The result of using the effective interest method of amortization for bond discounts is
that the
a. interest expense for each amortization period is constant.
b. effective interest rate for each amortization period is constant.
c. amount of interest expense decreases each period.
d. cash interest payment is greater than the interest expense.
Royal Dunes Company is a retailer of specialty beachwear. During 2015, the company
expanded its retail business by adding 30 new retail stores. The following information is
obtained from the comparative financial statements included in the company’s 2015
Form 10-K (all amounts in $ thousands).
January 31, 2015 January 31, 2014
Current liabilities $ 6,000 $ 8,000
Total liabilities 26,000 18,000
Total stockholders’ equity 34,000 38,000
Total assets 60,000 56,000
For the fiscal years ended January 31
2015 2014
Depreciation expense $ 2,000 $ 6,000
Interest expense 3,400 3,200
Income tax expense 12,600 18,100
Net income 6,000 15,000
Net cash flows from operations 41,000 (400)
Total dividends paid 2,000 12,000
Using the information provided, address the following questions for both 2015 and
2014:
A) What is the debt-to-equity ratio?
B) What is the times interest earned ratio?
C) What is the long-term debt-to-equity ratio, assuming that there is no current portion
of long-term debt?
D) What is the long-term debt-to-total assets ratio, assuming that there is no current
portion of long-term debt?
E) What is the debt-to-total assets ratio?
F) Comment briefly on the company’s debt management position.
Lemke Corp.
Lemke Corp. uses a perpetual inventory system with a (moving) weighted average
inventory costing method. The following information is available for the month of
April:
Apr. 1 On hand, 30 units at $5.00 each $150
8 Purchased 40 units at $5.35 each 214
15 Sold 50 units
22 Purchased 40 units at $5.50 each 220
30 On hand, 60 units
Refer to the information provided for Lemke Corp. How much is the cost of goods sold
for the units sold on April 15th?
a. $245
b. $255
c. $260
d. $270
Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the
company’s checking account as of March 31, 2013.
Cash balance according to the general ledger ?
Bank statement balance $18,500
Outstanding checks 2,700
Customer’s bounced check 350
Bank service charges 100
Deposits in transit 1,000
Interest earned on the checking account 60
Refer to Dance Town Academy. How will the deposits in transit be handled on a bank
reconciliation?
a. add to the balance from the company records
b. subtract from the balance from the company records
c. add to the bank statement balance
d. subtract from the bank statement balance
Determine the amount of inventory on the balance sheet of a manufacturing company
from the following account balances:
Finished goods $24,000 Merchandise inventory $50,000
Raw materials 30,000 Work in process 6,000
a. $24,000
b. $60,000
c. $74,000
d. $104,000
A company is required to estimate a liability for repairs for products sold with a
warranty. In the year following the sale, the firm’s accountants find that the estimated
amount for repairs has been overstated. The correct accounting procedure in the year
following the sale is to
a. make an adjusting entry to reduce the amount of the estimate.
b. make a correcting entry because the overstatement is an error.
c. show the amount of overstatement on the income statement as a loss.
d. do nothing because the misstatement related to the prior year.
When the market rate of interest was 9%, Kennesaw Van Lines leased several transfer
trucks. The annual payments are $1,000,000 and the life of the lease is 8 years. It is
estimated that the useful life of the trucks is 10 years. The present value interest factors
for 9% are provided below:
n PV($1) PV(annuity)
8 0.502 5.535
9 0.460 5.995
10 0.422 6.418
The company should record the acquisition of the trucks (rounded to nearest thousand)
as an asset with a cost of:
a. $422,000.
b. $502,000.
c. $5,535,000.
d. $6,418,000.
Several accounts from the financial statements of Hotlanta Promotions, Inc. are listed
below. In the two columns provided for answers, indicate the type of account and the
normal account balance. Use the following identification codes for your answers:
Type of Account Normal Balance
A = Asset Dr = Debit
L = Liability Cr = Credit
SE = Stockholders’ Equity
R = Revenue
E = Expense
Type of Normal
Account Balance
A) Prepaid Rent
B) Television Equipment
C) Unearned Revenue
D) Service Revenue
E) Common Stock
F) Accounts Payable
G) Income Tax Expense
H) Interest Income
I) Salary Expense
J) Notes Payable
Which of the following statements is true regarding a credit memo and its relationship
to a company’s bank reconciliation procedures?
a. It must be recorded as a credit to the balance per the customer’s records.
b. It is issued to notify a company of bank service charges which need to be recorded on
the company’s records.
c. It is issued when a customer gives the company an NSF check which needs to be
recorded on the company’s records.
d. It must be recorded as a debit to the balance per the company’s records.
