PART I — MULTIPLE CHOICE (5 points)
Instructions
Designate the best answer for each of the following questions.
Questions 1 and 2 are based on the following information:
Bono Company recently incurred the following costs:
(1) Purchase price of land and dilapidated building $350,000
(2) Real estate broker's commission 14,000
(3) Net demolition costs of dilapidated building 39,000
(4) Excavation costs for new building 44,000
(5) Architect's fees and building permits 30,000
(6) Costs associated with new building construction 950,000
(7) Costs associated with new furniture and equipment 250,000
(8) Actual interest costs during building construction 168,000
(9) Actual interest cost after completion of building construction 120,000
(10) Costs of walks, driveways, and parking lot 55,000
____ 1. The building should be recorded on Bono's books at
a. $880,000.
b. $924,000.
c. $963,000.
d. $1,192,000.
____ 2. Land should be recorded on Bono's books at
a. $350,000.
b. $364,000.
c. $403,000.
d. $433,000.
____ 3. In order to be relevant, accounting information must
a. be neutral.
b. be verifiable.
c. help predict future events.
d. be a faithful representation.
____ 4. The cost of intangible assets should be
a. amortized over the assets' estimated useful life, or legal life, whichever is shorter.
b. amortized over a period not exceeding 5 years.
c. amortized over the assets' estimated useful life.
d. charged to an expense account at acquisition.
____ 5. One of the two constraints in accounting is
a. comparability.
b. materiality.
c. reliability.
d. relevance.
____ 6. The assumption that assumes a company will continue in operation long enough to carry out its existing objectives is the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. time period assumption.
____ 7. All of the following are intangible assets except
a. patents.
b. land improvements.
c. goodwill.
d. franchises.
____ 8. A daily cash count of register receipts made by a cashier department supervisor demonstrates an application of which of the following internal control principles?
a. Documentation procedures
b. Segregation of duties
c. Establishment of responsibility
d. Independent internal verification
____ 9. When the allowance method is used for bad debts, the entry to write off an individual account known to be uncollectible involves a
a. debit to an expense account.
b. credit to an expense account.
c. credit to the Allowance account.
d. debit to the Allowance account.
____ 10. Bates Company has a $300,000 balance in Accounts Receivable and a $2,000 debit balance in Allowance for Doubtful Accounts. Credit sales for the period totaled $1,800,000. What is the amount of the bad debt adjusting entry if Bates uses a percentage of receivables basis (at 10%)?
a. $30,000
b. $28,000
c. $32,000
d. $30,400
____ 11. The constraint of conservatism is best expressed as
a. the cost of applying an accounting principle should not exceed its benefit.
b. only material items should be recorded and reported.
c. when in doubt, choose the method that will least likely overstate assets and net income.
d. the lower of cost or market method should be used for inventories.
____ 12. Barker Company's records show the following for the month of January:
Total Retained Earnings at January 1 $600,000
Total Retained Earnings at January 31 900,000
Total Revenues 1,005,000
Total Dividends Declared 45,000
Total expenses for January were
a. $960,000.
b. $1,005,000.
c. $705,000.
d. $660,000.
____ 13. Jetson Company's financial information is presented below.
Sales $ ???? Purchase Returns and Allowances $ 30,000
Sales Returns and Allowances 60,000 Ending Merchandise Inventory 70,000
Net Sales 700,000 Cost of Goods Sold 360,000
Beginning Merchandise Inventory ???? Gross Profit ????
Purchases 340,000
The missing amounts above are:
Sales Beginning Inventory Gross Profit
a. $760,000 $90,000 $340,000
b. $640,000 $90,000 $400,000
c. $760,000 $120,000 $340,000
d. $640,000 $120,000 $400,000
____ 14. The necessity of making adjusting entries relates mostly to the
a. economic entity assumption.
b. time period assumption.
c. going concern assumption.
d. monetary unit assumption.
____ 15. The preparation of closing entries
a. is an optional step in the accounting cycle.
b. results in zero balances in all accounts at the end of the period so that they are ready for the following period's transactions.
c. is necessary before financial statements can be prepared.
d. results in transferring the balances in all temporary accounts to Retained Earnings.
