COMPREHENSIVE EXAMINATION A

PART 1
(Chapters 1-6)
Problem A-I Multiple Choice.
Choose the best answer for each of the following questions and enter the identifying
letter in the space provided.
_____ 1. How does failure to record accrued revenue distort the financial reports?
a. It understates revenue, net incoe, and current assets.
!. It understates net incoe, stoc"holders# equity, and current lia!ilities.
c. It overstates revenue, stoc"holders# equity, and current lia!ilities.
d. It understates current assets and overstates stoc"holders# equity.
_____ $. % contingent lia!ility which is norally accrued is
a. notes receiva!le discounted.
!. accoodation endorseents on custoer notes.
c. additional copensation that ay !e paya!le on a dispute now !eing
ar!itrated.
d. estiated clais under a service warranty on new products sold.
_____ &. 'hich of the following ites is a current lia!ility?
a. (onds due in three onths )for which there is an adequate sin"ing fund
classified as a long*ter investent+.
!. (onds due in three years.
c. (onds )for which there is an adequate appropriation of retained earnings+
due in eleven onths.
d. (onds to !e refunded when due in eight onths, there !eing no dou!t
a!out the ar"eta!ility of the refunding issue.
_____ ,. -n .une 1/, $01$ 1tine Corporation accepted delivery of erchandise which
it purchased on account. %s of .une &0 1tine had not recorded the
transaction or included the erchandise in its inventory. 2he effect of this
error on its !alance sheet for .une &0, $01$ would !e
a. assets and stoc"holders# equity were overstated !ut lia!ilities were not
affected.
!. stoc"holders# equity was the only ite affected !y the oission.
c. assets and lia!ilities were understated !ut stoc"holders# equity was not
affected.
d. assets and stoc"holders# equity were understated !ut lia!ilities were not
affected.
_____ /. 3eversing entries are ost coonly used in relation to year*end ad4usting
entries that
a. allocate the e5pired portion of a deprecia!le asset to e5pense.
!. aorti6e intangi!le assets.
c. provide for !ad de!t e5pense.
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d. accrue interest revenue on notes receiva!le.
_____ 8. -f the following ad4usting entries, which one would cause an increase in
assets at the end of the period?
a. 2he entry to record the earned portion of rent received in advance.
!. 2he entry to accrue unrecorded interest e5pense.
c. 2he entry to accrue unrecorded interest revenue.
d. 2he entry to record e5piration of prepaid insurance.
_____ 9. 'hy is it necessary to a"e ad4usting entries?
a. 2he accountant has ade errors in recording e5ternal transactions.
!. Certain facts a!out the affairs of the !usiness are not included in the
ledger as !uilt up fro e5ternal transactions.
c. 2he accountant wants to show the largest possi!le net incoe for the
period.
d. 2he accountant wants to show the net cash flow for the year.
_____ :. ;otes to financial stateents should not !e used to
a. descri!e the nature and effect of a change in accounting principles.
!. identify su!stantial differences !etween !oo" and ta5 incoe.
c. correct an iproper financial stateent presentation.
d. indicate !asis for asset valuation.
_____ <. Consistency is !est deonstrated when
a. e5penses are reported as charges against the period in which incurred.
!. the effect of changes in accounting ethods is properly disclosed.
c. e5traordinary gains and losses are not reported on the incoe stateent.
d. accounting procedures are adopted which give a consistent rate of net
incoe.
_____10. 2he current assets section of a !alance sheet should never include
a. a receiva!le fro a custoer not collecti!le for over one year.
!. the preiu paid on short*ter !ond investent.
c. goodwill arising fro the purchase of a going !usiness.
d. custoers= accounts with credit !alances.
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Coprehensive 75a %
Problem A-II %d4usting and 3eversing 7ntries.
2he following list of accounts and their !alances represents the unad4usted trial !alance
of %lt Copany at >ece!er &1, $01$?