Refer to Fabian Woodworks. Based on the information presented above, what method
of depreciation will maximize depreciation expense in 2013?
a. straight-line
b. double-declining-balance
c. units-of-production
d. All methods produce the same expense in 2013.
Fabulous Creations
The assets section of the company’s balance sheets for the years ended December 31,
2013 and 2012, is provided below.
Fabulous Creations
Assets Section of Consolidated Balance Sheets (in millions)
at December 31,
Assets 2013 2012
Current Assets
Cash and equivalents $ 719 $ 2,610
Short-term investments 0 886
Receivables, less allowances of $1,889 and $97 6,054 464
Inventories 1,791 0
Prepaid expenses and other current assets 1,710 711
Total Current Assets $10,274 $ 4,671
Noncurrent inventories & film costs 6,853 0
Investments 6,886 3,824
Land and buildings $ 2,107 $ 440
Cable television equipment 9,966 0
Furniture, fixtures, and equipment 4,329 1,297
Property, plant, and equipment $16,402 $1,737
Less: Accumulated depreciation (3,718) (696)
Property, plant, & equipment (net) 12,684 1,041
Music catalogue, and copyrights 2,927 0
Cable television and sport franchises 27,109 0
Brands and trademarks 10,684 0
Goodwill and other intangibles 128,338 713
Other assets 2,804 578
Total assets $208,559 $10,827
Refer to Fabulous Creations. The company recorded depreciation expense of $344
million for 2012. Calculate the following ratios for 2013.
A) If Net Sales were $60,000 for 2013, what would be the fixed asset turnover ratio?
B) Average age of property, plant, and equipment
Which of the following accounts is decreased by a debit entry?
a. unearned revenue
b. prepaid insurance
c. cash
d. insurance expense
Dividends are declared and paid to the company’s stockholders. What effect does this
transaction have on the company’s accounting equation?
a. Assets and liabilities decrease.
b. Assets and retained earnings decrease.
c. Liabilities decrease and retained earnings increases.
d. Liabilities increase and contributed capital decreases.
Which of the following is an example of a debit memo?
a. notice of a bank service charge
b. notice of interest earned on a checking account
c. outstanding checks
d. a company’s transposition error in the recording of a deposit
Refer to Ladder Distributors. Suppose the company reissued 1,000 shares of its treasury
stock on June 1, 2015, for $44 each. Which of the following is true regarding the entry
required to record this transaction?
a. A debit to treasury stock is required for $44,000.
b. A credit to treasury stock is required for $50,000.
c. A credit to retained earnings is required for $6,000.
d. A debit to paid-in capital from treasury stock transactions is required for $6,000.
Refer to Rio Imports. The net profit margin percentage for 2015 is
a. 14.32%.
b. 16.00%.
c. 18.95%.
d. 24.11%.
An oil company purchased 10,000 acres of land on January 1, 2011, for $5,000,000, on
which it developed an underground oil site. The company spent $11,000,000 to prepare
the site for operation but believes that 500,000 barrels of oil can be extracted from the
site over 5 years after drilling begins. The land has a residual value of $250,000.
Assuming 50,000 barrels of oil were extracted from the land in 2013, how much
depletion would be recorded?
a. $1,600,000
b. $1,575,000
c. $160,000
d. $157,500
Fiona’s Italian Market purchased a delivery truck for deliveries for $25,000 at the
beginning of 2012. The truck has an estimated life of 5 years, and an estimated residual
value of $5,000. The company plans to use the straight-line depreciation method. At the
beginning of 2013, the company spent $4000 to replace the truck’s transmission. This
resulted in a 2-year extension of useful life, but no change in residual value.
A) What type of cost is the $4,000? Explain.
B) Calculate the asset’s book value at the end of 2012.
C) Calculate depreciation expense for 2013.
