Comprehensive Examination A
A-1
COMPREHENSIVE EXAMINATION A
(Chapters 1 – 5)
Approximate
Problem Topic Points Minutes
A – I Multiple Choice ……………………………………… 20 13
A – II Matching ……………………………………………… 12 8
A – III Adjusting Entries ………………………………….. 15 10
A – IV Financial Analysis …………………………………. 12 12
A – V Journal Entries ……………………………………… 18 14
A – VI Multiple-Step Income Statement ……………… 14 12
A – VII Assumptions and Principles ……………………. 9 10
100 79
Checking Work …………………………………….. 11
90
Test Bank for Accounting, Fifth Edition
A-2
Problem A – I — Multiple Choice (20 points)
Circle the one best answer.
1. Which statement is false concerning accounting principles in the United States?
a. The Securities and Exchange Commission oversees U.S. financial markets and
accounting standard-setting bodies.
b. The International Accounting Standards Board issues accounting standards that must
be followed by all companies that engage in international business.
c. The primary accounting standard-setting body in the U.S. is the Financial Accounting
Standards Board.
d. The Public Company Accounting Oversight Board determines auditing standards.
2. Wise Company purchased 10 calculators for $20 each, one-half on May 14, and the other
half on May 22, all on account. Wise sold 8 of the calculators on May 25 for $30 each. of
which It received payment for 6 of them on May 30 and payment for the other 2 on June 4.
Wise paid the supplier for 5 of the calculators on May 21. How much revenue should Wise
recognize during May?
a. $120
b. $180
c. $240
d. $80
3. A corporation began the month of May with $58,000 of obligations and $180,000 of
economic resources. Stockholders’ equity increased by $22,000 during May. The
company paid $11,000 of dividends and generated revenue totaling $145,000. How much
is total stockholders’ equity at the end of May?
a. $33,000
b. $144,000
c. $122,000
d. $111,000
4. Which one of the following is a contra account with a debit balance?
a. Depreciation Expense
b. Accumulated Depreciation
c. Sales Discounts
d. Cost of Goods Sold
5. Which one of the following is not a contribution of the general journal to the recording
process?
a. It discloses the complete effect of a transaction in one place.
b. It proves that all debits and credits have been posted.
c. It provides a chronological record of transactions.
d. It helps to prevent or locate errors.
6. What is the purpose of recording depreciation on plant assets?
a. To adjust the asset amount on the balance sheet to fair value
b. To allocate the cost of the asset to expense in the accounting periods in which the
asset was used to generate revenue
c. To properly apply the cost principle
d. To provide funds for the replacement of the asset when it reaches the end of its useful
life
Comprehensive Examination A
A-3
7. Lansing Company paid $1,500 for a 12-month insurance policy and increased the
Prepaid Insurance account upon payment on November 1, 2014. Lansing forgot to make
an adjusting entry at the end of its fiscal year on December 31, 2014. Which of the
following is an effect of the error?
a. Assets will be overstated and net income will be understated.
b. Expenses will be overstated and assets will be understated.
c. Assets will be understated and net income will be understated.
d. Expenses will be understated and assets will be overstated.
8. Which one of the following accounts is closed at the end of an accounting period?
a. Retained Earnings
b. Dividends
c. Unearned Sales Revenue
d. Accumulated Depreciation
9. Analysts determined that Better Buy has the ability to pay its obligations expected to come
due within the next year. What did the analysts measure?
a. Liquidity
b. Profitability
c. Solvency
d. Cash on hand
10. Mason Electronics determined that it generated $1.40 of cash provided by operating
activities compared to each $1.00 of net income. What did Mason calculate?
a. Profit margin
b. Quality of earnings
c. Return on assets
d. Gross profit rate
Test Bank for Accounting, Fifth Edition
A-4
Problem A – II — Matching (12 points)
Match the items below by entering the appropriate letter in the space.
_____1. Income summary
A. An amount paid in advance of when the work
will be performed
2. Trial balance
B. The price received to sell an asset or settle a
liability
_____3. Liabilities
C. Company will remain in business long enough
to carry out its existing objectives.
____ 4. Revenue recognition principle
D. The recognition of amounts are recorded in the
period in which they are incurred
____ 5. Solvency
E. An economic entity that is not a separate legal
entity
____ 6. Fair value
F. A chronological record listing of all transactions
recorded by a company
G. Distributions of profits to owners
____ 7. Unearned revenues
H. A contra revenue account
I. The recognition of efforts (expenses) at the
same time as accomplishments (revenues)
____ 8. Ledger
____ 9. Journal
J. Creditors’ claims on total assets
K. The ability of a company to pay obligations that
are expected to become due within the next
year
L. Contains all of a company’s accounts and
tracks the balances of each
M. The ability of a company to survive over a long
period of time
N. Noncurrent assets that do not have physical
substance
P. A proof of the mathematical equality of debits
and credits after posting
Q. Economic resources that are expected to
provide future benefits
____ 10. Assets
____ 11. Accrual
____ 12. Dividends
R. Requires that companies recognize amounts in
the accounting period in which the amounts are
earned
S. A temporary account used in closing revenue
and expense accounts
Comprehensive Examination A
A-5
Problem A – III — Adjusting Entries (15 points)
The following information for Station Products is available on June 30, 2014, the end of a monthly
accounting period. Prepare the necessary adjusting journal entries for Station Products for the
month of June for each situation given. Adjusting entries are recorded at the end of every quarter
prior to the preparing financial statements. You may omit journal entry explanations.
1. Station purchased a 1-year insurance policy on June 1, 2014, and debited an asset account
for $3,600.
