Finance Chapter 1 enterprises incurred several costs related

Final Exam: Chapters 1-13 Name __________________________

Accounting Instructor _______________________

Kimmel, Weygandt, & Kieso Section # _______ Date _________

Part

I

II

III

IV

V

VI

VII

VIII

Total

Points

76

20

8

18

15

12

21

30

200

Score

PART I — MULTIPLE CHOICE (76 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Randace Enterprises incurred several costs related to the acquisition of plant assets.

Purchase price of land and dilapidated building $260,000

Real estate broker’s commission 17,000

Demolition costs of dilapidated building 22,000

Architect’s fees and building permits 24,000

Payments to contract for building construction 870,000

Purchase of new furniture and equipment 74,000

Actual interest costs during building construction 135,000

Actual interest cost after completion of building construction 120,000

Costs of walks, driveways, and parking lot 55,000

At what amount should the land be recorded in Randace’s accounting records?

a. $299,000

b. $277,000

c. $354,000

d. $282,000

____ 2. Randace Enterprises incurred several costs related to the acquisition of plant assets.

Purchase price of land and dilapidated building $260,000

Real estate broker’s commission 17,000

Demolition costs of dilapidated building 22,000

Architect’s fees and building permits 24,000

Payments to contract for building construction 870,000

Purchase of new furniture and equipment 74,000

Actual interest costs during building construction 135,000

Actual interest cost after completion of building construction 120,000

Costs of walks, driveways, and parking lot 55,000

At what amount should the building be recorded in Randace’s accounting records?

a. $1,051,000

b. $1,029,000

c. $870,000

d. $894,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 2

____ 3. The market rate of interest is higher than the stated rate of interest on bonds issued

by Dax, Inc. At what amount will the bonds be issued?

a. At a premium

b. More information is needed to determine the answer. c. At an

amount lower than face value

d. At an amount higher than face value

____ 4. Which statement is true concerning the accrual basis of accounting?

a. Revenues are recognized when earned and expenses are recognized when paid.

b. Revenues are recognized when earned and expenses are recognized when

incurred.

c. Revenues are recognized when received from customers and expenses are

recognized when incurred.

d. Revenues are recognized when received from customers and expenses are

recognized when paid.

____ 5. Why are adjusting entries necessary?

a. To update amounts in retained earnings for activity that occurred during the

period

b. To correct errors due to erroneous recording of journal entries

c. To update accounts due to resources used, amounts expired due to the passage

of time, or amounts that may need to be recorded

d. To remove the balances of temporary accounts so that financial statements can

be prepared

____ 6. How should the cost of intangible assets with indefinite lives be accounted for?

a. They should be amortized over the assets’ estimated useful lives, or their legal

lives, whichever is shorter.

b. They should be amortized over the assets’ estimated useful lives, or their legal

lives, whichever is longer.

c. They should be capitalized as an asset and checked for impairment periodically.

d. They should be expensed at acquisition.

____ 7. In a period of rising prices, which inventory method will result in the largest amount of

net income?

a. LIFO

b. FIFO

c. Average cost

d. Specific identification

____ 8. On October 31, 2014, Williams Company issued a $5,000, 8%, 6-month note to First

National Bank. Williams accrued interest at December 31, 2014. How much will

Williams credit to Cash to record the payment of the note at maturity?

a. $5,000

b. $7,400

c. $5,200

d. $5,133

Final Exam

FE – 3

____ 9. Wilson Company uses FIFO for inventory costing. During 2014, price levels

increased. Which statement is true concerning the amounts reported on Wilson’s

balance sheet and income statement?

a. The costs allocated to inventory on Wilson’s balance sheet reflect inventories

that approximate current costs.

b. The costs allocated to inventory on Wilson’s balance sheet may be significantly

understated in terms of current cost.

c. The costs allocated to cost of goods sold on Wilson’s income statement may be

significantly overstated in terms of current cost.

d. The costs allocated to cost of goods sold on Wilson’s income statement will

reflect the costs that most closely approximate current costs.

____ 10. The following information is available for Houser Produce Market:

Sales $225,000 Freight-in $11,000

Ending merchandise inventory 27,000 Purchase returns and allowances 4,000

Sales discounts 3,000 Depreciation expense 8,000

Purchases 143,000 Beginning merchandise inventory 23,000

How much is Houser’s cost of goods sold?

a. $173,000

b. $146,000

c. $143,000

d. None of these answer choices are correct.