Cash @ $<,0<0
7quity Investents )trading+ 80,000
%ccounts 3eceiva!le 8<,000
%llowance for >ou!tful %ccounts @ /00
Inventory /,,9$0
Arepaid 3ent &8,000
Alant %ssets 180,000
%ccuulated >epreciation*Alan %ssets 1,,9,0
%ccounts Aaya!le 11,&90
(onds Aaya!le <0,000
Coon 1toc" 190,000
3etained 7arnings <9,1:0
1ales 3evenue $1,,:00
Cost of Boods 1old 1/,,,00
Creight*-ut 11,000
1alaries and 'ages 75pense &$,000
Interest 75pense $,0,0
3ent 3evenue $1,800
Miscellaneous 75pense :<0
Insurance 75pense 11,0/0
@8$0,1<0 @8$0,1<0
%dditional >ata?
Problem A-II )cont.+
1. 2he !alance in the Insurance 75pense account contains the preiu costs of three
policies?
Aolicy 1, reaining cost of @$,//0, 1*yr. ter, ta"en out on May 1, $011D
Aolicy $, original cost of @9,$00, &*yr. ter, ta"en out on -ct. 1, $01$D
Aolicy &, original cost of @1,&00, 1*yr. ter, ta"en out on .an. 1, $01$.
$. -n 1epte!er &0, $01$, %lt received @$1,800 rent fro its lessee for an eighteen
onth lease !eginning on that date.
&. 2he regular rate of depreciation is 10E per year. %cquisitions and retireents during
a year are depreciated at half this rate. 2here were no purchases during the year. -n
>ece!er &1, $011, the !alance of the Alant and 7quipent account was @$,0,000.
,. -n >ece!er $:, $01$, the !oo""eeper incorrectly credited 1ales for a receipt on
account in the aount of @10,000.
/. %t >ece!er &1, $01$, salaries and wages accrued !ut unpaid were @,,$00.
8. %lt estiates that 1E of sales will !ecoe uncollecti!le.
9. -n %ugust 1, $01$, %lt purchased, as a short*ter investent, 80 @1,000, 9E !onds
of %llen Corp. at par. 2he !onds ature on %ugust 1, $01&. Interest payent dates
are .uly &1 and .anuary &1.
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:. -n %pril &0, $01$, %lt rented a warehouse for @&,000 per onth, paying @&8,000 in
advance.
I"str#$t%o"s
)a+ 3ecord the necessary correcting and ad4usting entries.
)!+ Indicate which of the ad4usting entries ay !e reversed at the !eginning of the ne5t
accounting period.
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Problem A-III Fey Conceptual 2ers.
Garious accounting assuptions, principles, constraints, and characteristics are listed
!elow. 1elect those which !est 4ustify the following accounting procedures and indicate
the corresponding letter)s+ in the space)s+ provided. % letter ay !e used ore than
once or not at all.
a. Historical cost f. 7conoic entity ". 3evenue recognition
!. 3elevance g. Materiality l. Cull disclosure
c. Monetary unit h. Conservatis . Cost constraint
d. Boing concern i. Aeriodicity n. Industry practices
e. Consistency 4. 75pense recognition o. Caithful
representation
______ 1. Chose the solution that will !e least li"ely to overstate assets or incoe.
______ $. >escri!ing the depreciation ethods used in the financial stateents.
______ &. %pplying the sae accounting treatent to siilar accounting events.
______ ,. 2he quality which helps users a"e predictions a!out present, past, and
future events.
______ /. 3ecording a transaction when goods or services are e5changed for cash or
clais to cash.
______ 8. Areparing consolidated stateents.
______ 9. Inforation ust a"e a difference or a copany need not disclose it.
______ :. Arovides the figure at which to record a lia!ility.
______ <. 2he preparation of tiely reports on continuing operations.
______10. %ccrual accounting )do not use Hgoing concernH+.
______11. 3eporting those ites which are significant enough to affect decisions. 1elect
two )11 and 1$+.
