COMPREHENSIVE EXAMINATION D
(Chapters 12 – 14)
Approximate
Problem Topic Points Minutes
E – I Multiple Choice …………………………………….. 18 18
E – II Short-term Investments ………………………….. 10 10
E – III Long-term Investments ………………………….. 20 14
E – IV Statement of Cash Flows ……………………….. 25 21
E – V Calculation of Ratios ……………………………… 27 22
100 85
Checking Work …………………………………….. 5
90
Test Bank for Financial Accounting, Ninth Edition
D- 2
Problem D – I — Multiple Choice (18 points)
Circle the one best answer.
1. Inventory turnover is computed by dividing the average inventories into
a. net sales.
b. total assets.
c. stockholders’ equity.
d. cost of goods sold.
2. Unrealized loss on available-for-sale securities appears as a deduction
a. on the income statement as an expense.
b. from total assets on the balance sheet.
c. from revenues on the income statement.
d. from stockholders’ equity on the balance sheet.
3. On January 1, 2015, Hunt Company purchased 30,000 shares of the 100,000 common
shares outstanding of Agler Company for $2,700,000. During 2015, Agler Company
reported net income of $600,000 and paid a cash dividend of $275,000. The balance of
the Stock Investments account on the books of Hunt Company on December 31, 2015, is
a. $2,797,500.
b. $2,617,500.
c. $2,880,000.
d. $2,700,000.
4. The purchase of office equipment for $15,000 cash
a. is a cash outflow from financing activities.
b. is a cash outflow from operating activities.
c. is a cash outflow from investing activities.
d. does not affect cash flows.
5. Colaw Company reported net income of $80,000 for the year ended December 31, 2015.
During the year, inventories decreased by $28,000, accounts payable decreased by
$32,000, depreciation expense was $40,000, and a gain on disposal of equipment of
$26,000 was recorded. Net cash provided by operations in 2015 using the indirect method
was
a. $206,000.
b. $42,000.
c. $154,000.
d. $90,000.
6. Which one of the following transactions does not affect cash?
a. Acquisition and retirement of bonds payable
b. Write-off of an uncollectible accounts receivable
c. Acquisition of treasury stock
d. Payment of cash dividend
Comprehensive Examination D
D- 3
7. Theel Company had a balance in the Inventory account of $260,000 at the beginning of
the year and a balance of $340,000 at the end of the year. Inventory turnover for 2015
was 5 times. If gross profit as a percentage of sales was 40%, the amount of sales for
2015 was
a. $2,500,000.
b. $1,500,000.
c. $3,750,000.
d. $937,500.
8. Callis Company reported net income of $140,000 for 2015. The income statement also
indicates that interest expense for 2015 was $50,000. Assuming an income tax rate of
30%, the times interest earned for 2015 was
a. 4 times.
b. 5 times.
c. 3.8 times.
d. 2.8 times.
9. During 2015, Morlan Company had an asset turnover of four times with sales totaling
$1,000,000. If net income was $60,000, Morlan Company’s return on assets in 2015 was
a. 6%.
b. 24%.
c. 30%.
d. 60%.
Test Bank for Financial Accounting, Ninth Edition
D- 4
Problem D – II — Short-term Investments (10 points)
Nolan Company entered into the transactions listed below during 2015. Prepare the appropriate
journal entries for Nolan Company. You may omit journal entry explanations but you should show
computations.
Jan. 10 Purchased 500 shares of Scott Company common stock for $35,000 as a short-
term investment in equity securities.
Apr. 6 Purchased 1,000 shares of Jensen Company common stock for $45 per share as
a short-term investment in equity securities.
Sept. 20 Sold 400 shares of Jensen Company common stock for $20,400.
Dec. 31 Use the following information for year-end adjusting entries:
Fair value per share:
Scott Company Common Stock—$69 per share.
Jensen Company Common Stock—$42 per share.
Nolan classifies both investments as trading securities.
