Bu127 PQ

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) What is the primary purpose of the statement of financial position?

A) To measure the profit of a business up to a particular point in time.
B) To report assets at their current market value at a particular point in time.
C) To report the financial position of the reporting entity at a particular point in time.
D) To report the difference between cash inflows and cash outflows for the period.
Answer: C
2) On January 1, 20X1, two individuals invested $150,000 each to form Hornbeck Corporation.
Hornbeck had total revenues of $15,000 during 20X1 and $40,000 during 20X2. Total expenses for
the same periods were $8,000 and $22,000, respectively. Cash dividends paid out to shareholders
totaled $6,000 in 20X1 and $12,000 in 20X2. What was the ending balance in Hornbeck's retained
earnings account at the end of 20X1 and 20X2?
A) $1,000 and $6,000 respectively. B) $7,000 and $19,000 respectively.
C) $1,000 and $7,000, respectively. D) $301,000 and $306,000 respectively.
Answer: C
3) The BAT Corporation had revenues of $110,000, expenses of $85,000, and an income tax rate of 20
percent in 20X2. What would profit after taxes be?
A) $25,000. B) $15,000. C) $5,000. D) $20,000.
Answer: D
4) Brown Corporation reported the following amounts at the end of the first year of operations,
December 31, 20X1: Share capital $20,000; Sales revenue $95,000; Total assets $85,000, No
dividends, and Total liabilities $35,000. What would shareholders' equity and total expenses be?
A) Shareholders' equity, $80,000 and expenses $40,000.
B) Shareholders' equity, $80,000 and expenses $85,000.
C) Shareholders' equity, $50,000 and expenses $65,000.
D) Shareholders' equity, $60,000 and expenses $75,000.
Answer: C
5) Which of the following would not be considered an internal user of accounting data?
A) A creditor of a company. B) The controller of a company.
C) A salesperson of a company. D) The president of a company.
Answer: A
6) If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period,
then total assets must change by what amount and direction during that same period?
A) $20,000 decrease. B) $25,000 increase.
C) $30,000 increase. D) $20,000 increase.
Answer: C
7) Which of the following activities involves raising the necessary funds to support the business?
A) Operating. B) Marketing. C) Financing. D) Investing.
Answer: C
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8) Buying assets needed to operate a business is an example of a(n)
A) purchasing activity. B) investing activity.
C) operating activity. D) financing activity.
Answer: B
9) The common characteristic possessed by all assets is

A) tangible nature. B) long life.
C) great monetary value. D) future economic benefit.
Answer: D
10) Expenses are incurred

A) to generate revenues. B) to produce assets.
C) to produce liabilities. D) only on rare occasions.
Answer: A
11) The financial statement that summarizes the changes in contributed capital and retained earnings for
a specific period of time is the
A) statement of earnings. B) statement of changes in equity.
C) statement of cash flows. D) statement of financial position.
Answer: B
12) Retained earnings at the end of the period is equal to

A) assets plus liabilities.
B) retained earnings at the beginning of the period plus net earnings minus liabilities.
C) retained earnings at the beginning of the period plus net earnings minus dividends.
D) net earnings for the period
Answer: C
13) What form does financial accounting information provided by an entity to decision makers generally
take?
A) Various forecasts and performance reports.
B) An analysis of changes in the price of a corporation's shares.
C) Financial statements.
D) Comparisons between the company and its competitors.
Answer: C
14) If the retained earnings account increases from the beginning of the year to the end of the year, then
A) additional investments are less than reported losses.
B) dividends were paid.
C) a loss is less than dividends.
D) profit is greater than dividends.
Answer: D
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15) Shareholders'equity can be described as claims of
A) debtors on total assets. B) creditors on total assets.
C) customers on total assets. D) owners on total assets.
Answer: D
16) Which financial statement would indicate whether the company relies more on debt or shareholders'
equity to finance its assets?
A) Statement of earnings. B) Statement of changes in equity.
C) Statement of financial position. D) Statement of cash flows.
Answer: C
17) Thestatement of financial position and statement of changes in equity are related because
A) the ending amount on the statement of changes in equity is transferred to the statement of cash
flows.
B) both contain information for the corporation.
C) the ending amount on the statement of changes in equity is reported on the statement of
financial position.
D) the total assets on the statement of financial position is reported on the statement of changes in
equity.
Answer: C
18) Carrington Company owes you $500 on account due within 15 days. Which of the following
amounts on its statement of financial position would help you to determine the likelihood that you
will be paid in full and on time?
A) Cash and inventory. B) Contributed capital and retained earnings.
C) Cash and property and equipment. D) Cash and trade receivables.
Answer: D
19) Thestatement of cash flows and the statement of financial position are interrelated because
A) the ending amount of cash on the statement of cash flows must agree with the amount on the
statement of earnings.
B) both disclose the corporation's profit.
C) the ending amount of cash on the statement of cash flows must agree with the amount in the
statement of financial position.
D) the ending amount of cash on the statement of cash flows must agree with the amount in the
statement of changes in equity.
Answer: C
20) Which of the following are the two primary components of shareholders' equity?
A) Short term debt and retained earnings B) Long-term debt and retained earnings.
C) Contributed capital and Retained earnings. D) Non-current assets and liabilities
Answer: C
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21) Thestatement of changes in equity is dependent on the results from
A) a company's share capital. B) the statement of financial position.
C) the statement of earnings. D) the statement of cash flows.
Answer: C
22) Theprimary purpose of the statement of cash flows is to report

A) information about cash receipts and cash payments of a company.
B) a company's financing transactions.
C) the net increase or decrease in cash.
D) a company's investing transactions.
Answer: A
23) Kamil'sCar Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of
$40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in
expenses, and dividends of $5,000. Shareholders' equity at the end of the year was
A) $70,000. B) $75,000. C) $65,000. D) $60,000.
Answer: D
24) Themost significant expense for a merchandising company is

A) income taxes B) cost of goods sold
C) equipment maintenance D) salaries expense
Answer: B
25) Onthe statement of financial position, assets may be presented

A) in alphabetical order
B) in order of liquidity
C) in order of reverse liquidity
D) either in order of liquidity or in order of reverse liquidity
Answer: D
26) Retained earnings are

A) the amount of profit kept in the corporation for future use.
B) equal to revenues.
C) equal to cash.
D) the shareholders' claim on total assets.
Answer: A
27) What are business liabilities?

A) Debts or obligations resulting from past business events.
B) Amounts it expects to collect in the future from customers.
C) The amounts that owners have invested in the business.
D) The increases in assets that result from profitable operations.
Answer: A
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28) Why would Parker Bank, in deciding whether to make a loan to Davis Company, be interested in the
amount of liabilities, Davis has on its statement of financial position?
A) Parker would be interested in the amount of Davis's assets but not the amount of liabilities.
B) Existing liabilities give an indication of how profitable Davis has been in the past.
C) If Davis already has many other obligations, it might not be able to repay the loan.
D) The liabilities represent resources that could be used to repay the loan.
Answer: C
29) What are the two categories of shareholders' equity usually found on the statement of financial
position of a corporation?
A) Share capital and property, plant, and equipment.
B) Share capital and long-term liabilities.
C) Retained earnings and notes payable.
D) Contributed capital and retained earnings.
Answer: D
30) Jameson & Johnson Inc., recorded $250,000 of depreciation expense in December 20X6. The most
likely effect on the company's accounting equation is
A) no effect on assets. B) a decrease in assets of $250,000.
C) an increase in assets of $250,000. D) an increase in liabilities of $250,000.
Answer: B
31) Allentown Corporation has on its statement of financial position the following amounts:
Total assets of $3,500,000

Total liabilities of $500,000
Contributed capital of $1,000,000.
What is the amount of retained earnings that should appear on Allentown's statement of financial position?
A) $4,000,000. B) $3,000,000. C) $2,000,000. D) $5,000,000.
Answer: C
32) Which financial statement for a business would you look at to determine the company's performance
during an accounting period?
A) Statement of financial position. B) Statement of earnings.
C) Statement of cash flows. D) Statement of changes in equity.
Answer: B
33) Which of the following is not a principal type of business activity?

A) Delivering B) Investing C) Operating D) Financing
Answer: A
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34) How do most businesses earn revenues?
A) Through sales of goods or services to customers.
B) By selling shares to shareholders.
C) By borrowing money from a bank.
D) When they collect trade receivables.
Answer: A
35) A group of individuals formed a new company with an investment of $100,000. The most likely
effect of this transaction on the company's accounting equation at the time of the formation is an
increase in cash and
A) an increase in liabilities. B) an increase in revenue.
C) an increase in owners' capital. D) an increase in assets.
Answer: C
36) During 20X2, its second year in operation, Banner Company delivered goods to customers for
which customers paid or promised to pay $5,850,000. The amount of cash collected from customers
was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. What is
the amount of sales revenue that Banner should report on its statement of earnings for 20X2?
A) $5,960,000. B) $4,760,000. C) $5,850,000. D) $4,650,000.
Answer: C
37) During 20X2, its second year in operation, Banner Company delivered goods to customers for
which customers paid or promised to pay $5,850,000. Assume all sales were on account and the
amount of cash collected from customers was $5,960,000. The amount of trade receivables at the
beginning of 20X2 was $1,200,000. Based on this information, what is the amount of trade
receivables that Banner would report at the end of 20X2?
A) $1,090,000. B) $110,000. C) $1,310,000. D) $5,850,000.
Answer: A
38) What isthe amount of revenue recognized in the statement of earnings by a company that sells
goods to customers?
A) The amount of cash collected plus the beginning amount of trade receivables.
B) Total sales, both cash and credit sales, for the period.
C) The cash collected from customers during the current period.
D) Total sales minus beginning amount of trade receivables.
Answer: B
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39) Thestatement of cash flows and the statement of financial position are interrelated because
A) the ending amount of cash on the statement of cash flows must agree with the amount in the
statement of changes in equity.
B) the ending amount of cash on the statement of cash flows must agree with the amount in the
C) the ending amount of cash on the statement of cash flows must agree with the amount on the
D) both disclose the corporation's profit.
Answer: B
40) On January 1, 20X1, Taylor Corporation had retained earnings of $6,500,000. During 20X1, Taylor
had profit of $1,050,000 and dividends of $450,000. What is the amount of Taylor's retained
earnings at the end of 20X1?
A) $6,050,000. B) $7,550,000. C) $6,950,000. D) $7,100,000.
Answer: D
41) What are the categories

of cash flows that appear on a statement of cash flows?
A) Cash flows from investing, financing, and service activities.
B) Cash flows from operating, investing, and financing activities.
C) Cash flows from financing, production, and growth activities.
D) Cash flows from operating, production, and internal activities.
Answer: B
42) Borrowing money is an example of a(n)

A) financing activity. B) investing activity.
C) operating activity. D) delivering activity.
Answer: A
43) Onthe statement of cash flows, how would a company report the purchase of machinery?
A) As cash used in financing activities. B) As cash used in operating activities.
C) As cash used in purchasing activities. D) As cash used in investing activities.
Answer: D
44) When would a company report a net loss?

A) When its liabilities increased during an accounting period.
B) When its expenses exceeded its revenues for an accounting period.
C) When its assets decreased during an accounting period.
D) When retained earnings decreased due to paying dividends to shareholders.
Answer: B
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45) Which of the following is the amount of rent expense reported on the statement of earnings?
A) The amount of rent used up in the current period to earn revenue.
B) The amount of cash paid for rent for the future period.
C) The amount of cash paid for rent in the current period less any unpaid rent at the end of the
period.
D) The amount of cash paid for rent in the current period.
Answer: A
46) What events cause changes in a corporation's retained earnings?

A) Declaration of dividends and purchase of new machinery.
B) Profit issuance of shares, and borrowing from a bank.
C) Declaration of dividends and issuance of shares to new shareholders.
D) Profit or loss and declaration of dividends.
Answer: D
47) The statement of financial position

A) summarizes the changes in retained earnings for a specific period of time.
B) presents the revenues and expenses for a specific period of time.
C) reports the assets, liabilities, and shareholders' equity at a specific date.
D) reports the changes in assets, liabilities, and shareholders' equity over a period of time.
Answer: C
48) If you wanted to know how much of its profit a corporation distributed as dividends, which financial
statement would you look at?
A) Statement of earnings. B) Statement of changes in equity.
C) Statement of cash flows. D) Statement of financial position.
Answer: B
49) Why is the operating activities section often believed to be the most important part of a statement of
cash flows?
A) It shows the net increase or decrease in cash during the period.
B) It shows the dividends that have been paid to shareholders.
C) It gives the most information about how operations have been financed.
D) It indicates a company's ability to generate cash from sales to meet current cash needs.
Answer: D
50) If
you wanted to know what accounting rules a company follows related to its inventory, where
would you look?
A) The statement of financial position. B) The statement of earnings.
C) The headings to the financial statements. D) The notes to the financial statements.
Answer: D
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51) During 20X1, Burton Company delivered products to customers for which customers promised to
pay $3,820,000. The company collected $3,670,000 in cash from customers during the year. Indicate
which of these amounts will appear on the statement of earnings and which on the statement of cash
flows.
A) $3,820,000 appears on both the statement of earnings and the statement of cash flows.
B) $3,670,000 appears on the statement of cash flows, and $3,820,000 appears on the statement of
earnings.
C) $3,670,000 appears on both the statement of earnings and the statement of cash flows.
D) $3,820,000 appears on the statement of cash flows, and $3,670,000 appears on the statement of
earnings.
Answer: B
52) Atthe beginning of 20X2, Rodriguez Corporation had assets of $820,000 and liabilities of
$340,000. During the year, assets increased by $40,000 and liabilities decreased by $8,000. What
was total shareholders' equity at the end of 20X2?
A) $480,000. B) $1,208,000. C) $432,000. D) $528,000.
Answer: D
53) What term is used for probable future economic benefits owned by an entity, and obtained as the
result of past transactions?
A) Retained earnings. B) Assets.
C) Liabilities. D) Revenues.
Answer: B
54) What results from the purchase of goods or services on credit and from borrowing?
A) Liabilities. B) Revenues. C) Assets. D) Share capital.
Answer: A
55) How are the differing claims of creditors and investors recognized by a corporation?
A) The claims of creditors are liabilities; those of investors are assets.
B) The claims of creditors are liabilities; the claims of investors are recorded as shareholders'
equity.
C) The claims of creditors and investors are essentially equivalent.
D) The claims of both creditors and investors are liabilities, but only the claims of investors are
long term.
Answer: B
56) In what order are assets are listed on a statement of financial position?
A) Dollar amount (largest first).
B) Importance to the operation of the business.
C) Ease of conversion to cash.
D) Date of acquisition (earliest first).
Answer: C
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57) In what order, would the assets of Any Company be listed on their statement of financial position?
A) Cash, Inventory, Trade Receivables, Plant and Equipment.
B) Cash, Trade Receivables, Plant and Equipment, Inventory.
C) Cash, Trade Receivables, Marketable Securities, Inventory.
D) Cash, Trade Receivables, Inventory, Plant and Equipment.
Answer: D
58) The ending retained earnings balance of the Brown Hat restaurant chain increased by $4.3 billion
from the beginning of the year. The company had declared a dividend of $1.5 billion. What was the
profit earned during the year?
A) $2.8 billion.
B) $5.8 billion.
C) $3.0 billion.
D) There is no way to determine net income as not enough information was given.
Answer: B
59) What section of the statement of cash flows do bankers consider to be the most important?
A) Operating. B) Investing.
C) Financing. D) All the sections are equally important.
Answer: A
60) Which of the following statements is TRUE?

A) The Accounting Standards Board is a government body.
B) The SEC is the most influential Canadian regulator of the flow of financial information
provided by publicly traded companies in Canada.
C) Publicly traded enterprises must use the accounting standards prescribed for private enterprises
for external reporting.
D) Publicly traded enterprises must use IFRS for external reporting purposes.
Answer: D
61) Which of the following activities would cause investors to overpay for the acquisition of a company
from its current owners?
A) Understated trade payables and overstated inventory.
B) Understated assets and overstated expenses.
C) Understated assets and overstated revenues.
D) Understated revenues and overstated expenses.
Answer: A
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62) Which of the following statements is true about the price earnings (P/E) ratio?
A) The P/E ratio increases as profit increases.
B) It is a ratio of importance to creditors.
C) A high P/E ratio indicates investors have little confidence in the future profit potential of the
company.
D) The P/E ratio could be used to approximate the value investors would be willing to pay for the
company's acquisition from existing owners.
Answer: D
63) Which government regulatory agency has the legal authority to prescribe financial reporting
requirements for corporations that sell their securities in Canadian stock exchanges in the province
of Ontario?
A) OSC. B) CICA. C) CRA. D) AcSB.
Answer: A
64) Under IFRS, income includes increases in economic benefits from

A) All increases related to owners' contributions.
B) increases in owners' equity related to owners' contributions
C) increases in liabilities not related to owners' contributions
D) enhancements of assets not related to owners' contributions
Answer: D
65) Which securities regulator in the province of Ontario has broad powers to determine measurement
rules for financial statements of publicly traded companies on the Toronto Stock Exchange?
A) The Supreme Court. B) The Canada Revenue Agency.
C) The Federal Accounting Office. D) The Ontario Securities Commission.
Answer: D
66) Financial statements are prepared for the user. Which of the following best describes the
responsibility for the preparation of financial statements?
A) It is the responsibility of management. B) It is the responsibility of shareholders.
C) It is the responsibility of external auditors. D) It is the responsibility of standard setters.
Answer: A
67) With whom does primary responsibility for the information in a corporation's financial statements
rest?
A) The public accountant who audited the financial statements.
B) The Ontario Securities Commission.
C) The managers of the corporation.
D) The shareholders of the corporation.
Answer: C
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68) What is an examination of the financial statements of a business to ensure that they conform with
international financial reporting standards called?
A) A validation. B) An audit. C) A certification. D) A verification.
Answer: B
69) What isthe purpose of an audit?

A) To establish that a corporation's shares are a sound investment.
B) To lend credibility to an entity's financial statements.
C) To prove the accuracy of an entity's financial statements.
D) To endorse the quality of leadership that managers provide for a corporation.
Answer: B
70) Why do the managers of a corporation hire independent auditors?

A) To lobby the AcSB for changes in generally accepted accounting principles.
B) To guarantee annual and quarterly financial statements.
C) To handle some personnel issues and problems.
D) To audit and report on the fairness of financial statement presentation.
Answer: D
71) Why is the auditor's role in performing audits, important to our society?
A) Auditors have the primary responsibility for the information contained in financial statements.
B) Auditors issue reports on the accuracy of each financial transaction.
C) An audit of financial statements helps investors and others to know that they can rely on the
information presented in the financial statements.
D) Auditors provide direct financial advice to potential investors.
Answer: C
72) What isone of the disadvantages of a corporation, when compared to a partnership?

A) The corporation and its shareholders are potentially subject to double taxation.
B) The shareholders have limited liability.
C) The corporation provides continuity of life.
D) The shareholders are treated as a separate legal entity from the corporation.
Answer: A
73) Which of the following statements is true about a sole proprietorship?

A) The owner and the business are separate legal entities but not separate accounting entities.
B) The owner and the business are separate legal entities and separate accounting entities.
C) The owner and the business are separate accounting entities but not separate legal entities.
D) Most large businesses in this country are organized as sole proprietorships.
Answer: C
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74) For a business organized as a general partnership, which statement is true?
A) Formation of a partnership requires getting a charter from the province of incorporation.
B) A partnership is not considered to be a separate accounting entity.
C) The owners and the business are separate legal entities.
D) Each partner is potentially responsible for the debts of the business.
Answer: D
75) For what reason might a group of people establishing a business prefer to set it up as a corporation
rather than a partnership?
A) To avoid complex reporting procedure for government agencies
B) To avoid double taxation.
C) Because of ease of formation.
D) To have limited liability.
Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
76) Accounting is a system that collects and processes financial information about an organization and
reports that information to decision makers.
Answer: True False
77) External users of accounting information include the managers who plan, organize, and run a
business.
Answer: True False
78) Inaccounting and reporting for a business entity, the accounting and reporting for the business must
be kept separate from other economic affairs of its owners.
Answer: True False
79) Accounting communicates financial information about a business to both internal and external
users.
Answer: True False
80) A statement of financial position should be dated for a period (such as "For the year ended
December 31, 20X1"), whereas a statement of earnings should be dated at a point in time (such as
"At December 31, 20X1").
Answer: True False
81) Expenses are the cost of assets consumed or services used in the process of generating revenue.
Answer: True False
82) Financing activities for corporations include borrowing money and selling shares.
Answer: True False
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83) Totalassets are $60,000, total liabilities, $30,000, and share capital is $20,000; therefore, retained
earnings is $5,000.
Answer: True False
84) Investing activities involve collecting the necessary funds to operate the business.
Answer: True False
85) The purchase of equipment is an example of a financing activity.

Answer: True False
86) The reasons for a decrease in cash can be determined by examining the statement of earnings.
Answer: True False
87) Economic resources that are owned by a business are called shareholders' equity.
Answer: True False
88) Theaccounting model for the statement of financial position is: Assets + Liabilities - Shareholders'
Equity.
Answer: True False
89) Assets are resources owned by a business that provide current services or benefits to the business.
Answer: True False
90) Profitis the excess of total revenues over total expenses incurred to generate revenue during a
specific period.
Answer: True False
91) The financial statements prepared by a corporation include a statement of financial position,
statement of earnings, statement of cash flows, and statement of money.
Answer: True False
92) A banker who is considering making a loan to a corporation would be one of the corporation's
internal decision makers.
Answer: True False
93) Assets
are economic resources controlled by the entity as a result of past transactions or events and
from which future economic benefits can be obtained.
Answer: True False
94) The financial statement that shows an entity's economic resources and its liabilities is the statement
of retained earnings.
Answer: True False
95) Thestatement of comprehensive income reports the change in shareholders' equity during a period
from business activities other than investments by shareholders or distributions to shareholders.
Answer: True False
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96) A note payable is a borrowing instrument that generally does not involve the payment of interest.
Answer: True False
97) If a corporation does not pay its obligations when they are due, its creditors may be able to force the
sale of the business's assets to pay their claims.
Answer: True False
98) When a company ships products to a customer and bills the customer, the company should
recognize revenue as earned.
Answer: True False
99) The amount of cash paid by a business for office rent would be reported on the statement of cash
flows as a financing activity.
Answer: True False
100) Repayment of a bank loan is classified on the statement of cash flows as an operating activity.
Answer: True False
101) Liabilities are the entity's legal obligations that result from past business events.
Answer: True False
102) International Financial Accounting Standards are produced by the International Accounting
Standards Board (IASB), which is an independent standard-setting board consisting of 15 members
from twelve countries.
Answer: True False
103) Accounting is based on man-made rules that sometimes undergo change.

Answer: True False
104) Primary responsibility for the information in the financial statements lies with management.
Answer: True False
105) The AcSB is currently the body responsible for establishing accounting standards.
Answer: True False
106) The Accounting Standards Board (AcSB) is an agency of the federal government that establishes
generally accepted accounting principles for businesses.
Answer: True False
107) Generally accepted accounting principles are essentially identical in most developed countries.
Answer: True False
108) One of the disadvantages of a corporation when compared to a partnership is the limited liability of
the owners.
Answer: True False
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109) A partnership is an incorporated entity that has more than one owner.
Answer: True False
110) Accountants generally must meet educational requirements, pass a rigorous exam, and meet
experience requirements before becoming licensed CAs, CGAs, or CMAs.
Answer: True False
111) Independent CAs in the public practice of accounting are viewed as employees of their clients.
Answer: True False
112) An audit involves the examination of the financial reports (prepared by the management of the
company) to ensure that they represent what they claim and conform with IFRS.
Answer: True False
113) Many opportunities exist for managers to intentionally prepare misleading financial reports.
Answer: True False
114) Failure to comply with professional rules of conduct can result in serious penalties for professional
accountants, but not the rescinding of the professional designation of an offending member.
Answer: True False
115) High standards of ethics are not required for preparers of financial information.
Answer: True False
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
116) Identify which of the following accounts appear on a statement of financial position.
(a) Service revenue

(b) Cash
(c) Common shares
(d) Accounts payable
(e) Rent expense
(f) Supplies
(g) Land
Answer: (b), (c), (d), (f), (g)
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117) For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or
shareholders' equity item.
Code
Asset A
Liability L
Shareholders' Equity SE
________ 1. Rent expense ________ 7. Trade receivables

________ 2. Office equipment ________ 8. Retained earnings
________ 3. Trade payables ________ 9. Service revenue
________ 4. Common shares ________ 10. Bank loan payable
________ 5. Insurance expense ________ 11. Dividends
________ 6. Cash ________ 12. Unearned revenue
Answer: Please review the following information:
1. SE 7. A
2. A 8. SE
3. L 9. SE
4. SE 10. L
5. SE 11. SE
6. A 12. L
118) Classify each of these items as an asset (A), liability (L), or shareholders' equity (SE).
________ 1. Rent receivable ________ 6. Cash

________ 2. Salaries payable ________ 7. Mortgage payable
________ 3. Preferred shares ________ 8. Land
________ 4. Office supplies ________ 9. Dividends
________ 5. Retained earnings ________ 10. Office supplies expense
1. A 6. A
2. L 7. L
3. SE 8. A
4. A 9. SE
5. SE 10. SE
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119) Match each definition with its related term or abbreviation by entering the appropriate letter in the space
provided.
________ 1. OSC
________ 2. CICA
________ 3. AcSB
________ 4. CA
________ 5. IFRS
Term or Abbreviation Definition
A. A system that collects and processes financial information about an organization and reports that
information to decision makers.
B. Measurement of information about an entity in the monetary unit–dollars or other national currency.
C. An unincorporated business owned by two or more persons.
D. The organization for which financial data are to be collected (separate and distinct from its owners).
E. An incorporated entity that issues shares as evidence of ownership.
F. Initial recording of financial statement elements at acquisition cost.
G. An examination of the financial reports to assure that they represent what they claim and conform with
international financial reporting standards.
H. Chartered Accountant.
I. An unincorporated business owned by one person.
J. A report that describes the auditors' opinion of the fairness of the financial statement presentations and the
evidence gathered to support that opinion.
K. Ontario Securities Commission.
L. Accounting Standards Board.
M. Company that can be bought and sold by investors on established stock exchanges.
N. International financial reporting standards
O. Canadian Institute of Chartered Accountants.
Answer: 1. K; 2. O; 3. L; 4. H; 5. N
18
120) Using the income statement model and the statement of financial position model, fill-in the missing amounts
for each independent case below. Assume the amounts given are at the end of the first full year of operations
of the company.
Case Total Total Total Shareholders'

Revenue Total Assets Expenses Liabilities Profit (Loss) Equity
A $500,000 $300,000 $425,000 $110,000 $ $
B 75,000 $ $ 70,000 15,000 55,000
C $ 145,000 70,000 $ (10,000) 90,000
D 250,000 375,000 200,000 60,000 $ $
E $ $ 64,000 88,000 3,000 65,000
Case Total Total Total Total Profit Shareholders'

Revenue Assets Expenses Liabilities (Loss) Equity
A $75,000 $190,000
B $125,000 $60,000
C $60,000 $55,000
D $50,000 $315,000
E $67,000 $153,000
121) Plants Supreme, Inc., a small retail store which sells house plants, started business on January 1, 20X1. At the
end of January, 20X1, the following information was available:
Sales of plants for cash $50,000

Sales of plants for credit 3,000
Cost of plants which were sold and paid for during January 30,000
Cash expenditures during January:
Salaries $4,500
Telephone 100
Office Supplies (all used) 100
Electricity 200
Rent on the store for January, 20X1 800
(will not be paid until February, 20X1)
A. Using the above information, prepare the income statement for Plants Supreme for the month ended
January 31, 20X1.
B. What is the amount of cash flows provided by operating activities to be presented on the statement of
cash flows?
19
Answer: Plants Supreme, Inc.
Income Statement
For the Month Ended January 31, 20X1
Revenue ($50,000 + $3,000) $53,000

Expenses:
Cost of goods sold $30,000
Salaries 4,500
Telephone 100
Office supplies used 100
Electricity 200
Rent 800
35,700
Profit $17,300
B. $17,300 — $3,000 + $800 = $15,100 OR $50,000 — $30,000 — $4,500— $100 — $100 — $200 =
$15,100
122) Calculate the missing amount in each category of the accounting equation.
Assets Liabilities Shareholders' Equity

(a) $360,000 $ __?__ $98,000
(b) $178,000 $73,000 $ __?__
(c) $ __?__ $302,000 $310,000
Answer: (a) $262,000 ($360,000 - $98,000 = $262,000).

(b) $105,000 ($178,000 - $73,000 = $105,000).
(c) $612,000 ($302,000 + $310,000 = $612,000).
123) Rockaway Corporation's shareholders' equity equals one-fifth of the company's total assets. The
company's liabilities are $125,000. What is the amount of the company's shareholders' equity?
Answer: $31,250 (X = 1/5X + $125,000)
Where X = total assets
Solving for X
X - 1/5X = $125,000 Shareholder's equity = (1/5) × $156,250 = $31,250
4/5X = $125,000
X = $125,000 × 5/4
X = $156,250 Proof: $31,250 + $125,000 = $156,250
124) Lopez Corporation began operations at the start of 20X3. During the year, it made cash and credit sales
totaling $974,000 and collected $860,000 in cash from its customers. It purchased inventory costing $508,000,
paid $25,000 for dividends and the cost of goods sold was $445,000. The corporation incurred the following
expenses:
Salary expense $180,000

20
Interest expense 15,000
Insurance expense 10,000
Supplies expense 18,000
Income tax expense 65,000
Required:
1. Prepare an income statement showing revenues, expenses, pretax profit, income tax expense, and profit for
the year ended December 31, 20X3.
2. Based on the above information, what is the amount of trade receivables on the statement of financial
position prepared at the end of 20X3?
3. Based on the above information, what is the amount of retained earnings on the statement of financial
position prepared at the end of 20X3?
Answer: 1. Lopez Corporation
Income Statement
For the Year Ended December 31, 20X3
Revenues:
Sales $974,000
Total revenues $974,000
Expenses:
Cost of goods sold 445,000
Salary expense 180,000
Total expenses 668,000
Pretax profit 306,000
Profit $241,000
2. $974,000 - 860,000 = $114,000 trade receivables at the end of the year.

3. $0 beginning amount + $241,000 profit - $25,000 dividends = $216,000.
125) Delft Corporation was established on December 31, 20X1, by a group of investors who invested a
total of $100,000 for shares of the new corporation. During the month of January, 20X2, Delft
provided services to customers for which the total revenue was $40,000. Of this amount, $4,500 had
not been collected by the end of January. Delft recorded salary expense of $17,000, of which 90% had
been paid by the end of the month; rent expense of $3,000, which had been paid on January 1, 20X2; and other
expenses of $8,500, which had been paid by check. On January 31, 20X2, Delft purchased a van by paying
cash of $25,000. There were no other events that affected cash.
Required:
21
1. In which section of the statement of cash flows would the amount of cash paid for salaries be reported?
2. In which section of the statement of cash flows would the amount of cash paid for the van be reported?
3. By how much did Delft's cash increase or decrease during January?
4. If the amount of cash was $100,000 at the beginning of January, how much cash did Delft have at the end of
the month?
5. What was Delft's profit or loss (after income tax expense) for the month of January? The income tax rate
was 25%.
6. Explain why the net increase or decrease in cash for a business generally will be different than the profit, or
net loss, for the same period.
Answer: 1. Cash used in operating activities
2. Cash used in investing activities
3.
Amount collected from customers $35,500
Payment of salaries (15,300)
Payment of rent (3,000)
Payment of other expenses (8,500)
Payment for van (25,000)
Decrease in cash $(16,300)
4. Amount of cash at the end of January:

$100,000 — 16,300 = $83,700
5.
Revenues $40,000
Less expenses:
Salaries expense $17,000
Rent expense 3,000
Other expenses 8,500 28,500
Income before taxes 11,500
Income taxes 2,875
Profit $8,625
6. Profit or loss for a period is equal to revenues minus expenses; it is not equal to the change in cash.
Revenues are reported on the income statement when the goods or services are sold to the customer,
which may be before or after the period in which cash is received from the customer. Expenses are
reported on the income statement in the period they are used to earn revenues. Again, the
payment of cash may occur before or after the period when an expense appears on the income
statement.
22
126) Pool Supply, Inc., reported the following items for the year ended December 31, 20X3:
Wages and salary expense $825,000

Cost of goods sold 1,400,000
Rent expense 490,000
Sales revenue 3,417,000
Trade receivables 25,000
Required:
Prepare an income statement for the year.

Answer: Pool Supply, Inc.
Income Statement
Revenue:
Sales revenue $3,417,000
Total revenues $3,417,000
Expenses:
Wages and salary expense 825,000
Total expenses 2,765,000
Profit $491,000
Note: Trade receivables of $25,000 would appear on the statement of financial position, not on the
income statement.
127) Empire Stores, Ltd., reported the following amounts on its statement of financial position on December 31,
20X2:
Inventory $710,000
Notes payable 160,000
Cash 300,000
Share capital 900,000
Net property, plant and equipment 425,000
Trade payables 131,000
Retained earnings ?
23
Required:
1. What is the amount of Empire's total assets at the end of 20X2?

2. Identify the items listed above that are liabilities.
3. What is the amount of Empire's retained earnings at the end of 20X2?
4. Prepare a statement of financial position for Empire Stores as of December 31, 20X2.
5. Empire Stores wishes to purchase merchandise from your company on account. The amount of the
purchases would probably be about $5,000 per month, and the terms would require Empire to make
payment in full within 30 days. Would you recommend that your company grant credit to Empire
under these terms? Explain the reasoning for your response.
Answer: 1. Total assets = $710,000 + 300,000 + 425,000 + 88,000 = $1,523,000
2. Liabilities: Trade payables and Notes payable.
3. Assets = Liabilities + Shareholder's equity
$1,523,000 = (131,000 + 160,000 + Shareholder's equity)
Shareholder's equity = $1,232,000 = Share capital + retained earnings
$900,000 + retained earnings = $1,232,000
Retained earnings = $332,000
4.
Empire Stores, LTD
Statement of Financial Position
At December 31, 20X2
(in dollars)
Assets
Cash $300,000
Inventory 710,000
Total Assets $1,523,000
Liabilities
Trade payables $131,000
Notes payable (long-term) 160,000
Total liabilities $291,000
Shareholders' Equity
Share capital $900,000
Retained earnings 332,000
Total shareholders' equity $1,232,000
Total liabilities and shareholders' equity $1,523,000
5. The statement of financial position of Empire Stores shows that the company can pay its short-term
24
liabilities. There is cash of $300,000, more than enough to settle the accounts payable of $131,000. I
would recommend that my company grant credit to Empire Stores.
128) During 20X2, Wilmont Company performed services for which customers promised to pay
$286,000. Of this amount, $270,000 had been collected by year end. Wilmont paid $125,000 in cash
for employee wages and owed the employees $5,000 at the end of the year for work that had been
done but had not paid for. Wilmont paid interest expense of $1,700 and $80,000 for other service
expenses. The income tax rate was 25%, and income taxes had not yet been paid at the end of the year.
Wilmont declared and paid dividends of $6,000. There were no other events that affected cash.
Required:
1. What was the amount of the increase or decrease in cash during the year?
2. Prepare an income statement for Wilmont for the year.
Answer: 1. Amount of increase or decrease in cash:
$ 270,000 Collected from customers

- 125,000 Paid to employees
- 1,700 Interest expense
- 80,000 Other service expense
- 6,000 Dividends
$ 57,300 Increase in cash
2.
Wilmont Company
Income Statement
Revenues
Service revenues $286,000
Total Revenues 286,000
Expenses
Wages expense 130,000
Service expense 80,000
Total expense 211,700
Net income $55,725
25
129) Alfred Company manufactures men's clothing. During 20X2, the company reported the following items that
affected cash. Indicate whether each of these items is a cash flow from operating activities (O), investing
activities (I), or financing activities (F).
Description Classification
Purchased equipment by paying cash
Collected cash on account from customers
Paid dividends to shareholders
Paid cash for supplies
Paid suppliers for fabric
Borrowed money from bank on a long-term note
Paid interest to bank on the note
Paid wages to employees
Sold shares to new shareholders
Answer: Purchased equipment by paying cash: I

Collected cash on account from customers: O
Paid dividends to shareholders: F
Paid cash for supplies: O
Paid suppliers for fabric: O
Borrowed money from bank on a long-term note: F
Paid interest to bank on the note: O
Paid wages to employees: O
Sold shares to new shareholders: F
130) Fulton Company was established on January 1, 20X4 when several investors paid a total of
$200,000 to purchase Fulton shares. No additional investments in shares were made during the year.
By the end of that year, Fulton had cash on hand of $45,000, office equipment (net) of $40,000,
inventories of $156,000, and trade payables of $10,000. Sales for the year were $812,000. Of this
amount, customers still owed $20,000. Fulton paid dividends of $25,000 to its investors.
Required:
1. Based on the information above, prepare a statement of financial position for Fulton Company as at
December 31, 20X4. In the process of preparing the statement, you must calculate the ending balance in
retained earnings.
2. What was the amount of Fulton's profit for the year?
3. Was Fulton successful during its first year in operation?
26
Answer: 1.
Fulton Company
Assets
Cash $45,000
Inventories 156,000
Office Equipment (net) 40,000
Total Assets $261,000
Liabilities
Trade payables $ 10,000
Share capital $ 200,000
Total shareholders' equity 251,000
Total liabilities and shareholders' equity $261,000
2.
Retained earnings, January 1, 20X4 $ -0-
Profit (plug) 76,000
Dividends to shareholders (25,000)
Retained earnings, December 31, 20X4 $ 51,000
3. Yes, Fulton's first year was successful. The company earned a healthy amount of profit, and many
new companies have losses during their early years of operations. Also, it was able to pay dividends to
its shareholders. At the end of the first year, the company has just $10,000 in liabilities. It
appears to be in sound financial condition.
27
131) For Baggerly Fashions, the following information is available for the year ended December 31, 20X3:

Salaries expense 1,100,000
Administrative expense 490,000
The income tax rate is 35%.
Required:
Prepare an income statement for Baggerly Fashions.

Answer: Baggerly Fashions
Income Statement
Revenue:
Total revenue $5,500,000
Expenses (excluding income taxes):
Less income tax expense 171,500
Profit $318,500
28
132) The following data was taken from the books of Amelmen Inc. as of December 31, 20X1:
Cost of goods sold $15,300 Selling & admin expense $3,500

Income tax expense 6,120 Accounts payable 12,000
Cash 3,500 Common shares, (6,500 shares) 20,000
Dividends 6,000 Other income 1,500
Interest expense 900 Sales revenue 35,000
Amortization expense 1,500 Retained earnings 8,000
Prepare an income statement for Amelmen Inc.

Answer: Amelmen Inc.
Income Statement
Sales $35,000
Other income 1,500
Total revenues 36,500
Costs and expenses:
Selling & administrative expense 3,500
Interest expense 900
Amortization expense 1,500
Total costs and expenses 21,200
Earnings before taxes 15,300
Income taxes 6,120
Net income $ 9,180
133) Baseline Corporation was formed two years ago, to manufacture fitness equipment. It has been
profitable and is growing rapidly. It currently has 150 shareholders and 90 employees; most of the
employees own at least a few shares of Baseline's shares. The company has received financing from
two banks. It will sell additional shares within the next three months and will also seek additional loans
and hire new employees to support its continued growth.
Required:
1. Explain who relies on the information in financial statements prepared by Baseline Corporation.
2. Why is compliance with international financial reporting standards and accuracy in accounting important
for Baseline?
3. A new accountant who tried to prepare Baseline's financial statements at the end of the current
year made several errors. For each of the following items, indicate how the income statement and
statement of financial position are affected by the error and the nature of the effect. (For example, an
error might cause revenues and net income on the income statement and retained earnings and assets on
the statement of financial position to be overstated). Ignore the effects of income taxes.
29
A. The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000 that had been
collected by the end of the year, and sales on account of $200,000 that are expected to be collected early the
following year. The accountant reported total sales revenue of $4,800,000.
B. The company had total inventories of $600,000 at the end of the year. Of this amount, inventory reported at
$30,000 was obsolete and will have to be scrapped. The statement of financial position prepared by the
accountant showed total inventories of $600,000.
C. The company has a bank loan for which interest expense during the year of $10,000 will be paid early in
January of the next year. The accountant did not record either the interest expense or the related liability.
Answer: 1. Various external decision makers rely on the financial statements of a corporation. For
Baseline, these decision makers include the bankers who have loaned money to the company.
These creditors would monitor the performance of Baseline to estimate the likelihood that
Baseline will be able to repay existing loans when they come due, and to decide whether to
make additional loans to Baseline in the future. Current shareholders would want to review
Baseline's financial statements to decide whether they wanted to continue to own Baseline's
shares. Potential shareholders and creditors would use the information to decide whether they
wanted to purchase Baseline's shares or loan money to the company in the future. Baseline
anticipates hiring additional workers in the near future; potential employees might use information in
the financial statements to evaluate the company as an employer.
2. Compliance with international financial reporting standards and accuracy in accounting are
important to Baseline because they are important to the people who use Baseline's financial statements.
To maintain the credibility of its financial statements, Baseline must comply with IFRS and must ensur
the accuracy of its accounting records.
3. A. On the income statement, revenues are understated by $200,000 and profit is understated. On the
statement of financial position, trade receivables and retained earnings are understated.
B. On the statement of financial position, inventory and retained earnings are overstated by $30,000. O
the income statement, expenses are understated and profit is overstated.
C. On the income statement, expenses are understated and profit is overstated by $10,000. On the
statement of financial position, interest payable is understated and retained earnings are
overstated.
134) Lloyd Company ends the first year of operations with $2.2 million in retained earnings when no
dividends were paid out. Since the company began operations on January 1 st, 20X2 of the current
year ending December 31 st, 20X2 calculate the amount of beginning retained earnings and explain
your answer.
Answer: The beginning balance of retained earnings is zero because a new business would not have
generated income from prior operations. Retained earnings represents the profit generated
through operations not distributed in the form of a dividend. A company just beginning
operations could not have any profit so there would always be a zero beginning balance for
new companies.
30
Answer Key
Testname: UNTITLED7
1) C
2) C
3) D
4) C
5) A
6) C
7) C
8) B
9) D
10) A
11) B
12) C
13) C
14) D
15) D
16) C
17) C
18) D
19) C
20) C
21) C
22) A
23) D
24) B
25) D
26) A
27) A
28) C
29) D
30) B
31) C
32) B
33) A
34) A
35) C
36) C
37) A
38) B
39) B
40) D
41) B
42) A
43) D
44) B
45) A
46) D
47) C
48) B
49) D
50) D
31
Answer Key
Testname: UNTITLED7
51) B
52) D
53) B
54) A
55) B
56) C
57) D
58) B
59) A
60) D
61) A
62) D
63) A
64) D
65) D
66) A
67) C
68) B
69) B
70) D
71) C
72) A
73) C
74) D
75) D
76) TRUE
77) FALSE
78) TRUE
79) TRUE
80) FALSE
81) TRUE
82) TRUE
83) FALSE
84) FALSE
85) FALSE
86) FALSE
87) FALSE
88) FALSE
89) FALSE
90) TRUE
91) FALSE
92) FALSE
93) TRUE
94) FALSE
95) TRUE
96) FALSE
97) TRUE
98) TRUE
99) FALSE
100) FALSE
32
Answer Key
Testname: UNTITLED7
101) TRUE
102) TRUE
103) TRUE
104) TRUE
105) TRUE
106) FALSE
107) FALSE
108) FALSE
109) FALSE
110) TRUE
111) FALSE
112) TRUE
113) TRUE
114) FALSE
115) FALSE
116) (b), (c), (d), (f), (g)
117) Please review the following information:
1. SE 7. A
2. A 8. SE
3. L 9. SE
4. SE 10. L
5. SE 11. SE
6. A 12. L
1. A 6. A
2. L 7. L
3. SE 8. A
4. A 9. SE
5. SE 10. SE
119) 1. K; 2. O; 3. L; 4. H; 5. N
Case Total Total Total Total Profit Shareholders'

Revenue Assets Expenses Liabilities (Loss) Equity
A $75,000 $190,000
B $125,000 $60,000
C $60,000 $55,000
D $50,000 $315,000
E $67,000 $153,000
33
Answer Key
Testname: UNTITLED7
121) Plants Supreme, Inc.

Income Statement
For the Month Ended January 31, 20X1
Revenue ($50,000 + $3,000) $53,000

Expenses:
Salaries 4,500
Telephone 100
Office supplies used 100
Electricity 200
Rent 800
35,700
Profit $17,300
B. $17,300 — $3,000 + $800 = $15,100 OR $50,000 — $30,000 — $4,500— $100 — $100 — $200 = $15,100
122) (a) $262,000 ($360,000 - $98,000 = $262,000).
(b) $105,000 ($178,000 - $73,000 = $105,000).
(c) $612,000 ($302,000 + $310,000 = $612,000).
123) $31,250 (X = 1/5X + $125,000)
Where X = total assets
Solving for X
X - 1/5X = $125,000 Shareholder's equity = (1/5) × $156,250 = $31,250
4/5X = $125,000
X = $125,000 × 5/4
X = $156,250 Proof: $31,250 + $125,000 = $156,250
34
Answer Key
Testname: UNTITLED7
124) 1. Lopez Corporation

Income Statement
Revenues:
Sales $974,000
Total revenues $974,000
Expenses:
Total expenses 668,000
Profit $241,000
2. $974,000 - 860,000 = $114,000 trade receivables at the end of the year.

3. $0 beginning amount + $241,000 profit - $25,000 dividends = $216,000.
35
Answer Key
Testname: UNTITLED7
125) 1. Cash used in operating activities

2. Cash used in investing activities
3.
Amount collected from customers $35,500
Payment of salaries (15,300)
Payment of rent (3,000)
Payment of other expenses (8,500)
Payment for van (25,000)
Decrease in cash $(16,300)
4. Amount of cash at the end of January:

$100,000 — 16,300 = $83,700
5.
Revenues $40,000
Less expenses:
Rent expense 3,000
Other expenses 8,500 28,500
Income taxes 2,875
Profit $8,625
6. Profit or loss for a period is equal to revenues minus expenses; it is not equal to the change in cash. Revenues are
reported on the income statement when the goods or services are sold to the customer, which may be before or after
the period in which cash is received from the customer. Expenses are reported on the income statement in the
period they are used to earn revenues. Again, the payment of cash may occur before or after the period
when an expense appears on the income statement.
36
Answer Key
Testname: UNTITLED7
126) Pool Supply, Inc.

Income Statement
Revenue:
Total revenues $3,417,000
Expenses:
Wages and salary expense 825,000
Profit $491,000
Note: Trade receivables of $25,000 would appear on the statement of financial position, not on the income statemen
127) 1. Total assets = $710,000 + 300,000 + 425,000 + 88,000 = $1,523,000
2. Liabilities: Trade payables and Notes payable.
3. Assets = Liabilities + Shareholder's equity
$1,523,000 = (131,000 + 160,000 + Shareholder's equity)
Shareholder's equity = $1,232,000 = Share capital + retained earnings
$900,000 + retained earnings = $1,232,000
Retained earnings = $332,000
4.
Empire Stores, LTD
(in dollars)
Assets
Cash $300,000
Inventory 710,000
Total Assets $1,523,000
Liabilities
Trade payables $131,000
37
Answer Key
Testname: UNTITLED7
Notes payable (long-term) 160,000

Total liabilities and shareholders' equity $1,523,000
5. The statement of financial position of Empire Stores shows that the company can pay its short-term liabilities.
There is cash of $300,000, more than enough to settle the accounts payable of $131,000. I would recommend that m
company grant credit to Empire Stores.
128) 1. Amount of increase or decrease in cash:
$ 270,000 Collected from customers

- 125,000 Paid to employees
- 1,700 Interest expense
- 80,000 Other service expense
- 6,000 Dividends
$ 57,300 Increase in cash
2.
Wilmont Company
Income Statement
Revenues
Service revenues $286,000
Total Revenues 286,000
Expenses
Service expense 80,000
Total expense 211,700
Net income $55,725
38
Answer Key
Testname: UNTITLED7
129) Purchased equipment by paying cash: I

Collected cash on account from customers: O
Paid dividends to shareholders: F
Paid cash for supplies: O
Paid suppliers for fabric: O
Borrowed money from bank on a long-term note: F
Paid interest to bank on the note: O
Paid wages to employees: O
Sold shares to new shareholders: F
130) 1.
Fulton Company
Assets
Cash $45,000
Inventories 156,000
Office Equipment (net) 40,000
Total Assets $261,000
Liabilities
Trade payables $ 10,000
Share capital $ 200,000
2.
Retained earnings, January 1, 20X4 $ -0-
Profit (plug) 76,000
Dividends to shareholders (25,000)
Retained earnings, December 31, 20X4 $ 51,000
3. Yes, Fulton's first year was successful. The company earned a healthy amount of profit, and many new companie
have losses during their early years of operations. Also, it was able to pay dividends to its shareholders. At the
end of the first year, the company has just $10,000 in liabilities. It appears to be in sound financial
condition.
39
Answer Key
Testname: UNTITLED7
131) Baggerly Fashions

Income Statement
Revenue:
Total revenue $5,500,000
Expenses (excluding income taxes):
Less income tax expense 171,500
Profit $318,500
132) Amelmen Inc.

Income Statement
Sales $35,000
Other income 1,500
Total revenues 36,500
Costs and expenses:
Selling & administrative expense 3,500
Amortization expense 1,500
Total costs and expenses 21,200
Earnings before taxes 15,300
Income taxes 6,120
Net income $ 9,180
40
Answer Key
Testname: UNTITLED7
133) 1. Various external decision makers rely on the financial statements of a corporation. For Baseline, these
decision makers include the bankers who have loaned money to the company. These creditors would
monitor the performance of Baseline to estimate the likelihood that Baseline will be able to repay existing
loans when they come due, and to decide whether to make additional loans to Baseline in the future.
Current shareholders would want to review Baseline's financial statements to decide whether they wanted
to continue to own Baseline's shares. Potential shareholders and creditors would use the information to
decide whether they wanted to purchase Baseline's shares or loan money to the company in the future.
Baseline anticipates hiring additional workers in the near future; potential employees might use information in the
financial statements to evaluate the company as an employer.
2. Compliance with international financial reporting standards and accuracy in accounting are important to Baseline
because they are important to the people who use Baseline's financial statements. To maintain the credibility of its
financial statements, Baseline must comply with IFRS and must ensure the accuracy of its accounting records.
3. A. On the income statement, revenues are understated by $200,000 and profit is understated. On the statement of
financial position, trade receivables and retained earnings are understated.
B. On the statement of financial position, inventory and retained earnings are overstated by $30,000. On the income
statement, expenses are understated and profit is overstated.
C. On the income statement, expenses are understated and profit is overstated by $10,000. On the statement of
financial position, interest payable is understated and retained earnings are overstated.
134) The beginning balance of retained earnings is zero because a new business would not have generated
income from prior operations. Retained earnings represents the profit generated through operations not
distributed in the form of a dividend. A company just beginning operations could not have any profit so
there would always be a zero beginning balance for new companies.
41
1) The continuity assumption is inappropriate when

A) the business is organized as a proprietorship.
B) the business is just starting up.
C) liquidation appears likely.
D) fair values are higher than costs.
Answer: C
2) Shareholders' equity
A) is equal to liabilities and retained earnings.
B) is shown on the income statement.
C) is usually equal to cash on hand.
D) includes retained earnings and contributed capital.
Answer: D
3) It is assumed that the activities of Petro Canada Corporation can be distinguished from those of
Imperial Oil Limited because of the
A) unit-of-measure assumption. B) periodicity assumption.
C) separate-entity assumption. D) continuity assumption.
Answer: C
4) Abe Cox is the sole owner and manager of Cox Auto Repair Shop. In 20X1, Cox purchased a new
automobile for personal use and continued to use an old truck in the business. Which of the
following fundamentals prevents Cox from recording the cost of the new automobile as an asset to
the business?
A) Historical cost principle B) Separate-entity assumption
C) Full disclosure D) Revenue principle
Answer: B
5) The main objective of financial reporting is to:

A) meet the needs of all potential users.
B) provide information that is useful to individuals making investment and credit decisions.
C) provide information that will be used by a company's managers for product pricing decisions.
D) compare a company's performance with its competitors.
Answer: B
6) Which one of the following is not a qualitative characteristic of useful accounting information?
A) Faithful representation B) Relevance
C) Materiality D) Comparability
Answer: C
1
7) The adoption of International Financial Reporting Standards can be viewed as an application of
which of the following quality enhancing characteristics?
A) Verifiability B) Representational faithfulness
C) Comparability D) Timeliness
Answer: C
8) The dominating criteria by which accounting information can be judged is that of

A) freedom from bias. B) usefulness for decision making.
C) timeliness. D) comparability.
Answer: B
9) The assumption that a business enterprise will not be liquidated or sold in the near future is known
as the
A) going concern assumption. B) monetary unit assumption.
C) conservatism assumption. D) economic entity assumption.
Answer: A
10) Accounting information is considered to be relevant when it

A) is verifiable and neutral.
B) can be depended on to represent the economic conditions and events that it is intended to
represent.
C) is understandable by reasonably informed users of accounting information.
D) is capable of making a difference in a decision.
Answer: D
11) During the lifetime of an entity, accountants produce financial statements at arbitrary points in time
in accordance with which accounting concept?
A) Periodicity B) Cost/benefit relationship
C) Monetary unit assumption D) Comparability
Answer: A
12) If Golden Company owed Eye Company $500, where would Golden Company reflect this?
A) Statement of cash flows B) Statement of financial position.
C) Income statement. D) Statement of changes in equity.
Answer: B
13) Which of the following defines assets?

A) Probable future economic benefits owned by an entity as a result of past transactions.
B) Probable future economic benefits owned by an entity as a result of future transactions.
C) Possible future economic benefits owed by an entity as a result of future transactions.
D) Possible future economic benefits owed by an entity as a result of past transactions.
Answer: A
2
14) Which of the following defines liabilities?
A) Probable debts or obligations of an entity as a result of past transactions which will be paid
with assets or services.
B) Possible debts or obligations of an entity as a result of future transactions which will be paid
C) Possible debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
D) Probable debts or obligations of an entity as a result of future transactions which will be paid
Answer: A
15) Which of the following defines shareholders' equity?

A) Probable debts or obligations of an entity as a result of past transactions which will be paid
B) The financing provided by the owners and the operations of a business.
C) Probable future economic benefits owned by an entity as a result of past transactions.
D) Assets plus liabilities.
Answer: B
16) Liabilitiesare generally classified on a statement of financial position as

A) current liabilities and non-current liabilities.
B) small liabilities and large liabilities.
C) tangible liabilities and intangible liabilities.
D) present liabilities and future liabilities.
Answer: A
17) The asset that results when a customer buys goods or services on credit is
A) notes receivable. B) accounts receivable.
C) Cash. D) accounts payable.
Answer: B
18) The asset that results from the payment of expenses in advance is
A) accounts receivable. B) short term investments.
C) inventory. D) prepaid expenses.
Answer: D
19) Where would we report changes in shareholders' equity caused by operating activities?
A) In a contributed capital account. B) In the retained earnings account.
C) In an asset account. D) In a liability account.
Answer: B
20) How are goods, which are purchased for sale later, recorded in the financial statements
A) as operating expenses. B) as prepaid expenses.
C) as cost of goods sold. D) as inventory.
Answer: D
3
21) Ona classified balance sheet, prepaid expenses are classified as
A) a current liability. B) a current asset.
C) a long-term investment. D) property, plant, and equipment.
Answer: B
22) Which of the following is not considered an asset?

A) Equipment B) Accounts receivable
C) Dividends D) Inventory
Answer: C
23) Which of the following liability accounts is usually not satisfied by payment of cash?
A) Trade payables. B) Taxes payable.
C) Unearned revenues. D) Short-term borrowings.
Answer: C
24) Accounting systems should record

A) only events that involve cash.
B) items of interest to the shareholders.
C) all economic events.
D) events that result in a change in assets, liabilities, or shareholders' equity items.
Answer: B
25) Which of the following is least likely to have a liability called Deferred Revenue?
A) A magazine subscription company B) A retailer
C) A university or college D) An insurance company
Answer: B
26) When a new business is just starting up, which of the following must be done first?
A) Acquire the assets both long-lived and short-lived so they can operate.
B) Acquire financing from issuance of shares and borrowing from creditors.
C) These activities all occur simultaneously not sequentially.
D) Generate positive cash flow through successful operations.
Answer: B
27) An account is a part of the financial information system and is described by all except which one of
the following?
A) An account consists of three parts B) An account has a title
C) An account is a source document D) An account has a debit and credit side
Answer: C
4
28) Iftotal liabilities decreased by $14,000, and shareholders' equity increased by $6,000 during the
same period, then the amount and direction (increase or decrease) of the period's change in total
assets is a(n)
A) $20,000 increase. B) $14,000 increase.
C) $8,000 increase. D) $8,000 decrease.
Answer: D
29) Collection of a $600 accounts receivable

A) increases an asset $600; decreases a liability $600.
B) has no effect on total assets.
C) decreases a liability $600; increases shareholders' equity $600.
D) decreases an asset $600; decreases a liability $600.
Answer: B
30) The purchase of an asset on credit

A) has no effect on total assets. B) increases assets and shareholders' equity.
C) increases assets and liabilities. D) decreases assets and increases liabilities.
Answer: C
31) Assume a company's January 1, 20X1, financial position was: Assets, $40,000 and Liabilities,
$15,000. During January 20X1, the company completed the following transactions: (a) paid on a
note payable, $4,000 (no interest); (b) collected trade receivables, $4,000; (c) paid trade payables,
$2,000; and (d) purchased a truck, $1,000 cash, and $8,000 notes payable. What is the company's
January 31, 20X1 financial position?
Assets Liabilities Shareholders' Equity

A) $42,000 $9,000 $33,000
B) $44,000 $17,000 $27,000
C) $43,000 $18,000 $25,000
D) $42,000 $17,000 $25,000
A) Choice A B) Choice B C) Choice C D) Choice D

Answer: D
32) Winsome Inc. reports total assets and total liabilities of $225,000 and $100,000, respectively, at the
end of its first year of business. The company earned $75,000 during the first year and distributed
$30,000 in dividends. What was the corporation's contributed capital?
A) $80,000 B) $50,000 C) $95,000 D) $125,000
Answer: A
5
33) Which one of the following represents the expanded basic accounting equation?
A) Assets = Revenues + Expenses - Liabilities
B) Assets + Liabilities = Dividends + Expenses + Contributed capital + Revenues
C) Assets = Liabilities + Contributed capital + Retained Earnings + Revenues - Expenses -
Dividends
D) Assets - Liabilities - Dividends = Contributed capital + Revenues - Expenses
Answer: C
34) Thecollection of a trade receivable from a customer would do which of the following?
A) Not affect liabilities. B) Decrease shareholders' equity.
C) Increase liabilities. D) Decrease liabilities.
Answer: A
35) The following amounts are reported in the ledger of Bowers Company:
Assets $25,000 (debit)

Liabilities 15,000 (credit)
Retained earnings 3,000 (credit)
What is the balance in the contributed capital account?

A) $12,000 credit. B) $8,000 debit. C) $7,000 credit. D) $12,000 debit.
Answer: C
36) Thepurchase of an asset on credit

A) decreases assets and increases liabilities. B) increases assets and shareholders' equity.
C) increases assets and liabilities. D) has no effect on total assets.
Answer: C
37) Which of the following will not result in recording a transaction?

A) Signing a contract to have an outside cleaning service clean offices nightly.
B) Buying equipment and agreeing to pay a note payable and interest at the end of a year.
C) Selling shares to investors.
D) Paying our employees their wages.
Answer: A
38) Which of the following transactions will cause both the left and right side of the equation to
increase?
A) We pay a supplier for inventory we previously bought on account
B) We borrow money from the bank
C) We collect cash from a customer who owed us money
D) We purchase equipment for cash
Answer: B
6
39) When a company buys equipment for $60,000 and pays for one third in cash and the other two
thirds is financed by a note payable, which of the following are the effects on the accounting
equation?
A) Equipment increases by $20,000. B) Liabilities increase by $40,000.
C) Total assets increase by $60,000. D) Cash decreases by $60,000.
Answer: B
40) The payment of a liability

A) increases assets and decreases liabilities. B) decreases assets and increases liabilities.
C) decreases assets and liabilities. D) decreases assets and shareholders' equity.
Answer: C
41) Iftotal liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period
of time, then total assets must change by what amount and direction during that same period?
A) $20,000 decrease B) $30,000 increase
C) $25,000 increase D) $20,000 increase
Answer: B
42) A new company signed a lease for office space during their first month of business. At that time,
they paid a total of $16,000 for first and last months' rent. At the end of the first month, the effect on
the financial statements would be:
A) $8,000 rent expense and $8,000 prepaid rent
B) $14,000 prepaid rent
C) $14,000 rent expense
D) Nothing is recorded because the company has not made any sales yet
Answer: A
43) Which of the following statements is true?

A) The normal balance is always on the debit side of the T account.
B) The normal balance is always on the credit side of the T account.
C) The normal balance is always on the side of the T account that is decreasing.
D) The normal balance is always on the side of the T account that is increasing
Answer: D
44) The classification and normal balance of the dividend account is

A) an expense with a debit balance. B) shareholders' equity with a debit balance.
C) a liability with a credit balance. D) revenue with a credit balance.
Answer: B
45) The best interpretation of the word credit is the

A) decrease side of an account. B) offset side of an account.
C) right side of an account. D) increase side of an account.
Answer: C
7
46) In
the first month of operations, the total of the debit entries to the cash account amounted to $1,900
and the total of the credit entries to the cash account amounted to $1,500. The cash account has a
A) $900 debit balance. B) $400 credit balance.
C) $400 debit balance. D) $500 credit balance.
Answer: C
47) Borrowing $100,000 of cash from First National Bank, signing a note to be paid, would do which of
the following?
A) Increase cash by a credit. B) Decrease cash by a debit.
C) Increase notes payable by a debit. D) Increase notes payable by a credit.
Answer: D
48) Jet
Corporation was organized on March 1, 20X2. Jet Corporation issued shares to each of the six
owners who paid in a total of $3,000 cash. On the basis of transaction analysis, the following entry
should be recorded in the accounts (dr = debit and cr = credit)
A) Cash (dr), $3,000; Revenue (cr), $3,000.
B) Cash (dr), $3,000; Contributed capital (cr), $3,000.
C) Cash (cr), $3,000; Contributed capital (dr), $3,000.
D) Cash (cr), $3,000; Shareholders' equity (dr), $3,000.
Answer: B
49) Salida Company paid a note payable of $10,000 (interest had previously been paid). This transaction should be
recorded as follows on the payment date.
A) Accounts payable 10,000

Cash 10,000
B) Cash 10,000
Note payable 10,000
C) Note payable 10,000
Cash 10,000
D) Note payable expense 10,000
Cash 10,000

Answer: C
50) A T account is
A) a special account used instead of a journal.
B) is the actual account form used in real accounting systems.
C) a way of depicting the basic form of an account.
D) a special account used instead of a trial balance.
Answer: C
8
51) An
accountant has debited an asset account for $500 and credited a revenue account for $1,000.
What can be done to complete the recording of the transaction?
A) Debit another asset account for $500.
B) Credit a different asset account for $500.
C) Nothing further must be done.
D) Debit a shareholders' equity account for $500.
Answer: A
52) Thetrade payables account has a beginning balance of $1,000 and we purchased $3,000 of
inventory on credit during the month. The ending balance was $800. How much did we pay our
creditors during the month?
A) $3,000 B) $4,800 C) $2,800 D) $3,200
Answer: D
53) When recording transactions in T-account format, we must add an additional step to the transaction
analysis process. Which of the following is the additional step?
A) We must have equal debits and credits once the entry is recorded in the accounts.
B) The accounting equation must remain in balance after each transaction.
C) Determine what accounts and elements in the equation are affected by the transaction.
D) Determine if the affected accounts are increased or decreased by the transaction.
Answer: A
54) Assetsnormally show

A) credit balances. B) debit balances.
C) debit or credit balances. D) debit and credit balances.
Answer: B
9
Reference: 02-01
KOOL BILLIARDS LTD.

December 31, 20X6
Cash $60,000 Accounts $70,000

payable
Accounts 50,000 Salaries 10,000
receivable payable
Inventory 70,000 Mortgage 90,000
payable
Prepaid 40,000 $170,000
insurance
Land 190,000
Building 100,000 Common 140,000
shares
Less (20,000) Retained 250,000
accumulated earnings
amortization 80,000
Trademark net Total
of amortization shareholders'
70,000 equity $390,000
Total liabilities
and
Total assets $560,000 shareholders' $560,000
equity
55) The total dollar amount of assets to be classified as current assets is

A) $220,000 B) $270,000 C) $190,000 D) $170,000
Answer: A
56) The total dollar amount of assets to be classified as investments is

A) $0 B) $180,000 C) $100,000 D) $150,000
Answer: A
57) Long-term liabilities total

A) $170,000 B) $390,000 C) $560,000 D) $90,000
Answer: D
58) The total dollar amount of assets to be classified as property, plant, and equipment is
A) $340,000 B) $270,000 C) $80,000 D) $190,000
Answer: B
10
59) The total amount of working capital is
A) $40,000 B) $60,000 C) $140,000 D) $370,000
Answer: C
60) The current ratio is:

A) 1.50to 1 B) 2.75 to 1 C) 3.25 to 1 D) 1.75 to 1
Answer: B
61) Earnings retained for use in the business are

A) $250,000 B) $390,000 C) $60,000 D) $80,000
Answer: A
62) A weakness of the current ratio is

A) that it doesn't take the composition of the current assets into account.
B) that it is rarely used by sophisticated analysts.
C) that it can be expressed as a percentage, as a rate, or as a proportion.
D) the difficulty of the calculation.
Answer: A
63) Financing activities involve

A) lending money. B) acquiring long-lived assets.
C) issuing shares. D) acquiring investments.
Answer: C
64) Which of the following would be an example of a financing transaction?

A) Buying inventory from a supplier for cash.
B) Buying inventory from a supplier on credit.
C) Purchasing equipment for cash.
D) Selling shares to investors for cash.
Answer: D
65) Investing activities include

A) repaying money previously borrowed. B) obtaining cash from creditors.
C) obtaining capital from owners. D) collecting the principal on loans made.
Answer: D
66) Which of the following would cause an inflow of cash?

A) Payment of accounts payable.
B) Payment of a long-term mortgage.
C) Purchase of inventory for debt.
D) Sale of an asset for cash at less than its book value.
Answer: D
11
67) Dow Construction Company reports a net use of cash for investing activities of $1.2 million and a
net source of cash provided by financing of $.8 million. What was the effect on the cash balance?
A) To cause the balance to increase by $.4 million.
B) To cause the balance to decrease by $.4 million.
C) Undeterminable because the beginning cash balance was not given.
D) To cause the balance to increase by $.8 million.
Answer: B
68) Which of the following expenses has no effect on the cash flow of a firm?
A) Salaries expense B) Cost of goods sold
C) Interest expense D) Depreciation expense
Answer: D
69) Qualitative characteristics of accounting information are not part of the conceptual framework of
accounting.
Answer: True False
70) Ifyou trade your computer plus cash for a new car, the cost of the new car is equal to the cash paid
plus the market value of the computer.
Answer: True False
71) Faithful representation means information must be free from material error, neutral and complete.
Answer: True False
72) Theunit-of-measure assumption states that financial information is reported in the national
monetary unit.
Answer: True False
73) The separate-entity assumption assumes a stable monetary unit (not affected by inflation or
deflation).
Answer: True False
74) Three of the four basic assumptions that underlie accounting measurement and reporting relate to
the statement of financial position.
Answer: True False
75) The amount shown on the statement of financial position as shareholders' equity represents the
current market value of the owners' residual claim against the company.
Answer: True False
76) Cash and supplies are both classified as current assets.

Answer: True False
12
77) Assets are economic resources controlled by an entity as a result of past transactions or events and
for which future economic benefits may be obtained.
Answer: True False
78) Liability accounts are reported on the statement of financial position.

Answer: True False
79) Thebasic system of recording transactions has withstood the test of time, and has been in use for
more than 500 years.
Answer: True False
80) An individual accounting record for a specific asset, liability or shareholders' equity item is called an
account.
Answer: True False
81) Long-term investments appear in the property, plant, and equipment section of the balance sheet.
Answer: True False
82) On the income statement, assets should always equal liabilities plus shareholders' equity.
Answer: True False
83) Transactions have a dual economic effect on the fundamental accounting model.
Answer: True False
84) The payment of a liability in cash will decrease shareholders' equity.

Answer: True False
85) Ifthe correct accounts have been identified and the appropriate direction of the effect on each
account has been determined, then the equation should remain in balance.
Answer: True False
86) The purchase of a delivery truck for cash increases assets and shareholders' equity.
Answer: True False
87) Recording the borrowing of cash with a note payable increases shareholders' equity.
Answer: True False
88) When a business owner invests cash in the business, the investment causes a liability to increase.
Answer: True False
89) When a business pays a previously recorded bill, the liabilities of the business decrease.
Answer: True False
90) The objective of transaction analysis is to determine the economic effects of each transaction in
terms of the accounting model.
Answer: True False
13
91) If a company has assets of $60,000 and shareholders' equity of $30,000, then its liabilities must be
$90,000.
Answer: True False
92) A debit increases an account and a credit decreases an account.

Answer: True False
93) A T-account shows total debits of $25,000 and total credits of $22,000; therefore, it has a $3,000
credit balance.
Answer: True False
94) In its simplest form, a T account consists of three parts: (1) its title, (2) a left or debit side and (3) a
right or credit side.
Answer: True False
95) Debit and credit can be interpreted to mean "bad" and "good," respectively.
Answer: True False
96) A T-account is an accounting method of expressing the effects of a single transaction in a

debits-equal-credits format.
Answer: True False
97) Normally, asset accounts will have credit balances and liability accounts will have debit balances.
Answer: True False
98) "Debit" is the designation for the left side of an account, and "credit" is the designation for the right
side of an account.
Answer: True False
99) Some legal contracts, such as the signing of a contract to hire a new employee, are not reflected in
the financial statements.
Answer: True False
100) Contributed capital results when a company buys a new delivery truck.
Answer: True False
101) Usually when a short-term, interest-bearing note payable is paid on its maturity date, an asset is
credited and a liability is debited.
Answer: True False
102) By themselves, journal entries do not provide the balances in accounts.

Answer: True False
103) Calculating financial ratios can give clues to underlying conditions that may not be noticed by
examining each financial statement item separately.
Answer: True False
14
104) The current ratio takes into account the composition of current assets.
Answer: True False
105) The sale of land for cash would be classified as a cash inflow from an investing activity.
Answer: True False
106) The activity from the balance sheet to be presented in the financing activities section of the cash
flow statement is based on an analysis of shareholders' equity only.
Answer: True False
107) Match the terminology with the description by entering the proper letter in the space to the left.
A. Credits
B. Share Capital
C. Cost principle
D. Transaction
E. Debits
F. Liability
G. Statement of financial position
H. Primary objective of external financial reporting
I. Separate-entity assumption
J. Retained earnings
K. As at December 31, 20X1
L. For the period ended December 31, 20X1
M. None of the above is correct
____ 1. Increase assets and decreases shareholders'' equity.

____ 2. An exchange between an entity and another party.
____ 3. Normal balances for liabilities.
____ 4. To provide useful economic information about a business to help external parties make sound financial
decisions.
____ 5. Accounting assumption that requires assets to be recorded at their cash equivalent cost.
____ 6. Cumulative earnings that have not been distributed to the owners.
____ 7. A debt owed by the entity.
____ 8. Statement of financial position.
____ 9. Account for a business separate from its owners.
___10. Dating of the statement of financial position (20X1).
Answer: 1. E; 2. D; 3. A; 4. H; 5. C; 6. J; 7. F; 8. G; 9. I; 10. K
15
108) Why is the continuity assumption so important for statement of financial position reporting?
Answer: The continuity assumption is also known as the going-concern assumption. It is important for
statement of financial position reporting because of valuation issues. If a business is expected
to operate into the foreseeable future, amounts presented on the statement of financial position
for assets and liabilities are based on the cost principle. If the continuity assumption is not
followed, assets and liabilities might be reported at liquidation values as if they are going out
of business.
109) Why is the separate-entity assumption so important for statement of financial position reporting?
Answer: The separate-entity assumption is important for statement of financial position reporting
because a business should present only its own assets and liabilities on the statement. A
business is a separate accounting entity from its owners. Therefore, the owners' assets and
liabilities would appear on their own (personal) financial statement.
110) Why is the historical cost principle so important for statement of financial position reporting?
Answer: The cost principle is important for statement of financial position reporting because of
valuation issues. The cash-equivalent cost is verifiable. If it were not for the cost principle,
assets and liabilities could be reported at more subjective values. This could lead to
manipulation of statement of financial position amounts.
111) Classify the following statement of financial position accounts for White Goose Linen Co.
________ a. Investments in associates

________ b. Retained Earnings
________ c. Notes Payable due in 3 months
________ d. Land
________ e. Short-term investments
________ f. Bonds Payable
________ g. Supplies
________ h. Share Capital
________ i. Notes Payable due in 5 years
________ j. Income Taxes Payable
Answer: (a) NCA, (b) SE, (c) CL, (d) NCA, (e) CA, (f) NCL, (g) CA, (h) SE, (i) NCL, (j) CL
16
112) For each of the following events, which ones result in an exchange transaction for the O'Brien Company?
________ a. Purchased land for cash and a note payable

________ b. Agreed to purchase one million inventory parts from a new
supplier
________ c. Paid the employees for the week
________ d. One of our shareholders sells her shares to a new investor
________ e. Received inventory from a supplier under the new contract
________ f. Entered into a contract with a new cleaning service
Answer: (a) Y, (b) N, (c) Y, (d) N, (e) Y, (f) N
113) For each item below, indicate whether the account will be debited or credited:
1. Decrease in Accounts Payable

2. Increase in Dividends
3. Increase in Common Shares
4. Increase in Unearned Revenue
5. Decrease in Interest Payable
6. Increase in Prepaid Insurance
7. Decrease in Wages Expense
8. Decrease in Supplies
9. Increase in Revenues
10. Decrease in Accounts Receivable
1. Decrease in Accounts Payable Dr.

2. Increase in Dividends Dr.
3. Increase in Common Shares Cr.
4. Increase in Unearned Revenue Cr.
5. Decrease in Interest Payable Dr.
6. Increase in Prepaid Insurance Dr.
7. Decrease in Wages Expense Cr.
8. Decrease in Supplies Cr.
9. Increase in Revenues Cr.
10. Decrease in Accounts Receivable Cr.
114) Analyze the transactions of the business organized as a corporation described below and indicate their effect
on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (-) to indicate a
decrease.
Assets = Liabilities + Shareholders'

Equity
1. Received cash for services provided.
17
2. Purchased office equipment on
credit.
3. Paid employees' salaries.
4. Received cash from customer in
payment on account.
5. Paid telephone bill for the month.
6. Paid for office equipment purchased
in transaction 2.
7. Purchased office supplies on credit.
8. Dividends were paid.
9. Obtained a loan from the bank.
10. Billed customers for services
performed.

Equity
1. Received cash for services provided.+ +
2. Purchased office equipment on + +
credit.
3. Paid employees' salaries. - -
4. Received cash from customer in +, -
payment on account.
5. Paid telephone bill for the month. - -
6. Paid for office equipment purchased- -
in transaction 2.
7. Purchased office supplies on credit.+ +
8. Dividends were paid. - -
9. Obtained a loan from the bank. + +
10. Billed customers for services + +
performed.
18
115) For each financial statement element listed, enter check marks to reflect the Debit = Credit concept.
Element Debit Credit

Increase Decrease Increase Decrease
A Assets
B Liabilities
C Share
Capital
D Retained
Earnings

A Assets X X
B Liabilities X X
C Share X X
Capital
D Retained x X
Earnings
19
116) For each of the accounts listed below, enter a check mark in the space provided to the right to indicate whether
the typical or normal balance is a debit or credit.
Transaction Typical Balance

Debit Credit
A Supplies
B Notes payable
C Retained earnings
D Equipment
E Prepaid insurance
F Trade receivables
G Building
H Share capital
I Trade payables

Debit Credit
A Supplies X
B Notes payable X
C Retained earnings X
D Equipment X
E Prepaid insurance X
F Trade receivables X
G Building X
H Share capital X
I Trade payables X
117) In what two places do amounts for transactions appear in the accounting system or "the books"?
Describe them.
Answer: Transactions are first recorded in the journal. This is known as the book of original entry.
Transactions are entered chronologically in a debit-credit format. After transactions are
journalized, the amounts are posted to the ledger (the book of final entry). The ledger contains
accounts for each financial statement element so that balances can be determined.
118) The accounts with identification letters for Wild World Inc. are listed below.
Letter Account Title
A Cash
B Trade Receivables
C Office supplies
D Equipment
20
E Land
F Trade Payables
G Notes Payable
H Share Capital
I Retained Earnings
During 20X1, the company completed the transactions given below. You are to indicate the appropriate journal
entry for each transaction by giving the account letter and amount. Some entries may need three letters. The
first transaction is given as an example.
Transaction Debit Credit

Letter Amount Letter Amount
Ex. Owners invested $30,000 cash for A $30,000 H $30,000
shares.
A Borrowed $50,000 and signed a note.
B Purchased equipment for $30,000. Paid
$10,000 in cash, signed a $20,000 note
payable.
C Collected $16,000 trade receivables.
D Paid $8,000 of trade payables.
E Acquired a $40,000 piece of land by
issuing capital shares.
F Purchased $2,000 of office supplies (an
asset) on credit.
G Paid for the office supplies in (F).

A Borrowed $50,000 and A 50,000 G 50,000
signed a note.
B Purchased equipment for D 30,000 A 10,000
$30,000. Paid $10,000 in G 20,000
cash, signed a $20,000 note
payable.
C Collected $16,000 trade A 16,000 B 16,000
receivables.
D Paid $8,000 of trade F 8,000 A 8,000
payables.
E Acquired a $40,000 pieceE 40,000 H 40,000
of land by issuing capital
shares.
21
F Purchased $2,000 of officeC 2,000 F 2,000
supplies (an asset) on
credit.
G Paid for the office supplies
F 2,000 A 2,000
119) Analyze the effect of the following transactions using the basic accounting equation and the format provided
below.
i. Bought land with an estimated fair value of $150,000 by issuing 100,000 shares.
ii. Issued 10,000 common shares for $15,000 cash
iii. Purchased a 2-year insurance policy for $4,800.
iv. Paid rent of $3,000
v. Bought equipment for $50,000. Paid 20% down in cash and the balance on a 5-year, 6% note payable.
vi. Purchased $9,000 of merchandise inventory on credit.
vii. Paid utilities bill for $750.
viii. Sold $8,000 of merchandise inventory for $16,000 cash.
ix. Paid $2,500 on merchandise inventory previously purchased.
x. Declared a $1,000 dividend.
xi. Recognized that 1 month of the insurance coverage had expired.
FORMAT:
22
23
120) (A) Complete the following schedule for Gold Eye Company.
Transaction Assets Liabilities Shareholders'

Equity
Beginning financial position $75,000 $25,000 $50,000
Borrowed $20,000 cash using a note
payable, face amount $20,000
Collected trade receivables for cash,
$5,000
Paid trade payables, $1,000 cash
Purchased office supplies on credit,
$1,000
Sold shares to new investors for $5,000
of cash
Paid a $10,000 note payable
Ending financial position
24
(B) How much did cash change during the period?
Answer: (A)

Equity
Borrowed $20,000 cash using a note +20,000 +20,000
Collected trade receivables for cash, +5,000
$5,000 -5,000
Paid trade payables, $1,000 cash -1,000 -1,000
Purchased office supplies on credit, +1,000 +1,000
$1,000
+5,000 +5,000
of cash
Paid a $10,000 note payable -10,000 -10,000
Ending financial position $90,000 $35,000 $55,000
(B) Cash increase, $19,000

(+ 20,000 + 5,000 - 1,000 + 5,000 - 10,000)
121) Scott, Kim and Koko organized the SKK Corporation on January 1 20X1. Each of these owners invested
$30,000 cash and received shares. Below are selected transactions that were completed during January.
(A) Give the entry on SKK's books for each transaction:
(1) Sold shares to the owners.

(2) Borrowed $100,000 on one-year note payable.
(3) Purchased land by signing a $20,000 note payable.
(4) Paid $5,000 of trade payables.
(5) Purchased two service vehicles, $21,000 each; paid cash.
(6) Accepted a promissory note of $1,000 from a customer.
(B) Complete the following based only on the 6 transactions above:
Assets $
Liabilities $
Shareholders' equity $
Answer: a)
1. Cash(30,000 × 3) (A) 90,000
Share capital (SE) 90,000
Investment by owners
2. Cash (A) 100,000
Note payable (L) 100,000
25
Borrowed $100,000 on a one-year note.
3. Land (A) 20,000
Purchased land by signing a $20,000 note
payable.
4. Trade payables (L) 5,000
Cash (A) 5,000
Paid $5,000 of trade payables.
5. Equipment (A) 42,000
Cash (A) 42,000
Purchased two service vehicles, $21,000 each
(paid cash)
6. Notes receivable (A) 1,000
Cash (A) 1,000
Accepted a $1,000 promissory note from a
customer.
b)
Assets $205,000
Liabilities $115,000
Shareholders' equity $90,000
26
122) On January 1, 20X1, Cliff Constable started a new professional corporation, Cliff Constable, LLC., to practice
medicine with an initial investment of $50,000. On June 30, 20X1 the accounting records contained the
following amounts:
Trade Payables $100

Trade Receivables 3,900
Cash 25,100
Share Capital 50,000
Office Equipment 24,000
Office Supplies 500
Retained Earnings 3,400
Prepare a statement of financial position at June 30, 20X1.

Answer: Cliff Constable, LLC.
As of June 30, 20X1
Assets $25,100
Cash 3,900
Trade receivables 500
Office supplies 24,000
Total assets $53,500
Liabilities
Trade payables $100
27
123) For each of the transactions listed below, indicate whether it is an investing (I) or financing (F) activity on the
cash flow statement. Also, indicate if the transaction increases (+) or decreases (-) cash.
Transaction Type of Activity Effect on Cash

Ex. Paid dividends to the owners F -
A Purchased equipment to use in the
business.
B Issued shares for cash.
C Borrowed money at the bank.
D Sold a piece of land adjacent to the plant.
E Paid the principal balance of a note
payable.

A Purchased equipment to use in the I -
business.
B Issued shares for cash. F +
C Borrowed money at the bank. F +
D Sold a piece of land adjacent to the I +
plant.
E Paid the principal balance of a note F -
payable.
28
Answer Key
Testname: UNTITLED8
1) C
2) D
3) C
4) B
5) B
6) C
7) C
8) B
9) A
10) D
11) A
12) B
13) A
14) A
15) B
16) A
17) B
18) D
19) B
20) D
21) B
22) C
23) C
24) B
25) B
26) B
27) C
28) D
29) B
30) C
31) D
32) A
33) C
34) A
35) C
36) C
37) A
38) B
39) B
40) C
41) B
42) A
43) D
44) B
45) C
46) C
47) D
48) B
49) C
50) C
29
Answer Key
Testname: UNTITLED8
51) A
52) D
53) A
54) B
55) A
56) A
57) D
58) B
59) C
60) B
61) A
62) A
63) C
64) D
65) D
66) D
67) B
68) D
69) FALSE
70) TRUE
71) TRUE
72) TRUE
73) FALSE
74) TRUE
75) FALSE
76) TRUE
77) TRUE
78) TRUE
79) TRUE
80) TRUE
81) FALSE
82) FALSE
83) TRUE
84) FALSE
85) TRUE
86) FALSE
87) FALSE
88) FALSE
89) TRUE
90) TRUE
91) FALSE
92) FALSE
93) FALSE
94) TRUE
95) FALSE
96) FALSE
97) FALSE
98) TRUE
99) TRUE
100) FALSE
30
Answer Key
Testname: UNTITLED8
101) TRUE
102) TRUE
103) TRUE
104) FALSE
105) TRUE
106) FALSE
107) 1. E; 2. D; 3. A; 4. H; 5. C; 6. J; 7. F; 8. G; 9. I; 10. K
108) The continuity assumption is also known as the going-concern assumption. It is important for statement of
financial position reporting because of valuation issues. If a business is expected to operate into the
foreseeable future, amounts presented on the statement of financial position for assets and liabilities are
based on the cost principle. If the continuity assumption is not followed, assets and liabilities might be
reported at liquidation values as if they are going out of business.
109) The separate-entity assumption is important for statement of financial position reporting because a
business should present only its own assets and liabilities on the statement. A business is a separate
accounting entity from its owners. Therefore, the owners' assets and liabilities would appear on their own
(personal) financial statement.
110) The cost principle is important for statement of financial position reporting because of valuation issues.
The cash-equivalent cost is verifiable. If it were not for the cost principle, assets and liabilities could be
reported at more subjective values. This could lead to manipulation of statement of financial position
amounts.
111) (a) NCA, (b) SE, (c) CL, (d) NCA, (e) CA, (f) NCL, (g) CA, (h) SE, (i) NCL, (j) CL
112) (a) Y, (b) N, (c) Y, (d) N, (e) Y, (f) N

31
Answer Key
Testname: UNTITLED8

Equity
1. Received cash for services provided.+ +
2. Purchased office equipment on + +
credit.
3. Paid employees' salaries. - -
4. Received cash from customer in +, -
payment on account.
5. Paid telephone bill for the month. - -
6. Paid for office equipment purchased- -
in transaction 2.
7. Purchased office supplies on credit.+ +
9. Obtained a loan from the bank. + +
10. Billed customers for services + +
performed.

A Assets X X
B Liabilities X X
C Share X X
Capital
D Retained x X
Earnings
32
Answer Key
Testname: UNTITLED8

Debit Credit
A Supplies X
B Notes payable X
C Retained earnings X
D Equipment X
E Prepaid insurance X
F Trade receivables X
G Building X
H Share capital X
I Trade payables X
117) Transactions are first recorded in the journal. This is known as the book of original entry. Transactions are
entered chronologically in a debit-credit format. After transactions are journalized, the amounts are posted
to the ledger (the book of final entry). The ledger contains accounts for each financial statement element
so that balances can be determined.

A Borrowed $50,000 and A 50,000 G 50,000
signed a note.
B Purchased equipment for D 30,000 A 10,000
$30,000. Paid $10,000 in G 20,000
cash, signed a $20,000 note
payable.
C Collected $16,000 trade A 16,000 B 16,000
receivables.
D Paid $8,000 of trade F 8,000 A 8,000
payables.
E Acquired a $40,000 pieceE 40,000 H 40,000
of land by issuing capital
shares.
F Purchased $2,000 of officeC 2,000 F 2,000
supplies (an asset) on
credit.
G Paid for the office supplies
F 2,000 A 2,000
in (F).
33
Answer Key
Testname: UNTITLED8
34
Answer Key
Testname: UNTITLED8
120) (A)

Equity
Borrowed $20,000 cash using a note +20,000 +20,000
Collected trade receivables for cash, +5,000
$5,000 -5,000
Paid trade payables, $1,000 cash -1,000 -1,000
Purchased office supplies on credit, +1,000 +1,000
$1,000
+5,000 +5,000
of cash
Paid a $10,000 note payable -10,000 -10,000
Ending financial position $90,000 $35,000 $55,000
(B) Cash increase, $19,000

(+ 20,000 + 5,000 - 1,000 + 5,000 - 10,000)
35
Answer Key
Testname: UNTITLED8
121) a)
1. Cash(30,000 × 3) (A) 90,000
Share capital (SE) 90,000
Investment by owners
2. Cash (A) 100,000
Borrowed $100,000 on a one-year note.
3. Land (A) 20,000
Purchased land by signing a $20,000 note
payable.
4. Trade payables (L) 5,000
Cash (A) 5,000
Paid $5,000 of trade payables.
5. Equipment (A) 42,000
Cash (A) 42,000
Purchased two service vehicles, $21,000 each
(paid cash)
6. Notes receivable (A) 1,000
Cash (A) 1,000
Accepted a $1,000 promissory note from a
customer.
b)
Assets $205,000
Liabilities $115,000
Shareholders' equity $90,000
36
Answer Key
Testname: UNTITLED8
122) Cliff Constable, LLC.

As of June 30, 20X1
Assets $25,100
Cash 3,900
Trade receivables 500
Office supplies 24,000
Liabilities
Trade payables $100

A Purchased equipment to use in the I -
business.
B Issued shares for cash. F +
C Borrowed money at the bank. F +
D Sold a piece of land adjacent to the I +
plant.
E Paid the principal balance of a note F -
payable.
37
1) The periodicity assumption is the basis for which of the following?

A) the cut-off of expense recognition only.
B) dividing the activities of a business into a series of time periods for accounting and reporting
purposes.
C) keeping the company's transactions separate from the owners' transactions.
D) the cut-off of revenue recognition only.
Answer: B
2) The operating cycle of a business is best defined as which of the following?