2. On May 1, 2014, a tenant in an office building owned by Station Products paid $6,600, which
represents three months’ rent in advance. The amount received was credited to the Unearned
Rent Revenue account.
3. On June 1, 2014, the balance in the Supplies account was $420. During June, office supplies
costing $840 were purchased and half was paid in cash, with the balance on account. A
physical count of office supplies at June 30 revealed that there was $125 of supplies still on
hand.
4. On March 31, 2014, Station Products purchased equipment for $30,000. The company
calculated annual depreciation to be $6,000.
5. Station Products has 7 employees who earn $120 per day, and 3 employees who earn $200
per day, respectively. Employees are paid each Friday for a five-day work week that begins
each Monday. June 30 is a Thursday.
Test Bank for Accounting, Fifth Edition
A-6
Problem A – IV — Financial Analysis (12 points)
The following data are taken from the financial statements of JB Edwards, Inc. The average
number of shares of common stock outstanding for the year was 4,000. The following data are in
are provided:
Accounts payable $ 16,000 Net sales $294,000
Accounts receivable 21,000 Other current liabilities 11,000
Cash 42,000 Salaries and wages payable 3,000
Gross profit 114,000 Total stockholders’ equity 132,000
Net income 20,800 Total assets 240,000
Instructions: Compute the following:
1. Current ratio
2. Debt to assets ratio
3. Earnings per share
4. Profit margin
Comprehensive Examination A
A-7
Problem A – V — Journal Entries (18 points)
Instructions: Prepare the necessary general journal entries for the month of October for
DynaCore Retail for each situation given below. DynaCore uses a perpetual inventory system.
Oct. 5 Paid cash of $12,600 for operating expenses that were incurred and properly recorded
in the previous period
9 Purchased merchandise for $22,000 on account. Credit terms: 3/10, n/30
12 Paid a freight bill of $110 for merchandise purchased on October 9
17 Paid for merchandise purchased on October 9. The company takes all discounts to
which it is entitled
20 Sold merchandise for $8,000 to Rattles Distribution on account. The cost of the
merchandise sold was $3,200. Credit terms: 2/10, n/30
26 Issued a credit memo to Rattles Distribution for $300 for merchandise returned from
the sale on October 20. The cost of the merchandise returned was $180.
Test Bank for Accounting, Fifth Edition
A-8
Problem A – VI — Multiple-Step Income Statement (14 points)
Below is a partial listing of the adjusted account balances of Barnett Cabinets at year-end on
December 31, 2014:
Accounts receivable $ 24,000
Cost of goods sold 256,000
Selling expenses (includes depreciation) 48,000
Interest expense 3,000
Accumulated depreciation—Building 15,000
Sales discounts 5,000
Inventory 52,000
Administrative expenses (includes depreciation) 65,000
Sales revenue 418,000
Accounts payable 34,000
Interest revenue 500
Instructions: Using whatever data you believe appropriate, prepare a multiple-step income
statement for the Barnett Cabinets for the year ended December 31, 2014.
Comprehensive Examination A
A-9
Problem A – VII — Assumptions and Principles (9 points)
Instructions: Each of the situations below may illustrate a violation of an accounting assumption
or principle. Indicate the assumption or principle that is most clearly violated using the following
codes: Codes
A. Economic entity assumption G. Materiality
B. Monetary unit assumption H. Full disclosure principle
C. Periodicity assumption I. Cost principle
D. Going concern assumption J. Comparability
E. Revenue recognition principle K. No violation of operating guidelines
F. Expense recognition principle
Situations
____ 1. Dollar Saver has 20,000 Model 44G cell phones in inventory at a cost of $64 each.
Due to the advancement of technology and newer models available, only 4 of Model
44G phones were sold last month. To avoid recognizing a loss on writing off this
inventory, Dollar Saver has decided not to issue financial statements until at least half
of the remaining Model 44G phones have been sold.
____ 2. Homer Bates, president of Bates Machinery, took an iPod Touch out of inventory to
use as a birthday present for his son. The cost was debited to Supplies Expense.
____ 3. Wilson, Inc. made no entry to record depreciation on its equipment for 2014.
____ 4. Stockholders invested an additional $43,000 cash in the business in 2014. This
investment was reported as revenue on the 2014 income statement.
____ 5. Toys, Inc. is being liquidated because it has sustained losses for the past few years. It
continues to depreciate its assets and prepare financial statements on the cost basis.
____ 6. Counters Galore values its pre-made granite it has on hand at its expected selling
price since this is the amount the company will receive from customers when it sells
the counters to customers. The granite’s expected selling price exceeds the price
Counters Galore paid for it.
____ 7. Rand Enterprises developed a fuel cell that will run on sea water, while providing
equal performance to other fuels. Rand has chosen to defer the release of the new
product to the public until it has enough capital to fund the production.
____ 8. Darzion Products reports its inventory based on euros for its stores in Great Britain
when issuing financial statements for British banks when loans are needed.
____ 9. Dalani Water bought 700 new desk chairs, one for each of its employees. Each chair
cost $180 and was decorated with the company’s logo. Dalani’s policy is to expense
all assets costing less than $200. Dalani recorded the cost of the chairs as an
expense due to its policy. .
Test Bank for Accounting, Fifth Edition
A-10
Solutions — Comprehensive Examination A
Problem A – I — Solution
Problem A – II — Solution
Problem A – III — Solution
Problem A – IV — Solution
Comprehensive Examination A
Problem A – V — Solution
Problem A – VI — Solution
Test Bank for Accounting, Fifth Edition
A-12
Problem A – VII — Solution