Problem D – III — Long-term Investments (20 points)
Gerber Corporation purchased the following long-term investments in stock securities on January
10, 2015:
10,000 shares of the 100,000 outstanding common shares of Todd
Corporation for $400,000.
3,000 shares of the 10,000 outstanding common shares of Carey
Company for $135,000.
6,000 shares of the 50,000 outstanding common shares of Maris
Company for $150,000.
Other information:
Dividends Per Share
Net Income Declared and Fair Value
for 2015 Paid in 2015 at 12/31/15
Todd Corporation $ 90,000 $50,000 $37
Carey Company 200,000 80,000 50
Maris Company 50,000 25,000 23
Instructions
Prepare the journal entries for Gerber Corporation to record the acquisition of the long-term stock
investments, the receipt of dividends, and any other necessary entries at year end on December
31, 2015. Assume that Gerber Corporation’s ownership interest in each company remained
constant throughout the year.
Comprehensive Examination D
D- 5
Problem D – IV — Statement of Cash Flows (24 points)
The comparative balance sheet for Lane Company appears below:
LANE COMPANY
Comparative Balance Sheet
Dec. 31, 2015 Dec. 31, 2014
Assets
Cash ……………………………………………………………………………….. $40,000 $12,000
Accounts receivable …………………………………………………………… 5,000 8,000
Inventory ………………………………………………………………………….. 11,000 7,000
Prepaid expenses ……………………………………………………………… 2,000 3,000
Buildings ………………………………………………………………………….. 20,000 20,000
Accumulated depreciation—buildings …………………………………… (3,000) (2,000)
Total assets …………………………………………………………………. $75,000 $48,000
Liabilities and Stockholders’ Equity
Accounts payable ………………………………………………………………. $ 2,000 $ 4,000
Long-term note payable ……………………………………………………… 13,000 14,000
Common stock ………………………………………………………………….. 33,000 18,000
Retained earnings ……………………………………………………………… 27,000 12,000
Total liabilities and stockholders’ equity ……………………………. $75,000 $48,000
The income statement for the year is as follows:
LANE COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales revenue (all on credit) ………………………………………………… $280,000
Expenses and gains:
Cost of goods sold ……………………………………………………….. $199,000
Operating expenses, exclusive of depreciation ………………….. 42,300
Depreciation expense ……………………………………………………. 1,000
Interest expense …………………………………………………………… 1,200
Gain on disposal of land ………………………………………………… (2,500)
Income taxes ……………………………………………………………….. 9,000
Total expenses and loss …………………………………………… 250,000
Net income ……………………………………………………………………….. $ 30,000
Cash dividends of $15,000 were paid during the year. Land costing $15,000 was acquired by the
issuance of common stock. The property was subsequently sold for $17,500 cash.
Instructions
Prepare a statement of cash flows for the year ended December 31, 2015 using the indirect
method.
Test Bank for Financial Accounting, Ninth Edition
D- 6
Problem D – V — Ratios (27 points)
The financial information below was taken from the annual financial statements of Falls
Company.
2015 2014
Current assets $240,000 $170,000
Current liabilities 80,000 90,000
Total assets 550,000 450,000
Sales revenue 750,000 600,000
Cost of goods sold 520,000 510,000
Inventory 90,000 110,000
Accounts receivable (net) 100,000 60,000
Net income 60,000 48,000
Common stockholders’ equity 330,000 270,000
Total liabilities 220,000 180,000
Instructions
Calculate the following ratios for Falls Company for 2013. Round to one decimal place.
1. Return on assets.
2. Average collection period of receivables in days.
3. Current ratio.
4. Debt to assets ratio.
5. Inventory turnover.
6. Profit margin.
7. Asset turnover.
8. Return on common stockholders’ equity.
Comprehensive Examination D
D- 7
Solutions — Comprehensive Examination D
Problem D – I — Solution (18 points)
Test Bank for Financial Accounting, Ninth Edition
D- 8
Comprehensive Examination D
D- 9