A) the length of time over which our plant and equipment assets are expected to be used by the
company in generating revenues
B) the time it takes for a company to purchase and pay for goods or services from suppliers, sell
those goods or services to customers and collect cash from the customers
C) the period of time for which we prepare our financial statements
D) one year
Answer: B
3) Which of the following businesses would most likely have the shortest operating cycle?
A) A pizza franchise such as Pizza Pizza B) A jewelry manufacturer such as Mappins
C) A retail chain such as Walmart D) A grocery chain such as Loblaws
Answer: A
4) All the following statements about the cash-to-cash cycle are true except:
A) typical business operations involve an outflow of cash followed by an inflow of cash.
B) specific activities include purchasing inventory and selling product.
C) It includes normal buying / selling of goods to earn profit.
D) It includes normal day to day operating activities, investing activities, and financing activities.
Answer: D
5) If total revenues are the same as total expenses, then a company has which of the following?
A) a loss. B) a profit.
C) a decrease in shareholders' equity. D) neither a profit nor a loss.
Answer: D
6) Financial analysts look to the statement of earnings to determine which of the following?
A) if the company is collecting its receivables on time
B) whether the company has generated sufficient cash to pay its bills
C) whether the company has generated profits from operations
D) if the company has invested too much cash in its inventory
Answer: C
1
7) Which of the following expenses is usually listed last on the statement of earnings?
A) Income tax expense B) General administrative expenses
C) Cost of sales D) Advertising expense
Answer: A
8) If a toy manufacturer sold a piece of equipment in the normal course of its operations, where would
the related amount be reported on a multi-step income statement?
A) In income from asset dispositions B) In income from discontinued operations
C) In income from operations D) In non-operating income
Answer: D
9) If a heavy equipment manufacturer sold heavy equipment in the normal course of its operations,
where would the related amount be reported on a multi-step income statement?
A) In income from discontinued operations B) In income from operations
C) In non-operating income D) In income from asset dispositions
Answer: B
10) Which of the following amounts would be presented separately from the results of continuing
operations in the income statement?
A) The loss incurred due to a flood
B) The loss from writing down obsolete inventory
C) A gain on the sale of land
D) The loss from a plant closure
Answer: D
11) Calculate the effective tax rate for a company that reports an income tax expense of $3.0 million,
profit of $7.5 million, and income before taxes of $10.5 million.
A) 28.6%
B) 40%
C) 35%
D) It cannot be computed with the above information
Answer: A
12) Which of the following activities will most likely result in a reported loss on the statement of
earnings?
A) The wages and benefits paid to employees B) Interest expense
C) The sale of inventory to customers D) The sale of old equipment
Answer: D
13) Which of the following statements about accumulated depreciation is NOT true?
A) It is reflected on the balance sheet
B) It is consistent with the matching principle
C) It helps determine the fair value of the asset
D) It records the portion or how much of the asset has been used up
Answer: C
2
14) Accrued revenues are
A) earned and already received and recorded.
B) earned and recorded as liabilities before they are received.
C) received and recorded as liabilities before they are earned.
D) earned but not yet received or recorded.
Answer: D
15) The matching principle states that expenses should be matched with revenues because
A) efforts should be matched with accomplishments.
B) assets should be matched with liabilities.
C) dividends should be matched with shareholder investments.
D) cash payments should be matched with cash receipts.
Answer: A
16) During 20X2, New Company earned service revenues amounting to $200,000, of which $120,000
were collected in cash; the balance will be collected in January 20X3. The 20X2 statement of
earnings of the company should report which of the following amounts for service revenues?
A) $120,000. B) $200,000. C) $320,000. D) $80,000.
Answer: B
17) Atthe end of December, the owner of an apartment complex realized that the December rent had
not been collected from one of the tenants. December 31 was the end of the accounting year;
therefore, the owner made the appropriate adjusting entry at that time. When the December rent was
collected in January of the following year, the entry made by the apartment owner should include
which of the following?
A) debit to Rent receivable. B) credit to Rent revenue.
C) debit to Rent revenue collected in advance. D) credit to Rent receivable.
Answer: D
18) Under the accrual basis of accounting

A) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial
statements are prepared.
B) cash must be received before revenue is recognized.
C) events that change a company's financial statements are recognized in the period they occur
rather than in the period in which cash is paid or received.
D) profit is calculated by matching cash outflows against cash inflows.
Answer: C
19) Acompany purchased and received $3,500 worth of goods on credit to be sold in their stores. How
would the event be recorded?
A) Dr. Expenses $3,500, Cr. Accounts payable $2,500
B) the event would be disclosed in the notes to financial statements only
C) Dr. Inventory $3,500, Cr. Accounts payable $3,500
D) Dr. Inventory $3,500, Cr. Expenses $2,500
Answer: C
3
20) Which method of preparing income statements provides the most information about future cash
flows?
A) accrual basis B) historical basis C) actual basis D) cash basis
Answer: A
21) Accrued expenses which must be recorded in adjusting entries represent which of the following?
A) expenses paid in advance and not recorded.
B) expenses paid in advance.
C) expenses incurred but not yet paid.
D) expenses incurred but not yet recorded or paid.
Answer: D
22) Revenue is always recognized when which of the following occurs?

A) expenses are paid. B) it is earned.
C) the end of the period arrives. D) cash is collected.
Answer: B
23) Which of the following is not an example of the application of the revenue principle?
A) Recording the sale of merchandise for cash in sales revenue.
B) Recording rent received in advance as rent revenue.
C) Recording the sale of merchandise on credit in sales revenue.
D) Recording accrued interest revenue on a loan made to another party.
Answer: B
24) Inapplying the revenue principle to a given transaction, the most important moment or period in
time is when which of the following happens?
A) Sales transaction is completed (i.e., ownership passes) or services are rendered.
B) Related cash inflows occur.
C) The service contract is signed regarding service to be performed.
D) Related expenses are incurred.
Answer: A
25) Which principle holds that all the expenses incurred in earning revenue should be identified with the
revenue recognized and reported for the same period?
A) Liability principle. B) Revenue principle.
C) Matching principle. D) Timing principle.
Answer: C
4
26) During the accounting period, Luxor Company had the following data:
Sales of products:
Cash received $70,000
On credit (not yet received) $10,000
Expenses:
Cash paid $35,000
On credit (not yet paid) $3,000
What were the sales revenue and expenses?
Sales Revenue Expenses

A $60,000 $32,000
B $70,000 $35,000
C $80,000 $35,000
D $80,000 $38,000

Answer: D
27) Which of the following is not normally a condition that must be met for revenue to be recognized
(recorded) under the revenue principle?
A) The earnings process is complete or nearly complete.
B) The amount of revenue can be measured reliably.
C) Collection of receivables from credit sales is reasonably assured.
D) The promise to perform an exchange in the future has been made.
Answer: D
28) Which of the following costs is most likely to be the largest expense item on the statement of
earnings of a merchandising chain such as Walmart?
A) Wage, salary and benefits expense B) Cost of Sales
C) Advertising D) Income tax expense
Answer: B
29) Accrued expenses are

A) paid and recorded in an asset account after they are used or consumed.
B) incurred and already paid or recorded.
C) paid and recorded in an asset account before they are used or consumed.
D) incurred but not yet paid or recorded.
Answer: D
5
30) Tony'sTune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May
31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony
receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?
A) June 6 B) June 1 C) June 5 D) May 31
Answer: D
31) Acompany receives a $25,000 cash deposit from a customer on March 15 but will not deliver the
goods until April 20. Which of the following statements is false?
A) A liability will be reported on the statement of financial position at the end of March.
B) Revenue will be recorded and reported on the statement of earnings for March.
C) Revenue will be recorded and reported on the statement of earnings for April.
D) Cash will be reported on the statement of cash flows for the month of March.
Answer: B
32) Which of the following activities does not violate the revenue recognition principle?
A) Recording cash received in advance from customers as revenue when the product is not yet
shipped
B) Recording revenue in December 2013 for units manufactured but not yet sold to customers
C) Not recording interest earned in 2013 until the cash is received in 2014
D) Recording cash received in advance from customers as a liability when the product is not yet
shipped
Answer: D
33) Savannah Spa sells gift certificates for spa services. These gift certificate sales should be recorded
as:
A) a debit to sales revenue B) a credit to cash
C) a credit to sales revenue D) a credit to unearned revenue
Answer: D
34) Fairchild had the following information related to the sale of its products during its first year of business:
Revenue $1,000,000
Returns of goods sold $100,000
Cash collected $800,000
Under the accrual basis of accounting, how much net revenue would be reported on Fairchild 's income
statement?
A) $900,000 B) $700,000 C) $800,000 D) $200,000
Answer: A
6
35) Cheeptravel.com sells flights for various airlines and destinations over the internet and receives a 25
percent commission for tickets sold. Cheeptravel collects the full amount from the customer and
remits the net amount after commission to the airline. Unsold tickets are returned to the airline after
90 days. During 20X6, Cheeptravel had the following information:
1. Total sales price of tickets sold during 20X6 was $2,000,000.

2. Total commissions retained by Cheeptravel during 20X6 for these tickets was $500,000.
3. Total expenses incurred for web site maintenance for Cheeptravel was $1,000 per month.
How much revenue should Cheeptravel report on its 20X6 income statement?
A) $1,500,000 B) $500,000 C) $2,000,000 D) $488,000
Answer: B
36) NettletonTechnologies has a December 31 year-end. They provided services worth $40,000 in
December and were paid $10,000 in cash at that time with the rest paid in January. The employees
who performed the services were paid $25,000 for their work in January. Under the matching
concept how much net income would be reported in December?
A) ($15,000) B) $40,000 C) $10,000 D) $15,000
Answer: D
37) Which of the following is an advantage of accrual accounting?

A) It provides more relevant information
B) It records all economic events
C) It provides more timely information
D) It does not require the application of professional judgment
Answer: A
38) What would be the effect on December's statement of earnings of a utility bill received on December
27, 2013 but which will not be paid until January 10, 2014?
A) No expense will be recognized until the bill is paid in January
B) Recording the expense in December when it is incurred will increase expenses
C) Profit will be decreased when we pay the bill in January
D) We would cause an increase in profit by recording the expense in December
Answer: B
39) Collectionof a $600 accounts receivable

A) decreases an asset $600; decreases a liability $600.
C) increases an asset $600; decreases a liability $600.
D) decreases a liability $600; increases shareholders' equity $600.
Answer: B
7
40) The purchase of an asset for cash
A) leaves total assets unchanged. B) increases assets and shareholders' equity.
C) decreases assets and increases liabilities. D) increases assets and liabilities.
Answer: A
41) Recording revenue

A) increases assets and liabilities.
C) increases assets and shareholders' equity.
D) increases assets and decreases shareholders' equity.
Answer: C
42) The payment of a liability

A) increases assets and decreases liabilities. B) decreases assets and shareholders' equity.
C) decreases assets and liabilities. D) decreases assets and increases liabilities.
Answer: C
43) A payment of a portion of accounts payable will

A) not affect total assets. B) not affect shareholders' equity.
C) increase liabilities. D) decrease net earnings.
Answer: B
44) Which of the following items has no effect on retained earnings?

A) dividends B) hiring a new employee
C) expense D) revenue
Answer: B
45) The equality of debits and credits is the basis for

A) the single-entry accounting system. B) the double-entry accounting system.
C) all accounting systems. D) the T account.
Answer: B
46) The right side of an account

A) shows all the balances of the accounts in the system.
B) is used to record decreases.
C) is the credit side.
D) is used to record increases.
Answer: C
8
47) Which one of the following represents the expanded basic accounting equation?
A) Assets - Liabilities - Dividends = Contributed Capital + Revenues - Expenses
B) Assets + Liabilities = Dividends + Expenses + Contributed Capital + Revenues
C) Assets = Liabilities + Contributed Capital + Retained Earnings + Revenues - Expenses -
Dividends
D) Assets = Revenues + Expenses - Liabilities
Answer: C
48) An
accountant has debited an asset account for $500 and credited a revenue account for $1,000.
What can be done to complete the recording of the transaction?
A) Debit a shareholders' equity account for $500.
B) Nothing further must be done.
C) Credit a different asset account for $500.
D) Debit another asset account for $500.
Answer: D
49) Anaccount will have a credit balance if the

A) last transaction entered was a credit. B) first transaction entered was a credit.
C) debits exceed the credits. D) credits exceed the debits.
Answer: D

A) Debits increase liabilities and decrease assets.
B) Debits increase assets and increase liabilities.
C) Credits decrease assets and decrease liabilities.
D) Credits decrease assets and increase liabilities.
Answer: D
51) Which of the following liability accounts is likely to be satisfied with other than payment of cash?
A) Accounts Payable B) Wages payable
C) Income taxes payable D) Deferred subscriptions revenue
Answer: D
52) OnJune 15, Tandem Toys signed a lease to rent a storefront starting on July 1st for the next two
years at $1,000 per month. They paid the first two months' rent in advance on signing the lease. On
June 15, how would the transaction be recorded?
A) Dr. Rent expense $2,000, Cr. Cash $2,000
B) Dr. Rent expense $24,000, Cr. Cash $24,000
C) Dr. Prepaid rent $2,000, Cr. Cash $2,000
D) Dr. Prepaid rent $24,000, Cr Cash $2,000 Cr. Rent payable $22,000
Answer: C
9
53) On December 10, 20X6 Canadian Vessels placed an order for a new maintenance vessel from a German
shipbuilder. The purchase price will be $620,000, and the equipment will be delivered in March 20X7.
How would this event be reported in the December 31 20X6 year-end financial statements of Canadian
Vessels?.
A) An increase in capital assets and an increase in accounts payable.
B) An increase in inventory and an increase in accrued liabilities.
C) An increase in capital assets and an increase in accrued liabilities.
D) The event would be disclosed in the notes to financial statements only.
Answer: D
54) On January 1, 20X2, Grover Inc., started the year with a $22,000 credit balance in its retained
earnings account. During 20X2, the company earned profit of $40,000 and declared and paid
dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by
its owners. Therefore, the balance in retained earnings on December 31, 20X2, would be which of
the following?
A) $67,000. B) $57,000. C) $42,000. D) $52,000.
Answer: D
55) Golden Company had these transactions during the accounting period:
Sold merchandise for $600; its cost was $400.
Collected $400 from a trade receivable. The account was established in the previous year.
Used office supplies of $50.
Golden's profit for the period would be which of the following?
A) $900. B) $150. C) $600. D) $50.
Answer: B
56) Cash receipts from interest are classified as

A) either financing or investing activities. B) operating activities.
C) investing activities. D) financing activities.
Answer: B
57) The category that is generally considered to be the best measure of a company's ability to continue
as a going concern is
A) cash flows from financing activities. B) usually different from year to year.
C) cash flows from operating activities. D) cash flows from investing activities.
Answer: C
58) For a merchandising company, the largest operating cash outflow would result from which of the
following?
A) payment of interest on notes payable
B) payment of wages and benefits to employees
C) payment of taxes to the various government entities
D) payments to suppliers from whom we have purchased inventory on credit
Answer: D
10
59) Operating cash inflows and outflows are primarily connected to which of the following?
A) the sale of goods and services to customers and costs incurred to operate the business
B) issuance of shares, bank borrowings and repayments, and dividend payments
C) acquisitions and sale of long lived assets
D) purchase and sale of long-term investments
Answer: A
60) Asset turnover measures

A) the overall rate of return on assets.
B) the portion of the assets that have been financed by creditors.
C) how efficiently a company uses its assets to generate sales.
D) how often a company replaces its assets.
Answer: C
61) A company reports sales revenue of $120 million this year and $110 million last year. Their total
assets in the current year are $80 million and last year's total assets were $75 million. What is the
current year's asset turnover ratio?
A) 1.55 B) 1.46 C) 1.40 D) 1.61
Answer: A
62) It is not optimal to borrow any further funds when

A) the company's debt-to-equity ratio exceeds 50%.
B) the average borrowing costs start to equal or exceed the ROA.
C) the average borrowing costs start to equal or exceed the ROE.
D) the company's net profit margin falls below the average borrowing costs.
Answer: B
63) Which of the following statements about ROA is true?

A) ROA reflects the risk inherent in a company.
B) ROA is useful for determining how the company financed its assets.
C) ROA is useful for comparing companies in different industries.
D) ROA is the most important ratio for an equity investor
Answer: C
64) IfPizza Pizza reports an asset turnover ratio of 2.34 for 2013 and their competitor Pizza Hut reports
3.79 for their 2013 ratio, it means which of the following?
A) Pizza Pizza has been more effective in managing the use and level of its assets.
B) Pizza Pizza is better able to pay their current obligations with their current assets.
C) Pizza Pizza is less able to pay off their current obligations with their current assets.
D) Pizza Pizza has been less effective in managing the use and level of its assets.
Answer: D
11
65) Which of the following would be included in comprehensive income but not in net income?
A) A gain on the sale of land
B) The loss incurred due to a flood
C) The loss from a plant closure
D) Unrealized gains and losses on certain types of investments
Answer: D
66) Comprehensive income includes all changes in equity during a period except
A) gains and losses from discontinued operations
B) unrealized gains and losses on available for sale securities
C) those resulting from investments by owners and distributions to owners
D) gains and losses from irregular items.
Answer: C
67) What is Other Comprehensive Income?

A) Income that is not related to normal earnings activities.
B) Income included with continuing operations.
C) Income items that bypass the income statement.
D) Income from unusual activities
Answer: C
68) How is Accumulated Comprehensive Income reported?

A) In net income from continuing operations. B) In net income
C) In the retained earnings section. D) in shareholders' equity
Answer: D
69) The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell
them to customers, and collect the cash from the customers.
Answer: True False
70) According tothe periodicity assumption, to measure and report financial information periodically,
we assume the long life of the company can be cut into shorter periods.
Answer: True False
71) The operating cycle is of a similar duration for most companies.

Answer: True False
72) The division of business activities into a series of equal periods for accounting purposes is known as
the periodicity assumption.
Answer: True False
73) The statement of earnings provides investors with information about a company's investing
activities.
Answer: True False
12
74) A Taco Bell restaurant would most likely have a longer operating cycle than Walmart.
Answer: True False
75) When a growing company finds it needs to buy more inventory before cash has been collected from
customers, they often use short term credit such as trade or notes payable to finance the inventory
purchases.
Answer: True False
76) Revenues are decreases in assets or settlements of liabilities from ongoing operations.
Answer: True False
77) The profit of a business is computed by subtracting revenues from expenses.

Answer: True False
78) Losses are decreases in assets or increases in liabilities from peripheral activities.
Answer: True False
79) Income tax expense will appear on the statement of financial position.
Answer: True False
80) Operating revenues result from the sale of goods or services.

Answer: True False
81) A gain on sale of land causes an increase in income as a result of normal operating activities.
Answer: True False
82) Cost of sales is usually the largest expense for manufacturing or merchandising companies.
Answer: True False
83) Accrual basisaccounting records revenues when earned and expenses when incurred, regardless of
when the related cash is received or paid.
Answer: True False
84) Using the accrual basis of accounting, a company recognizes expenses when they are paid.
Answer: True False
85) The
revenue principle recognizes revenues when the earnings process is complete or nearly
complete, an exchange has taken place, and collection is probable.
Answer: True False
86) Cashbasis accounting is often adequate for very small businesses such as a small retail store or a
doctor's office.
Answer: True False
87) Accrual basis accounting recognizes revenues when cash is received from the customer.
Answer: True False
13
88) Expenses incurred, but not yet paid, create a receivable (i.e., an asset) until payment occurs.
Answer: True False
89) Accrued in the case of expenses means paid in advance, and deferred in the case of expenses means
not yet paid.
Answer: True False
90) Deferredin the case of revenues means collected in advance of being earned and accrued in the case
of revenues means not yet collected.
Answer: True False
91) Expenses are recognizedwhen an exchange takes place of productive assets, the earnings process is
complete or nearly complete, and collection is likely.
Answer: True False
92) The matching process recognizes liabilities when incurred in earning revenue.
Answer: True False
93) Transactions where cash is received before being earned often result in adjusting entries at the end
of the period to record profit in the proper period.
Answer: True False
94) The revenue principle recognizes revenue from the sale of goods when ownership passes from the
seller to the buyer. In the sale of services, revenue is recognized when the services are rendered.
Answer: True False
95) The sale of merchandise on credit and the collection from the customer ten days later constitutes one
transaction for accounting purposes.
Answer: True False
96) Revenue recognition most commonly occurs at the point of delivery of goods or services to the
customer.
Answer: True False
97) Acompany that ships product to its customers in January 20X2 but records them as revenue in
December 20X1 has not violated the revenue principle because they were manufactured and ready
for sale before the accounting year end.
Answer: True False
98) We record insurance as an expense when we pay for a three-year policy.

Answer: True False
99) Under the double-entry system, revenues must always equal expenses.
Answer: True False
14
100) An expense account is a subdivision of the retained earnings account and decreases shareholder's
equity.
Answer: True False
101) If a revenue account is credited, the revenue account is increased.

Answer: True False
102) Debit and credit can be interpreted to mean "bad" and "good," respectively.
Answer: True False
103) A credit means that an account has been increased.

Answer: True False
104) An increase in an asset is recorded by a debit.

Answer: True False
105) A decrease in a liability account is recorded by a debit.

Answer: True False
106) The double-entry accounting system records the dual effect of each transaction.
Answer: True False
107) The normal balance of the Dividend account is a debit.

Answer: True False
108) The normal balance of an asset is a credit.

Answer: True False
109) The normal balance of all accounts is a debit.

Answer: True False
110) Revenue accounts normally have debit balances because they represent assets received while
expense accounts normally have credit balances because they represent assets used.
Answer: True False
111) The double-entry system of accounting refers to the placement of a double line at the end of a
column of figures.
Answer: True False
112) Collection of a customer's account has an impact on total assets.

Answer: True False
113) The statement of earnings reports profit or loss at a point in time.

Answer: True False
15
114) A company can experience financial difficulty even if it does not report a loss.
Answer: True False
115) Unadjusted financial statements do not reflect revenues earned or expenses incurred in the
accounting period if the receipt or payment of cash occurs in a different period.
Answer: True False
116) Profit differs from cash flow from operations because the revenue recognition and matching
principle result in the recognition of revenues and related expenses that are independent of the
timing of cash receipts and payments.
Answer: True False
117) A high total asset turnover signifies efficient management of assets; a low asset turnover ratio
signifies less efficient management.
Answer: True False
118) In a well-run business, creditors expect the total asset turnover ratio to fluctuate due to seasonal
upswings and downturns.
Answer: True False
119) The Upton Country Store had the following transactions in April:
a. Sold $25,000 of goods to customers and received $22,000 in cash and the rest are on account
b. The cost of the inventory sold was $13,000
c. The store purchased $8,000 of inventory and paid for $4,000 in cash and the rest were bought on account
d. They paid $7,000 in wages for the month
e. Received a $600 bill for utilities for the month that will not be paid until May
f. Received rent for the adjacent store front for the months of April and May in the amount of $3,000
Complete the following statements:
Cash Basis
Statement of earnings
Revenues:
Cash Sales a. ________
Rent Collected b. ________
Expenses:
Inventory purchases c. ________
Wages paid d. ________
Profit e. ________
Accrual Basis
Statement of earnings
16
Revenues:
Sales to customers f. ________
Rent Revenue g. ________
Expenses:
Cost of sales h. ________
Wages expense i. ________
Utilities expense j. ________
Profit k. ________
Answer: (a) $22,000, (b) $3,000, (c) $4,000, (d) $7,000, (e) $14,000, (f) $25,000, (g) $1,500, (h)
$13,000, (i) $7,000, (j) $600, (k) $5,900
120) Small Company rendered services to customers amounting to $6,000 during 20X1; the related cash
was collected as follows: $4,000 in 20X1; $2,000 in 20X2. During 20X1, $3,000 was incurred for
wages expense; the related cash payments were made as follows: $1,200 in 20X1; in 20X2, $1,800.
Based only on these data, provide the following amounts on accrual basis:
Amount to be reported for: 20X1 20X2

Revenue $ $
Expense $ $

Revenue $6,000 $0
Expense $3,000 $0
121) Explain why a $500 revenue collected in advance for service would be recorded as a debit to cash
and a credit to a liability account.
Answer: A debit is recorded to cash because a receipt of cash increases this asset account. A
corresponding credit to a liability account (unearned revenue) is appropriate because the
customer is "owed" services in the future. If the services are not performed, the customer
would get a refund.
17
122) Why might managers be tempted to violate the revenue principle and the matching principle in
financial reporting?
Answer: Managers want their companies to appear successful when financial statements are issued.
With revenues as high as possible and expenses as low as possible, profit will be elevated.
Managers might be tempted to report revenues even though the earnings process is not
complete. Also, if some expenses can be put off until a later time, profit will appear larger.
Often, manager bonuses are calculated based on profit. Lower profit could cause an adverse
reaction in the market place regarding share prices. This could cause some managers to lose
their jobs.
123) Analysis the transactions of a business organized as a corporation described below and indicate their effect on
the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (-) to indicate a
decrease.

Equity
1. Received cash for
services provided.
2. Purchased office
equipment on credit.
3. Paid employees'
salaries.
4. Received cash from
customer in payment on
account.
5. Paid telephone bill for
the month.
6. Paid for office
equipment purchased in
transaction 2.
7. Purchased office
supplies on credit.
8. Dividends were paid.
9. Obtained a loan from
the bank.
10. Billed customers for
services performed.

Equity
1. Received cash for + +
services provided.
18
2. Purchased office + +
3. Paid employees' - -
salaries.
customer in payment on +, -
account.
5. Paid telephone bill for - -
the month.
6. Paid for office
equipment purchased in - -
transaction 2.
supplies on credit.
9. Obtained a loan from + +
the bank.
10. Billed customers for + +
services performed.
19
124) For each item below, indicate whether the account will be debited or credited:
1. Decrease in Accounts Payable

2. Increase in Dividends
3. Increase in Common Shares
4. Increase in Unearned Revenue
5. Decrease in Interest Payable
6. Increase in Prepaid Insurance
7. Decrease in Wages Expense
8. Decrease in Supplies
9. Increase in Revenues
10. Decrease in Accounts Receivable

125) For each of the following accounts indicate (a) the type of account (Asset, Liability, Shareholders' Equity,
Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance.
Example
0. Cash a. Asset account
b. Debit increases, credit decreases
c. Normal balance — debit
Accounts:
1. Accounts Payable
2. Accounts Receivable
3. Common shares
4. Dividends
5. Service Revenue
6. Insurance Expense
7. Notes Payable
8. Equipment
20
1. a. Liability Account.
b. Debit decreases, credit increases
c. Normal balance — credit.
2. a. Asset Account.
c. Normal balance — debit.
3. a. Shareholders' Equity Account
4. a. Shareholders' Equity Account.
b. Debit increases, credit decreases.
5. a. Revenue Account.
b. Debit decreases, credit increases.
6. a. Expense Account.
21
126) Immediately after the adjusting entries were journalized and posted for the 20X2 year, the accounts of Way
Corporation showed the following balances:
Share capital, December 31, 20X2 $80,000

Retained earnings, beginning balance, January 1, 20X2 $20,000
Total revenues earning during 20X2 $85,000
Total expenses incurred during 20X2 $65,000
Total dividends declared and paid during 20X2 $2,000
Give the amount that should be shown in each of the following accounts before any transactions are recorded
for the year 20X3:
Share Capital $
Retained earnings $
Share Capital $80,000

Retained earnings $38,000
* $20,000 + $85,000 - $65,000 - $2,000 = $38,000
127) You have been hired as the accountant for a newly formed real estate company called Porter Real Estate
Limited. The following business transactions occurred during the month of September, 20X3:
1. Shareholders invest $50,000 in cash for 10,000 common shares to start a real estate office.
2. Signed a lease for office space.
3. Paid $200 cash for office supplies
4. Purchased office equipment for $6,000, paying $2,500 in cash and signing a 30-day, note payable for the
remainder.
5. Purchased $100 of office supplies on account.
6. Real estate commissions billed to clients amount to $5,400.
7. Paid $700 in cash for the current month's rent.
8. Paid $50 cash on account for office supplies purchased in transaction 5.
9. Received a bill for $500 for advertising for the current month.
10. Paid $2,500 cash for office salaries.
11. Paid $1,000 cash dividends to shareholders.
12. Received a cheque for $3,000 from a client in payment on account for commissions billed in transaction 6.
Record the transactions for September 20X3.

1. Cash 50,000
Common Shares 50,000
2. No entry
22
3. Office Supplies 200
Cash 200
4. Office Equipment 6,000
Cash 2,500
Notes Payable 3,500
Accounts Payable 100
6. Accounts Receivable 5,400
Real Estate Commission Revenue 5,400
7. Rent Expense 700
Cash 700
8. Accounts Payable 50
Cash 50
9. Advertising Expense 500
10. Office Salaries Expense 2,500
Cash 2,500
11. Dividends 1,000
Cash 1,000
12. Cash 3,000
Accounts Receivable 3,000
23
128) On June 1, 20X1, Global Services, Inc., was started with $50,000 invested by the owners as share capital. On
June 30, the accounting records contained the following amounts:
Trade payables $100

Cash 25,100
Consulting fees earned 8,400
Dividends declared 2,100
Office equipment 24,100
Office supplies 500
Rent expense 1,300
Supplies expense 100
Telephone expense 500
Prepare a statement of earnings for the month ended June 30, 20X1.
Answer: Global Services, Inc.
Statement of Earnings
For the Month Ended June 30, 20X1
Revenues
Consulting fees earned $8,400
Expenses
Rent Expense 1,300
Salary Expense 1,000
Supplies Expense 100
Telephone Expense 500
Total Expenses 2,900
Net Earnings $5,500
129) Explain why the profit reported on the statement of earnings is usually not equal to net cash flows
from operating activities on the statement of cash flows.
Answer: Profit on the statement of earnings is an application of the accrual basis of accounting.
Revenues are reported when earned and expenses incurred are matched to those earned
revenues. The net cash flows from operating activities on the statement of cash flows are
reported on the cash basis of accounting. That is, amounts received from customers and
amounts paid for expenses are on the statement of cash flows. Therefore, the difference in
profit and net cash from operating activities is a timing issue.
24
130) Emploi Maintenant LLC (EML) operates an employment center in a local mall. The company works closely
with Service Canada to provide access to employment opportunities for young adults and recent graduates.
The shareholder and general manager is Marie-France Tessier. During the month of April, the following
activities occurred:
1. On April 1, Marie-France decided to replace four computers that are available for clients to use in
the center. EML donated the old computers to "Computers in Haiti" a charity that refurbishes and
supplies old computers to schools in Haiti. EML paid $5,220 cash for the new machines. The new
computers are expected to last for 3 years at which time they will also be donated to charity.
2. The company made cash sales of $11,400 worth of coffee and snacks during April. Another $800 in sales on
account was made for a seminar that Marie-France presented in the adjoining office building. She expects to
collect that amount in 30 days.
3. In conjunction with a study of similar companies in other cities, EM sold their first memberships for $1,800,
which entitle the holder complete data base access for six months. EM also collected $350 in user fees from
non-members during the month.
4. Staff wages paid during the month was $875. $175 of this amount related to work done in March and no one
has been paid for the last three days of April, a total of $95.
5. The utilities, including data base fees and internet access fee, are paid in advance for a two-month period.
They total $360 per month and were paid on April 15.
6. Monthly rent of $2,000 was paid.
7. Marie-France ordered a new soda dispenser and other supplies for the snack bar totaling $5,000 and paid the
$4,500 outstanding accounts payable from March. At the beginning of April, she had estimated that there was
$600 in supplies inventory on hand, and at April 30 supplies inventory was estimated at $1,000.
8. On April 30, EM repaid in full a $5,000 loan to Marie-France, who had lent money to EM when it first
opened. She had been charging 6% interest on the loan and the interest was paid at the end of every month.
9. The income tax rate is 25%.
Required:
Prepare a proper form multiple step statement of earnings for the month of April.
Answer: Suggested approach: Analyze each event to determine the effects on revenues and expenses
only.
Depreciation on new computers for one month $5,220 / 36 months × 1 month = $145.
Sales = $11,400 + $800
Membership revenues = $1,800/6 = $300 + $350 user fees = $650
Wages for April = Amt paid $875 — March wages $175 + April accrual $95 = $795
Utilities $360 per month
Rent expense $2,000
April purchases $5,000 + Beginning inventory $600 — Ending inventory $1,000 = COGS $4,600
Interest on loan for one month $5,000 × 6 × 1/12 = $25
Tax rate 25% × Income before income taxes $4,925 = $1,231 (rounded)
Emploi Maintenant LLC

For the Month Ending April 30, 20X6
25
Revenues $12,850

Gross Profit 8,250
Operating expenses
Rent 2,000
Wages 795
Utilities 360
Depreciation 145
Total operating expenses 3,300
Net income before interest and income taxes 4,950
Interest expense 25
Net income before income taxes 4,925
Net Earnings $3,694
131) The following data is from Gauthier Machine Shop:
20X3 20X2 20X1

Total Assets $500,000 $475,000 $450,000
Total Liabilities $200,000 $190,000 $170,000
Total Shareholders' Equity$300,000 $285,000 $280,000
Sales $1,000,000 $900,000 $820,000
Profit $140,000 $120,000 $110,000
Compute Gauthier Machine Shop's asset turnover ratio for the two most recent years
(a) 20X3 ________

(b) 20X2 ________
Answer: (a) 2.05, (b) 1.95
26
Answer Key
Testname: UNTITLED9
1) B
2) B
3) A
4) D
5) D
6) C
7) A
8) D
9) B
10) D
11) A
12) D
13) C
14) D
15) A
16) B
17) D
18) C
19) C
20) A
21) D
22) B
23) B
24) A
25) C
26) D
27) D
28) B
29) D
30) D
31) B
32) D
33) D
34) A
35) B
36) D
37) A
38) B
39) B
40) A
41) C
42) C
43) B
44) B
45) B
46) C
47) C
48) D
49) D
50) D
27
Answer Key
Testname: UNTITLED9
51) D
52) C
53) D
54) D
55) B
56) B
57) C
58) D
59) A
60) C
61) A
62) B
63) C
64) D
65) D
66) C
67) C
68) D
69) TRUE
70) TRUE
71) FALSE
72) TRUE
73) FALSE
74) FALSE
75) TRUE
76) FALSE
77) FALSE
78) TRUE
79) FALSE
80) TRUE
81) FALSE
82) TRUE
83) TRUE
84) FALSE
85) TRUE
86) TRUE
87) FALSE
88) FALSE
89) FALSE
90) TRUE
91) FALSE
92) FALSE
93) TRUE
94) TRUE
95) FALSE
96) TRUE
97) FALSE
98) FALSE
99) FALSE
100) FALSE
28
Answer Key
Testname: UNTITLED9
101) TRUE
102) FALSE
103) FALSE
104) TRUE
105) TRUE
106) TRUE
107) TRUE
108) FALSE
109) FALSE
110) FALSE
111) FALSE
112) FALSE
113) FALSE
114) TRUE
115) TRUE
116) TRUE
117) TRUE
118) TRUE
119) (a) $22,000, (b) $3,000, (c) $4,000, (d) $7,000, (e) $14,000, (f) $25,000, (g) $1,500, (h) $13,000, (i)
$7,000, (j) $600, (k) $5,900

Revenue $6,000 $0
Expense $3,000 $0
121) A debit is recorded to cash because a receipt of cash increases this asset account. A corresponding credit to
a liability account (unearned revenue) is appropriate because the customer is "owed" services in the future.
If the services are not performed, the customer would get a refund.
122) Managers want their companies to appear successful when financial statements are issued. With revenues
as high as possible and expenses as low as possible, profit will be elevated. Managers might be tempted to
report revenues even though the earnings process is not complete. Also, if some expenses can be put off
until a later time, profit will appear larger. Often, manager bonuses are calculated based on profit. Lower
profit could cause an adverse reaction in the market place regarding share prices. This could cause some
managers to lose their jobs.
29
Answer Key
Testname: UNTITLED9

Equity
1. Received cash for + +
services provided.
3. Paid employees' - -
salaries.
customer in payment on +, -
account.
5. Paid telephone bill for - -
the month.
6. Paid for office
equipment purchased in - -
transaction 2.
supplies on credit.
9. Obtained a loan from + +
the bank.
10. Billed customers for + +
services performed.

30
Answer Key
Testname: UNTITLED9
3. a. Shareholders' Equity Account
4. a. Shareholders' Equity Account.
b. Debit increases, credit decreases.
5. a. Revenue Account.
6. a. Expense Account.
Share Capital $80,000

* $20,000 + $85,000 - $65,000 - $2,000 = $38,000
31
Answer Key
Testname: UNTITLED9
1. Cash 50,000
Common Shares 50,000
2. No entry
Cash 200
4. Office Equipment 6,000
Cash 2,500
Notes Payable 3,500
6. Accounts Receivable 5,400
Real Estate Commission Revenue 5,400
7. Rent Expense 700
Cash 700
8. Accounts Payable 50
Cash 50
9. Advertising Expense 500
10. Office Salaries Expense 2,500
Cash 2,500
11. Dividends 1,000
Cash 1,000
12. Cash 3,000
128) Global Services, Inc.

Revenues
Consulting fees earned $8,400
Expenses
Rent Expense 1,300
Salary Expense 1,000
Telephone Expense 500
Net Earnings $5,500
32
Answer Key
Testname: UNTITLED9
129) Profit on the statement of earnings is an application of the accrual basis of accounting. Revenues are
reported when earned and expenses incurred are matched to those earned revenues. The net cash flows
from operating activities on the statement of cash flows are reported on the cash basis of accounting. That
is, amounts received from customers and amounts paid for expenses are on the statement of cash flows.
Therefore, the difference in profit and net cash from operating activities is a timing issue.
130) Suggested approach: Analyze each event to determine the effects on revenues and expenses only.
Depreciation on new computers for one month $5,220 / 36 months × 1 month = $145.
Sales = $11,400 + $800
Membership revenues = $1,800/6 = $300 + $350 user fees = $650
Wages for April = Amt paid $875 — March wages $175 + April accrual $95 = $795
Utilities $360 per month
Rent expense $2,000
April purchases $5,000 + Beginning inventory $600 — Ending inventory $1,000 = COGS $4,600
Interest on loan for one month $5,000 × 6 × 1/12 = $25
Tax rate 25% × Income before income taxes $4,925 = $1,231 (rounded)
Emploi Maintenant LLC

For the Month Ending April 30, 20X6
Revenues $12,850

Gross Profit 8,250
Operating expenses
Rent 2,000
Wages 795
Utilities 360
Depreciation 145
Total operating expenses 3,300
Net income before interest and income taxes 4,950
Interest expense 25
Net income before income taxes 4,925
Net Earnings $3,694
131) (a) 2.05, (b) 1.95
33
1) An adjusted trial balance

A) proves the equality of the total debit balances and total credit balances of ledger accounts after
all adjustments have been made.
B) is prepared after the financial statements are completed.
C) cannot be used to prepare financial statements.
D) is a required financial statement under international financial reporting standards.
Answer: A
2) Joe Company purchased supplies inventory for $5,000. Due to an error in posting, the inventory
account was debited for only $500 when trade payables were credited for $5,000. During which
phase of the accounting information cycle, would this error be discovered?
A) analysis of each transaction. B) preparation of the financial statements.
C) preparation of the trial balance. D) recording transaction in the journal.
Answer: C
3) Which is the correct order of the steps in the accounting cycle during the accounting period?
A) transaction analysis, journal entries, trial balance
B) transaction analysis, posting to the accounts, journal entries
C) transaction analysis, journal entries, posting to the accounts
D) transaction analysis, posting to the accounts, adjusting the accounts
Answer: C
4) The process that begins with analyzing transactions and ends with the preparation of a post-closing
trial balance is called
A) the accounting cycle. B) the business cycle.
C) the accounting period. D) the fiscal period.
Answer: A
5) On January 1, 20X1, Thomas Company paid $1,000 for a two-year insurance policy on the building. The
accounting period ends December 31. At the end of 20X1, the financial statements should report which of the
following?
On the Statement of Financial On the Statement of Earnings

Position
A. Prepaid insurance, $0 Insurance expense, $1,000
B. Prepaid insurance, $250 Insurance expense, $250
C. Prepaid insurance, $500 Insurance expense, $500
D. Prepaid insurance, $1,000 Insurance expense, $0

Answer: C
1
6) On March 1, 20X1, the premium on a two-year insurance policy on equipment was paid amounting
to $1,800. At the end of 20X1 (end of the accounting period), the financial statements for 20X1,
would report which of the following?
A) Insurance expense, $0; Prepaid insurance $1,800.
B) Insurance expense, $1,800; Prepaid insurance $0.
C) Insurance expense, $750; Prepaid insurance $1,050.
D) Insurance expense, $900; Prepaid insurance $900.
Answer: C
7) On April 1, 20X1, Allen Company signed a $12,000, one-year, 10 percent note payable. At due date,
April 1, 20X2, the principal and interest will be paid. Interest expense should be reported on the
statement of earnings (for the year ended December 31, 20X1) as which of the following?
A) $900. B) $1,200. C) $700. D) $800.
Answer: A
8) On January 1, 20X2, the ledger of Global Corporation correctly showed supplies inventory of $500.
During 20X2, supplies purchases amounted to $700. A count (inventory) of supplies on hand at
December 31, 20X2, showed $400. The 20X2 statement of earnings should report supplies expense
amounting to which of the following?
A) $1,200. B) $1,100. C) $800. D) $700.
Answer: C
9) A legal firm received $2,000 cash for legal services to be rendered in the future. The full amount
was credited to Unearned Service Revenue. If the legal services have been provided at the end of the
accounting period and no adjusting entry is made, this would cause
A) expenses to be overstated. B) liabilities to be understated.
C) profit to be overstated. D) revenues to be understated.
Answer: D
10) Prepaid expenses are

A) incurred and already paid or recorded.
B) incurred but not yet paid or recorded.
C) paid and recorded in an asset account before they are used or consumed.
D) paid and recorded in an asset account after they are used or consumed.
Answer: C
11) The Town Laundry purchased $5,500 worth of laundry supplies on June 2 and recorded the
purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $3,000 on
hand. The adjusting entry that should be made by the company on June 30 is
A) debit Laundry Supplies, $2,500; credit Laundry Supplies Expense, $2,500.
B) debit Laundry Supplies, $3,000; credit Laundry Supplies Expense, $3,000.
C) debit Laundry Supplies Expense, $3,000; credit Laundry Supplies, $3,000.
D) debit Laundry Supplies Expense, $2,500; credit Laundry Supplies, $2,500.
Answer: D
2
12) On July 1, Rawling Store paid $6,000 to Iceberg Realty for six months' rent, starting July 1. Prepaid
rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting
entry to be made by Rawling Store is
A) debit prepaid rent, $1,000; credit rent expense, $1,000.
B) debit rent expense, $6,000; credit prepaid rent, $6,000.
C) debit rent expense, $1,000; credit prepaid rent, $1,000.
D) debit prepaid rent, $6,000; credit rent expense, $6,000.
Answer: C
13) The balance in the Prepaid Rent account before adjustment at the end of the year is $12,000 and
represents three months' rent starting on November 1. The adjusting entry required on December 31
is
A) debit prepaid rent, $8,000; credit rent expense, $8,000.
B) debit prepaid rent, $4,000; credit rent expense $4,000.
C) debit rent expense, $12,000; credit prepaid rent, $12,000.
D) debit rent expense, $8,000; credit prepaid rent, $8,000.
Answer: D
14) The Pitter Corporation purchased a notebook computer for $3,000 on December 1. The useful life of
the notebook computer is estimated to be 5 years. If financial statements are to be prepared on
December 31, the company should make the following adjusting entry:
A) debit office equipment, $50; credit accumulated depreciation, $50.
B) debit depreciation expense, $600; credit accumulated depreciation, $600.
C) debit depreciation expense, $50; credit accumulated depreciation, $50.
D) debit depreciation expense, $2,400; credit accumulated depreciation, $2,400.
Answer: C
15) Anadjusted trial balance shows that

A) all accounts have the correct balance.
B) debits equal credits in the ledger accounts after the adjusting entries have been made.
C) all journal entries have been made.
D) no posting errors have been made.
Answer: B
16) Ultra Realty received a cheque for $21,000 on July 1, which represents a 6-month advance payment
of rent on a building it rents to a client. Unearned Rental Revenue was credited for the full $21,000.
Financial statements will be prepared on July 31. Ultra Realty should make the following adjusting
entry on July 31:
A) debit Cash, $3,500; credit Rental Revenue, $3,500.
B) debit Rental Revenue, $3,500; credit Unearned Rental Revenue, $3,500.
C) debit Unearned Rental Revenue, $21,000; credit Rental Revenue, $21,000.
D) debit Unearned Rental Revenue, $3,500; credit Rental Revenue, $3,500.
Answer: D
3
17) Atthe end of its accounting period, December 31, 20X2, May Corporation owed $1,000 for
property taxes which had not been recorded nor paid. Therefore, the 20X2 adjusting entry should be
A) $1,000 credited to a liability account and debited to an expense account.
B) $1,000 debited to an expense account and credited to an asset account.
C) $1,000 debited to a liability account and credited to an asset account.
D) $1,000 credited to an expense account and debited to a liability account.
Answer: A
18) On October 1, 20X1, Ethan Company borrowed $10,000 on a 4-month note with an annual interest
rate of 9 percent. How much interest expense should be reported for 20X1, assuming that the note is
paid on time and Ethan Company's accounting year coincides with the calendar year?
A) $-0-. B) $225. C) $900. D) $300.
Answer: B
19) Theprimary difference between prepaid and accrued expenses is that prepaid expenses have
A) not been paid and accrued expenses have been paid.
B) been paid and accrued expenses have not been paid.
C) not been recorded and accrued expenses have been recorded.
D) been incurred and accrued expenses have not incurred.
Answer: B
20) Assume Minor Company recorded the following adjusting entry at year-end:
Dr Insurance expense $800

Cr Prepaid insurance $800
If the beginning balance in prepaid insurance was $700 and $1,500 was paid for an insurance premium during
the year, the ending balance in the prepaid insurance account (after the above adjusting entry) would be which
of the following?
A) $1,400 debit. B) $2,200 debit. C) $1,500 debit. D) $100 debit.
Answer: A
21) Anaccountant has billed her clients for services performed in October. In November, she receives
payments from her clients. What entry will she make upon receipt of the payments?
A) debit unearned revenue and credit service revenue.
B) debit accounts receivable and credit service revenue.
C) debit cash and credit accounts receivable.
D) debit cash and credit service revenue.
Answer: C
4
22) Which of the following is an example of an adjusting entry?
A) Recording the salary expense earned in the last week of the year, to be paid next year.
B) Recording the payment of year-end dividends.
C) Recording the increase in the market value of land.
D) Recording the receipt of inventory in the last week of the year that will be paid next year.
Answer: A
23) Which of the following statements about adjusting entries is true?

A) Adjusting entries are required whenever the accounting records are updated.
B) Adjusting entries always involve an expense account.
C) Adjusting entries always include at least one balance sheet account and one income statement
account.
D) Adjusting entries may involve the cash account.
Answer: C
24) Failure to make an adjusting entry to recognize service revenue receivable would cause which of the
following?
A) no effect on assets, liabilities, profit, nor shareholders' equity.
B) an overstatement of assets and shareholders' equity and an understatement of profit.
C) an understatement of assets, profit, and shareholders' equity.
D) an overstatement of assets, profit, and shareholders' equity.
Answer: C
25) Which of the following is not an example of an adjusting entry?

A) Recording the loss on the sale of equipment made during the year.
B) Recording amortization on office computers purchased during the year.
C) Reducing the prepaid rent account for the portion of rent consumed.
D) Recording unpaid interest at year end relating to an outstanding loan balance.
Answer: A
26) Manfretti Corporation received cash of $12,000 on August 1, 20X7 for one year's rent in advance
and recorded the transaction with a credit to Rent Revenue. The December 31, 20X7 adjusting entry
is
A) debit cash and credit unearned rent, $7,000.
B) debit rent revenue and credit unearned rent, $7,000.
C) debit unearned rent and credit rent revenue, $5,000.
D) debit rent revenue and credit unearned rent, $5,000.
Answer: B
27) Which of the following would normally be recorded with an adjusting entry?
A) Payment for supplies bought on account B) Depreciation expense
C) Sales on credit D) Salaries expense
Answer: B
5
28) Manitoba Metals Ltd lent $100,000 to Coltraine Ltd. at an interest rate of 5%. Both the loan and all
the interest are to be repaid after two years. At the end of the first year what is the entry required on
Manitoba's books? (Dr.=Debit and Cr.=Credit)
A) no entry is required until the amount becomes due.
B) Dr. Interest expense $5,000, Cr. Interest payable $5,000
C) Dr. Interest revenue $5,000, Cr. Interest payable $5,000
D) Dr. Interest receivable $5,000, Cr. Interest revenue $5,000
Answer: D
29) At
the end of 20X4, Dallas Company made the following adjusting entry to record $10,000 accrued (unpaid)
wages:
Dr Wage expense 10,000

Cr Wages payable 10,000
A payroll of $40,000 (including the $10,000 accrued wages) was paid during the first week of January, 20X5.
The entry to record the payment of this payroll should include a
A) $40,000 debit to wages expense and a $10,000 debit to wages payable.
B) $50,000 debit to wages expense and a $10,000 debit to wages payable.
C) $10,000 debit to wages expense and a $30,000 debit to wages payable.
D) $30,000 debit to wages expense and a $10,000 debit to wages payable.
Answer: D
30) Which of the following is the essential difference between an unadjusted trial balance and an
adjusted trial balance?
A) An unadjusted trial balance is prepared at the start of the accounting year, while an adjusted
trial balance is prepared at the end of the year.
B) An unadjusted trial balance is prepared after the post-closing trial balance.
C) An unadjusted trial balance is prepared before the adjusting entries are reflected, while an
adjusted trial balance is prepared after the adjusting entries are reflected.
D) An unadjusted trial balance is prepared by companies which make adjusting entries, while an
adjusted trial balance is prepared by companies that do not make adjusting entries.
Answer: C
31) Thedifference between the equipment account balance and the accumulated amortization equipment
account balance is called which of the following?
A) acquisition cost B) net realizable value
C) market value D) net book value
Answer: D
32) Whichof the following accounts would most likely lead to a deferred adjustment?
A) Rent receivable B) Prepaid expenses
C) Wages payable D) Subscriptions revenue receivable
Answer: B
6
33) Which of the following would most likely lead to an accrued adjustment?
A) Rent received in advance.
B) Interest revenue earned but not yet collected.
C) Prepaid wages.
D) Prepaid insurance
Answer: B
Reference: 04-01
The earnings statement of Waylon Taylor Textiles Ltd. for 20X7 included the following items:
Interest revenue $75,500

Insurance expense $9,600
The following balances have been excerpted from the company's Statement of Financial Position:
December 31, 20X7 December 31, 20X6

Accrued interest receivable $9,100 $7,500
Accrued salaries payable $8,900 $4,200
Prepaid insurance $1,100 $1,500
34) How much cash did WTT receive for interest during 20X7?
A) $73,900 B) $66,400 C) $75,500 D) $77,100
Answer: A
35) How much cash did WTT pay out for salaries during 20X7?
A) $73,900 B) $60,300 C) $69,700 D) $60,800
Answer: B
36) How much cash did WTT pay out for insurance during 20X7?
A) $8,500 B) $9,200 C) $10,000 D) $8,100
Answer: B
37) Auto Kool has implemented a policy that requires all tools expenditures below $100 to be expensed.
This is an application of
A) the materiality constraint. B) the matching principle.
C) the full disclosure principle. D) representational faithfulness.
Answer: A
38) Charging thecost of a wastebasket with an estimated useful life of 10 years to an expense account
when purchased is an example of the application of
A) the materiality constraint. B) the full disclosure principle.
C) the matching principle. D) the historical cost principle.
Answer: A
7
39) Which of the following statements about materiality is not correct?
A) Materiality is a matter of both its nature and relative size.
B) An item is material if its inclusion or omission would influence or change the judgement of a
reasonable person.
C) The amount involved must make a difference or it should not be disclosed.
D) A traditional guideline for auditors is 5 to 10 percent of net earnings.
Answer: C
40) Which of the following statements is true about earnings per share?
A) It is the only ratio required to be disclosed on the statement of earnings.
B) It represents the profit available to the preferred shareholders.
C) It assesses the ability of the firm to pay their bills as they come due.
D) It evaluates the efficiency with which the company uses their assets to generate sales revenue.
Answer: A
Reference: 04-02
The bank statements of Waylon Taylor Textiles Ltd. for 20X7 included the following items:
Insurance premiums paid $12,400

Interest collected $25,900
Salaries paid $125,200
The following balances have been excerpted from the company's Statement of Financial Position:
December 31, 20X7 December 31, 20X6

Prepaid insurance $1,400 $1,700
Accrued interest receivable $3,700 $2,900
Accrued salaries payable $12,300 $10,600
41) How much insurance expense should WTT report on its 20X7 statement of earnings?
A) $15,100 B) $12,700 C) $9,600 D) $12,100
Answer: B
42) How much interest revenue should WTT report on its 20X7 statement of earnings?
A) $19,300 B) $25,100 C) $26,700 D) $32,500
Answer: C
43) How much salaries expense should WTT report on its 20X7 statement of earnings?
A) 102,300 B) $126,900 C) $148,100 D) $123,500
Answer: B
8
44) Before the closing entries were made at the end of 20X2, the following data were taken from the accounts of
Joe Corporation:

Retained earnings, beginning balance January 1, 20X2 100,000
Total revenue earned during 20X2 300,000
Total expenses incurred during 20X2 200,000
Total cash collected during 20X2 40,000
What is the amount of shareholders' equity that should appear on Joe Corporation's statement of
financial position dated December 31, 20X2?
A) $230,000. B) $270,000. C) $110,000. D) $300,000.
Answer: B
45) Because of its complexity and susceptibility to errors, which step in the process do independent
auditors examine most closely?
A) closing entries B) tax reports
C) financial statement preparation D) deferred and accrued adjustments
Answer: D
46) For the year 20X1, Tally Corporation reported $50,000 pre-tax profit (average annual income tax
rate of 40%). What was the after-tax profit?
A) $15,000. B) $20,000. C) $30,000. D) $10,000.
Answer: C
47) Time Corporation reported the following for 20X1:
Share Capital 5,000 shares outstanding

Revenues $100,000
Expenses $95,000
What was the amount of earnings per share?

A) $20.00. B) $1.00. C) $19.00. D) $2.00.
Answer: B
48) Atthe end of 20X3, Libby Company reported an ending balance for retained earnings of $50,000.
During 20X4, the company reported the following amounts: dividends declared and paid $30,000,
and profit $40,000. The 20X4 retained earnings account should report an ending balance of
A) $80,000. B) $60,000. C) $90,000. D) $100,000.
Answer: B
9
49) Which of the following statements best describes the relationship between profit for the period and
the ending balance in retained earnings?
A) Profit for the period has no effect on the ending balance of retained earnings.
B) Retained earnings at the end of the period increases the amount of profit.
C) Profit for the period reduces the ending balance of retained earnings.
D) Profit for the period increases the ending balance of retained earnings.
Answer: D
50) A Statement of Earnings reports which of the following?

A) revenues, expenses, assets, and liabilities during an accounting period.
B) resources, liabilities, and shareholders' equity of a business at a point in time.
C) profit of a business for a period of time.
D) profit of a business at a point in time.
Answer: C
51) Which of the following errors would most likely lead to an overstatement of income?
A) Recording revenue in the next period when the cash is collected although it is earned in the
current year.
B) Recording an expense incurred in this year when the cash is paid next year.
C) Failure to adjust prepaid expenses account for the portion of insurance expired this year.
D) Failure to adjust deferred rent revenue account for the portion of rent earned this year.
Answer: C
52) The statement of changes in shareholder's equity

A) is a required statement under IFRS
B) is not a required statement under either private entity GAAP or IFRS
C) is a required statement under private entity GAAP
D) is a required statement under both private entity GAAP and IFRS
Answer: A
53) Financial statements should be prepared

A) from an adjusted trial balance. B) from a post-closing trial balance.
C) using permanent accounts only. D) using the retained earnings account.
Answer: A
54) The basic financial statements prepared for external users do not include which of the following?
A) The revenue statement. B) The statement of financial position.
C) The statement of cash flows. D) The income statement.
Answer: A
10
55) The statement of changes in equity would not include which of the following?
A) Net sales.
B) Dividends declared.
C) The closing balance in the relevant accounts from the previous year.
D) Profit.
Answer: A
56) If a business declared and paid a $500 dividend, it would appear on which of the following?
A) Statement of changes in equity and the statement of cash flows.
B) Statement of financial position only.
C) Income statement only.
D) Statement of changes in equity only.
Answer: A
57) Profit would appear on which of the following?

A) Statement of financial position only.
B) Income statement only.
C) Income statement and statement of financial position.
D) Statement of changes in equity and income statement.
Answer: D
58) The statement of cash flows does which of the following?

A) Explains that the trial balance is in balance.
B) Explains all the sources and uses of cash during the accounting period.
C) Identifies all assets held at the end of the accounting period by type and amount.
D) Explains what caused profit during the accounting period.
Answer: B
59) In a classified statement of financial position which of the following is NOT true
A) Shareholders' equity is made up of retained earnings and share capital.
B) The asset and liability sections are divided into short-term and long-term sections.
C) The current assets are listed in order of liquidity.
D) The long-term assets and liabilities are presented before the short- term assets and liabilities.
Answer: D
60) On the cash flow statement, the changes in revenues and expenses caused by accruals and deferrals
are classified as which of the following?
A) investing activities B) financing activities
C) non-operating activities. D) operating activities
Answer: D
11
61) Manfred Mann Corporation's books revealed the following data for the current year:
Net earnings $50,000

Common shares January 1 25,000 shares
Common shares December 31 30,000 shares
The earnings per share is closest to:

A) $1.67 B) $2.00 C) $1.82 D) $30.50
Answer: C
62) Which of the following is one of the sections on the statement of cash flows?
A) Inventing activities. B) Cycling activities.
C) Operating activities. D) Borrowing activities.
Answer: C
63) Acalendar year reporting company preparing its annual financial statements should use the phrase
"At December 31, 20XX" in the heading of which of the following?
A) The Statement of Earnings and statement of financial position, but not the statement of cash
flows.
B) The Statement of earnings, but neither the statement of financial position nor the statement of
cash flows.
C) The statement of financial position only.
D) All the required financial statements it prepares.
Answer: C
64) The statement of earnings is prepared by using the revenue and expense account balances from the
A) ledgers. B) trial balance.
C) adjusted trial balance. D) journal.
Answer: C
65) The primary purpose of the statement of cash flows is to report which of the following?
A) liability changesmade by the financial department of the company during the period.
B) assets owned and claims against those assets at the end of the period.
C) profit earned and dividends paid during the period.
D) all inflows and outflows of cash during the period.
Answer: D
12
66) Which of the following statements about a high net profit margin is FALSE?
A) It may mean that you are capitalizing on some competitive advantage that can provide your
business with extra capacity and flexibility during the hard times.
B) It may mean that you are keeping your operating expenses under control to earn an acceptable
profit.
C) It may mean that your business might need to take on debt to pay its expenses.
D) It demonstrates how effective your business is at converting sales into profit.
Answer: C
67) Return on equity is a ratio that:

A) cannot be calculated if the company has preferred shares in addition to common shares.
B) shows the relationship between net earnings and average shareholders' equity.
C) shows the relationship between net earnings and retained earnings.
D) is calculated by dividing profit plus preferred dividends by average common shareholders'
equity.
Answer: B
68) At the end of 20X4, the following data were taken from the accounts of Timberline Company:

Retained earnings, beginning balance January 1, 20X4 100,000
Total revenue earned during 20X4 190,000
Total expenses incurred during 20X4 180,000
Total cash collected during 20X4 200,000
The 20X4 closing entries would include which of the following?

A) $10,000 net credit to retained earnings. B) $180,000 credit to retained earnings.
C) $190,000 debit to retained earnings. D) $10,000 net debit to retained earnings.
Answer: A
69) Thepurpose of the post-closing trial balance is to

A) prove the equality of the temporary account balances that are carried forward into the next
accounting period.
B) prove the equality of the permanent account balances that are carried forward into the next
accounting period.
C) prove that no mistakes were made.
D) list all the balance sheet accounts in alphabetical order for easy reference.
Answer: B
70) The final step in the accounting cycle is to prepare

A) adjusting entries. B) financial statements.
C) closing entries. D) a post-closing trial balance.
Answer: D
13
71) Which of the following applies to both the depreciation expense account and the accumulated
depreciation account at the end of the first year of operations?
A) They appear in a trial balance prepared prior to the adjusting and closing entries.
B) They are closed.
C) They are not closed at the end of the accounting period.
D) They appear in a trial balance prepared after the adjusting entries but before the closing entries.
Answer: D
72) A post-closing trial balance will show account balances for which of the following?
A) permanent and temporary accounts. B) income statement accounts only.
C) temporary accounts only. D) permanent accounts only.
Answer: D
73) Which one of the following accounts would not be closed at the end of the accounting year?
A) Rent expense. B) Sales revenue.
C) Dividends payable. D) Salaries expense.
Answer: C
74) A trial balance prepared after the closing entries have been posted would exclude which one of the
following accounts?
A) Accumulated depreciation. B) Service revenue.
C) Trade receivables. D) Inventory.
Answer: B
75) Closing entries

A) summarize the activity in every account.
B) reduce the number of permanent accounts.
C) are prepared before the financial statements.
D) cause the revenue and expense accounts to have zero balances.
Answer: D
76) Select the statement that best describes the primary purpose of preparing closing entries.
A) To complete the recording of various transactions which are begun in one period and
concluded in a later period.
B) To facilitate adjusting entries.
C) To reduce the balances in the temporary accounts to zero in order to accumulate the revenues
and expenses of the next period.
D) To determine the amount of profit or loss for the period.
Answer: C
14
77) The purpose of preparing the post-closing trial balance is to
A) prove that no mistakes were made.
B) prove the equality of the permanent account balances that are carried forward into the next
accounting period.
C) prove the equality of the temporary account balances that are carried forward into the next
accounting period.
D) list all the statement of financial position accounts in alphabetical order for easy reference.
Answer: B
78) Which of the following is true about closing the books of a corporation?
A) Revenues, expenses, and the Dividends account are closed to the Income Summary account.
B) Expenses are closed to the Expense Summary account.
C) Revenues and expenses are closed to the Income Summary account.
D) Only revenues are closed to the Income Summary account.
Answer: C
79) A post-closing trial balance will show

A) only income statement accounts.
B) zero balances for all accounts.
C) zero balances for statement of financial position accounts.
D) only statement of financial position accounts.
Answer: D
80) Expenses paid before being used or consumed are initially recorded as liabilities.
Answer: True False
81) Accrued revenues represent money received from customers for work to be done later.
Answer: True False
82) Prepaid expenses are costs that are paid for before they are used.
Answer: True False
83) An adjusting entry to a prepaid expense is required to recognize costs that expire with time.
Answer: True False
84) The accounting cycle begins with the journalizing of the transactions.
Answer: True False
85) At the end of the accounting period, wages earned by employees but not yet recorded nor paid
amounted to $400; therefore, the adjusting entry should be: Debit--Wages payable; Credit - Wages
expense.
Answer: True False
15
86) Atrial balance is a list of all accounts with their debit or credit balances indicated in the appropriate
column to provide a check on the equality of the debits and credits.
Answer: True False
87) To compute depreciation expense using the straight-line formula, the cost of a depreciable asset
(i.e., equipment) must be reduced by any estimated residual or salvage value.
Answer: True False
88) The unadjusted trial balance does not reflect adjusting entries.
Answer: True False
89) Expenses paid in advance of the use of services or goods give rise to an asset until the goods and
services are used, consumed, or expired.
Answer: True False
90) Each adjusting entry affects at least one income statement account and at least one statement of
financial position account.
Answer: True False
91) An expense incurred, but not yet recorded nor paid, creates a liability until the payment is made.
Answer: True False
92) Usually, adjusting entries are entered in the accounts at the end of the accounting period.
Answer: True False
93) Adjusting entries are used to update income statement accounts and statement of financial position
accounts.
Answer: True False
94) Rentof $150 collected in advance was credited to rent revenue. At the end of the accounting period,
it was still unearned. The related adjusting entry should be: Debit-- Rent revenue, $150;
Credit--Unearned rent revenue, $150.
Answer: True False
95) Service revenue earned but not yet collected by the end of the period was $200; therefore, the
adjusting entry should be: Debit--Service revenue receivable, $200; Credit--Unearned service
revenue, $200.
Answer: True False
96) During the accounting period, an expense paid in advance and debited to prepaid expense was $180;
therefore, the adjusting entry for the expiration of this item should be to debit an expense account
for $180 and credit a prepaid expense account for $180.
Answer: True False
16
97) On July 1, 20X1, Liz Company borrowed $5,000 cash and signed a one year note payable, interest
10 percent, payable on the maturity date, June 30, 20X2. The accounting period ends on December
31; therefore, the required adjusting entry on December 31, 20X1 would be: Debit--Interest payable,
$250; Credit--Interest expense, $250.
Answer: True False
98) Adjusting entries are recorded in the journal (i.e., journalized) but they are not posted to the ledger.
Answer: True False
99) Both the adjusting entries and the closing entries usually are dated as of the last day of the
accounting period.
Answer: True False
100) An adjusted trial balance is usually developed to show the balances in all the accounts after the
effects of the adjusting and closing entries.
Answer: True False
101) Amortization expense is an example of the need for accountants to make estimates in order to
record adjustments.
Answer: True False
102) Those firms that make relatively conservative estimates for their accrued and deferred adjustments
are said to have financial reports disclosing a higher quality of earnings.
Answer: True False
103) Amortization attempts to adjust the value of the assets to reflect the market value of those assets on
the statement of financial position.
Answer: True False
104) External auditors closely examine the adjustment process of a company because adjustments are the
most complex part of the accounting process and therefore the most error prone.
Answer: True False
105) The statement of cash flows is designed to explain the causes of changes in the cash account during
the period that resulted from the inflows and outflows of cash.
Answer: True False
106) When preparing the statement of financial position, the balance of Retained Earnings is taken from
the Adjusted Trial Balance.
Answer: True False
107) Earnings per share (EPS) amounts must be reported on the statement of financial position of
corporations.
Answer: True False
17
108) Analysts, investors, and creditors use these same statements to evaluate performance as part of their
share valuation and credit evaluation judgments.
Answer: True False
109) The three sections of the statement of cash flows are operating, investing, and financing activities.
Answer: True False
110) The statement of cash flows shows the cash inflows, cash outflows, and change in cash for a period.
Answer: True False
111) Earnings per share is widely used in evaluating the operating performance and profitability of a
company and is the only ratio required to be disclosed on the statement of earnings or in the notes to
Answer: True False
112) Profit under accrual timing is subject to more distortion than cash flow from operations because of
large accruals and deferrals that can impact reported profit.
Answer: True False
113) The net profit margin ratio (Profit ÷ Net Sales) measures how much profit is earned as a percentage
of revenues generated during the period.
Answer: True False
114) The return on equity measures how effectively management used shareholders' investment to
generate revenue during the period.
Answer: True False
115) Temporary accounts are closed to a zero balance at the end of the accounting period to allow for the
accumulation of profit items in the following period.
Answer: True False
116) The dividends declared account should be closed to retained earnings at year-end.
Answer: True False
117) Revenue and expense accounts often are called temporary (nominal) accounts because their balances
are closed out at the end of the accounting year.
Answer: True False
118) The Income Summary account is a permanent account.

Answer: True False
119) Closing entries are prepared before adjusting entries.

Answer: True False
120) Financial statements are generally prepared before the closing entries are posted.
Answer: True False
18
121) Closing entries result in the transfer of net profit or loss into the Retained Earnings account.
Answer: True False
122) The post-closing trial balance will have fewer accounts than the adjusted trial balance.
Answer: True False
123) Match the following entry descriptions with the accounting entries to which they relate by placing the
appropriate letter to the left. A letter may be used more than once.
A. Adjusting entries.
B. Closing entries.
C. All the entries listed above.
D. None of the entries listed above.
________ 1. May be initially recorded in the general ledger.

________ 2. They must be determined before the financial statements for the period are prepared.
________ 3. Clears the temporary account balances at the end of the period.
________ 4. Clears the permanent account balances at the end of the period.
________ 5. They affect both temporary and nominal accounts.
Answer: 1. D; 2. A; 3. B; 4. D; 5. C
19
124) On September 1, 20X1, RF Corporation collected rent of $2,400 for one year in advance. The three
possible ways in which RF Corporation could have recorded the transaction on September 1, 20X1,
(i.e., the original journal entry) are listed below. Also listed are three different adjusting entries that
could be made on December 31, 20X1 (the end of the accounting year). Match each journal entry with
the appropriate adjusting entry.
Journal Entry, Sept. 1, 20X1.
A.
Cash 2,400
Rent revenue 2,400
B.
Cash 2,400
Unearned rent revenue 2,400
C.
Cash 2,400
Rent revenue 800
Adjusting Entry, Dec 31, 20X1

1.
Unearned rent revenue 800
Rent revenue 800
2.
Rent revenue 1,600
3. No adjusting entry needed

Answer: 1. B; 2. A; 3. C
20
125) All the accounts in an accounting system can be classified broadly as either:
A. Income statement accounts.

B. Statement of financial position accounts.
Below are listed some other classifications of accounts. You are to identify them with the above
classifications by entering either A or B to the left of each.
________ 1. Temporary accounts.

________ 2. Not closed at the end of the accounting period.
________ 3. Permanent accounts.
________ 4. Closed at the end of the accounting period.
Answer: 1. A; 2. B; 3. B; 4. A.
126) This question focuses on the accounting cycle and the accounting model. For each item listed, indicate the best
description by entering a capital letter in the space provided.
Description
A. End-of-period entries to transfer balances of temporary accounts to another account.

B. Income statement accounts.
C. Revenues collected but not earned.
D. Revenues minus expenses.
E. An expense incurred but not recorded nor paid.
F. Ending retained earnings.
G. Statement of financial position accounts.
H. Entries at the end of the period necessary to measure income.
Item
________ 1. Accrued expense
________ 2. Temporary accounts
________ 3. Closing entries
________ 4. Permanent accounts
________ 5. Adjusting entries
________ 6. Deferred revenues
Answer: 1. E; 2. B; 3. A; 4. G; 5. H; 6. C
127) The following trial balance of Lazy Corporation dated December 31, 20X1, developed by a clerk, contains
errors.
Trial Balance
Accounts Debits Credits
Cash $4,700
Trade receivables $3,500
Machine 8,300
21
Accumulated depreciation, machine 500
Totals $16,500 $16,500
Prepare a corrected Trial Balance.
Trial Balance
Cash $ $
Trade receivables
Machine
Accumulated depreciation, machine
Trade payables
Share capital
Retained earnings
Totals $ $ ________
Trial Balance
Cash $4,700
Machine 8,300
Accumulated depreciation, machine $500
Totals $16,500 $16,500
128) Is the adjusted trial balance a financial statement? Explain why or why not.
Answer: No, the adjusted trial balance is not a financial statement. It is an internal working paper that
lists all accounts with their balances to provide a check on the equality of debits and credits. It
is an aid in the preparation of financial statements (income statement, statement of changes in
equity, and statement of financial position).
129) Ten independent transactions for Scooter Corporation are listed below. A list of accounts used to record the
economic effects of transactions in terms of the fundamental accounting model is given below. You are to
indicate the accounts to be debited and credited for each transaction by entering the appropriate letter in each
blank.
22
ACCOUNTS
A. Cash G. Dividends Declared
B. Trade Receivables H. Share Capital
C. Office Equipment I. Services Revenue
D. Accumulated Depreciation J. Operating Expenses
E. Trade Payables K. Interest Expense
F. Notes Payable L. Retained Earnings

1. Purchased office equipment for cash
2. Issued shares for cash
3. Recorded depreciation expense on the office equipment
4. Borrowed cash from the bank on a note payable
5. Provided services on credit
6. Paid operating expenses with cash
7. Provided services for cash
8. Paid interest on notes payable
9. Incurred operating expenses, but cash has not been paid
10. Declared and paid cash dividends to shareholders

1. C A
2. A H
3. J D
4. A F
5. B I
6. J A
7. A I
8. K A
9. J E
10. G or L A
130) On December 1, 20X1, Pest Company collected $1,200 in advance for three months of rent on some
office space. It was credited in full to unearned rent revenue. Assuming the accounting year ends
December 31, give the adjusting entry required on December 31, 20X1.
Dr Unearned rent revenue ($1,200 × 1/3) 400

Cr Rent revenue 400
23
131) Below are two related transactions for Tweet Corporation. The annual accounting period ends December 31.
For each date listed, give the required entry in journal format.
a. October 1, 20X1-- Tweet Corporation Borrowed $15,000 and signed a note providing for 10% interest. The
principal and interest are due in one year (on September 30, 20X2).
b. December 31, 20X1--end of the annual accounting period. (If no entry is required, explain why).
Answer: a.
Cash 15,000
Note payable 15,000
b.
Interest Expense 375
Interest payable 375
132) Model Company keeps a small inventory of supplies used for cleaning and maintenance purposes.
On January 1, 20X1, the inventory of supplies on hand was $400. During the year, supplies
purchased were debited to the supplies inventory account in the amount of $800. On December 31,
20X1, the inventory count of supplies in the storeroom was $100. Give the adjusting entry required
at December 31, 20X1.
Dr Supplies expense 1,100

Cr Supplies inventory 1,100
Feedback: $400 + 800 - 100 = $1,100
133) On November 1, 20X1, Zany Company leased some of its office space to Fox Company and
immediately collected twelve months rent in advance of $24,000. Zany debited cash and credited
unearned rent revenue for $24,000. At the end of 20X1 (the end of the accounting period), give the
adjusting entry Zany should make in respect to the rent.
Dr Unearned rent revenue ($1,200 × 1/3) 4,000

Cr Rent revenue 4,000
Feedback: $24,000 × 2/12 = $4,000
24
134) On December 1, 20X1, Widow Company paid $1,500 rent for some office space which was debited
in full to the prepaid rent account. The rent was for three months. Assuming Widow's accounting
year ends December 31, give the adjusting entry required on December 31, 20X1.
Dr Rent expense ($1,500 × 1/3) 500

Cr Prepaid rent 500
135) Atlantic Company is completing the information processing cycle at the end of the annual
accounting period, December 31, 20X1. Four adjusting entries must be made at this date to update
the accounts. The following accounts, selected from Atlantic's chart of accounts, are to be used for
this purpose. They are coded to the left for easy reference.
A. Office Supplies J. Office Supplies Expense

B. Trade Receivables K. Rent Expense
C. Accumulated Depreciation L. Bad Debt Expense
D. Interest Receivable M. Depreciation Expense
E. Notes Payable N. Interest Expense
F. Interest Payable O. Sales Revenue
G. Property Tax Payable P. Rent Revenue
H. Unearned Rent Q. Interest Revenue
I. Rent Payable R. Equipment
You are to indicate the appropriate account code and amount for each required adjusting entry at December
31, 20X1
Transaction Debits Credits

Code Amount Code Amount
A. On January 1, 20X1, equipment was
purchased for $6,000. The equipment had
an estimated useful life of five years with
no residual value. It is depreciated using
the straight-line method. Record
depreciation.
B. On November 1, 20X1, collected
$1,800 rent revenue in advance for some
warehouse space temporarily rented to a
customer (credited in full to Unearned
Rent). The rent was collected for
November, December, and January.
C. Office supplies purchased during
20X1 amounted to $400 which was
debited in full to office supplies during the
25
year. The year-end inventory count of
office supplies showed $100 of supplies
on hand. The beginning inventory of
office supplies was $150.
D. On November 1, 20X1, the company
signed a $6,000 interest bearing note
payable. It was for one year and specified
12 percent annual interest payable at the
maturity date of the note.

A M $1,200 C $1,200
B H $1,200 P $1,200
C J $450 A $450
D N $120 F $120
A. [($6,000 - 0) ÷ 5] = $1,200.
B. ($1,800 × 2/3) = $1,200.
C. ($150 + $400 - $100) = $450.
D. ($6,000 × 12% × 2/12) = $120.
136) Settler Service is completing the information processing cycle at the end of its annual accounting period,
December 31, 20X1. Four adjusting entries must be made to update the accounts. The following accounts,
selected from the company's chart of accounts, are to be used for this purpose. They are coded to the left for
easy reference.
A. Cash I. Unearned Rent

B. Notes Payable J. Rent Expense
C. Interest Receivable K. Wage Expense
D. Operational Assets L. Depreciation Expense
E. Accumulated Depreciation M. Interest Expense
F. Notes Payable N. Interest Revenue
G. Interest Payable O. Rent Revenue
H. Wages Payable P. Some other account, not listed
You are to indicate the appropriate account code and amount for each required adjusting entry at December
31, 20X1.

A. Unpaid wages at December 31, 20X1, of
26
$2,400 have not been recorded.
B. On October 1, 20X1, a note receivable was
received from a customer. The note was for
$5,000, one year, and was interest bearing at
14%. The interest is to be received at the
maturity date of the note.
C. Record depreciation of machinery. Cost of
$91,000, residual value $3,000, ten-year life,
straight-line method
D. On December 1, 20X1, collected rent
revenue in advance of $1,800. This rent was for
six months on some office space that
temporarily rented to Sam White. The $1,800
was credited in full to unearned rent

A K $2,400 H $2,400
B C $175 N $175
C L $8,800 E $8,800
D I $300 O $300
A. All $2,400
B. ($5,000 × 14% × 31/2) = $175
C. [($91,000 - $3,000)/10] = $8,800
D. ($1,800 × 1/6) = $300
137) Below are four transactions that were completed during 20X1 by Doby Company. The annual accounting
period ends on December 31. Each transaction will require an adjusting entry at December 31, 20X1. You are
to provide the 20X1 adjusting entries required for Doby Company.
A. On July 1, 20X1, Doby Company paid a two-year insurance premium for a policy on its equipment. This
transaction was recorded as follows:
July 1, 20X1:
Prepaid insurance $1,000
Cash $1,000
December 31, 20X1--Adjusting entry:
B. On December 31, 20X1 a tenant renting some office space from Doby Company had not paid the rent of
$500 for December.
27
C. On September 1, 20X1, Doby Company borrowed $3,000 cash and gave a one-year, 10 percent, note
payable. The total interest of $300 is payable on the due date, August 31, 20X2. The note was recorded as
follows:
September 1, 20X1:
Cash $3,000
Note payable $3,000
D. Assume Doby Company publishes a magazine. On October 1, 20X1, the company collected $440 for
subscriptions two years in advance. The $440 collection was recorded as follows:
October 1, 20X1:
Cash $440
Unearned subscription revenues 440

Answer: December 31, 20X1--Adjusting entry:
A. Insurance expense 250

Prepaid insurance 250
$1,000 × 6/24 = $250
B. Rent revenue receivable 500
Rent revenue 500
C. Interest expense 100
$3,000 × 10% × 4/12 = $100
D. Unearned subscription revenues 55
Subscription revenues 55
$440 × 3/24 = $55
138) Four transactions are given below that were completed during 20X1 by Wren Company. The annual
accounting period ends December 31. Each transaction requires an adjusting entry at December 31, 20X1.
You are to provide the adjusting entries required for Wren Company.
A. On December 31, 20X1, Wren Company owed employees $1,750 for wages that were earned by them
during December and were not recorded.
B. During 20X1, Wren Company purchased office supplies that cost $500 which were placed in the supplies
28
room for use as needed. The purchase was recorded as follows:
20X1:
Office supplies inventory $500
Cash 500
At the beginning of 20X1, the inventory of unused office supplies was $75. At the end of 20X1, a count showed
unused office supplies in the supply room amounting to $100.
C. On December 1, 20X1, Wren Company rented some office space to another party. Wren collected $900
rent for the period December 1, 20X1, to March 1, 20X2. The rent collected was recorded as follows:
December 1, 20X1:
Cash $900
Unearned rent 900
D. On June 1, 20X1, Wren Company borrowed $2,000 cash on a one-year, 10% interest-bearing, note payable.
The interest is payable on the due date, May 31, 20X2. The note was recorded as follows:
June 1, 20X1:
Cash $2,000
Notes payable 2,000
Answer: December 31, 20X1--Adjusting entry:
A. Wages expense 1,750

Wages payable 1,750
B. Office supplies expense 475
Office supplies 475
$75 + $500 - $100 = $475
C. Unearned rent 300
Rent revenue 300
$900 × 1/3 = $300
D. Interest expense 117
$2,000 × 10% × 7/12 = $117
29
139) Four transactions are given below that were completed during 20X1 by Lucky Company. The annual
accounting period ends December 31. Each transaction will require an adjusting entry at December 31, 20X1.
Provide the adjusting entry required.
A. On January 1, 20X1, Lucky Company purchased office equipment that cost $8,000. The estimated life of
the office equipment was five years ($500 residual value).
B. On June 1, 20X1, Lucky Company paid $12,600 for one year's rent beginning on that date. The rent payment
was recorded as follows:
June 1, 20X1:
Prepaid rent $12,600
Cash $12,600
C. Lucky Company purchased office supplies during the year that cost $700 and placed the supplies in a
storeroom for use as needed. The purchase was recorded as follows:
February 1, 20X1:
Office supplies inventory $700
Cash 700
At the end of 20X1, a count showed unused office supplies of $200 in the storeroom. There was no beginning
inventory of supplies on hand.
D. On December 31, 20X1, Lucky Company owed employees $3,000 for wages earned during December.
These wages had not been paid nor recorded.

A. Depreciation Expense $1,500

Accumulated depreciation $1,500
[($8,000 - $500) / 5 years] = $1,500
B. Rent Expense $7,350
Prepaid Rent $7,350
($12,600 × 7/12) = $7,350
C. Office Supplies Expense $500
Office Supplies $500
D. Wage Expense $3,000
30
Wages payable $3,000
140) Below, to the left, are listed several different account titles that you have studied. Under each column for each
cell you are to enter one capital letter which indicates for each account its normal characteristics.
Use the letter code given
Type of Account Closing Status Normal Balance Financial Statement

A = Assets L = Liabilities C = Closed D = Debit B = Balance Sheet
R = Revenue E = Expenses N = Not Closed C = Credit I = Income Statement
C = Contra SE = SE = Statement of
N = Not ApplicableShareholders' Earnings
Equity N = None of the
above
Account Titles Type of Account Closing Status Typical Balance Financial

(before Closing) Statement(s) (on
which reported)
Ex. Cash A N D B
1. Dividends
declared
2. Wages payable
3. Share capital
4. Rent expense
5. Retained earnings
6. Notes payable
7. Unearned
revenue
8. Dividends
payable
9. Building
10. Accumulated
depreciation
11. Trade receivable
12. Supplies
inventory
13. Interest revenue
14. Interest expense
15. Service revenue
16. Depreciation
expense
31
Account Titles Type of Closing Status Typical Financial

Account Balance Statement(s) (on
(before which reported)
Closing)
1. Dividends declaredSE C D SE
2. Wages payable L N C SFP
3. Share capital SE N C SFP, SE
4. Rent expense E C D I
5. Retained earnings SE N C SFP, SE
6. Notes payable L N C SFP
7. Unearned revenue L N C SFP
8. Dividends payableL N C SFP
9. Building A N D SFP
10. Accumulated C N C SFP
depreciation
11. Trade receivable A N D SFP
12. Supplies inventory
A N D SFP
13. Interest revenue R C C I
14. Interest expense E C D I
15. Service revenue R C C I
16. Depreciation E C D I
expense
141) A list of the accounts of TIP Corporation is given below, followed by some selected transactions. Indicate the
accounts that should be debited and credited for each transaction entry, adjusting entry, and closing entry by
placing the appropriate account codes in the debit and credit columns provided.
Code Account Code Account

A Cash I Share Capital
B Prepaid Insurance J Retained Earnings
C Trade Receivables K Dividends Declared
D Service Trucks L Service Revenues
E Accumulated Depreciation M Expenses
F Trade Payables N Income Tax Payable
G Notes Payable O Income Summary
H Unearned Service Revenue P Rent Payable
Transactions Accounts
Debit Credit
32
Ex. Purchased a service truck, paid 1/2 cash and
D A, G
gave a 90-day interest-bearing note for the
balance
1. An investor contributed $55,000 cash to the
business and received 5,000 shares
2. Paid $600 for a two-year premium on the
insurance policy covering the trucks
3. Borrowed $10,000 from a local bank by
signing a one-year, interest-bearing note
4. Service revenues earned; Cash collected
$40,000; on credit: $12,000
5. One month’s rent on the building was paid at
year end
6. Collected $1,000 in advance for a service to
be provided next year
7. Expenses incurred: paid cash $28,000; On
credit: $7,000
8. Declared and paid a cash dividend of $2,000
9. Depreciation of $1,500 on the truck must be
recorded
10. Expired insurance for one full year must be
recorded (see above)
11. Revenue accounts must be closed at the end
of the period
12. Expense accounts must be closed at the end
of the period
2. Paid $600 for a two-year premium on

the insurance policy covering the trucks
3. Borrowed $10,000 from a local bank by
4. Service revenues earned; Cash
collected $40,000; on credit: $12,000
5. One month's rent on the building was
paid at year end
6. Collected $1,000 in advance for a
service to be provided next year
7. Expenses incurred: paid cash $28,000;
On credit: $7,000
8. Declared and paid a cash dividend of
$2,000
33
9. Depreciation of $1,500 on the truck
must be recorded
10. Expired insurance for one full year
must be recorded (see above)
11. Revenue accounts must be closed at the
end of the period
12. Expense accounts must be closed at the
end of the period
Debit Credit
Ex. Purchased a service truck, paid 1/2 cash
D A, G
and gave a 90-day interest-bearing note
for the balance
1. An investor contributed $55,000 cashAto I
the business and received 5,000 shares
2. Paid $600 for a two-year premium onB A
3. Borrowed $10,000 from a local bank A by G
4. Service revenues earned; Cash A, C L
5. One month's rent on the building was M A
paid at year end
6. Collected $1,000 in advance for a A H
7. Expenses incurred: paid cash $28,000;M A, F
On credit: $7,000
8. Declared and paid a cash dividend of J or K A
$2,000
9. Depreciation of $1,500 on the truck M E
must be recorded
10. Expired insurance for one full year M B
11. Revenue accounts must be closed at theL J
end of the period
12. Expense accounts must be closed at theJ M
end of the period
34
142) On December 31, 20X, Martin Company prepared an income statement and a statement of financial
position. In making the adjusting entries at year-end, Martin failed to record the adjusting entry for
wages earned by employees, but not yet paid, amounting to $3,000 for the last four days of the year.
The income statement reported profit of $21,000. The statement of financial position reported total
assets, $82,000; total liabilities, $30,000; and shareholders' equity, $52,000.
Complete the following tabulation to show the correct amounts for the financial statements.
Item Net Income Assets Liabilities Shareholders'

Equity
Balances Reported $21,000 $82,000 $30,000 $52,000
Correction for Wages
Corrected Balances
Item Net Income Assets Liabilities Shareholders' Equity

Balances $21,000 $82,000 $30,000 $52,000
Reported
Correction for ($3,000) -0- $3,000 ($3,000)
Wages
Corrected $18,000 $82,000 $33,000 $49,000
Balances
143) Allen Corporation is completing the accounting information processing cycle at the end of the fiscal year, June
30, 20X2. The following trial balances are on Allen's worksheet at June 30, 20X2.
June 30, 20X2

Account Titles Unadjusted Trial Balance Adjusted Trial Balance
Debit Credit Debit Credit
Cash $13,000 $13,000
Trade Receivables 1,500 1,800
Prepaid Insurance 600 200
Equipment 60,000 60,000
Accumulated $16,500 $22,000
Depreciation
Wages Payable 100
Share Capital 25,000 25,000
Retained Earnings 11,600 11,600
Service Revenues 38,000 38,300
Wage Expense 16,000 16,100
Depreciation Expense 5,500
Insurance Expense 400
35
Totals 91,100 91,100 97,000 97,000
Reconstruct the adjusting entries and give a brief explanation of each.

Debit Credit
a. Trade receivables 300
Services Revenues 300
(Services were provided to customers
during the year which has not been
collected or recorded)
b. Insurance Expense 400
Prepaid Insurance 400
(Insurance expired during the year)
c. Depreciation Expense 5,500
Accumulated depreciation 5,500
(Depreciation on equipment during
20X2)
d. Wages 300
Wages Payable 300
(Wages earned during 20X2 but not yet
recorded paid)
36
144) The comparative statements of financial positions of Savoy Company for December 31, 20X1 and 20X2,
reported the following selected amounts:
20X1 20X2
Assets: Office supplies inventory $2,000 $800
Liabilities: Unearned rent revenue11,000 10,500
The 20X2 income statement reported the following:
Revenues: Rent revenue $12,000

Expenses: Office supplies expense 15,000
A. The total amount of office supplies purchased during 20X2 was $________.
B. The total amount of rent collected during 20X2 was $________.
C. In what section of the statement of cash flows would the payments for office supplies appear?
D. In what section of the statement of cash flows would the collection for rents appear?
Answer: A. $800 - $2,000 + $15,000 = $13,800
B. $10,500 - $11,000 + $12,000 = $11,500
C. Operating activities
D. Operating activities
37
145) Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $1,050.

2. Interest incurred and owed on a loan but not paid or recorded is $275.
3. There was a beginning balance of supplies of $120 and the company purchased $400 of office supplies
during the period. At the end of the year $70 of supplies were on hand.
4. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 had expired.
5. Accrued salaries at year end were $1,100.
Answer: 1.
Accumulated Depreciation — Equipment 1,050
2.
Interest Payable 275
3.
Supplies ($120 + $400 — 70) 450
4.
Rent Expense 400
Prepaid Rent 400
5.
Salaries Expense 1,100
Salaries Payable 1,100
38
146) Prepare adjusting entries for the following transactions.
1. Interest accrued on notes receivable is $270.

2. Property taxes owing but not paid or recorded amount to $700.
3. Legal service revenues of $3,000 were collected in advance. By year end, $600 was earned.
4. Prepaid insurance had a $400 debit balance prior to adjustment. By year end, 40% was still unexpired.
5. Salaries owing at year end but not yet paid or recorded amounted to $950.
Answer: 1.
Interest Receivable 270
Interest Revenue 270
2.
Property Taxes Expense 700
Property Taxes Payable 700
3.
Unearned Legal Service Revenues 600
Legal Service Revenues 600
4.
5.
Salaries Expense 950
Salaries Payable 950
147) Prepare adjusting entries for the following transactions.
1. Accrued interest on notes receivable is $95.

2. Unearned revenues earned totals $2,000.
3. Four years rent, totaling $60,000, was paid in advance at the beginning of the year.
4. Services totaling $2,100 had been performed but not yet billed at the end of the year.
5. Equipment purchased two years ago for $18,000 had an estimated useful life of 4 years.
6. The balance in the Supplies account was $690. By year end, only $100 in supplies remained.
7. Salaries owed to employees at the end of the year total $1,000.
Answer: 1.
Interest Revenue 95
2.
Unearned Revenues 2,000
Revenues 2,000
39
3.
Rent Expense (60,000 / 4) 15,000
Prepaid Rent 15,000
4.
Services Revenue 2,100
5.
Depreciation Expense — 4,500
Equipment (18,000 / 4)
Accumulated Depreciation — 4,500
Equipment
6.
Supplies 590
7.
148) One part of an adjusting entry is given below. Indicate the account title for the other part of the entry.
1. Unearned Service Revenue is debited.