____ 11. At what value are inventory items reported on the balance sheet?

a. At the lower of selling price or replacement cost

b. At the lower of selling price or original cost c. At the original cost to

acquire

d. At the lower of original cost or replacement cost

____ 12. What occurs when a company factors its receivables?

a. An estimate for bad debts is made

b. Accounts are written off

c. Receivables are sold

d. An aging analysis is performed

____ 13. Where can an investor find operating activities in a company’s financial statements?

a. On the statement of cash flows

b. On the income statement

c. On the statement of cash flows and the income statement

d. On all four financial statements

____ 14. Mattress King determined its return on assets was 1.5%. Which statement is true?

a. Mattress King earned profit equal to 1.5% of its total revenue for the period.

b. Mattress King earned profit equal to 1.5 times the amount of its assets.

c. Mattress King generated $1.50 of net income for each dollar of sales earned by

the company.

d. Mattress King generated $.015 of net income for each dollar of assets held by

the company.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 4

____ 15. Which internal control is demonstrated by assigning different individuals to be

responsible for related activities?

a. Documentation procedures

b. Segregation of duties

c. Establishment of responsibility

d. Independent internal verification

____ 16. At what point in time does a company recognize an expense when it uses the

allowance method of accounting for uncollectible accounts?

a. When a customer’s account is identified as being uncollectible

b. In the same period as the revenue is earned

c. At the time expenses related to the collection activities are incurred

d. At the time the account is written off

____ 17. Which of the following describes shipping terms of FOB shipping point?

a. The purchaser is responsible for the shipping charges.

b. The shipping charges are debited to Delivery Expense by the buyer.

c. At the end of the year, any items in transit should be included as part of the

seller’s inventory. d. The seller must absorb the cost of shipping the

items.

____ 18. Respondo Company has a $145,000 balance in Accounts Receivable and a $420

debit balance in Allowance for Doubtful Accounts at yearend just prior to recording

adjusting entries. Credit sales for the period totaled $960,000. How much is the

amount of the bad debt adjusting entry if Respondo estimates that 1.5% of its

receivables will be uncollectible?

a. $2,595

b. $2,175

c. $14,400

d. $1,755

____ 19. What does the full disclosure principle require?

a. Companies must allow investors and creditors to examine their accounting

records.

b. Companies must disclose all circumstances and events that may affect decisions

made by investors and other users.

c. Companies must disclose the true value of all resources owned by the company

and all amounts owed to creditors.

d. Companies must disclose all transactions as part of their complete set of

financial statements.

____ 20. KB Retail sold merchandise for $800 subject to credit terms of 3/10, n/30. Which one

of the following is part of the journal entry made by KB Retail to record the collection

in full within the discount period in a perpetual inventory system?

a. Debit to Sales Discounts for $24

b. Debit to Cash for $824

c. Credit to Accounts Receivable for $824

d. Credit to Inventory for $24

Final Exam

FE – 5

____ 21. Haxen Company’s records show the following for the month of January:

Total retained earnings at January 1 ………………………………….. $432,000

Total retained earnings at January 31 ………………………………… 450,000

Total revenues ………………………………………………………………… 2,160,000

Total dividends declared ………………………………………………….. 140,000

How much are total expenses for January?

a. $2,002,000

b. $2,318,000

c. $1,984,000

d. None of the answer choices are correct.

____ 22. Stetson Company’s financial information is presented below.

Purchase returns and allowances $ 16,000 Purchases $275,000

Sales returns and allowances 11,000 Ending inventory 32,000

Net sales 480,000 Cost of goods sold 290,000

How much is gross profit?

a. $190,000

b. $147,000

c. $195,000

d. $179,000

____ 23. Which statement is true concerning the preparation of closing entries?

a. They can be prepared before or after adjusting entries.

b. They cause the balances of all accounts at the end of the period to be adjusted

to zero.

c. They are necessary before financial statements can be prepared.

d. They result in updating the balance in Retained Earnings for the period.

____ 24. Navarro, Inc. reported the following item in its balance sheet at December 31, 2014:

Accounts receivable, net of $940 allowance……………………………..$56,300

Which statement is true?

a. Navarro’s customers owe $57,240.

b. During the year, customers charged $56,300 on account.

c. The balance owed by customers is $56,300.

d. Navarro expects its customers to pay $55,360.

