Hernandez Company began business operations and experienced the following
transactions during 2016:
1) Issued common stock for $50,000 cash.
2) Provided services to customers for $125,000 on account.
3) Purchased $2,500 of supplies on account.
4) Paid $30,000 cash to rent office space for a 12-month period beginning July 1.
5) Collected $115,000 cash from customers.
6) Paid cash for $90,000 of operating expenses.
7) Adjusted the accounting records to reflect that there was $750 of supplies remaining
on hand at year-end.
8) Recorded an end-of-year adjustment to recognize rent expense.
Required:
a) Record the above transactions on a horizontal statements model, reflecting their
effect on the different financial statements. Precede the amount with a minus sign if the
transaction reduces that section of the equation. Precede a cash outflow amount with a
minus sign. Enter 0 for items not affected.
b) Prepare Hernandez Company’s income statement, balance sheet and statement of
cash flows for the year ended December 31, 2016.
Which of the following industries would most likely have the highest value for the ratio
of sales to property, plant, and equipment?
A.Airline
B.Consumer product manufacturing company
C.Electric utility
D.Stock brokerage
The net effect of the entries to recognize the receipt of a previously written-off account
under the allowance method is to:
A.have no effect on total assets or total equity.
B.increase total equity only.
C.decrease total assets.
D.increase total assets and total equity.
The reason bonds are sometimes issued at a discount is:
A.the stated rate of interest is higher than the rate being paid on investments in the
securities market with comparable risk.
B.the stated rate of interest is the same as the rate being paid on investments in the
securities market with comparable risk.
C.the stated rate of interest is lower than the rate being paid on investments in the
securities market with comparable risk.
D.the bonds are being issued between interest payment dates.
Sanchez Company engaged in the following transactions during 2015:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during 2016:
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system.
The amount of retained earnings at December 31, 2016 is:
A.$6,200.
B.$26,000.
C.$6,800.
D.$38,800.
The term “FOB Shipping Point” means
A.The buyer pays the shipping cost.
B.The seller pays the shipping cost.
C.The buyer records transportation cost as an expense.
D.The seller records transportation-out cost.
Which of the following transactions affects cash flows?
A.Accrual of interest receivable
B.Issuance of a stock dividend
C.Recognition of depreciation expense
D.Payment of dividends declared in a previous year
On December 31, 2015, the Loudoun Corporation estimated that 3% of its credit sales
of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting
for uncollectible accounts. In February 2016, one of Loudoun’s customers failed to pay
his $1,050 account and the account was written off. On April 4, 2016, this customer
paid Loudoun the $1,050.
Which of the following answers correctly states the effect of the December 31, 2015
adjusting entry for uncollectible accounts on the financial statements of the Loudoun
Corporation?
A.
B.
C.
D.
When using a perpetual inventory system, which of the following events is an asset use
transaction?
A.Paid cash to purchase inventory.
B.Paid cash for transportation-out costs.
C.Purchased inventory on account.
D.Paid cash for transportation-in costs.
Which of the following is increased with a debit?
A.Insurance expense
B.Service revenue
C.Accounts payable
D.Common stock
Seymore Corp. has the following number of shares of stock outstanding:
Seymore will distribute $80,000 to the two classes of stockholders this year. Not
counting the current year, the preferred stock dividends are one year in arrears. Indicate
whether each of the following statements is true or false.
_____ a) Preferred stockholders will receive $16,000 of cash dividends in the current
year.
_____ b) After all required preferred dividends are paid, preferred and common
stockholders will share the remaining dividend.
_____ c) Common stockholders will receive $48,000 of cash dividend in the current
year.
_____ d) The amount of common dividends per share that stockholders will receive in
the current year is $6.40.
_____ e) The amount of dividends in arrears is zero after the $80,000 of dividends have
been paid.
Which of the following is considered a product cost?
A.Utility expense for the current month.
B.Salaries paid to employees of a retailer.
C.Transportation cost on goods received from suppliers.
D.Transportation cost on goods shipped to customers.
The following entry is taken from the journal of a merchandising company:
This entry results in
A.an increase in operating expenses.
B.an increase in Cost of Goods Sold.
C.an increase in inventory.
D.a decrease in gross margin.
The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, 2016 at 98.