2. Prepaid Rent is credited.
3. Accounts Receivable is debited.
4. Depreciation Expense is debited.
5. Utilities Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts).
8. Interest Receivable is debited.
1. Service Revenue 5. Utilities Payable

2. Rent Expense 6. Interest Expense
3. Service Revenue 7. Accounts Receivable or Unearned
Service Revenue
4. Accumulated Depreciation 8. Interest Revenue
40
149) On June 1, 20X1, Global Services, Inc., was started with $50,000 invested by the owners as share capital. On
June 30, the accounting records contained the following amounts:
Trade Payables $100 Office Supplies $500

Trade Receivables 3,900 Rent Expense 1,300
Cash 25,100 Salary Expense 1,000
Share Capital 50,000 Supplies Expense 100
Consulting Fees Earned 8,400 Telephone Expense 500
Dividends Declared 2,100 Office Equipment 24,000
Prepare a statement of changes in equity for June, the first month of operation. Ignore income taxes.
Answer: Global Services Inc.
Statement of Shareholders' Equity
Share Capital Retained Earnings Total Equity

Beginning Balance, 6/1 -0- -0- -0-
Shares issued 50,000 50,000
Profit 5,500 5,500
Dividends Declared (2,100) (2,100)
Ending Balance, 6/30 $50,000 $3,400 $53,400
150) A. Explain how the income statement relates to the statement of changes in equity
B. Explain how the statement of changes in equity relates to the statement of financial position.
C. Explain how the statement of cash flows relates to the statement of financial position.
Answer: A. Profit from the income statement appears in the statement of changes in equity as an increase to
retained earnings.
B. The ending balance for share capital and retained earnings appear on the statement of financial
position in the shareholders' equity section.
C. The bottom line for the ending cash balance on the statement of cash flows is the same as the cash
account balance on the statement of financial position.
151) Modern Woman magazine has received cash subscriptions on April 1, 20X1, in the amount of $3,600,000 for
the next three years. Their year end is December 31, 20X1. Magazine delivery occurs monthly and started on
April 1, 20X1. These were the only subscription sales for the year. Answer the following questions:
a. What amount of cash should be reported for the year on the statement of cash flows?
b. What amount of subscriptions revenue should be reported on the statement of earnings?
c. What amount would be reported as unearned subscriptions revenue on the statement of financial position as
of December 31, 20X1?
Answer: (a) $3,600,000 (b) $900,000 (c) $2,700,000
41
152) The following statement of financial position was prepared by Bob, the recently hired and inexperienced
bookkeeper for Beaumont Developments Inc.
Beaumont Developments Inc

as of December 31, 20X7
Cash 1 $40,000 Accounts payable7 $15,000
Accounts receivable2 52,200 Long-term liabilities8 170,000
Inventories3 57,000 9
Shareholders' equity 208,500
Investments4 76,300
Property, plant & equipment
(net) 5 136,000
Patents6 32,000
$393,500 $393,500
The following additional information is provided:

1. Cash includes the cash value of a life insurance policy $9,400, and Bob found a utilities bill for $1,500 in his
in-box, so he deducted the amount from cash.
2. The accounts receivable balance includes an amount of $2,300 owing from a customer who has since gone
out of business. The company does not expect to receive any further payments on this debt. The company
writes off bad debts as they occur. Bob also included the account prepaid expenses with accounts receivable
on the statement, as explained in point 6 below.
3. Inventories do not include goods costing $5,000 held on consignment at Hardy Home Emporium.
Receivables and sales of $5,000 were recorded for these goods.
4. Investments include investments in trading shares $4,000 and long-term bonds $43,300, a patent $32,000 and
franchises $9,000. The company accounts for unrealized gains and losses on investments in other
comprehensive income. The patent is for a manufacturing process that is now obsolete and is no longer used.
5. Property plant and equipment (PPE) has a remaining useful life of eight years, and includes a new machine
purchased during the year for $26,000, which has a useful life of 10 years. Bob does not know what "net"
means, but he used the same accounts and followed the same format as last year to prepare the statement.
Accumulated depreciation has the same balance as last year, $68,000. The company uses the straight-line
method of depreciation. Also, included in PPE are a patent with an original cost of $32,000, which was
obtained twelve years ago and is now obsolete, and franchises in the amount of $9,000.
6. Insurance premiums of $18,000 were paid during the year. The insurance policy runs from April 1 to
March 31 of the following year. Last year the premium paid was $14,880. The previous bookkeeper
had debited the account called prepaid insurance in the amount of $3,720. Bob was not confident
this was correct, so he charged this year's premium as insurance expense and he included the prepaid
expense amount of $3,720 in accounts receivable.
7. Accounts payable includes the account wages payable for $2,300. The amount has not changed since last
year. The last pay in the current year was on December 28 for hours worked up to that date. The company
incurs wage expenses of $500 per day.
8. Long-term liabilities include a bank loan of $60,000 and a mortgage payable of $110,000.
9. Shareholder's equity consists of the following items:
Common shares outstanding (20,000 shares) $40,000
42
Accumulated other comprehensive income $11,600
Required:
After making all necessary adjustments, prepare a classified Statement of Financial Position in good form.
What is the effect of your adjustments on earnings per share?
Answer: Beaumont Developments Inc.
As at December 31 20X7
Current assets Current liabilities

Trading securities 4,000 Salaries payable7 1,500
Accounts receivable2 41,180 Total current liabilities 15,700
Inventories3 59,280
Prepaid insurance4 4,720 Long-term liabilities
Total current assets 141,280 Bank loan 60,000
Shareholder loan 110,000
Investments 170,000
Long-term securities 43,300
Cash value — life insurance9,400 Shareholder’s equity
52,700 Common shares 4,000
Accumulated other
Property, plant, and comprehensive income 11,600
equipment
Equipment5 163,000 Retained earnings 76,955
Less accumulated 87,725 92,555
depreciation
75,275
Intangible assets Total liabilities & $278,255
shareholder’s equity
Franchises 9,000
($40,000 — $9,400 + $1,500) = $32,100

($52,200 — $2,300 — $5,000 - $3,720) = $41,180
($54,280 + $5,000) = $59,280
($14,880/12 x 3 months) + ($18,000/12 x 9 months) = $4,720
PPE ($136,000 + $68,000 - $9,000 - $32,000) = $163,000
Accumulated depreciation ($163,000 - $26,000)/8 years + $26,000/10 years = $19,725 + beg balance
$68,000 = $87,725
($15,000 - $2,300 + $1,500) = $14,200
$500 x 3 days = $1,500
43
b.
Effect of adjustments on EPS:
Retained earnings before adjustments 156,900
Retained earnings after adjustments 76,955
Total impact of adjustments 79,945
Impact per share (20,000 shares) (4.00)
153) The following statement of earnings was reported for Cotrell Inc. for the first year of operations
ending December 31, 20X2, reported in thousands of dollars:
Sales revenue $10,600

Expenses:
Cost of Sales $4,200
Salaries and Wages 2,100
Rent 1,400
Utilities 800
Miscellaneous 1,100
Income tax expense 250
Profit $750
Calculate the following:
(a) net profit margin

(b) earnings per share if there are 100,000 shares outstanding
Answer: (a) 7.1%, (calculated by dividing net income $750 by net sales $10,600), (b) $7.50 per share
(calculated by taking net income $750,000 divided by common shares outstanding 100,000)
154) The adjusted trial balance of Ward Company at the end of the accounting year, December 31, 20X2, showed
the following:
Adjusted Trial Balance

Account Titles Debits Credits
Cash $20,000
Machinery 90,000
Accumulated Depreciation 16,000
Trade Payables 7,000
Share Capital 20,000
Service Revenue 40,000
Interest Expense 4,000
Operating Expenses 17,000
44
Dividends declared and paid 3,000
Totals $142,000 $142,000
1) Give all the required closing entries for Ward Company at December 31, 20X2. (You need not use the
Income Summary account).
2) The 20X2 ending balance in retained earnings was $________

Answer: 1.
Debits Credits
a. Services Revenue $40,000
Retained Earnings $40,000
b. Retained Earnings $29,000
Operating Expenses $17,000
Depreciation Expense $8,000
Interest Expense $4,000
c. Retained Earnings $3,000
Dividends Declared and paid $3,000
2. $59,000 + $11,000 - $3,000 = $67,000 (Balance of retained earnings at the end of 20X2)
155) Air Cargo Company recorded the following adjusting entries at the end of the accounting year, December 31,
20X2:
Debits Credits
Wages expense 2,000
Wages payable 2,000
Interest receivable 1,000
Interest revenue 1,000
Before these adjusting entries were recorded, a partial unadjusted trial balance reflected the following:
Partial Unadjusted Trial

Balance
Dividends declared 1,000
Service revenue 80,000
Operating expenses 52,000
Wage expense 28,000
Wages payable -0-
Interest receivable -0-
Give the closing entries for Air Cargo Company at December 31, 20X2. (You need not use the Income
45
Summary account).
Debits Credits
a. Service Revenue 80,000
Interest Revenue 10,000
b. Retained Earnings 82,000
Wages Expense 30,000
c. Retained Earnings 1,000
Dividends Declared 1,000
156) At December 31, 20X1, the following adjusting entries were recorded in the accounts of ABC Company:
Debit Credit
Interest receivable 2,000
Wages payable 10,000
There were no other accrued receivables or payables on ABC's books in 20X1.
The balances in the following accounts immediately after the closing entries were posted would be:
Debit Credit
1. Interest Receivable $ $
2. Interest Revenue $ $
3. Wages Expense $ $
4. Wages Payable $ $
Debit Credit
1. Interest Receivable $2,000
2. Interest Revenue $0
3. Wages Expense $0
4. Wages Payable $10,000
46
Answer Key
Testname: UNTITLED10
1) A
2) C
3) C
4) A
5) C
6) C
7) A
8) C
9) D
10) C
11) D
12) C
13) D
14) C
15) B
16) D
17) A
18) B
19) B
20) A
21) C
22) A
23) C
24) C
25) A
26) B
27) B
28) D
29) D
30) C
31) D
32) B
33) B
34) A
35) B
36) B
37) A
38) A
39) C
40) A
41) B
42) C
43) B
44) B
45) D
46) C
47) B
48) B
49) D
50) C
47
Answer Key
51) C
52) A
53) A
54) A
55) A
56) A
57) D
58) B
59) D
60) D
61) C
62) C
63) C
64) C
65) D
66) C
67) B
68) A
69) B
70) D
71) D
72) D
73) C
74) B
75) D
76) C
77) B
78) C
79) D
80) FALSE
81) FALSE
82) TRUE
83) TRUE
84) FALSE
85) FALSE
86) TRUE
87) TRUE
88) TRUE
89) TRUE
90) TRUE
91) TRUE
92) TRUE
93) TRUE
94) TRUE
95) FALSE
96) TRUE
97) FALSE
98) FALSE
99) TRUE
100) FALSE
48
Answer Key
101) TRUE
102) TRUE
103) FALSE
104) TRUE
105) TRUE
106) FALSE
107) FALSE
108) TRUE
109) TRUE
110) TRUE
111) TRUE
112) TRUE
113) TRUE
114) TRUE
115) TRUE
116) TRUE
117) TRUE
118) FALSE
119) FALSE
120) TRUE
121) TRUE
122) TRUE
123) 1. D; 2. A; 3. B; 4. D; 5. C
124) 1. B; 2. A; 3. C
125) 1. A; 2. B; 3. B; 4. A.
126) 1. E; 2. B; 3. A; 4. G; 5. H; 6. C
Trial Balance
Cash $4,700
Machine 8,300
Accumulated depreciation, machine $500
Totals $16,500 $16,500
128) No, the adjusted trial balance is not a financial statement. It is an internal working paper that lists all
accounts with their balances to provide a check on the equality of debits and credits. It is an aid in the
preparation of financial statements (income statement, statement of changes in equity, and statement of
financial position).
49
Answer Key

1. C A
2. A H
3. J D
4. A F
5. B I
6. J A
7. A I
8. K A
9. J E
10. G or L A
Dr Unearned rent revenue ($1,200 × 1/3) 400

Cr Rent revenue 400
131) a.
Cash 15,000
Note payable 15,000
b.
Dr Supplies expense 1,100

Cr Supplies inventory 1,100
Feedback: $400 + 800 - 100 = $1,100

Dr Unearned rent revenue ($1,200 × 1/3) 4,000

Cr Rent revenue 4,000
Feedback: $24,000 × 2/12 = $4,000
50
Answer Key
Dr Rent expense ($1,500 × 1/3) 500

Cr Prepaid rent 500

A M $1,200 C $1,200
B H $1,200 P $1,200
C J $450 A $450
D N $120 F $120
A. [($6,000 - 0) ÷ 5] = $1,200.
B. ($1,800 × 2/3) = $1,200.
C. ($150 + $400 - $100) = $450.
D. ($6,000 × 12% × 2/12) = $120.

A K $2,400 H $2,400
B C $175 N $175
C L $8,800 E $8,800
D I $300 O $300
A. All $2,400
B. ($5,000 × 14% × 31/2) = $175
C. [($91,000 - $3,000)/10] = $8,800
D. ($1,800 × 1/6) = $300
51
Answer Key
137) December 31, 20X1--Adjusting entry:
A. Insurance expense 250

Prepaid insurance 250
$1,000 × 6/24 = $250
B. Rent revenue receivable 500
Rent revenue 500
C. Interest expense 100
$3,000 × 10% × 4/12 = $100
D. Unearned subscription revenues 55
Subscription revenues 55
$440 × 3/24 = $55
138) December 31, 20X1--Adjusting entry:
A. Wages expense 1,750

Wages payable 1,750
B. Office supplies expense 475
Office supplies 475
$75 + $500 - $100 = $475
C. Unearned rent 300
Rent revenue 300
$900 × 1/3 = $300
D. Interest expense 117
$2,000 × 10% × 7/12 = $117
A. Depreciation Expense $1,500

Accumulated depreciation $1,500
[($8,000 - $500) / 5 years] = $1,500
B. Rent Expense $7,350
Prepaid Rent $7,350
($12,600 × 7/12) = $7,350
C. Office Supplies Expense $500
Office Supplies $500
D. Wage Expense $3,000
Wages payable $3,000
52
Answer Key
Account Titles Type of Closing Status Typical Financial

Account Balance Statement(s) (on
(before which reported)
Closing)
1. Dividends declaredSE C D SE
2. Wages payable L N C SFP
3. Share capital SE N C SFP, SE
4. Rent expense E C D I
5. Retained earnings SE N C SFP, SE
6. Notes payable L N C SFP
7. Unearned revenue L N C SFP
8. Dividends payableL N C SFP
9. Building A N D SFP
10. Accumulated C N C SFP
depreciation
11. Trade receivable A N D SFP
12. Supplies inventory
A N D SFP
13. Interest revenue R C C I
14. Interest expense E C D I
15. Service revenue R C C I
16. Depreciation E C D I
expense
53
Answer Key
Debit Credit
Ex. Purchased a service truck, paid 1/2 cash
D A, G
and gave a 90-day interest-bearing note
for the balance
1. An investor contributed $55,000 cashAto I
the business and received 5,000 shares
2. Paid $600 for a two-year premium onB A
3. Borrowed $10,000 from a local bank A by G
4. Service revenues earned; Cash A, C L
5. One month's rent on the building wasM A
paid at year end
6. Collected $1,000 in advance for a A H
7. Expenses incurred: paid cash $28,000;M A, F
On credit: $7,000
8. Declared and paid a cash dividend of J or K A
$2,000
9. Depreciation of $1,500 on the truck M E
must be recorded
10. Expired insurance for one full year M B
11. Revenue accounts must be closed at theL J
end of the period
12. Expense accounts must be closed at theJ M
end of the period
54
Answer Key
Item Net Income Assets Liabilities Shareholders' Equity

Balances $21,000 $82,000 $30,000 $52,000
Reported
Correction for ($3,000) -0- $3,000 ($3,000)
Wages
Corrected $18,000 $82,000 $33,000 $49,000
Balances
Debit Credit
a. Trade receivables 300
Services Revenues 300
(Services were provided to customers
during the year which has not been
collected or recorded)
b. Insurance Expense 400
(Insurance expired during the year)
c. Depreciation Expense 5,500
(Depreciation on equipment during
20X2)
d. Wages 300
Wages Payable 300
(Wages earned during 20X2 but not yet
recorded paid)
144) A. $800 - $2,000 + $15,000 = $13,800

B. $10,500 - $11,000 + $12,000 = $11,500
C. Operating activities
D. Operating activities
55
Answer Key
145) 1.
Accumulated Depreciation — Equipment 1,050
2.
Interest Payable 275
3.
Supplies ($120 + $400 — 70) 450
4.
Rent Expense 400
Prepaid Rent 400
5.
146) 1.
Interest Revenue 270
2.
Property Taxes Expense 700
Property Taxes Payable 700
3.
Unearned Legal Service Revenues 600
Legal Service Revenues 600
4.
5.
Salaries Expense 950
Salaries Payable 950
56
Answer Key
147) 1.
Interest Revenue 95
2.
Unearned Revenues 2,000
Revenues 2,000
3.
Rent Expense (60,000 / 4) 15,000
Prepaid Rent 15,000
4.
Services Revenue 2,100
5.
Depreciation Expense — 4,500
Equipment (18,000 / 4)
Accumulated Depreciation — 4,500
Equipment
6.
Supplies 590
7.
1. Service Revenue 5. Utilities Payable

2. Rent Expense 6. Interest Expense
3. Service Revenue 7. Accounts Receivable or Unearned
Service Revenue
4. Accumulated Depreciation 8. Interest Revenue
57
Answer Key
149) Global Services Inc.

Statement of Shareholders' Equity
Share Capital Retained Earnings Total Equity

Beginning Balance, 6/1 -0- -0- -0-
Shares issued 50,000 50,000
Profit 5,500 5,500
Dividends Declared (2,100) (2,100)
Ending Balance, 6/30 $50,000 $3,400 $53,400
150) A. Profit from the income statement appears in the statement of changes in equity as an increase to retained
earnings.
B. The ending balance for share capital and retained earnings appear on the statement of financial position in the
shareholders' equity section.
C. The bottom line for the ending cash balance on the statement of cash flows is the same as the cash account
balance on the statement of financial position.
151) (a) $3,600,000 (b) $900,000 (c) $2,700,000
152) Beaumont Developments Inc.
As at December 31 20X7
Current assets Current liabilities

Trading securities 4,000 Salaries payable7 1,500
Accounts receivable2 41,180 Total current liabilities 15,700
Inventories3 59,280
Prepaid insurance4 4,720 Long-term liabilities
Total current assets 141,280 Bank loan 60,000
Shareholder loan 110,000
Investments 170,000
Long-term securities 43,300
Cash value — life insurance9,400 Shareholder’s equity
52,700 Common shares 4,000
Accumulated other
Property, plant, and comprehensive income 11,600
equipment
Equipment5 163,000 Retained earnings 76,955
Less accumulated 87,725 92,555
depreciation
75,275
58
Answer Key
Intangible assets Total liabilities & $278,255

shareholder’s equity
Franchises 9,000
($40,000 — $9,400 + $1,500) = $32,100

($52,200 — $2,300 — $5,000 - $3,720) = $41,180
($54,280 + $5,000) = $59,280
($14,880/12 x 3 months) + ($18,000/12 x 9 months) = $4,720
PPE ($136,000 + $68,000 - $9,000 - $32,000) = $163,000
Accumulated depreciation ($163,000 - $26,000)/8 years + $26,000/10 years = $19,725 + beg balance $68,000 =
$87,725
($15,000 - $2,300 + $1,500) = $14,200
$500 x 3 days = $1,500
b.
Effect of adjustments on EPS:
Retained earnings before adjustments 156,900
Retained earnings after adjustments 76,955
Total impact of adjustments 79,945
Impact per share (20,000 shares) (4.00)
153) (a) 7.1%, (calculated by dividing net income $750 by net sales $10,600), (b) $7.50 per share (calculated by
taking net income $750,000 divided by common shares outstanding 100,000)
154) 1.
Debits Credits
a. Services Revenue $40,000
Retained Earnings $40,000
b. Retained Earnings $29,000
Operating Expenses $17,000
Depreciation Expense $8,000
Interest Expense $4,000
c. Retained Earnings $3,000
Dividends Declared and paid $3,000
2. $59,000 + $11,000 - $3,000 = $67,000 (Balance of retained earnings at the end of 20X2)
59
Answer Key

Debits Credits
a. Service Revenue 80,000
b. Retained Earnings 82,000
Wages Expense 30,000
c. Retained Earnings 1,000
Dividends Declared 1,000
Debit Credit
1. Interest Receivable $2,000
2. Interest Revenue $0
3. Wages Expense $0
4. Wages Payable $10,000
60
1) Which one of the following items is not generally used in preparing a statement of cash flows?
A) Current Statement of earnings
B) Comparative statements of financial position
C) Additional information
D) Adjusted trial balance
Answer: D
2) The cash flow statement will not report the

A) uses of cash in the current period.
B) change in the cash balance for the current period.
C) sources of cash in the current period.
D) amount of cheques outstanding at the end of the period.
Answer: D
3) One of the primary purposes of the cash flow statement is to

A) inform users of dividends declared during the year
B) determine the company's annual profit after taxes
C) segregate operating revenues from non-operating revenues
D) determine if the company is adequately managing accounts receivable and inventory
Answer: D
4) Which of the following transactions is not a direct source of cash?

A) Borrowing cash. B) Disposal of inventory for cash.
C) Sale of services on credit. D) Sale and issuance of shares for cash.
Answer: C
5) Which of the following transactions is not a direct use of cash?

A) Exchange of bonds payable for land. B) Cash dividend paid.
C) Purchase of treasury shares with cash. D) Acquisition of inventory for cash.
Answer: A
6) How should the statement of cash flows be dated?

A) At Year-End December 31, 20X. B) December 31, 20X.
C) At December 31, 20X. D) For the Year Ended December 31, 20X.
Answer: D
7) If a company reports a net loss, it

A) may still have a net increase in cash.
B) will not be able to pay cash dividends.
C) may not be able to make capital expenditures.
D) will not be able to get a loan.
Answer: A
1
8) Which of the following is a cash equivalent?
A) A note payable to a supplier
B) A demand note receivable from another company
C) Government of Canada 180-day treasury bill
D) A short-term bank loan
Answer: B
9) The category that is generally considered to be the best measure of a company's ability to continue
as a going concern is
A) usually different from year to year. B) cash flows from operating activities.
C) cash flows from financing activities. D) cash flows from investing activities.
Answer: B
10) The information in statement of cash flows should help investors and creditors evaluate:
A) the company's ability to receive dividends and meet shareholder obligations
B) the investing and financing transactions during the period.
C) the reasons for the difference between net liabilities and net cash provided or used by operating
activities.
D) the company's ability to generate past cash flows.
Answer: B
11) Investing activitiesinclude

A) obtaining cashfrom creditors. B) collecting the principal on loans made.
C) repaying money previously borrowed. D) obtaining capital from owners.
Answer: B
12) Financing activities involve

A) issuing debt. B) acquiring long-lived assets.
C) lending money. D) acquiring investments.
Answer: A
13) Which of the following transactions does not affect cash during a period?
A) Redemption of bonds B) Collection of an accounts receivable
C) Write-off of an uncollectible account D) Sale of common shares
Answer: C
14) Which of the following is a cash inflow from financing activities?

A) Proceeds from selling investments in equity securities of another company.
B) Proceeds from selling equipment.
C) Receipt of interest payments.
D) Proceeds from issuance of bonds payable.
Answer: D
2
15) For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount
of cash and which of the following is correct?
A) It must be identified as a cash equivalent on the statement of earnings.
B) Must be sufficiently close to its maturity date so that its market value is relatively insensitive to
interest rate changes.
C) The investment must have a known foreign exchange rate.
D) It must mature within 4 months.
Answer: B
16) Acompany has incurred some routine maintenance costs. If they decide to capitalize these costs
instead of expensing them, what would be the effect on cash from operations and cash from
investing activities in that period?
A) Cash from operations would decrease; cash from investing would increase.
B) Cash from operations would increase; cash from investing would increase.
C) Cash from operations would increase; cash from investing would decrease.
D) Cash from operations would decrease; cash from investing would decrease.
Answer: C
17) Under the indirect approach adjustments must be made to net income in the operations section for
all of the following items, except
A) proceeds for the sale of temporary investments.
B) loss on the sale of land.
C) gain on the sale of equipment.
D) depreciation.
Answer: A
18) In the indirect method, a gain on sale of equipment is reported as:

A) a decrease to equipment purchases.
B) an increase to revenues.
C) a decrease to net earnings.
D) an increase to cash provided by investing activities.
Answer: C
19) In the indirect method, an increase in trade receivables is reported on the statement of cash flows as:
A) a decrease to cash. B) a decrease to sales.
C) an increase to sales. D) an increase to cash.
Answer: A
3
20) The indirect method starts with net earnings and converts them to net cash provided by operating
activities. This means that:
A) the indirect method adjusts net earnings for contra account balances.
B) the indirect method starts with net earnings and adds back all the expenses relating to operating
activities.
C) the indirect method adjusts net earnings, for items that affected reported net earnings but did
not affect cash.
D) the indirect method calculates net earnings as the difference between net assets and net
liabilities.
Answer: C
21) Thedifferences in the indirect method and the direct method of the statement of cash flows are
evident in which section?
A) Investing activities B) Financing activities
C) Cash reconciliation section D) Operating activities
Answer: D
22) Toga Corporation reported profit of $50,000 for the year. During the year, trade receivables
increased by $8,000, trade payables decreased by $4,000 and depreciation expense of $6,000 was
recorded. Net cash provided by operating activities for the year, using the indirect method, is
A) $44,000. B) $56,000. C) $50,000. D) $54,000.
Answer: A
23) Winn Company's 20X2 income statement reported total revenues, $110,000, and total expenses
(including $10,000 depreciation), $70,000 (i.e., a profit of $40,000). The 20X2 balance sheet
reported the following: trade receivables--beginning balance, $16,000 and ending balance, $14,000;
wages payable--beginning balance, $2,000 and ending balance, $1,500. Therefore, based only on
this information, the 20X2 net cash inflow from operating activities was which of the following?
A) $59,500. B) $48,500. C) $51,500. D) $50,000.
Answer: C
24) Jackson Company gathered the following data to prepare its 20X7 statement of cash flows:
Profit $40,000
Depreciation expense 5,000
Trade receivables decrease 3,000
Wages payable increase 4,000
Amortization of patent 1,000
Income tax payable decrease 2,000
Based only on the above data, the net cash inflow from operating activities during 20X7 was which of the
following?
A) $51,000. B) $53,000. C) $43,000. D) $45,000.
Answer: A
4
25) Matlock Company reported total sales revenue of $55,000 and total expenses amounting to $45,000
(i.e., profit of $10,000) on its income statement for the year ended December 31, 20X2. During
20X2, trade receivables decreased by $4,000, merchandise inventory decreased by $6,000, trade
payables increased by $2,000 and depreciation of $8,000 was recorded. Therefore, based only on
this information, the net cash flow from operating activities for 20X2 would be which of the
following?
A) $30,000. B) $18,000. C) $19,000. D) $10,000.
Answer: A
26) AllenCompany reported total sales revenue of $150,000 and total expenses of $152,000 (i.e., a net
loss of $2,000) for the year ended December 31, 20X4. During 20X4, trade receivables decreased by
$1,000, trade payables increased by $5,000, wages payable increased by $3,000, and $18,000 in
depreciation expense was recorded. Assuming no other adjustments are needed, what was the "net
cash flow from operating activities" for 20X4 (parentheses indicate net cash outflow)?
A) ($1,000). B) $23,000. C) $29,000. D) $25,000.
Answer: D
27) Assume the 20X4 income statement reported total sales revenue of $160,000. The 20X3-20X4,
comparative statements of financial position showed that trade receivables increased by $10,000.
What was the "cash inflow from customers" for 20X4?
A) $140,000. B) $150,000. C) $170,000. D) $160,000.
Answer: B
28) Restless
Company's 20X2 income statement reported total sales revenue of $100,000. The
20X1-20X2, comparative statements of financial position showed that trade receivables decreased
by $10,000. What were the 20X2 "cash receipts from customers"?
A) $100,000. B) $80,000. C) $110,000. D) $90,000.
Answer: C
29) WT Company reported sales revenue of $100,000 and total expenses of $90,000 (including
depreciation) for the year ended December 31, 20X1. During 20X1, trade receivables decreased by
$4,000, merchandise inventory increased by $3,000, trade payables increased by $2,000, and
depreciation expense of $6,000 was recorded. Assuming no other data are needed, what was the net
cash inflow from operating activities for 20X1?
A) $20,000. B) $21,000. C) $19,000. D) $24,000.
Answer: C
30) Tradereceivables arising from sales to customers amounted to $35,000 and $40,000 at the
beginning and end of the year, respectively. Profit reported on the income statement for the year was
$120,000. Exclusive of the effect of other adjustments, the cash flows from operating activities,
prepared using the indirect method, is
A) $125,000. B) $155,000. C) $115,000. D) $120,000.
Answer: C
5
31) ABC Company reported total sales revenue of $80,000 and total expenses of $72,000 (i.e., profit of
$8,000) for the year ended December 31, 20X. During 20X, trade receivables increased by $3,000,
merchandise inventory decreased by $2,000, trade payables increased by $1,000, and $5,000 in
depreciation expense was recorded. Assuming no other adjustments to profit are needed, what was
the net cash inflow from operating activities?
A) $13,000. B) $19,000. C) $10,000. D) $11,000.
Answer: A
32) Thestatement of cash flows (indirect method) reports depreciation expense as an addition to profit
because depreciation does which of the following?
A) Reduces reported profit and causes an inflow of cash.
B) Causes an inflow of funds for the replacement of assets.
C) Is a direct use of cash
D) Reduces reported profit of the period but does not involve an outflow of cash for that period.
Answer: D
33) In
calculating cash flows from operating activities using the indirect method, a loss on the sale of
equipment is
A) not reported on a cash flow statement. B) ignored because it does not affect cash.
C) added to net earnings. D) deducted from net earnings.
Answer: C
34) TravisCompany reported a profit for 20X2 of $20,000, building depreciation expense of $6,000,
and amortization expense (patent) of $5,000. Also, trade payables increased by $7,000 and inventory
decreased by $2,000. What was the amount of "cash flows from operating activities" for 20X2?
A) $35,000. B) $34,000. C) $36,000. D) $40,000.
Answer: D
35) The20X2 income statement of Dunn Company reported total sales revenue of $106,000 and total
expenses of $108,000 (i.e., net loss, $2,000). Expenses were: building depreciation, $10,000 and
patent amortization, $5,000. There was an increase in inventory of $1,000. What was cash flow
from operating activities during 20X2 (parentheses indicate outflow)?
A) $12,000. B) $7,000. C) $14,000. D) ($3,000).
Answer: A
36) Which of the following is not true of the direct method of preparing a statement of cash flows?
A) It has the same cash flows from investing and financing activities as the indirect method.
B) It gives the user a sense of the magnitude of gross dollars flowing in and out of the company.
C) It results in a different net cash from operating activities than the indirect method.
D) It reports the same net increase or decrease in cash as the indirect method.
Answer: C
6
37) The 20X2 income statement for Ryan Corporation showed the following:
Profit $81,00
0
The statement of financial position showed:
Trade receivables increase $5,000

Prepaid expenses decrease 2,000
What was the cash flow from operating activities?

A) $70,000. B) $86,000. C) $66,000. D) $82,000.
Answer: B
38) Green Corporation reported net earnings of $50,000 for the year. During the year, trade receivables
increased by $8,000, trade payables decreased by $4,000 and depreciation expense of $6,000 was
recorded. Net cash provided by operating activities for the year, using the indirect method, is
A) $50,000. B) $44,000. C) $56,000. D) $54,000.
Answer: B
39) Mason Corporation reported a net loss of $12,000 for the year ended December 31, 20X3. During
the year, accounts receivable decreased $5,000, merchandise inventory increased $4,000, accounts
payable increased by $13,000, and depreciation expense of $7,000 was recorded. During 20X3,
operating activities using the indirect method was
A) provided net cash of $7,000. B) provided net cash of $9,000.
C) used net cash of $23,000. D) used net cash of $33,000.
Answer: B
40) The following information pertains to Brockville Inc. for 20X4:
Inventory January 1, $300,000

Inventory December 31, $335,000
Accounts payable January 1 $ 45,000
Accounts payable December 31 $ 48,000
Cost of goods sold during 20X4 $2,400,000
If Brockville prepares their cash flow statement using the indirect method, what adjustment to the net income
will be made for the year for Cornwall when calculating their cash flow from operations?
A) $35,000 deduction from net income B) $32,000 deduction from net income
C) $35,000 addition to net income D) $32,000 addition to net income
Answer: B
7
41) Wyman Co. reported $26,000 of cash provided by operating activities and the following data:
Amortization $45,000
Increase in accounts payable 12,000
Increase in wages payable 8,000
Decrease in taxes payable 2,000
Wyman's net income/loss for the period was

A) $54,000 loss B) $10,000 net income
C) $37,000 loss D) $12,000 loss
Answer: C
42) A bank credit manager, while reviewing a company's cash flow statement, noticed that the company
reported a large increase in inventory, but no increase in accounts receivable. Which of the
following is not a possible explanation for this?
A) The company increased its credit terms but not its production time.
B) The company experienced a decrease in demand for its products
C) The company may be stockpiling inventory in anticipation of a strike at a supplier.
D) The company has obsolete inventory on hand.
Answer: A
43) A banker contemplating a loan to a company should focus on which section(s) of the cash flow
statement in order to determine the company's ability to repay the loan?
A) Operating activities B) Operating and investing activities
C) Operating and financing activities D) Investing activities
Answer: A
44) Which of the following statements about the quality of earnings ratio is true?
A) Failure to accrue appropriate expenses will inflate net earnings and reduce the quality of
earnings ratio.
B) Failure to accrue appropriate expenses will inflate net earnings and increase the quality of
earnings ratio.
C) Seasonal variations in sales have no impact on the quality of earnings ratio.
D) When sales are growing, receivables and inventory normally increase faster than payables so
the ratio increases.
Answer: A
8
45) Which of the following statements about the quality of earnings ratio is false?
A) Seasonal variations in sales have no impact on the quality of earnings ratio.
B) Seasonal variations in sales and purchases of inventory can cause wide deviations in the quality
of earnings ratio.
C) When sales are growing, receivables and inventory normally increase at a faster rate than trade
payables often causing operating cash flows to be less than profit.
D) An increase in operating assets and a decrease in liabilities will reduce operating cash flows,
thereby reducing the ratio.
Answer: A
46) In20X3, The W D Company reported net earnings of $1.3 billion and cash flow from operations of
$5.6 billion. In 20X2, it's net earnings was $1.9 billion and cash flow from operations was $5.1
billion. What were their quality of earnings ratios for 20X3 and 20X2 respectively?
A) 1.10 and .68 B) .23 and .37 C) 4.31 and 2.68 D) .91 and 1.46
Answer: C
47) In20X3, C Co. reported a quality of earnings ratio of 1.60. In 20X2 and 20X1 the ratio was .97 and
.98 respectively. Which of the following was the most likely cause of the large increase in the ratio?
A) A decrease in expense while net earnings remained the same.
B) An increase in sales revenue while net earnings remained the same.
C) An increase in trade payables and accrued liabilities.
D) An increase in current assets such as receivables and inventory.
Answer: C
48) Which item may be of concern when analyzing cash flow from operating activities?
A) Decreasing accounts receivable B) Payments of dividends
C) Increasing inventories D) Repayment of debt at maturity
Answer: C
49) Which of the following would increase earnings but lower the quality of reported earnings?
A) Decreasing operating expenses B) Increasing operating expenses.
C) Embarking on a capital expansion D) Writing off obsolete inventory
Answer: D
50) Which of the following would be an example of an investing activity on the cash flow statement?
A) Dividends paid to shareholders B) Purchase of capital assets
C) Repurchase of shares issued D) Sale of preferred shares
Answer: B
9
51) Melmore Ltd had the following activity during 20X7:
Proceeds from sale of long-term investments $156,000

Gain on the sale of long-term investments $16,000
Loss on the disposal of equipment ($0 proceeds from disposal) $17,000
Proceeds from sale of preferred shares $182,000
Repayment of long-term debt $30,000
What is the cash flow from investing activities?

A) $16,000 B) $189,000 C) $173,000 D) $156,000
Answer: D
52) Crocker Inc. had the following activity during 20X7:
Proceeds from sale of bonds payable $200,000

Loss from disposal of equipment ($0 proceeds from disposal) $38,000
Dividends paid to shareholders $25,000
Sale of shares $125,000
Gain on the sale of short term investments $75,000

A) $22,000 B) $93,000 C) $ 0 D) $57,000
Answer: C
53) A company sold a piece of land for $40,000 which had an original cost of $25,000. What is the cash
flow effect of this transaction?
A) $15,000 increase in cash flows from investing activities
B) $15,000 increase in cash flows from operations
C) $40,000 increase in cash flows from operations
D) $40,000 increase in cash flows from investing activities
Answer: D
10
54) Keller Inc. had the following activities during the year:
Proceeds from the sale of land $346,000

Gain on sale of land $46,000
Proceeds from the issue of common shares $800,000
Purchase of equipment $450,000
What was Keller's cash flow from investing activities for the year?
A) $796,000 Cash inflow from investing activities.
B) $150,000 Cash inflow from investing activities.
C) $104,000 Cash outflow from investing activities.
D) $300,000 Cash outflow from investing activities.
Answer: C
55) Mazoff Corp had the following activities during the year:

Proceeds from the issue of common shares $1,000,000
Repayment of mortgage outstanding on the sold land $200,000
Interest paid $22,500
Dividends paid $10,000
What was Mazoff's cash flow from investing activities for the year?
A) $350,000 outflow B) $150,000 outflow
C) $850,000 inflow D) $100,000 outflow
Answer: B
56) In20X3, Cee Co. disclosed cash paid for property, plant and equipment of $1.069 million and cash
flow from operations of $3.883 million. Their average property, plant and equipment from the
comparative statement of financial position was $3.968 million. Compute Cee Co.'s capital
expenditures ratio for 20X3.
A) 3.63 B) .77 C) .98 D) .28
Answer: A
11
57) Inthe years 20X0-20X3, Bee Co.'s capital expenditures ratio was 2.74 and from 20X4-20X7, it was
1.24. From 20X4-20X7, Are Co.'s ratio was .30. Which of the following statements about Bee Co.'s
capital expenditures ratio is correct?
A) Bee Co.'s capital expenditure ratio is relatively low and indicates inability to finance property,
plant and equipment with cash flow from operations.
B) Bee Co.'s ratio has improved in the period 20X4-20X7.
C) It appears that Are Co. is more aggressive about investing in additional property, plant and
equipment than is Bee Co.
D) It appears that Bee Co. is more aggressive about investing in additional property, plant and
equipment than is Are Co.
Answer: C
58) Mansour Machines had cash flow from operations of $5,070, cash flows from investments of
$(1,244), capital expenditures of $1,244, cash flows from financing of $(3,537), including $1,500 of
dividends paid, and net income of $2,314. Mansour's free cash flow is:
A) $1,533 B) $2,756 C) $3,826 D) $2,326
Answer: D
59) Havery has the following cash flow & earnings numbers:
Cash flows from operations $585

Capital expenditures $154
Net income $166
Dividends declared $210
Dividends paid $180
Havery has free cash flows of:

A) $541 B) $251 C) $221 D) $375
Answer: B
60) The following information was available for Brockville Corp for the 20X6 fiscal year:
Cash inflow from financing activities $225,000

Cash outflow from investing activities $415,000
Cash inflow from operations $372,500
Amount spent on capital expenditures $300,000
What is Brockville's free cash flow for 20X6?

A) $47,500 B) ($42,000) C) $347,500 D) ($67,000)
Answer: A
12
61) Typicalfinancing activities do NOT include the following
A) Purchase of shares for retirement.
B) Proceeds from issuance of short- and long-term borrowings.
C) Principal payments on short- and long-term borrowings.
D) Purchase of short- or long-term investments for cash.
Answer: D
62) Melmore Ltd had the following activity during 20X7:
Proceeds from sale of long-term investments $156,000

Gain on the sale of long-term investments $16,000
Loss on the disposal of equipment ($0 proceeds from disposal) $17,000
Proceeds from sale of preferred shares $182,000
Repayment of long-term debt $30,000
What is the cash flow from financing activities?

A) $168,000 B) $169,000 C) $152,000 D) $135,000
Answer: C

Loss from disposal of equipment (Net book value $60,000) $38,000
What is the cash flow from financing activities?

A) $300,000 B) $325,000 C) $292,000 D) $275,000
Answer: A
64) Randy,Inc., issued $50,000 of bonds, paid cash dividends of $8,000, sold long-term investments for
$12,000, received $5,000 of dividend revenue, purchased treasury shares for $15,000, and purchased
new equipment for $19,000. What is the net cash flow from financing activities?
A) $70,000. B) $80,000. C) $27,000. D) ($20,000).
Answer: C
13
65) Kinross Corp had the following activities during the year:

What was Kinross' cash flow from financing activities for the year?
A) $767,500 inflow B) $800,000 inflow
C) $790,000 inflow D) $1,000,000 inflow
Answer: C
66) A new, fast-growing company may typically have which of the following patterns of cash flows?
A) Positive cash flows from operations, cash inflows from financing and cash outflows from
investing.
B) Negative cash flows from operations, cash outflows from financing and cash inflows from
investing.
C) Positive cash flows from operations, cash outflows from financing and cash inflows from
investing.
D) Negative cash flows from operations, cash inflows from financing and cash outflows from
investing.
Answer: D
67) A stable, mature company may typically have which of the following patterns of cash flows?
A) Positive cash flows from operations, cash inflows from financing and cash outflows from
investing.
B) Positive cash flows from operations, cash outflows from financing and cash outflows from
investing.
C) Positive cash flows from operations, cash outflows from financing and cash inflows from
investing.
D) Positive cash flows from operations, cash inflows from financing and cash inflows from
investing.
Answer: B
68) Acompany wants to maintain its current debt/equity ratio. Which of the following relationships
would most likely occur on the cash flow statement?
A) New borrowings would be less than cash from operations for the year.
B) Cash from operations would be equal to cash from financing activities for the year.
C) Cash from operations would be equal to any debt paid off during the year.
D) New borrowings would replace any debt paid off.
Answer: D
14
69) A company acquired some land, which had been independently appraised at $12,000, and paid for it
by issuing 1,000 shares of its common shares. The shares had a par value of $10 per share and no
market price was available. How should this be reported on the statement of cash flows?
A) Should not be reported on the statement of cash flows.
B) Report on a schedule of significant noncash transactions if it is material.
C) Report $12,000 as inflow and outflow of cash.
D) Report $12,000 as an inflow of cash.
Answer: B
70) Preferred shares issued in exchange for land would be reported on the statement of cash flows in
A) the cash flows from investing activities section.
B) the cash flows from operating activities section.
C) the cash flows from financing activities section.
D) the notes to the financial statements.
Answer: D
71) Lori Company sold an operational asset, a machine, for cash. It originally cost $20,000. The
accumulated depreciation at the date of disposal was $15,000. A gain on the disposal of $2,000 was
reported. What was the cash inflow from this transaction?
A) $5,000. B) $7,000. C) $3,000. D) $4,000.
Answer: B
72) Nelson Company collected the following data in its accounting records in 20X7:
Income Statement
Depreciation expense $1,000
Loss on sale of equipment $3,000

Beginning balance - equipment $12,500
Ending balance - equipment $8,000
Beginning balance — accumulated depreciation $2,000
Ending balance - accumulated depreciation $2,400
No new equipment was purchased during the year. What was the cash inflow from the sale of equipment in
20X7?
A) $900. B) $600. C) $1,000. D) $3,900.
Answer: A
73) Ifa loss of $20,000 is incurred in selling (for cash) office equipment that cost $90,000 and had
accumulated depreciation of $22,500, the total amount reported in the investing activities section of
the statement of cash flows is
A) $70,000. B) $67,500. C) $87,500. D) $47,500.
Answer: D
15

Loss from disposal of equipment (Net book value $60,000) $38,000

A) $22,000 B) $93,000 C) $57,000 D) $75,000
Answer: A
75) The financial statements for Ozzie Company show the following:
Beginning balance Ending balance

Merchandise inventory $25,000 $26,000
Trade receivables 35,000 33,000
Trade payables 18,000 21,000
Cost of Goods Sold $121,000
How much cash was paid for merchandise?

A) $121,000. B) $119,000.
C) $124,000. D) $117,000.
Answer: B
76) The financial statements of Juliet Company show the following:
Beginning balance Ending balance

Trade receivables $28,000 $22,000
Trade payables $21,000 $25,000
Sales $154,000
How much cash was collected from customers?

A) $160,000. B) $148,000. C) $154,000. D) $150,000.
Answer: A
16
Beginning Ending
balance balance
Trade $28,000 $22,000
receivables
Trade payables$11,000 $15,000
Purchases $74,000
How much cash was paid out to suppliers?

A) $15,000. B) $11,000. C) $74,000. D) $70,000.
Answer: D
Beginning Ending
balance balance
Trade $28,000 $22,000
receivables
Inventories $38,400 32,000
Trade payables$11,000 $15,000
COGS $74,000
How much cash was paid out to suppliers?

A) $67,600 B) $85,000 C) $15,000 D) $70,000
Answer: A
79) The sales terms for Jensen Company are 10 percent down and the balance due by the end of the
following month. Sales for January, February and March were $8,500, $11,500 and $13,000
respectively. The cash collections from operations for the month of February would be closest to?
A) $10,350 B) $1,150 C) $7,600 D) $8,800
Answer: D
80) The income statement, statement of financial position and statement of cash flows all are prepared
on the accrual basis.
Answer: True False
81) Both the statement of cash flows and the statement of financial position report on the causes of the
changes in the cash of the business.
Answer: True False
17
82) For external reporting, a company must prepare either a statement of earnings or a cash flow
statement, but not both.
Answer: True False
83) The statement of cash flows is dated exactly like the income statement but unlike the statement of
financial position.
Answer: True False
84) Short-terminvestments in marketable equity securities are considered the equivalent of cash (i.e.,
they are combined with cash) in preparing the statement of cash flows.
Answer: True False
85) A primary objective of the statement of cash flows is to show the earnings or loss on investing and
financing transactions.
Answer: True False
86) When the statementof cash flows is prepared in conformity with IFRS there is only one acceptable
way to measure and report cash flows from operating activities.
Answer: True False
87) Theprimary objective of the statement of cash flows is to provide information about a company's
cash receipts and cash payments during an accounting period.
Answer: True False
88) A statement of cash flows indicates the sources and uses of cash during a specific period.
Answer: True False
89) When a cash dividend is paid, the cash outflow is classified as an operating activity.
Answer: True False
90) Cash equivalents are defined as short-term, highly liquid investments that are readily convertible
into known amounts of cash and are so near their maturity that there is insignificant risk of changes
in their value due to interest rate changes.
Answer: True False
91) The statement of cash flows is the only financial statement prepared on the cash basis of accounting
rather than on the accrual basis of accounting.
Answer: True False
92) Only investments with original maturities of less than three months at the date of purchase qualify
as cash equivalents.
Answer: True False
93) Cash collected from customers is a cash flow from a financing activity.
Answer: True False
18
94) The amortization of a patent is treated in a similar manner to depreciation of a building when
preparing the operating activities section of the statement of cash flows using the indirect method.
Answer: True False
95) The payment to shareholders for repurchase of treasury shares is a cash flow from a financing
activity.
Answer: True False
96) The payment of interest on a note payable is a cash flow from an operating activity.
Answer: True False
97) Dividends collected from a long-term investment are cash flows from investing activities.
Answer: True False
98) Collection of principal on a note receivable is a cash flow from investing activities.
Answer: True False
99) Loans to other companies (notes receivable) are cash flows from investing activities.
Answer: True False
100) The date in the heading of a statement of cash flows should say, "At December 31, 20X1," rather
than "For the Year Ended December 31, 20X1."
Answer: True False
101) Very few companies use the direct method for disclosing their cash flows from operating activities.
Answer: True False
102) The net increase (or decrease) in cash that is reported on the statement of cash flows should be the
same as the change in the balance of the cash account for the two most recent years on the
comparative statements of financial position.
Answer: True False
103) Depreciation expense does not cause a cash outflow for the current period; therefore, it should never
be shown on the statement of cash flows.
Answer: True False
104) Any item that appears on the statement of earnings would be considered either a cash inflow or cash
outflow from operating activities.
Answer: True False
105) Under the indirect method, noncash expenses are added to net earnings.
Answer: True False
106) Operating activities include the cash effects of transactions that Evaluation revenues and expenses.
Answer: True False
19
107) The quality of earnings ratio (Cash Flow from Operating Activities ÷ Net earnings) measures the
portion of profit that was generated in cash.
Answer: True False
108) A higher quality of earnings ratio indicates that it is less likely that the company is using aggressive
revenue recognition policies to increase profit.
Answer: True False
109) Cash flow from investing activities is considered the most important category on the cash flow
statement because it is considered the best measure of expected earnings.
Answer: True False
110) Capital expenditures are a normal use of cash for firms.

Answer: True False
111) Acquisitions and sales of long-lived assets are examples of investing cash flows.
Answer: True False
112) Investing activities reported on the statement of cash flows include cash payments to acquire property, plant,
and equipment, and short-term and long-term investments.
Answer: True False
113) Billton Company purchased a machine in the current year for $18,000. Payment included cash,
$5,000; a one-year note payable, $5,000; and a 2-year, $8,000 note payable. This transaction
decreases cash by $5,000 in the current year.
Answer: True False
114) When using the indirect method, a loss on the sale of equipment should be added to profit to derive
cash flows from operating activities.
Answer: True False
115) The capital expenditures ratio (Cash Flow from Operating Activities ÷ Cash Paid for Property,
Plant, and Equipment) reflects the portion of purchases of property, plant, and equipment financed
from operating activities without the need for outside debt or equity financing or the sale of other
investments or other long-term assets.
Answer: True False
116) A low capital expenditures ratio indicates a higher need to obtain outside financing to expand
property, plant, and equipment assets.
Answer: True False
20
117) The acquisition of a building by issuing a mortgage note payable would be considered both an
investing activity and financing activity that do not affect cash and would be reported in the notes to
Answer: True False
118) In preparing statement of cash flows, an increase in the common shares account during a period
would be an investing activity.
Answer: True False
119) Proceeds from borrowing and issuing the firm's own equity securities are examples of financing
cash inflows
Answer: True False
120) Wish Corporation acquired a computer for $15,000 and paid for it in full by issuing 1,000 shares of
its own common shares, par $10 (current market price $15 share). This transaction should not be
reported on the statement of cash flows because cash was neither paid out nor received.
Answer: True False
121) A transaction that does not cause an inflow or outflow of cash should be reported on the statement
of cash flows only if it is an adjustment to convert accrual profit to the cash basis.
Answer: True False
122) The purchase of a piece of equipment in exchange for common shares must be reported on the
statement of cash flows.
Answer: True False
123) While creditors rely heavily on cash flow information, investors do not need to be concerned with
cash flows and can rely exclusively on earnings.
Answer: True False
124) It is not possible for a firm to be highly profitable and go bankrupt.

Answer: True False
125) Expenses reported on the income statement for 20X1 (the first year of operations), totaled $60,000,
which included depreciation expense of $8,000, and wages payable increased by $3,000 by the end
of 20X1. Therefore, the 20X1 cash outflow for expenses was $71,000.
Answer: True False
126) The sales revenue reported on the income statement for 20X1 totaled $96,000, of which one third
was on credit. The 20X1 beginning balance of trade receivables was zero and the 20X1 ending
balance reported on the statement of financial position was $10,000; therefore, the 20X1 cash inflow
from customer sales was $86,000.
Answer: True False
21
127) Match each activity below with the proper classification by inserting the proper capital letter in the space to
the left.
Classification of Activity
I. Investing
F. Financing
O. Operating
1. Collection of interest on a note receivable

2. Payment of debt principal with cash
3. Sales of operational assets
4. Payment of cash dividends
5. Issuance of shares for cash
6. Borrowing cash from the bank
7. Purchase of operational assets for cash
8. Collections of dividends on long term investments
Answer: Solution:
O 1. Collection of interest on a note receivable

F 2. Payment of debt principal with cash
I 3. Sales of operational assets
F 4. Payment of cash dividends
F 5. Issuance of shares for cash
F 6. Borrowing cash from the bank
I 7. Purchase of operational assets for cash
O or I 8. Collections of dividends on long term investments
22
128) Selected transactions of Horner Inc. are listed below.
1. Common shares are sold for cash.

2. Bonds payable are issued for cash at a discount.
3. Interest on a short-term note receivable is collected.
4. Merchandise is sold to customers for cash.
5. Cash is paid to purchase inventory.
6. Equipment is purchased by signing a 3-year, 5% note payable.
7. Cash dividends on common shares are declared and paid.
8. One hundred XYZ common shares are purchased for cash.
9. Land is sold for cash at book value.
10. Recorded an increase in the market value of available-for-sale securities.
Classify each transaction as either A - an operating activity, B - an investing activity, C - a financing activity, or
D- a noncash investing and financing activity.
Answer: Solution:
1. C, 2. C, 3. A, 4. A, 5. A, 6. D, 7. C, 8. B, 9. B, 10. D
129) Selected transactions of Torts Corporation are listed below.
1. Collected a trade receivable.

2. Declared and paid dividends on common shares.
3. Sold long-term investments for cash.
4. Issued common shares for equipment.
5. Repaid a five-year note payable.
6. Paid employee wages.
7. Converted bonds payable to common shares.
8. Acquired long-term investment with cash.
9. Sold buildings and equipment for cash.
10. Sold merchandise to customers.
Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or
(d) a noncash investing and financing activity.
Answer: Solution:
1. A, 2. C, 3. B, 4. D, 5. C, 6. A, 7. D, 8. B, 9. B, 10. A
23
130) Connor Limited reported net earnings of $265,000 for the current year. Depreciation expense recorded on
buildings and equipment amounted to $82,000 for the year. Balances of the current assets and current liabilities
accounts at the beginning and end of the year are as follows:
Beginning of year End of year

Cash $15,000 $20,000
Inventories 57,000 52,000
Prepaid expenses 4,000 8,500
Trade payables 18,000 14,000
Income taxes payable 900 1,200
Prepare the operating activities section of the cash flow statement using the indirect method.
Net Earnings $265,000

Adjustments:
Decrease in trade receivables 6,000
Decrease in inventories 5,000
Increase in prepaid expenses (4,500)
Decrease in trade payables (4,000)
Increase in income taxes payable 300
Net cash provided by operations $349,800
24
131) Using the indirect method, calculate the amount of cash flows from operating activities from the following
data:

Beginning trade receivables 43,000
Ending trade receivables 37,000
Beginning prepaid expenses 10,000
Ending prepaid expenses 3,000
Beginning trade payables 19,000
Ending trade payables 14,000
Dividends declared and paid 12,000

+ Decrease in trade receivables 6,000
+ Decrease in prepaid expenses 7,000
- Decrease in trade payables -5,000
+ Depreciation expense 48,000
Cash flows from operating activities
$331,000
132) The comparative balance sheets for Gillen Inc. appear below:
Dec 31, 20X7 Dec. 31, 20X6

Assets
Cash $29,000 $10,000
Prepaid expenses 6,000 9,000
Inventory 25,000 15,000
Long-term investments 0 23,000
Equipment 57,000 30,000
Accumulated (18,000) (14,000)
depreciation-equipment
Total assets $122,000 $87,000
Liabilities and Shareholders'
Equity
Mortgage notes payable 37,000 45,000
Common shares 40,000 23,000
Retained earnings 24,000 10,000
Total liabilities and $122,000 $87,000
shareholders' equity
25
Additional information:
1. Net earnings for the year ending December 31, 20X7 were $27,000.
2. Cash dividends of $13,000 were declared and paid during the year ended December 31 20X7.
3. Long-term investments that had a carrying amount of $23,000 were sold for $18,000 in 20X7.
Prepare
Answer: aPlease
cash flow statement
review for theinformation:
the following year ended December 31, 20X7, using the indirect method.
GILLEN INC.
Cash Flow Statement
Year Ended December 31, 20X7
Operating activities
Net earning $27,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Loss on sale of long-term investment in bonds
5,000
Increase in trade receivables (9,000)
Decrease in prepaid expense 3,000
Increase in inventory (10,000)
Increase in trade payable 12,000 5,000
Net cash provided by operating activities $32,000
Investing activities
Sale of long-term investments $18,000
Purchase of equipment (27,000)
Net cash used by investing activities (9,000)
Financial activities
Issues of common shares $17,000
Repayment of mortgage notes payable (8,000)
Payment of cash dividend (13,000)
Net cash used by financing activities (4,000)
Net increase in cash 19,000
Cash, January 1 10,000
Cash, December 31 $29,000
133) A comparative balance sheet for Austin Corporation is presented below:
20X7 20X6
Assets
Cash $39,000 $31,000
26
Trade receivables (net) 73,000 60,000
Prepaid insurance 19,000 17,000
Land 18,000 40,000
Equipment 70,000 60,000
Accumulated depreciation (20,000) (13,000)
Total assets $199,000 $195,000
Liabilities and Shareholders' Equity
Bonds payable 27,000 19,000
Common shares 140,000 115,000
Retained earnings 21,000 55,000
Total liabilities and shareholders' equity $199,000 $195,000
Additional information for 20X7:
1. Net loss for 20X7 is $25,000.

2. Cash dividends of $9,000 were declared and paid in 20X7.
3. Land was sold for cash at a loss of $10,000. This was the only land transaction during the year.
4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash.
5. $12,000 of bonds were retired during the year at their carrying amount.
6. Equipment was acquired for common shares. The fair value of the shares at the time of the exchange was
$25,000.
Prepare a cash flow statement for the year ended 20X7, using the indirect method.
Answer: AUSTIN CORPORATION
Cash Flow Statement
Net loss $(25,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense (a) $17,000
Loss on sale of land 10,000
Increase in trade payables 5,000 17,000
Net cash used by operating activities (8,000)
Proceeds from the sale of land (b) $12,000
Proceeds from the sale of equipment 5,000
Net cash provided by investing activities 17,000
Retirement of bonds payable $(12,000)
27
Issue of bonds payable 20,000
Payment of dividends (9,000)
Increase in cash 18,000
Noncash investing and financing activities

Purchase of equipment through issue of common shares $25,000
(a) Accumulated Depreciation, December 31, 20X6 $13,000

Accumulated Depreciation, December 31, 20X7 20,000
Difference 7,000
Add: Accumulated depreciation on equipment sold 10,000
(b) Cost of land sold $22,000
Less: Loss on sale of land (10,000)
Proceeds from sale of land $12,000
134) Reba Company reported profit of $10,000 for 20X1. Additional 20X1 information is as follows:
Expenditures for operational assets $6,000

Depreciation expense on operational assets 2,000
Dividends paid on common shares 900
Net increase in trade payables 400
Net decrease in inventory 200
Amortization of patent 100
Net decrease in trade receivables 300
Based on the information given above, the statement of cash flows would show "cash flows from operating
activities" of $________
Answer: $10,000 + $2,000 + $400 + $200 + $100 + $300 = $13,000
28
135) McIntire Company reported net earnings of $40,000 which included depreciation expense and depletion
expense of $21,000 and $18,000, respectively. The following changes also occurred during 20X3
Inventory $10,000 decrease

Trade payables 5,000 increase
Notes payable (long-term) 15,000 decrease
Income tax payable 7,000 increase
Trade receivables 10,000 increase
The amount of "cash flows from operating activities" was $________

Answer: $40,000 + $21,000 + $18,000 + $10,000 + $5,000 + $7,000 - $10,000 = $91,000
29
136) The following changes were noted from the statement of financial position: trade receivables increased
$8,000; inventory increased $4,000; trade payables increased $6,000; prepaid expense decreased $2,000;
accrued liability decreased $5,000; and interest payable increased $1,000
ABC Corporation
Income Statement
Net sales $100,000

Cost of goods sold $(40,000)
Gross profit on sales $60,000
Various operating expenses $25,000
Income tax expense 4,000 $(63,000)
Required: Prepare the operating activities section of the statement of cash flows using the indirect method.

Adjustments to reconcile net income to net cash
provided by operations:
Trade receivables increase $(8,000)
Inventory increase $(4,000)
Trade payables increased $6,000
Prepaid expense decrease $2,000
Accrued liability decrease $(5,000)
Interest payable increase $1,000
30
137) The following information was reported from the statement of cash flows for The W D Company for the years
2015 through 2017 in millions of dollars:
20X7 20X6 20X5

Net earnings $1,300 $1,850 $1,966
Cash provided by operations $5,599 $5,115 $5,099
Cash used by investments $(5,310) $(5,665) $(3,936)
Cash provided/used by financing $9 $360 $(1,124)
A. Calculate the quality of earnings ratio for the years 20X5 through 20X7.
B. Interpret the quality of earnings ratio for The W D Company for the three-year period.
Answer: (A) 20X7: 4.30, 20X6: 2.76, 20X5: 2.59.
(B) The W D Company had a strong quality of earnings ratio for all three years. They could generate
positive cash flow from a low of $2.59 for every dollar in net income earned to a high of $4.30 of cash
for every dollar of net earnings. The ratio took a big jump in 2017 primarily caused by an increase in
cash flow from operations and a decrease in net earnings of over a half billion dollars. The
change in net earnings was the major influence on the increase in the quality of earnings ratio.
138) Cox Co. reported the following information from their statement of cash flows in millions of dollars:
20X7 20X6 20X5

Profit $2,431 $3,533 $4,129
Cash provided by operating activities $3,883 $3,433 $4,033
(A) Calculate the quality of earnings ratio for Cox Co for the three years:
(B) In 20X6, Pax Co. reported a quality of earnings ratio of 1.61. Compare C Co.'s quality of earnings ratio for
that year to their competitor's ratio.
Answer: (A) 20X7: 1.60, 20X6: .97, 20X5: .98.
(B) In 20X6, Cox Co.'s quality of earnings ratio was .97 compared to Pax Co's ratio of 1.61. Cox Co.'s
ratio was much lower but it was still close to a ratio of one, so overall its ratio was adequate. Pax Co.'s
ratio showed their ability to generate better cash flow from their earnings than did Cox Co.; however,
by 20X7, it appears as if Cox Co.'s ratio has improved and is in line with Pax Co's 20X6 ratio.
31
139) The following information was available from the financial statements of C Co. Company for the years 20X6
and 20X7 in millions of dollars:
20X7 20X6
Cash flow from operating activities $3,883 $3,433
Cash paid for purchases of property, plant, and equipment $1,069 $863
Average property, plant and equipment, net $3,968 $3,706
A. Calculate the capital expenditures ratio for C Co. for the two years:
B. Comment on the sufficiency of the capital expenditures ratio for the two years.
Answer: (A) 20X7: 3.63, 20X6: 3.98.
(B) The ratio appears to be sufficient in both years. C Co. is generating $3.63 of cash flow from
operations for every $1 they are investing in new plant and equipment as of 20X7. This indicates they d
not need to borrow or issue shares to secure external financing for their expansion of plant and
equipment assets.
140) The following information is provided from the cash flow statement for Toys 4 U for the years
20X3 through 20X7 in millions of dollars:
20X7 20X6 20X5 20X4 20X3

Cash provided by operating activities
$964 $509 $743 $250 $592
Capital expenditures, net $373 $494 $415 $468 $586
(A) Calculate the capital acquisitions ratio for Toys 4 U for the five-year period from 20X3 to 20X7.
(B) Comment on the capital acquisitions ratio for Toys 4 U for the five years.
Answer: (A) 20X7: 2.58, 20X6: 1.03, 20X5: 1.79, 20X4: .53, 20X3: 1.01.
(B) The capital acquisitions ratio for Toys 4 U has been erratic over the five years ranging from a low o
.53 to a high of 2.58. During the five years from 20X3 to 20X7, the company had been investing
between $586 million to $373 million in property, plant and equipment. However, their cash flow from
operations was very erratic ranging from a high of $964 million in 20X7 to a low of $250
million in 20X4. The ratio has been affected not only by the level of investments in these
long-lived assets, but by the erratic inflow of cash from operations. In 20X7, the ratio was at
its highest point at 2.58 caused by a decrease in the level of investment, $373 million, while
cash inflow was at its peak of $964 million.
32
141) While preparing a statement of cash flow, you encountered the following transaction:
February 1, 20X1: Zorro Corporation acquired a small office building in exchange for 5,000 shares of its own
common shares; par value $10 per share; market value $15 per share.
(a) Should this transaction be included in the calculations on the statement of cash flows or
shown in the notes?
(b) Explain your answer.
Answer: (a) Notes
(b) Because it is a direct exchange, it is reported on the statement of cash flows in the Schedule of
Non-cash Investing and Financing Transactions as "Office building, acquired for 5,000 shares of Zorro
common shares, $75,000."
33
Answer Key
1) D
2) D
3) D
4) C
5) A
6) D
7) A
8) B
9) B
10) B
11) B
12) A
13) C
14) D
15) B
16) C
17) A
18) C
19) A
20) C
21) D
22) A
23) C
24) A
25) A
26) D
27) B
28) C
29) C
30) C
31) A
32) D
33) C
34) D
35) A
36) C
37) B
38) B
39) B
40) B
41) C
42) A
43) A
44) A
45) A
46) C
47) C
48) C
49) D
50) B
34
Answer Key
51) D
52) C
53) D
54) C
55) B
56) A
57) C
58) D
59) B
60) A
61) D
62) C
63) A
64) C
65) C
66) D
67) B
68) D
69) B
70) D
71) B
72) A
73) D
74) A
75) B
76) A
77) D
78) A
79) D
80) FALSE
81) FALSE
82) FALSE
83) TRUE
84) FALSE
85) FALSE
86) FALSE
87) TRUE
88) TRUE
89) FALSE
90) TRUE
91) TRUE
92) TRUE
93) FALSE
94) TRUE
95) TRUE
96) TRUE
97) FALSE
98) TRUE
99) TRUE
100) FALSE
35
Answer Key
101) TRUE
102) TRUE
103) FALSE
104) FALSE
105) TRUE
106) TRUE
107) TRUE
108) TRUE
109) FALSE
110) TRUE
111) TRUE
112) TRUE
113) TRUE
114) TRUE
115) TRUE
116) TRUE
117) TRUE
118) FALSE
119) TRUE
120) TRUE
121) FALSE
122) FALSE
123) FALSE
124) FALSE
125) FALSE
126) TRUE
127) Solution:
O 1. Collection of interest on a note receivable

F 2. Payment of debt principal with cash
I 3. Sales of operational assets
F 4. Payment of cash dividends
F 5. Issuance of shares for cash
F 6. Borrowing cash from the bank
I 7. Purchase of operational assets for cash
O or I 8. Collections of dividends on long term investments
128) Solution:
1. C, 2. C, 3. A, 4. A, 5. A, 6. D, 7. C, 8. B, 9. B, 10. D
129) Solution:
1. A, 2. C, 3. B, 4. D, 5. C, 6. A, 7. D, 8. B, 9. B, 10. A
36
Answer Key

Adjustments:
Decrease in trade receivables 6,000
Decrease in inventories 5,000
Decrease in trade payables (4,000)
Increase in income taxes payable 300
Net cash provided by operations $349,800

+ Decrease in trade receivables 6,000
+ Decrease in prepaid expenses 7,000
- Decrease in trade payables -5,000
+ Depreciation expense 48,000
Cash flows from operating activities
$331,000
37
Answer Key
GILLEN INC.
Cash Flow Statement
Net earning $27,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Loss on sale of long-term investment in bonds
5,000
Decrease in prepaid expense 3,000
Increase in inventory (10,000)
Increase in trade payable 12,000 5,000
Sale of long-term investments $18,000
Purchase of equipment (27,000)
Net cash used by investing activities (9,000)
Issues of common shares $17,000
Repayment of mortgage notes payable (8,000)
Payment of cash dividend (13,000)
Net increase in cash 19,000
133) AUSTIN CORPORATION

Cash Flow Statement
Net loss $(25,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense (a) $17,000
Loss on sale of land 10,000
38
Answer Key

Increase in trade payables 5,000 17,000
Net cash used by operating activities (8,000)
Proceeds from the sale of land (b) $12,000
Proceeds from the sale of equipment 5,000
Net cash provided by investing activities 17,000
Retirement of bonds payable $(12,000)
Issue of bonds payable 20,000
Payment of dividends (9,000)
Increase in cash 18,000
Noncash investing and financing activities

Purchase of equipment through issue of common shares $25,000
(a) Accumulated Depreciation, December 31, 20X6 $13,000

Accumulated Depreciation, December 31, 20X7 20,000
Difference 7,000
Add: Accumulated depreciation on equipment sold 10,000
(b) Cost of land sold $22,000
Less: Loss on sale of land (10,000)
Proceeds from sale of land $12,000
134) $10,000 + $2,000 + $400 + $200 + $100 + $300 = $13,000

135) $40,000 + $21,000 + $18,000 + $10,000 + $5,000 + $7,000 - $10,000 = $91,000
39
Answer Key

Adjustments to reconcile net income to net cash
provided by operations:
Trade receivables increase $(8,000)
Inventory increase $(4,000)
Trade payables increased $6,000
Prepaid expense decrease $2,000
Accrued liability decrease $(5,000)
Interest payable increase $1,000
137) (A) 20X7: 4.30, 20X6: 2.76, 20X5: 2.59.

(B) The W D Company had a strong quality of earnings ratio for all three years. They could generate positive cash
flow from a low of $2.59 for every dollar in net income earned to a high of $4.30 of cash for every dollar of net
earnings. The ratio took a big jump in 2017 primarily caused by an increase in cash flow from operations and a
decrease in net earnings of over a half billion dollars. The change in net earnings was the major influence
on the increase in the quality of earnings ratio.
138) (A) 20X7: 1.60, 20X6: .97, 20X5: .98.
(B) In 20X6, Cox Co.'s quality of earnings ratio was .97 compared to Pax Co's ratio of 1.61. Cox Co.'s ratio was mu
lower but it was still close to a ratio of one, so overall its ratio was adequate. Pax Co.'s ratio showed their ability to
generate better cash flow from their earnings than did Cox Co.; however, by 20X7, it appears as if Cox Co.'s
ratio has improved and is in line with Pax Co's 20X6 ratio.
139) (A) 20X7: 3.63, 20X6: 3.98.
(B) The ratio appears to be sufficient in both years. C Co. is generating $3.63 of cash flow from operations for ever
$1 they are investing in new plant and equipment as of 20X7. This indicates they do not need to borrow or issue sha
to secure external financing for their expansion of plant and equipment assets.
140) (A) 20X7: 2.58, 20X6: 1.03, 20X5: 1.79, 20X4: .53, 20X3: 1.01.
(B) The capital acquisitions ratio for Toys 4 U has been erratic over the five years ranging from a low of .53 to a hig
of 2.58. During the five years from 20X3 to 20X7, the company had been investing between $586 million to $373
million in property, plant and equipment. However, their cash flow from operations was very erratic ranging
from a high of $964 million in 20X7 to a low of $250 million in 20X4. The ratio has been affected not
only by the level of investments in these long-lived assets, but by the erratic inflow of cash from
operations. In 20X7, the ratio was at its highest point at 2.58 caused by a decrease in the level of
investment, $373 million, while cash inflow was at its peak of $964 million.
40
Answer Key
141) (a) Notes

(b) Because it is a direct exchange, it is reported on the statement of cash flows in the Schedule of Non-cash
Investing and Financing Transactions as "Office building, acquired for 5,000 shares of Zorro's common shares,
$75,000."
41
1) A current liability is a debt that can reasonably be expected to be paid

A) out of cash currently on hand. B) out of currently recognized revenues.
C) between 6 months and 18 months. D) within one year.
Answer: D
2) Which of the following is not a typical current liability?

A) Income tax payable B) Deferred revenue
C) Sales taxes payable D) Bonds payable
Answer: D
3) Which of the following most likely would be classified as a current liability?

A) Mortgage payable B) Bonds payable
C) Three-year notes payable D) Dividends payable
Answer: D
4) Purchase of inventory for cash will:

A) decrease the current ratio. B)decrease the quick ratio.
C) increase the quick ratio. D) increase the current ratio.
Answer: B
5) A company's quick ratio:

A) indicates how quickly the company converts its current assets to cash.
B) can never be larger than its current ratio at the same date.
C) is computed by dividing current assets by current liabilities, excluding accounts payable for
inventory purchases.
D) indicates the length of time the company takes to pay its short-term creditors.
Answer: B
6) The following is a partial list of account balances from the books of Ellsworth Enterprise at the end of 20X1:
Trade Payables $1,200

Accrued Vacation Liability 900
Cash 3,000
Deferred Revenue 500
Income Taxes Payable 2,200
Notes Payable (due in 2 years) 600
Based solely upon these balances, what amount of current liabilities should appear on Ellsworth's 20X1
year-end statement of financial position?
A) $4,300 B) $5,400 C) $3,900 D) $4,800
Answer: D
1
7) On January 1, 20X3, Osler Limited, a calendar-year company, issued $160,000 of notes payable, of
which $40,000 is due on January 1 for each of the next four years. The proper balance sheet
presentation on December 31, 20X3, is
A) Current Liabilities, $120,000; Long-term Debt, $40,000.
B) Current Liabilities, $40,000; Long-term Debt, $120,000.
C) Current Liabilities, $160,000.
D) Long-term Debt, $160,000.
Answer: B
8) Liquidity ratios measure a company's

A) revenue-producing ability. B)operating cycle.
C) long-range solvency. D) short-term debt paying ability.
Answer: D
9) The following information is available for Lowell Company:
Current Assets
Cash $4,000
Marketable securities 75,000
Accounts receivable 61,000
Inventories 110,000
Prepaid expenses 30,000
Total current assets $280,000
Total current liabilities are $80,000. The quick ratio for Lowell is
A) 2.13 B) 3.25 C) 1.75 D) 1.3
Answer: C
10) Which of the following most likely would be classified as a current liability?
A) Mortgage payable B) Bonds payable
C) Dividends payable D) Three-year notes payable
Answer: C
11) A customer paid a total of $84,000 for a purchase, including 5% PST (provincial sales tax). What
was the PST amount?
A) $4,000 B) $4,200 C) $80,000 D) $84,000
Answer: A
12) A company receives $111, of which $11 is for PST (provincial sales tax). The journal entry to
record the sale would include a
A) debit to Sales for $111. B) debit to PST Expense for $11.
C) debit to Cash for $90. D) credit to PST Payable for $11.
Answer: D
2
13) Therelationship between current assets and current liabilities is
A) called the matching principle.
B) useful in evaluating a company's liquidity.
C) useful in determining the amount of a company's long-term debt.
D) useful in determining profit.
Answer: B
14) Which of the following method of ordering is normally used to present current liabilities on the
statement of financial position?
A) In order of reverse liquidity B) In order of their magnitude
C) In alphabetical order D) In order of their liquidity (due date)
Answer: D
15) Most companies pay current liabilities

A) out of current assets. B) by creating long-term liabilities.
C) by issuing interest-bearing notes payable. D) by issuing shares.
Answer: A
16) Failureto record a liability will probably

A) result in overstated net earnings.
B) have no effect on net earnings.
C) result in overstated total assets.
D) result in overstated total liabilities and shareholders' equity.
Answer: A
17) Accounts payable are recorded on the books at their:

A) net realizable value B) net amount
C) gross amount D) net present value
Answer: C
3
18) GothicArchitects Inc. received its annual property tax bill for $7,800 in January. It is due on
February 28th. What is the journal entry that should be made in January?
A) Please see the following information:
Prepaid Property Tax 7,800

Property Tax Payable 7,800
B) Please see the following information:
Property Tax Expense 650

Property Tax Payable 650
C) Please see the following information:
Property Tax Expense 7,800

D) Please see the following information:
Property Tax Expense 650

Prepaid Property Tax 7,150
Answer: D
19) Haletone Corp provides the following information for 20X6 and 20X7
20X6 20X7
Current assets $23,000 $27,000
Accounts payable 9,000 10,000
Other current liabilities 5,000 4,000
Non-current liabilities 50,000 62,000
Sales 125,000 135,000
Cost of sales 75,000 79,600
Haletone's days payable outstanding for 20X7 is closest to

A) 48 days B) 43.6 days C) 47.2 days D) 46.2
Answer: B
20) GST (goods and services tax) collected by a retailer is recorded by

A) crediting GST Revenue. B) debiting GST Payable.
C) debiting GST Expense. D) crediting GST Payable.
Answer: D
4
21) GST (goods and services tax) collected by a retailer are expenses
A) of the customers.
B) that are not recognized by the retailer until they are submitted to the government.
C) of the government.
D) of the retailer.
Answer: A
22) Carly Design Inc. received its annual property tax bill for $8,400 in January. It was paid when due
on March 31. Carly Design's year end is Dec 31. The Dec 31 account balances should be
A) $0 for Prepaid Property Tax, $0 for Property Tax Payable
B) $2,100 for Prepaid Property Tax, $6,300 for Property Tax Expense
C) $700 for Prepaid Property Tax, $7,700 for Property Tax Expense
D) $2,100 for Prepaid Property Tax, $2,100 for Property Tax Payable
Answer: A
23) Emerald Jewelers is a retail store operating in Ontario, where the GST is 5% and the PST is 8%. For
the month of June, Emerald sold $45,000 worth of jewelry to customers, 60% of which were cash
sales and the balance paid by credit cards. Credit card fees are 2.5%. Based on this information,
what is the total debit to Accounts Receivable for the month of June?
A) $45,000 B) $50,850 C) $50,342 D) $44,550
Answer: B
24) Acash register tape shows cash sales of $2,000 and provincial sales tax (PST) of $120. The journal
entry to record this information is
A) Please see the following information: B) Please see the following information:
Cash 2,120 Cash 2,000

PST payable Sales 2,000
120
Sales 2,000
C) Please see the following information: D) Please see the following information:
Cash 2,120 Cash 2,000

Sales 2,000 PST receivable 120
PST Payable 120 Sales 2,120
Answer: C
5
25) An employee receives a bi-weekly gross salary of $2,000. Income tax is $218, CPP is $99, EI is $36,
and union dues are $50. What is the amount of the employee's take home pay (net pay) on a
bi-weekly basis?
A) $1,732 B) $1,597 C) $1,782 D) $2,000
Answer: B
26) Agracon Foods distributes coupons to consumers which may be presented, on or before a stated
expiry date, to grocery stores for discounts on certain Agracon products. The stores are reimbursed
when they send the coupons to Agracon. In Agracon's experience, only about 50% of these coupons
are redeemed. During 2011, Agracon issued two separate series of coupons as follows:
Amounts Reimbursed as of
Issued On Total Value CouponExpiry Date Dec 31 20X1
Jan 1 20X1 $250,000 Jun 30 20X1 $118,000
Oct 1 20X1 $360,000 Mar 31 20X2 $150,000
Agracon's only journal entries for 20X1 recorded debits to coupon expense, and credits to cash of $268,000.
Their December 31, 20X1 balance sheet should include a provision for unredeemed coupons of:
A) $0 B) $62,000 C) $180,000 D) $30,000
Answer: D
27) Site Company had the following account balances related to payroll at the end of the period:
CPP payable — employees' share 7,000

Liability for income taxes withheld 20,000
Salary and wage expense 95,000
Without considering any employer payroll taxes, Site would record Salaries Payable for the pay period
amounting to which of the following?
A) $75,000 B) $95,000 C) $61,000 D) $68,000
Answer: D
28) How should the amount of federal income tax that is withheld from employees' paychecks by the
employer be recorded?
A) On the employer's books as an asset.
B) On the employer's books as a current liability.
C) On the employer's books as revenue.
D) It should not be recorded on the employer's books.
Answer: B
6
29) The federal government requires which of the following?
A) Only the employer to pay CPP contributions.
B) Both the employer and the employee to pay CPP contributions.
C) Only the employee to pay CPP contributions.
D) Neither the employer nor the employee to pay CPP contributions.
Answer: B
30) ACo, a biotechnology company, reported cost of sales of $345.2 million and trade payables of
$121.6 million for 20X3. In 20X2, cost of sales was $300.8 million and trade payable was $103.9
million. What was A Co's trade payables turnover ratio in 20X3?
A) 2.86 B) 2.84 C) 3.06 D) 2.90
Answer: C
31) In20X3, P Co reported a trade payables turnover ratio of 2.49 and C Co reported a turnover ratio of
1.74 for that same year. Which of the following statements is true?
A) P Co took approximately 147 days while C Co took about 210 days to pay vendors.
B) On a comparative basis to cost sales, P Co carries more in average payables than does C Co.
C) C Co pays their vendors in a timelier manner than P Co pays their vendors.
D) It is unclear if P Co pays their vendors in a timelier manner than C Co.
Answer: A
32) In
20X3, Toys 4 U had a trade payables turnover ratio of 6.08; in 20X2, 5.87; and 5.45 in 20X1.
Which statement is true about what the ratios indicate?
A) Toys 4 U is taking less time to pay vendors in 20X3 than it took in both 20X2 and 20X1.
B) Toys 4 U is taking less time to collect from its customers.
C) Toys 4 U is taking longer to pay its vendors in 20X3 versus 20X2.
D) Toys 4 U has been increasing its average payables at a faster rate than its cost of goods sold has
increased.
Answer: A
33) G Co and A Co are both in the biotechnology industry. In 20X3, G Co reported a trade payables
turnover of 7.71 and A Co reported a ratio of 3.06. Which of the following is an incorrect reason for
the difference in ratios?
A) G Co has a better payment record in terms of timely payment to vendors.
B) A Co is taking longer to pay vendors.
C) A Co has a higher average trade payables in comparison to G co.
D) A Co has a lower average trade payables in comparison to G co.
Answer: D
34) The amount of sales tax collected by a retail store when making sales is
A) a current liability.
B) recorded as an operating expense.
C) miscellaneous revenue for the store.
D) not recorded because it is a tax paid by the customer.
Answer: A
7
35) Ingrid'sBoutique has made a total of $24,250 in instalments for corporate income tax for calendar
20X6, all of which have been debited to the account - Income tax expense. At year end, Dec 31,
20X6, the accountant has calculated that the corporation's actual tax liability is only $22,500. What
is the correct adjusting entry to reflect this fact?

Income taxes payable 22,500

Income taxes receivable 1,750


Answer: C
36) On September 1, Hauser Corp. borrowed $70,000 from the Metro Bank for five months at 9%.
Interest is payable at maturity. The entry Hauser must make on December 31, its year-end, assuming
no prior accruals is:
Interest Expense 2,625 Interest Expense 2,100

Notes Payable 2,625 Interest Payable 2,100

Interest Payable 1,575 Notes Payable 6,300
Answer: B
8
37) A 9% six-month note for $10,000 was recorded on October 1. What journal entry would be recorded
at the year end of December 31 if interest is payable at maturity?
Interest Expense 225 Interest Expense 900

Interest Payable 225 Interest Payable
900
Note Payable 900 Interest Expense 450

Interest Payable Notes Payable 450
450
Interest Expense
450
Answer: A
9
38) On September 1, Linwell Corp. borrowed $70,000 from the Highland Bank for five months at 9%.
Interest is due at maturity. The company's year-end is December 31, at which time any outstanding
interest was accrued. The entry to record payment of the note and accrued interest on February 1, the
due date, is:
Notes Payable 72,625

Cash 72,625

Interest Payable 2,100
Cash 72,625
Note Payable 70,000

Cash 72,625
Note Payable 70,000

Cash 72,625
Answer: B
39) Failure
to make a necessary adjusting entry for accrued interest on a note payable would cause
A) An overstatement of profit, an understatement of liabilities, and an overstatement of
shareholders' equity.
B) Profit to be overstated and assets to be understated.
C) An understatement of liabilities and shareholders' equity.
D) Profit to be understated and liabilities to be understated.
Answer: A
10
40) Goodman Company borrowed $100,000 cash on September 1, 20X1, and signed a one-year, 12%,
interest-bearing note payable. What would be the required adjusting entry at the end of the
accounting period, December 31, 20X1?
Interest payable 4,000



Cash 112,000

Answer: D
41) Theinterest charged on a $200,000 note payable, at the rate of 6%, on a 3-month note would be
A) $3,000 B) $12,000 C) $4,000 D) $1,000
Answer: A
42) Deferred revenue is another term for which of the following?
A) Trade payables B) Deferred revenue

C) Prepaid expenses D) Sales revenue
Answer: B
Reference: 09-01
On July 1, 20X0, Wilson, Inc., borrowed $12,000 from First Bank on a one year, 8% note payable. Interest is
payable on December 31, 20X0 and on June 30, 20X1, the due date of the note.
43) The
journal entry required on the company's books to record the note payable on July 1, 20X0
would include which of the following?
A) A debit to interest expense for $960. B) A debit to cash for $11,040.
C) A credit to notes payable for $12,000. D) A credit to notes payable for $12,960.
Answer: C
11
44) Onthe company's 20X0 year-end statement of financial position, the liability related to this note
should be reported as which of the following?
A) A $12,480 long-term liability. B) A $12,000 current liability.
C) A $12,000 long-term liability. D) A $12,480 current liability.
Answer: B
45) Interestrates on notes are usually stated as a(n)

A) daily rate. B) semi-annual rate.
C) annual rate. D) monthly rate.
Answer: C
46) Bison Corp. issues a 5 year 8%, $60,000 note payable on March 1. The terms of the note include
monthly blended principal and interest payments of $1,217. The entry to record the second
instalment payment will show a:
A) debit to Interest Expense for $400. B) credit to Interest Expense for $395.
C) debit to Cash for $1,217. D) debit to Notes Payable of $822.
Answer: D
Reference: 09-02
On October 1, Mystic Window Cleaners borrowed $50,000 from Falconville Credit Union on a 3-month, $50,000, 3% no
47) What entry must Mystic Window Cleaners make on December 31 before financial statements are
prepared, assuming interest is payable at maturity?
Interest Payable 375 Interest Expense 375

Interest Expense 375 Interest Payable 375

Interest Payable 1,500 Notes payable 1,500
Answer: B
12
48) The entry by Mystic Window Cleaners to record payment of the note and accrued interest on January 1 is

Cash 50,375

Cash 51,500

Cash 50,375

Cash 50,375
Answer: A
49) On Dec 8, 20X0, Peter Goldfarb, CPA, received $1,000 from a customer as an advance payment for
accounting services. The payment was credited to service revenues. Thirty percent of the work was
performed in December 20X0, with the rest to be done in January 20X1, at which time the customer
will be billed. What is the required adjusting entry at year end December 31, 20X0?
Service Revenues 700 Service Revenues 300

Deferred Revenue 700 Deferred Revenue 300
Deferred Revenue 700 Deferred Revenue 300

Service Revenues 700 Service Revenues 300
Answer: A
13
50) Thecurrent portion of long-term debt should be
A) classified as a long-term liability on the statement of financial position.
B) paid immediately.
C) removed from the long-term portion of debt with a journal entry.
D) classified as a current liability on the statement of financial position.
Answer: D
51) OnDecember 31, 20X7, a company has a $500,000 fifteen-year mortgage outstanding. Over the
next year, they will make twelve monthly payments of $5,000 representing $33,500 of interest and
$26,500 of principal repayment. Which of the following best represents how the mortgage will be
reported on the December 31, 20X7 statement of financial position
Current liabilities Long-term liabilities

$60,000 $473,500

$26,500 $473,500

$26,500 $440,000

$60,000 $440,000
Answer: B
52) Under IFRS, a provision is

A) an allowance for future dividends to be paid.
B) a liability of uncertain timing or amount.
C) a special fund set aside to pay long-term debt.
D) deferred revenue.
Answer: B
53) When the occurrence of a liability is dependent on the outcome of some future event, the liability is
referred to as a(n)
A) commitment. B) contingent liability.
C) accounts payable. D) accrued liability
Answer: B
14
54) On December 31, 20X5, Gold Charter Airlines has $2,000,000 in short-term notes payable due on
February 10, 20X6. On January 10, 20X6, Gold arranged a line of credit with Fargo Wells Bank,
which allows Gold to borrow up to $1,500,000 at 1% above the prime rate for three years. On
February 2, 20X6, Gold borrowed $1,200,000 from Fargo Wells Bank and used $500,000 additional
cash to liquidate $1,700,000 of the short-term notes payable. What is the amount of the short-term
notes payable that should be reported as current liabilities on Gold's December 31, 20X5 statement
of financial position (to be issued on Feb 28, 20X5) is
A) $2,000,000 B) $300,000 C) $1,200,000 D) $0
Answer: A
55) Saturn Bedding and Linens secured a $750,000, five- year, 4% note payable on January 1. The loan
will be repaid using blended monthly payments with a fixed monthly principal payment of $12,500.
Which of the following represents how the loan will be reflected on statement of financial position
at the end of the first year?
Current portion long-term debt Long-term liabilities note payable

$0 $750,000

$600,000 $0

$150,000 $450,000

$300,000 $450,000
Answer: C
15
Reference: 09-03
Serenity Spa sells $25,000 worth of gift certificates in November and December. 25% of the gift certificates are redeeme
in December prior to the December 31 year-end.
56) What journal would Serenity Spa make to record the sale of the gift certificates?
Gift card revenue 25,000

Deferred gift card revenue 25,000
Cash 25,000
Deferred gift card revenue 25,000
Cash 25,000
Prepaid gift cards 6250

Answer: B
16
57) What year-end adjusting entry should Serenity Spa make?
Deferred gift card revenues 6250

Gift card revenues
6,250
Gift card revenues 18,750

Deferred gift card revenue
18,750
Revenues 6,250
Deferred gift card revenues
6,250
Gift card revenues 18,750

Deferred gift card revenues
18,750
Answer: A
Reference: 09-04
Big Top Electronics Inc. offers a two-year warranty on its products. The estimated liability is 4% of sales in the
year of sale and 6% in the second year. Sales for 20X0 and 20X1 were: $2,500,000 and $2,800,000,
respectively. They incurred no warranty costs in 20X0 but in 20X1 they spent $175,000 on repairs related to the
warranties from 20X0 and 20X1.
58) Big Top's

warranty liability at the year-end 20X0 is
A) $250,000 B) $150,000 C) $100,000 D) $0
Answer: A
59) Big Top's

warranty expense for 20X0 is
A) $250,000 B) $150,000 C) $80,000 D) $100,000
Answer: A
60) Big Top's warranty liability as at the end of the 20X1 year is
A) $280,000 B) $380,000 C) $355,000 D) $75,000
Answer: C
17
61) Armadillo Appliances sells new and reconditioned kitchen and laundry appliances. Armadillo sold a
reconditioned refrigerator for $1,100 on Oct 25, 20X4, with a one-year warranty covering parts and
labour. Warranty expense is estimated at 5% of the selling price, and the appropriate adjusting entry
is recorded at Dec 31, 20X4. On January 6, 20X5, the refrigerator is returned for warranty repairs.
This cost Armadillo $25 in parts and $20 in labour. When recording the January 6, 20X5
transaction, Armadillo would debit warranty expense with
A) $25 B) $0 C) $45 D) $55
Answer: B
62) A contingent liability is recorded in the accounting records

A) under no circumstances.
B) if a reasonable estimate of the expected loss can be determined and if it is probable.
C) if the contingency has not already been disclosed in the notes to the financial statements.
D) if it will possibly become an actual liability, and the exact amount is unknown.
Answer: B
63) Which of the following is correct with respect to a contingent liability that is "reasonably possible"
but "cannot reasonably be estimated"?
A) It must only be disclosed as a note to the financial statements.
B) It does not need to be recorded or reported as a liability.
C) It must be reported as a liability, but not recorded.
D) It must be recorded and reported as a liability.
Answer: A
64) Jake Company is involved in a lawsuit. The liability which could arise as a result of this lawsuit
should be recorded on the books if the probability of Jake owing money as a result of the lawsuit is
A) Probable and the amount can be reasonably estimated.
B) Remote and the amount can be reasonably estimated.
C) Reasonably possible and the amount can be reasonably estimated.
D) Probable and the amount cannot be reasonably estimated.
Answer: A
65) Cress Company is involved in a lawsuit. Note disclosure of the contingent liability which could
arise does NOT have to be presented if the probability of Cress owing money as a result of the
lawsuit is which of the following?
A) Reasonably possible and the amount cannot be reasonably estimated.
B) Reasonably possible and the amount can be reasonably estimated.
C) Remote and the amount cannot be reasonably estimated.
D) Probable and the amount cannot be reasonably estimated.
Answer: C
18
66) Alamo Autoworks, Inc. is involved in a lawsuit. Their lawyers state that it is probable that the jury
will find in favour of the plaintiff and Alamo will owe two million dollars. Even though the lawsuit
is not yet settled, Alamo should record a liability in the statement of financial position as which of
the following?
A) A contra-asset B) Deferred revenue
C) A loss D) A prepaid expense
Answer: C
67) In20X3, C Co reported a trade payables turnover ratio of 1.85 and a current ratio of 0.66. Their
statement of financial position shows $2.1 billion in marketable securities not included in their
current assets and cash flow from operations. Which of the following interpretations is most likely?
A) C Co practices aggressive cash management policies including investing excess cash and using
vendors to finance operations by making slow payment to them.
B) C Co must be carrying a low amount of current liabilities in comparison to its total liabilities.
C) Since the two ratios are fairly high, it indicates C Co has little difficulty paying its bills in a
timely manner.
D) Since both these ratios are low, it might indicate poor liquidity and inability to pay vendors in a
timely manner.
Answer: A
68) In20X3, P Co reported an increase in trade receivables of $303 million, and an increase in
inventory of $284 million. They also experienced an increase in short-term borrowings of $3,921
million and an increase in trade payables of $253 million. Calculate the net cash effect of these
changes.
A) $3,587 million increase B) $3,587 million decrease
C) $4,761 million decrease D) $4,761 million increase
Answer: A
69) In
20X3, Toys 4 U reported inventory of $1,902 million and trade payables of $1,415 million. In
20X2, the company reported inventory of $2,464 million and trade payables of $1,280 million. What
was the effect on the 20X3 cash flow from operating activities?
A) A decrease in cash of $427 million. B) A decrease in cash of $697 million.
C) An increase in cash of $697 million. D) An increase in cash of $427 million.
Answer: C
70) When a company increases trade payables from one year to the next, what is the effect on cash
flows?
A) A decrease in cash caused by paying down our debt to vendors.
B) A decrease to cash because we will have to pay these liabilities in the future.
C) An increase to cash because we have received cash from vendors.
D) An increase in cash because we have not paid cash for all the inventory and services purchased
on credit during the period.
Answer: D
19
71) Futureincome tax obligations should be reported on which of the following?
A) A corporation's statement of financial position.
B) A corporation's income tax return.
C) A corporation's income statement.
D) Statement of changes in equity.
Answer: A
72) Freeman Inc. reported a profit of $40,000 for 20X0. The income tax return excluded a revenue item of $3,000
(reported on the income statement) because under the tax laws the $3,000 would not be reported for tax
purposes until 20X1. Assuming a 30% income tax rate, this situation would cause a 20X0 future tax amount of
A) $3,000 (debit) B) $900 (credit) C) $900 (debit) D) $3,000 (credit)

Answer: B
73) Income tax expense reported on the income statement is $45,000 for 20X0, and the tax return for
20X0 (the first year) shows an income tax liability of $42,000 because of a deduction that cannot be
taken until 20X1. The future income tax amount on the statement of financial position at the end of
20X0 will be which of the following?
A) credit of $45,000 B) credit of $42,000
C) credit of $3,000 D) debit of $3,000
Answer: C
74) Situations which require that future income tax be reported involve a difference that is called which
of the following?
A) A permanent difference. B) A reversing tax inverse difference.
C) A contingent liability. D) A temporary difference.
Answer: D
75) FutureIncome taxes are caused by which of the following?