______1$. 1ee ite 11 a!ove.
______1&. Ignoring the phenoenon of price*level changes )do not use Hhistorical costH+.
______1,. ;ot reporting assets at liquidation prices )do not use Hhistorical costH+.
______1/. Characteri6ed !y copleteness, neutrality, and !eing free fro error.
______18. 7sta!lishent of an allowance for dou!tful accounts.
______19. %dditivity of financial stateent figures relating to different tie periods.
______1:. Carrying inventories at sales price less distri!ution costs.
______1<. Ise of estiating procedures for aorti6ation policies. 1elect two )do not use
HperiodicityH+ )1< and $0+.
______$0. 1ee ite 1< a!ove.
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Problem A-IV (alance 1heet Cor.
Jist the corrections needed to present in good for the !alance sheet !elow. 7rrors
include isclassifications, lac" of adequate disclosure, and poor terinology. >o not
concern yourself with the arithetic. If an ite can !e classified in ore than one
category, select the category ost favored !y the authors of your te5t!oo".
2anner Corporation
(alance 1heet
Cor the year ended >ece!er &1, $01$
%ssets
Current %ssets?
Cash @ 1:,000
7quity investents*trading )fair value, @&$,000+ $9,000
%ccounts receiva!le 9/,000
Inventory 80,000
1upplies inventory &,000
Investent in su!sidiary copany 80,000 @$,&,000
Investents?
2reasury stoc" 9:,000
2angi!le Ci5ed %ssets?
(uildings and land $1&,000
Jess? 3eserve for depreciation 80,000 1/&,000
>eferred Charges?
>iscount on !onds paya!le &,000
-ther %ssets?
Cash surrender value of life insurance /,,000
@/&1,000
Jia!ilities and Capital
Current Jia!ilities?
%ccounts paya!le @ ,/,000
3eserve for incoe ta5es ,$,000
Custoer=s accounts with credit !alances & @ :9,00&
Jong*2er Jia!ilities?
(onds paya!le 1$0,000
2otal Jia!ilities $09,00&
Capital 1toc"?
Capital stoc" $$/,000
7arned surplus 9,,<<9
Cash dividends declared $,,000 &$&,<<9
@/&1,000
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Coprehensive 75a %
Problem A-V (alance 1heet and Incoe 1tateent Classifications.
1pecify, to the left of each account, the letter of the financial stateent classification the
account would appear in. Ise only the classifications shown.
(alance 1heet Incoe and 3etained 7arnings
1tateent
a. Current %ssets 4. 1ales 3evenue
!. Investents ". Cost of Boods 1old
c. Aroperty, Alant, and 7quipent l. -perating 75penses
d. Intangi!le %ssets . -ther 3evenues and Bains
e. -ther %ssets n. -ther 75penses and Josses
f. Current Jia!ilities o. 75traordinary Ite
g. Jong*ter >e!t p. 3etained 7arnings 1ection
h. Capital 1toc" q. ;ot on the 1tateents
i. 3etained 7arnings
%ccount !alances ta"en fro the ledger of Morin Copany on >ece!er &1, $01$
follow?
______ 1. Coon 1toc", @10 par ______18. Inventory
______ $. Joss on >isposal of 7quipent ______19. 1alaries and 'ages 75pense
______ &. (uildings ______1:. Merchandise on order with supplier
______ ,. -ffice 75pense ______1<. Interest 3evenue
______ /. %llowance for >ou!tful %ccounts ______$0. 1elling 75penses
______ 8. ;otes Aaya!le )1hort 2er+ ______$1. Interest 75pense
______ 9. %ccu. >epreciation(uildings ______$$. Incoe 2a5es Aaya!le
______ :. Mortgage Aaya!le due $01, ______$&. Insurance 75pense
______ <. >epletion 75pense ______$,. %dvertising 75pense
______10. Creight*-ut ______$/. 7quity Investents
______11. 1ales 3evenue ______$8. %ccounts 3eceiva!le
______1$. >ividends ______$9. Jand
______1&. 3etained 7arnings >ec. &1, ______$:. %ccounts Aaya!le
$011
______$<. 7rror ade in coputing $010
______1,. Cash depreciation e5pense
______1/. 1ales >iscounts ______&0. Bain on 3edeption of
>e!t
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Coprehensive 75a %
Problem A-VI Cuture Galue and Aresent Galue.