The interest payments are due on December 31 each year. Gordon uses the straight-line
method of amortization.
On 12/31/20, Gordon Corporation makes the final entry to record interest and
amortization. Immediately after that, Wise pays off the bonds as scheduled. Which of
the following answers shows the effect of the bond payoff on the financial statements?
A.
B.
C.
D.
The amortization of the discount on a note payable has what effect on a company’s
financial statements?
A.Decreases interest expense and decreases liabilities.
B.Decreases interest expense and increases liabilities.
C.Increases interest expense and decreases liabilities.
D.Increases interest expense and increases liabilities.
Which of the following could represent the effects of an asset exchange transaction on a
company’s financial statements?
A.
B.
C.
D.
Chico Company experienced an accounting event that affected its financial statements
as indicated below:
Which of the following accounting events could have caused these effects on Chico’s
statements?
A.Issued common stock.
B.Earned cash revenue.
C.Borrowed money from a bank.
D.Paid a cash dividend.
A company’s classified balance sheet shows current assets of $8,650 and current
liabilities of $6,000. The company’s current ratio is closest to:
A.0.69 to 1
B.1.44 to 1
C.1.16 to 1
D.3.26 to 1
Explain the significance of (a) a high, and (b) a low, price-earnings ratio.
Which of the following would be classified as a tangible asset?
A.Land.
B.Goodwill.
C.Copyright.
D.Trademark.
Valdez Co. sold land that had cost $48,000 for $60,000 cash.
A.The $12,000 gain would be subtracted from net income in the operating activities
section using the indirect method.
B.$48,000 would appear as a cash inflow from investing activities and $12,000 would
be added in the operating activities section using the indirect method.
C.$60,000 would appear as a cash inflow from investing activities.
D.The $12,000 gain would be subtracted from net income in the operating activities
section using the indirect method and $60,000 would appear as a cash inflow from
investing activities.
At the time that Kirby Company issued a 2-for-1 stock split, the company had 5,000
shares of $6 par value common stock outstanding. Stockholders’ equity also contained
$15,000 of additional paid in capital and $22,000 of retained earnings. Immediately
after the stock split,
A.the balance in the common stock account would amount to $30,000.
B.the amount of paid-in capital would be equal to $150,000.
C.the balance in the retained earnings account would amount to $11,000.
D.the number of outstanding shares of common stock would be 2,500.
The term “Retained Earnings” is best explained by which of the following statements?
A.Money set aside for the redemption of bonds.
B.The difference between total revenue and total expenses in an accounting period.
C.Cash retained in a separate bank account designated for emergency uses.
D.A measure of capital generated through operating activities.
Nelson Company experienced the following transactions during 2016, its first year in
operation.
1) Issued $12,000 of common stock to stockholders.
2) Provided $4,600 of services on account.
3) Paid $3,200 cash for operating expenses.
4) Collected $3,800 of cash from accounts receivable.
5) Paid a $200 cash dividend to stockholders.
The amount of net cash flow from operating activities shown on Nelson Company’s
2016 statement of cash flows is
A.$400.
B.$600.
C.$1,400.
D.$1,200.
The Valencia Company reported net income of $80,000 on 20,000 outstanding common
shares. Preferred dividends total $12,000. On the most recent trading day, the preferred
shares sold at $50 and the common shares sold at $68. This company’s current
price-earnings ratio is closest to:
A.15
B.17
C.20
D.None of these answer choices are correct.
The May 31, 2016, balance per bank statement was $12,400. The cash balance per
books was $17,000. Outstanding checks amounted to $1,700, and deposits in transit
were $4,800. The bank statement contained an NSF check for $1,100, a service charge
for $50, and a debit memo for direct payment of the telephone bill of $350.
Required: a) Prepare a bank reconciliation to determine the true cash balance at May
31, 2016.
b) Prepare any necessary journal entries.
On September 1, 2016, Orville Corporation has unrestricted Retained Earnings of
$600,000, Appropriated Retained Earnings of $400,000, Cash of $850,000, and
Accounts Payable of $50,000. What is the maximum amount that can be used for cash
dividends?
A.$850,000
B.$600,000
C.$800,000
D.$450,000
Which ratio measures the percentage of company’s assets that are financed by debt?