A) Differences in IFRS and ITA rules pertaining to when revenue and expenses should be
recognized.
B) Accounting errors.
C) The fact that the value of one country's currency relative to that of another can change over
time.
D) A company's inability to pay income tax due in a particular tax year.
Answer: A
76) All
the following transactions lead to temporary timing differences except:
A) The use of provisions for gift card sales
B) the use of straight-line amortization for accounting purposes
C) the recognition of dividend income for dividends received from another Canadian company
D) the use of estimated warranty costs for calculating warranty expense
Answer: C
20
77) A future tax asset indicates that the company
A) paid their taxes for the current year in advance.
B) had some expenses that were deductible for taxes but are prepaid for accounting purposes.
C) expects to pay higher taxes in the future
D) expects a benefit in the form of lower taxes in the future.
Answer: D
78) A current liability must be paid out of current earnings.

Answer: True False
79) Ifany portion of a long-term debt is to be paid in the next year, the entire debt should be classified
as a current liability.
Answer: True False
80) Current liabilities are expected to be paid within one year.

Answer: True False
81) A company whose current liabilities exceed its current assets may have a liquidity problem.
Answer: True False
82) Property taxpayable is classified as a long-term liability because it is related to property, a

noncurrent asset.
Answer: True False
83) Ifa company's fiscal year is the same as the year used for property tax purposes, there should be no
prepaid property tax on its year-end financial statements but there may be a property tax liability.
Answer: True False
84) Interest expense is reported under Other Expenses in the statement of earnings.
Answer: True False
85) Deferred revenues should be classified as Other Revenues on the statement of earnings.
Answer: True False
86) Payroll liabilities include the employer's share of CPP contributions and EI premiums.
Answer: True False
87) The quick ratio is the dollar difference between total assets and total liabilities.
Answer: True False
88) Analysts use the quick ratio to assess the profitability of a company.
Answer: True False
21
89) A quick ratio that is high when compared to an industry average might mean the company may have excessive
inventory levels or slow moving inventory items.
Answer: True False
90) A company that sells primarily on a cash basis could support a lower quick ratio because their cash
inflow is faster than a company selling on credit.
Answer: True False
91) G Co, a biotechnology company, reported current assets of $1,326.5 million and current liabilities of
$484.1 million in 20X3 and in 20X2, current assets of $1,242.0 million and $291.3 million of
current liabilities. Therefore, working capital for G Co. increased from 20X2 to 20X3.
Answer: True False
92) Liabilities represent an obligation to pay that the company must satisfy.
Answer: True False
93) A liability, to be reported on the statement of financial position, must have a fixed, known amount
to be paid in the future.
Answer: True False
94) The trade payables turnover ratio can indicate if a company is experiencing cash flow problems.
Answer: True False
95) The "trade payables" account should generally be used only for trade payables (obligations owed to
suppliers in the normal course of business) which relate to the purchase of goods and services.
Answer: True False
96) An accrued expense arises because an expense item has been prepaid, but the related expense has
not been incurred yet.
Answer: True False
97) The Canada Pension Plan contribution is a matching contribution with a portion paid by both the
employer and the employee.
Answer: True False
98) The trade payables turnover ratio shows how quickly management is paying its trade creditors and is
considered to be a measure of liquidity.
Answer: True False
99) Interest expense on a note payable is only recorded at maturity.

Answer: True False
100) Most notes are not interest bearing.

Answer: True False
22
101) Simple interest is calculated as: Principal × Time.
Answer: True False
102) Current liabilities are short-term obligations that will be paid within the current operating cycle of
the business or within two years of the statement of financial position date, whichever is longer.
Answer: True False
103) The amount of salary expense that a company records for a pay period will usually be less than the
amount of salary payable that it records.
Answer: True False
104) If a company intends to refinance a liability that is due within one year, that liability should not be
classified as a current liability.
Answer: True False
105) The trade payables turnover ratio tests how quickly our credit customers pay their bills.
Answer: True False
106) The trade payables turnover ratio can be manipulated by management through paying off more of
their vendors at the end of the year, even though they have been paying late all year, so their ratio
would look acceptable.
Answer: True False
107) A low trade payables turnover ratio caused by an aggressive cash management strategy, while the
quick ratio is adequate, would be perceived by analysts as a weakness.
Answer: True False
108) With an interest-bearing note, the amount of cash received upon issue of the note generally exceeds
the note's face value.
Answer: True False
109) A note payable must always be paid before an account payable.

Answer: True False
110) When the current assets of a company such as trade receivables or inventory increase during the
year, the increase provides additional cash inflow from operating activities.
Answer: True False
111) Notes payable usually require the borrower to pay interest.

Answer: True False
112) Notes payable are sometimes used instead of trade payables.

Answer: True False
113) Changes in trade payables and accrued liabilities affect cash flows from operating activities.
Answer: True False
23
114) In the recognition of revenues and expenses, temporary and permanent differences between the
financial statements and the tax return will result in a Future Income Tax Asset.
Answer: True False
115) The balance in the Future Income Tax Asset account always will reverse or "turn around" over a
period of one or more future periods if no new differences originate.
Answer: True False
116) All contingent liabilities should be classified as either current or long-term liabilities on the
statement of financial position for the current period.
Answer: True False
117) Contingencies are disclosed in a note if it is probable that cash of other assets will be required to
settle the obligation, or if the amount of the obligation cannot be measured with sufficient reliability.
Answer: True False
118) Under IFRS, a distinction is made between provisions and contingencies. Provisions are estimated liabilities
that are reported on the statement of financial position whereas contingencies are not recognized as liabilities
because of the uncertainty of the amount and timing of future payments.
Answer: True False
119) A contingent liability that is "probable" and can be "reasonably estimated" must be accrued and
reported as a liability.
Answer: True False
120) A commitment is a contractual agreement to enter into a transaction with another party in the future.
Answer: True False
121) A contingent liability that has a remote probability of occurrence must be disclosed in a note to the
financial statements.
Answer: True False
122) The time value of money refers to the fact that interest accrues on borrowed money with the passage
of time.
Answer: True False
123) Time value of money is based on the concept that money received today is worth more than money
to be received a year from today.
Answer: True False
24
124) There is a reciprocal relationship between which of the following?

A) Future value of $1 and the future value of an annuity of $1.
B) Present value of $1 and the future value of $1.
C) Present value of the annuity of $1 and the future value of annuity of $1.
D) Present value of the annuity of $1 and the present value of $1.
Answer: D
125) If the market rate of interest is 10%, a rational person would just as soon receive $1,100 three years
from now as what amount today (round to the nearest dollar)?
A) $826 B) $1,000 C) $783 D) $1,100
Answer: A
126) Present value can be defined as which of the following?

A) Maturity value of a debt.
B) Sum of cash inflows over a future period of time.
C) Future amount of a sum of money held now.
D) Value today of future cash inflow(s).
Answer: D
127) Kristen's grandmother promises to give her $1,000 at the end of five years. How much is the money
worth today, assuming Kristen could invest the money and earn a 6% annual rate of return? (Round
to the nearest dollar).
A) $747 B) $4,212 C) $1,338 D) $5,637
Answer: A
128) Kristen's grandmother promises to give her $1,000 at the end of each of the next five years. How
much is the money worth today, assuming Kristen could invest the money and earn a 6% annual rate
of return? (Round to the nearest dollar).
A) $4,212 B) $1,338 C) $5,637 D) $747
Answer: A
129) How much would Kristen have to deposit in the bank today if she will be earning a 6% annual rate
of return and wants to have $5,000 in the bank at the end of five years? (Round to the nearest
dollar).
A) $5,637 B) $3,736 C) $4,212 D) $4,737
Answer: B
130) How much would Kristen have to deposit in the bank at the end of each of the next five years if she
wishes to have $5,000 in the bank at the end of that time, assuming she will be earning 6% annual
rate of return? (Round to the nearest dollar).
A) $1,187 B) $943 C) $887 D) $1,000
Answer: C
25
131) The present value of an annuity is determined only from the interest (discount) rate and the periodic
payment amount.
Answer: True False
132) An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over
the payment amount of the prior year.
Answer: True False
133) Kristen deposits $5,000 in the bank today. She will be earning 6% interest annually on her deposit.
How much money will she have in the bank at the end of 5 years? (Round to the nearest dollar).
A) $28,186 B) $3,736 C) $6,691 D) $21,062
Answer: C
134) Calculation of the amount of the equal periodic payments that would be required at the end of each year to
accumulate a $20,000 fund at the end of the tenth year is most readily determined by reference to a table that
shows which of the following?
A) Future value of $1. B) Present value of a single sum.

C) Future value of annuity of $1. D) Present value of $1.
Answer: C
135) You have been asked to compute the amount that will be available at the end of three years as a
result of a single sum of $1,000 that is deposited. What is the interest concept that best describes
this application?
A) Present value of an annuity. B) Future Value of Annuity
C) Present value of a single amount. D) Future value of a single amount.
Answer: D
136) An amount is to be deposited in a savings account at the end of each year in order to provide funds
for a trip to Europe, at the end of the fourth year. You have been asked to determine the amount of
the annual deposit. What is the interest concept that best describes this application?
A) Present value of a single amount. B) Future Value of Annuity
C) Future value of a single amount. D) Present value of an annuity.
Answer: B
137) A reciprocal relationship exists between the "future value of $1" and the "present value of $1."
Answer: True False
138) For the future value of a single amount, the compounding period may only be once a year.
Answer: True False
26
139) The future value of $1 is always more than $1, whereas the present value of $1 is always less than
$1.
Answer: True False
140) The future value of an annuity is always more than the sum of its payments whereas the present
value of an annuity is always less than the sum of its payments.
Answer: True False
141) Match the liabilities with their usual classification on the statement of financial position by entering the
appropriate letters in the spaces.
Usual Classification
A. Current liability
B. Long-term liability
C. Current or long-term liability
D. None of the above
Liabilities
________ (1) Rent payable
________ (2) Payroll Income Taxes payable
________ (3) Interest payable
________ (4) Mortgage payable (due in 2 years)
________ (5) Bond payable, current portion
________ (6) Notes payable
________ (7) Cash deposits (advances) received from customer for services to be performed
in six months
________ (8) Bonds payable (due in 6 years)
________ (9) Future income tax (a credit balance)
________ (10) Accumulated Depreciation
________ (11) Employee income taxes withheld
________ (12) Trade receivables
________ (13) Trade payables
________ (14) Allowance for doubtful accounts
________ (15) Current Income tax payable
Answer: (1) A, (2) A, (3) A, (4) B, (5) A, (6) C, (7) A, (8) B, (9) C, (10) D, (11) A, (12) D, (13) A, (14)
D, (15) A
27
142) Hallberg Company reported total assets of $165,000; current assets of $22,000; total shareholders' equity of
$57,000; and non-current liabilities of $85,000.
Required: (show computations).
Compute Working Capital. $________

Answer: 1. $165,000 = 85,000 + ? + 57,000
$165,000 - 85,000 - 57,000 = current liabilities of $23,000
Working Capital = $22,000 - 23,000 = <$1,000>
143) Shirlen Company has the following partial list of account balances at year end:
Trade payables $500

Bonds payable (due in 5 years) 80,000
Cash 2,000
Equipment (net) 5,000
Land 9,900
Notes payable (due in 6 months) 800
Salaries payable 700
Cost of Goods Sold 5,000
Required:
A. Determine the amount of working capital.

B. Assume that cash is used to pay the balance due on trade payables. Compute the new amount of working
capital.
C. Compute the trade payables turnover ratio.
Answer: A. Working capital = $3,600 - 2,000 = $1,600.
B. Current assets = $1,500 + 1,600 = $3,100.
Current liabilities = $800 + 700 = $1,500.
Working capital = $3,100 - 1,500 = $1,600
C. Cost of Goods Sold/T/P = $5,000/$500 = 10 times.
28
144) Use the following financial statement information:
Financial Statement Information

C Co 20X2 C Co 20X1 P Co 20X2 P Co 20X1
Current Assets $4,362 $6,251 $6,380 $5,969
Total Assets 22,660 20,101 19,145 16,881
Current Liabilities 7,914 4,257 8,640 7,379
Total Liabilities 16,259 13,165 10,742 9,607
Calculate the following:
a. C Co's 20X2 current ratio

b. C Co's 20X1 current ratio
c. C Co's 20X2 working capital
d. C Co's 20X1 working capital
e. P Co's 20X2 current ratio
f. P Co's 20X1 current ratio
g. P Co's 20X2 working capital
h. P Co's 20X1 working capital
Answer: a. 0.55 ($4,362/$7,914)

b. 1.47 ($6,251/$4,257)
c. - $3,552 ($4,362 - $7,914)
d.1,994 ($6,251 - $4,257)
e. 0.74 ($6,380/$8,640)
f. 0.81 ($5,969/$7,379)
g.- $2,260 ($6,380 - $8,640)
h.- $1,410 ($5,969 - $7,379).
29
145) Mountain Gear Corporation has the following selected accounts after posting adjusting entries:
Accounts Payable $79,000

Notes Payable, 3-month 90,000
Accumulated Amortization–Equipment 14,000
Notes Payable, 5-year, 4% 30,000
Employee Benefits Expense 6,000
Mortgage Payable 250,000
Provincial Sales Tax Payable 39,500
Required:
1. Prepare the current liability section of Mountain Gear Corporation's statement of financial position,
assuming $15,000 of the 5-year note is payable next year.
2. Comment on Mountain Gear's liquidity, assuming total current assets are $450,000.
Answer: 1.
Mountain Gear Corporation
Partial Statement of Financial Position
Current Liabilities
Current portion of long-term debt $15,000
Notes payable, 3-month 90,000
Accounts payable 79,000
Provincial sales tax payable 39,500
Total current liabilities $225,000
2.
The liquidity position looks favourable. If all current liabilities are paid out of current assets, there wou
still be $125,000 of current assets (working capital). The current ratio is 1.78 to 1 and it appears
Mountain Gear Corporation has sufficient current resources to meet their current obligations.
30
146) At the end of the annual accounting period, the adjusting entries for the following three items have not been
made. You are to provide the 20X1 adjusting entry for each item.
A. Unpaid wages for the last two days of December, 20X1 amounting to $3,200 have not been recorded
(disregard payroll taxes).
B. On December 1, 20X1 rent revenue of $600 was collected for December and January. (Rent revenue was
credited for a total of $600).
C. A $4,000, six-month, 10% interest-bearing note payable was singed on October 1, 20X1.
Answer: A.
Wage expense 3,200
Wages payable 3,200
B.
Rent Revenue 300
Rent collected in advance 300
C.
4,000 × 10% × 3/12 = 100
31
147) Warner Company borrowed $38,000 on a 12% one-year, interest bearing note dated November 1, 20X0. The
annual accounting period ends on December 31. Give journal entries on the following dates:
A. November 1, 20X0
B. December 31, 20X0
C. October 31, 20X1
Answer: A.
Cash 38,000
Note payable 38,000
B.
Interest Payable ($38,000 × 12% × 2/12 = 760) 760
C.
Note Payable 38,000
Cash 42,560
Assumes no reversing entry on 1/1/20X1
($38,000 × 12% × 12/12 = 3,800)
148) Midland Company borrowed $5,000 on an 8% (annual rate) interest-bearing note payable on March 1, 20X2.
The maturity date of the note (and payment of all interest) is September 1, 20X3. The accounting period ends
December 31. Give the entry for each of the dates. Assume simple interest. Round to the nearest dollar.
Answer: A. March 1, 20X2

Cash 5,000
Note payable 5,000

C. September 1, 20X3
Note Payable (principal) 5,000
Interest payable (as per above) 333
Interest expense ($5,000 × 8% × 8/12) 267
Cash [5,000 / ($5,000 × 8% × 8/12)] 5,600
32
149) The following data were provided by the detailed payroll records of Journey Corporation for the month of
March 20X0:
Salaries $20,000
Wages 15,000
Income taxes withheld 7,350
Union dues 175
Income taxes at an average 7.65% rate (no employee has reached the maximum)
Required:
1. Give the March 31, 20X0 entry to record the payroll and related employee deductions.
2. Give the March 31, 20X0 entry to record the employer's payroll income tax expense.
Answer: Requirement 1:
Salaries expense 20,000

Liability for income taxes withheld — 7,350
employees
Income taxes payable — employees ($35,000 2,678
× 7.65%)
Union dues payable 175
Cash (take-home pay) 24,797
Requirement 2:
Employment benefit (payroll tax) expense 2,678

Income taxes payable — employer 2,678
150) The following is a partial list of account balances for Van Buskirk Inc. as of December 31, 20X1:
Trade Payables $5,000

Bonds payable (100% due in 10 years) 40,000
Mortgage payable (10% due within one year) 10,000
Notes payable (due in 6 months) 2,000
Sales revenue 49,000
Current income taxes payable 8,000
Deferred revenue 800
Required:
33
Prepare the liability section of Van Buskirk's classified statement of financial position for December 31,
20X1.
Answer: Van Buskirk, Inc.
As at December 31, 20X1
LIABILITIES
Current Liabilities
Notes payable $2,000
Mortgage payable (current portion) 1,000
Current taxes payable 8,000
Total Current Liabilities $17,600
Long term liabilities
Bond payable 40,000
Mortgage payable 9,000
Total Long-Term Liabilities $49,000
TOTAL LIABILITIES $66,600
34
151) The following data is available for Toys 4 U for the years 2004 through 20X7:
Toys 4 U
Financial Data
20X7 20X6 20X5 20X4

Cost of sales $8,191 $7,710 $6,892 $6,592
Accounts payable 1,415 1,280 1,346 1,182
1. Calculate the trade payables turnover ratio for the following years:
a. 20X7
b. 20X6
c. 20X5
2. Calculate the number of days it is taking Toys 4 U to pay their vendors:

a. 20X7
b. 20X6
c. 20X5
3. Explain whether Toys 4 U is doing a better job at paying their vendors in a timely manner.
Answer: (1a) 6.08 ($8,191/ [$1,415 + $1,280]/2); (1b) 5.87 ($7,710/ [$1,280 + $1,346]/2); (1c) 5.45 ($6,892/
[$1,346 + $1,182]/2).
(2a) 60 days (365/6.08); (2b) 62 days (365/5.87); (2c) 67 days (365/5.45).
(3) Over the three-year period, Toys 4 U has managed to reduce the time it takes to pay their vendors b
7 days or a week. They have made some improvement in making timely payment to vendors but
they still take two months to pay. If their suppliers offer them 30-day credit or even a discount
for early payment, then that 60-day payment period is not very good. We would really be able
to see if their payable payment period is in line with other big retail companies by comparing
their ratio to similar companies.
152) Monmouth Limited has a December 31 year-end. On December 1, 20X6 Monmouth had the following current
liabilities listed on its books:
Bank overdraft $18,750

Accounts payable $122,500
CPP, EI and income tax payable $6,620
Unearned revenues $12,000
During December 20X6 Monmouth engaged in the following transactions:
Dec 1 Bought $20,000 of inventory on credit, terms of 30 days
35
Dec 2 Negotiated a $40,000 line of credit with their bank and drew-down $18,750 to replace
the bank overdraft. Interest will be charged at 4%, based on the average balance
outstanding during the month, and paid on the last day of the month.
Dec 7 Sold goods worth $30,000 on which they had previously received a $12,000 deposit.
The balance was due in 30 days.
Dec 8 Paid $63,000 owing to a supplier
Dec 12 Paid amounts due to federal government for the payroll amounts outstanding from
November 30.
Dec 19 Sold $66,000 of goods half for cash, half on credit.
Dec 20 Made a $10,000 payment on the line of credit
Dec 21 Received $5,000 from a client for work that will be performed in January 2012.
Dec 22 Received a lawyer's letter stating that a customer is suing the company for failure to
clear the snow away from the front of the business premises. The customer fell and
was injured as a result. Monmouth's lawyer says that it is likely that the company
will be required to pay but she is unable to reasonably determine the amount of the
loss.
Dec 28 Paid the monthly payroll amounts to employees. The gross payroll was $16,200.
Amounts withheld from the employees' cheques were as follows:
Canada pension plan premiums (CPP) $1,200
Employment insurance premiums (EI) $1,850
Income tax $2,800
At the same time, the company also recorded their liability for amounts due to the
government for CPP and EI. Assume the employer must match the employees'
contribution for both EI and CPP.
Required:
1. Prepare all the journal entries required as a result of the above transactions.
2. Prepare the current liabilities section of the balance sheet at December 31, 20X6.
Answer: 1.
Dec 1 Inventory 20,000
To record purchase of inventory
Dec 2 Bank overdraft 18,750

Bank loan - current 18,750
To record draw-down on line of credit
Dec 7 Accounts receivable 18,000

Unearned revenues 12,000
Sales 30,000
To record sale and reverse previously unearned customer
deposit
Dec 8 Accounts payable 63,000

36
Cash 63,000
To record payment to supplier
Dec 12 CPP, EI, income tax payable 6,620

Cash 6,620
To record payment of payroll expense for November
Dec 19 Cash 33,000

Sales 66,000
To record sales
Dec 20 Bank loan 10,000

Cash 10,000
To record payment on bank loan
Dec 21 Cash 5,000

To record deposit received from customer
This is a contingent liability. Since no estimate can be made, no

accrual is required. Monmouth should disclose the contingency
Dec 22 in the notes to the financial statements.
Dec 28 Wage expense 16,200

CPP payable 1,200
EI payable 1,850
Income tax payable 2,800
Cash 10,350
To record payroll expense for December
Dec 28 Wage benefits expense 3,050

CPP payable 1,200
EI payable 1,850
To record employer's wage benefits expense for December
Dec 31 Interest expense 45

Cash 45
To record interest on bank loan*Avg bal. = (18,750 + 8,750)/2 =
13,750 × .04 × 30/365 = 45.21
2.
37
Monmouth Limited
December 31, 20X6
Bank loan (18,750 — 10,000) $8,750

Accounts payable (122,500 +20,000 — 63,000) 79,500
CPP and EI payable (6,620 — 6,620 + 3,050 + 3,050)6,100
Unearned revenues (12,000 — 12,000 + 5,000) 5,000
$102,150
153) 1. What is a contingent liability?

2. When must a contingent liability be recorded through a journal entry?
3. When should a contingent liability be disclosed in the footnotes to the financial statements?
4. When is disclosure of a contingent liability not required?
Answer: 1. Contingent liabilities are potential liabilities which arise due to past events.
2. Whether or not the potential liability becomes a recorded liability depends upon the outcome of futur
events. For example, a company is currently involved in a product liability lawsuit the company may
have to pay the plaintiff if the settlement is unfavourable. A contingent liability must be recorded if it is
probable that the future events will occur and the amount can be reasonably estimated.
3. Contingent liabilities should be disclosed in the footnotes to the financial statements if it is probable
that future events will occur but the amount cannot be reasonably estimated. Footnote disclosure should
also occur if it is reasonably possible that the future events will occur whether or not it can be
reasonably estimated.
4. Disclosure is not required if the probability of future events occurring is remote.
154) In 20X2, The W D Company reported the following increases or decreases in current assets and
current liabilities. Identify whether each of these increases or decreases caused cash to increase or
decrease. Show increases with a (+) in front of the amount and decreases with a (-) in front of the
amount in the column labelled cash effect.
Changes in current assets and liabilities

Account Account Balance Change Cash Effect (+/-)
Receivables — CA Decrease $366 1.
Inventories — CA Decrease $103 2.
Film and television costs — CA Increase $848 3.
Trade payables — CL Decrease $179 4.
Current portion of borrowings — CL Increase $292 5.
Unearned royalties — CL Increase $69 6.
Answer: (1) +$366, (2) +$103, (3) -$848, (4) -$179, (5) +$292, (6) +$69.
38
155) Company P had pretax profit of $30,000 in 20X0 and $34,000 in 20X1. A revenue of $2,000 was included
correctly on the 20X0 income statement and was properly reported on the 20X1 income tax return. The
corporate income tax rate was 25%. Give the entries relating to the incurrence of the tax liability for 20X0 and
20X1:
20X0:
20X1:
Answer: 20X0:
Interest tax expense ($30,000 × 25%) 7,500

Future income tax ($2,000 × 25%) 500
Income tax payable ($30,000 — 2,000) × 25% 7,000
20X1:

Income tax payable [($34,000 — 2,000) × 25%] 9,000
156) Cathy Company reported the following summary amounts for its second year ended December 31, 20X1:
Revenues $100,000
Expenses (excluding income tax) 80,000
Income taxes paid for 20X1 10,000
Income tax rate, 40%
Give the entry to record income tax for 20X1.

Income tax expense ($100,000 — 80,000) × 40% 8,000

Future income tax ($10,000 — 8,000) 2,000
Paid Cash 10,000
39
157) What are "Future Income taxes"? Where specifically would they appear in financial statements?
Answer: Future Income taxes arise due to the fact that the income tax expense recognized on the
income statement is based upon "book" profit (derived using IFRS) and the amount of income
tax actually owed to the government is based upon rules established by the Income Tax Act
(ITA) which are reported on the tax return. IFRS and ITA rules sometimes vary on when
certain expenses and revenue should be recognized. Due to these timing differences, the
income tax expense shown on the income statement could be more, or less than the amount
actually owed to the government in a particular year. The Future Income tax account is used to
record this difference. Future Income tax could be an asset on the statement of financial
position or it could be a liability, depending upon the nature of the recognition difference.
158) The following table values are provided for use in solving the following independent problems (show
computations):
n=5
Value 6% 7% 8%
Future value of $1 1.3382 1.4026 1.4693
Present value of $1 .7473 .7130 .6806
Future value of annuity of $1 5.6371 5.7507 5.8666
Present value of $1* 4.2124 4.1002 3.9927
*Ordinary annuity
A. Company A deposited $20,000 in a savings account on January 1, 20X1 that will accumulate 6% interest
each December 21.
1. What will be the fund balance at the end of Year 5
2. How much interest will be earned by the end of Year 5?
B. Company B needs to accumulate a $50,000 fund by making five equal annual deposits. Assuming a 7%
interest accumulation, how much must be deposited at the end of the year?
C. Company C has new machine that has an estimated life of five years and a $5,000 residual value. Assuming
an 8% interest rate, what is the present value of the estimated residual value?
D. Company D owes a $50,000 debt that is now due (January 1, 20X1). Arrangements have been made to pay
it off in five equal annual installments, starting December 31, 20X1 (an ordinary annuity situation).
1. Assuming 8% interest, how much will the annual payment be?
2. Give the entry for Company D above for the first payment on December 31, 20X1 on the note payable.
Answer: A. 1. $20,000 × 2.3382 (Fn = 5:1; I = 6%) = $26.764
2. $26,764 - 20,000 = $6,764
B. $50,000/5.7507 (Fn = 5; I = 7%) = $8,695
C. $5,000 × 0.6806 (Pn = 5; U = 8%) = $3,403
D. 1. $50,000/3.9927 (Pn = 5; I = 8%) = $12,523
2. Note Payable 8,523

40
Cash 12,523
159) At the beginning of Year 1, Mesa Corporation placed $10,000 in a savings account at 9%.
A. Assuming no withdrawals, complete the following tabulation (round to the nearest dollar).
B. Give the required journal entry at the end of Year 10 to record only the year 10 earnings:
Year-end Balance in the Savings Account Total Interest Earned to Date

3
9
10

3 $10,000 × 1.2950 = $12,950 $2,950
9 10,000 × 2.1719 = 21,719 11,719
10 10,000 × 2.3674 = 23,674 13,674
Savings fund 1,955

Interest revenue ($23,674 - $21,719) 1,955
41
Answer Key
1) D
2) D
3) D
4) B
5) B
6) D
7) B
8) D
9) C
10) C
11) A
12) D
13) B
14) D
15) A
16) A
17) C
18) D
19) B
20) D
21) A
22) A
23) B
24) C
25) B
26) D
27) D
28) B
29) B
30) C
31) A
32) A
33) D
34) A
35) C
36) B
37) A
38) B
39) A
40) D
41) A
42) B
43) C
44) B
45) C
46) D
47) B
48) A
49) A
50) D
42
Answer Key
51) B
52) B
53) B
54) A
55) C
56) B
57) A
58) A
59) A
60) C
61) B
62) B
63) A
64) A
65) C
66) C
67) A
68) A
69) C
70) D
71) A
72) B
73) C
74) D
75) A
76) C
77) D
78) FALSE
79) FALSE
80) TRUE
81) TRUE
82) FALSE
83) TRUE
84) TRUE
85) FALSE
86) TRUE
87) FALSE
88) FALSE
89) FALSE
90) TRUE
91) FALSE
92) TRUE
93) FALSE
94) TRUE
95) TRUE
96) FALSE
97) TRUE
98) TRUE
99) FALSE
100) FALSE
43
Answer Key
101) FALSE
102) FALSE
103) FALSE
104) TRUE
105) FALSE
106) TRUE
107) FALSE
108) FALSE
109) FALSE
110) FALSE
111) TRUE
112) TRUE
113) TRUE
114) FALSE
115) TRUE
116) FALSE
117) FALSE
118) TRUE
119) TRUE
120) TRUE
121) FALSE
122) TRUE
123) TRUE
124) D
125) A
126) D
127) A
128) A
129) B
130) C
131) FALSE
132) FALSE
133) C
134) C
135) D
136) B
137) TRUE
138) FALSE
139) TRUE
140) TRUE
141) (1) A, (2) A, (3) A, (4) B, (5) A, (6) C, (7) A, (8) B, (9) C, (10) D, (11) A, (12) D, (13) A, (14) D, (15) A
142) 1. $165,000 = 85,000 + ? + 57,000
$165,000 - 85,000 - 57,000 = current liabilities of $23,000
Working Capital = $22,000 - 23,000 = <$1,000>
44
Answer Key
143) A. Working capital = $3,600 - 2,000 = $1,600.

B. Current assets = $1,500 + 1,600 = $3,100.
Current liabilities = $800 + 700 = $1,500.
Working capital = $3,100 - 1,500 = $1,600
C. Cost of Goods Sold/T/P = $5,000/$500 = 10 times.
144) a. 0.55 ($4,362/$7,914)
b. 1.47 ($6,251/$4,257)
c. - $3,552 ($4,362 - $7,914)
d.1,994 ($6,251 - $4,257)
e. 0.74 ($6,380/$8,640)
f. 0.81 ($5,969/$7,379)
g.- $2,260 ($6,380 - $8,640)
h.- $1,410 ($5,969 - $7,379).
145) 1.
Mountain Gear Corporation
Current Liabilities
Current portion of long-term debt $15,000
Notes payable, 3-month 90,000
Provincial sales tax payable 39,500
Total current liabilities $225,000
2.
The liquidity position looks favourable. If all current liabilities are paid out of current assets, there would still be
$125,000 of current assets (working capital). The current ratio is 1.78 to 1 and it appears Mountain Gear Corporatio
has sufficient current resources to meet their current obligations.
45
Answer Key
146) A.
Wage expense 3,200
Wages payable 3,200
B.
Rent Revenue 300
Rent collected in advance 300
C.
4,000 × 10% × 3/12 = 100

147) A.
Cash 38,000
Note payable 38,000
B.
Interest Payable ($38,000 × 12% × 2/12 = 760) 760
C.
Note Payable 38,000
Cash 42,560
Assumes no reversing entry on 1/1/20X1
($38,000 × 12% × 12/12 = 3,800)
46
Answer Key
148) A. March 1, 20X2

Cash 5,000
Note payable 5,000

C. September 1, 20X3
Note Payable (principal) 5,000
Interest payable (as per above) 333
Interest expense ($5,000 × 8% × 8/12) 267
Cash [5,000 / ($5,000 × 8% × 8/12)] 5,600
149) Requirement 1:
Salaries expense 20,000

Liability for income taxes withheld — 7,350
employees
Income taxes payable — employees ($35,000 2,678
× 7.65%)
Union dues payable 175
Cash (take-home pay) 24,797
Requirement 2:
Employment benefit (payroll tax) expense 2,678

Income taxes payable — employer 2,678
47
Answer Key
150) Van Buskirk, Inc.

As at December 31, 20X1
LIABILITIES
Current Liabilities
Notes payable $2,000
Mortgage payable (current portion) 1,000
Current taxes payable 8,000
Total Current Liabilities $17,600
Long term liabilities
Bond payable 40,000
Mortgage payable 9,000
Total Long-Term Liabilities $49,000
TOTAL LIABILITIES $66,600
151) (1a) 6.08 ($8,191/ [$1,415 + $1,280]/2); (1b) 5.87 ($7,710/ [$1,280 + $1,346]/2); (1c) 5.45 ($6,892/ [$1,346 + $1,1
(2a) 60 days (365/6.08); (2b) 62 days (365/5.87); (2c) 67 days (365/5.45).
(3) Over the three-year period, Toys 4 U has managed to reduce the time it takes to pay their vendors by 7 days or a
week. They have made some improvement in making timely payment to vendors but they still take two
months to pay. If their suppliers offer them 30-day credit or even a discount for early payment, then that
60-day payment period is not very good. We would really be able to see if their payable payment period is
in line with other big retail companies by comparing their ratio to similar companies.
152) 1.
Dec 1 Inventory 20,000
To record purchase of inventory
Dec 2 Bank overdraft 18,750

Bank loan - current 18,750
To record draw-down on line of credit
Dec 7 Accounts receivable 18,000

Sales 30,000
To record sale and reverse previously unearned customer
48
Answer Key
deposit
Dec 8 Accounts payable 63,000

Cash 63,000
To record payment to supplier
Dec 12 CPP, EI, income tax payable 6,620

Cash 6,620
To record payment of payroll expense for November
Dec 19 Cash 33,000

Sales 66,000
To record sales
Dec 20 Bank loan 10,000

Cash 10,000
To record payment on bank loan
Dec 21 Cash 5,000

To record deposit received from customer
This is a contingent liability. Since no estimate can be made, no

accrual is required. Monmouth should disclose the contingency
Dec 22 in the notes to the financial statements.
Dec 28 Wage expense 16,200

CPP payable 1,200
EI payable 1,850
Income tax payable 2,800
Cash 10,350
To record payroll expense for December
Dec 28 Wage benefits expense 3,050

CPP payable 1,200
EI payable 1,850
To record employer's wage benefits expense for December
49
Answer Key
Dec 31 Interest expense 45

Cash 45
To record interest on bank loan*Avg bal. = (18,750 + 8,750)/2 =
13,750 × .04 × 30/365 = 45.21
2.
Monmouth Limited
December 31, 20X6
Bank loan (18,750 — 10,000) $8,750

Accounts payable (122,500 +20,000 — 63,000) 79,500
CPP and EI payable (6,620 — 6,620 + 3,050 + 3,050)6,100
Unearned revenues (12,000 — 12,000 + 5,000) 5,000
$102,150
153) 1. Contingent liabilities are potential liabilities which arise due to past events.
2. Whether or not the potential liability becomes a recorded liability depends upon the outcome of future events. Fo
example, a company is currently involved in a product liability lawsuit the company may have to pay the plaintiff if
the settlement is unfavourable. A contingent liability must be recorded if it is probable that the future events will
occur and the amount can be reasonably estimated.
3. Contingent liabilities should be disclosed in the footnotes to the financial statements if it is probable that future
events will occur but the amount cannot be reasonably estimated. Footnote disclosure should also occur if it is
reasonably possible that the future events will occur whether or not it can be reasonably estimated.
4. Disclosure is not required if the probability of future events occurring is remote.
154) (1) +$366, (2) +$103, (3) -$848, (4) -$179, (5) +$292, (6) +$69.
155) 20X0:

Income tax payable ($30,000 — 2,000) × 25% 7,000
20X1:

Income tax payable [($34,000 — 2,000) × 25%] 9,000
50
Answer Key
Income tax expense ($100,000 — 80,000) × 40% 8,000

Future income tax ($10,000 — 8,000) 2,000
Paid Cash 10,000
157) Future Income taxes arise due to the fact that the income tax expense recognized on the income statement
is based upon "book" profit (derived using IFRS) and the amount of income tax actually owed to the
government is based upon rules established by the Income Tax Act (ITA) which are reported on the tax
return. IFRS and ITA rules sometimes vary on when certain expenses and revenue should be recognized.
Due to these timing differences, the income tax expense shown on the income statement could be more, or
less than the amount actually owed to the government in a particular year. The Future Income tax account
is used to record this difference. Future Income tax could be an asset on the statement of financial position
or it could be a liability, depending upon the nature of the recognition difference.
158) A. 1. $20,000 × 2.3382 (Fn = 5:1; I = 6%) = $26.764
2. $26,764 - 20,000 = $6,764
B. $50,000/5.7507 (Fn = 5; I = 7%) = $8,695
C. $5,000 × 0.6806 (Pn = 5; U = 8%) = $3,403
D. 1. $50,000/3.9927 (Pn = 5; I = 8%) = $12,523
2. Note Payable 8,523

Cash 12,523

3 $10,000 × 1.2950 = $12,950 $2,950
9 10,000 × 2.1719 = 21,719 11,719
10 10,000 × 2.3674 = 23,674 13,674
Savings fund 1,955

Interest revenue ($23,674 - $21,719) 1,955
51
1) When a company prepares a bond indenture, certain provisions of the bonds are included. Which of
the following are not provisions specified in the indenture?
A) Maturity date. B) Cash to be received at the issue date.
C) Dates of interest payments. D) Rate of interest to be paid.
Answer: B
2) Positive financial leverage occurs in which of the following situations?

A) The return to the owners is enhanced through the use of debt financing.
B) Interest payments can be deducted for income tax purposes.
C) Payment of resources to creditors is limited to the required interest payments while the return
of the principal borrowed is not required.
D) The company's after-tax return on total assets is less than the after-tax cost of borrowing.
Answer: A
3) Bonds payable usually are classified on the statement of financial position as which of the
following?
A) Long-term liabilities. B) Current assets.
C) Current liabilities. D) Investments and funds.
Answer: A
4) Bonds usually are issued to obtain cash for what purpose?

A) Purchasing insurance.
B) Investing in short-term marketable securities.
C) Meeting working capital needs.
D) Acquisitions of long-term assets.
Answer: D
5) A bond issue is a form of

A) collateral B) Debt financing C) Bank loan D) Equity financing
Answer: B
Reference: 10-01
Note to Instructor: Present and future value tables are needed for this question.
6) On January 1, 20X1, Ross Company acquired a truck that had a purchase price of $20,000. The
seller agreed to allow Ross to pay for the truck over a two-year period at 10% interest with equal
payments due at the end of 20X1 and 20X2. What is the amount of each annual payment the
company must make (round to the nearest dollar)?
A) $14,151 B) $11,524 C) $22,267 D) $17,751
Answer: B
1
Reference: 10-02
Bennett Industries purchased a large piece of equipment from Crumpet Company on January 2, 20X1. Bennett signed a
note, agreeing to pay Crumpet $400,000 for the equipment on December 31, 20X3. The market rate of interest for simila
notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 20X1, Bennett
recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520.
7) On December 31, 20X1, Bennett recorded an adjusting entry to account for interest that had accrued
on the note. What is the approximate amount of interest expense that would have accrued at
December 31, 20X1?
A) $96,000 B) $25,402 C) $76,200 D) $32,000
Answer: B
8) On Bennett's 20X1 year-end statement of financial position, the book value of the liability for notes
payable related to this purchase would equal which of the following?
A) $317,520
B) An amount more or less than $317,520 depending upon Bennett's income for the year.
C) An amount more than $317,520.
D) An amount less than $317,520.
Answer: C
9) Accrued interest was recorded annually. On December 31, 20X3, the due date of the note, Bennett
paid the amount due and recorded the transaction with which of the following?
A) A credit to notes payable for $317,520. B) A credit to notes payable for $400,000.
C) A debit to notes payable for $317,520. D) A debit to notes payable for $400,000.
Answer: D
10) Note disclosures for long-term debt generally include all of the following EXCEPT
A) names of significant debt holders. B) call provisions and conversion privileges.
C) restrictions imposed by creditors. D) assets pledged as security.
Answer: A
11) Which of the following statements pertaining to instalment notes with blended principal and interest
payments is correct?
A) The portion of the instalment applied to the principal will decrease, while the portion applied to
the interest will increase over time.
B) The portion of the instalment applied to the principal will increase, while the portion applied to
the interest will decrease over time.
C) The portion of each instalment applied to the interest and principal will remain constant.
D) The portion of the instalment applied to the interest will depend on prevailing market interest
rates, with the difference being applied to the principal.
Answer: B
2
12) On January 1, 20X3, Carter Ltd. issued a 15-year, $600,000 note payable, with annual fixed
principal payments of $40,000, plus 5% interest. The cash payment for the first year is:
A) $70,000. B) $42,000 C) $40,000. D) $30,000
Answer: A
13) Assume that you borrow $10,000 at an annual interest rate of 6%. Your loan agreement calls for
monthly payments of $200, which include both interest and principal. Your first payment is made
one month after you received the loan. The amount of interest and principal applied to your first
instalment, respectively, would be:
A) $150 and $50. B) $50 and $150. C) $140 and $60. D) $60 and $150.
Answer: B
14) Tech Magic purchased a new computer system and in return signed a three-year $30,000
non-interest-bearing note payable. An investigation by the company's accountant revealed that
similar notes have market rates of interest around 8%. At what amount should the note payable be
initially recorded on Chi's financial statements?
A) $23,815 B) $30,000 C) $27,777 D) $25,771
Answer: A
15) Mastertack Inc. bought an asset and signed a four-year non-interest-bearing note for the full amount.
If the note were recorded at its face value, which of the following statements would be true?
A) Both assets and liabilities will be overstated
B) Only liabilities will be overstated
C) Only liabilities will be understated
D) Both assets and liabilities will be understated
Answer: A
16) Most of the information regarding a company's long term debt can be found:
A) on the cash flow statement. B) on the balance sheet.
C) in the notes to the financial statements. D) in the annual report.
Answer: C
17) On January 1, 20X6, Goldstein Company purchased a machine. The seller agreed that a total of
$9,000 would be paid over a three-year period--$3,000 per year at the end of 20X6, 20X7, and
20X8. At the time the machine was purchased, the market rate of interest was 10%. What amount
should be debited to the asset account, Machinery, on the date of purchase (round to the nearest
dollar)?
A) $9,000 B) $7,461 C) $9,948 D) $9,016
Answer: B
3
18) You have been asked to compute the cash equivalent price of a machine assuming the cost
(including principal and interest) is to be paid in two equal payments after the acquisition date. What
is the interest concept that best describes this application?
A) Future value of a single amount. B) Present value of a single amount.
C) Present value of an annuity. D) Future value of an annuity.
Answer: C
19) On January 1, 20X1, Tie Company purchased a machine that had a sticker (list) price of $22,000.
The seller agreed to allow Tie Company to pay for the machine over a three-year period at 10%
interest on the unpaid balance and with equal payments of $8,444 due at the end of 20X1, 20X2, and
20X3. What is the amount that should be debited to the asset account, Machinery, on the day the
contract was initiated is (rounded to the nearest dollar)?
A) $25,332 B) $27,865 C) $20,999 D) $22,000
Answer: C
20) Ifthe market interest rate is higher than the coupon interest rate (or stated rate) of the bond, the bond
sells:
A) at a discount. B) It is undeterminable.
C) at face value. D) at a premium.
Answer: A
21) When a bond is issued at a discount, the amount of interest expense for an interest period is
calculated by multiplying the ________ amount times the ________ interest rate during the period.
A) face, stated B) face, market C) carrying, stated D) carrying, market
Answer: D
22) Which item listed below does not influence the issue price (present value) of a bond?
A) The length of time until the amounts are received
B) The reason the bond was issued
C) The dollar amounts to be received
D) The market rate of interest
Answer: B
23) If a bond is issued at a premium, the coupon rate is:

A) greater than the effective rate. B) less than the effective rate.
C) equal to the effective rate. D) not used to determine the bond's sale price.
Answer: A
24) If a bond is issued at a discount, the coupon rate is:

A) less than the effective rate. B) greater than the effective rate.
C) not used to determine the bond's sale price. D) equal to the effective rate.
Answer: A
4
25) When the bond liability reported on the statement of financial position increases each year, this
indicates that the bond was:
A) issued at a discount. B) issued at a premium.
C) issued at net realizable value. D) issued at face value.
Answer: A
26) On January 1, 20X1, A-Ace Corp. issued $3,000,000 par value 12%, 10 year bonds which pay
interest each December 31. If the market rate of interest was 14%, what should the issue price of the
bonds be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The
present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)
A) $2,686,896 B) $3,000,000 C) $2,843,172 D) $3,339,084
Answer: A
27) When abond investment is sold (issued) at a discount, subsequent amortization of the discount does
A) Decreases interest expense. B) Decreases interest in the bond.
C) Increases interest expense. D) Has no effect upon interest expense.
Answer: C
28) Which of the following is true?

A) Retractable bonds require cash outflow connected to investing when the issuing corporation
redeems the bonds.
B) It is common for companies to both retire debt and issue new bonds in the same year as a way
to replace higher interest rate debt with lower rate issuances.
C) The corporation will have to pay cash to bond investors when those investors demand to call
the bonds.
D) Payment of interest is an investing activity since we would not have interest unless we
borrowed money or sold bonds to the public.
Answer: B
29) Bond discounts should be amortized to comply with the

A) cost principle. B) full disclosure principle.
C) revenue recognition principle. D) matching process.
Answer: D
30) Onthe maturity date of bonds payable after interest has been paid, the issuing company will do
A) Debit Bonds Payable and credit Cash for the par value of the bonds.
B) Pay bondholders the original amount the bondholders paid to purchase the bonds.
C) Record a loss of the market rate of interest on the maturity date exceeds the stated rate of
interest.
D) Debit Cash and credit Bonds Payable for the carrying amount of the bonds.
Answer: A
5
31) If bonds have been issued at a discount, then over the life of the bonds the
A) interest expense will decrease.
B) carrying amount of the bonds will decrease.
C) unamortized discount will increase.
D) carrying amount of the bonds will increase.
Answer: D
32) The amortization of a bond discount results in periodic interest expense

A) equal to the constant percentage of the carrying amount of the bonds.
B) greater than the constant percentage of the carrying amount of the bonds.
C) increasing over the term of the bond issue.
D) less than the constant percentage of the carrying amount of the bonds.
Answer: B
33) On January 1, 20X7, Tio Rinto Aluminum Co. issued a $500,000, 6%, 8-year bond with interest payable
semi-annually at par. The issuance price of the bond and the first period's interest expense are closest to
Issue price Interest expense

A $500,000 $15,000
B $500,000 $30,000
C $470,000 $15,000
D $470,000 $30,000

Answer: A
34) Which of the following statements is not true?

A) EBIT can be calculated by adding interest expense and income tax expense to net earnings.
B) The higher a company's debt to total assets ratio, the lower the company's times interest earned
ratio will be.
C) The times interest earned ratio gives an indication of a company's ability to meet interest
payments as they come due.
D) The times interest earned ratio is calculated by dividing the sum of net earnings, interest
expense, and income tax expense, by interest expense.
Answer: B
35) The times interest earned ratio is calculated by dividing

A) net earnings before interest expense by interest expense.
B) net earnings before interest expense and income taxes by interest expense.
C) net earnings before income taxes by interest expense.
D) net earnings by interest expense.
Answer: B
6
36) In20X4, H Co's times interest earned ratio was 2.51 while T Co's ratio for that year was .80. Which
of the following statements is false?
A) T Co's ratio is very low and they present high risk to their creditors and investors.
B) H Co's ratio appears to provide adequate coverage of interest from its present net earnings.
C) H Co.'s ratio shows an extra margin of risk in case profitability deteriorates.
D) Since H Co's is actively pursuing growth through investment in other companies, its ratio may
improve once those investments begin to generate additional net earnings.
Answer: C
37) In20X4, P Co reported net earnings of $1,933 million, interest expense of $395 million and income
taxes of $270 million. In 20X3, they reported net earnings of $2,142 million, interest expense of
$478 million and income taxes of $818 million. Calculate the times interest earned ratio for 20X4
and 20X3, respectively.
A) 6.58 and 7.19 times B) 5.73 and 6.19 times
C) 5.05 and 4.48 times D) 6.05 and 5.48 times
Answer: A
38) In
20X4, C Co. reported a times interest earned ratio of 12.33 times while P Co. reported a ratio of
11.07 times. Which of the following statements is false?
A) C Co's ratio is about 11.3% higher than P Co's ratio.
B) Lenders would be pleased with the ratios of both companies and be willing to lend them money
for future expansion.
C) C Co. is more liquid than P. Co.
D) P Co. and C Co. have more than adequate ratios demonstrating their ability to cover interest
charges with their earnings levels.
Answer: C
39) The times interest earned ratio is calculated by dividing

A) net earnings before income taxes by interest expense.
B) net earnings by interest expense.
C) net earnings before interest expense and income taxes by interest expense.
D) net earnings before interest expense by interest expense.
Answer: C
40) Tasker Inc. earned a gross profit of $300,000 on sales of $1,200,000 during 20X3. The company
also had operating expenses of $180,000. These operating expenses included interest expense of
$40,000. The company is subject to an effective tax rate of 30%. What is the company's times
interest earned ratio for the year?
A) 4.5 times B) 4 times C) 5 times D) 3.2 times
Answer: B
7
41) Bonds issued at a premium reduce:
A) the cost of borrowing.
B) the bond value to be shown on the balance sheet.
C) the interest payments to be made to the bondholder.
D) the perceived risk to the bondholder.
Answer: A
42) The amortization of bond premium by the issuer will do which of the following?
A) Determine the cash paid for interest. B) Decrease interest expense.
C) Increase interest expense. D) Have no effect on interest expense.
Answer: B
43) If a bond payable is sold (issued) at a premium, the amount of the carrying value (the long-term
liability) reported on the subsequent statements of financial position does which of the following?
A) Increases each year.
B) Remains constant.
C) Decreases each year.
D) Changes from year to year depending upon the market rate of interest each year.
Answer: C
44) The amortization of bond premium by the issuer will do which of the following?
A) Have no effect on interest expense. B) Decrease interest expense.
C) Increase interest expense. D) Determine the cash paid for interest.
Answer: B
45) On December 31, 20X1, Dive Company sold $100,000, ten-year, 8% bonds at 104.5. The bonds
were dated January 1, 20X1, and interest is payable each June 30 and December 31. The company
uses the straight-line amortization method. The company should report the long-term liability
(carrying value) for the bonds on the December 31, 20X1, statement of financial position as which
of the following?
A) $100,000 B) $104,500 C) $103,400 D) $104,000
Answer: B
8
46) One thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issue is
A Cash 1,040,000
Bonds Payable 1,000,000
Interest Payable
40,000
B Cash 961,538
Bonds Payable
961,538
C Cash 1,040,000
Bonds Payable
1,040,000
D Cash 1,000,000
Interest Expense
40,000
Bonds Payable
1,040,000

Answer: C
47) If bonds have been issued at a premium, then over the life of the bonds the
A) unamortized discount will increase.
B) carrying amount of the bonds will increase.
C) interest expense will remain unchanged.
D) carrying amount of the bonds will decrease.
Answer: D
9
48) AccurateNumbers, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 20X1, for $102,360 on April 1,
20X1. The bonds pay interest on April 1 and October 1. Straight-line amortization is used by the company.
What entry is needed at October 1 for the first interest payment?
A Interest expense 5,882

Premium on bonds payable 118
Cash 6,000
B Interest expense 6,118
Discount on bonds payable 118
Cash 6,000
C Interest expense 6,000
Cash 6,118
D Interest expense 6,000
Cash 6,000

Answer: A
49) Alimentation Deslauriers has a $100,000 bond outstanding with an unamortized discount of $5,679.
The company has decided to retire the bonds for a cost of $103,000. The journal entry to record the
retirement of the banks will include which of the following?
A) Gain on redemption of bonds, $5,679. B) Gain on redemption of bonds, $8,679
C) Loss on redemption of bonds, $5,679. D) Loss on redemption of bonds, $8,679
Answer: D
50) A corporation recently retired $1,000,000 worth of bonds early for $997,500. They reported a gain
related to the retirement of the bonds of $24,250. What was the unamortized bond discount or
premium at the time of retirement?
A) $21,750 discount B) $21,750 premium
C) $24,250 premium D) $26,750 premium
Answer: B
51) A $100,000 bond was retired at 96 when the carrying amount of the bond was $105,000. The entry
to record the retirement would include a:
A) gain on bond redemption of $9,000. B) loss on bond redemption of $8,000.
C) loss on bond redemption of $4,000. D) gain on bond redemption of $4,000.
Answer: A
52) A$500,000 bond is retired at 97 when the carrying amount of the bond is $480,000. The entry to
record the retirement would include a:
A) $20,000 loss. B) $5,000 loss. C) $2,000 gain. D) $15,000 gain.
Answer: B
10
53) Acompany decides to redeem its bonds before maturity for 101. The face value of the bonds is
$5,000,000 and the carrying amount on date of redemption is $4,945,000. The journal entry to
record this transaction is:

Loss on Bond Redemption 50,000
Cash 5,050,000

Cash 5,050,000

Cash 5,00,000

Cash 5,050,000
Answer: D
54) A $100,000 bond was retired at 95 when the carrying amount of the bond was $103,000. The entry
to record the retirement would include a:
A) loss on bond redemption of $8,000. B) loss on bond redemption of $3,000.
C) gain on bond redemption of $3,000. D) gain on bond redemption of $8,000.
Answer: D
55) A corporation issues $100,000, 10%, 5-year bonds on January 1, 20X4 for $108,111, at a price to
yield 8%. Interest is paid semi-annually on January 1 and July 1. The amount of premium amortized
on July 1, 20X4 is
A) $4,324 B) $676 C) $8,649 D) $5,000
Answer: B
11
56) If there is a loss on bonds redeemed early, it is
A) reported as "Other Expense" on the statement of earnings.
B) debited directly to Retained Earnings.
C) debited to Interest Expense, as a cost of financing.
D) reported as part of earnings from operations on the statement of earnings.
Answer: A
57) A ten-year bond was issued in 20X4 at a discount with a call provision to retire the bonds. When the
bond issuer exercised the call provision on an interest date in 20X6, the carrying value of the bond
was less than the call price. The amount of bond liability removed from the accounts in 20X6 would
be the
A) carrying value. B) face amount plus unamortized discount.
C) maturity value. D) call price.
Answer: A
58) Which of the following is a reason a company would prefer an operating lease over purchasing an
asset?
A) The company's ability to borrow increases due to larger assets.
B) The risk of loss from obsolescence is reduced.
C) The company benefits from the increase in value of the assets.
D) The company does not have to depreciate the asset.
Answer: B
59) Alamo Airways purchase or leases its entire aircraft fleet. Since Alamo already has too much debt,
they would prefer off-balance-sheet financing, which can be achieved using:
A) Bank debt B) Convertible bonds
C) Finance leases D) Operating leases
Answer: D
60) Ifa company makes extensive use of operating leases to finance assets, what is the effect on the
debt-to-equity ratio?
A) The debt-to-equity ratio would not be affected.
B) The debt-to-equity ratio would be understated.
C) The debt-to-equity ratio would be overstated.
D) The effect depends on whether the ratio is above 1 or not.
Answer: B
61) Which of the following criteria would indicate that a lease should be accounted for as a finance
lease?
A) The lease is for real property.
B) The lease term is for four years, while the asset's useful life is ten years.
C) The lease asset is guaranteed to revert to the lessor at the end of the lease term.
D) The present value of the minimum lease payments is $93,500, while the fair market value of
the leased asset is $100,000.
Answer: D
12
62) What is the effect of classifying a lease as an operating lease, as opposed to as a finance lease, on the debt to
equity ratio and the times-interest-earned ratio?
Debt to equity ratio Times-interest-earned ratio

A Overstated Overstated
B Overstated Understated
C Understated Overstated
D Understated Understated

Answer: C
63) PleasantCompany has established a pension plan for its employees that operates as follows: Each
year, Pleasant Company places a fixed dollar amount in a pension fund for each employee. The
funds are then invested. Upon retirement, each employee is entitled to the cash value of the funds
that have been invested in his/her name. This arrangement is an example of which of the following?
A) Defined contribution program. B) Defined benefit program.
C) Contingent program. D) Deferred timing program.
Answer: A
64) In20X6, General Dynamics (GD) had a Prepaid Pension Asset of $12.4 billion, total assets of $495
billion, and net income of $13.7 billion. This means that
A) GD recorded a nonrecurring item on the income statement for $12.4 billion.
B) GD's pension plan was underfunded by $12.4 billion.
C) GD's pension plan was overfunded by $12.4 billion.
D) GD had extraordinary liabilities of $12.4 billion.
Answer: C
65) Acompany uses a defined benefit pension plan. At year-end, the pension obligation is $67.8 million
and plan assets $56.9 million. This plan is:
A) Committed to expend an additional $10.9 million.
B) Insolvent.
C) Underfunded by $10.9 million.
D) Overfunded by $10.9 million.
Answer: C
66) Anaccountant is reviewing the financial statements of a company and notes that the company
reports a pension liability on its balance sheet. What does the pension liability represent?
A) The amount of this year's pension expense that has not been paid yet.
B) The difference between the pension plan obligations and the pension plan assets.
C) The present value of all future pension obligations.
D) The increase in the pension obligation that was earned this year.
Answer: B
13
67) A company with a defined contribution pension plan is best described as being
A) committed to specific retiree benefit levels at retirement.
B) committed to making cash payments for pensions when the employee actually retires.
C) committed to early retirement for all employees.
D) committed to specific levels of contributions to the pension plan of the employee.
Answer: A
68) In20X4, The W D Co. had total liabilities of $22,704 million and total assets of $43,679 million. In
20X3, they had total liabilities of $21,990 million and total assets of $41,378 million. Calculate
their debt to equity ratio for 20X4 and 20X3, respectively.
A) .52 and .53 B) .92 and .88 C) 1.08 and 1.13 D) .48 and .47
Answer: C
69) Milford Inc. has a debt-to-equity ratio of 0.80. It has total shareholders' equity of $2.5 million and
current liabilities of $750,000. How much long-term debt is outstanding?
A) $3,125,000 B) $1,250,000 C) $2,100,000 D) $2,375,000
Answer: B
70) Bullseye is a large retailer. Its debt-to-equity ratio last year was 0.82 and its interest-coverage ratio
was 20.5. The industry averages for these two ratios are 0.68 and 24.59, respectively. Based on that
information, which of the following statements is true?
A) Bullseye has less debt in its capital structure than the average for the industry.
B) Bullseye has more debt in its capital structure than the average for the industry.
C) Bullseye is less risky than average for the industry.
D) Bullseye can pay its interest expense more easily than the average in the industry.
Answer: B
71) Which of the following ratios can be used to evaluate an entity's capital structure?
A) Debt-to-equity B) Times interest earned ratio
C) Current ratio D) Return-on-assets ratio
Answer: A
14
72) A financial analyst is evaluating the solvency and liquidity of Flagstaff Manufacturing and has collected the
following data:
20X7 20X6 20X5

Total debt $2,000 $1,900 $1,750
Total equity $4,000 $4,500 $5,000
What would the analyst be most likely to conclude?

A) The company is becoming increasingly less solvent as evidenced by the increase in its debt to
equity ratio from 0.35 in 20X5 to 0.50 in 20X7.
B) The company is becoming increasingly more solvent as evidenced by the increase in its debt to
C) The company is becoming increasingly more liquid as evidenced by the increase in its debt to
D) The company is becoming increasingly less liquid as evidenced by the increase in its debt to
Answer: A
73) Acreditor would most likely consider a decrease in which of the following ratios to be positive
news?
A) Inventory turnover B) Current ratio
C) Debt to equity ratio D) Times interest earned
Answer: C
74) Compared to using a finance lease, a lessee that makes use of an operating lease will most likely
report higher:
A) Current ratio B) Bank debt
C) Rent or lease expense D) Cash flows from financing activities
Answer: C

A) The corporation will have to pay cash to bond investors when those investors demand to call
the bonds.
B) The corporation will have an outflow of cash connected to an investing activity when interest is
paid to bond investors.
C) The corporation will have cash inflow when bonds are issued for an amount equal to, greater
than, or less than the par value of the bonds.
D) An outflow of cash when convertible bonds are converted is a financing activity.
Answer: C
15
76) Which of the following is true?
A) An outflow of cash for interest payments is an investing activity.
B) An outflow of cash when convertible bonds are converted is an investing activity.
C) Payment of interest is an investing activity since we would not have interest unless we
borrowed money or sold bonds to the public.
D) An outflow of cash when callable bonds are recalled by the issuer is a financing activity.
Answer: D
77) Acompany wants to maintain its current debt/equity ratio. Which of the following relationships
would most likely occur on the cash flow statement?
A) Cash from operations would be equal to cash from financing activities for the year.
B) Cash from operations would be equal to any debt paid off during the year.
C) New borrowings would replace any debt paid off.
D) New borrowings would be less than cash from operations for the year.
Answer: C
78) Madison Co had the following activity during 20X7:
Face value of bond issuance $200,000

Amortization of bond premium 2,000
Unamortized premium on bond issue 12,000
Payment of long-term note payable 45,000
Dividends paid to shareholders 25,000
Sale of shares 125,000
Gain on the sale of equipment 75,000
What was the cash flow from financing activities?

A) $255,000 B) $269,000 C) $267,000 D) $300,000
Answer: B
79) A 6% five-year bond was issued at $918.89. The face value and yield to maturity for the bond are
Face value Yield to maturity

A $918.89 greater than 6%.
B $918.89 less than 6%.
C $1,000.00 greater than 6%.
D $1,000.00 less than 6%.

Answer: C
16
80) On January 1, 20X7 Thesante Metals Ltd issued a $100,000, 6%, 5-year bond for $91,889 to yield 8%. Interest
is payable semi-annually. The interest expense and interest payable for the first year are closest to:
Interestexpense Interest payable

A $3,675 $3,000
B $7351 $6,000
C $7,418 $6,000
D $7,351 $8,000

Answer: C
81) On January 1, 20X6, Malenfant Ltd. sold five year, 12% bonds with a face value of $500,000.
Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for $538,500
to yield 10%. Using the effective interest method of amortization of bond discount or premium,
interest expense for 20X6 is
A) $50,000 B) $60,000 C) $53,696 D) $53,850
Answer: C
82) Manu Corporation issued $200,000 of 4% five-year bonds for proceeds of $192,330. The market
interest rate is 6%. Interest is paid semi-annually. How much bond interest expense is recorded on
the first interest date?
A) $6,000 B) $4,000 C) $5,770 D) $3,847
Answer: C
83) On January 1, 20X1, Winston Corporation sold a four-year, $10,000, 7% bond. The interest is
payable annually each December 31. The issue price was $9,668 based on an 8% effective interest
rate. Assuming effective-interest amortization is used, the interest expense on the 20X1 income
statement would be which of the following amounts (to the nearest dollar)?
A) $700 B) $1,547 C) $883 D) $773
Answer: D
84) On July 1, 20X2, Wild World Inc. sold (issued) 300, $1,000, ten-year, 7% bonds at 101. The bonds
were dated July 1, 20X2, and semi-annual interest will be paid each December 31 and June 30. Wild
World uses straight-line amortization. What is the bond liability that would be reported on the
statement of financial position at December 31, 20X2?
A) $302,850 B) $302,700 C) $300,000 D) $303,000
Answer: A
85) On November 1, 20X1, Duval Company sold (issued) 300, $1,000, ten-year, 7% bonds at 97. The
bonds were dated November 1, 20X1, and interest is payable each November 1 and May 1. What
would be the amount of discount amortization at each semi-annual interest date (assume
straight-line amortization)?
A) $450 B) $600 C) $100 D) $50
Answer: A
17
86) On January 1, 20X1, Washer Company sold (issued) 600, $1,000, five-year, 8% bonds at 95. The
bonds were dated January 1, 20X1, and interest is payable each June 30 and December 31. The
company uses the straight-line method of amortization. What is the amount of the net liability for
bonds payable that would be reported on the December 31, 20X1, statement of financial position?
A) $597,000 B) $600,000 C) $576,000 D) $573,000
Answer: C
87) Ifbonds are initially sold at a discount and the straight-line method of depreciation is used, interest
expense in the earlier years will be
A) less than the stated rate of interest.
B) the same as it would have been had the effective interest method of amortization been used.
C) higher than it would have been had the effective interest method of amortization been used.
D) less than it would have been had the effective interest method of amortization been used.
Answer: C
88) Notes payable usually require the borrower to pay interest.

Answer: True False
89) Bonds often are a superior method of financing in comparison with sale and issuance of capital
shares because of both the (a) leverage effects and (b) tax deductibility of interest payments.
Answer: True False
90) A long-term note payable is often secured by a mortgage.

Answer: True False
91) All long-term note payables are secured.

Answer: True False
92) Bondsare debt instruments issued by corporations and government units in order to raise large
amounts of money.
Answer: True False
93) Most notes are not interest bearing.

Answer: True False
94) Notes payable are sometimes used instead of accounts payable.

Answer: True False
95) A note payable must always be paid before an account payable.

Answer: True False
96) A$20,000, 5%, 9-month note payable requires an interest payment of $750, if interest is due at
maturity.
Answer: True False
18
97) With an interest-bearing note, the amount of cash received upon issue of the note generally exceeds
the note's face value.
Answer: True False
98) Interest expense on a note payable is only recorded at maturity.

Answer: True False
99) Each payment made on a long-term note payable usually consists of both interest and principal
Answer: True False
100) Interest expense on fixed principal long-term notes does not change each payment.
Answer: True False
101) When a mortgage payment is made, the entire amount is debited to Interest Expense.
Answer: True False
102) The contractual interest rate is always equal to the market rate of interest on the date that bonds are
issued.
Answer: True False
103) Bonds are often traded on an organized exchange.

Answer: True False
104) Bonds are a form of interest-bearing notes payable.

Answer: True False
105) If a bond has a face value of $5,000 and a coupon rate of 6 percent, then the interest paid
semi-annually will be $150.
Answer: True False
106) The effective (market) interest rate almost always exceeds the stated interest rate on bonds.
Answer: True False
107) When the effective (market) interest rate is higher than the stated interest rate, a bond can be
purchased at a discount.
Answer: True False
108) The carrying amount of a bond is equal to the maturity value on the date of maturity.
Answer: True False
109) Total interest cost for a bond issued at a premium equals the total of the periodic interest payments
added to the premium.
Answer: True False
19
110) Total interest cost for a bond issued at a premium equals the total of the periodic interest payments
minus the premium.
Answer: True False
111) The difference between the carrying amount and the amount paid to retire the bonds is reported as a
gain or loss, depending on the circumstances.
Answer: True False
112) The carrying amount of bonds issued at a discount will initially be higher than the face value.
Answer: True False
113) The calculation of interest to be paid each interest period on a bond payable is not influenced by any
premium or discount upon issue.
Answer: True False
114) The carrying value (book value) of a bond payable is equal to the maturity amount of the bond plus
any unamortized discount or premium.
Answer: True False
115) If bonds sell at a premium, the interest expense recognized each year will be greater than the
contractual rate of interest.
Answer: True False
116) If the market rate of interest at the date of a bond issue is greater than the stated interest rate, the
bond will be issued at a premium.
Answer: True False
117) If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a
weak credit rating.
Answer: True False
118) A corporation that issues bonds at a discount will recognize interest expense at a rate which is
greater than the market rate of interest.
Answer: True False
119) The market rate of interest on bonds equals the stated rate of interest if the bonds were sold at face
value.
Answer: True False
120) If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the
face amount of the bonds on the maturity date.
Answer: True False
121) A bond sold at a discount will pay total cash payments for interest that is more than the total interest
expense recognized over the period the bond is issued.
Answer: True False
20
122) If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face
amount of the bonds for all periods prior to the bond maturity date.
Answer: True False
123) If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a
discount.
Answer: True False
124) If $240,000, 3%, bonds are issued on January 1, and pay interest semi-annually, the amount of
interest paid on July 1 will be $3,600.
Answer: True False
125) The times interest earned ratio uses accrual based figures from the income statement for its
calculation.
Answer: True False
126) The times interest earned ratio measures the ability of a company to meet its interest obligations
with resources from its profit-making activities.
Answer: True False
127) A high growth rate company may have a low times interest earned ratio because it has used debt to
finance property, plant and equipment assets that are not yet generating a level of profits expected to
materialize in the future.
Answer: True False
128) The issuance and retirement of bonds have significant impact on investing cash flows.
Answer: True False
129) If $100,000 bonds with a carrying amount of $93,500 are redeemed at 98, a loss on redemption will
be recorded.
Answer: True False
130) Calculating the present value of bonds determines the price at which they should sell.
Answer: True False
131) The effective-interest method of amortization results in a constant percentage rate.

Answer: True False
132) Typical non-current liabilities include lease obligations, asset retirement obligations, accrued
retirement benefits liability, and deferred income taxes.
Answer: True False
133) When the effective-interest amortization method is used, the related interest expense for the period
is determined by multiplying the stated interest rate by the book value of the bond at the beginning
of the current period.
Answer: True False
21
134) Under the effective-interest method, the interest paid each year is the same but the interest expense
recorded is different.
Answer: True False
135) A high debt to equity ratio indicates reliance on creditor financing thereby increasing the risk that a
company will not be able to meet its obligations.
Answer: True False
136) The debt to total assets ratio measures the percentage of the total assets provided by creditors.
Answer: True False
137) The times interest earned ratio is calculated by dividing net earnings by interest expense.
Answer: True False
138) Bonds held as investments should not be reported in the intangible assets section of the statement of
financial position.
Answer: True False
139) The financial leverage ratio compares the amount of capital supplied by creditors to the amount
supplied by owners.
Answer: True False
140) The financial leverage ratio is a measure of a company's profitability.

Answer: True False
22
141) Match the definitions with the appropriate terms.

Definition
A. The issue price of the bond.

B. A cash fund set up to retire bonds.
C. The theoretically correct approach to amortizing bond discount or premium.
D. Involves repayment of the bond in instalments.
E. The bond contract containing legal provisions relating to the bond.
F. None of the above.
Term
________ 1. Equipment trust bond

________ 2. Effective-interest amortization method
________ 3. Current cash equivalent amount
________ 4. Serial bond
________ 5. Ordinary payment bond
________ 6. Debenture
________ 7. Bond sinking fund
________ 8. Straight-line amortization method
________ 9. Indenture
Answer: (1) F, (2) C, (3) A, (4) D, (5) F, (6) F, (7) B, (8) F, (9) E
142) Match the way a bond will sell with the situations given.
Bond will sell for
A. Par
B. A discount
C. A premium
D. None of the above
Situation
________ 1. Bond sells at 108.

________ 2. Bond sells at 93.
________ 3. Bond sells at 100.
________ 4. The effective rate is greater than the stated rate.
________ 5. The stated rate equals the effective rate.
________ 6. The stated rate exceeds the effective rate.
Answer: (1) C, (2) B, (3) A, (4) B, (5) A, (6) C
23
143) Match the type of bond with the appropriate description.
Type of Bond
A. Debentures
B. Secured bonds
C. Ordinary bonds
D. Serial bonds
E. Callable bonds
F. Redeemable bonds
G. Convertible bonds
H. Registered bonds
I. Coupon bonds
J. Indentures
K. None of the above
Description
________ 1. When the bond interest date approaches, the investor detaches a form from the bond, signs it, and
mails it to the issuing company.
________ 2. Bonds that can be exchanged for other securities of the issuer, at the option of the investor.
________ 3. There is no pledge of assets, or mortgage, as a guarantee of payment of the bonds at maturity.
________ 4. Bonds that may be called for early retirement at the option of the issuer.
________ 5. The payment of the principal as a single sum at a specified date.
________ 6. Payment of bond interest is made only to the investor currently on the records of the issuer.
________ 7. Bonds that may be turned in for early retirement at the option of the investor.
________ 8. Bonds that include a mortgage or pledge of specific assets as a guarantee of repayment at
maturity.
Answer: (1) I, (2) G, (3) A, (4) E, (5) C, (6) H, (7) F, (8) B,
144) On March 1, 20X1, Warner Corporation, a calendar year company, issued 40 of its $1,000, 8%, five-year bonds
at par. The bonds were dated March 1, 20X1, and the first interest payment will be on February 28, 20X2. The
accounting period ends December 31.
Part A: Complete the journal entry grid for each of the following dates (round to the nearest dollar)
Accounts March 1, 20X6 December 31, 20X6 February 28, 20X7

Debit Credit Debit Credit Debit Credit
Cash
Bonds Payable
Interest Payable
Interest Expense
Other Accounts
Part B: Discuss why an entry is needed on December 31, 20X6.

24
Answer: Part A: Complete the journal entry grid for each of the following dates (round to the nearest dollar)

Cash 40,000 (a) 3,200 (c)
Bonds Payable 40,000 (a)
Interest Payable 2,667 (b) 2,667 (c)
Interest Expense 2,667 (b) 533 (c)
Other Accounts
(a) Sold at par, $40,000

(b) $40,000 × 8% × 10/12 = $2,667
(c) Cash paid: $40,000 × 8% = $3,200
Interest payable (per b) = $2,667
Interest expense ($40,000 × 8% × 2/12) = $533
Part B: Warner Corporation has borrowed money via its bonds from March 1 through December 31,
20X6. It has, therefore, incurred an expense for the use of money for ten months. To reflect this
interest expense ($2,667) in the proper accounting period, an accrual adjusting entry is
required.
145) On April 1, 20X2, Larel Corporation issued $40,000, 9%, ten-year bonds payable at 108 that were dated April 1
20X2. Interest is payable each March 31 and September 30.
(a) Give the entry to record the issuance of the bonds on April 1, 20X2
(b) Give the entry to record the first interest payment on September 30, 20X2. Use straight-line amortization
(c) Give the adjusting entry required on December 31, 20X2, the end of the annual accounting period. Use
straight-line amortization
Answer: (a)
Cash (40,000 × 1.08) 43,200
Bond premium ($43,200 - $40,000) 3,200
Bonds payable 40,000
(b)
Bond interest expense 1,640
Bond premium ($3,200 × 6/12) 160
Cash 1,800
(c)
Bond interest expense 820
Bond premium ($3,200 × 3/12) 80
Interest payable ($40,000 × 9% × 3/12) 900
25
146) On January 1, 20X2, Dole Corporation sold (issued) 400 of its $1,000, ten-year, 9% bonds. The bonds were
dated January 1, 20X2, and interest is paid semi-annually each June 30 and December 31. The bonds sold at
99.
Part A: Give the entry to record the sale of the bonds on January 1, 20X2
Part B: Were the bonds sold at par, at a premium or at a discount and how did you arrive at your answer?
Answer: Part A:
Cash ($400,000 × .99) 396,000

Discount on bonds payable ($400,000 - $396,000) 4,000
Part B: The bonds were sold at a discount. They were sold at 99 which means that 99% of their face or
par value. Since 99$% is less than 100%, they were sold at less than par or at a discount.
147) On June 30, 20X1, Reagan Corporation sold (issued) a $1,000, ten-year, 8% bonds payable (interest payable
each June 30 and December 31).
For the three assumptions below, complete the following schedule assuming the accounting year ends
December 31, and straight-line depreciation is used:
Transaction Sale @ 100 Sale @ 96 Sale @ 104

Assumption 1 Assumption 2 Assumption 3
a. Cash received
b. Interest expense for 20X1
c. Net bond carrying value on the
December 31, 20X2 balance sheet
Sale @ 100 Sale @ 96 Sale @ 104

Transaction Assumption 1 Assumption 2 Assumption 3
a. Cash received $1,000 $960 $1,040
b. Interest expense for 20X1 40 42 38
c. Net bond carrying value on the 1,000 966 1,034
26
148) Lamar Company authorized a $500,000, five-year, 12% bond issue dated October 1, 20X1, with semi-annual
interest to be paid each September 30 and March 31. On October 1, 20X1, the bonds were issued (sold) for
$497,340.
(a) Give the entry to record the sale of the bonds.

(b) It is December 31, 20X1, the end of the accounting period. Give the required adjusting entry using
straight-line amortization
(c) Was the bond sold at par, at a discount or at a premium?
(d) Will interest expense be greater than or less than the cash payments for interest?
Answer: (a)
Cash 497,340
Discount on bonds payable 2,660
(b)
Interest Payable: $500,000 × 12% × 3/12$15,000

=
Discount amortization: $2,660 × 3/60 = 133
(c) Discount
(d) Greater Than
149) On March 1, 20X1, Allen, Inc., issued a $1,000, 8%, five-year bond payable for $1,060. The bond was dated on
March 1, 20X1, and interest is payable each February 28 and August 31. You are to complete the following
entries: (round to the nearest dollar.)
(a) March 1, 20X1 — Date of issuance:

Cash
Bonds payable
Premium on bonds payable
(b) August 31, 20X1 — Interest payment date (assume straight-line
amortization):
Bond interest expense
Cash
(c) December 31, 20X1 — Adjusting entry (end of annual
accounting period):
Bond interest expense
Bond interest payable
27
(d) Was the bond issued at par, at a premium, or at a discount?
(e) What is the carrying value of book value of the bond on December 31, 20X1?
(f) Where in the financial statements does the carrying value of the bond appear (be specific)?
(g) On what date does the bond issue mature?

Cash 1,060
Bonds payable 1,000
(b) August 31, 20X1 — Interest payment date
(assume straight-line amortization):
Cash 40
(c) December 31, 20X1 — Adjusting entry (end of
annual accounting period):
Bond interest payable 27
(d) Premium.
(e) $1,050 ($1,000 + 60 - 6 - 4)
(f) On the balance sheet, in the long-term liabilities section.
(g) February 28, 20X6 (or March 1, 20X6).
150) On October 1, 20X1, Britt Company issued a $5,000, 6%, bond payable. The interest is payable
annually each October 1 and the bond matures in five years. The annual accounting period for the
company ends December 31. Complete the following entries at the date specified under three
different assumptions as to the issue price. Use straight-line amortization.
Assumed Issue Price

@ par @ 94 @ 106
Entry Debit Credit Debit Credit Debit Credit
Record Issuance:
October 1, 20X1
Cash
Bond Discount
Bond Premium
Bonds Payable
Record adjusting
entry: December
31, 20X1
28
Bond interest
expense
Bond discount
Bond premium
Bond interest
payable
Record Interest
Payment: October
1, 20X2
Bond interest
expense
Bond interest
payable
Bond discount
Bond premium
Entry Assumed Issue Price

@ par @ 94 @ 106
Record Issuance: October 1,
20X1
Cash 5,000 4,700 5,300
Bond Discount
300
Bond Premium
300
Bonds Payable 5,000 5,000 5,000
Record adjusting entry:
December 31, 20X1
Bond interest expense 75 90 60
Bond discount 15
Bond premium 15
Bond interest payable 75 75 75
Record Interest Payment:
October 1, 20X2
Bond discount 45
Bond premium 45
Cash 300 300 300
29
151) Millwood Company prepared a bond issue dated January 1, 20X1. On January 1, 20X1, the company sold
$100,000 of its par value bonds at 103. The bonds mature in thirty years and have a stated rate of interest of 8%
per year. Interest is payable annually on December 31. Straight-line amortization is used (round to the nearest
dollar).
(a) Give the entry to record the sale of bonds on January 1, 20X1:
(b) Give the entry to record interest expense at December 31, 20X1 (end of the annual accounting period)
(c) Show how the bonds would be reported on the statement of financial position of Millwood Company dated
December 31, 20X3
Answer: (a)
Cash 103,000
Bonds Payable 100,000
Premium on bonds payable 3,000
(b)
Premium on bonds payable ($3,000
× 1/30) 100
Cash ($100,000 × 8%) 8,000
(c)
Long-term liabilities
Bonds payable, 8% 100,000
Add: Unamortized premium* 2,700 102,700
*$3,00 - (3,000 × 3/30)
152) Roy Company sold the following ten-year bonds payable on January 1, 20X1: $100,000 maturity value, 5%
interest payable annually on each December 31. The bonds were dated January 1, 20X1 and the accounting
period ends December 31. The bonds were sold at 98.
(a) Fill in each blank to the right (assume straight-line amortization)
Transaction Amount
1. Cash inflow at date of issuance $
Cash outflow under 10-year period:
2. Principal $
3. Interest $
4. Total interest $
5. Stated interest rate $
6. Interest expense for 20X2 $
Balance Sheet at December, 31, 20X2:
7. Bonds payable $
8. Unamortized amount $
30
9. Net liability $
(b) Assuming the account period ends on June 30, give the adjusting entry related to interest expense for X
Answer: (a)
Transaction Amount
1. Cash inflow at date of issuance $98,000
2. Principal $100,000
3. Interest $50,000
4. Total interest $52,000
5. Stated interest rate 5%
6. Interest expense for 20X2 $5,200
Statement of Financial Position at December 31, 20X2:
7. Bonds payable $100,000
8. Unamortized amount $1,600
9. Net liability $98,400
(b)
Interest Expense (for six months) 2,600
Discount on bonds payable ($2,000 / 10 × 6/12) 100
Interest payable ($100,000 × 5% × 6/12) 2,500
153) Consider the following statement: "Issuing bonds at a discount is bad for the issuing corporation."
Required:
Discuss the statement above and comment on its validity.

Answer: The issuance of bonds at a discount is not bad nor is the issuance of bonds at a premium good.
Bonds are issued at a price based on the market rate of interest. When bonds are issued at a
discount, the market rate exceeds the stated rate. When bonds are issued at a premium, the
stated rate exceeds the market rate. The price at which bonds are sold simply adjusts the
selling price to yield the market rate to the bondholders.
31
154) The following information was taken from the statement of earnings of The W D Company for the years 20X0
through 20X2 (in millions):
20X2 20X1 20X0

Interest expense $612 $62 $693
Income taxes 1,104 1,397 1,421
Profit 1,300 1,850 1,966
(1) Calculate the times interest earned ratio for 20X0 through 20X2.
(2) Comment on the sufficiency of the ratio.
Answer: (1) 20X2, 4.93 times, 20X1, 5.9 times, 20X0, 5.89 times.
(2) The ratio was constant between 20X0 and 20X1; however, it did drop significantly in 20X2 primari
caused by the decrease in profit. The level of interest expense has dropped over the three years but the
profit has declined at a faster rate than the decrease in interest in 20X2. Overall, even in 20X2, the
company still has almost five dollars of profit coverage for every dollar of interest charges
incurred so they do not appear to be having difficulty generating sufficient profit coverage for
interest charges.
155) On July 1, 20X1, GAAP Corporation sold (issued) $100,000 of its ten-year, 6% bonds payable at 98. The bonds
were dated July 1, 20X1, and interest is paid each June 30, and December 31.
(a) Give the entry to record the sale of the bonds
(b) Give the entry to record the first interest payment. Assume straight-line amortization
Answer: (a) July 1, 20X1
Cash ($100,000 × .98) 98,000

(b) December 31, 20X1
Bond Interest expense ($3,000 +

100) 3,100
Cash ($100,000 × 6% × 6/12) 3,000
156) Bush Company authorized $150,000 of 5-year bonds dated January 1, 20X1. The stated rate of
interest was 14%, payable each June 30 and December 31. The bonds were issued on January 1,
20X1, when the market interest rate was 12%. Assume effective-interest amortization. (The present
value factor for $1 at 6% for 10 periods is 0.5584, for $1 at 7% for 10 periods is 0.5083, for $1 at 14%
for 5 periods is 0.5194, and for $1 at 12% for five periods is 0.5674. The present value of an annuity of $1 for 1
periods at 6% is 7.3601, for 10 periods at 7% is 7.0236, for 5 periods at 6% is 4.2124, and for 5 periods at 7% i
4.1002.) Round to the nearest dollar.
(a) What would be the amount of premium amortization for June 30, 20X1?
32
(b) What would be the amount of premium amortization for December 31, 20X1?
(c) What would be the amount of the interest payment on June 30, 20X1?
(d) What would be the amount of the interest payment on December 31, 20X1?
Answer: (a) $838
(b) $888
(c) $10,500
(d) $10,500
Computations:
Issue price: $150,000 × factor [10; i — 6% (Table A-2 = 0.5584)]

$83,760
(150,000 × 14% / 2) = $10,500 × factor [10; i — 6 (Table A-4 =
7.3601)] $77,281
Issue Price: $161,041
Amortization Schedule
Date Cash interest Interest expense Effective Interest Net Liability

($150,000 × 7%) Amortization
1/1/20X1 $161,041
6/30/20X1 $10,500 $161,041 × 6% = $838 $160,203
$9,662
12/31/20X1 $10,500 $160,203 × 6% = $888 $159,315
$9,612
157) Austin Corporation sold its $1,000,000, 7%, ten-year bonds to the public on January 1, 20X1. The bonds pay
interest annually, beginning on December 31, 20X1. Austin received $1,153,420 in cash at the issuance of the
bonds. The market rate of interest when the bonds were sold was 5%
(a) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1,
assuming the "effective-interest" method is used. $________
(b) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1,
assuming the "straight-line" method is used. $________
(c) Which method above is theoretically the better to use for amortizing a bond premium?
Answer: (a) ($1,000,000 × 7% = $70,000) - ($1,153,420 × 5% = $57,671) = $12,329
(b) $153,420/10 = $15,342.
(c) Effective-interest method.
33
158) Webber Company reported the following information for 20X2 (in millions). Identify where these items would
be classified on the statement of cash flows (operating, investing, or financing) and whether they would be
added or deducted in those sections.
20X2
Interest payments $585
Proceeds from the issuance of notes $3,833
Borrowings under a revolving line of credit $462
Debt retirements $2,794
Gain on early retirement of debt $350
Type of activity Effect +/-

Interest payments Operating
Proceeds from the issuance of notes Financing +
Borrowings under a revolving line of credit Financing +
Debt retirements Financing -
Gain on early retirement of debt Operating -
34
159) On November 1, 20X1, Rossy Co. purchased $100,000, 9%, ten-year bonds of Bossy Corporation at a cost of
$100,000 as a held-to-maturity investment. The bonds pay interest semi-annually each April 30 and October
31. Give the journal entries required for the following dates:
November 1, 20X1
December 31, 20X1 (End of account period)
April 30, 20X2
Answer: November 1, 20X1
Held-to-maturity investment 100,000

Cash 100,000
Bond interest receivable 1,500

Revenue from investment 1,500
April 30, 20X2

(Assuming no reversing entry on January 1, 20X2)
Cash ($100,000 × 9% × 6/12) 4,500

Revenue from interest 3,000
35
160) As a held-to-maturity investment, Jones Company purchased a $1,000, 7% bond of Company Y on January 1,
20X1. The interest is paid each December 31 and the bonds mature in five years from the acquisition date.
Give the journal entry to record the acquisition of the bond under each of the following three assumptions.
The bond sold at par

The bond sold at 103:
The bond sold at 97:
Answer: At par:
Long term investment 1,000

Cash 1,000
At 103:

Cash 1,030
At 97:
Long term investment 970

Cash 970
161) Marie is considering several possible investment alternatives.
Option A Marie could receive $10,000 today

Option B Marie could receive $3,000 at the end of each year for four years
Option C Marie could receive $15,000 five years from now
Required:
1. Calculate the present value of each option assuming Marie can earn 8% on any of the investment funds.
2. Which option results in the greatest financial benefit to Marie?
Answer: Requirement 1:
Option A Present value $10,000

Option B The present value is $3,000 × 3.3121 (present value of an annuity; 4
periods at 8%) or $9,936.30
Option C The present value is $15,000 × 0.6806 (present value of $1; five
periods at 8%) or $10,209
Requirement 2:
Therefore the best option is C
36
162) Note to the instructor: Present and future value tables could be used for this question, but they are not required
for its solution.
Meade Company has accumulated cash in a fund to use for future expansion.
The following accumulation schedule for the fund was prepared:
Date ? ? ?
12/31/20X1 $4,811 $-0- $4,811
12/31/20X2 4,811 433 10,055
12/31/20X3 4,811 905 15,771
12/31/20X4 4,811 1,419 22,001
Required:
Refer to the schedule above and respond to the following questions by entering the answers in the blanks to
right.
A. What was the fund's goal in dollars?