____ 16. Allowance for Doubtful Accounts is reported in the
a. balance sheet as a contra asset.
b. balance sheet as a contra liability account.
c. income statement under other expenses and losses.
d. income statement under other revenues and gains.
____ 17. 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
____ 18. Which of the following errors will cause a trial balance to be out of balance? The entry to record a payment on account was
a. not posted at all.
b. posted as a debit to Cash and a credit to Accounts Payable.
c. posted as a debit to Cash and a debit to Accounts Payable.
d. posted as a debit to Accounts Receivable and a credit to Cash.
____ 19. The primary accounting standard-setting body in the United States is the
a. Securities and Exchange Commission.
b. Accounting Principles Board.
c. Financial Accounting Standards Board.
d. Internal Revenue Service.
____ 20. Which of the following would not be included in the operating activities section of a statement of cash flows?
a. Cash inflows from returns on loans (i.e., interest)
b. Cash inflows from returns on equity securities (i.e., dividends)
c. Cash outflows to governments for taxes
d. Cash outflows to reacquire treasury stock
____ 21. Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively?
&n bsp; Liquidity Profitability Solvency
a. Inventory turnover Inventory turnover Times interest earned
b. Current ratio Inventory turnover Debt to total assets
c. Receivable turnover Return on assets Times interest earned
d. Average days collection Payout ratio Return on assets
____ 22. Which of the following pairs of terms in the area of financial statement analysis are synonymous?
a. Ratio — Trend
b. Horizontal — Trend
c. Vertical — Ratio
d. Horizontal — Ratio
____ 23. The statement of cash flows is a(n)
a. required supplemental financial statement.
b. required basic financial statement.
c. optional basic financial statement.
d. optional supplementary statement.
____ 24. Which of the following should be classified as an extraordinary item?
a. Effects of major casualties not infrequent in the area
b. Write-off of a significant amount of receivables
c. Loss from the expropriation of facilities by a foreign government
d. Losses due to a bitter, lengthy labor strike
____ 25. A Discount on Bonds Payable account
a. is a contra account to Bonds Payable.
b. will cause interest expense to be less than cash interest payable.
c. is increased over the life of the bond until it equals the bond's face value.
d. is an adjunct account to Bonds Payable.
____ 26. In order to be considered extraordinary, an item must be
a. frequent and uninsured.
b. unusual and uninsured.
c. uninsured and infrequent.
d. infrequent and unusual.
____ 27. If the market rate of interest is lower than the stated rate, bonds will sell at an amount
a. equal to face value.
b. not determinable from the given information.
c. lower than face value.
d. higher than face value.
PART II — MATCHING (5 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. Additions and improvements X. Full disclosure principle
B. Allowance method Y. Going-concern assumption
C. Amortization Z. Held-to-maturity securities
D. Available-for-sale securities AA. Internal control
E. Average cost method AB. Last-in, first-out method
F. Book value AC. LIFO reserve
G. Capital expenditure AD. Matching principle
H. Cash debt coverage ratio AE. Materiality
I. Consistency AF. Monetary unit assumption
J. Contra asset account AG. Net purchases
K. Cost method AH. Periodic inventory system
L. Credit memorandum AI. Permanent accounts
M. Debit memorandum AJ. Perpetual inventory system
N. Declining-balance method AK. Ratio analysis
O. Depreciable Cost AL. Relevance
P. Depreciation AM. Reliability
Q. Direct write-off method AN. Revenue expenditure
R. Discontinued operations AO. Revenue recognition principle
S. Earnings per share AP. Stock dividend
T. Economic entity assumption AQ. Stock split
U. Equity method AR. Temporary accounts
V. Extraordinary items AS. Time period assumption
W. First-in, first-out method AT. Units-of-activity method
___ 1. The periodic write-off of an intangible asset.
___ 2. The total amount subject to depreciation.
___ 3. The principle that efforts be matched with accomplishments.
___ 4. An expenditure charged against revenues as an expense when incurred.
___ 5. 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.
___ 6. Use of the same accounting principles and methods from period to period by the same business enterprise.
___ 7. A measure of solvency calculated as cash provided by operating activities divided by average total liabilities.
___ 8. An inventory costing method that assumes that the latest units purchased are the first to be allocated to cost of goods sold.