A company with operating income of $200,000, cash flow from operating activities of
$75,000 and gross profit of $380,000, has interest payments of $25,000. What is the
company’s Interest Coverage Ratio (Cash Basis)?
a. 4 or 4 to 1
b. 3 or 3 to 1
c. 15.2 or 15.2 to 1
d. 2.67 or 2.67 to 1
On January 15, 2014, a corporation paid a cash dividend that had been declared prior to
the end of its previous fiscal year. The entry to pay the dividends includes a debit to
a. cash and a credit to dividends payable.
b. dividends payable and a credit to cash
c. retained earnings and a credit to dividends payable.
d. dividends payable and a credit to retained earnings.
Refer to Dance Town Academy. Determine the company’s cash balance before
adjustment.
a. $16,410
b. $16,900
c. $17,190
d. $17,310
What is the effect on the accounting equation when a company recognizes rent as
earned that had previously been received in advance from customers?
a. Assets increase
b. Revenues decrease
c. Liabilities increase
d. Net income increases
Allowing only certain employees to order goods and services on behalf of the company
is an example of what internal control activity?
a. segregation of duties
b. safeguarding of assets and records
c. checks on recorded amounts
d. clearly defined authority and responsibility
Which of the following statements best describes the act of collusion?
a. Collusion is caused by an overstatement of ending inventory.
b. Collusion is an intentional act of two or more employees to accomplish theft of
company assets.
c. Collusion is one of the necessary outcomes of a system of internal control over
financial reporting.
d. Collusion is enhanced by an effective system of independent reconciliations and
other checks on recorded amounts.
Which of the following is considered a measure of short-term liquidity?
a. gross profit percentage
b. quick ratio
c. dividend yield ratio
d. return on assets ratio
“Revenues” are best described as
a. decreases in assets resulting from the sale of goods or services.
b. increases in assets resulting from the sale of products or services.
c. assets used or consumed in the sale of products or services.
d. an increase in the financing activities.
The payment of employee salaries has what effect on the accounting equation?
a. assets and stockholders’ equity decrease
b. liabilities and stockholders’ equity decrease
c. assets decrease and liabilities increase
d. assets increase and liabilities decrease
Which of the following statements regarding bonds payable is true?
a. Generally, bonds are issued in denominations of $100.
b. When an issuing company’s bonds are traded in the “secondary” market, the company
will receive part of the proceeds when the bonds are sold from the first purchaser to the
second purchaser.
c. A debenture bond is backed by specific assets of the issuing company.
d. The interest rate in the bond contract is called the stated rate.
Which of the following accounts is increased by a credit entry?
a. cash
b. dividends
c. capital stock
d. salary expense
Which of the following terms does notdescribe the interest rate printed on the bond
certificate?
a. coupon rate
b. yield rate
c. contract rate
d. stated rate
Lending Branch, Inc. was incorporated as a new business on May 1, 2014. The
company is authorized to issue 50,000 shares of $1 par common stock and 10,000
shares of 4%, $5 par cumulative, participating preferred stock. On May 1, 2014, the
company issued 15,000 shares of common stock for $8 per share. Net income for the
period ended December 31, 2014 ,was $115,000. Cash dividends in the amount of
$30,000 were declared, but only $25,000 were paid as of year-end.
Prepare the stockholders’ equity section of the balance sheet at December 31, 2014.
The payment of a dividend increases both cash and stockholders’ equity of the
distributing entity.
Interest may only be charged to a borrower by a bank.
All authorized stock is issued.
The current ratio is computed by dividing current assets by ____________________.
If a company hires honest employees and its top management acts with integrity,
nointernal control procedures will be necessary.
Contributed capital is the residual interest that remains after deducting liabilities from
stockholders’ equity.
When merchandise is sold FOB destination, the seller is responsible for the shipping
costs.
If a company accepts a major credit card such as VISA from a customer, then the
company is responsible for the amount of the sale in a case of nonpayment from a
cardholder.
Refer to King Cotton Company. What are the total long-term liabilities for each of the
two years presented?
Refer to Recovery Solutions, Inc. Calculate the return on common equity ratio for 2015
and 2014. Assume that preferred stock and total stockholders’ equity at June 30, 2013,
were $3,157 and $969,000, respectively.
What is the matching principle? How does it relate to the revenue recognition process?
Refer to Atlantis Tropicals. Determine the effect on the company’s accounting equation
of the year-end adjustment of bad debts using the aging approach.
Assets = Liabilities + Stockholders’ Equity
Management’s Discussion and Analysis is a key part of the 10-K because it provides
investors with information management believes necessary to understand the company
and forecast future performance.
List three different groups of users of accounting information. Indicate the type of
decisions each group typically makes from accounting information.