B. What was the annual contribution to the fund?
C. What interest rate was earned?
D. What amount interest was earned in
20X1:
20X3:
E. Give the entry on 12/31/20X2:
Answer: A. $22,001
B. $4,811
C. $433 / $4811 = 9%
D. 20X1, -0-, 20X3, $905
E.
Expansion fund 5,244
Interest revenue 433
Cash 4,811
37
163) Watson Company purchased a truck that cost $17,000. The company signed a $17,000 note payable
that specified four equal annual payments (at each year-end), each of which includes a payment on the
principal and interest on the unpaid balance at 10% per annum.
A. Compute the amount of each equal payment (round to the nearest dollar).
B. Give the entry to record the purchase of the truck.
C. Give the entry to record the first annual payment on the note.
D. Will the interest paid with the first annual payment be more or less than the interest paid with the
second annual payment? Explain your answer.
Answer: A. $17,000/3.1699 (present value of annuity) = $5,363
B. Truck 17,000
Note Payable 17,000
C. Note Payable 3,663
Cash 5,363
D. The interest paid on the first installment will be more than the interest on the second payment
because the principal is lower
Payment Amount Interest Reduction or Principal

Expense Principal
#1 $5,363 $17,000 × 10%$5,363 - $1,700 = $13,337
= $1,700 $3,663
#2 $5,363 $13,337 × 10%$5,363 - $1,334 = $9,308
= $1,334 $4,029
38
164) Goodgold Corporation purchased a machine which had a current cash equivalent cost of $38,971 on
January 1, 20X1. Goodgold paid cash of $10,000 and signed an interest-bearing note for the
balance, payable in six equal annual instalments on each December 31 beginning with December 31,
20X1. The note specified a 10% interest rate on the unpaid balance.
A. Give the entry to record the purchases on January 1, 20X1 (round to the nearest dollar)
B. Give the entry to record the first installment payment on December 31, 20X1 (round to the nearest dollar)
Answer: A.
Machine 38,971
Cash 10,000
Note Payable 28,971
B.
Interest Expense ($28,971 × 10%) 2,897
Note Payable 3,755
Cash $28,971 / 4.3553 (Pn=6; I=10%) 6,652
165) Wheel Company purchased an asset that cost $70,000 on January 1, 20X1. Arrangements were
made with the supplier to pay $10,000 cash on January 1, 20X1, and the balance was to be paid over
a three-year period, with equal annual payments of $24,553 to be made at the end of 20X1, 20X2,
and 20X3. Each payment will include principal plus interest on the unpaid balance at 11% per year.
A. Complete the following table.
Date Payment Interest ExpenseReduction in Unpaid Principal

Principal
01/01/20X1
12/31/20X1
12/31/20X2
12/31/20X3 *
Totals
* Round to reduce principal to zero.
B. Give the entry for the payment on December 31, 20X2

C. On the debt payment schedule, what is the trend of amounts for interest expense and principal
reduction over time? Explain your response.
Answer: A.
Date Payment Interest Reduction in Unpaid
Expense Principal Principal
01/01/20X1 $60,000
12/31/20X1 $24,553 $6,600 $17,953 42,047
12/31/20X2 24,553 4,625 19,928 22,119
12/31/20X3 24,553 *2,434 22,119 -0-
39
Totals $73,659 $13,659 $60,000 -0-
* Rounded.
B.
Note Payable 19,928
Cash 24,553
C. Interest decreased over time because part of each debt payment reduces principal. As a result,
over time the debt principal decreased each year.
166) On January 1, 20X1, Bodner Company agreed to buy some equipment from Adams Company. Bodner signed a
note, agreeing to pay Adams $500,000 for the equipment on December 31, 20X3. The market rate of interest
for this note was 10%.
Required:
A. Prepare the journal entry Bodner would record on January 1, 20X1 related to his purchase.
B. Prepare the December 31, 20X1, adjusting entry to record interest expense related to the note for the first
year.
C. Prepare the December 31, 20X2, adjusting entry to record interest expense related to the note for the
second year.
D. Prepare the entry Bodner would record on December 31, 20X3, the due date of the note to record interest
expense for the third year and payment of the note.
Answer: A. $500,000 × 0.7513 = $375,650 (Present value of $1; Three periods, 10%)
Equipment 375,650
B. $365,650 × .10 = $37, 565

C.
$375,650 + 37,565 = 413,215 × .10 = 41,322

D. (375,650 + 37,565 + 41,322)× .10 = 45,454
(rounding error; use $45,463)

40
Cash 500,000
167) Why are present value concepts and applications so important when companies purchase equipment
financed by the seller?
Answer: Present value concepts are very important in seller financed purchases because the debt
payments will include principal and interest payments. The equipment should be capitalized at
an amount equal to the present value of the purchase. That is, the asset account should reflect
what the equipment could have been acquired for in terms of "today's dollars." The additional
amounts for interest are charges for borrowing. These interest amounts should be reported as interest
expense as incurred.
168) Trollium Properties reported the following account balances and events at their September 30, 20X4 year-end.
None of the year-end adjusting entries have been made.
Amounts owing to suppliers $42,000
Amount outstanding on the line of credit, estimated interest owing $225. $33,700
Amounts withheld from employee pay cheques to be remitted Oct 10. $18,750
Bonds outstanding, 6% semi-annual coupon. $500,000
Unamortized portion of bond premium. The last coupon was paid September $24,60030
Amount of shortfall of pension assets relative to pension obligations at year-end.
$135,700
Balance outstanding on mortgages. Next payment, due October 1, consists of
$1,042 of interest and $1,458 of principal. The next 12 monthly payments (including
the one due Oct 1) will total $30,000 of which $16,500 will be applied to the $125,000
principal
Rent payments received in advance from tenants for October $22,400
Required:
Prepare the liability section of their statement of financial position at September 30, 20X4 including the
effects of any required adjustments.
Current Liabilities
Interest payable (225 + 1,042) 1,267
Withholdings payable 18,750
Unearned Rent 22,400
Current portion of mortgages 16,500
134,617
Mortgage (125,000 — 16,500) 108,500
41
Pension liability 135,700
768,800
42
Answer Key
1) B
2) A
3) A
4) D
5) B
6) B
7) B
8) C
9) D
10) A
11) B
12) A
13) B
14) A
15) A
16) C
17) B
18) C
19) C
20) A
21) D
22) B
23) A
24) A
25) A
26) A
27) C
28) B
29) D
30) A
31) D
32) B
33) A
34) B
35) B
36) C
37) A
38) C
39) C
40) B
41) A
42) B
43) C
44) B
45) B
46) C
47) D
48) A
49) D
50) B
43
Answer Key
51) A
52) B
53) D
54) D
55) B
56) A
57) A
58) B
59) D
60) B
61) D
62) C
63) A
64) C
65) C
66) B
67) A
68) C
69) B
70) B
71) A
72) A
73) C
74) C
75) C
76) D
77) C
78) B
79) C
80) C
81) C
82) C
83) D
84) A
85) A
86) C
87) C
88) TRUE
89) TRUE
90) TRUE
91) FALSE
92) TRUE
93) FALSE
94) TRUE
95) FALSE
96) TRUE
97) FALSE
98) FALSE
99) TRUE
100) FALSE
44
Answer Key
101) FALSE
102) FALSE
103) TRUE
104) TRUE
105) TRUE
106) FALSE
107) TRUE
108) TRUE
109) FALSE
110) TRUE
111) TRUE
112) FALSE
113) TRUE
114) FALSE
115) FALSE
116) FALSE
117) FALSE
118) FALSE
119) TRUE
120) FALSE
121) FALSE
122) TRUE
123) TRUE
124) TRUE
125) TRUE
126) TRUE
127) TRUE
128) FALSE
129) TRUE
130) TRUE
131) TRUE
132) TRUE
133) FALSE
134) TRUE
135) TRUE
136) TRUE
137) FALSE
138) TRUE
139) TRUE
140) FALSE
141) (1) F, (2) C, (3) A, (4) D, (5) F, (6) F, (7) B, (8) F, (9) E
142) (1) C, (2) B, (3) A, (4) B, (5) A, (6) C
143) (1) I, (2) G, (3) A, (4) E, (5) C, (6) H, (7) F, (8) B,
45
Answer Key
144) Part A: Complete the journal entry grid for each of the following dates (round to the nearest dollar)

Cash 40,000 (a) 3,200 (c)
Bonds Payable 40,000 (a)
Interest Payable 2,667 (b) 2,667 (c)
Interest Expense 2,667 (b) 533 (c)
Other Accounts
(a) Sold at par, $40,000

(b) $40,000 × 8% × 10/12 = $2,667
(c) Cash paid: $40,000 × 8% = $3,200
Interest payable (per b) = $2,667
Interest expense ($40,000 × 8% × 2/12) = $533
Part B: Warner Corporation has borrowed money via its bonds from March 1 through December 31, 20X6. It has,
therefore, incurred an expense for the use of money for ten months. To reflect this interest expense ($2,667) in
the proper accounting period, an accrual adjusting entry is required.
145) (a)
Cash (40,000 × 1.08) 43,200
Bond premium ($43,200 - $40,000) 3,200
(b)
Bond interest expense 1,640
Bond premium ($3,200 × 6/12) 160
Cash 1,800
(c)
Bond premium ($3,200 × 3/12) 80
Interest payable ($40,000 × 9% × 3/12) 900
146) Part A:
Cash ($400,000 × .99) 396,000

Discount on bonds payable ($400,000 - $396,000) 4,000
Part B: The bonds were sold at a discount. They were sold at 99 which means that 99% of their face or par value.
Since 99$% is less than 100%, they were sold at less than par or at a discount.
46
Answer Key
Sale @ 100 Sale @ 96 Sale @ 104

Transaction Assumption 1 Assumption 2 Assumption 3
a. Cash received $1,000 $960 $1,040
b. Interest expense for 20X1 40 42 38
c. Net bond carrying value on the 1,000 966 1,034
148) (a)
Cash 497,340
(b)
Interest Payable: $500,000 × 12% × 3/12$15,000

=
Discount amortization: $2,660 × 3/60 = 133
(c) Discount
(d) Greater Than
47
Answer Key

Cash 1,060
Bonds payable 1,000
(b) August 31, 20X1 — Interest payment date
(assume straight-line amortization):
Cash 40
(c) December 31, 20X1 — Adjusting entry (end of
annual accounting period):
Bond interest payable 27
(d) Premium.
(e) $1,050 ($1,000 + 60 - 6 - 4)
(f) On the balance sheet, in the long-term liabilities section.
(g) February 28, 20X6 (or March 1, 20X6).
48
Answer Key
Entry Assumed Issue Price

@ par @ 94 @ 106
Record Issuance: October 1,
20X1
Cash 5,000 4,700 5,300
Bond Discount
300
Bond Premium
300
Bonds Payable 5,000 5,000 5,000
Record adjusting entry:
December 31, 20X1
Bond discount 15
Bond premium 15
Record Interest Payment:
October 1, 20X2
Bond discount 45
Bond premium 45
Cash 300 300 300
49
Answer Key
151) (a)
Cash 103,000
Bonds Payable 100,000
Premium on bonds payable 3,000
(b)
Premium on bonds payable ($3,000
× 1/30) 100
Cash ($100,000 × 8%) 8,000
(c)
Bonds payable, 8% 100,000
Add: Unamortized premium* 2,700 102,700
*$3,00 - (3,000 × 3/30)

152) (a)
Transaction Amount
1. Cash inflow at date of issuance $98,000
2. Principal $100,000
3. Interest $50,000
4. Total interest $52,000
5. Stated interest rate 5%
6. Interest expense for 20X2 $5,200
Statement of Financial Position at December 31, 20X2:
7. Bonds payable $100,000
8. Unamortized amount $1,600
9. Net liability $98,400
(b)
Interest Expense (for six months) 2,600
Discount on bonds payable ($2,000 / 10 × 6/12) 100
Interest payable ($100,000 × 5% × 6/12) 2,500
153) The issuance of bonds at a discount is not bad nor is the issuance of bonds at a premium good. Bonds are
issued at a price based on the market rate of interest. When bonds are issued at a discount, the market rate
exceeds the stated rate. When bonds are issued at a premium, the stated rate exceeds the market rate. The
price at which bonds are sold simply adjusts the selling price to yield the market rate to the bondholders.
50
Answer Key
154) (1) 20X2, 4.93 times, 20X1, 5.9 times, 20X0, 5.89 times.
(2) The ratio was constant between 20X0 and 20X1; however, it did drop significantly in 20X2 primarily caused by
the decrease in profit. The level of interest expense has dropped over the three years but the profit has declined at a
faster rate than the decrease in interest in 20X2. Overall, even in 20X2, the company still has almost five
dollars of profit coverage for every dollar of interest charges incurred so they do not appear to be having
difficulty generating sufficient profit coverage for interest charges.
155) (a) July 1, 20X1
Cash ($100,000 × .98) 98,000

(b) December 31, 20X1
Bond Interest expense ($3,000 +

100) 3,100
Cash ($100,000 × 6% × 6/12) 3,000
156) (a) $838

(b) $888
(c) $10,500
(d) $10,500
Computations:
Issue price: $150,000 × factor [10; i — 6% (Table A-2 = 0.5584)]

$83,760
(150,000 × 14% / 2) = $10,500 × factor [10; i — 6 (Table A-4 =
7.3601)] $77,281
Issue Price: $161,041
Amortization Schedule
Date Cash interest Interest expense Effective Interest Net Liability

($150,000 × 7%) Amortization
1/1/20X1 $161,041
6/30/20X1 $10,500 $161,041 × 6% = $838 $160,203
$9,662
12/31/20X1 $10,500 $160,203 × 6% = $888 $159,315
$9,612
51
Answer Key
157) (a) ($1,000,000 × 7% = $70,000) - ($1,153,420 × 5% = $57,671) = $12,329

(b) $153,420/10 = $15,342.
(c) Effective-interest method.
Type of activity Effect +/-

Interest payments Operating
Proceeds from the issuance of notes Financing +
Borrowings under a revolving line of credit Financing +
Debt retirements Financing -
Gain on early retirement of debt Operating -
159) November 1, 20X1
Held-to-maturity investment 100,000

Cash 100,000

Revenue from investment 1,500
April 30, 20X2

(Assuming no reversing entry on January 1, 20X2)
Cash ($100,000 × 9% × 6/12) 4,500

Revenue from interest 3,000
52
Answer Key
160) At par:

Cash 1,000
At 103:

Cash 1,030
At 97:
Long term investment 970

Cash 970
161) Requirement 1:
Option A Present value $10,000

Option B The present value is $3,000 × 3.3121 (present value of an annuity; 4
periods at 8%) or $9,936.30
Option C The present value is $15,000 × 0.6806 (present value of $1; five
periods at 8%) or $10,209
Requirement 2:
Therefore the best option is C
162) A. $22,001
B. $4,811
C. $433 / $4811 = 9%
D. 20X1, -0-, 20X3, $905
E.
Expansion fund 5,244
Cash 4,811
53
Answer Key
163) A. $17,000/3.1699 (present value of annuity) = $5,363
B. Truck 17,000
Note Payable 17,000
C. Note Payable 3,663
Cash 5,363
D. The interest paid on the first installment will be more than the interest on the second payment because the
principal is lower
Payment Amount Interest Reduction or Principal

Expense Principal
#1 $5,363 $17,000 × 10%$5,363 - $1,700 = $13,337
= $1,700 $3,663
#2 $5,363 $13,337 × 10%$5,363 - $1,334 = $9,308
= $1,334 $4,029
164) A.
Machine 38,971
Cash 10,000
Note Payable 28,971
B.
Interest Expense ($28,971 × 10%) 2,897
Note Payable 3,755
Cash $28,971 / 4.3553 (Pn=6; I=10%) 6,652
54
Answer Key
165) A.
Date Payment Interest Reduction in Unpaid
Expense Principal Principal
01/01/20X1 $60,000
12/31/20X1 $24,553 $6,600 $17,953 42,047
12/31/20X2 24,553 4,625 19,928 22,119
12/31/20X3 24,553 *2,434 22,119 -0-
Totals $73,659 $13,659 $60,000 -0-
* Rounded.
B.
Note Payable 19,928
Cash 24,553
C. Interest decreased over time because part of each debt payment reduces principal. As a result, over time
the debt principal decreased each year.
166) A. $500,000 × 0.7513 = $375,650 (Present value of $1; Three periods, 10%)
Equipment 375,650
B. $365,650 × .10 = $37, 565

C.
$375,650 + 37,565 = 413,215 × .10 = 41,322

D. (375,650 + 37,565 + 41,322)× .10 = 45,454
(rounding error; use $45,463)

Cash 500,000
55
Answer Key
167) Present value concepts are very important in seller financed purchases because the debt payments will
include principal and interest payments. The equipment should be capitalized at an amount equal to the
present value of the purchase. That is, the asset account should reflect what the equipment could have been
acquired for in terms of "today's dollars." The additional amounts for interest are charges for borrowing. These
interest amounts should be reported as interest expense as incurred.
Current Liabilities
Interest payable (225 + 1,042) 1,267
Withholdings payable 18,750
Unearned Rent 22,400
Current portion of mortgages 16,500
134,617
Mortgage (125,000 — 16,500) 108,500
Pension liability 135,700
768,800
56
1) With respect to a corporation, select the statement that is false:

A) Ownership rights to the corporation are transferable.
B) A corporation cannot sue others or be sued.
C) A corporation is a separate legal entity from its owners.
D) Its organization requires an approved charter which is governed by state law.
Answer: B
2) Which one of the following is not a basic right of an owner of common share?
A) Sharing in the responsibility of setting next year's budget.
B) Sharing in the distribution of assets of the corporation at liquidation.
C) Participation in the corporation by voting in shareholder meetings.
D) Participation in the profits of the corporation through dividends declared by the board of
directors.
Answer: A
3) The authorized shares of a corporation

A) is indicated in its by-laws.
B) only reflects the initial capital needs of the company.
C) must be recorded in a formal accounting entry.
D) is indicated in its charter.
Answer: D
4) The articles of incorporation include all of the following except:

A) the costs of issuing the shares.
B) the type of business to be conducted
C) how the board of directors will be organized
D) The types of shares to be issued.
Answer: A
5) From an investor's viewpoint, in today's litigious environment, what would be considered the most
advantageous characteristic of the corporate form of organization?
A) Limited liability for shareholders.
B) Lack of income taxes on the business itself.
C) Absolute control and management in the hands of shareholders.
D) Non-applicability of going concern.
Answer: A
6) For accounting purposes, the most important section of the articles of incorporation is the
description of
A) the costs of issuing the shares.
B) the type of business to be conducted.
C) how the board of directors will be organized.
D) the types of shares to be issued.
Answer: D
1
7) Which of the following statements is false?
A) Most small shareholders who do not attend the corporation's annual meeting, can cast their vote
by proxy card.
B) Some corporations are evaluated by application to the federal government.
C) Corporations do not limit the liability of its owners.
D) Some corporations are evaluated by application to a specific provincial government.
Answer: C
8) Which of the following represents the shares currently in the hands of investors?
A) Issued shares B) Authorized shares
C) Unissued shares D) Outstanding shares
Answer: D
9) Which of the following statements about issuing common shares is true?

A) All classes of common shares have the same voting rights.
B) All classes of common shares pay identical dividends.
C) The total amount received is referred to as legal capital and it may be paid out as dividends
once the company is profitable.
D) The total amount received is referred to as legal capital and it cannot be paid out as dividends.
Answer: D
10) Yet Corporation had net earnings of $500,000. It paid $125,000 in dividends to the preferred
shareholders. Yet Corporation had a weighted average of 1,500,000 common shares and 250,000
preferred shares. Yet Corporation's earnings per share was:
A) $0.25 B) $0.21 C) $0.33 D) $0.29
Answer: A
11) In calculating basic earnings per share, if the preferred shares are cumulative, the amount that
should be deducted as an adjustment to the numerator is the
A) preferred dividends in arrears net of income tax.
B) preferred dividends in arrears.
C) annual preferred dividend.
D) annual preferred dividends net of income tax.
Answer: B
2
12) Berkson Hawthorn is a public company trading on the Toronto Stock Exchange. The company's shares are
currently trading for $16.00 per share. Berkson just released the following information related to its 20X7
year-end:
20X7 20X6
Total assets $14,500,000 $13,250,000
Total liabilities $7,500,000 $6,750,000
Net income $762,500 $555,000
Preferred share dividends $65,000 $65,000
Average number of common shares outstanding100,000 100,000
For 20X7, the company's earnings per share were closest to

A) $7.00 B) $6.50 C) $7.63 D) $6.98
Answer: D
13) Cardwell Realty Limited has 20,000 common shares issued and outstanding at January 1, 20X4. On
July 1, the company sold an additional 10,000 common shares for proceeds of $100,000. Net
income for the year was $30,000. What would the earnings per share be?
A) $1.50 B) $1.00 C) $4.00 D) $1.20
Answer: D
Reference: 11-01
Belson Ltd. was organized on January 1, 20X4, with 300,000 no par value common shares authorized. During 20X4, the
corporation had the following share transactions:
Jan 4 Issued 120,000 shares at $10 per share

Mar 8 Issued 40,000 shares at $11 per share
May 17 Purchased 15,000 shares at $12 per share and cancelled them
Jul 6 Issued 30,000 shares at $13 per share
Aug 27 Issued 10,000 shares at $14 per share
14) The total amount in the common shares account at December 31, 20X4 is
A) $2,016,250 B) $2,007,250 C) $1,990,000 D) $2,170,000
Answer: A
15) The total amount of contributed surplus at December 31, 20X4 is

A) $0 B) $153,750 C) $26,250 D) $180,000
Answer: A
16) An additional contributed surplus account under shareholders' equity is the result of:
A) the sale of no par value shares B) legal capital
C) the sale of par value shares D) the sale of preferred shares
Answer: C
3
A) Common shares have a dividend rate fixed by the share contract.
B) Preferred shares have a volatile market value therefore, they are a riskier investment than
common shares.
C) Transfer of ownership is easy with a corporation.
D) Corporations are not always considered to be a separate legal entity.
Answer: C
18) . A "gain" on the sale of treasury shares should be credited to

A) retained earnings B) contributed surplus
C) other income D) share capital
Answer: B
19) A company purchased its own shares on January 1, 2014 for $20,000 and debited Treasury Shares
for the purchase price. The shares were subsequently sold for $12,000. The $8,000 difference
between the cost and sales price should be recorded as a debit to
A) loss from sale of treasury shares
B) retained earnings
C) Contributed Surplus to the extent that previous net "gains" from sales or retirements of the
same class of shares exist, otherwise, to retained earnings
D) Contributed Surplus, regardless of whether previous net "gains" from sales or retirements of
the same class of shares exist.
Answer: C
20) Which of the following statements about shares issued in exchange for assets is true?
A) They impact cash flows.
B) They are classified as investment activities.
C) They are classified as operating activities.
D) They are disclosed in a note to the statement of cash flows.
Answer: D

A) Repurchase of shares (treasury shares) and payment of cash dividends reduce cash flow from
financing activities.
B) Issuance of preferred shares would increase cash from financing activities.
C) A share dividend has no impact on cash.
D) Repurchases of shares at prices lower than the average issue price result in profit for the issuing
company.
Answer: D
4
22) Some managers argue that since employee stock options are usually issued at an exercise price that
is less than or equal to market value when they are granted, they have no value. However, generally
accepted accounting principles require that they be recorded as compensation expense. The primary
reason for this is:
A) The entity must use employee stock options in order to compete for talent.
B) The time value in the options creates economic value.
C) To achieve proper matching.
D) They are accepted by employees as compensation.
Answer: B
23) Which of the following statements about stock option plans is false?
A) Stock option plans are often a major part of an executive's compensation plan.
B) Offering excessive stock options to a company's managers reduces the likelihood they will not
always act in the best interest of the investors.
C) Stock options usually have a grant price equal to the market price of the share when the options are first
offered to the executives.
D) The holder of a stock option has an interest in a company's performance but not in the same
manner as a shareholder.
Answer: D
24) All
of the following are reasons a company would use employee stock options except?
A) They have no cost to the company
B) They do not require any cash
C) They align employee motivation to the shareholders' objectives
D) They increase the equity base of the company
Answer: A
25) Thestatement of financial position of Warner Company showed the following data about its
common shares: authorized shares, 100,000; outstanding shares, 55,000; and issued shares 60,000.
What was the number of treasury shares?
A) 5,000 B) 45,000 C) 30,000 D) 40,000
Answer: A
26) Thedate on which a cash dividend becomes a binding legal obligation is on the
A) last day of the fiscal year end. B) payment date.
C) declaration date. D) date of record.
Answer: C
5
27) Assume the following shares outstanding:
(1) Preferred shares, $3, cumulative, 1,000 shares with dividends in arrears 3 years, for 20X1, 20X2, and
20X3.
(2) Common shares, 2,000 shares.
Total dividends declared in 20X4 were $30,000. What is the total amount of dividends to which common
shareholders are entitled?
A) $18,000 B) $27,000 C) $30,000 D) $21,000
Answer: A
28) Which of the following is eligible for dividends?

A) The number of shares of authorized. B) The number of shares issued.
C) The number of treasury shares. D) The number of shares outstanding.
Answer: D
29) Slow, Inc., reported the following asset and liability balances at the ends of 20X1 and 20X2:
20X1 20X2
Total Assets $80,000 $110,000
Total Liabilities 50,000 40,000
Cash 22,000 32,000
During 20X2, cash dividends of $5,000 were declared and paid. Additional shares were issued for $15,000.
What was the profit (or loss) for 20X2?
A) $35,000 B) $40,000 C) $45,000 D) $30,000

Answer: D
30) Accounting entriesassociated with a cash dividend are usually made on which of the following
dates?
A) Record date and payment date. B) Declaration date and record date.
C) Payment date only. D) Declaration date and payment date.
Answer: D
31) OnDecember 15, 20X2, the board of directors of Home Corporation declared a cash dividend,
payable on January 8, 20X3, of $2 per share on the 100,000 common shares outstanding. The
accounting period ends December 31. Because of this action, on December 15, 20X2, Home
Corporation should do which of the following?
A) Decrease retained earnings $200,000 and increase contributed capital $200,000.
B) Make no journal entry because the event had no effect on the corporation's financial position
until 20X3.
C) Decrease retained earnings $200,000 and increase liabilities $200,000.
D) Decrease cash $200,000 and decrease retained earnings $200,000.
Answer: C
6
32) Spot Corporation declared a cash dividend on December 30, 20X1, payable on January 10, 20X2. A
journal entry for the dividend was not made in December 20X1. What were the effects on the 20X1
financial statements?
A) Retained earnings was overstated and liabilities understated.
B) Retained earnings was overstated and cash understated.
C) Retained earnings and liabilities were understated.
D) Retained earnings and liabilities were overstated.
Answer: A
33) The Basket Corporation has the following classes of shares:
Preferred shares, $40, 1,000 shares issued and outstanding, non-cumulative.

Common shares, 100,000 shares issued, 50,000 shares outstanding.
In 20X1, Basket Corporation was incorporated. It paid no dividends in its first year of existence. In 20X2, the
board of directors of Basket declared a total dividend of $180,000 to be paid to the holders of preferred
and common shares. What was the amount of the dividend paid in 20X2 on each common share?
A) $3.60 B) $2.00 C) $2.80 D) $1.80
Answer: C
34) The declaration and payment of a cash dividend does which of the following?
A) Reduces retained earnings and increases contributed capital by the same amount.
B) Reduces assets and retained earnings each by the amount of the dividend.
C) Reduces retained earnings and increases liabilities by the amount of the dividend.
D) Reduces assets and increases liabilities each by the amount of the dividend.
Answer: B
35) The dividend yield ratio

A) = Market price per share/Dividends per share.
B) = Dividends per share/Earnings per share
C) measures the earnings generated by each share for the shareholder based on the market price of
the shares.
D) should be considered bad if it is low.
Answer: C
36) In
20X4, W Co had a dividend yield ratio of 0.3% and J.C. Co. reported a yield of 6.9%.
What is the most likely reason for W Co's relatively low dividend yield in comparison to J.C. Co's ratio?
A) W Co does not generate sufficient cash from operations to be able to pay a dividend.
B) W Co is paying little in dividends because it continues to grow through expansion of store
locations financed by operations.
C) W Co does not have sufficient retained earnings to support declaring a dividend.
D) W Co does not generate sufficient operating profit to support declaring a dividend.
Answer: B
7
37) In20X4, P Co declared dividends totaling $.52 per common share when earnings per share were
$1.31 and its market price was 40 7/16. In 20X3, its dividends totaled $.46 per share, its earnings
per share were $1.36 and its market price was 34 11/16. What was the computed dividend yield
ratio for 20X4 and 20X3 respectively? (Rounded to nearest 1 decimal)
A) 1.7% and 1.3% B) 1.8% and 1.9% C) 2.1% and 2.3% D) 1.3% and 1.3%
Answer: D
38) Which of the following is false?

A) A low dividend yield is usually indicative of a growing company.
B) Almost all investors want an immediate return on their investment through dividend
distributions.
C) The lower the dividend yield, the less a company has distributed to investors as an immediate
return.
D) The dividend yield ratio is a measure of the immediate return investors are receiving from
dividends stated as a percentage of market price.
Answer: B
39) Which of the following is false about the dividend yield ratio?
A) Dividend yield ratio = Dividends per share/Market price per share
B) Dividend yield ratio = Market price per share/Dividends per share.
C) A low dividend yield is neither bad nor good by itself.
D) Measures the profit generated by each share for the shareholder based on the market price of
the shares.
Answer: B
40) On January 1, Norton Inc. had total shareholders' equity as shown below when their shares were selling at $25
per share
Common shares - 125,000 shares

issued and outstanding $2,500,000
Retained earnings 4,000,000
Assume the company declared and issued a 50% stock dividend. The effect of this dividend would:
A) Leave total shareholders' equity unchanged but increase the number of shares issued and
outstanding to 187,500
B) Reduce retained earnings by $2,000,000 and double the number of shares issued and
outstanding
C) Increase common shares by $1,250,000 and shares issued and outstanding by 62,500
D) Increase common shares by $1,250,000 with no change in the number of issued and
outstanding shares
Answer: A
8
41) Corporations generally issue stock dividends in order to
A) increase the marketability of the shares.
B) exceed shareholders' dividend expectations.
C) increase the market price per share.
D) decrease the amount of capital in the corporation.
Answer: A
42) A shareholder who receives a stock dividend would

A) expect the legal capital of the shares to change.
B) expect the market price per share to increase.
C) expect retained earnings to increase.
D) own more shares.
Answer: D
43) On which of the following dates should the dividends payable account be recorded in the company
records for a stock dividend?
A) No liability is associated with a share dividend.
B) Date of payment.
C) Date of declaration.
D) Date of record.
Answer: A
44) A stock dividend results in a decrease in

A) retainedearnings. B) current liabilities.
C) share capital. D) net earnings.
Answer: A
45) The per share amount normally assigned by the board of directors to a stock dividend is
A) the fair value at the declaration date.
B) zero.
C) the fair value at the distribution date.
D) the average price paid by shareholders on total shares issued.
Answer: A
46) A stock dividend results in

A) greater ownership interest. B) increased total assets.
C) the same ownership interest. D) less ownership interest.
Answer: C
47) The declaration of a stock dividend will

A) increase total liabilities. B) change the total of shareholders' equity.
C) increase total assets. D) increase share capital.
Answer: D
9
48) Which of the following statements about a 2 for 1 stock split is not true?
A) Total share capital increases.
B) The market value of the share will probably decrease.
C) Legal capital per share is reduced to half of what it was before the split.
D) A shareholder with 200 shares before the split owns 400 shares after the split.
Answer: A
49) A stock split will

A) decrease the number of shares. B) have no effect on retained earnings.
C) increase the total assets. D) increase total share capital.
Answer: B
50) Towson Inc. had 300,000 common shares before a stock split occurred and 600,000 shares after the
stock split. The stock split was
A) 2 for 1. B) 1 for 4. C) 2 for 4. D) 4 for 1.
Answer: A
51) Which of the following is true with regards to a stock dividend?

A) It is accounted for in the same manner as a stock split.
B) It does not require a journal entry.
C) It results in a transfer of retained earnings to contributed capital.
D) It increases the number of shares outstanding and involves a pro rata reduction in the par value
per share.
Answer: C
52) One characteristic of a stock split is that it will

A) increase the total assets. B) increase the number of shares.
C) increase total share capital. D) reduce retained earnings.
Answer: B
53) Wide World Corporation issued a 3-for-2 stock split (i.e., three new shares in exchange for each two old
shares turned in) of its common shares which had a market value of $100 before the split. What dollar amount
of retained earnings should be transferred to the common share account?
A) Market value after the split.

B) Market value before the split.
C) None should be transferred.
D) Half of the previous total amount in the common share account(s).
Answer: C
54) Which one of the following events would not require a journal entry on a corporation's books?
A) 100% stock dividend B) 2% stock dividend
C) 2 for 1 stock split D) $1 per share cash dividend
Answer: C
10
55) Theeffect of a stock dividend is to
A) change the composition of shareholders' equity.
B) decrease total assets and total liabilities.
C) decrease total assets and shareholders' equity.
D) increase the book value per share of common shares.
Answer: A
56) With respect to preferred shares, select the statement that is correct.
A) They cannot exist unless there also are common shares.
B) They always provide for a fixed payment to be made to the shareholders even for years when
no dividends have been declared.
C) They must have a par value.
D) They are never issued without voting privileges.
Answer: A
57) Theconversion feature on convertible preferred shares enables the shareholder to convert them to
A) Convertible bonds. B) Cash.
C) Products of the company. D) Common shares.
Answer: D
58) Dividends in arrears on cumulative preferred shares

A) should be recorded as a current liability until they are paid.
B) never have to be paid, even if common dividends are paid.
C) must be paid before common shareholders can receive a dividend.
D) enable the preferred shareholders to share equally in corporate profit with the common
shareholders.
Answer: C
59) Which of the following are the typical rights afforded to preferred shareholders?
A) A preference to receive dividends when declared by the board of directors after common
shareholders receive their dividends.
B) The right to vote on major corporate issues including electing the board of directors.
C) A preferential right to receive dividend and a preference to receive the liquidation value of
assets over common stock holders.
D) A preference to receive the liquidation value of the assets as stated in the share contract after
common shareholders receive their share.
Answer: C
60) Dunbar
Inc. has 10,000 $2, non-cumulative preferred shares and 150,000 common shares issued at
December 31, 20X2. What is the annual total dividend on the preferred shares?
A) $150,000 B) $10,000 C) $20,000 D) $300,000
Answer: C
11
61) Slick Willie Inc. had the following shares outstanding during 20X3:
(1) Preferred shares, $3, cumulative, 1,000 shares with dividends in arrears for 20X1 and 20X2.
(2) Common shares, 2,000 shares.
The total dividends declared for the current year were $21,000. What is the total amount of dividends to which
the preferred shareholders are entitled?
A) $6,000 B) $3,000 C) $9,000 D) $12,000
Answer: C
62) At
January 1, 20X4, Clare Corporation had outstanding capital shares as shown below. During December,
20X4, it declared and paid cash dividends of $48,000 to the preferred shareholders.
(1) Common shares--100,000 shares outstanding

(2) Preferred shares--20,000 shares outstanding, $0.80 cumulative. The shares were issued at a price of $15
per share.
How many years were the preferred dividends in arrears?
A) One year. B) Three years. C) Four years. D) Two years.
Answer: D
63) What is the difference between cumulative and non-cumulative preferred shares?
A) Cumulative preferred shares' undeclared dividends accumulate each year until paid, while
non-cumulative preferred shares' right to receive dividends is forfeited in any year that
dividends are not declared.
B) They both receive dividends in arrears.
C) Cumulative does not receive dividends but noncumulative does.
D) Cumulative preferred share's right to receive dividends is forfeited in any year that dividends
are not declared. However, noncumulative preferred shares' undeclared dividends accumulate
each year until paid.
Answer: A
64) Cosby Inc. has10,000, $5, cumulative preferred shares at December 31, 20X4. If the board of directors
declares a $40,000 annual dividend in 20X4,
A) the company will still owe the preferred shareholders $10,000 and should record a dividend
payable in this amount.
B) the company still has to pay the preferred shareholders $50,000, regardless of what amount was
declared.
C) the company will owe the preferred shareholders nothing further.
D) the $10,000 will be disclosed as dividends in arrears in the notes to the financial statements.
Answer: D
12
65) Dividends in arrears on cumulative preferred shares
A) only occur when preferred dividends have been declared.
B) are considered to be a non-current liability.
C) are considered to be a current liability.
D) should be disclosed in the notes to the financial statements.
Answer: D
66) Thetype of preferred share that can be bought back by the company at a specified time and price is a
A) nonparticipating preferred share. B) redeemable preferred share.
C) convertible preferred share. D) cumulative preferred share.
Answer: B
67) What type of preferred share is entitled to dividends above its specified dividend if the common
shares receive excess dividends and must receive dividends in arrears before the common dividends
can be declared?
A) Cumulative and participating B) Cumulative and non-participating
C) Redeemable and cumulative D) Redeemable and participating
Answer: A
68) Which of the following preferred share characteristics give the shareholders the right to force the
issuer to re-purchase the shares from them?
A) Redeemable B) Cumulative C) Retractable D) Convertible
Answer: C

A) Retained earnings represents the profit that has been earned by the company, less any dividends
declared since the first day of operations.
B) Retained earnings is an asset.
C) Retained earnings has a debit balance for a successful corporation.
D) Retained earnings represents the future dividend liability of the company.
Answer: A
70) Bateman Company reported total shareholders' equity of $58,000 on its statement of financial
position dated December 31, 20X2. During 20X2, it reported a profit of $4,000, declared and paid a
cash dividend of $2,000, and issued additional shares of $20,000. What was total shareholders'
equity at January 1, 20X2?
A) $34,000 B) $36,000 C) $38,000 D) $16,000

Answer: B
13
71) Retained earnings are occasionally restricted
A) due to contractual loan restrictions.
B) if preferred dividends are in arrears.
C) to set aside cash for dividends.
D) to keep the legal capital associated with share capital intact.
Answer: D
72) Atthe end of 20X5, the total assets of Dole Corporation were $90,000 and total liabilities were
$50,000. The company has been in business five years and has earned an average profit of $4,000
per year during the five years. Total cash dividends of $8,000 were declared and paid. What was the
total amount received for the shares issued by the company?
A) $30,000 B) $40,000 C) $46,000 D) $28,000
Answer: D
73) Albert Company reported the following statement of financial position amounts at December 31, 20X2:
Current assets $70,000

Current liabilities 40,000
Long-term liabilities 90,000
Operational assets 200,000
Common shares (10,000 shares issued) 100,000
What was the total amount of retained earnings on December 31, 20X2?
A) $50,000 B) $40,000 C) $20,000 D) $30,000
Answer: B
74) Before the journal

entry to record income tax and before the closing entries were recorded at the end of the
accounting period (December 31, 20X4), the following data were taken from the accounts of Buynow
Corporation:
Capital shares (20,000 shares issued) $215,000

Retained earnings, balance December 31, 20X3 80,000
Revenues earned during 20X4 400,000
Expenses (excluding income tax) incurred during 20X4 320,000
Cash dividends declared and paid (during 20X4) 30,000
Treasury shares (1,000 shares at cost) 17,000
Average income tax rate, 30%
What is the total amount of shareholders' equity that should be reported on the statement of financial position
dated December 31, 20X4?
A) $304,000 B) $300,000 C) $96,000 D) $128,000
Answer: A
14
75) During 20X4 Laplante Manufacturing Company discovered that in 20X3 they had neglected to record
depreciation expense of $12,500 on certain machinery. What journal entry would they make in 20X4? (ignore
income tax effects)
A Office equipment 12,500

B Retained earnings 12,500
C Depreciation expense 12,500
D Accumulated depreciation 12,500

Answer: B
76) Miter Corporationhad a credit balance of $5,450,000 in its retained earnings account as of January
1, 20X4. During the year, Miter declared $250,000 in dividends, reported net earnings of $560,000
and comprehensive income of $750,000. The December 31 balance of retained earnings is:
A) $6,450,000 B) $5,760,000 C) $6,200,000 D) $5,950,000
Answer: B
77) All of the following are normally found in a corporation's shareholders' equity section except
A) common shares. B) retained earnings.
C) share capital. D) dividends in arrears.
Answer: D
78) Which of the following transactions would not result in a decrease to retained earnings?
A) Correction of an error in which depreciation expense was understated in a prior period
B) Incurrence of a net loss for the period
C) Reacquisition of shares for less than the original issue price
D) Declaration of a stock dividend
Answer: C
79) Which of the following transactions would not result in an increase to retained earnings?
A) Redemption of shares for less than the original issue price.
B) Correction of an error in which expenses were overstated in a previous year.
C) Declaring a 3-for-1 stock split
D) Earning income during the year
Answer: A
15
80) Antaska Corp had the following activities during the year:

Declaration of 10% stock dividend $450,000
Granted stock options to employees $50,000
What was Antaska's cash flow from financing activities for the year?
A) $790,000 inflow B) $740,000 inflow C) $800,000 inflow D) $767,500 inflow
Answer: A
81) Which of the following describes how comprehensive income should be reported?
A) May be reported in a combined statement of earnings and comprehensive income or disclosed
within a statement of shareholders' equity; separate statements of comprehensive income are
not permitted.
B) Should not be reported in the financial statements but should only be disclosed in the footnotes.
C) May be reported in a separate statement, in a combined statement of earnings and
comprehensive income, or within a statement of shareholders' equity.
D) Must be reported in a separate statement, as part of a complete set of financial statements.
Answer: D
82) All
of the following statements regarding comprehensive income are true, except:
A) Comprehensive income is not a requirement for public companies under IFRS
B) Comprehensive income captures all transactions and events, even those excluded from net
income
C) Comprehensive income equals the sum of net income and other comprehensive income
D) Comprehensive income was created to be an all- inclusive measure of performance.
Answer: A
83) Accumulated other comprehensive income is reported in the:

A) Statement of Changes in Shareholders' equity
B) Notes to the financial statements
C) Income statement
D) Cash flow statement
Answer: A
84) Which of the following is a major difference between accounting for a corporation versus
accounting for a partnership?
A) Recording office supplies used. B) Recording sales revenue.
C) Recording rent expense. D) Recording withdrawals of the owners.
Answer: D
16
85) Which of the following accounts would appear in the general ledger of a partnership?
A) Retained earnings account. B) Drawings accounts.
C) Dividends paid account. D) Common share accounts.
Answer: B
86) A primary advantage of a general partnership, compared with a corporation, does not include which
of the following?
A) No income tax on the business itself. B) Ease of formation.
C) Complete control by the partners. D) Limited liability for the owners.
Answer: D
87) Shareholders have limited liability, which means that they are usually held liable for the
corporation's debts.
Answer: True False
88) A company can control the market value of its shares.

Answer: True False
89) A major advantage that a corporation has over a proprietorship or partnership is that it allows
individuals to participate in ownership by purchasing small amounts of shares.
Answer: True False
90) In general, the price of a company's shares follows the trend in its earnings and dividends.
Answer: True False
91) A shareholder owning common shares has the right to vote in the election of the board of directors.
Answer: True False
92) Since most small shareholders do not attend the annual corporate meeting, they will usually cast
their vote by proxy card.
Answer: True False
93) An initial public offering occurs the first time a corporation sells shares to the public.
Answer: True False
94) Preferred shares often are called the residual equity because they usually do not have voting rights.
Answer: True False
95) If a corporation issues 1,000 of its shares for $15 per share, contributed capital increases by $15,000.
Answer: True False
96) Ifcommon shares are reacquired at a price less than their average cost, the difference is credited to
contributed surplus.
Answer: True False
17
97) One of the reasons a company may reacquire its own shares is to reduce the market value to make
the shares more affordable.
Answer: True False
98) When a company reacquires its own shares, the shares are effectively restored to authorized but
unissued status.
Answer: True False
99) Preferred shares often have a preference in the distribution of assets over common shares in the
event of dissolution of the corporation.
Answer: True False
100) The actual cost of reacquired shares is credited to the common share account.
Answer: True False
101) Both inflows (e.g., issuance of share capital) and outflows (e.g., repurchase of shares) are reported
in the Financing Activities section of the statement of cash flows.
Answer: True False
102) Share capital is the amount paid in to the corporation by shareholders in exchange for shares of
ownership.
Answer: True False
103) The common shares receive a fixed dividend rate set in the share contract.
Answer: True False
104) The issue of common shares affects both share capital and retained earnings.
Answer: True False
105) Preferred shares provide investors certain advantages, but not dividend preferences and a preference
on asset distributions in the event the corporation is liquidated.
Answer: True False
106) The number of common shares authorized can never be greater than the number of shares issued.
Answer: True False
107) Most companies provide needed funds for expansion from a combination of operating and financing
activities. This means that cash flow used by investing activities is usually provided by positive cash
flow from operations and through a combination of borrowings or share issuances.
Answer: True False
108) Preferred shares have contractual preference over common shares in certain areas.
Answer: True False
18
109) When shareholder A sells Walmart shares to investor B, this transaction takes place in the secondary
market and Walmart receives nothing from the exchange.
Answer: True False
110) Preferred shareholders generally do not have the right to vote for the board of directors.
Answer: True False
111) When preferred shares are cumulative, preferred dividends not declared in a given period are called
dividends in arrears.
Answer: True False
112) Dividends may be declared and paid in cash or stock.

Answer: True False
113) Cash dividends are not a liability of the corporation until they are declared by the board of directors.
Answer: True False
114) A stock dividend does not affect the total amount of shareholders' equity.
Answer: True False
115) A stock split results in a transfer at market value from retained earnings to share capital.
Answer: True False
116) International Financial Reporting Standards require Canadian publicly accountable enterprises to
report Accumulated Other Comprehensive Income (Loss). This equity item reflects the financial
effect of events that cause changes in shareholders' equity other than investments by shareholders or
distributions to shareholders.
Answer: True False
117) A 3 for 1 stock split will increase total shareholders' equity but reduce the legal capital per common
share.
Answer: True False
118) Retained earnings represents the amount of cash available for dividends.
Answer: True False
119) Dividends in arrears are liabilities of the corporation.

Answer: True False
120) Net earnings of a corporation should be closed to retained earnings and net losses should be closed
to share capital accounts.
Answer: True False
121) Accumulated other comprehensive income is reported in the shareholders' equity section of the
Answer: True False
19
122) Preferred share dividends in arrears must be paid before dividends on common shares can be paid if
the preferred share has a cumulative dividend preference.
Answer: True False
123) Other comprehensive income includes unrealized gains or losses on debt or equity securities
available-for-sale.
Answer: True False
124) When preferred shares are cumulative and the board of directors passes on a dividend, the amount in
arrears must be shown as a liability on the statement of financial position and a reduction from
retained earnings on the statement of shareholders' equity and the statement of financial position.
Answer: True False
125) The dividend yield ratio measures the dividend return on the current price of the shares.
Answer: True False
126) The dividend yield ratio is calculated by dividing the market price per share by dividends per share.
Answer: True False
127) A very low dividend yield ratio is usually indicative of a growth-oriented corporation.
Answer: True False
128) The dividend yield ratio is a measure of the immediate return investors are receiving from dividends
stated as a percentage of market price.
Answer: True False
129) Earnings per share is calculated by dividing the net earnings available to common shareholders by
the number of common shares issued at year end.
Answer: True False
130) Net earnings available to common shareholders is calculated by deducting preferred dividends from
net earnings.
Answer: True False
131) When a corporation calls in its outstanding shares and issues two or more shares with a lower value
in place of each share called in, the corporation is said to have issued a stock split.
Answer: True False
132) A stock dividend usually causes a transfer of retained earnings to share capital, but not a decrease in
the assets of the issuing corporation.
Answer: True False
133) Stock splits and stock dividends are basically the same from the viewpoint of the shareholders but not from the
viewpoint of the corporation.
Answer: True False
20
134) A small stock dividend is generally defined as one involving the distribution of additional shares
that are more than 50% of the currently outstanding shares.
Answer: True False
135) A stock dividend requires a journal entry when issued, but a stock split does not require a journal
entry.
Answer: True False
136) While a cash dividend reduces assets, a stock dividend only shuffles amounts between shareholders'
equity accounts.
Answer: True False
137) The most common reason a company would declare a stock split is to reduce the market price of its
share to increase the trading activity.
Answer: True False
138) Retained earnings is one of the major categories of contributed capital.

Answer: True False
139) A statement of changes in equity reflects the changes in Retained Earnings during the year.
Answer: True False
140) Adjustments to the financial statements of prior periods should be made if an entity changes its
accounting policies.
Answer: True False
141) Retained earnings is the cash from operations retained by the corporation which may be returned to
investors in the form of dividends.
Answer: True False
142) Some preferred share issues are redeemable at the option of the shareholder.
Answer: True False
143) Partnerships, sole proprietorships, and corporations are three basic forms of business organizations.
Answer: True False
144) A primary disadvantage of a partnership is the unlimited liability of the partners for partnership
debts.
Answer: True False
21
145) Match the terms with the definitions below.
Terms
A. Common shares
B. Preferred shares
C. Preferred shares, noncumulative
D. Preferred shares, cumulative
E. None of the above
Definitions
________ 1. Shares that have been issued, repurchased, and are held by the corporation.
________ 2. Authorized but unissued shares.
________ 3. Shares that are limited to a specified dividend rate per year.
________ 4. The basic issue of shares; the residual equity.
________ 5. Shares on which dividends in arrears must be paid before current dividends can be paid.
________ 6. Shares with specified differences from the basic shares.
Answer: (1) E, (2) E, (3) C, (4) A, (5) D, (6) B
146) Match the type of business with their characteristics below.
Type of Business
A. Corporation
B. Partnership
C. Sole proprietorship
D. Partnership and sole proprietorship
Characteristic
________ 1. Uses withdrawal accounts or drawing accounts.

________ 2. Uses owner capital accounts.
________ 3. Uses retained earnings account.
________ 4. Uses a dividends declared account.
________ 5. Uses a profit ratio to allocate earnings among the owners.
________ 6. Requires a charter.
________ 7. Issues share certificates.
________ 8. Has only one owner.
________ 9. Has a board of directors.
________ 10. Involves more than one owner but has no charter.
Answer: (1) D, (2) D, (3) A, (4) A, (5) B, (6) A, (7) A, (8) C, (9) A, (10) B
22
147) Match the items with the definitions.
Items
A. Treasury shares
B. Convertible shares
C. Preferred shares
D. Authorized shares
E. Unissued shares
F. Redeemable shares
G. Cumulative shares
Definitions
________ 1. Shares that may, at the option of the holder, be turned in for another security.
________ 2. Shares that have been issued, repurchased, and are held by the corporation.
________ 3. Shares that have specified rights over common shares.
________ 4. Shares on which dividends in arrears must be paid prior to any current dividends.
Answer: (1) B, (2) A, (3) C, (4) G
148) The charter of Delta Corporation specified a maximum of 25,000 common shares. At the current date, 5,000
shares remain unissued, and 2,000 of the issued shares have been reacquired and are still held by Delta. Give
the number of shares:
Type Shares
A. Issued
B. Unissued
C. Authorized
D. Outstanding
E. Treasury shares
Type Shares
A. Issued 25,000 — 5,000 = 20,000
B. Unissued 5,000
C. Authorized 25,000
D. Outstanding 20,000 — 2,000 = 18,000
E. Treasury shares 2,000
23
149) What are the advantages of issuing common shares instead of issuing corporate bonds to raise
needed funds?
Answer: Advantages of issuing common shares rather than corporate bonds include:
Required repayment of principal sum does not apply.
Required interest payments are not applicable.
A creditor-debtor relationship does not exist.
Shareholders participate in corporate profits when dividends are declared.
Dividends are not an obligation of the corporation until the board of directors declares them.
When dividends are declared, they are not limited to specific sums like bond payments are.
150) What are the advantages of issuing corporate bonds instead of issuing common shares to raise
needed funds?
Answer: Advantages of issuing corporate bonds rather than common shares include:
Voting rights are not diluted.
Ownership is not diluted.
Control is not diluted.
Interest expense is a tax deductible expense but dividends are not.
Positive financial leverage can exist where a company's profit rate exceeds its borrowing rate.
151) The statement of financial position at December 31, 20X1, showed the following data for Bravo Corporation:
Common shares, issue price $10 (authorized 15,000 shares) 100,000

Treasury shares (at cost $15 per share) 600
Give the number of shares for each item.
Type Shares
A Issued
B Unissued
C Authorized
D Outstanding
E Treasury
Type Shares
A. Issued 100,000 / 10 = 10,000
B. Unissued 15,000 — 10,000 = 5,000
C. Authorized 15,000 given
D. Outstanding 10,000 — 40 = 9,960
E. Treasury 600 / 15 = 40
24
152) When a cash dividend is declared, three different dates usually are involved. These three dates are described
below. Assume a $5,000 cash dividend.
Part A: Name the dates in the space provided:
Description Name of the Date

A Date on which the Board of Directors votes on the dividend
B Date on which the names are taken from the shareholder
records
C Date on which the dividend cheques are mailed
Part B: Prepare the journal entry for each date:
Description Journal Entry

A Date on which the Board of
Directors votes on the dividend
B Date on which the names are taken
from the shareholder records
C Date on which the dividend cheques
are mailed
Answer: Part A:

A Date on which the Board of Directors votes on the Declaration Date
dividend
Date of Record
records
C Date on which the dividend cheques are mailed Date of Payment
Part B:
Description Journal Entry DR CR

A Date on which the Board of Dividends declared (or
Directors votes on the dividend retained earnings) 5,000
Cash 5,000
B Date on which the names are takenNo entry
are mailed Dividends Payable 5,000
Cash 5,000
25
153) At the end of 20X3, Bush Corporation reported a $40,000 balance in its common share account
(stated value $5 per share). The treasury share account showed $720 (cost $6 per share). No
dividends were paid during the first two years. During 20X3 the company declared and paid a cash
dividend at $1.50 per share. The total amount of the 20X3 cash dividend was $________.
Answer: [($40,000/$5 per share) - ($720/$6)] × $1.50 = $11,820
154) During 20X2, Washington Corporation made the following journal entry to record the declaration and payment
of a cash dividend:
Retained Earnings (Common Shares) 10,000

Retained Earnings (Preferred Shares) 3,600
Cash 13,600
The total values of common and preferred shares outstanding were $70,000 and $40,000, respectively. No
dividends were declared or paid during 20X1. There are 1,000 common treasury shares.
(a) If the preferred shares are noncumulative, the current dividend rate on the preferred shares was
________%.
(b) If the preferred shares are cumulative, the current dividend rate on the preferred shares was ________%.
Answer: (a) $40,000 × Rate = $3,600; Rate = 9%
(b) 2 × ($40,000 × Rate) = $3,600
($40,000 × Rate) = $1,800
Rate = 4.5% (or 9% [from part (a)]/2 = 4.5%
155) Casey Corporation has the following capital shares outstanding:
(a) Common shares, 6,000 shares.

(b) $.80 preferred shares, 2,000 shares, cumulative, with 2 years in arrears excluding the current year.
A cash dividend of $6,000 was declared and paid near the end of the current year.
(a) Total dividends received by the preferred shareholders would be $________.

(b) Total dividends received by the common shareholders would be $________.
Answer: (a) Preferred: 2,000 shares × $.80 × 3 = $4,800 (b) Common: $6,000 - $4,800 = $1,200
26
156) Contrast the economic effects of a cash dividend (declared and paid) with a share dividend (declared and
issued) on the distributing corporation by completing the following chart by placing "X" where appropriate.
Item on Financial Statement Economic Effect

Cash Dividend Share Dividend
Assets
Liabilities
Capital Shares Issued
Retained Earnings
Total Shareholders’ Equity

Assets X
Liabilities
Capital Shares Issued X
Retained Earnings X X
Total Shareholders’ Equity X
157) Tractor Corporation was just formed. The following accounts of Tractor Corporation, with code letters, are
needed to record the transactions given below. You are to indicate the appropriate journal entry for each
transaction by entering the code letters and the correct amounts.
A Cash G Bonds payable

B Remaining assets H Preferred shares
C Retained earnings I Treasury stock
D Common shares J Other accounts not listed
E Dividends payable K Dividends declared
F Trade payables L No entry needed

Ex. Sold and issued 10 common shares for A 200 D 200
$200. Disregard in subsequent
transaction.
1 Sold and issued 5,000 common shares at
$26 per share
2 Issued a 10% share dividend when the
shares were selling at $30 per share
27
3 Declared a cash dividend of $1 per share
on the shares outstanding
4 Paid the cash dividend of $1 per share
declared earlier (see above)
5 Purchased 100 treasury shares at $27 per
share
6 Issued a 2-for-1 share split when the
market price was $20 per share

Ex. Sold and issued 10 common shares for A $130,000 D $130,000
transaction.
1 Sold and issued 5,000 common sharesC or K 15,000 D 15,000
at $26 per share
2 Issued a 10% share dividend when theC or K 5,500 E 5,500
3 Declared a cash dividend of $1 per E 5,500 A 5,500
share on the shares outstanding
4 Paid the cash dividend of $1 per shareI 2,700 A 2,700
5 Purchased 100 treasury shares at $27 L L
per share
6 Issued a 2-for-1 share split when the A $130,000 D $130,000
158) Tower Company reported the following amounts of contributed capital in the shareholders' equity accounts as
of January 1, 20X5:
Contributed Capital:
Common shares, authorized 50,000 shares;
Issued outstanding 30,000 shares $250,000
A Cash F Treasury shares

B Dividends payable G Contributed capital-treasury share transactions
C Common shares H Dividends declared
D Preferred shares I None of the above accounts (specify)
E Retained earnings
Indicate the journal entry required to record each of the following transactions by entering the letter code
28
corresponding to each account to be debited and credited and the amount of each debit and credit. The
transactions are independent unless otherwise stated.

Ex. Sold and issued 10 common A 50 C 50
shares for $50. Disregard in
subsequent transaction.
1 Dec. 1, 20X5 — The board of
directors declared a $2 per
share cash dividend payment
which will be paid in 20X6
2 Dec. 1, 20X5 — The board of
directors declared (and issued)
a 10% stock dividend. At the
date of declaration market
price per share was $1.
3 Dec. 2, 20X5 — The
corporation sold and issued
20,000 common shares and
received $10 cash per share.
4 Dec. 28, 20X5 — The
corporation purchased 200 of
its own shares at $10 per share.

Ex. Sold and issued 10 common shares forA $130,000 D $130,000
transaction.
at $26 per share
E 5,500 A 5,500
5 Purchased 100 treasury shares at $27 per L L
share
29
159) Regan, Inc., declared a cash dividend of $40,000 in 20X2 when the following shares were
outstanding:
Common shares, 20,000 shares $400,000

Preferred shares, 40.60, 2,500 shares 25,000
No dividends were declared or paid during the prior year. Compute the amount of cash that would be paid to
each shareholder group under each of the following separate cases:
Case A - The preferred shares are non-cumulative

Preferred $________ Common $________
Case B - The preferred shares are cumulative
Preferred $________ Common $________
CASE A Preferred Residual Common

Current $1,500 $38,500
Total $1,5000 $38,500
CASE B Preferred Residual Common

Current $1,500 $37,000
Arrears $1,500
Total $3,000 $37,000
160) Dole Corporation is in the process of preparing the statement of retained earnings for the annual
period ended December 31, 20X4. During the preparation process, the company accountant
discovered an error in the 20X2 depreciation. There is a restriction on retained earnings for treasury
shares that cost $25,000. You are to complete the following statement by filling in the blanks.
DOLE CORPORATION
Statement of Retained Earnings
Retained earnings balance, January 1, 20X4 $180,000

________:
Correction of 20X2 Depreciation expense ________
Balance as restated 205,000
________ ________
Total 175,000
Deduct ________:
On ________ (including arrears) $6,000
On ________ ________ 10,000
$________
30
Answer: DOLE CORPORATION
Prior period adjustment

Adjustment of 20X2 depreciation 25,000

Net loss for 20X4 30,000
Total 175,000
Deduct dividends declared on 20X4:
On preferred shares (including dividends in arrears) $6,000
On common shares 4,000 10,000
Retained earnings balance, December 31, 20X4 (Note 1) $165,000
161) Madison Co had the following components of shareholders' equity at the beginning of 20X7:
Preferred shares, Class B, no par, $2, non-cumulative, redeemable

and retractable, 400,000 authorized, 100,000 issued and outstanding
$2,000,000
Common shares, unlimited number authorized, 600,000 issued and
outstanding 6,000,000
Retained earnings 11,400,000
The following events took place during 20X7:
Jan 22 Issuance of 50,000, $3 cumulative preferred shares — Class C for $30 per share
Apr 3 10% common stock dividend declared and issued
Oct 10 Common dividends declared and paid by Board of Directors of $1.50 per share
Nov 5 Repurchase of 10,000 $2 no par value preferred shares for $26.50 per share
Prepare the financing activities section of the cash flow statement for the year ended December 31, 20X7.
Financing Activities:
Issuance of preferred shares 1,500,000
Common dividends paid (900,000)
Redemption of preferred shares (265,000)
Cash flow from financing activities $335,000
31
Answer Key
1) B
2) A
3) D
4) A
5) A
6) D
7) C
8) D
9) D
10) A
11) B
12) D
13) D
14) A
15) A
16) C
17) C
18) B
19) C
20) D
21) D
22) B
23) D
24) A
25) A
26) C
27) A
28) D
29) D
30) D
31) C
32) A
33) C
34) B
35) C
36) B
37) D
38) B
39) B
40) A
41) A
42) D
43) A
44) A
45) A
46) C
47) D
48) A
49) B
50) A
32
Answer Key
51) C
52) B
53) C
54) C
55) A
56) A
57) D
58) C
59) C
60) C
61) C
62) D
63) A
64) D
65) D
66) B
67) A
68) C
69) A
70) B
71) D
72) D
73) B
74) A
75) B
76) B
77) D
78) C
79) A
80) A
81) D
82) A
83) A
84) D
85) B
86) D
87) FALSE
88) FALSE
89) TRUE
90) TRUE
91) TRUE
92) TRUE
93) TRUE
94) FALSE
95) TRUE
96) TRUE
97) FALSE
98) TRUE
99) TRUE
100) FALSE
33
Answer Key
101) TRUE
102) TRUE
103) FALSE
104) FALSE
105) FALSE
106) FALSE
107) TRUE
108) TRUE
109) TRUE
110) TRUE
111) TRUE
112) TRUE
113) TRUE
114) TRUE
115) FALSE
116) TRUE
117) FALSE
118) FALSE
119) FALSE
120) FALSE
121) TRUE
122) TRUE
123) TRUE
124) FALSE
125) TRUE
126) FALSE
127) TRUE
128) TRUE
129) FALSE
130) TRUE
131) TRUE
132) TRUE
133) TRUE
134) FALSE
135) TRUE
136) TRUE
137) TRUE
138) FALSE
139) TRUE
140) TRUE
141) FALSE
142) FALSE
143) TRUE
144) TRUE
145) (1) E, (2) E, (3) C, (4) A, (5) D, (6) B
146) (1) D, (2) D, (3) A, (4) A, (5) B, (6) A, (7) A, (8) C, (9) A, (10) B
147) (1) B, (2) A, (3) C, (4) G
34
Answer Key
Type Shares
A. Issued 25,000 — 5,000 = 20,000
B. Unissued 5,000
C. Authorized 25,000
D. Outstanding 20,000 — 2,000 = 18,000
E. Treasury shares 2,000
149) Advantages of issuing common shares rather than corporate bonds include:
Required repayment of principal sum does not apply.
Required interest payments are not applicable.
A creditor-debtor relationship does not exist.
Shareholders participate in corporate profits when dividends are declared.
Dividends are not an obligation of the corporation until the board of directors declares them.
When dividends are declared, they are not limited to specific sums like bond payments are.
150) Advantages of issuing corporate bonds rather than common shares include:
Voting rights are not diluted.
Ownership is not diluted.
Control is not diluted.
Interest expense is a tax deductible expense but dividends are not.
Positive financial leverage can exist where a company's profit rate exceeds its borrowing rate.
Type Shares
A. Issued 100,000 / 10 = 10,000
B. Unissued 15,000 — 10,000 = 5,000
C. Authorized 15,000 given
D. Outstanding 10,000 — 40 = 9,960
E. Treasury 600 / 15 = 40
35
Answer Key
152) Part A:

A Date on which the Board of Directors votes on the Declaration Date
dividend
Date of Record
records
C Date on which the dividend cheques are mailed Date of Payment
Part B:
Description Journal Entry DR CR

A Date on which the Board of Dividends declared (or
Directors votes on the dividend retained earnings) 5,000
Cash 5,000
B Date on which the names are takenNo entry
are mailed Dividends Payable 5,000
Cash 5,000
153) [($40,000/$5 per share) - ($720/$6)] × $1.50 = $11,820

154) (a) $40,000 × Rate = $3,600; Rate = 9%
(b) 2 × ($40,000 × Rate) = $3,600
($40,000 × Rate) = $1,800
Rate = 4.5% (or 9% [from part (a)]/2 = 4.5%
155) (a) Preferred: 2,000 shares × $.80 × 3 = $4,800 (b) Common: $6,000 - $4,800 = $1,200

Assets X
Liabilities
Capital Shares Issued X
Retained Earnings X X
Total Shareholders’ Equity X
36
Answer Key

Ex. Sold and issued 10 common shares for A $130,000 D $130,000
transaction.
at $26 per share
3 Declared a cash dividend of $1 per E 5,500 A 5,500
share on the shares outstanding
5 Purchased 100 treasury shares at $27 L L
per share

Ex. Sold and issued 10 common shares forA $130,000 D $130,000
transaction.
at $26 per share
E 5,500 A 5,500
5 Purchased 100 treasury shares at $27 per L L
share
37
Answer Key
CASE A Preferred Residual Common

Current $1,500 $38,500
Total $1,5000 $38,500
CASE B Preferred Residual Common

Current $1,500 $37,000
Arrears $1,500
Total $3,000 $37,000
160) DOLE CORPORATION

Prior period adjustment

Adjustment of 20X2 depreciation 25,000

Net loss for 20X4 30,000
Total 175,000
Deduct dividends declared on 20X4:
On preferred shares (including dividends in arrears) $6,000
On common shares 4,000 10,000
Retained earnings balance, December 31, 20X4 (Note 1) $165,000
Financing Activities:
Issuance of preferred shares 1,500,000
Common dividends paid (900,000)
Redemption of preferred shares (265,000)
Cash flow from financing activities $335,000
38
1) When are ratios most useful for analysis?

A) When compared with historical ratios of the same company.
B) When compared with ratios for other companies in the industry.
C) When compared with both historical ratios of the same company and ratios for other companies
in the industry.
D) When used alone.
Answer: C
2) Solvency is of most interest to:

A) long-term creditors. B) competitors.
C) short-term creditors. D) customers.
Answer: A
3) The primary responsibility for the information in a company's financial statements and related
disclosures lies with:
A) the internal auditors. B) the CEO and CFO of the company.
C) the external auditor. D) the creditors.
Answer: B
4) Why is the audit report important in the analysis of a company?

A) It guarantees the accuracy of the information in the financial statements.
B) The auditors are an independent third party expressing an opinion on the fairness of the
financial statements.
C) The auditors are hired by management to assess the appropriateness of the accounting policies
chosen.
D) It guarantees the accuracy of the internal controls of the company.
Answer: B
5) What type of audit report indicates that the financial statements present fairly the financial position,
results of operations and the cash flows for the accounting period?
A) A qualified report B) An adverse opinion
C) An unqualified report D) A disclaimer of opinion
Answer: C
6) What is the goal of the International Accounting Standards Board?

A) To develop accounting principles to meet the legal and tax needs of countries
B) To have worldwide acceptance of a set of international generally accepted accounting
principles
C) To protect the right of each country to develop and maintain its own accounting standards
D) To develop rules for listing securities in any market
Answer: B
1
7) International financial reporting standards are currently developed by which entity
A) the Ontario Securities Commission
B) the International Organization of Securities Commissions
C) the International Accounting Standards Board
D) the IFRS Foundation
Answer: C
8) In Canada, generally accepted accounting principles for private enterprises are currently developed
by which entity?
A) The Private Company Accounting Oversight Board
B) The Securities and Exchange Commission
C) Ontario Securities Commission
D) The Accounting Standards Board
Answer: D
9) Accounting methods, estimates, and assumptions used in preparing financial statements are found
A) on the income statement.
B) In the notes to the financial statements.
C) in the auditor's report.
D) in the management discussion and analysis.
Answer: B
10) Information about material events, opportunities and uncertainties would best be found in
A) In the notes to the financial statements.
B) in the management discussion and analysis.
C) on the income statement.
D) in the auditor's report.
Answer: B
11) Information about management and director compensation would best be found
A) In the shareholders' information circular B) In the cash flow statement
C) in the notes to the financial statements D) in the auditor's report
Answer: A
12) Whether by implementing a strategy of differentiation or one of cost advantage, the common
objective of a company is
A) maximum leverage B) an ROA above 8%
C) positive earnings per share D) maximum return on equity
Answer: D
13) Companies that focus on maintaining high profit margins in order to generate higher returns on
equity are most likely employing what type of business strategy?
A) Earnings capitalization B) Differentiation
C) Vertical integration D) Cost advantage
Answer: B
2
14) Companies that focus on making the most efficient use of assets in order to generate higher returns
on equity are most likely employing what type of business strategy?
A) Cost advantage B) Earnings capitalization
C) Vertical integration D) Differentiation
Answer: A
15) Time series analysis involves examining a company's financial data

A) and comparing it with other companies. B) as percentages of net sales or total assets.
C) across time periods. D) across account classifications.
Answer: C
16) Which of the following is not an example of a company comparison analysis?

A) Comparing total sales across companies in the same industry for the past three years.
B) Comparing growth in sales across different industries
C) Determining how the growth in sales from one company differed from that of another
company.
D) Determining the growth in sales for a company over a five-year period.
Answer: D
17) Ratiosare useful in explaining the:

A) relationships between financial data B)differences between companies
C) trends within industries D) reasons for financial performance
Answer: A
18) Ananalytical tool for comparing two companies of different sizes is

A) short-term liquidity B) Annual reports
C) financial leverage D) common size statements
Answer: D
19) Reviewof the financial statements revealed the following for Petrolis Sales Inc. Sales $1,250,000, Net income
$37,500, Total assets $650,000, Long-term debt $750,000, Interest expense $65,000 and Cost of goods sold
$775,000.
When preparing common size financial statements interest expense would be shown as
A) 9.4% B) 8.4% C) 10% D) 5.2%
Answer: D
20) What is the common denominator for each item on the income statement when preparing a common
size income statement?
A) Gross profit B) Sales C) Net income D) Operating profit
Answer: B
3
21) On a common size income statement, all items are shown as:
A) percentages of net income. B) percentages of total assets.
C) percentages of gross profit. D) percentages of gross revenue.
Answer: D
22) To see if a company's cost of sales is increasing proportionately with sales an analyst would use
A) raw financial data. B) trend analysis.
C) common sized analysis. D) prospective analysis.
Answer: C
23) A common- size analysis of the balance sheet is most likely to signal investors that the company
A) is using assets efficiently. B) has increased sale.
C) is becoming more leveraged. D) is becoming more liquid.
Answer: A
Reference: 12-01
Consider the following statement of earnings data for Mandrake Mills Inc.
20X7 20X6
Sales revenue $97,300 $86,200
Less: Cost of goods sold 45,600 53,400
Gross profit 51,700 32,800
Selling and administration expense 22,500 18,300
Income before income tax $29,200 $14,500
24) The common size percentage for selling and administration costs in 20X7 was
A) 33% B) 43.5% C) 21.2% D) 23.1%
Answer: D
25) Based on common size analysis, which of the following statements is correct?
A) the increase in gross profit in 20X7 was due to increased sales.
B) income before income tax as a percent of sales declined in 20X1.
C) the company's cost to sales ratio improved in 20X7.
D) the increase in sales revenue in 20X7 was caused by higher selling and administrative
expenses.
Answer: C
26) Which is an appropriate method of preparing a common - size cash flow statement?
A) Show each line item on the cash flow statement as a percentage of total liabilities
B) Show each cash inflow on the cash flow statement as a percentage of total cash outflows
C) Show each line item on the cash flow statement as a percentage of net revenue.
D) Show each line item on the cash flow statement as a percentage of total assets.
Answer: C
4
27) Net sales
are $2,700,000, beginning total assets are $750,000, and the asset turnover is 3.0. What is
the ending total asset balance?
A) $1,050,000. B) $600,000. C) $1,125,000. D) $900,000.
Answer: A
28) Which of the following ratios usually is not considered to be a test of profitability?
A) Return on assets. B) Net profit margin.
C) Earnings per share. D) Current ratio.
Answer: D
29) Financial leveragewill always be which of the following?

A) Positive, negative, or zero. B) Positive.
C) Either positive or negative. D) Negative.
Answer: A
30) Which profit measure is best for assessing how well a firm operates within their industry?
A) Operating profit B) Net income after tax
C) Earnings before tax D) Gross profit
Answer: A
31) The records of ZZZZ Better Corporation include the following:
Average total assets $60,000

Average total liabilities 45,000
Total revenue 107,600
Total expense (including income tax)104,000
What is the return on equity?

A) 16% B) 6% C) 13% D) 24%
Answer: D
32) The records of Twain Company include the following:
Average total assets $60,000

Average total liabilities 25,000
Total revenue 107,600
Total expense (including income tax)
104,000
Interest expense (included in total expenses)
2,000
Income tax rate 40%
What is the financial leverage percentage (rounded to the nearest percent)?

A) 7% B) 5% C) 4% D) 9%
Answer: A
5
33) May Company's return on equity was 21% and the financial leverage ratio was 13% (positive). What
was the return on assets?
A) 8% B) 13% C) 34% D) 21%
Answer: A
34) A common measure of profitability is the

A) cash current debt coverage ratio.
B) current ratio.
C) debt to total assets ratio.
D) return on common shareholders' equity ratio.
Answer: D
35) Which of the following events would likely result in a loss recognized on the write-down of
inventories?
A) The value of perished products for a produce company using the allowance method for
inventory
B) The additional costs resulting from an increase in oil prices caused by a hurricane destroying
oil refineries.
C) Purchasing another firm for more than the value of the fair market value of the assets.
D) A drop-in price of raw materials, once scarce, but now in ample supply.
Answer: D
36) Which of the following actions would be considered as contributing to low quality of financial
reporting?
A) A company uses an accelerated depreciation method for delivery vehicles
B) A beverage company reduces advertising expense in order to meet earnings forecast for the
quarter.
C) A company reveals that a major customer may file for bankruptcy.
D) A pharmaceutical company maintains research and development expenses even in a depressed
economy.
Answer: B
37) A quality of earnings ratio higher than one is an indicator of which of the following?
A) A company's high debt position.
B) That a company has cash generated by operations higher than the amount of profit.
C) That a company has too many fixed assets.
D) That fixed assets are the company's most important resources.
Answer: B
38) BetaLimited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month
note payable. What effect did the borrowing transaction have on Beta's current ratio?
A) The ratio increased. B) The ratio decreased.
C) The ratio remained unchanged. D) Cannot be determined.
Answer: A
6
39) Compared to an identical company that uses an operating lease, a company that uses a finance lease
will most likely produce a reported return on equity (ROE) that
A) starts higher but declines during the life of the lease
B) starts higher and remains so during the life of the lease.
C) is lower but does not change over the lease period.
D) starts lower but rises during the life of the lease
Answer: A
40) PerotCompany had profit before interest and taxes of $120,000. Interest expense for the period was
$17,000 and income taxes amounted to $28,500. The average shareholders' equity was $680,000.
What is Perot's return on equity?
A) 15.15% B) 13.46% C) 10.96% D) 17.65%
Answer: C
41) Lyceum Co. reported profit of $8.3 million, interest expense of $.5 million and they are in a 30% tax
rate bracket. Their average total assets are $65.8 million and average shareholders' equity is $48.6
million. What is Lyceum's financial leverage advantage or disadvantage?
A) 4.7% B) 4.0% C) 3.9% D) 3.7%
Answer: C
42) In20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%.
In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which
A) P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than
their ROA. This difference is caused by P Co's higher use of debt financing to leverage their
assets.
B) C Co provided higher positive financial leverage for their shareholders compared to P Co.
C) P Co's return on assets (ROA) was less than half of C Co's ROA.
D) C Co. is considerably more liquid than P Co.
Answer: D
43) In
20X2, C Co's gross profit ratio was 70.4% and their profit margin was 18.8%. In 20X2, P Co's
gross profit ratio was 58.3% and their profit margin was 8.9%. Which of the following is false?
A) In 20X2, C Co's profit margin was 111.2% greater than P Co's which would contribute to a
higher return on total investment.
B) C Co's cost of goods sold was a lower percentage of sales than P Co's.
C) The major reason for P Co's lower profit margin is that their selling, general and administrative
expenses were double the percentage of sales compared to C Co's percentage.
D) C Co looks to be a better investment than P Co.
Answer: C
44) A company that is leveraged is one that

A) contains debt financing. B) has a high current ratio.
C) has high earnings per share. D) contains equity financing.
Answer: A
7
45) Profit margin is calculated by dividing
A) net earnings by net sales. B) sales by cost of goods sold.
C) net earnings by shareholders' equity. D) gross profit by net sales.
Answer: A
46) In
20X2, C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9
days. In 20X2, P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and
37.6 days. Which of the following statements is false?
A) P Co's lower turnover ratio has an inverse relationship to its days' sales tied up in receivables.
B) C Co appears to be more profitable than P Co.
C) C Co's management has done a better job of managing their receivables.
D) The higher turnover ratio for C Co hurts their liquidity.
Answer: B
47) In20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%.
In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which
A) P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than
their ROA. This difference is caused by P Co's higher use of debt financing to leverage their
assets.
B) C Co provided higher positive financial leverage for their shareholders compared to P Co.
C) P Co's return on assets (ROA) was less than half of C Co's ROA.
D) C Co. is considerably more liquid than P Co.
Answer: D
48) Which of the following statements about ROA is true?

A) ROA reflects the risk inherent in a company.
B) ROA is the most important ratio for an equity investor
C) ROA is useful for comparing companies in different industries
D) ROA is useful for determining how the company financed its assets
Answer: A
49) When a company's ROE is greater than its ROA for a given time-period, it could be that
A) the company could borrow at an after-tax rate that was less than the rate earned by investing in
assets.
B) the company has no debt
C) the level of debt has no impact on the ROA
D) the company could borrow at an after-tax rate that was higher than the rate earned by investing
in assets
Answer: A
8
50) A company has a tax rate of 40%. Leverage would be beneficial for the company for each of the following
combinations of interest rates and ROA except
Interest rate ROA

A. 4% 6%
B. 6% 6%
C. 14% 10%
D. 16% 10%

Answer: D
51) A company's optimal capital structure occurs when

A) the company can borrow at a rate lower than its ROA.
B) ROA is maximized.
C) ROE is maximized.
D) the company assets are funded by 50% debt and 50% equity.
Answer: C
52) Ifa firm is using financial leverage successfully what would be the impact of doubling operating
earnings?
A) The return on equity will more than double
B) The return on equity will decline by half
C) The return on equity will double
D) The return on equity will increase, but not double
Answer: A
53) All of the following ratios are investor measures of profitability except
A) price-earnings ratio. B) dividend yield.
C) payout ratio. D) return on assets.
Answer: D
Reference: 12-02
The following information was taken from the financial statements of C Co for the years 20X2 and 20X1:
Statement of Earnings 20X2 20X1

Net operating revenues $19,805 $18,813
Cost of goods sold 6,009 5,562
Gross profit 13,796 13,251
Selling, administrative and general expenses 9,001 8,211
Other operating charges 813 73
Operating profit 3,982 4,967
Other revenues (expenses) including interest expense (163) 231
$337 million in 20X2 and $277 million in 20X1
Profit before taxes 3,819 5,198
9
Income tax expense (tax rate 36.3% in 20X2) 1,388 1,665
Profit 2,431 3,533
Statement of Financial Position 20X2 20X1

Cash and cash equivalents $1,611 $1,648
Marketable securities 201 159
Trade receivables, net 1,798 1,666
Inventories 1,076 890
Prepaid expenses and other assets 1,794 2,017
Total current assets 6,480 6,380
Equity method investments 6,442 6,291
Cost method investments 350 395
Marketable securities and other investments 2,124 1,863
Total investment assets 8,916 8,549
Property, plant and equipment, net 4,267 3,669
Goodwill and other intangible assets 1,960 547
Total assets $21,623 $19,145
Current liabilities 9,856 8,640

Long-term debt 854 687
Other liabilities and deferred taxes 1,400 1,415
Total liabilities 12,110 10,742
Total shareholders' equity 9,513 8,403
Total liabilities and shareholders' equity $21,623 $19,145
54) Calculate CCo's gross profit ratio for 20X2 and 20X1 respectively.
A) 20.1% and 26.4% B) 30.3% and 29.6%
C) 69.7% and 70.4% D) 40.6% and 45.7%
Answer: C
55) Calculate CCo's profit margin ratio for 20X2 and 20X1 respectively.
A) 69.7% and 70.4% B) 12.3% and 18.8%
C) 20.1% and 26.4% D) 19.3% and 27.6%
Answer: B
56) Calculate C Co's fixed asset turnover ratio for 20X2.

A) 4.99 B) .97 C) 4.87 D) 3.79
Answer: A
57) Calculate CCo's return on assets (ROA) for 20X2.

A) 17.7% B) 11.9% C) 13.0% D) 13.6%
Answer: C
10
58) Calculate C
Co's return on equity (ROE) for 20X2.
A) 31.8% B) 27.1% C) 30.9% D) 25.6%
Answer: B
59) Calculate C Co's financial leverage and identify whether it was positive or negative.
A) 14.1% positive B) 19.9% negative C) 15.2% positive D) 17.8% negative
Answer: A
60) Calculate CCo's current ratio for 20X2 and 20X1 respectively.
A) .63 and .72 B) .60 and .70 C) .54 and .59 D) .66 and .74
Answer: D
61) Calculate CCo's quick ratio for 20X2 and 20X1 respectively.
A) .55 and .64 B) .30 and .32 C) .56 and .54 D) .37 and .40
Answer: D
62) Calculate C Co's receivables turnover ratio and the days' sales in receivables for 20X2.
A) 11.15 times and 32.7 days B) 11.02 times and 33.1 days
C) 3.47 times and 105.2 days D) 11.43 times and 31.9 days
Answer: D
63) Calculate CCo's inventory turnover ratio and the days' sales in inventory for 20X2.
A) 5.58 times and 65.4 days B) 5.89 times and 62.0 days
C) 6.11 times and 59.7 days D) 18.41 times and 19.8 days
Answer: C
64) Calculate CCo's debt to equity ratio for 20X2 and 20X1 respectively.
A) .79 and .78 B) 1.27 and 1.28 C) .56 and .56 D) .66 and .66
Answer: B
65) Calculate CCo's times interest earned ratio for 20X2 and 20X1 respectively.
A) 11.33 and 18.77 B) 12.33 and 19.77 C) 7.21 and 12.75 D) 11.82 and 17.93
Answer: B
11
66) Ifa company has a current ratio of 1.3:1, what respective effects will the borrowing of cash by
short-term debt and collection of trade receivables have on the ratio?
Short-term Borrowing Collection of Receivables

Decrease Decrease

Increase No Effect

Decrease No Effect

Increase Increase
Answer: C
67) If trade receivables are collected quickly, it may indicate which of the following?
A) The trade receivables turnover is low.
B) The company's credit policies may be overly stringent.
C) The company is becoming more profitable.
D) Credit is often granted to poor credit risks.
Answer: B
68) A liquidity ratio measures the

A) number of times interest is earned.
B) earnings or operating success of a company over a specific time period.
C) short-term ability of the company to pay its maturing obligations and to meet unexpected needs
for cash.
D) ability of the company to survive in the long-term future.
Answer: C
69) An aircraft company would most likely have

A) a high inventory turnover. B) a low inventory turnover.
C) high volume. D) a low profit margin.
Answer: B
12
70) A successful grocery store would probably have
A) zero profit margin. B)low volume.
C) a high inventory turnover. D) a low inventory turnover.
Answer: C
71) Acompany has an average inventory on hand of $40,000 and its average days in inventory are 26.4
days. What is the cost of goods sold?
A) $553,030. B) $1,056,000. C) $480,000. D) $486,667.
Answer: A
72) Which of the following is an important measure of the average movement of goods "on and off the
shelf" of a company?
A) Profit margin. B) Gross inventory ratio.
C) Inventory turnover ratio. D) Price/earnings ratio.
Answer: C
73) Short-term creditors are usually most interested in assessing

A) marketability. B) profitability. C) liquidity. D) solvency.
Answer: C
74) Some of the ratios that are used to determine a company's short-term debt paying ability are
A) times interest earned, inventory turnover, current ratio, and receivables turnover.
B) asset turnover, times interest earned, current ratio, and receivables turnover.
C) times interest earned, current ratio, and inventory turnover.
D) current ratio, receivables turnover, and inventory turnover.
Answer: D
75) A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current
liability. Because of this transaction, the current ratio and working capital will
A) both decrease.
B) remain the same and decrease, respectively.
C) increase and remain the same, respectively.
D) both increase.
Answer: C
76) Whichone of the following ratios would not likely be used by a short-term creditor in evaluating
whether to sell on credit to a company?
A) Receivables turnover B) Dividend yield
C) Current ratio D) Asset turnover
Answer: B
77) A supplier to a company would be most interested in the

A) profit margin ratio. B) free cash flow.
C) asset turnover ratio. D) current ratio.
Answer: D
13
78) Teel Company's working capital was $40,000 and total current liabilities were 1/4 of that amount.
What was the current (working capital) ratio?
A) 5 to 1 B) 1 to 1 C) 7 to 1 D) 3 to 1
Answer: A
79) Nunn Company reported the following data:
Quick Assets $55,000

Current assets 150,000
Total Liabilities 12,600
Average net receivables 107,600
Beginning inventory 38,000
Net credit sales 126,000
Ending inventory 46,000
What was the current ratio?
A) 0.75 to 1 B) 0.5 to 1 C) 1.5 to 1 D) 2.5 to 1

Answer: C
80) A general rule to use in assessing the average collection period is that it
A) should not greatly exceed the credit term period.
B) can be any length as long as the customer continues to buy merchandise.
C) should not exceed 30 days.
D) should not greatly exceed the discount period.
Answer: A
81) Hayes Company had an average age of accounts receivable of 25 days and net credit sales of
$31,000. Assume a 365-day year. What was the amount of the average net receivables?
A) $4,000 B) $2,123 C) $5,760 D) $1,152
Answer: B
82) If the average collection period is 45 days, what is the receivables turnover?
A) 8.1times B) 18.0 times C) 12.0 times D) None of these
Answer: A
83) What is implied if the accounts receivable account has increased?

A) Cash flow from operating activities is greater relative to net income
B) The firm's cost of sales has decreased relative to the prior year
C) Cash flow from operating activities is less relative to net income
D) The firm's sales have decreased relative to the prior year
Answer: C
14
84) Box Company reported the following data at the end of 20X2:
Sales revenue (75% on credit) $300,000

Expenses 60,000
Trade receivables, net at December 31, 19B (a decrease of $4,000 during 19B) 8,000
Total assets 200,000
Assume a 365-day year
What was the average number of days to collect receivables during 20X2?
A) 16.2 B) 14.3 C) 21.9 D) 36.5
Answer: A
85) Which of the following accounting ratios considers the importance of cash flows relating to required
interest payments?
A) receivables turnover B) cash coverage ratio
C) debt/equity ratio D) times interest earned ratio
Answer: B
Reference: 12-03
Antarctica Cruises Inc. provided the following data for 20X1:
Sales $1,250,000
Cost of sales 787,500
Selling & Admin. expenses 252,300
Income tax expense and paid 27,400
Interest paid 44,000
Cash from operating activities 246,000
Tax rate 40%
86) The cash coverage ratio for 20X1 is closest to

A) 7.69 B) 11.28 C) 7.0 D) 5.13
Answer: C
87) The times interest earned ratio for 20X1 is closest to

A) 5.80 B) 7.69 C) 11.28 D) 5.13
Answer: D
88) If Antarctica has average total assets of $750,000, what is their total asset turnover?
A) .85 B) .60 C) 1.67 D) 2.69
Answer: C
15
89) Bailey Corporation reported the following information for 20X1:
Profit $10,000
Total assets 16,000
Bailey's debt/equity ratio was

A) 1.25 or 125 %. B) 1.0 or 100%. C) .33 or 33%. D) 3.0 or 300%.
Answer: B
90) In20X2, C Co's total liabilities were $10,742 million and shareholders' equity was $8,403 million.
In 20X2, P Co's total liabilities were $16,259 million and their shareholders' equity was $6,401
million. Which of the following statements is false?
A) C Co's debt to equity ratio was 1.28 and P Co's was 2.54.
B) C Co has only about 56.1% of its assets financed by debt while P Co has about 71.8% of assets
financed by debt.
C) C Co is more profitable than P Co.
D) P Co is a much higher leveraged company providing greater financial risk for investors but
potential higher return on owners' investment to its shareholders.
Answer: C
91) Which of the following ratios is not a test of solvency?

A) Cash coverage ratio. B) Debt to equity ratio.
C) Times interest earned ratio. D) Earnings per share ratio.
Answer: D
92) The price investors are willing to pay for a dollar's worth of earnings is the
A) Stock price B) EPS C) ROE D) PE ratio
Answer: D
93) Consider the following information:

Beginning number of shares 140,000
Ending number of shares 160,000
Current price per share $80.00
Dividend per share $1.20
What is the dividend yield?