____ 25. Current liabilities are obligations that are reasonably expected to be paid from

Existing Creation of Other

Current Assets Current Liabilities

a. No No

b. Yes Yes

c. Yes No

d. No Yes

____ 26. Which of the following errors will cause a trial balance to be out of balance?

a. Posting the issuance of stock as a debit to Cash and a credit to Common stock

b. Recording the payment of prepaid rent as rent expense

c. Posting a debit amount as a credit in the ledger

d. Posting a journal entry twice

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 6

____ 27. Which entity(ies) is/are responsible for establishing accounting standards?

a. Securities and Exchange Commission

b. International Accounting Standards Board

c. Financial Accounting Standards Board

d. Financial Accounting Standards Board and the International Accounting

Standards Board

____ 28. What does the balance in the Discount on Bonds Payable account represent?

a. Additional interest cost associated with the issuance of debt

b. A reduction of interest cost associated with the issuance of debt

c. A reduction of the maturity value of the bonds

d. An increase of the maturity value of the bonds

____ 29. Which of the following is not an operating activity?

a. Cash paid for interest on loans

b. Cash received from customers on account

c. Cash paid to suppliers for purchases made during prior months

d. Cash paid for dividends

____ 30. Which of the following combinations presents correct examples of liquidity,

profitability, and solvency ratios, respectively?

Liquidity Profitability Solvency

a. Days in inventory Price-earnings ratio Earnings per share

b. Current ratio Free cash flow Debt to assets ratio

c. Times interest earned Return on assets Free cash flow

d. Average collection period Payout ratio Cash debt coverage

____ 31. Which one of the following is an advantage of the corporate form of entity?

a. Limited life

b. Government regulation

c. Ownership rights are restricted to the same shareholders

d. Ability to acquire capital

____ 32. Which of the following pairs of terms in the area of financial statement analysis both

express each item in a financial statement as a percent of a base amount?

a. Vertical — Trend

b. Horizontal — Trend

c. Vertical — Common Size

d. Horizontal — Common Size

____ 33. At the beginning of June, assets totaled $45,600 and liabilities totaled $16,500.

During the year, the company earned net income of $15,000, and its assets

increased by $7,000. Stockholders’ equity increased by $3,200. How much are total

liabilities at the end of June?

a. $20,300

b. $29,100

c. $5,300

d. None of the answer choices are correct.

Final Exam

FE – 7

____ 34. Which of the following items is an item considered to be part of comprehensive

income, but is not reported as part of net income?

a. A gain from the disposal of plant assets

b. A realized loss from the sale of a trading security

c. An unrealized gain on an available-for-sale security

d. An extraordinary loss

____ 35. Mason Transport has the following stock outstanding at December 31, 2014:

5% Cumulative preferred stock, $12 Par $39,600

Common stock, $0.10 Par 12,000

Mason paid no dividends during 2013. During 2014, it declares $13,000 of dividends.

How much of the $13,000 will preferred stockholders receive?

a. $1,980

b. $3,960

c. $1,083

d. None of the answer choices are correct.

____ 36. Storage Products purchased 11,000 shares of its own $0.75 par value common

stock at a cost of $8 per share on April 30, 2014. The stock was originally issued at

$7 per share. Which of the following is part of the journal entry to record the

purchase?

a. Credit Common Stock for $88,000

b. Debit Treasury Stock for $88,000

c. Credit Common Stock for $8,250

d. Debit Treasury Stock for $8,250

____ 37. What is the effect on total stockholders’ equity of a stock dividend and a stock split,

respectively?

Stock Dividend Stock Split

a. Increase No effect

b. No effect No effect

c. Decrease No effect

d. Decrease Decrease

____ 38. Which of the following should be classified as an extraordinary item?

a. Effects of rare, major flooding

b. Write-off of a significant amount of receivables

c. Loss from the expropriation of facilities by a foreign government

d. Loss from disposal of the service division

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 8

PART II — MATCHING (20 points)

Instructions

Designate the terminology that best represents the definition or statement given below by

placing the identifying letter(s) in the space provided. No letter should be used more than once.