___ 9. An assumption that economic events can be identified with a particular unit of accountability.
PART II — MATCHING (cont.)
___ 10. A characteristic of information that means it is capable of making a difference in a decision.
___ 11. An assumption that the economic life of a business can be divided into artificial time periods.
___ 12. This method of accounting for uncollectible accounts is required when bad debts are significant in size.
___ 13. An accounting method in which cash dividends received are credited to Dividend Revenue.
___ 14. Used by a bank when a previously deposited customer’s check “bounces” because of insufficient funds.
___ 15. The assumption that the enterprise will continue in operation long enough to carry out its existing objectives and commitments.
___ 16. A system in which detailed records are not maintained and cost of goods sold is determined only at the end of an accounting period.
___ 17. The difference between inventory reported using LIFO and inventory reported using FIFO.
___ 18. The methods and measures adopted within a business to safeguard its assets and enhance the accuracy and reliability of its accounting records.
___ 19. Revenue, expense, and dividends accounts whose balances are transferred to retained earnings at the end of an accounting period.
___ 20. A technique for evaluating financial statements that expresses the relationship among selected financial statement data.
___ 21. A depreciation method that applies a constant rate to the declining balance book value of the asset and produces a decreasing annual depreciation expense over the useful life of the asset.
___ 22. A pro rata distribution of a corporation’s own stock to its stockholders.
___ 23. Events and transactions that are unusual in nature and infrequent in occurrence.
___ 24. The disposal of a significant segment of a business.
___ 25. The net income earned by each share of outstanding common stock.
PART III — ADJUSTING ENTRIES (2 points)
The trial balance of Timlin Company shows the following balances for selected accounts on November 30, 2008:
Prepaid Insurance $12,000 Unearned Revenue $ 4,800
Equipment 60,000 Notes Payable 30,000
Accumulated Depreciation 6,600 Interest Payable 450
Instructions: Using the additional information given below, prepare the appropriate monthly adjusting entries at November 30. Show computations.
A. Revenue for services rendered to customers, but not yet billed, totaled $6,000 on November 30.
B. The note payable is a 9%, 1 year note issued September 1, 2008.
C. The equipment was purchased on January 2, 2007, for $60,000. It has an estimated life of 10 years and an estimated salvage value of $6,000. Timlin uses the straight-line depreciation method.
D. An insurance policy was acquired on June 30, 2008; the premium paid for 2 years was $14,400.
E. Timlin received $4,800 fees in advance from a customer on November 1, 2008. Three-fourths of this amount was earned by November 30.
PART IV — RATIO ANALYSIS (3 points)
The condensed financial statements of Jenner Corporation for 2008 are presented below.
Jenner Corporation Jenner Corporation
Balance Sheet Income Statement
December 31, 2008 For the Year Ended December 31, 2008
Assets Revenues $2,000,000
Current assets Expenses
Cash and short-term Cost of goods sold 960,000
investments $ 30,000 Selling and administrative
Accounts receivable 70,000 expenses 740,000
Inventories 140,000 Interest expense 50,000
Total current assets 240,000 Total expenses 1,750,000
Property, plant, and Income before income taxes 250,000
equipment (net) 760,000 Income tax expense 100,000
Total assets $1,000,000 Net income $ 150,000
Liabilities and Stockholders' Equity
Current liabilities $ 100,000
Long-term liabilities 350,000
Stockholders' equity 550,000
Total liabilities and
stockholders' equity $1,000,000
Additional data as of December 31, 2007: Inventory = $100,000; Total assets = $800,000; Stockholders' equity = $450,000.
Instructions: Compute the following listed ratios for 2008 showing supporting calculations.
(a) Current ratio = .
(b) Debt to total assets ratio = .
(c) Times interest earned = .
(d) Inventory turnover = .
(e) Profit margin = .
(f) Return on stockholders' equity = .
(g) Return on assets = .
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