A) 6.2% B) 8.6% C) 1.5% D) 50.0%
Answer: C
16
Reference: 12-04
P Co's earnings per share ratios were $1.31 and $1.36 respectively for 20X2 and 20X1. P Co's share was trading
at $40 7/16 in 20X2 and $34 11/16 in 20X1. They paid cash dividends of $.515 per share in 20X2 and $.46 per
share in 20X1. Total shareholders' equity was $6,401 million and $6,936 million in 20X2 and 20011
respectively. The common shares outstanding were approximately 1,519,000,000 and 1,570,000,000 in 20X2 and 20X1
respectively.
94) Calculate PCo's price earnings ratios for 20X2 and 20X1 respectively.
A) 29.7 and 26.5 times B) 29.7% and 26.5%
C) 3.2% and 3.9% D) 30.9 and 25.5 times
Answer: D
95) Calculate P
Co's dividend yield for 20X2 and 20X1 respectively.
A) 38.6% and 34.5% B) 39.3% and 33.8%
C) 3.5% and 3.6% D) 1.3% and 1.3%
Answer: D
96) Calculate P
Co's dividend payout for 20X2 and 20X1 respectively.
A) 1.3% and 1.3% B) 39.3% and 33.8%
C) 38.6% and 34.5% D) 3.5% and 3.6%
Answer: B
97) Calculate PCo's book value per share in 20X2 and 20X1 respectively.
A) 4.14 and cannot compute 20X2's book value
B) 4.21 and 4.42
C) 4.21 and cannot compute 20X2's book value
D) 4.14 and 4.49
Answer: B
98) The Able Company had profit of $47,500 and earnings per share of $3.17 during 20X2. On
December 31, 20X2, the shares had a market price of $18.50 per share. What is Able's
price/earnings ratio?
A) 8.11 B) 25.70 C) 0.17 D) 5.84
Answer: D
99) Matt Company paid out $2.30 in dividends per share during 20X2. The market price of the share on
December 31, 20X2 was $21.00 per share. There were 15,000 shares of share outstanding for the
entire year. What was the dividend yield as of December 31, 20X2?
A) 16.43% B) 10.95% C) 913.04% D) 9.13%
Answer: B
17
100) If the components of price/earnings ratio are inverted, the resulting percent is referred to as which of
the following?
A) Multiple. B) Capitalization rate.
C) Book value per share. D) Dividend yield ratio.
Answer: B
101) If the components of price/earnings ratio are inverted, the resulting percent is referred to as which of
the following?
A) Capitalization rate. B) Dividend yield ratio.
C) Multiple. D) Book value per share.
Answer: A
102) At the end of 20X2, Storage Company reported 15,000 outstanding common shares. Total liabilities
were $440,000 and total assets were $860,000. The company had no preferred shares. What was the
book value per share of common share?
A) $29.00 B) $14.00 C) $28.00 D) $13.90
Answer: C
103) Strait Company has outstanding shares as follows: 16,000 common shares and 5,000 preferred
shares. What is the number of shares that should be used in the denominator to compute earnings
per share?
A) 11,000 B) 21,000 C) 5,000 D) 16,000
Answer: D
104) Which of the following regarding book value per common share is true?
A) It is usually greater than the market value per share.
B) It is not widely used in assessing the future dividend potential of the corporation.
C) It is a measure of liquidity.
D) It is a good measure of management performance.
Answer: B
105) The ratio that is calculated by dividing cash dividends declared on common shares by net earnings is
called the:
A) payout ratio. B) common dividend ratio.
C) earnings per share ratio. D) dividend yield ratio.
Answer: A
106) Which of the following circumstances might indicate that management is manipulating the
allowance for doubtful accounts?
A) A company tightens its credit standards and the allowance account decreases
B) A company lowers its credit standards and the allowance account decreases
C) A company lowers its credit standards and the allowance account increases
D) A company tightens its credit standards and the allowance account increases
Answer: B
18
107) Which item may be of concern when analyzing cash flow from operating activities?
A) Payments of dividends B) Repayment of debt
C) Increasing inventories D) Decreasing accounts receivable
Answer: C
108) Changes in the total asset turnover ratio may indicate changes in:
A) Cost structure B) financing decisions
C) Sales D) Product profitability
Answer: C
109) A primary objective of financial statements is to provide information to current and potential
investors and creditors.
Answer: True False
110) The cumulative effect of accounting changes is disclosed in the statement of shareholders' equity (or
retained earnings).
Answer: True False
111) Management's success at containing the effects of uncontrollable risks and managing in the face of
uncertainties plays a role in analysts' predictions of the future economic health of a specific
company.
Answer: True False
112) Liquidity ratios measure the ability of the company to survive over an extended time period.
Answer: True False
113) To compute component percentages for the statement of earnings, the base amount is profit.
Answer: True False
114) In simple terms, a business strategy establishes the objectives a business is trying to achieve.
Answer: True False
115) The only way an investor will get a return on shares while they own the shares is for the corporation
to distribute a dividend.
Answer: True False
116) A solvency ratio measures the earnings or operating success of a company for a given period of
time.
Answer: True False
117) The current ratio should not be interpreted on its own without also looking at the receivables
turnover and inventory turnover ratios.
Answer: True False
19
118) The quality of earnings computation is a test of the solvency of the company.
Answer: True False
119) The receivables turnover ratio is useful in assessing the profitability of receivables.
Answer: True False
120) Since inventory is a significant current asset for most retail organizations, the inventory turnover
ratio would be of significance to investors and analysts in terms of assessing liquidity.
Answer: True False
121) The quick ratio of a company will always be less than or equal to the current ratio (working capital
ratio).
Answer: True False
122) The inventory turnover ratio measures the number of times, on average, the inventory was sold
during the period.
Answer: True False
123) A price/earnings ratio is viewed as a good measure of a company's dividend paying ability.
Answer: True False
124) The inventory turnover ratio is a measure of liquidity that focuses on efficient use of inventory.
Answer: True False
125) Financial leverage is positive when the return on equity (ROE) is higher than the return on assets
(ROA).
Answer: True False
126) Profitability ratios are frequently used as a basis for evaluating management's operating
effectiveness.
Answer: True False
127) If an increase in ROA is the result of borrowing at high interest rates, investors could well interpret
negative leverage as reflecting good news.
Answer: True False
128) Both the profit margin ratio and the asset turnover ratio affect a company's return on assets.
Answer: True False
129) A high inventory turnover ratio indicates a large supply of inventory.

Answer: True False
130) The current ratio is a less stringent test of liquidity than is the quick ratio.
Answer: True False
20
131) The return on assets ratio will be greater than the rate of return on common shareholders' equity if
the company has been successful in trading on the equity.
Answer: True False
132) The average days' supply in inventory is computed by dividing the days in the year by the ending
balance of inventory.
Answer: True False
133) The price-earnings ratio reflects investors' expectations about the future profitability of the
company.
Answer: True False
134) Solvency ratios are evaluated by comparing them over time for a single company or by comparing
them with ratios for similar companies.
Answer: True False
135) From a creditor's point of view, the higher the debt to total assets ratio, the lower the risk that the
company may be unable to pay its obligations.
Answer: True False
136) Positive financial leverage benefits the common shareholders.

Answer: True False
137) A current ratio of 1.2 to 1 indicates that a company's assets exceed its current liabilities.
Answer: True False
138) Return on assets (ROA) is usually viewed as a realistic measure of management's performance in
using all the resources available to the company regardless of how the assets are financed.
Answer: True False
139) An investor interested in purchasing a company's shares for their income potential would be more
interested in the company's payout ratio than its price-earnings ratio.
Answer: True False
140) Liquidity refers to the ability of a company to meet its currently maturing obligations, and solvency
refers to the ability of a company to meet its long-term obligations on a continuing basis.
Answer: True False
141) Dividend yield measures earnings generated by each share, based on the market price per share.
Answer: True False
21
142) Indicate the proper category for each ratio.
Primary Category
Test of:
A. Profitability
B. Liquidity
C. Solvency
D. Market
E. Miscellaneous ratio
Ratio
________ 1. Earnings per share
________ 2. Current ratio
________ 3. Debt/equity ratio
________ 4. Dividend yield ratio
________ 5. Receivables turnover ratio
________ 6. Return on equity
________ 7. Price/earnings ratio
________ 8. Creditors' equity to total equities
________ 9. Profit margin
________ 10. Inventory turnover ratio
________ 11. Owners' equity to total equities
________ 12. Quick ratio
________ 13. Return on assets
________ 14. Financial leverage
________ 15. Book value per common share
________ 16. Quality of earnings
________ 17. Fixed asset turnover ratio
________ 18. Cash coverage
________ 19. Cash ratio
________ 20. Times interest earned
Answer: (1) A, (2) B, (3) C, (4) D, (5) B, (6) A, (7) D, (8) C, (9) A, (10) B, (11) C, (12) B, (13) A, (14)
A, (15) E, (16) A, (17) A, (18) C, (19) B, (20) C
143) For each of the following items indicate where you would most likely find the information
Statement of financial position.
B. Statement of earnings
C. Statement of stockholders' equity.
D. Statement of cash flows.
E. Notes to the financial statements.
F. Auditor's report.
G. Management's discussion and analysis.
H. The information circular
22
1. Details concerning the compensation of the CEO, CFO, and other key executive
officers
2. Detailed information about the term, cost and maturity of debt.
3. Changes to the company's equity accounts.
4. An unqualified opinion.
5. Assets.
6. Attestation to the fairness of financial statements.
7. Discussion of the company's liquidity.
8. Cash inflows from investing activities.
9. A breakdown of sales increases into price and volume components.
10. Summary of significant accounting policies.
1. details of the compensation of the CEO, CFO, and other key executive
officers H
2. Detailed information about the term, cost and maturity of debt. E
3. Changes to the company's equity accounts. C
4. An unqualified opinion. F
5. Assets. A
6. Attestation to the fairness of financial statements. F
7. Discussion of the company's liquidity. G
8. Cash inflows from investing activities. D
9. A breakdown of sales increases into price and volume components. G
10. Summary of significant accounting policies. E
23
144) Match the characteristic that is reflected best by the indicators.
Characteristic
A. Solvency
B. Global performance
C. Market performance
D. Profitability
E. Liquidity
Indicator
________ 1. Working capital
________ 3. Earnings per share
Answer: (1) E, (2) A, (3) D, (4) D, (5) E, (6) C, (7) D
145) Match the ratio computation with the ratio.
Ratio Computation
A. Profit ÷ Net sales revenue

B. Net credit sales ÷ Average net receivables
C. Return on equity - Return on assets
D. Sales revenue ÷ Total operating expenses
E. Total liabilities ÷ Shareholders' Equity
F. Market price per share ÷ EPS
G. Profit ÷ Average shareholders' equity
H. Creditors' equity ÷ Total equities
I. Income tax expense ÷ Pretax income
J. Quick assets ÷ Current liabilities
K. Sales revenue ÷ Total assets
L. Dividends per share ÷ Market price per share
M. Shareholders' equity ÷ Total equities
N. Cost of goods sold ÷ Average inventory
O. (Income + After-tax interest expense) ÷ Total assets
P. Current assets ÷ Current liabilities
Q. Profit ÷ Average number of shares of common share outstanding
R. (Cash + Cash equivalents) ÷ Current liabilities
S. Cash Flows from Operating Activities ÷ Profit
T. (Profit + Interest + Income Tax Expense) ÷ Interest Expense
U. Net Sales Revenue ÷ Net Fixed Assets
V. Cash Flows from Operating Activities (before interest and tax expense) ÷ Interest Paid
24
W. Not given above.
Ratio Designation
________ 1. Return on equity

________ 4. EPS
________ 5. Profit margin
________ 7. Quick ratio
________ 8. Receivables turnover ratio
________ 9. Inventory turnover ratio
________ 11. Owners' equity to total equities
________ 12. Creditors' equity to total equities
________ 14. Dividend yield ratio
________ 15. Book value per common share
________ 16. Cash coverage ratio
________ 17. Cash ratio
________ 18. Quality of earnings
________ 19. Times interest earned
________ 20. Fixed asset turnover ratio
Answer: (1) G, (2) O, (3) C, (4) Q, (5) A, (6) P, (7) J, (8) B, (9) N, (10) E, (11) M, (12) H, (13) F, (14)
L, (15) W, (16) V, (17) R, (18) S, (19) T, (20) U
25
146) Complete the following statement of earnings (both dollar amounts and component percentages):
Component
Amount percentage
Sales revenue $ %
Cost of goods sold 40%
Gross margin $120,000
Operating expenses
Interest expense 2%
Profit (before income tax)
Income tax expense (rate 20%)
Profit 6%
Component
Amount percentage
Sales revenue $200,000 100%
Cost of goods sold $80,000 40%
Gross margin $120,000 60%
Operating expenses $101,000 50.5%
Interest expense $4,000 2%
Profit (before income tax) $15,000 7.5%
Income tax expense (rate 20%) $3,000 1.5%
Profit $12,000 6%
147) List four categories of accounting ratios described in the text.

Answer: 1. Profitability; 2. Liquidity; 3. Solvency; 4. Market tests (Note: The student could include
miscellaneous ratios instead of one of the above).
26
148) The following financial data are available for Schultz Company:
Operating profit $236,000

Profit 196,300
Earnings per share 2.45
Dividends paid per share 1.25
Average common shareholders' equity 985,000
Average total assets 1,870,000
Current market price per share 24.50
Book value per share 12.30
Compute the following ratios:

1. Return on equity
3. Price/earnings ratio
3. Dividend yield
Answer: 1. Return on equity 19.93% ($196,300/$985,000)
2. Price earnings ratio 10 ($24.50/$2.45)
3. Dividend yield 5.10% ($1.25/$24.50)
149) The following data were reported for Marcellan Company:
Profit $275,000
Total dividend declared and paid on common stock 0.60 per share
Common stock outstanding, par $10 $1,750,000
Market price 20.00 per share
Cash flows from operating activities $280,000
(a) Dividend yield

(b) Price/earnings ratio
(c) Quality of earnings
Answer: (a) 3.0% (.60/20)

(b) EPS = 275,000/175,000 = $1.57
PE = 20/1.57 = 12.7%
(c) $280,000/275,000 = 1.02
27
150) Easy Company reported the following data at year-end:
Total shareholders' equity $200,000

Common stock (par $10) 125,000
(a) Compute the debt/equity ratio: ________

(b) Compute shareholders' equity to total equities: ________
(c) Compute creditors' equity to total equities: ________
(d) Compute the current ratio: ________
Answer: (a) ($350,000 - $200,000)/$200,000 = 75%

(b) $200,000/350,000 = 57.1%
(c) $150,000/350,000 = 42.9%
(d) $80,000/75,000 = 1.07 to 1
151) The following data were shown in the records of Morgan Company at the end of 20X2:
Quick assets $180,000

Average net receivables 10,000
Average inventory 42,000
Net credit sales 120,000
Assume a 365-day year
Compute the following ratios
(a) Quick ratio:

(b) Current (working capital) ratio:
(c) Receivable turnover:
(d) Inventory turnover:
(e) Average age of receivables
(f) Average days' supply in inventory
Answer: (a) $180,000/$50,000 = 3.6 to 1
(b) $225,000/$50,000 = 4.5 to 1
(c) $120,000/$10,000 = 12 times
(d) $84,000/$42,000 = 2 times
(e) 365/12 = 30 days
(f) 365/2 = 183 days
28
152) The following data were available for Lorie Company:
Sales revenue, $225,000 (including 75,000 cash sales)

Cost of goods sold, $175,000
Average inventory (per month), $20,000
Average monthly balance in trade receivables, $20,000
Assume a business year of 365 days and calculate the following:
(a) Inventory turnover ________

(b) Days' supply in inventory ________
(c) Receivables turnover ________
(d) Average number of days to collect receivables ________
Answer: (a) $175,000/20,000 = 8.75 times
(b) 365/8.75 = 42 days
(c) $150,000/$20,000 = 7.5 times
(d) 365/7.5 = 49 days
29
153) Slow Corporation reported the following data for the year ended December 31, 20X3:
Net sales revenue $400,000

Profit 25,000
Interest expense (net of tax) 3,000
Net fixed assets 100,000
Shares of common stock outstanding 15,000 shares
Market value per share $16.00
(a) Profit margin

(b) Return on assets
(c) Return on equity
(d) Earnings per share
(e) Price/earnings ratio
(f) Debt/equity ratio
(g) Financial leverage percent
(h) Fixed asset turnover ratio
Answer: (a) $25,000/$400,000 = 6.25%

(b) ($25,000 + $3,000)/$200,000 = 14%
(c) $25,000/$160,000 = 15.6%
(d) $25,000/15,000 shares = $1.67
(e) $16/$1.67 = 9.58
(f) $40,000/$160,000 = 25%
(g) 15.6% - 14% = 1.6% (positive)
(h) $400,000/100,000 = 4 times
30
154) Custer Corporation reported the following information related to its common share (par $10) outstanding and
profit:
Total shareholders' equity (no preferred stock) $125,000

Current market price per share of the common stock $40.00
Dividends declared and paid during 20X6 $10,000
Balance in the common stock account $40,000
Profit $35,000
(a) The price/earnings ratio related to current operations was ________.

(b) The dividend yield ratio was ________.
(c) The book value per share of common stock was $ ________.
Answer: (a) $40/ [($35,000)/ ($40,000/$10)] = 4.57

(b) ($10,000/4,000 shares)/$40 = 6.25%
(c) $125,000/4,000 shares = $31.25
155) At the end of 20X3, Anderson Corporation reported a return on assets of 16%; net income of
$42,000; total assets of $365,000, and total liabilities of $165,000. The financial leverage percent
was ________.
Answer: $42,000/ ($365,000 - $165,000) = 21%; 21% - 16% = 5% positive
156) At the end of 20X2, Wild Corporation reported net income of $70,000, gross sales revenue of
$1,525,000, and sales returns of $125,000. The profit margin was ________%.
Answer: $70,000/ ($1,525,000 - $125,000) = 5%
157) Howard Corporation reported a quick ratio of 1.75, current assets of $50,000 and a current (working capital)
ratio of 2.
(a) The total amount of quick assets was $________.

(b) What is another name for the quick ratio? ________
(c) Describe what type of assets are considered quick assets and give some examples.
(d) How does the quick ratio compare to the current ratio?
Answer: (a) $50,000/2 = $25,000 current liabilities $25,000 × 1.75 = $43,750 quick assets
(b) Acid-test ratio
(c) Quick assets are assets able to be readily converted to cash, usually at their book values. Quick
assets often include cash, short-term investments, and net accounts receivable.
(d) The quick ratio test of liquidity is a more stringent test of short-term liquidity than the current
ratio. It compares quick assets (cash or one step away from cash) to total current liabilities.
The quick ratio is usually less than the current ratio for a company.
31
158) The records of Sage Company showed the following:
Assets $230,000
Liabilities 130,000
Shareholders' equity* 100,000
Revenues $100,000
Expenses** (81,000)
Interest expense (2,000)
Profit $17,000
*10,000 shares outstanding; current market price, $30

**Including income tax; income tax rate, 30%
(1) The return on assets is ________ %.

(2) The return on equity is ________ %.
(3) The financial leverage factor is ________ %.
(4) Is the financial leverage positive or negative? ________
Answer: (1) $17,000 + ($2,000 × .70)/$230,000 = 8%

(2) $17,000/$100,000 = 17%
(3) 17% - 8% = 9%
(4) Positive
32
159) The 20X2 financial statements of Companies A and B showed the following:
Item Company A Company B

Net sales revenue $150,000 $200,000
Profit margin 6% 5%
Total assets $40,000 $80,000
Financial leverage +4% +3%
Interest expense (net of tax) $1,000 $800
Part A: For each company, compute the items listed in the following tabulation.
Item Company A Company B

a. Reported profit $ $
b. Return on assets % %
c. Return on equity % %
d. Amount of owners' equity $ $
Part B:
Which company do you believe is a better investment? Justify your response.
Answer: Part A:
Company A Company B
a. Reported profit $9,000 $10,000
b. Return on assets 25% 13.5%
c. Return on equity 29% 16.5%
d. Amount of owners' equity $31,034 $60,606
Part B: Company A appears to be a better investment. Company A's return on equity and return on asse
are both higher than Company B's. Also, financial leverage is greater for Company A. The fact that
Company A's profit is lower is not necessarily a critical factor. However, this information is
only for one year. It would be necessary to obtain more financial history, as well as industry
data, prior to making a final decision.
160) Night Corporation gathered the following data at the end of the accounting period, December 31, 20X4:
Profit $60,000
Net sales revenue 1,200,000
Total liabilities 200,000
Shareholders' equity (50,000 shares outstanding)300,000
Average income tax rate 40%
Dividends declared and paid during 20X4 22,500
Market price per share of stock at year end $9.00
33
(a) Based on the above information, prepare an analysis by computing the following:
(1) Profit margin: ________ %.

(2) Return on equity: ________ %.
(3) Earnings per share: $ ________.
(4) Dividend yield ratio: ________ %.
(5) Price/earnings ratio: ________.
(6) Return on assets: ________ %.
(7) Financial leverage: ________ %.
(b) Your interpretation of the financial leverage is:

Answer: (a) (1) $60,000/$1,200,000 = 5%
(2) $60,000/$300,000 = 20%
(3) $60,000/50,000 shares = $1.20
(4) ($22,500/50,000) ÷ $9 = 5%
(5) $9.00/$1.20 = 7.5
(6) [$60,000 + ($25,000 × .60)]/$500,000 = 15%
(7) 20% - 15% = 5%
(b) The advantage is favourable to the shareholders if the ratio is positive, and it is unfavourable to the
shareholders if the ratio is negative because of the difference between profit on total assets and
the cost of debt (interest expense net of income tax). For Night Corporation, the company's
shareholders are benefiting from financial leverage because the cost of borrowing is less than
the return to the shareholders.
34
161) The following data were reported by Jupiter Company at year-end:

Quick assets 105,000
Non-current assets 375,000
Common stock (par $10) 170,000
Total owners' equity 375,000
Compute the following ratios for the Company
(a) Debt to equity ratio:

(b) Current (working capital) ratio:
(c) Quick ratio:
(d) Which, if any, of the above are liquidity ratios?
(e) Which, if any, of the above are profitability ratios?
Answer: (a) $150,000/$375,000 = .40 or 40%
(b) $150,000/$75,000 = 2.0 to 1.
(c) $105,000/$75,000 = 1.4 to 1.
(d) Current ratio and quick ratio.
(e) None of the above.
35
162) The following return on investment ratios were computed for ET Company:
20X1 20X2 20X3 20X4

Return on assets 12% 15% 15% 18%
Return on equity 15% 15% 11% 20%
(a) Financial leverage percent for each year was:
20X1: ________ 20X2: ________ 20X3: ________ 20X4: ________
(b) Explain briefly the shareholders' advantage or disadvantage for each year:
20X1:
20X2:
20X3:
20X4:
Answer: (a) 20X1: 15% - 12% = +3% positive
20X2: 15% - 15% = -0- neither
20X3: 11% - 15% = (4%) negative
20X4: 20% - 18% = +2% positive
(b) 20X1: Positive leverage of 3% means the shareholders gained because of the use of debt.
20X2: The return on assets increased to 15% but the return on equity did not increase. Shareholders did
not gain from the use of debt because leverage was zero.
20X3: Negative leverage of 4% means the shareholders lost because of the use of debt.
20X4: The increase in the return on assets and the positive leverage of 2% are both favourable to
shareholders.
36
163) Smith Company gathered the following information for 20X2:
Total sales revenue (65% on credit) $432,000

Sales returns and allowances (on credit) 44,000
Trade receivables at end of 20X2 ($30,000 increase during 20X2) 100,000
Allowance for doubtful accounts:
Beginning of 20X2 5,000
End of 20X2 7,000
Merchandise inventory at end of 20X2 ($10,000 decrease during 20X2)
28,000
Assume 365 days in the year
(a) Receivable turnover

(b) Average number of days to collect
(c) Inventory turnover
(d) Average number of days' supply of inventory
Answer: (a) [$432,000 × 65%) - $44,000]/ {[($100,000 - $7,000) + ($70,000 - $5,000)]/2} = 3.0
(b) 365 days/3 = 122 average days' supply
(c) $231,000/ [($28,000 + $38,000)/2] = 7 times
(d) 365 days/7 = 52 average days' supply.
164) Red Company reported total shareholders' equity of $500,000, which included a common share
account balance of $200,000 (40,000 shares) at the end of 20X2. Compute the book value per
common share assuming the company had only common shares. The book value per common share
was $________.
Answer: $500,000/40,000 = $12.50/share
37
165) Ricon Company had the following data available from the statements of financial position and income
statements:
Current assets: 20X2 20X3

Cash 7,000 8,000
Inventory 10,000 12,000
Total assets 50,000 60,000
Current liabilities 15,000 20,000
Shareholders' equity:
Common stock, par $5 20,000 20,000
Retained earnings (including profit for 20X2 and 20X3,
6,000 11,000
respectively)
Total sales revenue 80,000 100,000
Credit sales 26,000 30,000
Income (before taxes) 5,000 7,000
Income tax (20%) 1,000 1,400
Ratio 20X2 20X3

a. Current ratio
b. Quick ratio
c. Earnings per share of common stock
Answer: (a) 20X2: $21,000/$15,000 = 1.4 to 1. 20X3: $26,000/$20,000 = 1.3 to 1.

(b) 20X2: $11,000/$15,000 = .73 to 1. 20X3: $14,000/$20,000 = .70 to 1.
(c) 20X2: (5,000 - 1,000)/ (20,000/5) = $1.00 20X3: (7,000 - 1,400)/ (20,000/5) = $1.40
38
166) Indicate the effect of each item on the ratios given below in the following manner: if an item would cause an
increase in the ratio, place a check in the + column; if a decrease, place a check in - column; and if no change,
check the 0 column. Each item is independent of the others.
Ratio Value
Before the Item
Occurred
Ratio Item Effect on Ratio
+ - 0
A Current Ratio 3 to 1 Borrowed funds by issuance of bonds maturing
at the end of 15 years
B Quick or acid test 1 to 1 Borrowed funds by discounting of 60-day
customer note received that has been held for 1
week. Cash receiver was less than the maturity
value of the note
C Receivable turnover 12 times per yearAll sales prior to change were on “net due in 30
days” basis; after change, there are only “net due
in 60 days” terms
D Earnings per share $2 Issued a 50% stock dividend
E Current ratio 4 to 1 Sold a short-term investment and a gain is
recorded
F Quick or acid test 1.4 to 1 Sold marketable securities held a short-term
investment at 10% less than their carrying value
G Current ratio 3 to 1 Sold short-term investments at book value for
cash
Answer: (a) + (current assets increased)

(b) - (decrease quick assets by the difference)
(c) - (amount of average accounts receivable increased)
(d) - (increases shares outstanding)
(e) + (increase in current assets)
(f) - (decrease in quick assets)
(g) -0- (current assets are unchanged)
39
167) Barry Company computed the following ratios for a two-year period:
Ratio 20X1 20X2

a. Current ratio 1.3 to 1 .6 to 1
b. Return on equity 25% 16%
c. Quality of earnings 1.7 .5
d. Cash coverage ratio 346 122
e. Profit margin 6% 4%
Required: Comment on the trend of each of the ratios from 20X1 to 20X2. State concerns or possible
implications for the future of each.
Answer: (a) The current ratio has decreased to half of the 20X1 ratio. The company's liquidity is taking a down
turn. Currently due bills may not be able to be paid in a timely manner.
(b) The ROE decreased. The profitability of the company may be of concern.
(c) The quality of earnings ratio went from above one to below one. The 20X2 earnings are of lower
quality than those of 20X1.
(d) Cash coverage has plummeted. One might be concerned about the declining amount of cash from
operations to pay interest payments.
(e) Since the profit margin declined from 20X1 to 20X2, less of each sales dollar is realized in income.
Note: Overall, the company is experiencing unfavourable trends.
168) Financial ratio data is listed below for Manchester Manufacturing Inc.
Manchester Manufacturing Inc.Ratios

Ratio Industry 20X9 20X8 20X7
Current 1.20 1.18 1.20 1.35
Quick 0.20 0.18 0.21 0.26
Cash flow liquidity 0.50 (0.11) (0.09) (0.05)
Average collection period 4 days 9 days 8 days 6 days
Days inventory held 75 days 106 days 99 days 90 days
Days payable outstanding 10 days 11 days 12 days 8 days
Fixed asset turnover 11.30 8.84 8.89 8.95
Total asset turnover 2.50 2.20 2.27 2.42
Debt to equity 3.50 3.65 3.17 2.35
Times interest earned 2.40 1.72 2.00 2.23
Gross profit margin 23.10% 21.21% 22.39% 23.52%
Operating profit margin 2.00% 3.05% 2.86% 2.52%
Net profit margin 1.10% 0.89% 1.00% 0.97%
Cash flow margin 4.30% (5.31%) (5.15%) (4.48%)
Return on equity 11.04% 9.14% 9.51% 7.88%
Required:
Prepare a list of strengths and weaknesses for the firm after analyzing the following ratios.
40
Answer: Strengths:
1. Good control of operating expenses; operating profit margin is increasing.
2. Return on equity has increased because the company is using debt successfully.
Weaknesses:
1. Short-term liquidity is deteriorating.
2. Current and quick ratios are declining and now below industry average.
3. Cash flows from operations are negative.
4. Average collection period is increasing and above industry average.
5. Inventory is a serious concern as the number of days held has grown to a much higher amount than th
industry.
6. Number of days to pay suppliers is increasing and now above industry average.
7. Fixed and total asset turnovers are declining indicating fewer sales and/or increased capital
expenditures.
8. Debt is increasing and above industry average implying more risk in firm.
9. Gross profit margin is on a downward trend and below industry average; possibly a result of price
reductions or increased cost of goods sold.
10. Return on equity is declining in 20X9 and below industry average.
41
Answer Key
1) C
2) A
3) B
4) B
5) C
6) B
7) C
8) D
9) B
10) B
11) A
12) D
13) B
14) A
15) C
16) D
17) A
18) D
19) D
20) B
21) D
22) C
23) A
24) D
25) C
26) C
27) A
28) D
29) A
30) A
31) D
32) A
33) A
34) D
35) D
36) B
37) B
38) A
39) A
40) C
41) C
42) D
43) C
44) A
45) A
46) B
47) D
48) A
49) A
50) D
42
Answer Key
51) C
52) A
53) D
54) C
55) B
56) A
57) C
58) B
59) A
60) D
61) D
62) D
63) C
64) B
65) B
66) C
67) B
68) C
69) B
70) C
71) A
72) C
73) C
74) D
75) C
76) B
77) D
78) A
79) C
80) A
81) B
82) A
83) C
84) A
85) B
86) C
87) D
88) C
89) B
90) C
91) D
92) D
93) C
94) D
95) D
96) B
97) B
98) D
99) B
100) B
43
Answer Key
101) A
102) C
103) D
104) B
105) A
106) B
107) C
108) C
109) TRUE
110) TRUE
111) TRUE
112) FALSE
113) FALSE
114) TRUE
115) TRUE
116) FALSE
117) TRUE
118) FALSE
119) FALSE
120) TRUE
121) TRUE
122) TRUE
123) FALSE
124) TRUE
125) TRUE
126) TRUE
127) FALSE
128) TRUE
129) FALSE
130) TRUE
131) FALSE
132) FALSE
133) TRUE
134) TRUE
135) FALSE
136) TRUE
137) TRUE
138) TRUE
139) TRUE
140) TRUE
141) FALSE
142) (1) A, (2) B, (3) C, (4) D, (5) B, (6) A, (7) D, (8) C, (9) A, (10) B, (11) C, (12) B, (13) A, (14) A, (15) E,
(16) A, (17) A, (18) C, (19) B, (20) C
44
Answer Key
1. details of the compensation of the CEO, CFO, and other key executive
officers H
2. Detailed information about the term, cost and maturity of debt. E
3. Changes to the company's equity accounts. C
4. An unqualified opinion. F
5. Assets. A
6. Attestation to the fairness of financial statements. F
7. Discussion of the company's liquidity. G
8. Cash inflows from investing activities. D
9. A breakdown of sales increases into price and volume components. G
10. Summary of significant accounting policies. E
144) (1) E, (2) A, (3) D, (4) D, (5) E, (6) C, (7) D

145) (1) G, (2) O, (3) C, (4) Q, (5) A, (6) P, (7) J, (8) B, (9) N, (10) E, (11) M, (12) H, (13) F, (14) L, (15) W,
(16) V, (17) R, (18) S, (19) T, (20) U
Component
Amount percentage
Sales revenue $200,000 100%
Cost of goods sold $80,000 40%
Gross margin $120,000 60%
Operating expenses $101,000 50.5%
Interest expense $4,000 2%
Profit (before income tax) $15,000 7.5%
Income tax expense (rate 20%) $3,000 1.5%
Profit $12,000 6%
147) 1. Profitability; 2. Liquidity; 3. Solvency; 4. Market tests (Note: The student could include miscellaneous
ratios instead of one of the above).
148) 1. Return on equity 19.93% ($196,300/$985,000)
2. Price earnings ratio 10 ($24.50/$2.45)
3. Dividend yield 5.10% ($1.25/$24.50)
149) (a) 3.0% (.60/20)
(b) EPS = 275,000/175,000 = $1.57
PE = 20/1.57 = 12.7%
(c) $280,000/275,000 = 1.02
45
Answer Key
150) (a) ($350,000 - $200,000)/$200,000 = 75%

(b) $200,000/350,000 = 57.1%
(c) $150,000/350,000 = 42.9%
(d) $80,000/75,000 = 1.07 to 1
151) (a) $180,000/$50,000 = 3.6 to 1
(b) $225,000/$50,000 = 4.5 to 1
(c) $120,000/$10,000 = 12 times
(d) $84,000/$42,000 = 2 times
(e) 365/12 = 30 days
(f) 365/2 = 183 days
152) (a) $175,000/20,000 = 8.75 times
(b) 365/8.75 = 42 days
(c) $150,000/$20,000 = 7.5 times
(d) 365/7.5 = 49 days
153) (a) $25,000/$400,000 = 6.25%
(b) ($25,000 + $3,000)/$200,000 = 14%
(c) $25,000/$160,000 = 15.6%
(d) $25,000/15,000 shares = $1.67
(e) $16/$1.67 = 9.58
(f) $40,000/$160,000 = 25%
(g) 15.6% - 14% = 1.6% (positive)
(h) $400,000/100,000 = 4 times
154) (a) $40/ [($35,000)/ ($40,000/$10)] = 4.57
(b) ($10,000/4,000 shares)/$40 = 6.25%
(c) $125,000/4,000 shares = $31.25
155) $42,000/ ($365,000 - $165,000) = 21%; 21% - 16% = 5% positive
156) $70,000/ ($1,525,000 - $125,000) = 5%
157) (a) $50,000/2 = $25,000 current liabilities $25,000 × 1.75 = $43,750 quick assets
(b) Acid-test ratio
(c) Quick assets are assets able to be readily converted to cash, usually at their book values. Quick assets often
include cash, short-term investments, and net accounts receivable.
(d) The quick ratio test of liquidity is a more stringent test of short-term liquidity than the current ratio. It
compares quick assets (cash or one step away from cash) to total current liabilities. The quick ratio is
usually less than the current ratio for a company.
158) (1) $17,000 + ($2,000 × .70)/$230,000 = 8%
(2) $17,000/$100,000 = 17%
(3) 17% - 8% = 9%
(4) Positive
46
Answer Key
159) Part A:
Company A Company B
a. Reported profit $9,000 $10,000
b. Return on assets 25% 13.5%
c. Return on equity 29% 16.5%
d. Amount of owners' equity $31,034 $60,606
Part B: Company A appears to be a better investment. Company A's return on equity and return on assets are both
higher than Company B's. Also, financial leverage is greater for Company A. The fact that Company A's profit is
lower is not necessarily a critical factor. However, this information is only for one year. It would be
necessary to obtain more financial history, as well as industry data, prior to making a final decision.
160) (a) (1) $60,000/$1,200,000 = 5%
(2) $60,000/$300,000 = 20%
(3) $60,000/50,000 shares = $1.20
(4) ($22,500/50,000) ÷ $9 = 5%
(5) $9.00/$1.20 = 7.5
(6) [$60,000 + ($25,000 × .60)]/$500,000 = 15%
(7) 20% - 15% = 5%
(b) The advantage is favourable to the shareholders if the ratio is positive, and it is unfavourable to the shareholders
the ratio is negative because of the difference between profit on total assets and the cost of debt (interest
expense net of income tax). For Night Corporation, the company's shareholders are benefiting from
financial leverage because the cost of borrowing is less than the return to the shareholders.
161) (a) $150,000/$375,000 = .40 or 40%
(b) $150,000/$75,000 = 2.0 to 1.
(c) $105,000/$75,000 = 1.4 to 1.
(d) Current ratio and quick ratio.
(e) None of the above.
162) (a) 20X1: 15% - 12% = +3% positive
20X2: 15% - 15% = -0- neither
20X3: 11% - 15% = (4%) negative
20X4: 20% - 18% = +2% positive
(b) 20X1: Positive leverage of 3% means the shareholders gained because of the use of debt.
20X2: The return on assets increased to 15% but the return on equity did not increase. Shareholders did not gain fro
the use of debt because leverage was zero.
20X3: Negative leverage of 4% means the shareholders lost because of the use of debt.
20X4: The increase in the return on assets and the positive leverage of 2% are both favourable to shareholders.
47
Answer Key
163) (a) [$432,000 × 65%) - $44,000]/ {[($100,000 - $7,000) + ($70,000 - $5,000)]/2} = 3.0
(b) 365 days/3 = 122 average days' supply
(c) $231,000/ [($28,000 + $38,000)/2] = 7 times
(d) 365 days/7 = 52 average days' supply.
164) $500,000/40,000 = $12.50/share
165) (a) 20X2: $21,000/$15,000 = 1.4 to 1. 20X3: $26,000/$20,000 = 1.3 to 1.
(b) 20X2: $11,000/$15,000 = .73 to 1. 20X3: $14,000/$20,000 = .70 to 1.
(c) 20X2: (5,000 - 1,000)/ (20,000/5) = $1.00 20X3: (7,000 - 1,400)/ (20,000/5) = $1.40
166) (a) + (current assets increased)
(b) - (decrease quick assets by the difference)
(c) - (amount of average accounts receivable increased)
(d) - (increases shares outstanding)
(e) + (increase in current assets)
(f) - (decrease in quick assets)
(g) -0- (current assets are unchanged)
167) (a) The current ratio has decreased to half of the 20X1 ratio. The company's liquidity is taking a down turn. Current
due bills may not be able to be paid in a timely manner.
(b) The ROE decreased. The profitability of the company may be of concern.
(c) The quality of earnings ratio went from above one to below one. The 20X2 earnings are of lower quality than th
of 20X1.
(d) Cash coverage has plummeted. One might be concerned about the declining amount of cash from operations to
pay interest payments.
(e) Since the profit margin declined from 20X1 to 20X2, less of each sales dollar is realized in income.
Note: Overall, the company is experiencing unfavourable trends.

168) Strengths:
1. Good control of operating expenses; operating profit margin is increasing.
2. Return on equity has increased because the company is using debt successfully.
Weaknesses:
1. Short-term liquidity is deteriorating.
2. Current and quick ratios are declining and now below industry average.
3. Cash flows from operations are negative.
4. Average collection period is increasing and above industry average.
5. Inventory is a serious concern as the number of days held has grown to a much higher amount than the industry.
6. Number of days to pay suppliers is increasing and now above industry average.
7. Fixed and total asset turnovers are declining indicating fewer sales and/or increased capital expenditures.
8. Debt is increasing and above industry average implying more risk in firm.
9. Gross profit margin is on a downward trend and below industry average; possibly a result of price reductions or
increased cost of goods sold.
10. Return on equity is declining in 20X9 and below industry average.
48
1) Which of the following is the best description of investments in trading securities?

A) Investments in bonds that management intends to hold to maturity.
B) Investments in more than fifty percent of the voting stock of another company.
C) Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future.
D) Investments that provide the investor significant influence over the investee, but not control
over the investee.
Answer: C
2) Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of the
following is true?
A) The investment would be accounted for by consolidation.
B) The investment would be accounted for under the market value method.
C) The investment would be accounted for under the amortized cost method.
D) The investment would be accounted for using the equity method.
Answer: A
3) Under the amortized cost model, holding gains are

A) the recognition depends on management's intention.
B) recognized in net income.
C) are not recognized.
D) recognized in other comprehensive income.
Answer: B
4) Under the fair value through other comprehensive income model, investments are reported as long
term assets
A) only if the intent is to sell before maturity.
B) depending on management intent.
C) depending on the value and risk of the investment.
D) depending on the balance in the accumulated comprehensive income account.
Answer: B
5) The premium or discount on bonds accounted for under the amortized cost method is
A) amortized over the life of the bond.
B) not amortized.
C) recognized in revenue.
D) amortized over the expected holding period.
Answer: A
1
6) Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 20X0. The bonds pay interest
at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following
statements is false?
A) The bond investment must be accounted for using the fair value approach.
B) Since the bonds were issued at par value, the cash interest will be the same as interest revenue.
C) Since they were classified as held-to-maturity, the company would recognize no unrealized
gains or losses on the bonds over their lifetime.
D) The bonds will earn $75,000 of interest by December 31, 20X0.
Answer: A
7) Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%.
Miller intends to hold these bonds to maturity. Which of the following statements is false?
A) Since the bonds were issued at a premium, the cash interest will be greater than interest
revenue.
B) The company would recognize unrealized gains or losses on the bonds under the fair value
approach within the income statement.
C) The bond investment must be accounted for using the held-to-maturity classification.
D) Since the bonds were issued at a premium, the book value of the bond investment will
decrease.
Answer: B
8) Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller
intends to hold these bonds to maturity. Which of the following statements is correct?
A) The bond investment must be accounted for using the trading securities classification.
B) Since the bonds were purchased at a discount, the book value of the bond investment will
increase.
C) Since the bonds were purchased at a premium, the cash interest will be less than interest
revenue.
D) The company would recognize unrealized gains or losses on the bonds.
Answer: B
9) Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato
Corporation as a long-term investment. Which of the following classifications should be used by
Idaho Company in accounting for the investment?
A) Available-for-sale. B) Trading securities.
C) Held-to-maturity. D) Consolidation.
Answer: A
10) Comprehensive income is included as part of

A) unearned revenue. B) retained earnings.
C) net income. D) shareholders' equity.
Answer: D
2
11) Which of the following is the best description of investments in available-for-sale securities?
A) Investments in bonds that management intends to hold to maturity.
B) Investments in more than fifty percent of the voting stock of another company.
C) Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future.
D) Investments in securities that are accounted for under the market value method other than
trading securities and held-to-maturity investments.
Answer: D
12) On its December 31, 20X1, statement of financial position, Lumilite Co. reported its temporary
investment in equity securities, under the fair value through net income method at $330,000. At
December 31, 20X2, the fair value of the securities was $350,000. What should Lumilite report on
its 20X2 statement of earnings because of the increase in fair value of the investments in 20X2?
A) Loss on investments of $10,000 B) Investment income of $20,000
C) Unrealized gain of $20,000 D) $0
Answer: B
13) AtDecember 31, 20X1, Prescott Corp. has the following equity securities (no significant influence) that were
purchased earlier this year, its first year of operation:
Cost Market
Security A $80,000 $83,000
Security B $112,000 $ 124,000
If the investments are accounted for under the fair value through net income method the aggregate book value
of the investment accounts should:
A) Remain unchanged B) be decreased by $15,000
C) be increased by $15,000 D) Be decreased by $32,000
Answer: C
14) On January 1, 20X4, Entertainment Company acquired 15% of the outstanding voting stock of
Rocker Company as a long-term investment and classified the shares as available-for-sale securities.
During 20X4, Rocker Company reported net income of $1,500,000 and dividends declared and paid
of $250,000. How much income will be reported during 20X4 from the Rocker investment?
A) $187,500 B) $250,000 C) $37,500 D) $225,000
Answer: C
3
15) Which of the following statements is correct?
A) Any unrealized holding gain or loss on investments in trading securities is reported on the
income statement.
B) Any unrealized holding gain or loss on investments in trading securities or in available-for-sale
securities is reported on the income statement.
C) Any unrealized holding gain or loss on investments in available-for-sale securities is reported
on the income statement.
D) All unrealized gains and losses are reported on the income statement regardless of the method
used to account for the investment.
Answer: A
16) Lyrical Company purchased equity securities for $500,000 and classified them as trading securities
on September 15, 20X0. On December 31, 20X0, the current market value of the securities was
$481,000. How should the investment be reported within the 20X0 financial statements?
A) The investment in trading securities would be reported in the balance sheet at its $481,000
market value and a realized holding loss on the trading securities would be reported on the
B) A realized holding loss on the trading securities would be reported on the statement of
earnings.
C) The investment in trading securities would be reported in the statement of financial position at
its $500,000 cost.
D) The investment in trading securities would be reported on the statement of financial position at
its $481,000 market value.
Answer: D
17) Libby Company purchased equity securities for $100,000 and classified them as available-for-sale
securities on September 15, 20X4. At December 31, 20X4, the current market value of the securities
was $105,000. How should the investment be reported in the 20X4 financial statements?
A) The $5,000 realized gain is reported within the income statement.
B) The investment in available for sale securities would be reported in the statement of financial
position at its $105,000 market value and an unrealized holding gain on available-for-sale
securities would be reported in the stockholders' equity section of the statement of financial
position.
C) The $5,000 unrealized gain is reported within the statement of earnings.
D) The investment in available-for-sale securities would be reported on the statement of financial
position at its $100,000 cost.
Answer: B
4
18) On January 1, 20X4, Short Company purchased as an available-for-sale investment, 20,000 shares
(15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at a cost
of $50 per share. During November 20X4, Daniel declared and paid a cash dividend of $2 per share.
At December 31, 20X4, end of the accounting period, Daniel's shares were selling at $48. The 20X4
financial statements for Short Company should report the following amounts:
Long-Term Unrealized Holding Investment Revenue

Investment Gains/Losses
A 1,000,000 40,000 40,000
B 960,000 Zero Zero
C 1,000,000 80,000 Zero
D 960,000 40,000 40,000
A) Option A B) Option B C) Option C D) Option D

Answer: D
19) OnJuly 1, 20X0, as a long-term investment in available-for-sale securities, Wildlife Supply Company
purchased 6,000 shares of the preferred stock (non-voting) of Nature Company for $30 per share (18,000
shares outstanding). The records of Nature Company reflect the following:
20X0 net income $60,000

Dividends declared and paid during December, 20X0 $6,500
December 31, 20X0 market price per share $27.00
The amount reported on the statement of financial position by Wildlife Company for its investment at
December 31, 20X0 would be which of the following?
A) $200,000 B) $160,000 C) $182,000 D) $162,000
Answer: D
20) On July 1, 20X4, Surf Company purchased long-term investments in available-for-sale securities as follows:
Blue Corporation common stock (par $5) 2,000 shares at $16 per share.
Black Company preferred stock (par $20) 1,500 shares at $30 per share.
The quoted market prices per share on December 31, 20X4 were as follows:
Blue Corporation stock, $15 per share

Black Company stock, $30 per share
Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying
value of the long-term investments reported in the statement of financial position at December 31, 20X4
would be which of the following?
A) $77,000 B) $75,000 C) $73,500 D) $71,500
Answer: B
5
21) When accounting for investments in trading securities, any decline in market value below cost of the
investments is reported in which of the following ways?
A) On the statement of earnings as an unrealized holding loss.
B) On the statement of financial position as an unrealized holding loss in the stockholders' equity
section.
C) On the statement of earnings as a realized loss.
D) On the statement of financial position as a realized loss.
Answer: B
22) The primary difference in accounting for available-for-sale investments in stock and accounting for
trading investments in stock is which of the following?
A) Measuring the market value of the long-term and short-term investment portfolios on the
balance sheet.
B) Where the unrealized holding loss or gain on investments is reported within the financial
statements.
C) Determination of the acquisition cost.
D) Determination of the unrealized holding gain or loss.
Answer: B
23) On July 1, 20X4, Carter Company purchased trading securities as follows:
Dark Corporation common stock (par $1) 10,000 shares at $25 per share.
Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share.
The quoted market prices per share on December 31, 20X4 were as follows:
Dark Corporation stock, $27 per share
Janvrin Corporation stock, $104 per share
Each of the investments represented 5% of the total shares outstanding. The carrying value amount of the
investments at December 31, 20X4 should be
A) $480,000 B) $460,000 C) $458,000 D) $478,000
Answer: D
24) Which of the following is true about passive investments?

A) The investing company usually owns less than 20% of the voting stock in the investee and they
are reported on the balance sheet at cost.
B) The investing company must usually own less than 20% of the voting stock in the investee and
these investments must be reported at market value on the balance sheet even though the
historical cost principal is violated.
C) These investments must not have any voting rights.
D) The market value method requires realized gains and losses to be recognized on the income.
Answer: B
6
25) PhillipsCorporation purchased 1,000,000 shares of Martin Corporation's common stock which
constitutes 10% of Martin's voting stock on June 30, 20X0 for $42 per share. Phillips' intent is to
keep these shares beyond the current year. On December 20, 20X0, Martin paid a $4,000,000 cash
dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X0 net
income was $52 million. What method of accounting will Phillips use to account for this
investment?
A) Equity method. B) Amortized cost method.
C) Consolidation. D) Fair value method.
Answer: D
26) Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which
keep these shares beyond the current year. On December 20, 20X4, Martin paid a $4,000,000 cash
dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X4 net
income was $52 million. What effect will the dividend have on Phillips' 20X0 financial statements?
A) It would increase cash and decrease investment in associated companies.
B) It would increase cash and increase investment income.
C) It would increase cash and increase the allowance to value at market account.
D) It would increase cash and increase net unrealized gains/losses.
Answer: B
27) PhillipsCorporation purchased 1,000,000 shares of Martin Corporation's common stock which
keep these shares beyond the current year. On December 20, 20X4, Martin paid a previously
declared $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share
and their reported 20X4 net income was $52 million. What investment value will be reflected on
Phillips' statement of financial position at December 31, 20X4?
A) $45,000,000 B) $42,000,000 C) $47,200,000 D) $46,800,000
Answer: A
28) McGinn Company purchased 10% of RJ Company's common stock during 20X3 for $100,000. The
10% investment in RJ had a $90,000 fair value at the end of 20X3 and a $105,000 fair value at the
end of 20X4. Which of the following statements is incorrect if McGinn classifies the investment as
available-for-sale security?
A) The 20X3 unrealized loss is $10,000, but is not included in McGinn's 20X3 net earnings.
B) The 20X4 unrealized gain is $10,000 and is included in McGinn's 20X4 net earnings.
C) The 20X4 unrealized gain is $15,000, but is not included in McGinn's 20X4 net earnings.
D) The 20X3 unrealized loss is $10,000 and is reported on McGinn's statement of financial
position as a component of stockholders' equity.
Answer: B
7
end of 20X3. Which of the following statements is correct if McGinn classified the investment as a
trading security and sold it at the beginning of 20X4 for $102,000?
A) The 20X4 realized gain reported on the statement of earnings is $2,000.
B) The 20X4 unrealized gain reported on the statement of earnings is $2,000.
C) The 20X4 unrealized loss reported on the statement of earnings is $3,000.
D) The 20X4 realized loss reported on the statement of earnings is $3,000.
Answer: D
end of 20X3. Which of the following statements is correct if McGinn classified the investment as an
available-for-sale security and sold it at the beginning of 20X4 for $102,000?
A) The 20X2 unrealized loss reported on the statement of earnings is $3,000.
B) The 20X4 realized gain reported on the statement of earnings is $2,000.
C) The 20X2 unrealized gain reported on the statement of earnings is $2,000.
D) The 20X4 realized loss reported on the statement of earnings is $3,000.
Answer: B
31) Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The
15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at
the end of 20X3. Which of the following statements is incorrect if Rye classifies the investment as
an available-for-sale security?
A) The 20X3 unrealized loss is $20,000, but is not included in Rye's 20X3 net earnings.
B) The 20X2 unrealized gain is $10,000 and is reported on Rye's statement of financial position as
a component of stockholders' equity.
C) The 20X2 unrealized gain is $10,000, but is not included in Rye's 20X2 net earnings.
D) The 20X3 unrealized loss is $10,000 and is included in Rye's 20X3 net earnings.
Answer: D
the end of 20X3. Which of the following statements is correct if Rye classifies the investment as a
trading security?
A) The 20X2 unrealized gain is $10,000 and is reported on Rye's statement of financial position as
a component of stockholders' equity and is not reported within the statement of earnings.
B) The 20X2 unrealized gain is $10,000 and is included in Rye's 20X2 net earnings.
C) The 20X3 unrealized loss is $20,000, but is not included in Rye's 20X3 net earnings.
D) The 20X3 unrealized loss is $10,000 and is included in Rye's 20X1 net earnings.
Answer: B
8
the end of 20X3. Which of the following statements is correct if Rye classifies the investment as a
trading security and sold it at the beginning of 20X4 for $148,000?
A) The 20X2 realized loss reported on the statement of earnings is $2,000.
B) The 20X2 unrealized loss reported on the statement of earnings is $2,000.
C) The 20X4 realized gain reported on the statement of earnings is $8,000.
D) The 20X2 unrealized gain reported on the statement of earnings is $8,000.
Answer: C
34) Atthe beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for
$150,000. Manowar does not have significant influence over Cortez. Manowar reports the
investment using the FVTPL method. In 20X1, Cortez earned net income of $70,000 and paid
dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of
$100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?
A) $152,000 B) $150,150 C) $172,500 D) $150,000
Answer: D
the end of 20X3. Which of the following statements is correct if Rye classifies the investment as an
available-for-sale security and sold it at the beginning of 20X4 for $148,000?
A) The 20X2 unrealized gain reported on the statement of earnings is $8,000.
B) The 20X4 realized loss reported on the statement of earnings is $2,000.
C) The 20X2 unrealized loss reported on the statement of earnings is $2,000.
D) The 20X2 realized gain reported on the statement of earnings is $8,000.
Answer: B
36) When is the equity method used to account for long-term investments in stocks?
A) When the investment is between 20 - 50% of the voting stock and significant influence can be
achieved.
B) When the investment is greater than 50% of the voting stock and significant influence can be
achieved.
C) When the investment is greater than 50% of the voting stock, whether or not significant
influence can be achieved.
D) When the investment is between 20 - 50% of the voting stock, whether or not significant
influence can be achieved.
Answer: A
9
37) Which of the following statements regarding the accounting for an investment using the equity
method is incorrect?
A) The investment account is increased by the proportionate share of investee net income.
B) The investment account is decreased by the proportionate share of investee dividends.
C) It is used for investments between 20 - 50% of the outstanding voting stock when the investor
has the ability to exert significant influence.
D) Investment income equals the proportionate share of investee dividends.
Answer: C
38) Atthe beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for
$150,000. Through this investment and by having two seats on their Board of Directors, Manowar
has significant influence over Cortez. In 20X1, Cortez earned net income of $70,000 and paid
dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of
$100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?
A) $152,000 B) $150,000 C) $172,500 D) $150,150
Answer: A
39) Heartfelt
Company owns a 40% interest in the voting common stock of Candle Corporation,
accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of
$100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle
investment was $500,000 on January 1, 20X4. How much income should Heartfelt report during
20X4 from the Candle investment?
A) $10,000. B) $4,000. C) $200,000. D) $40,000.
Answer: D
40) Heartfelt
Company owns a 40% interest in the voting common stock of Candle Corporation,
accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of
$100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle
investment was $500,000 on January 1, 20X4. At what amount is the Candle investment reported on
the December 31, 20X4 statement of financial position?
A) $540,000. B) $500,000. C) $496,000. D) $536,000.
Answer: D
41) On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a
cost of $137,000. The equity method of accounting for this investment is used. During 20X4,
Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end
of 20X4, the shares had a market value of $150,000. At what amount should the Arnold investment
be reported at on the December 31, 20X4 statement of financial position?
A) $145,000 B) $158,000 C) $150,000 D) $148,000
Answer: A
10
42) On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a
cost of $137,000. The equity method of accounting for this investment is used. During 20X4,
Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end
of 20X4, the shares had a market value of $150,000. How much income will Palmer report from the
Arnold investment during 20X4?
A) $12,000 B) $10,000 C) $4,000 D) $30,000
Answer: A
43) OnJanuary 1, 20X4, Calas Company acquired 40% of the outstanding voting stock of Nick
Company as a long-term investment. During 20X4, Nick reported net earnings of $10,000 and
declared and paid dividends of $4,000. During 20X4, Calas Company should report "Income from
investee earnings" of
A) $10,000. B) $4,000. C) $3,000. D) $2,400.
Answer: B
44) On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost
of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell
Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of
20X4, the shares had a market value of $160,000. How much investment income will Turtle report
from the Shell investment during 20X4?
A) $12,000 B) $40,000 C) $1,500 D) $5,000
Answer: A
45) On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost
of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell
Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of
20X4, the shares had a market value of $160,000. What investment balance will be reported on
Turtle's December 31, 20X4 statement of financial position?
A) $160,500 B) $150,000 C) $160,000 D) $162,000
Answer: A
46) When is
the equity method not used to account for long-term investments in stocks?
A) When the investment is greater than 50% of the voting stock and control is achieved.
B) When the investment is 15% and significant influence can be achieved.
C) When the investment is 30% of the voting stock and significant influence can be achieved.
D) When the investment is 40% of the voting stock and significant influence can be achieved.
Answer: A

A) Sale of stock investments is a cash inflow from investing activities.
B) Dividends received from stock investments accounted for using the equity method don't create
net income but do create cash flows.
C) Income from investments accounted for using the equity method doesn't create cash flows.
D) Dividends received from stock investments increase cash flows from investing activities.
Answer: D
11
48) Which of the following statements is correct?
A) When the equity method is used to account for an investment in an investee, the reported share
of investee dividends must be deducted from net income on the statement of cash flows.
B) Any realized or unrealized gains or losses that were reported on the statement of earnings under
the market value method must be removed from net income in the operating activities section
of the statement of cash flows.
C) When the equity method is used to account for an investment in an investee, the reported share
of investee income must be added to net income on the statement of cash flows.
D) When the equity method is used to account for an investment in an investee, the cash dividends
received are cash inflow from investing activities.
Answer: B
49) PhotoFinish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par
value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4.
On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and
reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock
was trading at $11.50 per share.
What effect will the dividend have on Photo Finish's financial statements?
A) It would increase cash and increase net unrealized gains/losses.
B) It would increase cash and increase investment income.
C) It would increase cash and increase the allowance to value at market account.
D) It would increase cash and decrease investment in Click It.
Answer: D
50) PhotoFinish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par
value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4.
On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and
reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its
stock was trading at $11.50 per share. At what amount will the Click It investment be reported on
Photo Finish's December 31, 20X4 statement of financial position?
A) $23,000,000 B) $20,000,000 C) $23,600,000 D) $24,000,000
Answer: C
12
51) GilmanCompany purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January
1, 20X0, at $40 per share as a long-term investment. The records of Burke Corporation showed the following
on December 31, 20X0:
Net income $575,000

Dividends declared and paid during December 20X0 $30,000
Market price per share $42.00
At what amount should Gilman Company report the Burke investment on the December 31, 20X0
A) $3,800,000 B) $4,000,000 C) $4,218,000 D) $4,124,000
Answer: C
52) GilmanCompany purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January
1, 20X0, at $40 per share as a long-term investment. The records of Burke Corporation showed the following
on December 31, 20X0:
Net income $575,000

Market price per share $42.00
How much should Gilman Company report as investment income from the Burke investment during
20X0?
A) $30,000 B) $218,000 C) $12,000 D) $230,000
Answer: D
53) JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000
as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0:

At what amount should JDR report the YRK investment on the December 31, 20X0 statement of financial
position?
A) $2,116,000 B) $2,108,000 C) $4,124,000 D) $2,000,000
Answer: B
54) AllenCorporation accounts for its investment in the common shares of Burns Company under the
equity method. Allen Corporation should ordinarily record a cash dividend received from Young as
A) a reduction of the carrying value of the investment.
B) an addition to the carrying value of the investment.
C) contributed surplus.
D) dividend income.
Answer: A
13
55) JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000
as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0:

Dividends declared and paid during December, 20X0 $20,000
How much investment income should JDR report from the YRK investment during 20X0?
A) $12,000 B) $290,000 C) $116,000 D) $30,000
Answer: C
56) Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
A) investee pays a dividend.
B) investor sells the investment.
C) earnings are reported by the investee in its financial statements.
D) investee declares a dividend.
Answer: C
57) Chapman Inc., owns 35% of Dawson Corporation. During the calendar year 20X1, Dawson had net
earnings of $300,000 and paid dividends of $30,000. Chapman mistakenly recorded these
transactions using the cost method rather than the equity method of accounting. What effect would
this have on the investment account, net income, and retained earnings?
Investment Account Net Income Retained Earnings

A Understate Overstate Overstate
B Overstate Understate Understate
C Overstate Overstate Overstate
D Understate Understate Understate

Answer: D
58) CannalliLandscape Architecture has invested in several domestic manufacturing corporations.

Which of the following investments would most likely be accounted for under the equity method on
Cannalli's financial statements?
A) 5,000 shares of the 60,000 outstanding common shares of Denman's Greenhouses Corp
B) 20,000 shares of the 25,000 outstanding common shares of Just Pure Water Co
C) 15,000 shares of the 50,000 outstanding common shares of Zeta Fertilizers Co
D) 3,000 shares of the 10,000 outstanding preferred shares of Fallow Co
Answer: C
14
Reference: 13-01
Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1,
Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to
exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and
declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in
Morton for $158,000 cash.
59) What amount should Tansent include in its 20X1 statement of earnings as a result of the
investment?
A) $100,000 B) $30,000 C) $18,000 D) $60,000
Answer: B
60) Thecarrying amount of this investment in Tansent's December 31, 20X1 statement of financial
position should be
A) $270,000 B) $252,000 C) $275,000 D) $240,000
Answer: B
61) What should be the gain on sale of this investment in Tansent's 20X2 statement of earnings?
A) $29,000 B) $35,000 C) $38,000 D) $23,000
Answer: A
62) Significantinfluence over the operating and financial policies of another company may be indicated
by the following except:
A) evidence of material transactions between the two companies.
B) have significant influence only on income earned by the other company.
C) participation on its board of directors.
D) participation in its policy-making process.
Answer: B
Reference: 13-02
Red Bully Beverages Inc. (RBB) is a producer of carbonated drinks. In 20X1 it purchased 4 million of the 5.5 million
outstanding common shares of Torritos Tacos Emporium, a producer of tacos, chips and various other snack items.
63) From RBB's perspective, this is an example of

A) horizontal growth. B)vertical integration.
C) Diversification. D) a passive investment.
Answer: A
64) What method should RBB use to account for their investment in Torritos Tacos Emporium?
A) Equity method B) Cost method
C) Consolidation method D) Fair value method
Answer: C
15
65) Useof the consolidated financial statement method of accounting for a long-term investment in
common stock of another company is required when the ownership of its voting stock is
A) between 20% and 50%. B) 20% or more.
C) more than 50%. D) less than 20%.
Answer: C
66) Funwith Florals Corporation acquired all the voting shares of Crafts to Go Corporation under the
purchase method. Which of the following statements about the consolidated statements is true?
A) Fun with Florals will use the equity method of accounting for this investment.
B) Fun with Florals will report Crafts to Go Corporation's revenues and expenses on a
consolidated statement of earnings.
C) Fun with Florals will use the market value method of accounting for this investment.
D) The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at
their market values on the date of acquisition.
Answer: B
67) The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company:
Mini Company
January 1, 20X0
Cash $90,000
Accounts receivable (net) 50,000
Inventory 150,000
Plant and equipment (net) 100,000

Common stock 155,000
Total Liabilities and Stockholders' Equity $390,000
On January 1, 20X0, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini
Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of
acquisition. If the market value and book value are the same for Mini's remaining assets, what was the
amount of goodwill purchased by Maxi Company?
A) $50,000 B) $60,000 C) $40,000 D) $20,000
Answer: C
16
68) On January 1, 20X4, Shelley Company paid $650,000 cash for 100% of the outstanding common
stock of SCD Company; SCD's stockholders equity on the date of acquisition was $500,000. The
current market value of SCD's plant and equipment was $100,000 in excess of the equipment's book
value. If the market value and book value are the same for SCD's remaining assets, what was the
amount of goodwill purchased by Shelley Company?
A) $40,000 B) $250,000 C) $50,000 D) $150,000
Answer: C
69) On January 1, 20X4, Sheldon Company paid $750,000 cash for 100% of the outstanding common
stock of Mullen Company; Mullen's stockholders equity on the date of acquisition was $550,000.
The current market value of Mullen's net assets was $70,000 in excess of their book value. What
was the amount of goodwill purchased by Sheldon Company?
A) $130,000 B) $480,000 C) $200,000 D) $270,000
Answer: A
70) The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company:
Mini Company
January 1, 20X0
Cash $90,000
Accounts receivable (net) 50,000
Inventory 150,000
Plant and equipment (net) 100,000

Common stock 155,000
Total Liabilities and
Stockholders' Equity $390,000
On January 1, 20X0, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini
Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of
acquisition. If the market value and book value are the same for Mini's remaining assets, what is the net
increase in Maxi's assets as a result of the merger with Mini?
A) $120,000 B) $470,000 C) $390,000 D) $430,000
Answer: A
17
71) Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should
the assets and liabilities of the acquired company be reported on the consolidated financial
statements immediately after the acquisition?
A) Market values on the date of the acquisition.
B) The previously reported book values.
C) Market values on the date of the acquisition less accumulated depreciation.
D) Nominal estimated values determined by the parent company.
Answer: A
72) During 20X4, Manning Corporation purchased 100% of the outstanding voting shares of Brady
Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair market value
of $6.5 million. The book value as well as fair market value of Brady's liabilities equaled $3.2
million. How much was paid for goodwill?
A) $2,200,000 B) $0 C) $700,000 D) $1,000,000
Answer: C
73) How is goodwill accounted for subsequent to acquisition?

A) It should be written off as soon as possible as an expense.
B) It should not be amortized because it has an indefinite life.
C) It should be written off as soon as possible against retained earnings.
D) It is amortized over its estimated useful life.
Answer: B
74) Which of the following is the primary justification for reporting the acquisition of a controlling
interest on a consolidated basis?
A) The companies are legally and in economic substance one entity.
B) The companies are legally and in economic substance separate.
C) The companies are legally one entity but they are separate in economic substance.
D) The companies are legally separate but they are one entity in economic substance.
Answer: D
75) On January 1, 20X4, Red Company purchased Patriot Shop for $400,000 cash. Red Company received the
assets listed below and assumed trade payables (owed by Patriot) amounting to $30,000.
Book Value per Patriot's Books Appraised Market Value

Inventory $300,000 $280,000
Furniture and 60,000 73,000
fixtures
Other assets 10,000 32,000
What amount of Goodwill will be recorded in the transaction?

A) $45,000 B) $35,000 C) $50,000 D) $20,500
Answer: A
18
76) Which of the following accounts is only created as the result of acquiring a controlling interest in
another company?
A) Goodwill B) Patents
C) Acquisition revenue D) Acquisition expense
Answer: A
77) Investments in bonds intended to be sold before they reach maturity should be reported under the
market value method.
Answer: True False
78) Management must have the intent and ability to hold a bond investment until maturity if it is to be
classified as a held-to-maturity security.
Answer: True False
79) If a bond is bought at a discount, then interest revenue will be less than the cash payment.
Answer: True False
80) Ifa bond is bought at a premium, the amortized book value of the bond investment will decrease as
the bond matures.
Answer: True False
81) Held-to-maturity bond investments should be reported on the statement of financial position at fair
value.
Answer: True False
82) Investments classified other than as held-to-maturity bond investments should be reported on the
statement of financial position at fair value.
Answer: True False
83) A realized gain or loss is reported on the income statement when a fair value adjustment is made.
Answer: True False
84) An unrealized holding gain is reported on the income statement when the fair value of an
available-for-sale security exceeds its cost.
Answer: True False
85) An unrealized holding gain is reported within other comprehensive income when the fair value of a
trading security exceeds its cost.
Answer: True False
86) An unrealized holding loss is reported on the income statement when the fair value of a trading
security is less than its cost.
Answer: True False
19
87) A realized gain or loss is reported on the income statement when a trading security is sold.
Answer: True False
88) A decline in the fair value of the available-for-sale portfolio reduces assets and net income.
Answer: True False
89) An increase in the fair value of the trading securities portfolio increases both assets and net income.
Answer: True False
90) Thesale of a stock from the available-for-sale portfolio creates a gain or loss on the statement of
earnings based on the difference between the stock's original cost and its selling price.
Answer: True False
91) The only income reported on the income statement for a stock from the available-for-sale portfolio
prior to its sale is dividend revenue.
Answer: True False
92) The equity method is required to be used when an investor has the ability to exert significant
influence over the investee.
Answer: True False
93) Useof the equity method is required for investments between 20 and 50% of a company's common
stock regardless of the investor's ability to influence the investee.
Answer: True False
94) The equity method requires the recognition of investment revenue for dividends received.
Answer: True False
95) Ocean Corporation owns 30% of Woods Corp. for which they paid $5.5 million and uses the equity
method to account for the investment. Woods Corp. paid a $100,000 dividend; the investment in
Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the
dividend.
Answer: True False
96) Aninvestment accounted for under the equity method would record a reduction in the investment
account for the proportionate share of the investee's reported net loss.
Answer: True False
97) Aninvestment accounted for under the equity method would record an increase in the investment
account and create net earnings in an amount equal to the proportionate share of the investee's
reported net earnings.
Answer: True False
98) An investment accounted for under the equity method is always reported on the statement of
financial position fair value.
Answer: True False
20
99) When an investment accounted for under the equity method is sold, the gain or loss reported on the
statement of earnings is the difference between the selling price and its original cost.
Answer: True False
100) Any unrealized gains or losses on trading securities would have to be added back to or deducted
from net earnings on the statement of cash flows under the indirect method of determining cash
flows from operating activities.
Answer: True False
101) The extent of influence and control over another company is a critical factor in determining the
proper method of accounting for a long-term investment in the common stock of another company.
Answer: True False
102) Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total
assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4
million. Madison will report goodwill of $0.9 million.
Answer: True False
103) When the acquiring company purchases 100% of the investee's stock, the investee's assets and
liabilities will be consolidated with those of the acquiring company at their book values.
Answer: True False
104) Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those
of the parent company on the consolidated statement of earnings.
Answer: True False
105) Goodwill is reported on a consolidated statement of financial position only if it was acquired in the
merger or acquisition.
Answer: True False
106) The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the
consolidation process.
Answer: True False
21
107) On January 1, 20X1, Castleton Co. purchased $100,000 of eight percent bonds for $108,530. The bonds were
purchased to yield six percent. Interest is paid on July 1 and January 1 and the bonds mature on January 1,
20X6. Castleton Co. uses the effective interest method to amortize the premium and applies the amortized
cost method.
Required:
1. Prepare the journal entry on January 1, 20X1.
2. Prepare the journal entries for the receipt of interest and amortization of the premium for the remainder of
20X1.
3. What is the carrying value of the investment at the end of 20X1?
Answer: 1.
Investment in Bonds 108,530
Cash 108,530
2.
July 1, 20X1
Cash 4,000
Investment in Bonds 744
$108,530 × .06 × .5 = $3,256
December 31, 20X1

Interest Receivable 4,000
($108,530 — $744) × .06 × .5 = $3,234
3.
Investment account = $108,530 — $744 - $766 = $107,020
22
108) On 1 August 20X4, Baker Sindall LLC, a public company, purchased $50,000 face amount of Shandlie
Company 6% coupon bonds for $43,200. The market interest rate was 8% on this date. The bond pays interest
semi-annually on 31 July and 31 January. At the fiscal year-end for Baker Sindall, the Shandlie bonds have a
market value of $45,000.
Required:
Prepare the journal entries to record the investment, the investment income and any other needed adjustments
at 31 December. The investment is classified as held to maturity and accounted for using amortized cost.
Answer: Aug 2
Investment in bonds 43,200
Cash 43,200
Dec 31
Interest receivable ($50,000 × 6% × 5/12) 1,250
Investment in bonds ($1,440 - $1,250) 190
Investment income ($43,200 × 8% × 5/12) 1,440
Note: An increase in market value is not relevant for a held-to-maturity investment.
109) Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach
for long-term investments.
Measurement and ReportingOutstanding Common Level of Ownership:

Method Stock Owned (%) Degrees of Influence or
Control
A Market value
B Equity
C Consolidated statements

Control
A Market value Less than 20% No significant influence
or control
B Equity 20% or over but no more Significant influence but
than 50% no control
C Consolidated statements Over 50% Control
23
110) On January 1, 20X0, Heitzman Company purchased the following shares as a long-term investment in
available-for-sale securities:
Corporation Shares Percent Outstanding Cost per Share

Maars 10,000 common (no par) 5% $25
Nassif 2,000 preferred (par $10) 2% $50
The market value of the stocks subsequently were as follows:
Dec. 31, 20X0 Dec. 31, 20X1

Maars Corporation common stock $24.00 $27.50
Nassif Corporation preferred stock 51.00 50.50
Calculate the "Net unrealized gains/loss," on both December 31, 20X0 and December 31, 20X1.
Answer: On December 31, 20X0: $350,000 - $342,000 = $8,000 debit because market is below cost.
Stock Shares Cost Market at 12/31/20X0

Maars 10,000 $250,000 $240,000
Nassif 2,000 100,000 102,000
$350,000 $342,000
On December 31, 20X1: $26,000 credit balance because market exceeds cost.

Maars 10,000 $250,000 $275,000
Nassif 2,000 100,000 101,000
$350,000 $376,000
111) On January 1, 20X4, as a long-term investment in available-for-sale securities, John Company

purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per
share. Wayne reported 20X4 net earnings of $30,000 and declared and paid cash dividends of
$20,000. The market price of the Wayne stock at the end of 20X4 was $10 per share. Calculate the
carrying value of John's investment at the end of 20X4.
Answer: 1,000/10,000 = 10%; must use the market value method.
($9 × 1,000) + ($1 × 1,000) = $10,000
112) Describe the difference in the calculation of the realized gain or loss on the sale of an investment
when the trading security classification is used relative to use of the available-for-sale classification.
Answer: When the investment is a trading security, the realized gain or loss is determined by
comparing the selling price to the prior year-end market value. When the investment is an
available-for-sale security, the realized gain or loss is determined by comparing the selling
price to the original cost.
24
113) On January 31, 20X0, McBurger Corporation purchased the following shares of voting common stock as
long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of
the respective company's outstanding voting shares. The accounting period ends December 31.
Stock Cost Market at Dec. 31, 20X0 Market at Dec. 31, 20X1
Orange Corporation $15,000 $12,000 $14,000
Bailey Inc. $13,000 $12,000 $13,000
All the Bailey stock was sold for $13,500 on January 12, 20X2. Prepare the required journal entries at the
following dates: January 31, 20X0, December 31, 20X0, December 31, 20X1 and January 12, 20X2.
Answer: January 31, 20X0:
Long-term investment in equity securities28,000
Cash 28,000
December 31, 20X0:

Net unrealized gains and losses -OCI 4,000
Investments 4,000
Stock Cost Market

Orange $15,000 $12,000
Bailey 13,000 12,000
$28,000 $24,000
$28,000 — 24,000 = $4,000
December 31, 20X1:

Investments 3,000
Stock Previous Market Current Market

Orange $12,000 $14,000
Bailey 12,000 13,000
$24,000 $27,000
$27,000 — 24,000 = $3,000
Step 1 Bring the OCI account up-to-date:

January 12, 20X2:
Investments 500
Net unrealized gains and losses -OCI 500

Orange $14,000 $14,000
Bailey 13,000 13,500
25
$27,000 $27,500
Step 2 Record the disposal:

January 12, 20X2:
Cash 13,500
Realized gain on sale of investment 500
Long-term investment in equity securities 13,500
114) Hampton Developments had the following transactions pertaining to its short-term equity investments.
Hampton does not use an allowance account to record unrealized gains and losses, but
Jan. 1 Purchased 1,000 shares of Chapman Foods Ltd. for $50,000 cash, plus brokerage
fees of $550. The shares were classified as trading securities.
June 1 Received cash dividends of $3 per share on the Chapman shares.
Sept. 15 Sold 500 Chapman shares for $24,900, less brokerage fees of $100.
Dec. 31 The fair value of the Chapman shares was $25,400.
Required:
1. Prepare all the journal entries required for these transactions.
2. How will these transactions be reported on the statement of earnings ending on December 31?
Answer: 1.
Jan 1
Investments 50,550
Cash 50,550
June 1
Cash (1,000 × $3.00) 3,000
Dividend revenue 3,000
Sept 15
Cash ($24,900 - $100) 24,800
Loss on sale of investments 475
Investments 25,275
($50,550 ÷ 1,000) × 500 shares
Dec 31
Investments 125
Unrealized gain on trading securities 125
($50,550 — $25,275) - $25,400
2. Dividend revenue and the unrealized gain on trading securities are reported under other revenues on
the statement of earnings. Loss on sale of investments is reported under other expenses on the
26
115) Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value
common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On
December 12, 20X4, Nutribar declared and paid a $1 million cash dividend and reported net
earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Nutribar's stock was trading
at $11.50 per share.
Requirements:
A. Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31, 20X0.
B. Record the cash dividend received by Kudos on December 12, 20X4.
C. Record any end of year entries needed on Kudos' books.
A Investment in Affiliated Companies 20,000,000

Cash 20,000,000
B Cash 400,000
Investments in Affiliated Companies 400,000
C Investments in Affiliated Companies 4,000,000
Equity in Investee Earnings 4,000,000
27
116) During 20X4, the following items were reported on Shoe Co's statement of cash flows in millions of dollars.
For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on
cash flows statement (added or deducted).
(in millions $)
Acquisitions and investments in unconsolidated affiliates $64
Sales of property, plant, and equipment 38
Investee equity income, and gains on sale of equipment 207
Short-term investments, purchases 44
Short-term investments, sales 38
Type of Activity Effect on Cash +/-

Acquisitions and investments in Investing -
unconsolidated affiliates
Sales of property, plant, and Investing +
equipment
Investee equity income, and gains Operating
on -
sale of equipment
Short-term investments, purchasesInvesting -
Short-term investments, sales Investing +
117) During 20X4, the following items were reported on The Mickey Company's statement of cash flows in
millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the
effect it would have on cash flows (added or deducted).
(in millions $)
Equity in the income of investees $372
Proceeds from the sale of investments 14
Purchases of investments 67

Equity in the income of investees Operating -
Proceeds from the sale of Investing +
investments
Purchases of investments Investing -
28
118) Discuss how the equity method prevents managers of the investor corporation from manipulating
income related to dividends from the investee.
Answer: When one corporation exerts significant influence over another (such influence results from
ownership of 20 to 50 percent of the common shares), it is unreasonable to assume that
transactions between those corporations are made at "arm's length" as assumed in financial
accounting. Without the equity method, managers of the investor company could manipulate
income by influencing the investee's dividend policy. Large dividend payments could be used
to bolster income in bad years. The equity method prevents this type of manipulation by
requiring dividends received to be offset against the investment account rather than
recognized as income.
119) On January 1, 20X0, Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation
for $600,000. The book and market values of Foliage's assets and liabilities as of January 1, 20X0 are listed
below:
Item Book Value Market Value

Equipment $60,000 $80,000
Trucks $40,000 $55,000
Factory $300,000 $320,000
Remaining assets $130,000 $130,000
Liabilities $100,000 $100,000
Calculate the amount of goodwill that should be recognized.

Equipment $80,000
Trucks 55,000
Factory 320,000
Remaining assets 130,000
Liabilities (100,000)
Fair value of net assets $485,000
Purchase price $600,000

Fair value of net assets (485,000)
Goodwill $115,000
29
120) On January 2, 20X0, Parent Company purchased 100% of Sub Company's stock for $900,000 cash. At this date
the book value of Sub Company's net assets (i.e., assets less liabilities) was $800,000 which included property,
plant and equipment that have a book value of $400,000 and a market value of $440,000.
Required:
A. Prepare the journal entry that would appear on the books of each company at the acquisition date.
B. How much goodwill should Parent Company recognize on the consolidated financial statements at the date
of acquisition?
Answer: A. Parent Company:
Investment in stock of Sub Company 900,000

Cash 900,000
Sub Company:
No entry is made by the subsidiary because only the subsidiary stockholders are affected.
B. Parent company should recognize goodwill of:

$900,000 — ($800,000 + $40,000) = $60,000
30
Answer Key
1) C
2) A
3) B
4) B
5) A
6) A
7) B
8) B
9) A
10) D
11) D
12) B
13) C
14) C
15) A
16) D
17) B
18) D
19) D
20) B
21) B
22) B
23) D
24) B
25) D
26) B
27) A
28) B
29) D
30) B
31) D
32) B
33) C
34) D
35) B
36) A
37) C
38) A
39) D
40) D
41) A
42) A
43) B
44) A
45) A
46) A
47) D
48) B
49) D
50) C
31
Answer Key
51) C
52) D
53) B
54) A
55) C
56) C
57) D
58) C
59) B
60) B
61) A
62) B
63) A
64) C
65) C
66) B
67) C
68) C
69) A
70) A
71) A
72) C
73) B
74) D
75) A
76) A
77) TRUE
78) TRUE
79) FALSE
80) FALSE
81) FALSE
82) TRUE
83) FALSE
84) FALSE
85) FALSE
86) TRUE
87) TRUE
88) FALSE
89) TRUE
90) TRUE
91) TRUE
92) TRUE
93) FALSE
94) FALSE
95) TRUE
96) TRUE
97) TRUE
98) FALSE
99) FALSE
100) TRUE
32
Answer Key
101) TRUE
102) TRUE
103) FALSE
104) TRUE
105) TRUE
106) TRUE
107) 1.
Investment in Bonds 108,530
Cash 108,530
2.
July 1, 20X1
Cash 4,000
$108,530 × .06 × .5 = $3,256
December 31, 20X1

Interest Receivable 4,000
($108,530 — $744) × .06 × .5 = $3,234
3.
Investment account = $108,530 — $744 - $766 = $107,020
108) Aug 2
Investment in bonds 43,200
Cash 43,200
Dec 31
Interest receivable ($50,000 × 6% × 5/12) 1,250
Investment in bonds ($1,440 - $1,250) 190
Investment income ($43,200 × 8% × 5/12) 1,440
Note: An increase in market value is not relevant for a held-to-maturity investment.
33
Answer Key

Control
A Market value Less than 20% No significant influence
or control
B Equity 20% or over but no more Significant influence but
than 50% no control
C Consolidated statements Over 50% Control
110) On December 31, 20X0: $350,000 - $342,000 = $8,000 debit because market is below cost.

Maars 10,000 $250,000 $240,000
Nassif 2,000 100,000 102,000
$350,000 $342,000
On December 31, 20X1: $26,000 credit balance because market exceeds cost.

Maars 10,000 $250,000 $275,000
Nassif 2,000 100,000 101,000
$350,000 $376,000
111) 1,000/10,000 = 10%; must use the market value method.

($9 × 1,000) + ($1 × 1,000) = $10,000
112) When the investment is a trading security, the realized gain or loss is determined by comparing the selling
price to the prior year-end market value. When the investment is an available-for-sale security, the realized
gain or loss is determined by comparing the selling price to the original cost.
113) January 31, 20X0:
Long-term investment in equity securities28,000
Cash 28,000
December 31, 20X0:

Investments 4,000
Stock Cost Market

Orange $15,000 $12,000
Bailey 13,000 12,000
$28,000 $24,000
34
Answer Key
$28,000 — 24,000 = $4,000
December 31, 20X1:

Investments 3,000

Orange $12,000 $14,000
Bailey 12,000 13,000
$24,000 $27,000
$27,000 — 24,000 = $3,000
Step 1 Bring the OCI account up-to-date:

January 12, 20X2:
Investments 500

Orange $14,000 $14,000
Bailey 13,000 13,500
$27,000 $27,500
Step 2 Record the disposal:

January 12, 20X2:
Cash 13,500
Realized gain on sale of investment 500
Long-term investment in equity securities 13,500
35
Answer Key
114) 1.
Jan 1
Investments 50,550
Cash 50,550
June 1
Cash (1,000 × $3.00) 3,000
Dividend revenue 3,000
Sept 15
Cash ($24,900 - $100) 24,800
Loss on sale of investments 475
Investments 25,275
($50,550 ÷ 1,000) × 500 shares
Dec 31
Investments 125
Unrealized gain on trading securities 125
($50,550 — $25,275) - $25,400
2. Dividend revenue and the unrealized gain on trading securities are reported under other revenues on the stateme
of earnings. Loss on sale of investments is reported under other expenses on the statement of earnings.
A Investment in Affiliated Companies 20,000,000

Cash 20,000,000
B Cash 400,000
Investments in Affiliated Companies 400,000
C Investments in Affiliated Companies 4,000,000
Equity in Investee Earnings 4,000,000
36
Answer Key

Acquisitions and investments in Investing -
unconsolidated affiliates
Sales of property, plant, and Investing +
equipment
Investee equity income, and gains Operating
on -
sale of equipment
Short-term investments, purchasesInvesting -
Short-term investments, sales Investing +

Equity in the income of investees Operating -
Proceeds from the sale of Investing +
investments
Purchases of investments Investing -
118) When one corporation exerts significant influence over another (such influence results from ownership of
20 to 50 percent of the common shares), it is unreasonable to assume that transactions between those
corporations are made at "arm's length" as assumed in financial accounting. Without the equity method,
managers of the investor company could manipulate income by influencing the investee's dividend policy.
Large dividend payments could be used to bolster income in bad years. The equity method prevents this
type of manipulation by requiring dividends received to be offset against the investment account rather
than recognized as income.
Equipment $80,000
Trucks 55,000
Factory 320,000
Remaining assets 130,000
Liabilities (100,000)
Fair value of net assets $485,000
Purchase price $600,000

Fair value of net assets (485,000)
Goodwill $115,000
37
Answer Key
120) A. Parent Company:
Investment in stock of Sub Company 900,000

Cash 900,000
Sub Company:
No entry is made by the subsidiary because only the subsidiary stockholders are affected.
B. Parent company should recognize goodwill of:

$900,000 — ($800,000 + $40,000) = $60,000
38
1) For sellers of goods, the revenue recognition principle generally requires that revenues be recorded
when the following conditions are met:
A) When title and risks of ownership pass to the buyer.
B) The sales order is received
C) When the goods are received by the buy
D) The item is manufactured
Answer: A
2) When do most companies usually recognize revenue as earned and record the revenue?
A) When the order is delivered
B) When the customer's order is received
C) When title and risks of ownership pass to the buyer
D) When payment is received
Answer: C
3) Regalia Inc. is a mail order clothing retailer. All items are shipped to customers FOB shipping and must be
prepaid by the customer before any items are shipped.
At what point should Raleigh recognize revenue?

A) When payment is received
B) When the goods reach the customer
C) At the time of shipping
D) When the goods are removed from inventory
Answer: C
4) Relax Shack is a giftware wholesaler. All orders are shipped FOB destination and paid for on delivery.
When should Relax Shack recognize its revenues?

A) When the goods reach the customer
B) When the goods are removed from inventory
C) When payment is received
D) At the time of shipping
Answer: A
5) Carthage Caravans rents storage units. In the first month of operation, they collected cash and credit
card receipts of $4,140 and during the month they rented thirty-six (36) storage units. All storage
units rent out at $115.00 per month. They also received non-refundable deposits of $23.00 each on
another five storage units. For two of those deposits the customers had not shown up, and the
company did not refund the deposits; the other three deposits were for the following month. The
appropriate amount for them to recognize as revenue for their first month is:
A) $4,186 B) $4,255 C) $4,140 D) $4,163
Answer: A
1
6) A retail company accepts credit cards as payments for all the following reasons EXCEPT:
A) Because the fee for the service is small compared to the benefits
B) To avoid the costs of providing credit directly to customers
C) To increase customer traffic at its stores.
D) To receive money faster
Answer: A
7) 401 Diner reported sales revenues of $53,000 in April. Thirty percent were cash sales and seventy percent
were paid by credit cards. 401 Diner pays a three percent fee to the credit card companies.
401 Diner's net sales reported for April would be closest to:
A) $51,887 B) $16,050 C) $15,900 D) $53,500
Answer: A
8) 401 Diner reported sales revenues of $53,000 in April. Thirty percent were cash sales and seventy percent
were paid by credit cards. 401 Diner pays a three percent fee to the credit card companies.
401 Diner's credit card fees for April would be closest to:
A) $1,080 B) $1,113 C) $1,590 D) $1,557
Answer: B
9) A customer purchased a $200 item at Best Bike Shop, paying with a credit card (VISA). The
merchant is charged a 2% fee by the credit card company. When recording this sale, the merchant
would do which of the following?
A) Credit unearned sales revenue for $200. B) Debit trade receivables for $200.
C) Credit sales revenue for $196. D) Credit sales revenue for $200.
Answer: D
10) Central Company sold goods for $5,000 to Western Company on March 12 on credit. Terms of the
sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by debiting trade
receivables for $5,000 and crediting sales revenue for $5,000. Western paid the balance due, less the
discount, on March 21. To record the March 21 transaction, Central would debit which of the
following?
A) Trade receivables for $5,000. B) Cash for $5,000.
C) Cash for $4,900. D) Trade receivables for $4,900.
Answer: C
11) On a multiple-step income statement, what happens to the amount of sales returns and allowances?
A) It is subtracted from gross sales to determine net sales.
B) It is added in the calculation of cost of goods sold.
C) It is subtracted from gross margin on sales to determine net sales.
D) It is subtracted from net sales to determine gross margin on sales.
Answer: A
2
12) What do credit terms of 2/10, n/30 indicate?
A) Two percent discount for early payment is available within ten days of the invoice date.
B) Two percent discount for early payment is available if the invoice is paid after the tenth day,
but before the thirtieth day of the invoice date.
C) Two percent discount for early payment is available if the invoice is paid before the tenth day
of the month following the month the sale.
D) Ten percent discount for early payment is available if the invoice is paid within two days of the
date of the invoice.
Answer: A
13) OnFebruary 15, a local business receives an invoice for electricity used in the month of January and
pays it on March 1. In which month should the business recognize the expense?
A) February B) January
C) March D) No expense should be recorded.
Answer: B
14) Acustomer purchased $2,000 of goods on credit from Holiday Party Supply on May 1. The
customer received the bill on May 15 and mailed a $2,000 cheque on May 28. Holiday received the
cheque on May 30. In recording this transaction, Holiday should credit Sales Revenue for $2,000 on
which of the following dates?
A) May 15. B) May 1. C) May 30. D) May 28.
Answer: B
15) A sale should, not be recognized as revenue by the seller at the time of sale if
A) the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated.
B) the selling price is less than the normal selling price.
C) the buyer cannot return the product unless there it is defective, which rarely occurs.
D) payment was made by cheque.
Answer: A
16) When goods are sold to a customer with credit terms of 2/15, n/30, the customer will receive which
of the following?
A) A 2% discount if they pay 15% of the amount due within 30 days.
B) A 15% discount if they pay within 30 days.
C) A 2% discount if they pay within 15 days.
D) A 15% discount if they pay within 2 days.
Answer: C
3
17) CentralCompany sold goods for $5,000 to Western Company on March 12 on credit. Terms of the
sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by debiting Trade
Receivables for $5,000 and crediting Sales Revenue for $5,000. Western paid the balance due on
April 9. To record the April 9 transaction, Central would debit which of the following?
A) Trade Receivables for $5,000. B) Cash for $5,000.
C) Cash for $4,900. D) Sales discounts for $100.
Answer: B
18) Merchandise was sold on credit for $3,000, terms 1/10, n/30. The entry to record the cash collection
should include which of the following?
A) Debit Cash, $3,000, and credit Trade Receivables, $2,970, and Sales Discount, $30, if collected
after the discount period.
B) Debit Cash, $3,000, and credit Trade Receivables, $3,000, if collected within the discount
period.
C) Debit Cash, $3,000, and credit Trade Receivables, $2,970, and Sales Discount, $30, if collected
within the discount period.
D) Debit Cash, $3,000, and credit Trade Receivables, $3,000, if collected after the discount
period.
Answer: D
19) A credit sale of $2,500, terms 1/20, n/30, should be recorded with which of the following journal entries?
DR CR
A Trade receivables 2,475
Sales revenue 2,475
B Allowance for discounts 25
Sales revenues 2,500
C Trade receivables 2,500
Sales revenue 2,500
D Trade receivables 2,500
Sales revenue 2,475
Sales discount 25
A) Choice C B) Choice A C) Choice B D) Choice D

Answer: A
4
20) A company had the following partial list of account balances at year-end:
Sales returns and allowances $500

Sales discounts 700
Sales revenues 57,200
Allowance for doubtful accounts 300
What amount of Net Sales would be shown on the income statement?