In coputing your answers to the cases !elow, you can round your answer to the
nearest dollar. Aresent value ta!les are provided on the ne5t page.
Ise the following inforation in answering Cases 1 and $ !elow?
-n .anuary 1, $008, Bray Copany sold @:00,000 of 10E !onds, due .anuary 1, $018.
Interest on these !onds is paid on .uly 1 and .anuary 1 each year. %ccording to the
ters of the !ond contract, Bray ust esta!lish a sin"ing fund for the retireent of the
!ond principal starting no later than .anuary 1, $01,. 1ince Bray was in a tight cash
position during the years $008 through $011, the first contri!ution into the fund was
ade on .anuary 1, $01$.
Case 1? %ssue that, starting with the .anuary 1, $01$ contri!ution, Bray desires to
a"e a total of four equal annual contri!utions into this fund. Copute the
aount of each of these contri!utions assuing the interest rate is :E
copounded annually.
Case $? %ssue, instead, that starting with the .anuary 1, $01, contri!ution, Bray
desires to a"e a total of five equal seiannual contri!utions into this fund.
Copute the aount of each of these contri!utions assuing the annual
interest rate is 1$E, copounded seiannually.
Case &? -n .anuary $, $01$, ;elson Copany loaned @<0,000 to Holt Copany. 2he
ters of this loan agreeent stipulate that Holt is to a"e / equal annual
payents to ;elson at 10E interest copounded annually. %ssue the
payents are to !egin on >ece!er &1, $01$. Copute the aount of each of
these payents.
Case ,? .i Marsh, a lawyer conteplating retireent on his 8/th !irthday, decides to
create a fund on an :E !asis which will ena!le hi to withdraw @/0,000 per
year !eginning .une &0, $01/, and ending .une &0, $01<. 2o provide this fund,
he intends to a"e equal contri!utions on .une &0 of each of the years $010
through $01,.
)a+ How uch ust the !alance of the fund equal after the last contri!ution on
.une &0, $01, in order for hi to satisfy his o!4ective?
)!+ 'hat are each of his contri!utions to the fund?
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2a!le 1
Cuture Galue of 1
Aeriods 8E :E <E 10E 1$E
1 1.08000 1.0:000 1.0<000 1.10000 1.1$00
$ 1.1$&80 1.188,0 1.1::10 1.$1000 1.$/,,
& 1.1<10$ 1.$/<91 1.$</0& 1.&&100 1.,0,<
, 1.$8$,: 1.&80,< 1.,11/: 1.,8,10 1./9&/
/ 1.&&:$& 1.,8<&& 1./&:8$ 1.810/1 1.98$&
2a!le $
Aresent Galue of 1
Aeriods 8E :E <E 10E 1$E
1 0.<,&,0 0.<$/<& 0.<19,& 0.<0<0< 0.:<$:
$ 0.:<000 0.:/9&, 0.:,18: 0.:$8,/ 0.9<91
& 0.:&<8$ 0.9<&:& 0.99$1: 0.9/1&$ 0.9119
, 0.9<$0< 0.9&/0& 0.90:,& 0.8:&01 0.8&//
/ 0.9,9$8 0.8:0/: 0.8,<<& 0.8$0<$ 0./89,
2a!le &
Cuture Galue of an -rdinary %nnuity of 1
Aeriods 8E :E <E 10E 1$E
1 1.00000 1.00000 1.00000 1.00000 1.0000
$ $.08000 $.0:000 $.0<000 $.10000 $.1$00
& &.1:&80 &.$,8,0 &.$9:10 &.&1000 &.&9,,
, ,.&9,8$ ,./0811 ,./9&1& ,.8,100 ,.99<&
/ /.8&90< /.:8880 /.<:,91 8.10/10 8.&/$:
2a!le ,
Aresent Galue of an -rdinary %nnuity of 1