A

Allowance method

W

Historical cost method

B

Amortization

X

Impairment

C

Average cost method

Y

Internal control

D

Book value

Z

Last-in, first-out method

E

Capital expenditure

AA

LIFO reserve

F

Cash debt coverage ratio

BB

Maker

G

Consistency

CC

Monetary unit assumption

H

Contra asset account

DD

Net purchases

I

Credit memorandum

EE

Payee

J

Debit memorandum

FF

Periodic inventory system

K

Declining-balance method

GG

Periodicity assumption

L

Depreciable cost

HH

Permanent accounts

M

Depreciation

II

Perpetual inventory system

N

Direct write-off method

JJ

Ratio analysis

O

Discontinued operations

KK

Relevance

P

Earnings per share

LL

Return on assets

Q

Economic entity assumption

MM

Revenue expenditure

R

Extraordinary items

NN

Revenue recognition principle

S

Factor

OO

Stock dividend

T

First-in, first-out method

PP

Stock split

U

Full disclosure principle

QQ

Temporary accounts

V

Going concern assumption

RR

Units-of-activity method

___ 1. A characteristic of information that means it is capable of making a difference in a

decision

___ 2. An assumption that the economic life of a business can be divided into artificial time

periods

___ 3. This method of accounting for uncollectible accounts is required when bad debts are

significant in size

___ 4. Used by a bank when a previously deposited customer’s check “bounces” because of

insufficient funds

___ 5. The assumption that the enterprise will continue in operation long enough to carry out

its existing objectives and commitments

___ 6. The periodic write–off of an intangible asset

___ 7. The total amount subject to depreciation

___ 8. Use of the same accounting principles and methods from period to period by the same

business enterprise

___ 9. A permanent decline in the fair value of an asset

PART II — MATCHING (cont.)

Final Exam

FE – 9

___ 10. The party in a promissory note who is making the promise to pay

___ 11. An expenditure charged as an expense when incurred

___ 12. The inventory costing method that assumes that the costs of the earliest goods

purchased are the first to be recognized as cost of goods sold

___ 13. A system in which detailed records are not maintained and cost of goods sold is

determined only at the end of an accounting period

___ 14. The methods and measures adopted within a business to safeguard its assets and

enhance the accuracy and reliability of its accounting records

___ 15. Accounts whose balances are transferred to retained earnings at the end of an

accounting period

___ 16. A technique for evaluating financial statements that expresses the relationship among

selected financial statement data

___ 17. A measure of solvency that compares cash provided by operating activities and

liabilities

___ 18. An inventory costing method that assumes that the latest units purchased are the first

to be allocated to cost of goods sold

___ 19. A pro rata distribution of a corporation’s own stock to its stockholders

___ 20. The net income earned by each share of outstanding common stock

PART III — DEPRECIATION (8 points)

Anslaw Electronics purchased packaging equipment for $600,000 cash on July 1, 2014.

Management estimates the equipment can package 800,000 inventory units and will be

productive for 5 years. Its salvage value is estimated at $50,000. During 2014, the equipment

packaged 130,000 units, with another 140,000 units in 2014.

Instructions: Compute the annual depreciation expense for 2014 and 2015, and book value at

December 31, 2015, under the straight-line method.

2014 depreciation = $_______________

2015 depreciation = $_______________

December 31, 2015 book value = $_______________.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 10

PART IV — ADJUSTING ENTRIES (18 points)

The trial balance of Active Fitness shows the following balances for selected accounts on

November 30, 2014:

Prepaid Insurance $10,000 Unearned Fitness Revenue $ 22,800

Equipment 68,400 Note Payable 32,000

Accumulated Depreciation 11,700 Rent Receivable 500

Instructions: Using the additional information given below, prepare the appropriate monthly

adjusting entries at November 30. Show computations.

1. Revenue earned for fitness center fees, but not yet billed, totaled $2,700 on November 30.

2. The note payable is a 9%, 1-year note issued October 1, 2014.

3. The equipment was purchased on January 2, 2012. It has an estimated life of 8 years and

an estimated salvage value of $6,000. Active Fitness uses the straight-line depreciation

method.

4. An insurance policy was acquired on June 30, 2014; the premium paid for 1 year had a

cost of $15,000.

5. Active Fitness received $22,800 in advance on November 1, 2014, from customers who

paid for 3 months of prepaid fitness fees.

Final Exam

FE – 11

PART V — BANK RECONCILIATION (15 points)

A review of the March 30 bank statement and other data of Sangster Aviation revealed a

$16,220 balance at March 31 on the bank statement and $15,940 as the balance in the cash

account in the company’s ledger. In addition, the following information was determined:

1. NSF Check from J. Beiber in payment of account ………………………………………. $ 180

2. Collection of a customer electronic payment by the bank ……………………………… 2,200

3. Deposits in transit at March 31 …………………………………………………………………. 2,920

4. Outstanding checks at March 31 ………………………………………………………………. 1,740

5. A check written by Sangster to Copytronics for a copy machine repair on March 13 was

recorded at $1,320 but correctly cleared the bank at $1,230.

6. A check drawn on the account of Halen Electronics for $650 was mistakenly charged

against Sangster’s account by the bank.