A) $57,200. B) $56,000. C) $64,200. D) $55,700.
Answer: B
21) A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does
not have cash available to pay within the discount period, the manager of the company is
considering borrowing money to take advantage of the discount. In order to make the appropriate
decision, the manager computed the annual interest rate associated with the sales discount. What is
the approximate annual rate?
A) 25%. B) 38%. C) 18%. D) 56%.
Answer: B
22) When creditterms for a sale are 2/15, n/40, the customer saves by paying the bill early.
Approximately what percent would this savings amount to on an annual basis?
A) 30%. B) 37%. C) 20%. D) 18%.
Answer: A
23) What is the annual interest rate of a sales discount of 2/10, n/30?
A) 36.5% B) 37.2% C) 24.8% D) 24.3%
Answer: B
24) Ifa company has the opportunity to take a discount of 2/10, n/30 but must borrow money at an
annual rate of 16%, what would be the net advantage of taking the discount?
A) 21.2% B) 8.3% C) 8.8% D) 20.5%
Answer: A
25) Which of the following accounts is always treated as a contra revenue and not as a selling expense?
A) Net sales B) Cash equivalents
C) Purchase returns and allowances D) Sales returns and allowances
Answer: D
5
26) What is the impact of treating sales returns and allowances as a contra revenue but treating sales
discounts and credit card discounts as selling expenses?
A) Gross margin is reduced by sales returns and allowance but operating profit is only reduced by
sales discounts and credit card discounts.
B) Gross margin is reduced by sales returns and allowances, sales discounts and credit card
discounts.
C) Gross margin is reduced by sales discounts and credit card discounts but all three accounts
cause a decrease in profit from operations.
D) Gross margin is reduced by sales returns and allowances but all three accounts cause a decrease
in profit from operations.
Answer: D
27) In
20X3, T Co.'s gross profit percentage was 39.8% while their competitor, WWW's percentage was
31.8%. What was the most likely reason for WWW's lower percentage?
A) Lower selling prices
B) Higher selling prices
C) Ability to differentiate their product in consumers' eyes
D) Lower product cost as a percentage of sales
Answer: A
28) TCo's gross profit percentage has been increasing in the three years from 20X1 through 20X3 from
36.5% to 39.8%. This change has most likely been caused by which of the following?
A) Higher product costs B) Discounted prices
C) Selling products with lower margins D) Selling products for higher prices
Answer: D
29) ACo. and G Co. are competitors in the biotechnology market. In 20X3, A Co. reported a gross
profit percentage of 86.3% while G Co's percentage was 80.7%. What is the most likely cause of G
Co.'s lower gross profit percentage?
A) Larger scale operations than A Co. B) Increased product selling prices
C) Smaller scale operations than A Co. D) Decreased product costs
Answer: C
30) G Co., which is a biotechnology firm, reported the following revenues on their 20X3 income
statement: Product sales $582.2 million, Royalties $214.7 million, Contract revenue $107.0 million
and Interest income $64.1 million. Their cost of sales was reported as $104.5 million. What was
their gross profit percentage?
A) 82.1% B) 88.4% C) 89.2% D) 86.9%
Answer: A
31) In
20X3, C Co. reported net sales revenues of $19.8 billion and cost of goods sold for $6.0 billion.
What was their gross profit percentage for 20X3?
A) 43.5% B) 30.3% C) 69.7% D) 76.74%
Answer: C
6
32) To record estimated uncollectible accounts using the allowance method for uncollectible accounts,
the adjusting entry would be a debit to?
A) Allowance for Doubtful Accounts and a credit to Trade Accounts Receivable.
B) Trade Accounts Receivable and a credit to Allowance for Doubtful Accounts.
C) Loss on Credit Sales and a credit to Trade Accounts Receivable.
D) Bad Debts Expense and a credit to Allowance for Doubtful Accounts.
Answer: D
33) Which of the following statements is true about the allowance method for uncollectible accounts?
A) The net realizable value of trade accounts receivable is greater before an account is written off
than after it is written off.
B) The net realizable value of trade accounts receivable on the balance sheet is the same before
and after an account is written off.
C) Bad Debts Expense is debited when a specific account is written off as uncollectible.
D) Allowance for Doubtful Accounts is closed each year to Income Summary.
Answer: B
34) The balance in Allowance for Doubtful Accounts would have a debit balance when
A) write-offs during the year have been less than previous provisions.
B) an uncollectible account is later recovered.
C) write-offs during the year have exceeded previous provisions.
D) the percentage of receivables basis is used.
Answer: C
35) An aging of a company's trade receivables indicates that $6,500 is estimated to be uncollectible. If
Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for
the period will require a
A) debit to Allowance for Doubtful Accounts for $6,500.
B) debit to Bad Debts Expense for $7,700.
C) debit to Bad Debts Expense for $5,300.
D) debit to Bad Debts Expense for $6,500.
Answer: B
36) If an account is collected after having been previously written off,

A) the allowance account should be debited.
B) only the control account needs to be credited.
C) there will be both a debit and a credit to trade accounts receivable.
D) both statement of earnings and balance sheet accounts will be affected.
Answer: C
7
37) During 20X1, Thomas Company recorded bad debt expense of $15,000 and wrote off an
uncollectible trade receivable amounting to $5,000. Assuming a January 1, 20X1, credit balance in
the allowance for doubtful accounts of $10,000, the December 31, 20X1, balance in the allowance
account would be which of the following?
A) $25,000. B) $15,000. C) $5,000. D) $20,000.
Answer: D
38) SchoolSupplies Company made the following journal entries (1) to write off an account judged to be
uncollectible and (2) to record bad debt expense for 20X1:
DR CR
A Allowance for doubtful accounts 1,000
B Bad debt expense 3,000
Allowance for doubtful accounts 3,000
As a result of the first entry only, the book value (net realizable value) of trade receivables was A; as a result
of the second entry only, the book value (net realizable value) of trade receivable was B:
A B
1 Increased Decreased
2 Decreased Decreased
3 Unchanged Unchanged
4 Unchanged Decreased
A) Choice 1 B) Choice 2 C) Choice 3 D) Choice 4

Answer: D
39) When an account is written off using the allowance method for uncollectible accounts, trade
accounts receivable
A) decreases and the allowance account increases.
B) increases and the allowance account increases.
C) decreases and the allowance account decreases.
D) is unchanged and the allowance account increases.
Answer: C
8
40) Tabor Company had trade receivables of $450,000 and an allowance for doubtful accounts of $15,500 just prior
to writing off as worthless a trade receivable from Fox Company of $5,000. What was the net realizable value
of trade receivables as shown by the accounting record before and after the write-off?
Before After
A) 450,000 450,000
B) 15,000 439,500
C) 434,500 429,500
D) 434,500 434,500

Answer: D
41) JacksonCompany uses the allowance method to account for bad debts. During 20X4, a customer became
bankrupt and a receivable of $5,000 was deemed uncollectible. What is the entry to record the uncollectible
amount?
A) Allowance for doubtful accounts 5,000

B) Bad debt expense 5,000
C) Allowance for doubtful accounts 5,000
Bad debt expense 5,000
D) Loss on receivables 5,000
A) Choice C B) Choice A C) Choice D D) Choice B

Answer: B
9
42) The books of Tweed Company provided the following information:
Beginning balances:
Allowances for doubtful accounts (a credit) $2,000
Transactions during the year:
Sales revenue (of which 1/3 were on credit) $1,800,000

Collections on trade receivables $590,000
Accounts written off as uncollectible $2,500
Past collection experience has indicated that 1% of credit sales normally is not collected. Therefore,
an adjusting entry for bad debt expense should be made in the amount of
A) $6,000. B) $2,500. C) $6,500. D) $500.
Answer: A
43) Under the allowance method for uncollectible accounts, when a specific account is written off
A) net earnings will decrease. B) total assets will decrease.
C) total assets will be unchanged. D) total assets will increase.
Answer: C
44) Under the allowance method for uncollectible accounts, when a year-end adjustment is made for
estimated uncollectible accounts,
A) total assets are unchanged. B) net earnings are unchanged.
C) liabilities decrease. D) total assets decrease.
Answer: D
45) SRM Company uses the allowance method to record its bad debt expense. When the account of a
particular customer is deemed to be uncollectible and is written off, which of the following will be
included in the journal entry?
A) Credit to bad debt expense. B) Debit to bad debt expense.
C) Debit to allowance for doubtful accounts. D) Debit to trade receivables.
Answer: C
10
46) Prior to the write off of a $30 customer account, Kraft Company had the following account balances:
Trade receivables $9,800 Debit balance

Allowance for doubtful accounts $500 Credit balance
What was the net realizable value of the receivables before and after the write-off?
Before After
A) $9,300 $9,300
B) $9,400 $9,270
C) $9,800 $9,770
D) $9,800 $9,800

Answer: A
47) In recording the year-end adjusting entry for bad debt expense, a company would do which of the
following?
A) Debit allowance for doubtful accounts. B) Debit trade receivables.
C) Credit trade receivables. D) Credit allowance for doubtful accounts.
Answer: D
48) Ifa customer pays her bill after her account has already been written off, the company receiving the
payment should record the account reinstatement with which of the following?
A) A debit to bad debt expense.
B) A credit to allowance for doubtful accounts.
C) A credit to cash.
D) A credit to bad debt expense.
Answer: B
Reference: 06-01
Liberty Company estimates that its annual bad debts approximate 4% of credit sales. Liberty had the following balances a
year-end prior to recording adjusting entries:
Credit Sales $160,000

Trade Receivables $30,000
Allowance for Doubtful Accounts $100 (debit balance)
49) On Liberty's income statement for the year, what would bad debt expense amount to?
A) $6,500. B) $6,400. C) $6,300. D) $5,200.
Answer: B
11
50) Liberty estimatesthat its annual bad debts approximate 4% of credit sales. What would the net
realizable value of the receivables on Liberty's year-end balance sheet be?
A) $29,900. B) $23,700. C) $23,500. D) $23,600.
Answer: B
51) Following the completion of an aging analysis, the accountant for Liberty estimated that $1,100 of
the receivables would be uncollectible. The year-end adjusting entry to record bad debt expense
would include which of the following?
A) Credit to allowance for doubtful accounts of $1,100.
B) Debit to bad debt expense of $900.
C) Credit to allowance for doubtful accounts of $1,200.
D) Debit to bad debt expense of $1,000.
Answer: C
52) Following thecompletion of an aging analysis, the accountant for Liberty estimated that $1,100 of the
receivables would be uncollectible. What would be the net realizable value of the receivables on Liberty's
year-end balance sheet?
A) $30,100. B) $29,900. C) $28,900. D) $28,800.

Answer: C
53) When using the allowance method for bad debts, how should bad debt expense be recorded?
A) Whenever the allowance for doubtful accounts has a zero balance.
B) When a particular account is written off.
C) As an adjusting entry at the end of the accounting period.
D) Whenever the allowance for doubtful accounts has a debit balance.
Answer: C
54) Which of the following is true about bad debt expense?

A) It should appear on the income statement as a contra revenue.
B) It should not appear in the financial statements.
C) It should appear on the statement of financial position as a contra asset.
D) It should appear on the income statement as part of selling expenses.
Answer: D
55) Mission Aces Inc partially recovered a trade receivable of $400 from a customer. The total trade
receivable of $4,000 had previously been written off as a bad debt. After considering the journal
entry or entries that the company will make to record the recovery, what will be the net effect on
accounts receivable?
A) The effect on accounts receivable is zero
B) Accounts receivable will decrease by $3,600
C) Accounts receivable will increase by $400
D) Accounts receivable will decrease by $400
Answer: A
12
Reference: 06-02
Springtime Company recorded $3,500,000 in credit sales in 20X1 and prepared the following aging schedule of their
$730,000 in accounts receivable as at December 31, 20X1:
Estimated percentage
Days outstanding Balance uncollectible
0 — 30 days $350,000 1%
31-60 days 275,000 2%
61-90 days 67,500 5%
Over 90 days 37,500 25%
The balance in their allowance for doubtful accounts before year-end adjustments is a $2,000 credit.
56) Thebad debt expense for 20X1 is:

A) $19,750 B) $35,000 C) $23,750 D) $21,750
Answer: A
57) Thebalance in the allowance for doubtful accounts after year-end adjustments will be
A) $21,750 B) $23,750 C) $19,750 D) $2,000
Answer: A
58) Upon completing an aging analysis of trade receivables, the accountant for Rosco Works estimated
that $5,000 of the current $98,000 of trade receivables would be uncollectible. The allowance for
doubtful accounts had a $400 credit balance at year-end prior to adjustment. What amount of bad
debt expense should appear in Rosco's income statement for the year?
A) $5,000. B) $0 C) $5,400. D) $4,600.
Answer: D
59) Forthe year ended December 31, 20X0, Barracks and Bullets Emporium estimated its allowance for doubtful
accounts using the year-end aging of accounts receivable.
The following data are available
Allowance for doubtful accounts, Jan 1 20X0 $37,000

Estimated uncollectible accounts during 20X0
(1% on credit sales of $4,000,000) $40,000
Uncollectible accounts written off, Nov 30 20X0 $52,000
Estimated uncollectible accounts per aging, Dec 31 20X0 $74,000
After year-end adjustment, the bad debt expense for 20X0 should be
A) $89,000 B) $52,000 C) $126,000 D) $37,000
Answer: A
13
60) In 20X3, T Co. reported a receivables turnover ratio of 11.1 and their competitor, WWW Co.,
reported a ratio of 4.6. Which of the following is true?
A) T Co has a better inventory management than WWW Co.
B) WWW Co. has done a better job of collecting their receivables than T Co.
C) T Co. needs to decrease their ratio in order to improve collection time
D) WWW Co. needs to focus on improving their credit and collection process
Answer: D
61) In 20X3, G CO. reported product sales of $717.8 million and trade receivables of $79.4 million. In
20X2, product sales were $584.9 million and trade receivables were $71.4 million. What was its
receivables turnover ratio for 20X3?
A) 8.19 B) 9.52 C) 9.04 D) 8.64
Answer: B
62) A high receivables turnover ratio indicates

A) the company's sales are increasing.
B) a large proportion of the company's sales are on credit.
C) customers are making payments slowly.
D) customers are making payments very quickly.
Answer: D
63) If
C Co.'s trade receivables balance was $1,666 million in 20X2 and $1,798 million in 20X3, what
would be the impact on the statement of cash flows?
A) An increase in cash flow from operating activities
B) A decrease in cash flow from investing activities
C) An increase in cash flow from investing activities
D) A decrease in cash flow from operating activities
Answer: D
64) In20X3, A Co. reported product sales revenue of $2,514.4 million and trade receivables of $319.9
million for 20X3 and $269.0 million in 20X2. What was the cash flow generated by sales?
A) $2,514.4 million B) $2,194.5 million C) $2,463.5 million D) $2,565.3 million
Answer: C
65) Profitfor T Co. in 20X3 was $59,156 (in thousands). There was a deduction from profit on the
statement of cash flows for $2,781 (in thousands) for the change in trade receivables. The trade
receivables balance on December 31, 20X3 was $79,024 (in thousands). How much was the trade
receivables balance on December 31, 20X2?
A) $61,937 B) $76,243 C) $81,805 D) $56,375
Answer: B
14
66) TheWD Co. reported revenue of $23,402 million for 20X3. Their trade receivables balance was
$3,999 million in 20X3 and $3,633 million in 20X2. How much cash was collected from
customers?
A) $23,768 B) $23,036 C) $23,402 D) $23,306
Answer: B
67) Foraccounting purposes, cash includes which of the following?

A) Balances on deposit in banks.
B) IOU's received from employees.
C) A post-dated cheque received from a customer.
D) A note received from a customer in settlement of an overdue trade account receivable.
Answer: A
68) On the April 30 bank reconciliation, a deposit made by a company to its bank account on April 18
will appear as a(n)
A) deduction from the balance per bank.
B) this will not affect the current period's bank reconciliation.
C) addition to the balance per books.
D) deduction from the balance per books.
Answer: B
69) Which of the following is not a reconciling item when preparing a bank reconciliation?
A) Bank service charges not recorded by the corporation.
B) Outstanding deposits.
C) Outstanding cheques.
D) Interest collected on a note receivable by the bank and recorded by the corporation.
Answer: D
70) AnNSF cheque should appear in which section of the bank reconciliation?
A) Additionto the balance per books. B) Deduction from the balance per bank.
C) Deduction from the balance per books. D) Addition to the balance per bank.
Answer: C
71) Ona bank reconciliation, which of the following would be deducted from the balance per bank?
A) Electronic payment by a customer on account.
B) Outstanding cheques.
C) Bank service charges.
D) Deposits in transit.
Answer: B
15
72) Outstanding cheques from the prior period which clear the bank in the current period
A) do not affect the current period's bank reconciliation.
B) should be deducted from the balance per books.
C) should be added to the balance per books.
D) should be deducted from the balance per bank.
Answer: A
73) Ifa cheque correctly written and paid by the bank for $521 is incorrectly recorded on the company's
books for $251, the appropriate treatment on the bank reconciliation would be to
A) deduct $270 from the balance per bank. B) add $270 to the balance per books.
C) deduct $270 from the balance per books. D) add $270 to the balance per bank.
Answer: C
74) On Eli Corp's June bank reconciliation, cheques outstanding totaled $5,400. In July, the corporation
issued cheques totaling $38,900. The July bank statement shows that $26,300 in cheques cleared the
bank in July. A cheque from one of Eli Corp's customers in the amount of $300 was also returned
marked "NSF." The amount of outstanding cheques on Eli's July bank reconciliation should be
A) $18,000. B) $12,600. C) $17,700. D) $7,200.
Answer: A
75) To aid internal control, the individual authorized to sign cheques should be which of the following?
A) Purchasing agent. B) Accounts payable bookkeeper.
C) Treasurer. D) Supervisor of receiving.
Answer: C
76) Cash equivalents typically include investments with original maturities of which of the following?
A) One year or the operating cycle, whichever is longer.
B) One year or less.
C) One month or less.
D) Three months or less.
Answer: D
77) Which of the following would not be considered an element of good internal control?
A) Require monthly reconciliation of bank accounts with the cash account.
B) Require that approval for cash payments and the signing of cheques be assigned to different
individuals.
C) Require that all cash receipts be deposited on a daily basis.
D) Require that the individual who handles cash receipts be responsible for the accounting
function related to those funds.
Answer: D
16
78) Which of the following is required for effective control of cash?
A) Cheques be pre-numbered.
B) A reconciliation of the bank balance with the cash balance be prepared twice a year.
C) One person handles the receipts and disbursements of cash.
D) Cash be deposited monthly in a bank.
Answer: A
79) Vida Corporation gathered the following reconciling information in preparing its July bank reconciliation:
Cash balance per books, July 31 $3,500

Deposits in transit 150
Electronic collection of account receivable 850
Bank charge for cheque printing 20
Outstanding cheques 2,000
NSF cheque 170
The adjusted cash balance per books at July 31 is

A) $2,310. B) $4,160. C) $4,010. D) $2,460.
Answer: B
80) Cawthra Limited gathered the following reconciling information in preparing its June bank reconciliation:
Cash balance per books, June 30 $12,000

Electronic collection of account 6,000
Deposits in transit 4,500
Bank service charge 75
NSF cheque 1,200
The adjusted cash balance per books at June 30 is

A) $16,500. B) $8,775. C) $16,725. D) $12,000.
Answer: C
17
81) Dobson Corporation gathered the following reconciling information in preparing its September bank
reconciliation:
Cash balance per books, September 30 $11,000

Note receivable collected by bank 6,000
Deposits in transit 4,500
Bank service charge 75
NSF cheque 1,200
The adjusted cash balance per bank at September 30 is

A) $6,500. B) $9,725. C) $1,775. D) $15,500.
Answer: A
82) Bank errors

A) are corrected by making an adjusting entry on the depositor's books.
B) occur because of time lags.
C) must be corrected by debits.
D) are infrequent in occurrence.
Answer: D
83) When preparing a bank reconciliation, which of the following would be deducted from the
company's cash balance?
A) Bank service charges. B) Note receivable collected by the bank.
C) Deposits in transit. D) Outstanding cheques.
Answer: A
84) Thefollowing information was available to the accountant of Midland Company when preparing the monthly
bank reconciliation:
Outstanding cheques: #643 for $502

#651 for $43
Bank service charges $25
Deposits in transit $190
Customer note receivable collected by bank $500
Cash balance per bank statement $975
Cash balance per books (prior to reconciliation) $145
What is the corrected cash balance per books following completion of the reconciliation?
A) $620. B) $430. C) $645. D) $120.
Answer: A
18
85) Thefollowing information was available to the accountant of Dove Company when preparing the monthly
bank reconciliation:
Cash balance per bank $3,450

Outstanding cheques 972
NSF cheque returned with the bank statement 58
Deposits in transit 351
Bank service charges 33
Notes receivable from customer, collected by bank 575
Error: cash payment of $532 received from a customer was
incorrectly recorded on the books as 523
What was the cash balance per books of Dove Company prior to beginning the bank reconciliation?
A) $2,270. B) $2,354. C) $2,238. D) $2,336.
Answer: D
86) Under the completed contract method, revenue is recognized

A) when the customer pays.
B) when the initial contract is signed.
C) when the product is delivered to the customer.
D) periodically as work is completed.
Answer: C
87) When isrevenue recognized under the completed contract method?

A) Throughout the project as bills are sent to the customer.
B) When the project is complete.
C) When construction begins on the project.
D) Throughout the project as cash payments are received from the customer.
Answer: B
88) When isrevenue recognized under the percentage of completion method?

A) When the project is complete.
B) Throughout the project, based upon the amount of work completed each year.
C) Throughout the project, based upon the amount of cash received from the customer.
D) When construction begins on the project.
Answer: B
89) Under the percentage of completion method, the amount of work completed in a particular year is
typically determined by comparing which of the following?
A) The cost incurred that year divided by the contract price.
B) The total costs incurred to date divided by the contract price.
C) The total costs incurred to date divided by the cash collected to date from the customer.
D) The costs incurred that year divided by the estimated total costs of the project.
Answer: D
19
90) When the outcome of a construction contract cannot be estimated reliably, but it is probable that the
costs can be collected, the amount of revenue recognized each period is calculated based on
A) the percentage of completion method.
B) the completed contract method.
C) no revenue should be recognized until cash is collected.
D) the zero profit method.
Answer: D
91) Ifa company uses the completed contract method rather than the percentage of completion method,
the total profit the company recognizes from the beginning of the project throughout its completion
will be which of the following?
A) Greater if the completed contract method is used.
B) Greater for the completed-contract method only if the project takes longer than five years to
complete.
C) Greater if the percentage of-completion method is used.
D) The same for both methods.
Answer: D
92) Albert Company agreed to build a bowling complex for Pins R Us for a price of $2,000,000. The
project is expected to take three years to complete. Albert estimated that the total cost of the project
would be $1,600,000. During the first year, construction costs amount to $600,000. If Albert uses
the percentage of completion method, how much revenue will be recognized for the first year?
A) $750,000. B) $150,000. C) $0. D) $600,000.
Answer: A
93) Sales revenue is measured as the market value of the consideration received, or the book value of
the item sold, whichever is more reliable.
Answer: True False
94) For most merchandisers and manufacturers, the required revenue recognition point is the time of
shipment or delivery of goods.
Answer: True False
95) "FOB shipping point" means that title to the shipped goods passes to the buyer when they are
delivered.
Answer: True False
96) For service companies, revenue is recognized the time at which services are provided.
Answer: True False
97) A merchant who accepts credit cards as payment exposes himself to greater risk of credit card fraud.
Answer: True False
20
98) A credit card discount will normally attract more customers
Answer: True False
99) A credit card discount means the sales revenue will be recorded at less than one hundred percent.
Answer: True False
100) Credit terms "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if
not paid within two days, the full invoice price will be due in thirty days.
Answer: True False
101) The sales returns and allowances account should be reported as a deduction from sales revenue
because it is a contra revenue account.
Answer: True False
102) Both credit card discounts and cash discounts can be recorded either as contra revenues or as
expenses.
Answer: True False
103) If the terms are 3/15, n/45 on a credit sale, the customer will save 3% of the invoice price by paying
at least 30 days before the credit period ends.
Answer: True False
104) Sales returns and allowances should be deducted from sales revenue when computing net sales.
Answer: True False
105) Many merchants accept credit cards for the sale of goods because it can increase the number of
customers.
Answer: True False
106) While sales discounts and credit card discounts can only be treated as contra revenues, sales returns
and allowances are treated as either a contra revenue or a selling expense.
Answer: True False
107) It is important to record sales returns and allowances in a separate account so that management can determine
the volume of returns and allowances in order to measure the quality of their products.
Answer: True False
108) The gross profit percentage is computed by taking operating profit divided by net sales.
Answer: True False
109) Managers, analysts, and creditors use gross profit percentage to assess the effectiveness of the
company's product development, marketing, and production strategy.
Answer: True False
21
110) The gross profit percentage measures the ability to charge premium prices and produce goods and
services at lower cost.
Answer: True False
111) MP Co.'s gross profit percentage decreased from 59.2% in 20X2 to 58.3% in 20X3. This means that
MP Co.'s cost of goods sold as a percentage of sales has decreased.
Answer: True False
112) An aging of trade accounts receivable schedule is based on the premise that the longer the period an
account remains unpaid, the greater the probability that it will eventually be collected.
Answer: True False
113) The allowance method of accounting for bad debts violates the matching principle.
Answer: True False
114) One characteristic of a note receivable is a definite future date known as the maturity date.
Answer: True False
115) An amount receivable from an insurance company for damaged inventory would be classified as a
trade receivable.
Answer: True False
116) Trade receivables which are more than one-year old are normally transferred to non-current
receivables.
Answer: True False
117) The gross amount of accounts receivable should be reflected on the balance sheet; this is what the
company expects to collect in cash
Answer: True False
118) Under the allowance method for uncollectible accounts, bad debts expense is recorded when an
individual customer defaults.
Answer: True False
119) Uncollectible accounts must be estimated because it is not possible to know which accounts will not
be collected.
Answer: True False
120) Under the allowance method for uncollectible accounts, the entry to write off an uncollectible
account only involves statement of financial position accounts.
Answer: True False
121) The percentage of trade receivables basis of estimating uncollectible accounts ignores the existing
balance in the allowance account when the bad debts adjusting entry is recorded.
Answer: True False
22
122) Under the aging method of estimating the allowance for doubtful accounts, the balance in the
allowance account must be considered prior to adjusting for estimated uncollectible accounts.
Answer: True False
123) It is possible for the allowance account to have a debit balance before the adjusting entry is
recorded.
Answer: True False
124) Allowance for Doubtful Accounts is credited when an account is determined to be uncollectible.
Answer: True False
125) Under the allowance method for uncollectible accounts, the recovery of an account receivable
results in a credit to the Bad Debt Expense account.
Answer: True False
126) Allowance for Doubtful Accounts is a contra account that is deducted from Trade Accounts
Receivable on the statement of financial position.
Answer: True False
127) The Allowance for Doubtful Accounts is a liability account.

Answer: True False
128) Net realizable value is determined by adding the Allowance for Doubtful Accounts to Trade
Accounts Receivable.
Answer: True False
129) Bad Debts Expense is a contra account for Trade Accounts Receivable.
Answer: True False
130) Under the allowance method for uncollectible accounts, Bad Debts Expense is debited when an
account is deemed uncollectible and must be written off.
Answer: True False
131) The lower the receivables turnover, the more effectively the company has managed their credit
granting and collection activities.
Answer: True False
132) The trade receivable turnover ratio is computed by dividing net sales by net trade receivables at the
end of the year.
Answer: True False
133) The percentage of credit sales method for estimating bad debt expense is based on the assumption
that the amount of bad debts is a function of the total sales made on credit.
Answer: True False
23
134) The percentage of credit sales method for estimating bad debt expense is based on the assumption
that the amount of bad debts is a function of the ending balance in accounts receivable.
Answer: True False
135) Analyzing the accounts receivable turnover is important in assessing the short-term liquidity of an
organization.
Answer: True False
136) The reason that we must adjust revenue for the change in trade receivables to convert the figure to
cash collected from customers is that trade receivables represent sales revenue not collected from
customers at the beginning and at the end of the accounting year.
Answer: True False
137) Companies who offer credit terms should require approval of customers' credit history by a person
independent of the sales and collection functions.
Answer: True False
138) Companies who offer credit terms should require approval of customers' credit history by the sales
manager of the account.
Answer: True False
139) An effective control activity results when at least two individuals are assigned to one cash drawer so
that each can serve as check on the other.
Answer: True False
140) Only large companies need to be concerned with a system of internal control.
Answer: True False
141) A good system of internal control does not require monitoring.

Answer: True False
142) Errors give rise to unintentional misstatements in the financial statements.

Answer: True False
143) Control activities are most effective when several people are responsible for a given task.
Answer: True False
144) All documents should be pre-numbered.

Answer: True False
145) Control over cash disbursements is improved if all expenditures are paid by cheque or through use
of electronic funds transfers.
Answer: True False
146) An example of separation of duties is having a cheque signer record cash disbursements.
Answer: True False
24
147) An authorized signing officer should sign a cheque only after reviewing the appropriate supporting
documentation.
Answer: True False
148) Outstanding cheques that appear on a bank reconciliation are those cheques written during the
current and previous periods that have not yet cleared the bank during the current period.
Answer: True False
149) Deposits in transit to the bank have not been recorded in the depositor's books but they have been
recorded by the bank.
Answer: True False
150) Journal entries made to update the cash account, after a bank reconciliation has been prepared,
should affect the "Bank Statement" part of the reconciliation rather than the "Depositor's Books"
part of the reconciliation.
Answer: True False
151) Deposits in transit that appear on a bank reconciliation are those deposits that were made during the
current month but which were not included by the bank on the current bank statement.
Answer: True False
152) The responsibility for keeping the records for an asset should be separate from the physical custody
of that asset.
Answer: True False
153) When completing a bank reconciliation, bank service charges should be added to the cash balance
appearing on the bank statement.
Answer: True False
154) When a company records adjusting entries following the completion of a bank reconciliation, the
cash account is debited for the amount of any deposit in transit.
Answer: True False
155) External auditors are usually employees of the company.

Answer: True False
156) A bank reconciliation compares the ending cash balance in the company's records to the ending cash
balance reported by the bank on the monthly bank statement.
Answer: True False
157) When using the percentage of completion method, revenue is recognized when work on the contract
is completed.
Answer: True False
25
158) Under the completed contracted method of accounting for long-term construction projects, revenue
is not recognized until the project is complete.
Answer: True False
159) Indicate the effect on a monthly bank reconciliation of each of the items listed below by placing the
appropriate letter to the left of each item.
A. Addition to the balance in the company's Cash account.

B. Deduction from the balance in the company's Cash account.
C. Addition to the balance on the bank statement.
D. Deduction from the balance on the bank statement.
E. Does not affect the reconciliation.
________ 1. The monthly service fee charged by the bank.

________ 2. Another company's cheque erroneously charged against the company's bank
balance on the bank statement.
________ 3. A customer's cheque returned by the bank marked NSF.
________ 4. A deposit in transit.
________ 5. A note collected by the bank during the month on behalf of the company.
________ 6. An outstanding cheque.
________ 7. A company recorded a cheque as a credit to its cash account in the books. The
cheque was recorded for $360 but it was actually written to a supplier for $630.
Assume the bank correctly recorded this cheque for $630 when cleared.
Answer: 1. B; 2. C; 3. B; 4. C; 5. A; 6. D; 7. B
160) The December 31, 20X3 statement of financial position of Howson Limited showed Trade Accounts
Receivable of $450,000 and a credit balance in Allowance for Doubtful Accounts of $45,000.
During 20X3, the following transactions occurred: service revenue billed on account, $1,500,000;
collections from customers, $1,300,000; accounts written off $37,000; previously written off accounts
of $4,000 were collected.
Required:
(a) Record the 20X3 transactions.
(b) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that
uncollectible accounts are expected to be 5% of trade accounts receivable, what is the adjusting entry at
December 31, 20X3?
Answer: (a)
DR CR
Trade Accounts Receivable 1,500,000
Service Revenue 1,500,000
26
(To record credit service revenue)
Cash 1,300,000
(To record collection of receivables)
Allowance for Doubtful Accounts 37,000
(To write off specific accounts)
Trade Accounts Receivable 4,000
(To reverse write-off of account)
Cash 4,000
(To record collection of account)
(b)
TRADE ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL

ACCOUNTS
450,000 37,000 45,000
1,500,000 1,300,000 4,000
4,000 37,000 12,000 Bal.
4,000
Bal. 613,000
Required balance ($613,000 × .05) $30,650

Balance before adjustment 12,000
Adjustment required $18,650
Dec 31 Bad Debts Expense 18,650

27
161) Eddie Corporation uses the allowance method for estimating uncollectible accounts.
Required:
Prepare entries to record the following transactions:
January 5 Sold merchandise to Tonya Holmes for $1,500, terms n/15. The merchandise sold
cost $900.
April 15 Received $500 from Tonya Holmes on account.
August 21 Wrote off as uncollectible the balance of the Tonya Holmes account when she
declared bankruptcy.
October 5 Received a cheque for $350 from Tonya Holmes. No further collections are
expected.
January 5 Trade Accounts Receivable — T. Holmes 1,500

Sales 1,500
Cost of Goods Sold 900
Merchandise Inventory 900
April 15 Cash 500
Trade Accounts Receivable — T. Holmes 500
August 21 Allowances for Doubtful Accounts 1,000
Trade Accounts Receivable — T. Holmes 1,000
October 5 Trade Accounts Receivable — T. Holmes 350
Allowance for Doubtful Accounts 350
Cash 350
28
162) On June 1, 20X2, Budget Appliance Company sold merchandise on credit at an invoice price of $1,000; terms
2/10, n/30. Give the journal entries to record the following:
A. To record the sale.

B. Assumption A: To record collection on June 28, 20X2.
C. Assumption B: To record collection on June 9, 20X2.
A. Trade receivables 1,000

Sales revenue 1,000
B. Cash 1,000
C. Cash 980
Sales discount 20
29
163) Robertson's Toy World sells a variety of toys at discount prices. The following transactions occurred on May
16. Consider credit card discount a selling expense.
A. Sold a bike for $95 each.

B. Sold a $359 swing set; customer will be billed at the end of the month.
C. Customer returned a $45 doll that had been purchased for cash on May 12; gave customer
a cash refund.
D. Sold a pair of $100 roller blades; customer paid with a credit card. The credit card
company charges Robertson a 2% fee for this service.
Required:
a. Present journal entries for each of the above transactions.

b. Compute the net sales for the day.
A. Cash 95
Sales revenue 95
B. Trade receivables 359
Sales revenue 359
C. Sales returns and allowances 45
Cash 45
D. Cash 98
Credit card discounts 2
Sales revenue 100
If credit card discounts are considered as an operating expense account:

Net Sales = Sales revenue - sales returns and allowances
$509 = (95 + 359 + 100) - 45
30
164) Northern Company sold $4,000 of goods to Southern Company on credit on May 1. At the time of the sale,
Northern recorded a debit to Trade Receivables and a credit to Sales Revenue for $4,000. Terms were 2/10,
n/30.
Required:
Present the entries Northern would record for each of the following independent situations:
A. Southern paid the balance due, less the discount, on May 10.
B. Southern returned half of the goods for credit on May 4. Paid the balance due, less the discount, on May 10.
C. Southern paid their bill on May 30 (there were no returns).
A. Cash 3,920
Sales discounts 80
B. Sales returns and allowances 2,000
Cash 1,960
Sales discounts 40
C. Cash 4,000
165) A portion of the statement of earnings for Tea Company is shown below. Provide the missing account titles and
amounts.
A. ________ $110,000
Sales returns and allowances B. ________

C. ________ $100,000
D. ________ ________
Gross Margin $25,000
Answer: A. Sales revenue

B. $110,000 - $100,000 = $10,000
C. Net sales
D. Cost of goods sold; $100,000 - $25,000 = $75,000
31
166) On July 10, 20X2, Mighty Company sold merchandise at an invoice price of $5,000 with terms of 3/10, n/30.
Give the journal entries required below by indicating the account code of the appropriate account for each
debit and credit and the amounts involved.
Code Item
A Cash
B Trade Receivables
C Sales Revenue
D Sales Discounts

Sale on July, 20X7
Assumption A: Collection of the
account on August 9, 20X7
Assumption B: Collection of the
account on July 18, 20X7

Sale on July, 20X7 B $5,000 C $5,000
account on August 9, 20X7 A $5,000 B $5,000
Assumption B: Collection of the A $4,850
account on July 18, 20X7 D 150 $5,000
167) A portion of the statement of earnings for Sun Company is shown below. Provide the missing account titles and
amounts.
A. ________ $190,000
Sales discounts $20,000
Net sales B. ________
C. ________ D. ________
Answer: A. Sales revenue

B. $190,000 - $20,000 = $170,000
C. Gross margin
D. $170,000 - $100,000 = $70,000
32
168) Indicate whether each of the accounts listed below normally will have a debit or a credit balance. Record your
answer to the left of each account by entering either Dr or Cr.
________ 1. Allowance for doubtful accounts

________ 2. Bad debt expense
________ 3. Sales returns and allowances
________ 4. Deferred revenue
________ 5. Sales discounts
________ 6. Notes receivable
________ 7. Sales revenue
________ 8. Short-term investments
Answer: 1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. Dr
169) The following information comes from P Co.'s statements of earnings for 20X7 and 20X6:
(In millions) 20X7 20X6

Net sales $22,348 $20,917
Cost of sales $9,330 $8,525
1. Compute the gross profit percentage for

a. 20X7 ________
b. 20X6 ________
2. Provide at least two potential reasons for the change in P Co's gross profit percentage.
Answer: (1) a. 58.3% (13,018/22,348), b. 59.2% (12,392/20,917), (2) P Co. may have discounted their
selling prices to meet competition, increasing costs of producing their product, a change in the
sales mix of their products toward selling more of the lower margin products, inventory losses
and/or higher storage costs caused by poor management control.
33
170) "Toys 4 U" has reported the following information on their income statements for the years 20X3 through
20X7:
20X7 20X6 20X5 20X4 20X3

Net Sales $11,170 $11,038 $9,932 $9,427 $8,746
Cost of Goods Sold 8,191 7,710 6,892 6,592 6,008
1. Compute the gross profit percentage for

a. 20X7 ________
b. 20X6 ________
c. 20X5 ________
d. 20X4 ________
e. 20X3 ________
2. Has the gross profit ratio for "Toys 4 U" improved over time or worsened? Explain your reason.
Answer: 1 a. 26.7% (2,979/11,170), b. 30.2% (3,328/11,038), c. 30.6% (3,040/9,932), d. 30.1%
(2,835/9,427), e. 31.3% (2,738/8,746). 2 The gross profit has been steadily falling between
20X8 and 20X1. However, in 20X7, "Toys 4 U" gross profit ratio took a sharp and severe
drop of 3.5% from 20X6. Therefore, the ratio has worsened over time with a severe drop
occurring in the most recent year.
171) An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct.
Dec. 17 Cash 4,410

(To record collection of Dec. 10 sales, net of $90 sales
discounter)
27 Cash 1,200
Bad Debts Expense 1,200
(Collection of account previously written off as
uncollectible under allowance method)
31 Bad Debts Expense 5,000
(To reduce the receivables to their net realizable value
of $580,000. Balances before adjustment:
Accounts Receivable = $600,000
Allowance for Doubtful Accounts = 15,000 credit)
Required: Prepare the correcting entries.

Dec. 17 Sales Discounts 90

Trade Accounts Receivable 90
(To correct accounts for sales discount)
27 Trade Accounts Receivable 1,200
34
(To reverse write-off of collected account)
(To correct erroneous collection entry)
(To correct error in recording Bad Debt
Expense on Dec. 31)
172) Near the end of 20X6, the ledger of Dice Company included the following accounts and balances:
Allowance for Doubtful Accts $800 credit balance

Bad Debt Expense 0 balance
Trade Receivables 50,000 debit balance
Cash collections on trade receivables during 20X6 amounted to $148,500. Sales revenue during 20X6
amounted to $200,000, of which 75% was on credit, and it was estimated that 2% of the credit sales
made in 20X6 would ultimately become uncollectible. Before adjusting entries were made for 20X6,
(a) a $600 account was determined to be uncollectible and written off by Dice and (b) bad debt
expense was recorded to 20X6. These adjustments are not reflected in the account balances above.
After the above entries were posted to the ledger, the account balances were as follows (give the amount under
the appropriate debit or credit column):

Allowance for Doubtful Accounts
Bad Debt Expense
Trade Receivables

A Allowance for Doubtful Accounts $3,200
800 + 3,000 — 600
B Bad Debt Expense $3,000
150,000 x 2%
C Trade Receivables 50,900
50,000 — 148,500 + (200,000 x 74%) — 600
35
173) On December 31, 20X1, Carter Corporation had the following account balances related to credit sales and
receivables prior to recording adjusting entries:

Allowance for doubtful accounts $200 (credit)
Sales revenue (all credit sales) $400,000
Required:
Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following
independent assumptions:
A. An aging of accounts receivable is completed. It is estimated that $1,950 of the receivables outstanding at
year-end will be uncollectible.
B. It is estimated that .5% of credit sales for the year will prove to be uncollectible.
C. Assume the same information presented in (A) above except that prior to adjustment, the Allowance
for doubtful accounts had a debit balance of $200 rather than a credit balance of $200.
A. Bad debt expense 1,750

B. Bad debt expense 2,000
C. Bad debt expense 2,150
174) Yahoo! Inc. reported the following figures from their financial statements for the years 20X0 through 20X2:
(In thousands)
20X2 20X1 20X0
Net revenues $203,270 $70,450 $21,490
Gross profit 176,528 59,565 16,768
Profit (loss) 25,588 (25,520) (6,427)
Cash flow from operations 110,278 480 (2,394)
Trade receivables 24,831 11,163 4,648
Calculate the gross profit ratio for all three years:
a. 20X2 ________
b. 20X1 ________
c. 20X0 ________
Answer: a. 86.8% (176,528/203,270), b. 84.5% (59,565/70,450), c. 78.0% (16,768/21,490)
36
175) A recent annual report for C Co. contained the following data:
2012 2011
Less: Allowance for Doubtful Accounts 12 10
Net trade receivables 1,786 1,656
Net sales (assume all are on credit) $19,805
1. Calculate the receivables turnover ratio and average collection period for the year:
a. Receivables turnover
b. Average collection period
2. What do these results indicate?

Answer: 1.
a. 11.51 (19,805/1,721)
b. 31.7 days (365 days/11.51),
2. The turnover ratio indicates the number of times on average that the receivables are collected while
the average collection period shows the length of time in days it takes the company to collect its
receivables from the credit customers. The higher the turnover ratio, the less days it takes to collect
our receivables, thereby increasing liquidity of the receivables.
176) During 20X1, Lau Inc. recorded credit sales of $1,500,000. Based on prior experience, it estimates a
1 percent bad debt rate on credit sales. At the beginning of the year, the balance in trade receivables,
net was $100,000. At the end of the year, but before the bad debt expense adjustment was recorded
and before any bad debts had been written off, the balance in trade receivables, net was $125,000.
1. Assume that on December 31, 20X1, the appropriate bad debt expense adjustment was recorded for the
year 20X1 and trade receivables totaling $10,000 were written off for the year, what was the receivables
turnover ratio for the year?
2. Assume that on December 31, 20X1, the appropriate bad debt expense adjustment was recorded for the
year 20X1 and trade receivables totaling $12,000 were written off for the year, what was the receivables
turnover ratio for the year?
3. Explain why the answers to parts 1 and 2 differ or do not differ.
Answer: 1. 14.29 ($1,500,000/ [100,000 + 110,000]/2),
2. 14.29 (same calculation),
3. The ratio stayed the same because only the adjusting entry affects the balance of trade receivables,
net while the actual write off of customer accounts simply offset the asset against the contra
asset account so that net receivables do not change.
177) Mephisto Inc. generated $2.75 million in credit sales during the current year. The balance of the allowance for
doubtful accounts at December 31 is $2,500 debit. Accounts receivable at December 31 consists of the
following:
Account Classification Amount Estimated Percentage Uncollectible

37
1-30 days $350,000 1.5%
31-60 days 180,000 3%
61-90 days 55,000 5%
Over 90 days 21,000 25%
Required:
Calculate and record the journal entry for bad debt expense for the current year using the aging of accounts
receivable approach.
Mephisto has decided to write off $15,000 of the accounts that were over 90 days old. Record the journal entry.
What is the balance for Accounts Receivable as shown on the December 31 balance sheet?
One of the customers whose $2,200 account was written off paid in full. Record the journal entry. (entries)
Is the balance in the allowance for doubtful accounts affected by the transaction in part d? If so, by how much?
What is the new balance?
Answer: a. Required balance for allowance for doubtful accounts
1-30 days $350,000 1.5% $5,250

31-60 days 180,000 3% 5,400
61-90 days 55,000 5% 2,750
Over 90 days 21,000 25% 5,250
$18,650
existing balance in the account 2,500
entry required to bad debt expense $21,150

b.
c.
Accounts receivable ($606,000 - $15,000) 591,000
Less allowance for doubtful accounts (18,650 — 15,000) — 3,650
Net accounts receivable 587,350
d.
Cash 2,200
38
e. The allowance for doubtful accounts balance would increase by $2,200, the new credit balance woul
be $5,850.
178) The cash records of Kupper Corp show the following:
1. The June 30 bank reconciliation indicated that deposits in transit totaled $300. During July, the general
ledger account, Cash, shows deposits of $9,700, but the bank statement indicates that only $9,540 in deposits
were received during the month.
2. The June 30 bank reconciliation also reported outstanding cheques of $1,800. During July, Kupper Corp's
books show that $11,170 of cheques were issued, yet the bank statement showed that $11,500 of cheques
cleared the bank in July.
There were no bank debit or credit memoranda and no errors were made by either the bank or Kupper Corp.
Required:
(a)Calculate the dollar amount of the deposits in transit at July 31.

(b)Calculate the dollar amount of the outstanding cheques at July 31.
Answer: (a) Deposits in transit:
Deposits per books in July $9,700

Deposits per the bank in July $9,540
Less: June 30 deposits in transit 300
July receipts deposited in July 9,240
Deposits in transit, July 31 $460
(b) Outstanding cheques:
Cheques per books in July $11,170

Cheques clearing the bank in July $11,500
Less: Outstanding cheques, June 30 1,800
July cheques clearing in July 9,700
Outstanding cheques, July 31 $1,470
179) Why is the reconciliation of a company's cash account to the bank statement so important for
effective internal control for cash?
Answer: The reconciliation of the cash account is very important in determining the correct, up-to-date
balance for cash to be presented on the company's statement of financial position. It is also a
good tool for detecting errors in the cash account.
39
180) The records of Topper. Ltd. show the following:
1. In February, deposits per the bank statement totaled $18,850; deposits per books $19,500; and deposits in
transit at February 28 were $1,400.
2. In February, cheques issued per books were $17,750; cheques clearing the bank were $18,400; and
outstanding cheques at February 28 were $1,250.
There were no bank debit or credit memoranda and no errors were made by either the bank or Topper Ltd.
Required:
(a)Calculate the dollar amount of the deposits in transit at January 31.

(b)Calculate the dollar amount of the outstanding cheques at January 31.
Answer: (a) Deposits in transit:
Deposits per bank statement in February $18,850

Add: Deposits in transit, February 28 1,400
Total deposits to be accounted for 20,250
Less: Deposits per books 19,500
Deposits in transit, January 31 $750
Cheques clearing the bank in February $18,400

Add: Outstanding cheques, February 28 1,250
Total cheques to be accounted for 19,650
Less: Cheques issued per books 17,750
Outstanding cheques, January 31 $1,900
181) You have recently started a part time job in the accounting department of Burris Limited. The accountant, Ted
Landry, had prepared the company's bank reconciliation for June 20X3. After completing the reconciliation, he
made the following journal entry:
June 30 Cash 2,390

Bank Charges Expense 124
Accounts Receivable ($3,000 collection less 2,500
$500 NSF)
Interest Earned 14
Ted was reviewing the bank reconciliation with you when, unfortunately, you spilled your coffee on it. He asks
you to rewrite the reconciliation, in good form. He remembers that the only outstanding deposit was the last
deposit for the month. You check the general ledger and the bank balance at June 30 was $24,527 (credit). You
also check the bank statement and the balance was $22,314 (credit, i.e. overdrawn). You look up the last
deposit for the month–it was for $21,789.
40
Required: Using the above information prepare, in good form, the bank reconciliation for Burris Limited for
June.
Answer: BURRIS LIMITED

Bank Reconciliation
June 30, 20X3
Cash balance per bank $(22,314)

Add: Deposit in transit 21,789
(525)
Less: Outstanding cheques (see note below) 21,612
Adjusted cash per bank $(22,137)
Cash balance per books $(24,527)
Add: Electronic collection of account $3,000
Interest earned 14 3,014
(21,513)
Less: Bank service charge $124
NSF cheque 500 624
Adjusted cash balance per books $(22,137)
Note: To solve, you complete the bank reconciliation with the information you know–the outstanding
cheques and the adjusted cash per bank will be unknown. After you arrive at the adjusted balance per
books, you enter this as the adjusted cash per bank and solve for the outstanding cheques.
41
182) Indicate the effect on a monthly bank reconciliation of each of the items listed below by placing the
appropriate letter to the left of each item.
A. Addition to the balance in the company's Cash account.

B. Deduction from the balance in the company's Cash account.
C. Addition to the balance on the bank statement.
D. Deduction from the balance on the bank statement.
E. Does not affect the reconciliation.
________ 1. The monthly service fee charged by the bank.

________ 2. Another company's cheque erroneously charged against the company's bank
balance on the bank statement.
________ 3. A customer's cheque returned by the bank marked NSF.
________ 4. A deposit in transit.
________ 5. A note collected by the bank during the month on behalf of the company.
________ 6. An outstanding cheque.
________ 7. A company recorded a cheque as a credit to its cash account in the books. The
cheque was recorded for $360 but it was actually written to a supplier for $630.
Assume the bank correctly recorded this cheque for $630 when cleared.
Answer: 1. B; 2. C; 3. B; 4. C; 5. A; 6. D; 7. B
183) Roucher Corporation's bank statement included two types of electronic funds transfers (EFT). One type of
EFT totaled $10,000 and was from customers paying their accounts online. Another type of EFT totaled
$16,500 and was from Roucher paying its accounts payable online.
Required:
(a) How will each of these items affect Roucher's bank reconciliation?
(b) Prepare the required journal entries, if any, that Roucher will make to record the above information on its
books.
Answer: (a) Roucher Corporation must add the electronic collections from customers in payment of their
accounts receivable to its cash balance per books on the bank reconciliation. It must deduct the
electronic payments it made in payment of its accounts payable from its cash balance per books on the
bank reconciliation.
(b)
Cash 10,000
Accounts Payable 16,500
Cash 16,500
42
184) Finn Company has just received its June 30 bank statement from City Bank. The bank statement and the cash
account, summarized below, are to be reconciled for the month of June.
Bank Statement
Balance, June 1 $5,200
Deposits 9,200
Notes receivable collected for X company
Principal 4,000
Interest 240
Cheques cashed (7,475)
Bank service charge (20)
NSF Cheque, Jimmy Dean (100)
Cash Account:
Cash Receipts 9,000
Cheques Written (7,000)
Other Data May June

Deposit in transit at month end $600 $400
Outstanding cheques at month end 300 525
Required:
a. Prepare a bank reconciliation using the following format:

Finn Company
Bank Reconciliation
June 30
Book Balance of Cash $ Bank Statement Balance $

Additions Additions
Deductions Deductions
Correct Cash Balance Correct Cash Balance
b. Give the journal entries that should be made in the accounts of Finn Company as a result of the above bank
reconciliation.
43
Answer: A.
Finn Company
Bank Reconciliation
June 30
Book Balance of Cash $6,800 Bank Statement Balance $11,045

Additions Additions
Note Collected 4,000 Deposit in transit 400
Interest on Note 240
Bank Service Charge (20) Outstanding Cheques (525)
NSF cheques, Jimmy Dean (100)
Correct Cash Balance $10,920 Correct Cash Balance $10,920
B.
1. Cash $4,240
Note receivable 4,000
2. Service charges expense 20
Cash 20
3. Trade receivables, Jimmy Dean 100
Cash 100
185) Red Company received the following October 31, 20X3, bank statement:
Transactions Balance
Balance, September 30 $18,000
Deposits recorded during October $40,000 58,000
Customer note collected for Red Company 2,520 60,520
(including $120 interest)
Cheques cleared during October 38,300 22,220
NSF cheque (given to Red by a customer) 100 22,120
Bank service charges 15 22,105
Balance, October 31 22,105
The cash account reflected the following for October:
CASH ACCOUNT
September 30 balance $20,500
October cash deposits 38,000
October cheques written $38,600
October 31 balance $19,900
The September 30 bank reconciliation showed:
44
Deposits in transit, $3,000, and outstanding cheques, $500.
Required:
A. What was the amount of the deposits in transit at October 31?

B. What was the amount of outstanding cheques at October 31?
C. Prepare a bank reconciliation for October. Use the following format:
Book Balance of Cash $ Bank Statement Balance $

Additions Additions
Correct Cash Balance $ Correct Cash Balance $
D. Give the journal entries that should be made by Red Company based on the bank reconciliation.
Answer: a. [$38,000 - (40,000 - 3,000)] = $1,000
b. [$36,600 - (38,300 - 500)] = $800
c.
Additions Additions
Note Collected 2,400 Deposit in transit 1,000
NSF Cheque (100) Outstanding Cheques (800)
Bank Service Charge (15)
d. Entries
1. Cash $2,520
2. Trade receivables 100
Cash 100
3. Service charge expense 15
Cash 15
45
186) What are "cash equivalents"? Specifically, where would they appear on the financial statements?
Answer: Cash equivalents are short-term investments that can readily be converted into cash and whose
value is unlikely to change. They normally have maturities of three months or less. They
usually appear with cash on the statement of financial position as the first listed current asset.
187) You are the new manager of Marsdon Company. The company distributes goods throughout the
Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within
two weeks. You notice that one employee is responsible for opening all incoming payments,
recording them in the accounting records, and depositing all receipts in the bank daily. When asked
why this one person performed all of these duties, you were told that it was more efficient for one
person to handle cash and to keep track of things. If any cash was missing, responsibility could be
easily determined. Do you agree with this arrangement? If you were to make changes, what would
you do, and why?
Answer: Note: Answers may vary. This is definitely not a good system. One person should not be
responsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties
of handling cash and accounting for cash should definitely be separated. This person could be
stealing from the firm; since he/she is the only one handling the receipt of cash, the theft could
easily be concealed. For example, when a customer pays cash on account, the employee could
debit sales returns and allowances instead of the cash account. To prevent such an occurrence,
different employees should have the responsibility of receiving cash, accounting for cash, and
depositing cash in the bank on a daily basis.
188) Piccolo Construction signed a contract to build a warehouse for a customer. Construction covers a four-year
period. The following data pertain to the contract and subsequent construction:
Contract price: $1,750,000

Estimated costs: 1,500,000
Actual results
Year Costs Collections

1 $750,000 $205,000
2 $450,000 $537,000
3 $225,000 $600,000
4 $ 75,000 $408,000
Required:
Calculate the revenue, expense, and profit for each of the four years assuming the following independent
situations:
The estimated costs to complete are well established and no unknown issues exist with respect to the project.
However, the customer has just been released from bankruptcy and this is the first contract with Piccolo
Construction has obtained from them.
Piccolo has previously built two warehouses for this customer and has never had any problems with cost
46
overruns or cash collections.
No problems with cash collections are anticipated however the project costs are uncertain due to
environmental issues which may arise.
Answer: Situation 1.
Completed Contract method should be used.
Year 1 Year 2 Year 3 Year 4
Revenue $0 $0 $0 $1,750,000
Expenses 0 0 0 1,500,000
Profit $0 $0 $0 $250,000
Situation 2
Percentage of completion method should be used
% of costs incurred 50% 30% 15% 5%
Revenue $875,000 $525,000 $262,500 $87,500
Expenses 750,000 450,000 225,000 75,000
Profit $125,000 $ 75,000 $37.500 $12.500
Situation 3
Zero-profit method should be used
Revenue $750,000 $450,000 $225,000 $325,000
Expenses 750,000 450,000 225,000 75,000
Profit $0 $0 $0 $250,000
47
Answer Key
1) A
2) C
3) C
4) A
5) A
6) A
7) A
8) B
9) D
10) C
11) A
12) A
13) B
14) B
15) A
16) C
17) B
18) D
19) A
20) B
21) B
22) A
23) B
24) A
25) D
26) D
27) A
28) D
29) C
30) A
31) C
32) D
33) B
34) C
35) B
36) C
37) D
38) D
39) C
40) D
41) B
42) A
43) C
44) D
45) C
46) A
47) D
48) B
49) B
50) B
48
Answer Key
51) C
52) C
53) C
54) D
55) A
56) A
57) A
58) D
59) A
60) D
61) B
62) D
63) D
64) C
65) B
66) B
67) A
68) B
69) D
70) C
71) B
72) A
73) C
74) A
75) C
76) D
77) D
78) A
79) B
80) C
81) A
82) D
83) A
84) A
85) D
86) C
87) B
88) B
89) D
90) D
91) D
92) A
93) FALSE
94) TRUE
95) FALSE
96) TRUE
97) FALSE
98) FALSE
99) TRUE
100) FALSE
49
Answer Key
101) TRUE
102) TRUE
103) TRUE
104) TRUE
105) TRUE
106) FALSE
107) TRUE
108) FALSE
109) TRUE
110) TRUE
111) FALSE
112) FALSE
113) FALSE
114) TRUE
115) FALSE
116) FALSE
117) FALSE
118) FALSE
119) TRUE
120) TRUE
121) FALSE
122) TRUE
123) TRUE
124) FALSE
125) FALSE
126) TRUE
127) FALSE
128) FALSE
129) FALSE
130) FALSE
131) FALSE
132) FALSE
133) TRUE
134) FALSE
135) TRUE
136) TRUE
137) TRUE
138) FALSE
139) FALSE
140) FALSE
141) FALSE
142) TRUE
143) FALSE
144) FALSE
145) TRUE
146) FALSE
147) TRUE
148) TRUE
149) FALSE
150) FALSE
50
Answer Key
151) TRUE
152) TRUE
153) FALSE
154) FALSE
155) FALSE
156) TRUE
157) FALSE
158) TRUE
159) 1. B; 2. C; 3. B; 4. C; 5. A; 6. D; 7. B
51
Answer Key
160) (a)
DR CR
Service Revenue 1,500,000
(To record credit service revenue)
Cash 1,300,000
(To record collection of receivables)
(To write off specific accounts)
(To reverse write-off of account)
Cash 4,000
(To record collection of account)
(b)
TRADE ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL

ACCOUNTS
450,000 37,000 45,000
1,500,000 1,300,000 4,000
4,000 37,000 12,000 Bal.
4,000
Bal. 613,000
Required balance ($613,000 × .05) $30,650

Balance before adjustment 12,000
Adjustment required $18,650
Dec 31 Bad Debts Expense 18,650

52
Answer Key
January 5 Trade Accounts Receivable — T. Holmes 1,500

Sales 1,500
Cost of Goods Sold 900
Merchandise Inventory 900
April 15 Cash 500
August 21 Allowances for Doubtful Accounts 1,000
Trade Accounts Receivable — T. Holmes 1,000
October 5 Trade Accounts Receivable — T. Holmes 350
Allowance for Doubtful Accounts 350
Cash 350
A. Trade receivables 1,000

Sales revenue 1,000
B. Cash 1,000
C. Cash 980
Sales discount 20
A. Cash 95
Sales revenue 95
B. Trade receivables 359
Sales revenue 359
C. Sales returns and allowances 45
Cash 45
D. Cash 98
Credit card discounts 2
Sales revenue 100
If credit card discounts are considered as an operating expense account:

Net Sales = Sales revenue - sales returns and allowances
$509 = (95 + 359 + 100) - 45
53
Answer Key
A. Cash 3,920
Sales discounts 80
B. Sales returns and allowances 2,000
Cash 1,960
Sales discounts 40
C. Cash 4,000
165) A. Sales revenue

B. $110,000 - $100,000 = $10,000
C. Net sales
D. Cost of goods sold; $100,000 - $25,000 = $75,000

Sale on July, 20X7 B $5,000 C $5,000
account on August 9, 20X7 A $5,000 B $5,000
Assumption B: Collection of the A $4,850
account on July 18, 20X7 D 150 $5,000
167) A. Sales revenue

B. $190,000 - $20,000 = $170,000
C. Gross margin
D. $170,000 - $100,000 = $70,000
168) 1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. Dr
169) (1) a. 58.3% (13,018/22,348), b. 59.2% (12,392/20,917), (2) P Co. may have discounted their selling
prices to meet competition, increasing costs of producing their product, a change in the sales mix of their
products toward selling more of the lower margin products, inventory losses and/or higher storage costs
caused by poor management control.
170) 1 a. 26.7% (2,979/11,170), b. 30.2% (3,328/11,038), c. 30.6% (3,040/9,932), d. 30.1% (2,835/9,427), e.
31.3% (2,738/8,746). 2 The gross profit has been steadily falling between 20X8 and 20X1. However, in
20X7, "Toys 4 U" gross profit ratio took a sharp and severe drop of 3.5% from 20X6. Therefore, the ratio
has worsened over time with a severe drop occurring in the most recent year.
54
Answer Key
Dec. 17 Sales Discounts 90

Trade Accounts Receivable 90
(To correct accounts for sales discount)
(To reverse write-off of collected account)
(To correct erroneous collection entry)
(To correct error in recording Bad Debt
Expense on Dec. 31)

A Allowance for Doubtful Accounts $3,200
800 + 3,000 — 600
B Bad Debt Expense $3,000
150,000 x 2%
C Trade Receivables 50,900
50,000 — 148,500 + (200,000 x 74%) — 600
A. Bad debt expense 1,750

B. Bad debt expense 2,000
C. Bad debt expense 2,150
174) a. 86.8% (176,528/203,270), b. 84.5% (59,565/70,450), c. 78.0% (16,768/21,490)
55
Answer Key
175) 1.
a. 11.51 (19,805/1,721)
b. 31.7 days (365 days/11.51),
2. The turnover ratio indicates the number of times on average that the receivables are collected while the average
collection period shows the length of time in days it takes the company to collect its receivables from the credit
customers. The higher the turnover ratio, the less days it takes to collect our receivables, thereby increasing
liquidity of the receivables.
176) 1. 14.29 ($1,500,000/ [100,000 + 110,000]/2),
2. 14.29 (same calculation),
3. The ratio stayed the same because only the adjusting entry affects the balance of trade receivables, net while the
actual write off of customer accounts simply offset the asset against the contra asset account so that net
receivables do not change.
56
Answer Key
177) a. Required balance for allowance for doubtful accounts
1-30 days $350,000 1.5% $5,250

31-60 days 180,000 3% 5,400
61-90 days 55,000 5% 2,750
Over 90 days 21,000 25% 5,250
$18,650
existing balance in the account 2,500
entry required to bad debt expense $21,150

b.
c.
Accounts receivable ($606,000 - $15,000) 591,000
Less allowance for doubtful accounts (18,650 — 15,000) — 3,650
Net accounts receivable 587,350
d.
Cash 2,200
e. The allowance for doubtful accounts balance would increase by $2,200, the new credit balance would be $5,850.
57
Answer Key
178) (a) Deposits in transit:
Deposits per books in July $9,700

Deposits per the bank in July $9,540
Less: June 30 deposits in transit 300
July receipts deposited in July 9,240
Deposits in transit, July 31 $460
Cheques per books in July $11,170

Cheques clearing the bank in July $11,500
Less: Outstanding cheques, June 30 1,800
July cheques clearing in July 9,700
Outstanding cheques, July 31 $1,470
179) The reconciliation of the cash account is very important in determining the correct, up-to-date balance for
cash to be presented on the company's statement of financial position. It is also a good tool for detecting
errors in the cash account.
180) (a) Deposits in transit:
Deposits per bank statement in February $18,850

Add: Deposits in transit, February 28 1,400
Total deposits to be accounted for 20,250
Less: Deposits per books 19,500
Deposits in transit, January 31 $750
Cheques clearing the bank in February $18,400

Add: Outstanding cheques, February 28 1,250
Total cheques to be accounted for 19,650
Less: Cheques issued per books 17,750
Outstanding cheques, January 31 $1,900
58
Answer Key
181) BURRIS LIMITED

Bank Reconciliation
June 30, 20X3
Cash balance per bank $(22,314)

Add: Deposit in transit 21,789
(525)
Less: Outstanding cheques (see note below) 21,612
Adjusted cash per bank $(22,137)
Cash balance per books $(24,527)
Add: Electronic collection of account $3,000
Interest earned 14 3,014
(21,513)
Less: Bank service charge $124
NSF cheque 500 624
Adjusted cash balance per books $(22,137)
Note: To solve, you complete the bank reconciliation with the information you know–the outstanding cheques and
adjusted cash per bank will be unknown. After you arrive at the adjusted balance per books, you enter this as the
adjusted cash per bank and solve for the outstanding cheques.
182) 1. B; 2. C; 3. B; 4. C; 5. A; 6. D; 7. B
183) (a) Roucher Corporation must add the electronic collections from customers in payment of their accounts receivabl
to its cash balance per books on the bank reconciliation. It must deduct the electronic payments it made in payment
its accounts payable from its cash balance per books on the bank reconciliation.
(b)
Cash 10,000
Accounts Payable 16,500
Cash 16,500
59
Answer Key
184) A.
Finn Company
Bank Reconciliation
June 30

Additions Additions
Note Collected 4,000 Deposit in transit 400
Bank Service Charge (20) Outstanding Cheques (525)
NSF cheques, Jimmy Dean (100)
B.
1. Cash $4,240
2. Service charges expense 20
Cash 20
3. Trade receivables, Jimmy Dean 100
Cash 100
60
Answer Key
185) a. [$38,000 - (40,000 - 3,000)] = $1,000

b. [$36,600 - (38,300 - 500)] = $800
c.
Additions Additions
Note Collected 2,400 Deposit in transit 1,000
NSF Cheque (100) Outstanding Cheques (800)
Bank Service Charge (15)
d. Entries
1. Cash $2,520
2. Trade receivables 100
Cash 100
3. Service charge expense 15
Cash 15
186) Cash equivalents are short-term investments that can readily be converted into cash and whose value is
unlikely to change. They normally have maturities of three months or less. They usually appear with cash
on the statement of financial position as the first listed current asset.
187) Note: Answers may vary. This is definitely not a good system. One person should not be responsible for
the receipt of cash, accounting for cash, and depositing in the bank. The duties of handling cash and
accounting for cash should definitely be separated. This person could be stealing from the firm; since
he/she is the only one handling the receipt of cash, the theft could easily be concealed. For example, when
a customer pays cash on account, the employee could debit sales returns and allowances instead of the
cash account. To prevent such an occurrence, different employees should have the responsibility of
receiving cash, accounting for cash, and depositing cash in the bank on a daily basis.
61
Answer Key
188) Situation 1.
Completed Contract method should be used.
Year 1 Year 2 Year 3 Year 4
Revenue $0 $0 $0 $1,750,000
Expenses 0 0 0 1,500,000
Profit $0 $0 $0 $250,000
Situation 2
Percentage of completion method should be used
% of costs incurred 50% 30% 15% 5%
Revenue $875,000 $525,000 $262,500 $87,500
Expenses 750,000 450,000 225,000 75,000
Profit $125,000 $ 75,000 $37.500 $12.500
Situation 3
Zero-profit method should be used
Revenue $750,000 $450,000 $225,000 $325,000
Expenses 750,000 450,000 225,000 75,000
Profit $0 $0 $0 $250,000
62
1) Retail Company reported the following amounts on its 20X2 income statement: Purchases, $45,000;
Beginning 20X2 inventory, $15,000; and Cost of goods sold, $50,000. What was the 20X2 ending
inventory?
A) $26,000 B) $27,000 C) $25,000 D) $10,000
Answer: D
2) The 20X2 records of Tom Company showed beginning inventory, $6,000; cost of goods sold,
$14,000; and ending inventory, $8,000. What was the purchases amount for 20X2?
A) $10,000 B) $16,000 C) $9,000 D) $12,000
Answer: B
3) When goods are sold on credit, revenue usually should be recognized on which of the following
dates?
A) manufacture of the goods.
B) passage of title from the seller to the buyer.
C) receipt of the goods by the buyer.
D) receipt of the sales order
Answer: B
4) Which of the following types of inventory usually is not held by a manufacturing business?
A) Work in process inventory. B) Raw material inventory.
C) Finished goods inventory. D) Merchandise inventory.
Answer: D
5) The cost of goods sold account is which of the following?

A) An expense B) A contra-asset
C) An extraordinary item D) An asset
Answer: A
6) Which of the following is not an inventory account in a manufacturing company?

A) Work in process B) Raw materials
C) Finished goods D) Goods available for sale
Answer: D
7) Wilburn Company reported the following data at year-end: Sales, $100,000; Beginning inventory,
$8,000; Ending inventory, $6,000; Cost of goods sold, $60,000; and Gross margin, $40,000. What
was the amount of merchandise purchases for the year?
A) $58,000 B) $40,000 C) $46,000 D) $68,000
Answer: A
8) The following information was taken from the 20X2 income statement of Milburn Company: Pretax
profit, $12,000; Total operating expenses, $20,000; Sales revenue, $120,000. Compute the cost of
goods sold.
A) $108,000 B) $88,000 C) $112,000 D) $100,000
Answer: B
1
9) The following information was taken from the 20X2 income statement of Milburn Company: Pretax
profit, $12,000; Total operating expenses (not including income taxes), $20,000; Sales revenue,
$120,000; Beginning inventory, $8,000; and Purchases, $90,000. Compute the amount of the ending
inventory.
A) $88,000 B) $18,000 C) $10,000 D) $8,000
Answer: C
10) Which of the following statements about inventory costs is true?

A) Purchases discounts increase sales revenue to arrive at net sales.
B) Net realizable value is the expected sales price plus selling costs.
C) Factory overhead consists of manufacturing costs other than direct materials and direct labour.
D) FIFO Reserve is a contra sales account for the excess of FIFO over weighted-average
inventory.
Answer: C
11) Which of the following costs would be included in the costs of inventory of a manufacturer?
A) Wages for factory workers. B) Electricity for the office building.
C) Wages for administrative staff. D) Sales salaries.
Answer: A
12) Which of the following should be included in the cost of inventory?

A) Amortization on the inventory warehouse B) Receiving and inspection costs
C) The cost of keeping the inventory records D) The salesperson's commission
Answer: B
13) Which of the following should be included in the cost of the inventory?
A) Salaries paid to warehouse employees.
B) The cost of shelves used to store inventory
C) Advertising costs to sell the inventory
D) Shipping and handling on inventory purchases
Answer: D
14) Richmond Company had the following information taken from its 20X1 adjusted trial balance:
Sales, $200,000; Sales Discounts, $4,000; Beginning Inventory, $10,000; and Purchases, $140,000.
A physical count of the merchandise on hand at the end of the year showed $20,000. Compute the
gross margin (gross profit) that would appear in the statement of earnings.
A) $74,000 B) $70,000 C) $62,000 D) $66,000
Answer: D
15) On March 10, Frazier Company received merchandise for resale from its normal supplier. The
invoice price was $3,600 with terms of 2/10, n/30 for 100 units of Part #345. The invoice was paid
on March 17. Freight costs were $120 and the company paid $108 of interest on a loan to buy the
inventory. What is the unit cost that should be recorded for each of the 100 units of Part #345?
A) $36.48 B) $37.56 C) $37.20 D) $36.00
Answer: A
2
16) Which of the following equations is correct?
A) Beginning Inventory + Ending Inventory - Purchases = Cost of Goods Sold.
B) Income Before Taxes - Operating Expenses = Cost of Goods Sold.
C) Sales + Cost of Goods Sold = Gross Margin.
D) Beginning Inventory + Purchases - Cost of Goods Sold = Ending Inventory.
Answer: D
17) Marsden Company purchased a significant amount of raw materials inventory for a new product it is
manufacturing. Marsden purchased insurance on these raw materials while they were in transit from
the supplier. How should Marsden account for the insurance costs?
A) As a prepaid expense until the inventory arrives
B) As part of the cost of the raw materials inventory
C) As an operating expense of the period
D) As a contra-asset account to inventory
Answer: B
18) Which of the following costs would not be part of product inventory costs for a manufacturer such
as Harley Davidson?
A) Costs to store finished motorcycles until they are sold.
B) The wages and benefits of an employee in the welding department.
C) The factory manager's salary and benefits.
D) Kickstands purchased for use in manufacturing the motorcycles.
Answer: A
19) Which of the following businesses would not have cost of goods sold?
A) A grocery store B) A movie theatre
C) A jewelry store D) A manufacturer of batteries
Answer: B
20) Theinventory of a retail company is comparable to which type of inventory of a manufacturing

company?
A) Supplies B) Work in process C) Finished goods D) Raw materials
Answer: C
21) Halles Medical Instrumentshas net sales and gross profit of $1,841,000 and $971,000 respectively.
Assuming the cost of goods available were $1,584,000, what was the cost of Halle's ending
inventory?
A) $460,000 B) $714,000 C) $747,000 D) $350,000
Answer: B
22) Smithers Amusement Machines has cost of goods sold of $100,000 and ending inventory of
$150,000. If Smithers had no purchases and no returns, what was the cost of its beginning
inventory?
A) $250,000 B) $150,000 C) $50,000 D) $100,000
Answer: A
3
23) If ABC's statement of earnings showed cost of goods sold at $78,000, purchases of $80,000,
freight-in at $300, purchases returns of $500 and end-of-the period inventory at $11,900, its
beginning-of-the-period-inventory must have been:
A) $9,200 B) $10,400 C) $9,900 D) $10,100
Answer: D
24) A company reports its 20X2 cost of goods sold at $20.0 billion. Its ending inventory for 20X2 is
$1.8 billion and for 20X1, ending inventory was $1.5 billion. How much inventory did the company
purchase during 20X2?
A) $21.8 billion B) $19.7 billion C) $18.5 billion D) $20.3 billion
Answer: D
25) Which of the following is true under the perpetual inventory system?
A) A separate account for purchases is required.
B) Two entries are required to record a sale.
C) Cost of goods sold cannot be determined unless a physical inventory is taken.
D) One entry is required to record a sales return.
Answer: B
26) Which inventory system keeps an ongoing record of purchases and sales of inventory with
adjustments that reflect changes as they occur
A) Just-in-time system B) Periodic system
C) Specific identification system D) Perpetual system
Answer: D
27) On February 20, 20X1, Ross Sound Company purchased $10,000 of stereo equipment for resale on
credit, subject to the terms 3/15, n/30. The periodic inventory system is used. If the company paid
for these goods on March 20, the entry made to record the payment should include which of the
following?
A) A $300 debit to Purchases discounts. B) An $8,500 credit to Cash.
C) A $10,000 debit to Trade payables. D) A $9,700 debit to Purchases.
Answer: C
28) Two systems are used in accounting for inventory-perpetual and periodic. Which of the following
statements is correct?
A) In a perpetual inventory system, the inventory account is not changed for each purchase during
the accounting period.
B) In a periodic inventory system, the inventory account is increased for each purchase during the
accounting period.
C) In a periodic inventory system, cost of goods sold is developed from a comparison of beginning
inventory and ending inventory only.
D) In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during
the accounting period.
Answer: D
4
29) If
merchandise for resale is purchased for $2,000, terms 2/10, n/30, the entry to record the purchase should be
which of the following (assuming a periodic inventory system)?
Debit Credit
A Inventory $2,000 Trade payables 1,960
B Accounts payable 1,960 Inventory 1,960
C Inventory 1,960 Trade payables 2,000
D Purchases 2,000 Trade payables 2,000

Answer: D
30) Which one of the following statements concerning the periodic and perpetual inventory systems is
true?
A) Due to advances in computers, many businesses recently have begun to use the periodic
inventory system.
B) The periodic system uses a purchases account.
C) Inventory controls are only needed for the periodic inventory systems.
D) None of the accounting entries vary between the two systems.
Answer: B
31) When a company uses the periodic inventory system in accounting for its merchandise inventory,
which of the following is true?
A) Purchases are recorded in the cost of goods sold account.
B) The inventory account is updated after each sale.
C) The inventory account is updated throughout the year as purchases are made.
D) Cost of goods sold is computed at the end of the accounting periods rather than at each sale.
Answer: D
32) Joe Company sold merchandise at an invoice price of $1,000 to Gibbs, Inc., with terms of 2/10, n/30. Which of
the following is the correct entry to record the purchase by Gibbs if the company uses the periodic inventory
system and the gross method to record purchases?
A Purchases 1,000
Cash 1,000
B Inventory 1,000
C Purchases 980
Trade Payables 980
D Purchases 1,000

Answer: D
5
33) In order to determine cost of goods sold in a periodic inventory system we
A) subtract ending inventory from beginning inventory.
B) subtract purchases from ending inventory.
C) subtract ending inventory from cost of goods available for sale.
D) add purchases to beginning inventory.
Answer: C
34) A company that makes the following journal entry at the time of purchasing inventory is using which of the
following inventory systems?
Dr. Inventory xxx

Cr. Accounts Payable xxx
A) Just in time system B) Periodic system

C) Specific identification method D) Perpetual system
Answer: D
35) Ifa company were using a perpetual inventory system, which of the following entries is the correct journal
entry to record the purchase of $20,000 of merchandise on account?
A. Dr. Inventory 20,000

Cr. Accounts payable 20,000
B. Dr. Inventory 20,000

Cr. Purchases 20,000
C. Dr. Purchases 20,000

Cr. Inventory 20,000
D. Dr. Purchases 20,000


Answer: A
36) Which of the following items will increase the cost of inventory for the buyer of goods?
A) Freight charges paid by the purchaser
B) Purchase returns and allowances granted by the seller
C) Freight charges paid by the seller
D) Purchase discounts taken by the purchase
Answer: A
6
37) IFRS standards require that a firm select the cost flow assumption that:
A) most clearly reflects current income.
B) most closely matches the physical flow of inventory.
C) provides the most conservative inventory cost.
D) maximizes income.
Answer: A
38) In
20X2, Landings, Inc. provided the following items in their footnotes. Their cost of goods
available for sale was $4.5 billion under FIFO costing and their ending inventory value under FIFO
costing was $2.1 billion. Their purchases were $4.1 billion. What was their opening inventory?
Answer: A
39) In20X2, Landings Inc. provided the following items in their footnotes. Its cost of goods available
for sale was $6.2 billion under FIFO costing and its ending inventory value under FIFO costing was
$2.1 billion. Its opening inventory was $2.5 billion. What was its purchases?
Answer: D
40) Which of the following statements regarding inventories is correct?

A) Under FIFO, the ending inventory is based on the latest units purchased.
B) FIFO assumes that the costs of the earliest goods acquired are the last to be sold.
C) It is generally good business management to sell the most recently acquired goods first.
D) FIFO seldom coincides with the actual physical flow of inventory.
Answer: A
41) Which of the following businesses would be most likely to use the specific identification method?
A) bookstore B) grocery store C) car dealership D) shoe store
Answer: C
42) Which cost determination method smooths the effects of price changes?
A) Lower of cost and net realizable value. B) Specific identification.
C) FIFO. D) Average cost.
Answer: D
43) During a period of inflation, which cost formula will result in the highest net income?
A) FIFO. B) Both FIFO and average cost.
C) Average cost. D) Lower of cost and net realizable value.
Answer: A
7
Reference: 07-01
Shillings had the following inventory activity during April:
Units Unit cost Total cost

Beginning inventory 800 $10.00 $8,000
Purchase: April 4 1,400 11.00 15,400
Sale: April 8 (1,500)
Purchase: April 12 900 10.50 9,450
Sales: April 24 (900)
44) IfShillings is using a perpetual system and the FIFO costing assumption, what is the ending
inventory closest to?
A) $7,350 B) $7,310 C) $7,500 D) $7,880
Answer: A
45) IfShillings is using a perpetual system and the weighted average costing assumption, what is the
ending inventory closest to?
A) $7,588 B) $7,460 C) $7,392 D) $8,470
Answer: C
46) IfShillings is using a perpetual system and the FIFO costing assumption, what is the cost of goods
sold closest to?
A) $25,700 B) $25,930 C) $25,500 D) $22,400
Answer: C
47) IfShillings is using a perpetual system and the weighted average costing assumption, what is the
cost of goods sold closest to?
A) $25,458 B) $25,012 C) $24,683 D) $24,777
Answer: A
48) A company purchased inventory as follows:
March 3 300 units at $9.00

March 4 200 units at $10.00
On March 5, it sold 400 units for $17 each. The weighted- average unit cost to be used for the cost of goods
sold on March 5, in a perpetual inventory system, is
A) $9.60. B) $10.00. C) $9.40. D) $9.00.
Answer: C
49) During a periodof rising costs, the owners of a company wishing to minimize the company's tax
burden would select which of the following cost flow assumptions?
A) Weighted-average cost. B) Lower of cost and net realizable value.
C) FIFO. D) Specific identification.
Answer: A
8
50) During a period of rising costs, the manager of a company wishing to maximize her bonus would
select which of the following cost flow assumptions?
A) Weighted-average cost. B) Specific identification.
C) Lower of cost and net realizable value. D) FIFO.
Answer: D
51) Selectionof an inventory cost formula by management should be influenced most by the:
A) income tax effects.
B) fiscal year end.
C) goal of reporting inventory at its lowest cost.
D) physical flow of goods.
Answer: D
52) Theconsistent application of an inventory cost formula is essential for

A) neutrality. B) relevance. C) accuracy. D) comparability.
Answer: D
53) Nutone values its inventory on the lower of cost and market basis. The following data came from the 20X7
inventory, which consisted of two items:
Components Cables
Original cost $12,000 $15,000
Selling price 15,000 26,000
Estimated selling costs 5,000 10,000
Normal profit margin 1,500 1,000
What would be the value of inventory on Nutone's statement of financial position?

A) $27,000 B) $25,000 C) $29,000 D) $24,000
Answer: B
54) Why would high technology firms probably choose FIFO as their inventory valuation method?
A) FIFO would cause reported earnings to be lower due to the deflationary nature of its ending
inventory causing taxes to also be lower.
B) FIFO is the easiest method to use.
C) FIFO would cause reported earnings to be higher.
D) FIFO would ensure that inventory would not become obsolete.
Answer: A
55) Which of the following should be assessed when analyzing the quality of the cost of goods sold
amount:
A) The method used to depreciate inventory.
B) The method used to count physical inventory
C) The amount of discretionary expenses included in the cost of goods sold amount.
D) The cost flow assumption for inventory
Answer: D
9
56) Thelower of cost and net realizable value basis of valuing inventories is a departure from the
A) historical cost principle. B) valuation principle.
C) matching principle. D) prudence principle.
Answer: A
57) Inventory thatoriginally cost $20,000 was written down to its net realizable value of $18,500 in the
last accounting period. At the end of the current accounting period, the net realizable value is
determined to be $23,000. At what amount should the inventory be reported on the current period's
A) $18,500. B) $20,000. C) $23,00000. D) $16,000.
Answer: B
58) Under the lower of cost and net realizable value basis, the adjusting entry to record a decline in net
realizable value below cost includes a
A) debit to the Cost of Goods Sold account. B) credit to the Cost of Goods Sold account.
C) debit to the Inventory account. D) credit to the Sales account.
Answer: A
59) Thelower of cost and net realizable value basis of valuing inventories ensures that inventories are
A) not under-valued. B) valued at their current cost.
C) not over-valued. D) valued at their selling price.
Answer: C
60) Tuba Inc. is a wholesaler of electronics. It purchased 1,000 units of Product X for $500 each during
2013. The selling price during the year was $750 per unit. At year end, it had 100 units on hand and
due of changes in technology, the selling price will have to be reduced by 40% in order to sell them.
The value of each unit of Product X for the year-end inventory presentation should be
A) $400. B) $600. C) $500. D) $450.
Answer: D
61) PictonCo. prepares its estimate of LCM using the net realizable value. Inventory item X570 cost
$45 and the item is currently selling in the market for $55 and selling costs are estimated to be $6.
Picton expects to earn a profit of $4 on the sale of this item. In its year-end financial statements,
Picton Co. should value this item at:
A) $49 B) $55 C) $50 D) $45
Answer: D
62) Inventory that

originally cost $10,000 was written down to its net realizable value of $8,500 at the
end of 2012. At the end of 2013, the net realizable value is determined to be $10,500. At what
amount should the inventory be reported on the December 31, 2013 statement of financial position?
A) $9,500. B) $10,000. C) $8,500. D) $10,500.
Answer: B
10
63) The lower of cost and net realizable value basis of valuing inventories ensures that inventories are
A) valued at their current cost. B) reflective of obsolescence.
C) not under-valued. D) valued at their selling price.
Answer: B
64) Shilling Company has implemented an inventory management system in which one person places
the order for new inventory, a second person checks it against the purchase order when it arrives and
a third person records the receipt of physical inventory in the accounting records. The purpose of
this system is:
A) to reduce accounting errors.
B) to guard against internal theft and collusion.
C) to reduce storage costs.
D) to guard against stock-outs.
Answer: B
65) An understatement of the beginning inventory results in

A) an overstatement of earnings. B) an understatement of earnings.
C) a need to adjust purchases. D) no effect on the period's earnings.
Answer: A
66) Will Company's independent accountant discovered that the ending inventory for 20X2 had been
overstated by the company by $2,000. Before the correction, what was the effect in the 20X2
statement of earnings because of the overstatement of the ending inventory?
A) Cost of goods sold was overstated by $2,000.
B) Pretax profit was overstated and the cost of goods sold was understated by $2,000.
C) Pretax profit understated by $2,000.
D) Pretax profit was understated by $2,000.
Answer: B
67) A $15,000 overstatement of the 20X2 ending inventory was discovered after the financial
statements for 20X2 were prepared. What was the effect of the inventory error on the 20X2 financial
statements?
A) Current assets were overstated and profit was understated.
B) Current assets were overstated and profit was overstated.
C) Current assets were understated and profit was understated.
D) Current assets were understated and profit was overstated.
Answer: B
11
68) Wilder Company reported pretax profit amounts of: 20X2, $11,000; and 20X3, $15,000. Later it was
discovered that the ending inventory for 20X2 was understated by $2,000 (and not corrected in 20X3). The
correct pretax profit for each year was which of the following?
20X2 20X3
A $9,000 $13,000
B $13,000 $13,000
C $13,000 $17,000
D $9,000 $17,000

Answer: B
69) At the end of 20X1, a $2,500 understatement was discovered in the amount of the 20X1 ending
inventory as reflected in the perpetual inventory records. What were the 20X1 effects of the $2,500
inventory error (before correction)?
A) Assets (inventory) were understated by $2,500 and pretax profit was overstated by $2,500.
B) Assets (inventory) were understated by $2,500 and pretax profit was understated by $2,500.
C) Cost of goods sold was overstated by $2,500 and pretax profit was overstated by $2,500.
D) Cost of goods sold was understated by $2,500 and pretax profit was understated by $2,500.
Answer: B
70) An overstatement of ending inventory in one period results in

A) an overstatement of the ending inventory of the next period.
B) no effect on profit of the next period.
C) an understatement of profit of the next period.
D) an overstatement of profit of the next period.
Answer: C
71) Ifbeginning inventory is understated by $1,300 and ending inventory is understated by $700, pretax
profit for the period will be which of the following?
A) Overstated by $600. B) Understated by $600.
C) Overstated by $2,000. D) Understated by $2,000.
Answer: A
72) On December 15, 20X1, Toby Company accepted delivery of merchandise which it purchased on
credit. As of December 31, 20X1, the company had neither recorded the transaction nor included the
merchandise in its inventory because the seller's invoice had not been received. The effect of this
omission on its statement of financial position at December 31, 20X1, (end of the accounting
period) was which of the following?
A) Assets and liabilities were understated but shareholders' equity was not affected.
B) Shareholder's equity was the only item affected by the omission.
C) Assets and shareholders' equity were overstated but liabilities were not affected.
D) Assets and shareholders' equity were understated but liabilities were not affected.
Answer: A
12
73) An overstatement of the beginning inventory results in
A) no effect on the period's profit. B) an understatement of profit.
C) an overstatement of profit. D) a need to adjust purchases.
Answer: B
74) Sue Company reported profit in 20X1 of $27,000 and in 20X2 of $32,000. Later it was discovered that the
ending inventory for 20X1 was understated by $15,000. Disregard income taxes. The correct amounts of profit
for 20X1 and 20X2 were which of the following?
20X1 20X2
A $27,000 $32,000
B $42,000 $17,000
C $12,000 $47,000
D $17,000 $32,000

Answer: B
75) Upaway Company hired some students to help count inventory during their semester break.
Unfortunately, the students added incorrectly and ending inventory was overstated by $12,000.
What would be the effect of this error in ending inventory?
A) Ending retained earnings would be understated.
B) Profit would be understated.
C) Profit would be overstated.
D) Cost of goods sold would be overstated.
Answer: C
76) During theaudit of Virginia Company's 20X2 financial statements, the auditors discovered that the
20X1 ending inventory had been overstated by $10,000 and that the 20X2 ending inventory had
been overstated by $8,000. Before the effect of these errors, 20X2 pretax profit had been computed
as $100,000. What should be reported as the correct 20X2 profit before taxes?
A) $118,000 B) $102,000 C) $98,000 D) $100,000
Answer: B
77) Darkhorse Ltd. has a days in inventory ratio of 40 and average inventory of $254,000. What is its
cost of goods sold?
A) Cannot be determined. B) $2,317,750.
C) $12,700,000. D) $1,854,200.
Answer: B
78) An automobile dealer would most likely have a

A) low inventory turnover. B) high inventory turnover.
C) low profit margin. D) high volume.
Answer: A
13
79) The inventory turnover ratio is calculated by dividing cost of goods sold by
A) 365 days. B) average inventory.
C) beginning inventory. D) ending inventory.
Answer: B
80) Days in inventory is calculated by dividing 365 days by

A) ending inventory. B) average inventory.
C) beginning inventory. D) the inventory turnover ratio.
Answer: D
81) For20X3, Wilver Inc. reported $24,000 beginning inventory and $26,000 ending inventory. Net
sales were $160,000 and gross profit was $55,000 for the same period. Based on these figures,
inventory turnover for 20X3 was:
A) 9.2 times. B) 4.2 times. C) 3.4 times. D) 6.4 times.
Answer: B
82) An increase in inventory turnover means, days in inventory

A) decreases. B) increases.
C) remains the same. D) cannot be determined.
Answer: A
83) Acompany recorded net purchases of $20.3 billion for 20X2. In 20X1, ending trade payables was
$1.2 billion and in 20X2, it was $1.6 billion. How much cash was paid to suppliers in 20X2?
Answer: A
84) Last Horizons Ltd. has a days in inventory ratio of 45 and average inventory of $265,000. What is
its cost of goods sold?
A) $2,149,444 B) $11,762,112
C) $1,655,210 D) Cannot be determined
Answer: A
85) How is the cost of goods sold calculated under the periodic method?
A) By carefully matching selling and administrative expenses with the sales to which they are
related and then reporting these expenses in the same period the associated revenue is reported.
B) By adding the cost of purchases during the period to the cost of the inventory on hand at the
end of the period and subtracting the inventory on hand at the beginning of the period.
C) By adding the cost of purchases during the period to the cost of the inventory on hand at the
beginning of the period and adding this figure to the cost of the inventory on hand at the end of
the period.
D) By subtracting the cost of the inventory on hand at the ending of the period from the cost of
goods available for sale.
Answer: D
14
86) In order to determine cost of goods sold in a periodic inventory system we
A) subtract ending inventory from beginning inventory plus purchases.
B) subtract purchases from ending inventory.
C) add purchases to beginning inventory.
D) subtract ending inventory from beginning inventory.
Answer: A
87) On March 15, 20X1, Jack Company purchased $5,000 of merchandise on credit subject to terms
2/10, n/20. The periodic inventory system is used. If Jack pays for these goods on March 30, the
entry made to record the payment should include which of the following?
A) Credit of $100 to Purchase discounts. B) Debit of $4,900 to Trade payables.
C) Credit of $4,900 to cash. D) Debit of $5,000 to Trade payables.
Answer: D
88) Ifa company were using a periodic inventory system, which of the following entries is the correct journal entry
to record the purchase of $20,000 of merchandise on account?
A. Dr. Inventory 20,000

B. Dr. Inventory 20,000

Cr. Purchases 20,000
C. Dr. Purchases 20,000

Cr. Inventory 20,000
D. Dr. Purchases 20,000


Answer: D
89) Seinerfeld Company had its merchandise inventory warehouse destroyed by a fire. Thankfully, the
owner had the accounting records at home to prepare financial statements after counting the
inventory earlier in the day. The company used the periodic inventory system. In the shock of being
notified of the fire, the owner spilled his dinner on the statement of earnings he had just completed.
However, the following information was readable: Sales, $200,000; Beginning Inventory, $20,000;
Purchases, $130,000; Total Operating Expenses (not including taxes), $40,000; and Profit Before
Taxes, $20,000. There were no sales returns, purchases returns, sales discounts nor purchases
discounts. Compute the amount of the ending inventory on hand before the fire.
A) $20,000 B) $30,000 C) $10,000 D) $-0-
Answer: C
15
90) The lower of cost and net realizable value basis of valuing inventories ensures that inventories are
A) monitored on an ongoing basis as to their value relative to their cost.
B) not undervalued.
C) valued at their selling price.
D) valued at their current cost.
Answer: A
91) When ending inventory is smaller than beginning inventory, gross margin is less than, if ending
inventory were larger than beginning inventory (assuming purchases remain constant).
Answer: True False
92) The cost of goods purchased for resale should include all amounts that are the responsibility of the
purchaser for freight and handling charges in order to get the goods to the purchaser's intended
location.
Answer: True False
93) In conformity with the matching process, the total cost of sales during the period must be related to
the sales revenue earned during the period.
Answer: True False
94) Ownership of goods passes from the seller to the buyer after the buyer has paid for the goods.
Answer: True False
95) If transportation costs are the responsibility of the buyer, they should be added to the cost of
purchases for the period.
Answer: True False
96) An error in the measurement of ending inventory affects the cost of sales on the current period's
statement of earnings and ending inventory on the statement of financial position.
Answer: True False
97) Inventory is a tangible asset purchased for use in the company's operations.
Answer: True False
98) A manufacturing company uses three different inventory accounts to track their product costs.
Answer: True False
99) An error in the ending inventory of the current period will have a similar but inverse effect on profit
of the next accounting period.
Answer: True False
100) An error that overstates the ending inventory will cause profit for the period to be understated.
Answer: True False
16
101) An error that understates the ending inventory will cause assets to be understated.
Answer: True False
102) An error that understates the ending inventory will cause the cost of goods sold for the period to be
understated.
Answer: True False
103) An overstatement of the ending inventory causes an overstatement of current assets and profit, as
well as an overstatement of cost of goods sold for the same year.
Answer: True False
104) The specific identification method of costing inventories is often used for goods that are
interchangeable.
Answer: True False
105) In periods of falling prices, FIFO will result in a higher ending inventory valuation than the average
cost formula.
Answer: True False
106) The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most
businesses.
Answer: True False
107) The method of inventory cost determination that best matches cost and revenues is FIFO.
Answer: True False
108) A change in the method of cost determination for inventory must be disclosed in the financial
statements.
Answer: True False
109) Approximating the physical flow of inventory is not important when selecting an inventory cost
formula.
Answer: True False
110) In periods of falling prices, FIFO will result in the same ending inventory valuation as the average
cost formula.
Answer: True False
111) The qualitative characteristic, reliability, is the primary consideration to a business considering
changing its inventory costing method.
Answer: True False
112) The selection of a method of inventory costing is important because it will affect reported profit,
income tax expense (and, hence, cash flow), and the inventory valuation reported on the statement
of financial position.
Answer: True False
17
113) A large retail department store probably would use the specific identification inventory costing
method for most of the items in its inventory.
Answer: True False
114) In periods of falling prices, FIFO will result in a higher cost of goods sold than the average cost
formula.
Answer: True False
115) If prices never changed, there would be no need for alternative inventory cost formulas.
Answer: True False
116) Inventory turnover measures the liquidity (nearness to cash) of inventory.