A. Debt to assets ratio
B. Asset turnover ratio
C. Debt to equity ratio
D. Return on investment
Pena Company experienced the following events during 2016:
1) Recognized $17,000 of service revenue on account
2) Wrote off as uncollectible an account receivable, $70.
3) Prepared adjusting entry to recognize uncollectible accounts expense. Pena expected
that 2% of service revenue would not be collected
Required: Show how each of these events would affect the financial statements model,
below. Include dollar amounts of increases and decreases. When an account is not
affected by a particular event, indicate with NA.
Under a periodic system, the account debited for shipping costs on goods received from
the vendor is called:
A.Merchandise Inventory
B.Cost of Goods Sold
C.Transportation-out
D.Transportation-in
Chadwick Associates retained $850,000 of net income in the business in 2016. If
$75,000 was appropriated to satisfy the restrictive covenant of a loan agreement, what
are the financial statements effects of the appropriation?
A.
B.
C.
D.
On February 2, 2016, a fire destroyed the entire inventory of Orange Co. The following
information was found in accounting records: Purchases, $420,000; Sales $690,000;
beginning inventory, $120,000; average gross margin percentage during the past five
years, 30%. Based on the above information, indicate whether each of the following
statements is true or false.
_____ a) The cost of goods available for sale is $540,000.
_____ b) The cost of goods sold as a percent of sales is 70%.
_____ c) The estimated cost of goods sold is $303,000.
_____ d) Estimated inventory lost in the fire is $66,000.
_____ e) Estimated gross margin for the period up to the date of the fire was $483,000.
Which of the following does not describe the effects of an asset use transaction on a
company’s financial statements?
A.
B.
C.
D.
Nelson Company began operations on December 1, 2016. The following transactions
were recorded in December:
1) The business received $9,000 cash from the issuance of common stock to its
stockholders.
2) Provided services on account for $7,500.
3) Paid $4,500 cash for land.
4) Accrued $3,000 of salaries expenses.
5) Purchased $900 of supplies on account to be used in January.
6) Collected $3,900 from customers.
At December 31, 2016, the total debits in the company’s adjusted trial balance would be
A.$12,000.
B.$20,400.
C.$6,900.
D.28,800.
The right side of a T-account is known as the
A.Credit side.
B.Claims side.
C.Debit side.
D.Equity side
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Use only one letter
for each element. You do not need to enter amounts.
Vancouver Co. paid a $50,000 cash dividend to its shareholders on July 5, 2016, which
was 2 months after Vancouver declared the dividend.
What is meant by the “spread” in banking? What does the “spread” have to do with the
issuance of bonds?
Sierra Company uses the weighted average inventory cost flow method. How would
Sierra’s accountant compute cost of goods sold when recording a sale under the
perpetual inventory system?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Enter only one letter for each element.
During the process of preparing the bank reconciliation, an employee for Heath
Company discovered that Check #4261 for $65, used to pay an account payable, was
recorded in the company books as $56.
In an inflationary period, which inventory cost flow method, FIFO or LIFO, is more
desirable from a tax standpoint? Why?
Can a company have a negative cash flow from operating activities for the year but still
have a net income on the income statement? Explain.
The Campbell Company began operations on January 1, 2015 and on that date issued
$60,000 of common stock for cash. In addition, the company borrowed $40,000 from
the bank. It provided services to its customers during 2015 and received $72,000 cash.
During the year, it paid $80,000 cash for land, $50,000 for salaries, and $10,000 in cash
dividends to the owners.
Required:
1) Write an accounting equation and record the effects of each transaction under the
appropriate heading. (Use specific accounting titles below the statement elements.)
Precede the amount with a minus sign if the transaction reduces that section of the
equation.
Enter 0 for items not affected.
2) Prepare an income statement and a balance sheet for the 2015 accounting
period.Precede the amount with a minus sign if the transaction reduces that section of
the income statement.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
Todd Co. collected $2,000 cash from accounts receivable.
When the indirect method is used to prepare the operating activities section of the
statement of cash flows, what is the starting point of that section?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Use only one letter
for each element. You do not need to enter amounts.
Moreno Company appropriated $12,000,000 of retained earnings for the purpose of
building a new office building.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Enter only one letter for each element.
The Greer Company purchased equipment on account on January 1, 2016. Show how
the purchase affected the financial statements of 2016.