Instructions: As of March 31, prepare:

1. The bank reconciliation for the month of March (omit heading)

2. Related journal entries

1. BANK RECONCILIATION:

Amount Amount

Balance per bank statement $16,220 Balance per books $15,940

Adjusted balance per bank $ Adjusted balance per books $

2. ENTRIES:

Account Titles

Debit

Credit

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 12

PART VI — INVENTORY (12 points)

Hanover Lighting had a beginning inventory of 15 units at a cost of $7 per unit on August 1.

During the month, the following purchases and sales were made.

Purchases Sales

August 5 20 units at $8 August 2 10 units

August 11 30 units at $9 August 10 15 units

August 23 25 units at $10 August 19 40 units

August 21 15 units

Hanover uses a periodic inventory system.

Instructions: Determine ending inventory and cost of goods sold under:

1. FIFO

2. LIFO

1. FIFO:

Ending inventory = $_____________; cost of goods sold = $____________.

2. LIFO:

Ending inventory = $_____________; cost of goods sold = $____________.

Final Exam

FE – 13

PART VII — RATIO ANALYSIS (21 points)

The condensed financial statements of Source Electronics for 2014 are presented below.

Source Electronics Source Electronics

Balance Sheet Income Statement

December 31, 2014 For the Year Ended December 31, 2014

Assets Revenues $650,000

Current assets Expenses

Cash and short-term Cost of goods sold 360,000

investments $ 25,000 Selling and admin expenses 150,000

Accounts receivable 32,000 Interest expense 30,000

Inventories 43,000 Total expenses 540,000

Total current assets 100,000 Income before income taxes 110,000

Property, plant, and Income tax expense 33,000

equipment (net) 320,000 Net income $ 77,000

Total assets $420,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 220,000

Common stockholders’ equity 140,000

Total liabilities and

stockholders’ equity $420,000

Additional data as of December 31, 2013: Inventory = $47,000; Total assets = $390,000;

Common stockholders’ equity = $110,000

Instructions: Compute the following listed ratios for 2014 showing supporting calculations.

Display answers to two decimal places.

1. Current ratio = _________________________________________________________ .

2. Debt to assets ratio = ____________________________________________________ .

3. Times interest earned = __________________________________________________ .

4. Inventory turnover = _____________________________________________________ .

5. Profit margin = _________________________________________________________ .

6. Return on common stockholders’ equity = ____________________________________ .

7. Return on assets = _____________________________________________________ .

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 14

PART VIII — STATEMENT OF CASH FLOWS (30 points)

Presented below is information for 2014 and 2013 related to the operations of Zyr Electronics.

December 31

2014

2013

2014

Cash

$ 32,400

$ 26,500

Sales

$298,000

Accounts receivable

26,800

23,200

Cost of goods sold

145,000

Inventory

23,500

34,000

Gross profit

153,000

Prepaid expenses

2,100

2,900

Depreciation expense

8,600

Land

45,000

Other operating expenses

114,000

Equipment

124,000

98,100

Income from operations

30,400

Accumulated depreciation

15,800

19,900

Loss on equipment disposal

1,400

Total

$238,000

$209,800

Income before income taxes

29,000

Income tax expense

9,800

Accounts payable

$ 32,400

$ 46,500

Net income

$ 19,200

Wages payable

11,000

9,700

Bonds payable

35,000

0

Common stock

109,000

105,000

Retained earnings

50,600

48,600

Total

$238,000

$209,800

Additional information:

a. In 2014, Zyr declared and paid a cash dividend of $17,200.

b. The company issued $35,000 of bonds at a discount for cash.

c. Equipment with a cost of $17,000 and a book value of $4,300 was sold for cash. New

equipment was acquired for cash.

d. The company issued stock for cash.

e. Prepaid expenses pertain to operating expenses; accounts payable is only used for

merchandise purchases.

Final Exam

FE – 15

Instructions:

Prepare a statement of cash flows in proper form for 2014, using the indirect method.

____________________________________________________________________________

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 16

Solutions — Final Exam: Chapters 1-13

PART I — MULTIPLE CHOICE (76 points)

PART II — MATCHING (20 points)

PART III — DEPRECIATION (8 points)

PART IV — ADJUSTING ENTRIES (18 points)

Final Exam

FE – 17

PART V — BANK RECONCILIATION (15 points)

PART VI — INVENTORY (12 points)

PART VII — RATIO ANALYSIS (21 points)

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FE – 18

PART VIII — STATEMENT OF CASH FLOWS (30 points)