Aeriods 8E :E <E 10E 1$E
1 0.<,&,0 0.<$/<& 0.<19,& 0.<0<0< 0.:<$:
$ 1.:&&&< 1.9:&$8 1.9/<11 1.9&//, 1.8<00
& $.89&01 $./9910 $./&1&0 $.,:8:/ $.,01:
, &.,8/11 &.&1$1& &.$&<9$ &.18<:8 &.0&9&
/ ,.$1$&8 &.<<$91 &.::<8/ &.9<09< &.80,9
2a!le /
Aresent Galue of an %nnuity >ue of 1
Aeriods 8E :E <E 10E 1$E
1 1.00000 1.00000 1.00000 1.00000 1.0000
$ 1.<,&,0 1.<$/<& 1.<19,& 1.<0<0< 1.:<$:
& $.:&&&< $.9:&$8 $.9/<11 $.9&//, $.8<00
, &.89&01 &./9910 &./&1&0 &.,:8:/ &.,01:
/ ,.,8/11 ,.&1$1& ,.$&<9$ ,.18<:8 ,.0&9&
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Coprehensive 75a %
Sol#t%o"s + Comprehe"s%,e E-am%"at%o" A
Problem A-I 1olution.
1. a ,. c 9. ! 10. c
$. d /. d :. c
&. c 8. c <. !
Problem A-II 1olution.
)a+ 1. Arepaid Insurance ....................................................................... 8,800
Insurance 75pense .......................................................... 8,800
)(oth Aolicies 1 and & have e5pired and their costs
!elong in Insurance 75pense. 2he onthly preiu
on Aolicy $ is @9,$00 K &8 L @$00. %t 1$M&1M1$, && os.
of insurance, or @8,800, reains une5pired+
$. 3ent 3evenue ............................................................................. 1:,000
Inearned 3ent ................................................................
1:,000
)Monthly rent is @$1,800 K 1: L @1,$00. %t 1$M&1M1$,
1/ os. of rent, or @1:,000, reains unearned+
&. >epreciation 75pense ................................................................. $0,000
%ccuulated >epreciation ...............................................
$0,000
N)7quipent retired during $01$ L
@$,0,000 O @180,000 L @:0,000+
10E of @180,000 L @18,000
/E of @:0,000 L ,,000
2otal depreciation L @$0,000P
,. 1ales .......................................................................................... 10,000
%ccounts 3eceiva!le .......................................................
10,000
)2o correct the entry ade in error+
/. 1alaries and 'ages 75pense ...................................................... ,,$00
1alaries and 'ages Aaya!le ........................................... ,,$00
8. (ad >e!t 75pense ....................................................................... $,0,:
%llowance for >ou!tful %ccounts ..................................... $,0,:
)Corrected 1ales !alance is @$1,,:00 O @10,000
L @$0,,:00. 1E of @$0,,:00 is @$,0,:.+
9. Interest 3eceiva!le ...................................................................... 1,9/0
Interest 3evenue ............................................................. 1,9/0
)Monthly interest is @80,000 Q .09 Q 1M1$ L @&/0.
/ onths= accrued interest is @1,9/0+
:. 3ent 75pense ........................................................................... $,,000
Arepaid 3ent ................................................................. $,,000
)2o record : onths= of rent e5pired at @&,000 per onth+
A-1.
