs are expensed as incurred.
c.
Capitalize. This is targeted advertising directed at specific past customers.
d.
Expense. This is advertising pertaining to a new product and not directed at specific past customers.
92. On December 31, 2012, Rippey Corporation reported total revenue of $3,750,000 and total expenses of
$2,125,000. Rippey had 50,000 shares of stocks outstanding. Also, as of January 1, 2012, Rippey had issued
stock options that allowed employees to receive 15,000 shares of stock for free at a time of their choosing in the
future. As of December 31, none of these stock options had been exercised.
a.
What is basic earnings per share for Rippey Corporation?
b.
What is diluted earnings per share for Rippey Corporation?
a.
Basic earnings per share: ($3,750,000 – $2,125,000) ¸ 50,000 = $32.50
b.
Diluted earnings per share: ($3,750,000 – $2,125,000) ¸ (50,000 + 15,000) = $25
93. Kline Corporation has taken the following information from the accounting records on December 31, 2012.
Prepare an income statement, in good form, for the year ended December 31, 2012. Assume that there are
50,000 shares of capital stock outstanding.
Gross sales revenue
$1,721,500
Income tax expense
48,000
Insurance expense (general and administrative)
950
Automobile expense (selling)
1,750
Miscellaneous selling expense
6,600
Payroll tax expense (selling)
1,550
Rent expense (selling)
9,000
Sales salaries expense
150,000
Cost of goods sold
1,270,500
Interest expense
23,000
Interest revenue
6,500
Advertising and promotion expense (selling)
80,000
Sales returns and allowances
6,000
Office supplies expense
5,550
Administrative salaries expense
70,000
Earthquake loss (net of taxes)
20,000