Coprehensive 75a %
)!+ 1, $, /, and 9. Ites ;o. 1 and ;o. $ represent prepaid ites that were initially
recorded in noinal accounts. Ites ;o. / and ;o. 9 represent accrued ites.
Problem A-III 1olution.
1. h 8. f 11. l 18. 4
$. l 9. g 1$. g or ! 19. c
&. e :. a 1&. c 1:. n
,. ! <. i 1,. d 1<. d
/. " 10. 4 or " 1/. o $0. 4
Problem A-IV 1olution.
1. HCor the year endedH in the title should !e deleted.
$. 7quity investents should !e reported at their fair value.
&. 2he aount of %llowance for >ou!tful %ccounts should !e disclosed and
deducted fro %ccounts 3eceiva!le.
,. 2he inventory costing ethod )cost, lower of cost or ar"et+ and the !asis for
pricing the inventory )JIC-, CIC-, etc.+ should !e disclosed.
/. Investent in 1u!sidiary should !e classified as an investent.
8. 2reasury 1toc" is isclassified under Investents. It should appear as a
deduction fro the 1toc"holders= 7quity section.
9. (uildings and Jand should !e separated.
:. H3eserve forH >epreciation should !e either H%llowance forH or H%ccuulatedH
>epreciation.
<. >iscount on (onds Aaya!le should !e classified with and deducted fro (onds
Aaya!le.
10. Cash 1urrender Galue of Jife Insurance should !e classified aong Investents.
11. H3eserveH for Incoe 2a5es should !e titled Incoe 2a5es Aaya!le.
1$. 2he sall !alance of @& for custoer=s accounts with credit !alances, while not
erroneously classified, ight !e offset against and !uried in the %ccounts
3eceiva!le account !ecause it is so sall in aount.
1&. 2he aturity date and the interest rate should !e disclosed for the (onds
Aaya!le.
1,. HCapital 1toc"H listed as title should !e H1toc"holders= 7quityDH HCapital stoc"H
listed as account should !e RCoon stoc".S
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1/. More inforation relative to the capital stoc", such as par value and the nu!er
of shares authori6ed, issued, and outstanding should !e disclosed.
18. H7arned surplusH should not !e usedD 3etained 7arnings is the preferred title.
19. Cash dividends declared is actually >ividends Aaya!le and should !e classified
as a current lia!ility.
Problem A-V 1olution.
1. h 9. c 1&. p 1<. $/.
!
$. n :. g 1,. a $0. l $8.
a
&. c <. " 1/. 4 $1. n $9.
c
,. l 10. l 18. a, " $$. f $:.
f
/. a 11. 4 19. l $&. l $<.
p
8. f 1$. p 1:. q $,. l &0.

Problem A-VI 1olution.

Case 1. @:00,000 is the aount of an :E annuity due for , periods. Ise the ta!le
factor for the future value of an :E ordinary annuity for , periods, and ultiply
!y )1.0:+?
,./0811 Q )1.0:+ L ,.:8880.
Aeriodic payents L @:00,000 K ,.:8880 L @18,,&:8
Case $. 1ince interest is copounded seiannually, divide the 1$E annual interest
rate !y $, and use the ta!le factor for the future value of a 8E ordinary annuity
for / periods.
Aeriodic payents L @:00,000 K /.8&90< L @1,1,<19
Case &. @<0,000 is the present value of a 10E ordinary annuity for / periods.
Aeriodic payents L @<0,000 K &.9<09< L @$&,9,$
Case ,. )a+ %t .une &0, $01,, the !alance in the fund is the present value of an :E
ordinary annuity of @/0,000 for / periods.
(alance in the fund L @/0,000 Q &.<<$91 L @1<<,8&8
)!+ %t .une &0, $01,, @1<<,8&8 is the future value of an :E ordinary annuity
for five periods.
Aeriodic payents L @1<<,8&8 K /.:888 L @&,,0$<
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