Answer: True False
117) Inventory turnover is computed as cost of goods sold divided by average inventory.
Answer: True False
118) The inventory turnover ratio measures the efficiency of inventory management.
Answer: True False
119) Analysts and creditors watch the inventory turnover ratio because a sudden decline in this ratio may
mean that a company is facing an unexpected decline in demand for its products or is becoming
sloppy in its production management.
Answer: True False
120) A low inventory turnover ratio indicates that minimal funds are tied up in inventory.
Answer: True False
121) The higher the inventory turnover ratio, the higher the average days it takes to sell inventory.
Answer: True False
122) A low inventory turnover ratio could mean a company is at risk of experiencing inventory shortages.
Answer: True False
123) A company that has decreased its inventory between years will cause a decrease in cash flow from
operations.
Answer: True False
124) The lower of cost and net realizable value should be applied to the total inventory, rather than to
individual inventory items.
Answer: True False
125) When the value of inventory is lower than its cost, the inventory is written down to its net realizable
value.
Answer: True False
18
126) If net realizable value of the inventory is lower than its cost, the total assets on the statement of
financial position and net earnings on the statement of earnings will be reduced.
Answer: True False
127) Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75.
Subsequently, the NRV of the inventory recovered to equal its cost of $100. In this situation, the
amount of the $25 ($100 - $75) prior write-down in value should be reversed.
Answer: True False
128) An inventory write-down from cost to net realizable value should not be made in the period in
which the price decline occurs.
Answer: True False
129) In the average cost formula used in a periodic inventory system, the same weighted average cost per
unit is used to calculate all of the goods sold during the period.
Answer: True False
130) When the average cost formula is applied in a periodic inventory system, the sale of goods during
the year will change the unit cost used for calculating ending inventory.
Answer: True False
131) When the average cost formula is applied in a periodic inventory system, a moving average cost per
unit is calculated after each purchase.
Answer: True False
132) The results under FIFO in a perpetual inventory system are the same as in a periodic inventory
system.
Answer: True False
133) All three methods of inventory cost determination will produce the same cumulative cost of goods
sold over the life cycle of the business.
Answer: True False
134) The appearance of a purchases account in a trial balance usually indicates that the company is using
a periodic inventory system.
Answer: True False
135) When a periodic inventory system is used, a sales transaction requires two journal entries, while
under the perpetual system, a sales transaction requires only one journal entry.
Answer: True False
136) Under the periodic inventory system, the balance in the inventory account changes each time a
purchase or sale is recorded.
Answer: True False
19
137) Purchases, returns and allowances should be added to the cost of purchases on the income
statement, assuming the periodic inventory system is used.
Answer: True False
138) When a perpetual inventory system is used, the purchases returns and allowances account will not
be part of the general ledger accounts.
Answer: True False
139) Purchases discounts should be recorded as an addition to the cost of purchases in the calculation of
cost of goods sold.
Answer: True False
140) For each of the following types of inventory, enter a letter to indicate the type of business in which the
inventory is more likely to appear.
Type of Business
A. Retail
B. Manufacturing
Type of Inventory
________ 1. Raw materials.
________ 2. Merchandise.
________ 3. Finished goods.
________ 4. Work in progress.
Answer: 1. B; 2. A; 3. B; 4. B
20
141) Match the descriptions with inventory costing methods by entering the proper letter in the space to the left.
A. Specific identification
B. Weighted average
C. FIFO
D. None of the above is correct.
________ 1. Tends to match older costs with current revenue.

________ 2. Cost of goods sold and inventory are costed at the oldest costs.
________ 3. Inventory and cost of goods sold are valued at the same unit cost.
________ 4. Requires computation of an average cost for the entire period excluding
beginning inventory.
________ 5. Requires computation of a new unit cost after each purchase and after each sale.
________ 6. Subject to manipulation by arbitrary choice of unit costs when sold or issued.
________ 7. Cost of goods sold is costed at the oldest unit costs.
________ 8. Inventory is costed at the newest unit costs.
Answer: 1. C; 2. D; 3. B; 4. D; 5. B; 6. A; 7. C; 8. C.
142) Match the appropriate letter regarding inventory systems with each of the following statements.
A. The perpetual inventory system.

B. The periodic inventory system.
C. Both the perpetual and periodic inventory systems.
D. Neither the perpetual nor the periodic inventory systems.
________ 1. Uses a separate account for recording purchases.

________ 2. Requires that purchases be recorded at their cash equivalent cost.
________ 3. Requires that two concurrent journal entries be made to record a purchase.
________ 4. Cost of goods sold cannot be determined until a physical count is taken.
________ 5. Inventory account is increased for each purchase and decreased for each sale.
________ 6. Used to reveal any inventory shortages and shrinkage that occur during the period.
Answer: 1. B; 2. C; 3. D; 4. B; 5. A; 6. A
21
143) Match the inventory system with the statement by entering the appropriate letters to the left:
A. Perpetual inventory system.

B. Periodic inventory system.
C. Neither of the above is correct.
D. Both A and B are correct.
________ 1. The inventory system that provides more control features.

________ 2. The inventory system that requires adjusting (or closing) entries for the beginning
and ending inventories.
________ 3. A purchase requires two journal entries.
________ 4. A sale requires one journal entry.
________ 5. Merchandise inventory is debited when goods are purchased.
________ 6. A return of a purchase requires two journal entries.
________ 7. A physical inventory count is never taken.
________ 8. A sale requires two journal entries.
________ 9. Cost of goods sold is computed as a residual amount after an inventory count.
Answer: 1. A; 2. B; 3. C; 4. B; 5. A; 6. C; 7. C; 8. A; 9. B
144) Taste Best Company uses the periodic inventory system. It has compiled the following information in order to
prepare the financial statements at the end of 20X2:
Gross sales during 20X2 $1,400,000

Sales returns and allowances during 20X2 20,000
Beginning inventory, January 1, 20X2 70,000
Ending inventory, December 31, 20X2 60,000
Purchases during 20X2 730,000
Calculate the following amounts:
A. Goods available for sale $ ________

B. Cost of goods sold $ ________
C. Gross margin on sales $ ________
Answer: A. $70,000 + $730,000 = $800,000

B. $800,000 - $60,000 = $740,000
C. $1,400,000 - $20,000 - $740,000 = $640,000
22
145) The records of Tea Time Company show 20X2 purchases of $9,000. An actual count revealed a
20X2 ending inventory of $4,000. The 20X2 beginning inventory was $5,000. What was the cost of
goods sold for 20X2? $________
Answer: $5,000 + $9,000 - $4,000 = $10,000
146) The following statement of earnings is complete except for a few captions with solid lines on the left, and
amounts with dotted lines on the right. You are to fill in the most likely captions and amounts:
Smith Retail Company

Statement of Earnings for the Year Ended December 31, 20X2
Gross Sales Revenue $________

________ $3,000
Sales discounts ________ 5,000
________ $101,000
Cost of goods sold:
________ $12,000
________ ________
________ 77,000
Ending Inventory ________
________ ________
________ 38,000
Operating expenses ________
________ $16,000
Answer: Smith Retail Company

Income Statement
Gross sales ($101,000 + $5,000) $106,000

Less: Sales and returns allowances $3,000
Sales discounts ($5,000 - $3,000) $2,000 5,000
Net Sales $101,000
Cost of goods sold:
Beginning inventory, January 1, 20B $12,000
Purchases ($77,000 - $12,000) 65,000
Goods available for sale 77,000
Less: Ending inventory, December 31, 20B ($77,000 -
$63,000) 14,000
Cost of goods sold ($101,000 - $38,000) 63,000
Gross margin on sales 38,000
Operating expenses ($38,000 - $16,000) 22,000
Profit $16,000
23
147) The Wilburn Company's income statement for 20X2 reported the following: Cost of goods sold, $75,000;
beginning inventory, $12,000; and ending inventory, $15,000. The amount of purchases during 20X2 was what
amount?
$________ (Show computations).

Answer: Purchases: $75,000 +$15,000 - $12,000 = $78,000
148) Supply the missing dollar amounts for the 20X2 statement of earnings of RDS Company by writing your
answer in the table provided for you for each of the following independent cases. Show your computations
below the table.
Case A Case B
Sales returns & allowances 150 ?
Net sales revenue ? ?
Beginning inventory 11,000 6,500
Purchases 5,000 ?
Transportation-in ? 120
Purchase returns 350 600
Goods available for sale ? 14,790
Ending inventory 10,000 10,740
Cost of goods sold ? ?
Gross margin ? 1,450
Expenses 1,300 ?
Pre-tax profit $800 $(500)
Case A Case B
Sales returns & allowances 150 500
Net sales revenue 7,850 5,500
Purchases 5,000 8,770
Transportation-in 100 120
Goods available for sale 15,750 14,790
Gross margin 2,100 1,450
Expenses 1,300 1,950
24
149) Compute the missing amounts for the statement of earnings for each independent case.
Case A Case B Case C

Sales revenue $800 $800
Beginning inventory 100 90
Purchases 500 420
Total available for sale
Ending inventory 150 110 160
Cost of goods sold 340
Gross margin
Expenses 300 400 420
Profit (50) 60

Sales revenue $800 $800 $820
Beginning inventory 100 140 90
Purchases 500 420 410
Total available for sale 600 560 500
Cost of goods sold 450 450 340
Gross margin 350 350 480
Profit 50 (50) 60
150) Webber Company prepared income statements that reflected pretax profit of $21,000 for 20X1 and $30,000
for 20X2. An audit has determined that there were two errors in the inventory amounts as follows
Amount Reported Correct Amount

Ending inventory, 20X1 $15,000 $14,000
Ending inventory, 20X2 18,000 16,000
The correct pretax profit amount for each year is (show computations assuming the errors were not
corrected):
20X1: $________
20X2: $________
Answer: 20X1: $21,000 - $1,000 = $20,000
20X2: $30,000 + $1,000 - $2,000 = $29,000
25
151) For each independent situation given below, determine the effect on pretax profit for each. Enter "+" to
indicate pretax profit is overstated, "-" to indicate pretax profit is understated, or "NA" to indicate that pretax
profit is not affected.
Independent Situations Effect on Pre-tax Profit

20X1 20X2
A. 20X1 ending inventory overstated
B. 20X1 ending inventory understated
C. 20X2 ending inventory overstated
D. 20X2 beginning inventory overstated
E. 20X1 beginning inventory understated
F. 20X2 beginning inventory understated and 20X2
ending inventory understated by the same amount

20X1 20X2
A. 20X1 ending inventory overstated + -
B. 20X1 ending inventory understated - +
C. 20X2 ending inventory overstated NA +
D. 20X2 beginning inventory overstated NA -
E. 20X1 beginning inventory understated + NA
- NA
152) House Depot Company hired a new store manager in March 20X3, who determined the ending inventory on
December 31, 20X3, to be $20,000. In March, 20X5 the company discovered that the 20X3 ending inventory
should have been $28,000. The December 31, 20X4, inventory was correct. Ignore income taxes.
Complete the following table to show the effects of the inventory error on the four amounts listed. Give
the amount of the discrepancy and indicate whether it was overstated (O), understated (U), or had no
effect (N).
Year Ending Inventory Cost of Goods Sold Profit

20X3 8,000 (U) 8,000 (O) 8,000 (U)
20X4 (N) 8,000 (U) 8,000 (O)
26
153) Goofy Company reported profit for 20X1 of $30,000, and in 20X2 $40,000 (both after income taxes
at a 20% rate). It was discovered in 20X3 that the ending inventory for 20X1 was overstated by
8,000 (before any income tax effect). The correct profit (after income tax of 20%) should be: 20X1
$________ 20X2 $________
Answer: 20X1-$30,000 - ($8,000 × .80) = $23,600; 20X2-$40,000 + ($8,000 × .80) = $46,400
154) Telly Company reported profit in 20X1 of $22,000 and in 20X2 of $32,000. Later it was discovered that the
20X1 ending inventory was overstated by $5,000. Compute the amount of profit (disregard income tax) for
20X1 and 20X2.
20X1 $________ 20X2 $________

Answer: 20X1-$22,000 - $5,000 = $17,000; 20X2-$32,000 + $5,000 = $37,000
155) While preparing the first quarter 20X7 financial statements, the accounting staff of Melanson
Flooring Inc. discovered an error in the December 31, 20X6 financial statements. Inventory costing
$225,000 had been in transit and was not received until January 5 20X7. The accounts payable had
recorded the purchase as an account payable on December 28 20X6. The inventory had been shipped on
December 27 20X6 with the terms FOB shipper. Melanson uses a periodic inventory system.
A What impact did the error have on Melanson's 20X6 financial statements?
B When the error is discovered in the first quarter of 20X7, what correcting entry should Melanson's
accountants make?
Answer: A. The shipment was recorded as a 20X6 purchase but was not included in the ending inventory.
Therefore, the 20X6 ending inventory was understated and 20X6 cost of sale was overstated.
B. Correcting entry in 20X5:
Inventory (opening) 225,000

27
156) Astro Corporation uses the periodic inventory system. Information related to Astro's inventory at October 31 is
given below:
October 1 Beginning inventory 400 units @ $10.00 = $4,000

8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.60 = 2,320
2,000 units $21,120
Requirements:
1. Show calculations to determine the ending inventory using the FIFO cost formula if 400 units remain on
hand at October 31
2. Show calculations to determine the ending inventory using the average cost formula if 400 units remain on
hand at October 31.
Answer: 1. 400 units in ending inventory.
Under FIFO, the units remaining in inventory are the ones purchased most recently.
Oct. 24 200 units @ $11.60 = $2,320

16 200 units @ 10.80 = 2,160
400 units $4,480
2. 400 units in ending inventory.

Under the average cost formula, the weighted-average cost per unit must be calculated.
$21,120 2,000 units = $10.56
400 units $10.56 = $4,224
157) Miller Corporation uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost

Jan 1. Beginning inventory 100 $4 $400
Jan 20 Purchase 500 $5 2,500
July 25 Purchase 100 $6 600
Nov. 20 Purchase 300 $7 2,100
1,000 $5,600
A physical count of inventory on December 31 revealed that there were 350 units on hand.
Requirements:
Answer the following independent questions and show calculations supporting your answers.
1. Assume that the company uses FIFO. The value of the ending inventory at December 31 is $________.
2. Assume that the company uses average cost. The value of the ending inventory on December 31 is
$________.
3. Determine the difference in the amount of profit that the company would have reported if it had used FIFO
instead of average cost. Would profit have been greater or less?
28
Answer: 1. FIFO: Ending inventory $2,400
300 units @ $7 = $2,100

50 units @ $6 = 300
350 units $2,400
2. Average Cost: Ending inventory $1,960

$5,600 / 1,000 = $5.60 per unit × 350 units = $1,9603. FIFO: Cost of goods sold $3,200
Cost of goods available - Ending Inventory = Cost of goods sold

$5,600 - $2,400 = $3,200
Proof: 100 units @ $4 = $400

500 units @ $5 = 2,500
50 units @ $6 = 300
650 units $3,200
Average: Cost of goods sold $3,640

$5,600 - $1,960 = $3,640
Profit would have been $440 ($3,640 vs. $3,200) greater if the company used FIFO instead of
average.
29
158) Libby Company uses the periodic inventory system and applied FIFO inventory costing. At the end of the
annual accounting period, December 31, 20X4, the accounting records for the best-selling item in inventory
showed:
Transaction Units Unit Cost

Beginning Inventory, Jan. 1, 20X4 200 $11
1. Purchase, Feb. 1 400 12
2. Sale, March 15, (sold at $20 each) (300)
3. Purchase, May 15 350 14
Sale, July 31 (sold at $25 each) (500)
Determine the following (show computations and round to the nearest dollar):
Goods available for sale: $________

$________
$________
Answer: Goods available for sale: 200 @ $11 + 400 @ $12 + 350 @ $14 = $11,900
Ending inventory: 150 units @ $14 = $2,100
Cost of goods sold: BI + P - EI = COGS $11,900 - $2,100 = $9,800
159) Walker Corporation uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost

Jan. 1 Beginning inventory 15 $4.00 $60
20 Purchase 60 4.40 264
July 25 Purchase 30 4.20 126
Oct. 20 Purchase 45 4.80 216
150 $666
A physical count of inventory on December 31 revealed that there were 50 units on hand.
Requirements:
Answer the following independent questions and show calculations supporting your answers.
1. Assume that the company uses FIFO. The value of the ending inventory at December 31 is $________.
2. Assume that the company uses average cost. The value of the ending inventory on December 31 is
$________.
3. Assume that the company uses average cost. The value of cost of goods sold on December 31 is $________.
4. Assume that the company uses FIFO. The value of the cost of goods sold on December 31 is $________.
Answer: 1. FIFO: Ending inventory $237
45 units @ $4.80 = $216

5 units @ $4.20 = 21
30
50 units $237
2. Average Cost: Ending inventory $222

$666 / 150 = $4.44 per unit × 50 units = $222
3. Average Cost: Cost of goods sold

$666 - $222 = $444
4. FIFO: Cost of goods sold $429

$666 - $237 = $429
Proof: 15 units @ $4.00 = $60

60 units @ $4.40 = 264
25 units @ $4.20 = 105
100 units $429
160) Dittner Inc. opened for business on July 1, 2013 selling unique jewelry purchased from local artisans. During
the month the company made the following purchases:
Date Inventory Tag Number Cost

July 1 001 $1,500
July 3 002 600
July 5 003 1,200
004 2,300
July 10 005 400
July 13 006 1,115
007 3,900
July 26 008 900
009 1,700
July 31 010 2,225
On July 31, only inventory items 006, 008, and 010 remained in inventory.
Requirements:
(a) Determine the cost of goods sold for Harris Inc. for the month of July using the specific identification cost
determination method.
(b) Discuss whether or not specific identification is an appropriate cost determination method for this
company.
31
Answer: (a) Inventory sold:
Inventory Tag Number Cost

001 $1,500
002 600
003 1,200
004 2,300
005 400
007 3,900
009 1,700
Cost of goods sold: $11,600
(b) Specific identification is the preferred inventory method for this company because it provides the
most accurate cost of goods sold and ending inventory values. It is appropriate for this company becaus
of the heterogeneity of the company's inventory items. The small volume of inventory purchased and
sold by the company makes this method practical in either a computerized or manual inventory
system.
161) Yoakum Company reported the following information related to inventory and sales:
Units Unit Cost

Beginning inventory 100 $7
Purchase No. 1 700 10
Purchase No. 2 200 12
Sold 700 units at $20 each. Calculate the revenue, cost of goods sold, gross margin and inventory balances
assuming a) the weighted average inventory cost method b) FIFO cost method
Method Revenue Cost of Goods Sold Gross Margin Inventory

a. Weighted-Average $14,000 $7,070 $6,930 $3,030
b. FIFO $14,000 $6,700 $7,300 $3,400
162) Morrison Corporation, which uses a perpetual inventory system, recorded the following inventory transactions
during the last two months of 2013.
Purchases Sales
Units Unit Cost Units Selling price/unit
Nov. 1 Beginning inventory 112 $72
13 Purchase 76 $71
29 Sale 121 $99
Dec 3. Purchase 56 $69
16 Sale 67 $98
Requirements:
32
(a) Using the FIFO cost formula, calculate the amount of cost of goods sold for the two months of November
and December. (Show calculations)
(b) Using the average cost formula, calculate the amount of ending inventory at December 31. (Show
calculations)
Answer: a.
Purchases Cost of Goods Sold Balance
Nov. 1 (112 @ $72) = $8,064
Nov. 13 (76 @ $71) = $5,396 (112 @ $72) = $8,064
(76 @ $71) = $5,396
= $13,460
Nov. 29 (112 @ $72) = $8,064 (67 @ $71) = $4,757
(9 @ $71) = $639
= $8,703
Dec. 3 (56 @ $69) = $3,864 (67 @ $71) = $4,757
(56 @ $69) = $3,864
= $8,621
Dec. 16 (67 @ $71) = $4,757 (56 @ $69) = $3,864
b.
Nov. 1 (112 @ $72) = $8,064
Nov. 13 (76 @ $71) = $5,396 (188 @ $71.60) =
$13,460.00
Nov. 29 (121 @ $71.60) = (67 @ 71.60) = $4,796.40
$8,663.60
Dec. 3 (56 @ $69) = $3,864 (123 @ 70.41) = $8,660.40
Dec. 16 (67 @70.41) = $4,717.47(56 @ 70.41) = $3,942.93
Please note that rounding discrepancies may result in the above schedule depending on how the unit
costs are rounded.
163) Jaywall Corporation, which uses a perpetual inventory system, recorded the following inventory transactions
during 20X3.
Purchases Sales
Price/Unit Units Unit Cost Units Selling
April 1 Beginning inventory 45 $8
25 Purchase 150 9
May 4 Purchase 65 10
16 Sale 120 $16
June 4 Purchase 50 12
(a) Using the FIFO cost formula, calculate the amount of the cost of goods sold for the quarter ended June 30.
33
(Show calculations)
(b) Using the average cost formula, calculate the amount of ending inventory at June 30. (Show calculations)
Answer: A
April 1 (45 @ $8) = $360
April 25 (150 @ $9) = $1,350 (45 @ $8) = $360
(150 @ $9) = $1,350
= $1,710
May 4 (65 @ $10) = $650 (45 @ $8) = $360
(150 @ $9) = $1,350
(65 @ $10) = $650
= $2,360
May 16 (45 @ $8) = $360
(75 @ $9) = $675
= $1,035

April 1 (45 @ $8) = $360
April 25 (150 @ $9) = $1,350 (195 @ $8.77) = $1,710.00
May 4 (65 @ $10) = $650 (260 @ $9.08) = $2,360.80
May 16 (120 @ $9.08) = (140 @ $9.08) = $1,270.40
$1,089.60
June 4 (50 @ $12) = $600 (190 @ $9.84) = $1,870.40
Please note that rounding discrepancies may result in the above schedule depending on how the unit
costs are rounded.
164) Davis Company uses the perpetual inventory system and the FIFO inventory costing method. All purchases
and sales were cash transactions. The records reflected the following for January, 20X2
Units Unit Cost

Beginning Inventory 100 $1.00
Purchase, January 6 200 1.20
Sale, January 10 (at $2.40 per unit) 110
Purchase, January 14 100 1.30
Sale, January 29 (at $2.60 per unit) 170
Determine the following
A. 20X2 goods available for sale

B. 20X2 ending inventory
C. 20X2 cost of goods sold
D. Prepare the journal entries for January 6 and 10.
34
A. 20X2 goods available for sale $470 (400 units)

B. 20X2 ending inventory $154
C. 20X2 cost of goods sold $316
A. $100 + 240 + 130 = $470 (400 units)

B. $400 - 280 = 120 units; (100 at $1.30) + (20 at $1.20) = $154
C. $100 + 160 = 270 units; (100 at $1.00) + (10 at $1.20) + (170 at $1.20) = $316
D.
January 6 Inventory 240
Cash 240
January 10 Cash (110 at $2.40 264
Sales Revenue 264
Inventory* 112
*(100 at $1.00) + (10 at $1.20)
165) Richardson Ltd. sells many products. Hela is one of its popular items. Below is an analysis of the inventory
purchases and sales of Hela for the month of March. Richardson uses the perpetual inventory system.
Purchases Sales
Units Unit Cost Units Selling
March 1 Beginning inventory 200 $60
3 Purchase 60 75
4 Sales 70 $120
10 Purchase 200 82
16 Sales 80 130
19 Sales 80 130
25 Sales 50 130
30 Purchase 40 90
Requirements:
(a) Using the FIFO cost formula, calculate the amount of the cost of goods sold for March. (Show
calculations)
(b) Using the average cost formula, calculate the amount of the ending inventory on March 31. (Show
calculations)
35
Answer: (a) FIFO
Date Description Purchases COGS Ending Inventory
Mar 1 Beginning 200 $60 $12,000
3 Purchase 60 $75 $4,500 200 60 16,500
60 75
4 Sale 70 $60 $4,200 130 60 12,300
60 75
10 Purchase 200 82 16,400 130 60 28,700
60 75
200 82
16 Sale 80 60 4,800 50 60 23,900
60 75
200 82
19 Sale 50 60 5,250 30 75 18,650
30 75 200 82
25 Sale 30 75 3,890 180 82 14,760
20 82
30 Purchase 40 90 3,600 180 82 18,360
40 90
30 Ending 280 $18,140 220 $18,360
(b) Average Cost
36
166) Solve for the missing amounts:
A B C
Sales $100,000 $239,000 $438,000
Cost of goods sold (a) 122,000 345,000
Inventory, beginning of year 23,000 45,000 (h)
Inventory, end of year 17,000 39,000 105,000
Average inventory (b) (e) 101,500
Gross profit margin 46% (f) (i)
Inventory turnover (c) (g) (j)
Days in inventory (d) 126 (k)
A B C
Sales $100,000 $239,000 $438,000
Cost of goods sold 54,000 122,000 345,000
Inventory, beginning of year 23,000 45,000 98,000
Average inventory 20,000 42,000 101,500
Gross profit margin 46% 49% 21%
Inventory turnover 2.7 2.9 3.4
Days in inventory 135 126 107
167) Landings Inc. provided the following footnote in their annual report:
Inventories are stated at the lower of cost or net realizable value. The cost of inventories has been
determined using last in first out (FIFO) method. Cost of goods sold under FIFO costing were $22.2
billion for 20X2 and ending inventory under FIFO was $1.3 billion. Inventory in 20X1 under FIFO
costing was $1.2 billion.
Compute the following for Landings:
1. Cost of Goods Available for Sale ________

2. Inventory turnover under FIFO costing for 20X2 ________
Answer: 1) 22.2 + 1.3 = 23.5

2) 22.2/((1.3 + 1.2)/2) = 17.76
37
168) Divergent Technologies reported the following information in their 20X2 annual report:
(In millions)
Net sales revenue $15,540
Cost of sales 8,960
December 31, 20X2 inventory 1,650
December 31, 20X1 inventory 1,380
1. Determine the inventory turnover ratio

2. Determine the average days to sell inventory
3. Explain the meaning of each number.
Answer: 1. 5.91 ($8,960/$1,515)
2. 61.8 days (365 days/5.91)
3. The inventory turnover ratio identifies how many times the inventory was sold or liquidated during
the year, while the average days to sell shows the volume of sales that can be supported in terms of
number of days' stock on hand. As the inventory turnover increases, the company will carry less stock
in terms of days' sales.
169) All Sports Inc. manufactures sporting equipment and clothing. Its recent annual report included the following
on its statement of financial position:
Consolidated Statements of Financial Position

February 29, 20X2 and February 28, 20X1
20X2 20X1
Inventories $610,850,000 $560,330,000
Trade payables $90,500,000 $85,800,000
In addition to the above statement of financial position information, All Sports Inc. reported cost of goods sold
on its income statement of $53,800,000,000. Calculate the following:
1. Inventory purchased during 20X2 ________

2. Cash paid to supplier during 20X2 ________
Answer: 1. $53,850,520,000 ($53,800,000,000 + ($610,850,000 minus $560,330,000),

2. $53,845,820, 000 ($53,850,520,000 minus ($90,500,000 minus $85,800,000)
38
170) The following information is available from recent financial statements of Competitor A and Competitor B:
Competitor A Competitor B
Ending inventory $6,031 $4,816
Sales 29,656 36,704
Requirement:
(a) Calculate the inventory turnover and days in inventory for both companies.
(b) What conclusion concerning the management of inventory can be drawn from these data?
Answer: (a)
Inventory turnover $21,761 $27,257
($6,031 + $6,162) / 2 ($4,816 + $5,044) / 2
$21,761 $27,257
$6,096.5 = 3.6 times $4,930 = 5.5 times
Days in inventory 365 / 3.6 = 101 days 365 / 5.5 = 66 days
(b) Competitor B's inventory turnover is approximately 53% [(5.5-3.6) ÷ 3.6)] higher than Competitor
A's. In addition, Competitor B's days in inventory is 35% [(101-66) 101] lower than Competitor A's.
Generally, a company prefers to maintain as high an inventory turnover as possible. Conclude that
Competitor B manages inventory more effectively than Competitor A.
39
171) Give the journal entries for the transactions listed below under each of the two inventory systems.
A. Purchase merchandise for cash, $1,000

B. Sold merchandise for $600 cash that had a cost of $480 (cost is 80% of the sales price)
C. Accepted a sales return from a customer: Sales price $30. A cash refund was given to the customer. The
goods were returned to regular inventory
D. Returned goods to the vendor because they did not meet our specification; $50 cash refund was received.
Perpetual Inventory Periodic Inventory

Account Debit Credit Account Debit Credit
A.
B.
C.
D.
172) Assume World Company buys compact disks at a unit cost of $10 and sells them at a unit price of $13. There
was no beginning inventory.
Provide the journal entries required below by entering the account code of the appropriate account and the
amount for each debit and credit:
Account Name Account Code

Inventory A
Purchases B
Cost of Goods Sold C
Sales Revenue D
Cash E
Debits Credits
Codes Amounts Codes Amounts
40
A. Purchased 100 units for cash
assuming the perpetual inventory
system is used
B. Purchased 100 units for cash
assuming the periodic inventory
system is used
C. Sold 100 units for cash assuming
the perpetual inventory system is
used
D. Sold 100 units for cash assuming
the periodic inventory system is
used
Debits Credits
A. Purchased 100 units for cash A 1,000 E 1,000
assuming the perpetual
inventory system is used
B. Purchased 100 units for cash B 1,000 E 1,000
system is used
C. Sold 100 units for cash E 1,300 D 1,300
assuming the perpetual C 1,000 A 1,000
D. Sold 100 units for cash E 1,300 D 1,300
system is used
41
173) Top TV Incorporated, a big box store that sells television sets, bought a large number of a television
model at a cost of $500 per unit. The contract reads that if 2000 or more sets are purchased during
the year, a rebate of $20 per set will be made. On December 15, the records showed that 1500 sets
had been purchased; purchases were recorded at $750,000 (1500 × $500). All these units had been
sold. Five hundred more sets were ordered FOB destination. The sets were received on December
22, and a request for the rebate was made. The rebate cheque was received on January 25, after the
books were closed. Furthermore, the supplier provides terms of 2/10, n/30. Top TV has a policy of
always paying invoices within the discount period. Further investigation reveals that a total of $17,600 of
freight was paid to acquire the sets purchased this year, including $3,750 on the last order of 500 sets.
Required:
A. Calculate the ending inventory value at 31 December.

B. What entry should be made relative to the rebate on 31 December?
C. What entry would be made on 25 January?
Answer: A.
Cost per unit of inventory $500.00
Less: 2% discount -10.00
Less: quantity rebate -20.00
Plus: Freight $3,750 ÷ 500 7.50
477.50
Inventory level X 500 units
Total cost $238,750
B
Accounts receivable (2000 × $20) 40,000
Purchases 40,000
C.
Cash 40,000
42
174) Mineral Waters has used the FIFO cost flow assumption since it was first organized in 20X4. Results have
been as follows:
20X4 20X5 20X6 20X7
Reported net income - FIFO $26,250 $45,000 $48,750 $67,500

Reported ending inventories - FIFO 142,000 164,000 173,000
82,250
Reported ending Inventories -Average 101,650 117,500 135,500
cost 78,500
Required:
1. Restate net income assuming use of the average cost method since the company's inception.
2. What inventory cost flow policy would you expect this company to adopt if it was trying to:
a. Minimize income tax payments.
b. Report maximum inventory values on the balance sheet.
Answer: 1.
20X4 20X5 20X6 20X7
FIFO income $26,250 $45,000 $48,750 $67,500
Difference in beginning inventory 0 3,750 40,350 46,500
Difference in ending inventory * (3,750) (40,350) (46,500) (37,500)
Revised net income $22,500 $8,400 $42,600 $76,500
* 20X4 $82,250 — $78,500 = $3,750

20X5 $142,000 — $101,650 = $40,350
20X6 $164,000 — $117,500 = $46,500
20X7 $173,000 — $135,500 = $37,500
2.
a. Minimize income tax–Average cost (except in 20X7)
b. Maximize inventory values–FIFO
43
Answer Key
1) D
2) B
3) B
4) D
5) A
6) D
7) A
8) B
9) C
10) C
11) A
12) B
13) D
14) D
15) A
16) D
17) B
18) A
19) B
20) C
21) B
22) A
23) D
24) D
25) B
26) D
27) C
28) D
29) D
30) B
31) D
32) D
33) C
34) D
35) A
36) A
37) A
38) A
39) D
40) A
41) C
42) D
43) A
44) A
45) C
46) C
47) A
48) C
49) A
50) D
44
Answer Key
51) D
52) D
53) B
54) A
55) D
56) A
57) B
58) A
59) C
60) D
61) D
62) B
63) B
64) B
65) A
66) B
67) B
68) B
69) B
70) C
71) A
72) A
73) B
74) B
75) C
76) B
77) B
78) A
79) B
80) D
81) B
82) A
83) A
84) A
85) D
86) A
87) D
88) D
89) C
90) A
91) TRUE
92) TRUE
93) TRUE
94) FALSE
95) TRUE
96) TRUE
97) FALSE
98) TRUE
99) TRUE
100) FALSE
45
Answer Key
101) TRUE
102) FALSE
103) FALSE
104) FALSE
105) FALSE
106) TRUE
107) FALSE
108) TRUE
109) FALSE
110) FALSE
111) FALSE
112) TRUE
113) FALSE
114) TRUE
115) FALSE
116) TRUE
117) TRUE
118) TRUE
119) TRUE
120) FALSE
121) FALSE
122) FALSE
123) FALSE
124) FALSE
125) TRUE
126) TRUE
127) TRUE
128) FALSE
129) TRUE
130) FALSE
131) FALSE
132) TRUE
133) TRUE
134) TRUE
135) FALSE
136) FALSE
137) FALSE
138) TRUE
139) FALSE
140) 1. B; 2. A; 3. B; 4. B
141) 1. C; 2. D; 3. B; 4. D; 5. B; 6. A; 7. C; 8. C.
142) 1. B; 2. C; 3. D; 4. B; 5. A; 6. A
143) 1. A; 2. B; 3. C; 4. B; 5. A; 6. C; 7. C; 8. A; 9. B
144) A. $70,000 + $730,000 = $800,000
B. $800,000 - $60,000 = $740,000
C. $1,400,000 - $20,000 - $740,000 = $640,000
145) $5,000 + $9,000 - $4,000 = $10,000
46
Answer Key
146) Smith Retail Company

Income Statement
Gross sales ($101,000 + $5,000) $106,000

Less: Sales and returns allowances $3,000
Sales discounts ($5,000 - $3,000) $2,000 5,000
Net Sales $101,000
Cost of goods sold:
Beginning inventory, January 1, 20B $12,000
Purchases ($77,000 - $12,000) 65,000
Goods available for sale 77,000
Less: Ending inventory, December 31, 20B ($77,000 -
$63,000) 14,000
Cost of goods sold ($101,000 - $38,000) 63,000
Gross margin on sales 38,000
Operating expenses ($38,000 - $16,000) 22,000
Profit $16,000
147) Purchases: $75,000 +$15,000 - $12,000 = $78,000

Case A Case B
Sales returns & allowances 150 500
Net sales revenue 7,850 5,500
Purchases 5,000 8,770
Transportation-in 100 120
Goods available for sale 15,750 14,790
Gross margin 2,100 1,450
Expenses 1,300 1,950
47
Answer Key

Sales revenue $800 $800 $820
Beginning inventory 100 140 90
Purchases 500 420 410
Total available for sale 600 560 500
Cost of goods sold 450 450 340
Gross margin 350 350 480
Profit 50 (50) 60
150) 20X1: $21,000 - $1,000 = $20,000

20X2: $30,000 + $1,000 - $2,000 = $29,000

20X1 20X2
A. 20X1 ending inventory overstated + -
B. 20X1 ending inventory understated - +
C. 20X2 ending inventory overstated NA +
D. 20X2 beginning inventory overstated NA -
E. 20X1 beginning inventory understated + NA
- NA
Year Ending Inventory Cost of Goods Sold Profit

20X3 8,000 (U) 8,000 (O) 8,000 (U)
20X4 (N) 8,000 (U) 8,000 (O)
153) 20X1-$30,000 - ($8,000 × .80) = $23,600; 20X2-$40,000 + ($8,000 × .80) = $46,400

154) 20X1-$22,000 - $5,000 = $17,000; 20X2-$32,000 + $5,000 = $37,000
48
Answer Key
155) A. The shipment was recorded as a 20X6 purchase but was not included in the ending inventory. Therefore, the 20X
ending inventory was understated and 20X6 cost of sale was overstated.
B. Correcting entry in 20X5:
Inventory (opening) 225,000

156) 1. 400 units in ending inventory.

Under FIFO, the units remaining in inventory are the ones purchased most recently.
Oct. 24 200 units @ $11.60 = $2,320

16 200 units @ 10.80 = 2,160
400 units $4,480
2. 400 units in ending inventory.

Under the average cost formula, the weighted-average cost per unit must be calculated.
$21,120 2,000 units = $10.56
400 units $10.56 = $4,224
157) 1. FIFO: Ending inventory $2,400
300 units @ $7 = $2,100

50 units @ $6 = 300
350 units $2,400
2. Average Cost: Ending inventory $1,960

$5,600 / 1,000 = $5.60 per unit × 350 units = $1,9603. FIFO: Cost of goods sold $3,200

$5,600 - $2,400 = $3,200
Proof: 100 units @ $4 = $400

500 units @ $5 = 2,500
50 units @ $6 = 300
650 units $3,200
Average: Cost of goods sold $3,640

$5,600 - $1,960 = $3,640
Profit would have been $440 ($3,640 vs. $3,200) greater if the company used FIFO instead of average.
49
Answer Key
158) Goods available for sale: 200 @ $11 + 400 @ $12 + 350 @ $14 = $11,900
Ending inventory: 150 units @ $14 = $2,100
Cost of goods sold: BI + P - EI = COGS $11,900 - $2,100 = $9,800
159) 1. FIFO: Ending inventory $237
45 units @ $4.80 = $216

5 units @ $4.20 = 21
50 units $237
2. Average Cost: Ending inventory $222

$666 / 150 = $4.44 per unit × 50 units = $222
3. Average Cost: Cost of goods sold

$666 - $222 = $444
4. FIFO: Cost of goods sold $429

$666 - $237 = $429
Proof: 15 units @ $4.00 = $60

60 units @ $4.40 = 264
25 units @ $4.20 = 105
100 units $429
50
Answer Key
160) (a) Inventory sold:
Inventory Tag Number Cost

001 $1,500
002 600
003 1,200
004 2,300
005 400
007 3,900
009 1,700
Cost of goods sold: $11,600
(b) Specific identification is the preferred inventory method for this company because it provides the most accurate
cost of goods sold and ending inventory values. It is appropriate for this company because of the heterogeneity of th
company's inventory items. The small volume of inventory purchased and sold by the company makes this method
practical in either a computerized or manual inventory system.
Method Revenue Cost of Goods Sold Gross Margin Inventory

a. Weighted-Average $14,000 $7,070 $6,930 $3,030
b. FIFO $14,000 $6,700 $7,300 $3,400
51
Answer Key
162) a.
Nov. 1 (112 @ $72) = $8,064
Nov. 13 (76 @ $71) = $5,396 (112 @ $72) = $8,064
(76 @ $71) = $5,396
= $13,460
Nov. 29 (112 @ $72) = $8,064 (67 @ $71) = $4,757
(9 @ $71) = $639
= $8,703
Dec. 3 (56 @ $69) = $3,864 (67 @ $71) = $4,757
(56 @ $69) = $3,864
= $8,621
Dec. 16 (67 @ $71) = $4,757 (56 @ $69) = $3,864
b.
Nov. 1 (112 @ $72) = $8,064
Nov. 13 (76 @ $71) = $5,396 (188 @ $71.60) =
$13,460.00
Nov. 29 (121 @ $71.60) = (67 @ 71.60) = $4,796.40
$8,663.60
Dec. 3 (56 @ $69) = $3,864 (123 @ 70.41) = $8,660.40
Dec. 16 (67 @70.41) = $4,717.47
(56 @ 70.41) = $3,942.93
Please note that rounding discrepancies may result in the above schedule depending on how the unit costs are
rounded.
52
Answer Key
163) A
April 1 (45 @ $8) = $360
April 25 (150 @ $9) = $1,350 (45 @ $8) = $360
(150 @ $9) = $1,350
= $1,710
May 4 (65 @ $10) = $650 (45 @ $8) = $360
(150 @ $9) = $1,350
(65 @ $10) = $650
= $2,360
May 16 (45 @ $8) = $360
(75 @ $9) = $675
= $1,035

April 1 (45 @ $8) = $360
April 25 (150 @ $9) = $1,350 (195 @ $8.77) = $1,710.00
May 4 (65 @ $10) = $650 (260 @ $9.08) = $2,360.80
May 16 (120 @ $9.08) = (140 @ $9.08) = $1,270.40
$1,089.60
June 4 (50 @ $12) = $600 (190 @ $9.84) = $1,870.40
Please note that rounding discrepancies may result in the above schedule depending on how the unit costs are
rounded.
53
Answer Key
A. 20X2 goods available for sale $470 (400 units)

B. 20X2 ending inventory $154
C. 20X2 cost of goods sold $316
A. $100 + 240 + 130 = $470 (400 units)

B. $400 - 280 = 120 units; (100 at $1.30) + (20 at $1.20) = $154
C. $100 + 160 = 270 units; (100 at $1.00) + (10 at $1.20) + (170 at $1.20) = $316
D.
January 6 Inventory 240
Cash 240
January 10 Cash (110 at $2.40 264
Sales Revenue 264
Inventory* 112
*(100 at $1.00) + (10 at $1.20)
54
Answer Key
165) (a) FIFO

Date Description Purchases COGS Ending Inventory
Mar 1 Beginning 200 $60 $12,000
3 Purchase 60 $75 $4,500 200 60 16,500
60 75
4 Sale 70 $60 $4,200 130 60 12,300
60 75
10 Purchase 200 82 16,400 130 60 28,700
60 75
200 82
16 Sale 80 60 4,800 50 60 23,900
60 75
200 82
19 Sale 50 60 5,250 30 75 18,650
30 75 200 82
25 Sale 30 75 3,890 180 82 14,760
20 82
30 Purchase 40 90 3,600 180 82 18,360
40 90
30 Ending 280 $18,140 220 $18,360
(b) Average Cost
55
Answer Key
A B C
Sales $100,000 $239,000 $438,000
Cost of goods sold 54,000 122,000 345,000
Inventory, beginning of year 23,000 45,000 98,000
Average inventory 20,000 42,000 101,500
Gross profit margin 46% 49% 21%
Inventory turnover 2.7 2.9 3.4
Days in inventory 135 126 107
167) 1) 22.2 + 1.3 = 23.5

2) 22.2/((1.3 + 1.2)/2) = 17.76
168) 1. 5.91 ($8,960/$1,515)
2. 61.8 days (365 days/5.91)
3. The inventory turnover ratio identifies how many times the inventory was sold or liquidated during the year, whi
the average days to sell shows the volume of sales that can be supported in terms of number of days' stock on hand.
As the inventory turnover increases, the company will carry less stock in terms of days' sales.
169) 1. $53,850,520,000 ($53,800,000,000 + ($610,850,000 minus $560,330,000),
2. $53,845,820, 000 ($53,850,520,000 minus ($90,500,000 minus $85,800,000)
170) (a)
Inventory turnover $21,761 $27,257
($6,031 + $6,162) / 2 ($4,816 + $5,044) / 2
$21,761 $27,257
$6,096.5 = 3.6 times $4,930 = 5.5 times
Days in inventory 365 / 3.6 = 101 days 365 / 5.5 = 66 days
(b) Competitor B's inventory turnover is approximately 53% [(5.5-3.6) ÷ 3.6)] higher than Competitor A's. In
addition, Competitor B's days in inventory is 35% [(101-66) 101] lower than Competitor A's. Generally, a company
prefers to maintain as high an inventory turnover as possible. Conclude that Competitor B manages inventory
more effectively than Competitor A.
56
Answer Key
Debits Credits
A. Purchased 100 units for cash A 1,000 E 1,000
assuming the perpetual
B. Purchased 100 units for cash B 1,000 E 1,000
system is used
C. Sold 100 units for cash E 1,300 D 1,300
assuming the perpetual C 1,000 A 1,000
D. Sold 100 units for cash E 1,300 D 1,300
system is used
57
Answer Key
173) A.
Cost per unit of inventory $500.00
Less: 2% discount -10.00
Less: quantity rebate -20.00
Plus: Freight $3,750 ÷ 500 7.50
477.50
Inventory level X 500 units
Total cost $238,750
B
Accounts receivable (2000 × $20) 40,000
Purchases 40,000
C.
Cash 40,000
174) 1.
20X4 20X5 20X6 20X7
FIFO income $26,250 $45,000 $48,750 $67,500
Difference in beginning inventory 0 3,750 40,350 46,500
Difference in ending inventory * (3,750) (40,350) (46,500) (37,500)
Revised net income $22,500 $8,400 $42,600 $76,500
* 20X4 $82,250 — $78,500 = $3,750

20X5 $142,000 — $101,650 = $40,350
20X6 $164,000 — $117,500 = $46,500
20X7 $173,000 — $135,500 = $37,500
2.
a. Minimize income tax–Average cost (except in 20X7)
b. Maximize inventory values–FIFO
58
1) Operational assets do not include which of the following kinds of assets?

A) Mineral deposits being mined. B) Plant and equipment in use.
C) Patents in use. D) Land held for resale.
Answer: D
2) Which of the following is not a tangible capital asset?

A) Equipment B) Buildings C) Land D) Copyrights
Answer: D
3) Which of the following is not a major characteristic of a property, plant, and equipment asset?
A) Acquired for resale B) Possesses physical substance
C) Yields services over several years D) Acquired for use
Answer: A
4) Which of the following costs would normally not be included in the cost of equipment?
A) Testing of equipment.
B) Installation of equipment.
C) Freight paid by buyer to have equipment shipped.
D) Insurance for equipment after it has started being used.
Answer: D
5) What are operational assets that have physical substance called?

A) Long-term investments. B) Intangible assets.
C) Current assets. D) Tangible assets.
Answer: D
6) Tangible assets include which of the following?

A) Natural resources, buildings, and franchises.
B) Land, buildings, and equipment.
C) Land, buildings, and leaseholds.
D) Licenses, trademarks, and land.
Answer: B
7) Intangible assets include which of the following?

A) Leaseholds, patents, and copyrights.
B) Buildings, patents, and trademarks.
C) Copyrights, licenses, and land.
D) Trade receivables, franchises, and trademarks.
Answer: A
1
8) Which of the following would be classified as an operational (fixed) asset?
A) A Ford Motor Company plant used to manufacture the Focus line in Oakville, Ontario.
B) Land and buildings owned by Toys "R" Us that are store sites closed due to restructuring and
consolidating operations.
C) Land purchased and held for sale by a realtor.
D) Land purchased and held for development by Wal-Mart as a new store site.
Answer: A
9) On March 1, Chapin Company purchased a new stamping machine for $5,000. Chapin paid cash for
the machine. Other costs associated with the machine were: transportation costs, $300; sales tax
paid, $200; and installation cost, $100. What cost was recorded for the machine?
A) $5,600 B) $5,500 C) $5,000 D) $5,200
Answer: A
10) IFRS permits corporations to capitalize interest costs for

A) both assets that are purchased or constructed.
B) assets that are constructed or acquired over time only.
C) assets that are purchased only.
D) capitalizing interest is never permitted.
Answer: B
11) Which of the following would be an example of a land improvement?

A) Land transfer tax paid on purchase of the land
B) Costs of installing lighting
C) Costs of grading the land before building
D) Costs of digging the hole for the foundation
Answer: B
12) To which account should the amount of sales tax paid on the purchase of new machinery be
debited?
A) The machinery account.
B) The sales tax expense account.
C) The separate deferred charge account.
D) The accumulated depreciation for machinery account.
Answer: A
13) Airbury Company acquired manufacturing equipment at an invoice price of $80,000 and paid $750
to have it delivered to the factory. $400 was spent to repair a door that was damaged while installing
the equipment. At what amount should this equipment be recorded on the company's books?
A) $81,150 B) $80,750 C) $80,400 D) $80,000
Answer: B
2
14) Martinelli Company recently purchased a truck. The price negotiated with the dealer was $85,000.
Martinelli also paid sales tax of $6,000 on the purchase, shipping and preparation costs of $950, and
insurance for the first year of operation of $2,000. For the truck, what amount should be debited to
the asset account Vehicles?
A) $85,950 B) $85,000 C) $91,950 D) $91,000
Answer: C
15) Under IFRS, a corporation may capitalize interest for:

A) Any asset that it purchases with debt.
B) Any asset that it purchases.
C) Any asset that is either purchased or constructed
D) Only assets that are constructed or acquired over time.
Answer: D
16) Belmont Corporation made a basket purchase of land, a building and equipment, paying a total of
$1,500,000. Market values for the assets were not available, but the appraised values were $300,000
for the land, $900,000 for the building, and $600,000 for equipment. What amounts should be
recorded in the Land, Building, and Equipment accounts, respectively?
A) $300,000, $900,000, and $600,000 B) $1,500,000, $-0-, and $-0-
C) $500,000, $500,000, and $500,000 D) $250,000, $750,000, and $500,000
Answer: D
17) When determining whether to capitalize or expense an amount relating to fixed assets, which of the
following is not relevant to the decision?
A) Matching principal B) Materiality concept
C) Income tax rules D) Revenue recognition principal
Answer: D
18) Los Miños purchased a large tract of land with the intention to transform it into a cocoa plantation.
Before the new seedlings can be planted, the site, which is prone to flooding, must be drained. The
cost of the draining should be
A) reported as an operating loss.
B) capitalized as part of the cost of the land.
C) expensed only after the first crop of has been harvested.
D) expensed immediately.
Answer: B
19) Ifa plant asset is acquired by the issuance of a public company's common shares, the cost of the
plant asset should be measured by the
A) stated value of the shares B) book value of the shares
C) market value of the shares D) the par value of the shares
Answer: C
3
20) Amunicipality has decided to donate a plant site to a local manufacturer that plans to open a new
factory and create jobs. The donated plant site should be recorded on the manufacturer's books at
A) the nominal cost of taking title to it.
B) the value assigned by the company's directors.
C) its market value.
D) one dollar (since the site cost nothing but should be included in the balance sheet).
Answer: C
21) Which of the following costs would be excluded from the acquisition cost of equipment purchased
from a supplier?
A) Cost to install the equipment.
B) The cost to widen an entrance in the building to bring the equipment into the facilities.
C) The cost of freight paid to get the equipment to our factory.
D) A purchases discount offered by the supplier.
Answer: D
22) The Land account would include all of the following costs except
A) drainage costs. B) the cost of building a fence.
C) the cost of tearing down a building. D) title fees.
Answer: B
23) Which of the following would not be included in the acquisition cost of a building?
A) The cost of paving the parking lot and outdoor lighting in the lot.
B) An apportioned amount of the purchase cost when both the land and building are acquired in a
basket purchase.
C) The cost of paying an architect to design the re-modelling modifications of the building before
the store opens.
D) The cost of putting new windows and doors in the building before it opens for operations.
Answer: A
24) When may a company include interest costs as part of the cost of the asset?
A) Interest is never allowed to be capitalized.
B) When they buy a piece of equipment and finance its acquisition by a bank loan.
C) When they are self-constructing a piece of equipment they will use to manufacture their
products, but only during the period of construction.
D) When they must borrow money to finance the manufacture of their inventory items.
Answer: C
25) Johnson Company acquires land and building for $4,000,000 including all fees related to
acquisition. The land is appraised at $2,700,000 and the building at $2,100,000. The building is then
renovated at a cost of $750,000. What amount is capitalized to the building account?
A) $4,000,000 B) $2,375,000 C) $2,078,125 D) $2,500,000
Answer: D
4
26) Acompany purchases a remote site building for computer operations. The building will be suitable
for operations after some expenditures. The wiring must be replaced to computer specifications. The
roof is leaky and must be replaced. All rooms must be repainted and re-carpeted and there will also
be some plumbing work done. Which of the following statements is true?
A) The cost of the building will not include the repainting and re-carpeting costs.
B) The cost of the building is the purchase price of the building, while the additional expenditures
are all capitalized as Building Improvements.
C) The cost of the building will include the cost of replacing the roof.
D) The wiring is part of the computer costs, not the building cost.
Answer: C
27) Jeffers Inc.

purchased a warehouse and the land upon which it was located. The total price was
$450,000. The land was appraised for $180,000 while the warehouse was appraised for $360,000.
What account balances should Jeffers show in its general ledger?
A) Land $180,000; Warehouse $360,000 B) Land $150,000; Warehouse $350,000
C) Land $150,000; Warehouse $300,000 D) Land $166,667; Warehouse $333,333
Answer: C
28) What is an extraordinary repair to a building?

A) It is a revenue expenditure and may be debited to accumulated depreciation.
B) It is a capital expenditure and it is debited to an expense account.
C) It is a revenue expenditure and it is debited to an expense account.
D) It is a capital expenditure and it is debited to an asset account.
Answer: D
29) In
20X2, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's
accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what
will be the effect on the financial statements of Gamma?
A) In the years following 20X2, net income will be too high.
B) The error increased assets and profit in 20X2.
C) The error decreased profit in 20X2.
D) The repair was accounted for correctly.
Answer: B
30) How should an expenditure for an ordinary repair to factory equipment be recorded?
A) As an expense in the period incurred.
B) Debited to an asset account and depreciated over the current and future years.
C) Debited to accumulated depreciation.
D) Debited to an asset account but not depreciated over future years.
Answer: A
5
31) If
a company classifies an expenditure as a capital expenditure instead of a revenue expenditure,
which of the following will be false?
A) The initial cost basis of the asset will be higher.
B) Depreciation expense will be higher over the asset's life.
C) It will be expensed in the year in which the expenditure takes place.
D) Profit for the year of acquisition will be higher.
Answer: C
32) Which of the following would most likely not be a revenue expenditure?
A) Repairing a leaky roof.
B) Putting a hydraulic lift on our delivery truck making it easier and quicker to deliver appliances.
C) Painting the exterior of our store.
D) Replacing carpet in the sales department offices.
Answer: B
33) Which of the following is not a factor affecting the calculation of straight-line depreciation?
A) Useful life. B) Cost.
C) Carrying amount. D) Residual value.
Answer: C
34) With respect to depreciation policies, the principle of consistency means:

A) a company should use the same depreciation method in computing depreciation expense on all
its assets.
B) a company should disclose on the financial statements the depreciation method for all its
capital assets.
C) a company should use the same depreciation methods as other companies in the same industry.
D) a company should use the same depreciation method from year to year for a given capital asset.
Answer: D
35) AA Riser owns machinery for moving and delivering plants to its customers. The recorded cost of
the machinery is $38,000. It is estimated that the machinery will be able to move 120,000 plants
over its life. The company depreciates the machinery using straight-line depreciation over a useful
life of twelve years and an estimated residual value of $2,000. The amount that will be charged
annually as depreciation will be:
A) $3,000 B) $3,800 C) $3,600 D) $3,167
Answer: A
36) Nadler Inc. purchased equipment for $48,000, and estimated that the equipment will have a $4,000
residual value at the end of its 8-year useful life. Using the double-declining-balance method, the
depreciation expense for the third year would be
A) $5,500 B) $6,188 C) $6,750 D) $9,000
Answer: C
6
37) The depreciable amount is:
A) the accumulated amortization less residual value.
B) the original cost less the residual value.
C) the original cost less the accumulated amortization.
D) the net present value.
Answer: B
38) The concept of depreciation is best explained by which accounting principle or assumption?
A) Expense recognition. B) Going concern assumption.
C) Cost principle. D) Economic entity assumption.
Answer: A
39) In
accounting for tangible operational assets, the continuity assumption is important because of
A) It is consistent with maintaining assets in the accounting records at market value rather than
acquisition cost.
B) It helps a company decide whether to use straight-line depreciation or an accelerated
depreciation method.
C) It justifies depreciating the asset over its expected useful life, without anticipating that the
business will liquidate in the near future.
D) It provides justification for including residual values in calculating depreciation.
Answer: C
40) Theapportionment of the acquisition cost of an operational asset to future periods in which the
benefits contribute to earning revenue must be which of the following?
A) Random. B) Rational.
C) Revised annually. D) Impaired.
Answer: D
41) What is the book value of a tangible operating asset?

A) Total depreciation that has been recorded on the asset to date.
B) Acquisition cost.
C) Current estimated market value.
D) Acquisition cost minus the balance in accumulated depreciation.
Answer: D
42) Amachine, acquired for a cash cost of $6,000, is being depreciated on a straight-line basis of $900
per year. The residual value was estimated to be 10% of cost. What is the estimated useful life?
A) 6 years B) 5 years C) 3 years D) 4 years
Answer: A
7
43) OnJanuary 1, 20X3, a machine with a useful life of five years and a residual value of $2,500 was
purchased for $25,000. Using the double-declining-balance method, the depreciation expense for the
year ending December 31, 20X4 would be
A) $9,000 B) $10,000 C) $6,000 D) $5,400
Answer: C
44) A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life
of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the
second year, during which the machine was used 5,000 hours, would be
A) $13,200 B) $11,000 C) $14,400 D) $12,000
Answer: B
45) Newson's Courier Service recently purchased a new delivery van for $29,000. The van is estimated
to have a useful life of 8 years or 250,000 kilometers. The van will have a residual value of $1,000.
The company uses the units-of-production method of depreciation. Assuming the van travelled
36,000 kilometers. during the first year, what is the depreciation expense for the van in year 1?
A) $4,032 B) $4,176 C) $3,500 D) $3,625
Answer: A
46) On September 1, 20X3, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated
residual value, and an 8-year useful life. The 20X3 depreciation expense using the
double-declining-balance method would be:
A) $625 B) $2,250 C) $1,875 D) $750
Answer: D
47) Anasset being amortized with the straight-line method has a residual value of $20,000 and
amortization expense of $25,000 in its second year. What was the original cost of the asset if its
useful life was 10 years?
A) $185,000 B) $250,000 C) $200,000 D) $270,000
Answer: D
48) Trumble Company purchased a machine on January 1, 20X2, for $10,000. The company bookkeeper
incorrectly used a six-year life instead of a five-year life to depreciate the machine. What would be
the effect of this error on the 20X2 financial statements?
A) Overstatement of assets offset by an understatement of shareholders' equity.
B) Overstatement of assets and an understatement of liabilities.
C) Overstatement of assets offset by an understatement of retained earnings.
D) Overstatement of assets, profit, and shareholders' equity.
Answer: D
8
49) SureCompany purchased a machine on January 1, 20X1, at a cash cost of $12,000. The estimated
useful life is 10 years, and the estimated residual value is $3,000. The company will use the
declining-balance method based on a 150 percent acceleration rate. What will be the depreciation
expense for the second year?
A) $1,530 B) $1,350 C) $1,800 D) $900
Answer: A
50) Bangor Industries purchased a car for $22,000 on January 1, 20X1. The car had an estimated useful
life of 80,000 kilometers and an estimated residual value of $4,000. In the second year of ownership
(20X2), the car was driven 25,000 kilometers. Using the units-of-production method, what was the
amount of depreciation expense for 20X2?
A) $6,875 B) $4,500 C) $5,000 D) $5,625
Answer: D
51) A company decided to use the units-of-production method to calculate depreciation on a car to be
driven by the sales manager. The amount of annual depreciation will vary with which of the
following?
A) Number of kilometers the car is driven.
B) Amount of maintenance expense incurred on the car.
C) Balance in accumulated depreciation.
D) Age of the car.
Answer: A
52) A depreciable asset that cost $100,000 had an estimated useful life of 5 years and estimated residual
value of $10,000. What is the first year for which depreciation would be greater under the
straight-line method than under the declining-balance method with an acceleration rate of 200%?
A) The first year. B) The third year. C) The fourth year. D) The second year.
Answer: B
53) Most companies keep separate sets of accounting records for financial reporting and for income tax
computations. Which of the following statements is true?
A) They do it because the Income Tax Act requires companies to keep separate records for tax
purposes.
B) They do it to enable a company to do a reconciliation between taxable income and reported
profit.
C) They do it even though this practice is illegal and in violation of international financial
reporting standards.
D) They do it because financial reporting rules and income tax regulations differ in many ways.
Answer: D
9
54) Belton Corporation uses straight-line depreciation and, for assets acquired during the fiscal year,
follows the policy of recording a full month's depreciation for all assets acquired on or before the
15th of the month. No depreciation is recorded for the month if an asset is acquired after the 15 th.
On May 22, 20X1, Belton purchased a car that cost $22,000 which had an estimated residual value
of $2,000 and an estimated useful life of five years. To the nearest dollar, what is the amount of
depreciation that should be recorded on the car for 20X1?
A) $4,000 B) $2,000 C) $2,333 D) $2,667
Answer: C
Reference: 08-01
Eastern Fisheries Co. purchased equipment on January 1, 20X1 for $22,500. The equipment had an estimated useful life
10 years and an estimated residual value of $2,500. The company uses double-declining-balance depreciation.
55) Assuming Eastern uses double-declining-balance depreciation, what would be the depreciation
expense for 20X1?
A) $4,500 B) $2,000 C) $3,500 D) $2,250
Answer: A
56) Assuming Eastern uses straight-line depreciation, what would be the book value of the machine ten
years later, on December 31?
A) $2,250 B) $2,350 C) $ -0- D) $2,500
Answer: D
57) Assuming Eastern uses double- declining-balance depreciation, what would be the book value of the
machine on December 31 20X2?
A) $14,400 B) $20,000 C) $18,000 D) $17,750
Answer: A
58) Angstrom Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five
years and estimated residual value of $5,000. At the beginning of year three, Angstrom's managers
concluded that the total useful life would be four years, rather than five. There was no change in the
estimated residual value. What is the amount of depreciation that Angstrom should record for year 3
under the straight-line method?
A) $16,500 B) $15,500 C) $11,000 D) $8,250
Answer: A
59) Recording depreciation expense does which of the following?

A) It reduces both profit and the amount of cash generated by a company.
B) It reduces profit but does not affect the amount of cash generated by a company.
C) It reduces profit and increases the amount of cash generated by a company.
D) It does not affect profit or the amount of cash generated by a company.
Answer: B
10
60) Helm Corporation purchased a machine with an initial cost of $80,000, a residual value of $5,000,
and an estimated useful life of 10 years. At the beginning of the fifth year, Helm spent $10,000 for
an extraordinary repair. Following the repair, Helm estimated that the machine had a remaining
useful life of 8 years, and that the residual value was unchanged. Calculate depreciation expense on
the machine for the fifth year, assuming that Helm uses the straight-line method.
A) $7,500 B) $5,625 C) $7,250 D) $6,875
Answer: D
61) How is the matching principle related to the recording of depreciation on tangible operational
assets?
A) A portion of the cost of the asset should be allocated as an expense for the periods in which the
asset helps the business to earn revenue.
B) Once a depreciation method is adopted for a particular asset, the owner must continue to use
the same method.
C) The accountant who calculates the depreciation may assume that the company will continue in
business at least as long as the estimated useful life of the asset.
D) The matching principle requires a company to use the same depreciation.
Answer: A
Reference: 08-02
Hershon Inc. acquires a new machine. It is comprised of 2 different identifiable components the P922 and the B14. Each
these components is expected to be overhauled at different intervals.
The acquisition cost of the entire machine is as follows:
Component P922: $198,000

Component R14: $240,000
Total $438,000
Component P922 is expected to have a useful life of five years and a residual value of $20,000 before the first major
overhaul is required. Component R14 is expected to have a useful life of seven years and a residual value of $15,000 bef
its first overhaul.
62) Assuming straight-line depreciation, what will be the net book value of component P922 at the end
of year five?
A) $22,000 B) $15,000 C) $18,000 D) $20,000
Answer: D
63) At the beginning of year six, component P922 undergoes a major overhaul at a cost of $100,000.
The work is expected to extend its life by 3 years with a residual value of zero. Hershon uses the
straight-line method to depreciate this asset. What will be the net book value of component P922
one year after the overhaul?
A) $66,667 B) $120,000 C) $80,000 D) $40,000
Answer: C
11
64) Assuming, the double declining balance is used, what will be the net book value of component R14
at the end of year one?
A) $205,321 B) $171,429 C) $140,000 D) $179,455
Answer: B
65) Fraser Ltd.has decided to change the estimate of the useful life of an asset that has been in service
for two years. Which of the following statements describes the proper way to revise a useful life
estimate?
A) Retroactive changes must be made to correct previously recorded depreciation.
B) Only future years will be affected by the revision.
C) Revisions in useful life are permitted if approved by Canada Revenue Agency.
D) Both the current and future years will be affected by the revision.
Answer: D
66) Under what conditions would a company most likely adopt the double-declining-balance method for
financial reporting?
A) They expect the asset to lose its value in a huge portion after some years of its use.
B) They have a fleet of trucks where repair costs increase annually as the fleet ages.
C) They expect the asset to lose its value more rapidly in the first few years of its life.
D) They have high technology, robotic equipment in their plant that have a long usable life.
Answer: C
67) Barnes Company purchased a machine on April 4, 20X1, for $210,000. The machine had an
estimated useful life of five years and a salvage value of $30,000. The machine is being depreciated
using the double-declining-balance method. Barnes depreciates its assets from the first day of the
month nearest the date of purchase. The asset balance, net of accumulated depreciation, at
December 31, 20X2, would be:
A) $88,200 B) $105,600 C) $75,600 D) $94,800
Answer: A
68) Marker Steel purchased a machine on January 1, 20X1, at a cost of $380,000 with an estimated
residual value of $30,000 at the end of its estimated useful life of eight years. On January 1, 20X3,
Proctor Paper estimates that the machine only has a remaining life of five years and a residual value
of $20,000. Proctor Paper uses straight-line amortization. Depreciation expense for 20X3 would be:
A) $48,500 B) $57,000 C) $55,000 D) $54,500
Answer: D
12
A) A change in estimate requires the company to recalculate and restate all the prior years'
estimates of depreciation and adjust the impact on the statement of financial position and
income statement.
B) A company can change the method used for depreciating assets if the change can be justified
because it provides a better measure of the company's profit.
C) Either a change in estimate or a change in method can only be justified on the basis it provides
a better measure of profit.
D) A change in estimate is frequently necessary because the estimates of useful lives or residual
values may change over time because conditions change.
Answer: A

A) The only cash effect for depreciation is the tax savings provided by its deduction to derive
taxable income.
B) Depreciation is a non-cash expense that reduces profit but involves no outflow of cash.
C) Depreciation expense is included in the investing activities section of the cash flow statement.
D) Depreciation expense is added to profit in the operating activities section of the statement of
cash flows because it had no cash effect on profit under the indirect method.
Answer: C
71) WD Company reports profit in 20X3 of $1,300 million and depreciation expense of $851 million.
They also report investment in new theme parks, resorts, and other property of $2,134 million for
20X3. Which of the following disclosures would appear on their statement of cash flows?
A) Depreciation of $851 million would be deducted from profit under operating activities and the
$2,134 million would be deducted under investing activities.
B) Depreciation of $851 million would be deducted from profit under operating activities and the
$2,134 million would be added under investing activities.
C) Depreciation of $851 million would be added to profit under operating activities and the
$2,134 million would be deducted under investing activities.
D) Depreciation of $851 million would be added to profit under operating activities and the
$2,134 million would be added under investing activities.
Answer: C
72) Dionne Developments. owns a piece of land it had purchased in 20X4 for $600,000. When they
started to develop the land in 20X5, they discovered that there were environmental problems with
the land. It is now estimated to be worth only $250,000. Which of the following is the correct way to
account for this?
A) No accounting is necessary because the land is recorded at its historical cost, not its market
value.
B) The land should be amortized at a new rate to reflect the decline in its value
C) The land account should be written down to $150,000 and a loss recognized.
D) The land should be written off completely because now the company cannot use it for the
purpose they intended to.
Answer: C
13
73) Barton Iron Ore, owns the following equipment:
Carrying amount $80,000

Value in use $68,000
Fair value less selling costs $72,000
The recoverable amount to be used in the determination of impairment is

A) $68,000 B) $72,000
C) $80,000 D) Cannot be determined
Answer: B
74) Raysion Company, a public corporation, owns equipment for which the following year-end information is
available:
Carrying amount $59,000

Recoverable amount $52,000
Which of the following best describes the proper accounting treatment for Magenta's equipment?
A) It is impaired, a loss must be recognized, and may not be reversed in future periods.
B) The equipment is not impaired.
C) It is not impaired and a loss should not be recognized
D) It is impaired, a loss must be recognized, but may be reversed in future periods.
Answer: D
75) Which of the following is not a likely indicator of possible asset impairment?
A) Double the number of asset purchases over the prior year.
B) A decrease in the asset's market value
C) Evidence of obsolescence
D) External competitive factors
Answer: A
76) The records of Pam Company showed the following about a machine on January 1, 20X8:
Purchased 1/1/20X5 for $35,000

Accumulated depreciation at January 1, 20X8, $26,400
On July 1, 20X8, the machine was sold for $7,000. Depreciation for the first six months of 20X8 was $1,467.
The gain or loss on disposal would be which of the following?
A) $1,600 loss. B) $1,600 gain. C) $133 gain. D) $133 loss.
Answer: D
14
77) Foghorn Ltd. has an asset with an original cost of $16,000 and a carrying amount (net book value)
today of $4,400. The Company no longer needs the asset and has decided to sell it today for $3,000
cash. The journal entry Foghorn will use to record the sale includes:
A) a credit to the asset account for $4,400.
B) a debit to accumulated amortization for $11,600.
C) a debit to the asset account for $4,400.
D) a credit to cash account for $3,000.
Answer: B
78) Kovacic Company purchased a computer that cost $10,000. It had an estimated useful life of five
years and residual value of $0. The computer was depreciated by the straight-line method and was
sold at the end of the fourth year of use for $3,000 cash. What should Kovacic record?
A) A gain of $1,000.
B) A loss of $1,000.
C) Neither a gain nor a loss-the computer was sold at its book value.
D) Neither a gain nor a loss-the gain that occurred in this case would not be recognized.
Answer: A
79) A loss on disposal of an asset is reported in the financial statements

A) in the non-operating section of the income statement.
B) as part of Cost of Goods Sold.
C) as part of Other Comprehensive Income.
D) in the operating section of the income statement.
Answer: D
15
80) On April 1, 20X4, Michal Company sold equipment for $11,400 cash. The equipment had originally been
purchased at a cost of $24,000 on January 1, 20X0. The equipment was expected to a useful life of 8 years with
no residual value. As of January 1, 20X4, had accumulated depreciation of $12,000. The entry to record the
sale of the equipment was:
Cash 11,400
A
Gain on Sale of Machine 150
Machine 24,000
Cash 11,400
B
Loss on Sale of Machine 600
Machine 24,000
Cash 11,400
C
Depreciation Expense 750
Gain on Sale of Machine 150
Machine 24,000
Cash 11400
D
Loss on Sale of Machine 600
Machine 12,000

Answer: A
81) When an asset is retired, the amount of the gain is equal to:
A) the asset's carrying amount.
B) the accumulated depreciation.
C) the difference between the carrying amount and the proceeds.
D) the amount of cash received.
Answer: C
16
82) On July 1, 20X0, FEDWHY sold a truck for $10,000. The company originally paid $28,000 on June
30, 20X7 and has recorded accumulated depreciation on it to date of $15,000. The entry to record
the sale would include a:
A) credit to gain on sale of truck for $3,000.
B) debit to trucks for $28,000
C) credit to accumulated depreciation for $15,000.
D) debit to loss on sale of truck for $3,000.
Answer: D
83) Upon the disposal of an asset, if the proceeds are greater than the carrying value of the asset the
company must:
A) recognize a loss
B) adjust the accumulated depreciation account so the carrying value equals the proceeds
C) recognize a gain
D) adjust the carrying value to market value
Answer: C
84) During 20X0, Time & Tenders Co. sold equipment that had cost $206,000 for $127,600. This
resulted in a gain of $9,600. The total balance in accumulated depreciation–equipment was$660,000
on January 1 20X0, and $630,000 on December 31. No other equipment was disposed of during
2010. Depreciation expense for 2010 was
A) $58,000 B) $101,000 C) $59,600 D) $38,600
Answer: A
85) On March 1, 20X1, Jance Company purchased a producing oil well at a cash cost of $100,000. It is
estimated that 250,000 barrels of oil can be produced over the remaining life of the well. By
December 31, 20X1 (end of the accounting period), 1,500 barrels of oil were produced and sold.
What would be the amount of depletion expense for 20X1 on this well?
A) $450 B) $750 C) $300 D) $600
Answer: D
86) OnJanuary 1, 20X3, Stacy Company purchased the College Book Store for $350,000. At the date of
purchase, it was determined the recorded assets had a total market value of $325,000, comprised of
inventory (books), $275,000; fixtures, $30,000; and other assets $20,000. It is estimated that the
goodwill (if any) has an economic useful life of 20 years. What is the amount of amortization
expense for goodwill for 20X3?
A) $1,250 B) $16,250 C) $0 D) $17,500
Answer: C
17
87) Carpenter Corporation purchased a mineral deposit, making payment as follows: Cash $10,000 and
6,000 Carpenter Corporation common shares. On the date of the purchase, the mineral deposit had
an appraised value of $75,000; the common shares were quoted on the market at $11 per share.
Other acquisition costs amounted to $3,000 cash. What was the cost recorded for the mineral
deposit?
A) $70,000 B) $79,000 C) $73,000 D) $75,000
Answer: B
88) InJanuary, 20X7, Barton Iron Ore purchased a mineral mine for $5.1 million with removable ore
estimated by geological surveys at 2 million tons. The property has an estimated value of $300,000
after the iron ore has been extracted. The company incurred $1.5 million of development costs
preparing the mine for production. During 20X7, 400,000 tons were sold. What is the amount of
depletion that Pratt should expense for 20X7?
A) $1,200,000 B) $1,320,000 C) $960,000 D) $1,020,000
Answer: A
89) In20X5, Barton Iron Ore Co purchased a mine for $200 million ($30 million was applicable to the land). An
independent evaluation estimated the mine's iron ore reserves at 7.5 million tons. In 20X5, Barton Co
extracted 0.9 million tons.
The company's depletion expense for 20X5 is:

A) 12.8 million B) $20.4 million C) $24 million D) $18.6 million
Answer: B
90) Depletion is recorded for which of the following?

A) Intangible assets. B) Land and buildings.
C) Uncollectible trade receivables. D) Natural resources.
Answer: D
91) The Orser Mining Company acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces
of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were
extracted. The Orser Mining Company would recognize:
A) depreciation expense of $3,000,000. B) an increase in profit of $3,000,000.
C) cost of goods sold of $3,000,000. D) depletion expense of $3,000,000.
Answer: D
92) The amortization of finite life intangibles is recorded as:

A) a credit to accumulated amortization and a debit to amortization expense.
B) a credit to accumulated amortization and a debit to the asset account.
C) a debit to accumulated amortization and a credit to amortization expense.
D) a debit to cost of goods sold and a credit to accumulated amortization.
Answer: A
18
93) All
of the following are examples of intangible assets except:
A) research costs. B) trademarks. C) franchises. D) copyrights.
Answer: A
94) Which of the following statements is true with respect to intangible assets with indefinite lives?
A) They should be expensed to income in the year they are acquired.
B) They should be evaluated each year to determine if there has been any impairment in their
value.
C) They are not amortized or written down but remain on the company's balance sheet at their
original cost.
D) They should be amortized over a period of 40 years.
Answer: B
95) On January 1, 20X3, Enid Corporation purchased a patent from another company for $190,000. The
estimated useful life of the patent is 10 years, and its remaining legal life is 15 years. The
amortization expense for 20X3 is:
A) $19,000. B) $12,667. C) $68,000. D) $85,000.
Answer: A
96) Which of the following is an example of an intangible with an indefinite life?

A) The goodwill value resulting from a business combination.
B) A copyright on a book of poetry.
C) The research costs to develop a new drug.
D) A patent on a new invention.
Answer: A
97) All
the following statements are true, except:
A) A copyright is amortized over its useful life.
B) A copyright gives the owner the exclusive right to reproduce and sell an artistic or published
work.
C) Copyrights extend for the life of the creator plus 10 years.
D) The cost of a copyright consists of the cost of acquiring and defending it.
Answer: C
98) Intangibleassets
A) can be reported separately from Property, Plant, and Equipment.
B) must be reported under the heading Property, Plant, and Equipment.
C) are not reported on the statement of financial position because they lack physical substance.
D) should be reported as Current Assets on the statement of financial position.
Answer: A
19
99) On the statement of cash flows, cash flows from the purchase and sale of long-lived assets are
shown in which section?
A) Investing activities.
B) Financing activities.
C) Operating activities.
D) They are not reported on the statement of cash flows.
Answer: A
100) All the following are examples of intangible assets except:

A) franchises. B) research costs. C) copyrights. D) trademarks.
Answer: B
101) A tangible asset must be fully depreciated before it can be removed from the books.
Answer: True False
102) A corporation may choose to list its operational assets in the current assets section of the statement
of financial position.
Answer: True False
103) The fixed asset turnover ratio is computed by dividing profit by the average fixed assets amount.
Answer: True False
104) Land improvements are not a depreciable asset.

Answer: True False
105) One of the most important challenges facing managers is forecasting the level of productive capacity
(fixed assets) needed in the long run to meet customer demand.
Answer: True False
106) Operating expenditures are expensed as incurred.

Answer: True False
107) The cost allocation method utilized affects the amount of net property, plant, and equipment that is
used in the computation of the fixed asset turnover ratio.
Answer: True False
108) Building and equipment are recorded at their cost at acquisition and are subsequently reported at
cost less accumulated depreciation.
Answer: True False
109) When an operational asset is acquired for non-cash consideration, the cost of the asset received
always is measured as the book value of the non-cash consideration given up.
Answer: True False
20
110) If a second-hand machine is purchased for operational use in a business, all renovation and repair
costs on the used machine incurred by the purchaser prior to its operational use should be excluded
from the cost of the asset.
Answer: True False
111) Acquisition cost of property, plant, and equipment is the cash-equivalent purchase price plus all
reasonable and necessary expenditures made to acquire and prepare the asset for its intended use.
Answer: True False
112) Expenditures made after the asset is in use are always capital expenditures.
Answer: True False
113) Behren Company purchased a building and the parcel of land on which the building was located for
a total purchase price of $810,000. To record the acquisition, the account, Building, should be
debited for $810,000.
Answer: True False
114) Because of depreciation, the net carrying amount of an asset declines over time and profit is reduced
by the amount of the expense.
Answer: True False
115) When a company acquires land by issuing 10,000 of its common shares currently trading for $20 per
share, the company must get an appraisal of the land and recognize a gain if the appraised value is
more than the $200,000 value of the shares issued.
Answer: True False
116) A company that is self-constructing a new store, which will open upon completion, is permitted to
capitalize the interest during the period of construction if they finance the construction with actual
loans.
Answer: True False
117) In conformity with the historical cost principle, cost (less any estimated residual value) is allocated
to periodic expense over the periods benefited.
Answer: True False
118) The cost of a major addition to an operational asset should be recorded as an asset and depreciated
over its useful life.
Answer: True False
119) An asset is always sold for its residual value at the end of the asset's useful life.
Answer: True False
21
120) When events or changes in circumstances reduce the estimated future cash flows of long-lived
assets below their book value, the book values should be written down (by recording a loss) to the
fair value of the assets.
Answer: True False
121) Depreciation expense and impairment losses are presented in the operating section of the income
statement.
Answer: True False
122) An impairment loss is credited to accumulated depreciation.

Answer: True False
123) An item of property, plant, and equipment is considered to be impaired if its carrying amount
exceeds its recoverable amount.
Answer: True False
124) Ordinary repairs and maintenance of operational assets should be capitalized and depreciated over
the remaining useful life of the related asset.
Answer: True False
125) Only the actual acquisition cost, the estimated useful life, and the method of depreciation of an
operational asset are required to compute the depreciation expense for a period.
Answer: True False
126) Depreciation and depletion conceptually are different because they apply to different kinds of
operational assets.
Answer: True False
127) One example of a capital expenditure is ordinary maintenance cost such as an oil change for a
company truck.
Answer: True False
128) If an accountant calculates depreciation expense on an asset without taking into account the asset's
residual value of $5,000, depreciation expense for the periods will be lower than it should have
been.
Answer: True False
129) No clear line distinguishes capital expenditures (assets) from revenue expenditures (expenses);
therefore, it requires managers to exercise judgment in making a subjective decision.
Answer: True False
130) When Ford Motor Company expenses a $200 tool used in manufacturing, instead of capitalizing its
cost as an asset, it does so because of the conservatism convention.
Answer: True False
22
131) Amortization is about valuation rather than allocation.
Answer: True False
132) Carrying amount (or net book value) is always the same as fair value.
Answer: True False
133) The book value of an operational asset initially declines less rapidly under the straight-line method
than under the declining-balance method.
Answer: True False
134) When using the declining-balance method of depreciation, a declining percentage is applied to a
constant book value.
Answer: True False
135) The straight-line depreciation method assumes an approximately equal decline in the economic
usefulness of the asset each period and provides greater tax benefits early in the useful life of the
asset.
Answer: True False
136) Accelerated depreciation methods are not desirable from the income tax point of view because the
asset will produce a greater profit when it is new (the early years) than when it is older (the later
years).
Answer: True False
137) A change in the estimated residual value of property, plant, and equipment requires a restatement of
prior years' depreciation.
Answer: True False
138) When a change in estimate is made, there is no correction of previously recorded depreciation
expense.
Answer: True False
139) The declining-balance method of depreciation is appropriate for companies that expect their
equipment or other assets to become obsolete rapidly.
Answer: True False
140) Regardless of the method of depreciation used under international financial reporting standards, the
ending book value will be the same at the end of the asset's economic life.
Answer: True False
141) The estimate of residual value made at the beginning of the useful life has no relationship to the
book value at the end of the asset's useful life.
Answer: True False
142) Impairment losses on goodwill are never reversed.

Answer: True False
23
143) Amortization expense is a result of the expense recognition principle.
Answer: True False
144) If an acquired franchise or license is intended to provide benefits for an indefinite time period, then
the cost of the asset should not be amortized.
Answer: True False
145) If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is
reported.
Answer: True False
146) A loss on disposal results if the cash proceeds received from the asset sale are less than the asset's
carrying amount.
Answer: True False
147) When an asset is retired, a gain or loss must be recorded.

Answer: True False
148) If a building is sold at a gain, the gain on disposal should be reported in the non-operating section of
the cash flow statement.
Answer: True False
149) Acquiring and disposing of long-lived assets are financing activities on the cash flow statement.
Answer: True False
150) Depreciation expense is a non-cash expense that has no effect on cash.

Answer: True False
151) The cost of a patent should be amortized over the shorter of its economic life and its remaining legal
life.
Answer: True False
152) The cash flows from the purchase and sale of long-lived assets are reported in the operating
activities section of the cash flow statement.
Answer: True False
153) When assets are disposed of through sale or abandonment, we record additional depreciation since
the last adjustment was made.
Answer: True False
154) The fixed asset turnover ratio measures how much profit is generated by use of operational (fixed)
assets.
Answer: True False
24
155) When an entire business is purchased, goodwill is the excess of cost over the carrying amount of the
net identifiable assets acquired.
Answer: True False
156) All research costs should be capitalized when incurred.

Answer: True False
157) If a trademark is developed internally, it cannot be recognized as an intangible asset on the

Answer: True False
158) The cost principle should be applied in recording the acquisition of natural resources and intangible
assets.
Answer: True False
159) Natural resources should be depleted (usually by the units-of-production method) usually with the
amount of the depletion expense capitalized to a revenue account.
Answer: True False
160) Research costs are an example of intangible assets.

Answer: True False
161) The cost of a finite life intangible asset is not amortized, but the asset is tested for impairment.
Answer: True False
162) The following information is available for C Co. and P Co:
C Co. P Co.
Net fixed assets (beginning of year) $3,743 $6,261
Net fixed assets (end of year) 3,669 7,318
Net sales for the year 18,813 22,348
Net income for the year 3,533 1,993
Compute the fixed asset turnover ratio for the year for both C Co. and P Co.
Answer: C Co. is 5.08 ($18,813/[$3,743 + $3,669]/2);
P Co. is 3.29 ($22,348/[$6,261 + $7,318]/2)
25
163) On January 1, 20X1, Reagan Company purchased a machine. The price quoted by the seller was
$10,000 less 2% if paid within 15 days of the invoice date. Paid with cash were: transportation,
$300; installation, $600; and sales tax, $200. Give the entry to record the acquisition assuming the
discount was taken.
Machinery* 10,900
Cash 10,900
*Computations:
Invoice less cash discount ($10,000 × 98%) $9,800
Transportation 300
Installation 600
Sales tax 200
Total $10,900
164) Rebuild Inc. purchased a plant and the land on which the plant was located for a total of $300,000
cash. The separate market values of the plant and land were not known, so Rebuild hired an
independent appraiser who gave the following estimated market values: plant, $220,000; land,
$110,000. Complete the entry to record the acquisition (show computation).
Plant 200,000
Land 100,000
Cash 300,000
Plant: $300,000 × $220,000 / ($220,000 + $110,000) = $200,000

Land: $300,000 × $110,000 / ($220,000 + $110,000) = $100,000
26
165) Raco Inc. purchased two used machines together to get a lower total cash price of $90,000. The
machines were different, although of the same general type. They were designated as Machines A
and B. New machines of the same type could be purchased as follows: Machine A, $25,000;
Machine B, $75,000. Prepare the journal entry to record the purchase and show your computations.
Machine A 22,500
Machine B 67,500
Cash 90,000
Computations:
Allocated Lump-Sum Cost

Amount Ratio Computation Allocated Cost
A. $25,000 25% $90,000 × 25% $22,500
B. 75,000 75% 90,000 × 25% 67,500
Total $100,000 100% $90,000
166) Yella Company made a lump sum purchase of an office building, including the land and some
fixtures, for cash of $160,000. The tax assessments for the past year reflected the following: Land,
$22,500; Building, $58,500; and Fixtures, $9,000. Prepare the journal entry to record the
acquisition:
Land [$160,000 × ($22,500 / $90,000)] 40,000

Building [$160,000 × ($58,500 / $90,000)] 104,000
Fixtures [$160,000 × ($9,000 / $90,000)] 16,000
Cash 160,000
27
167) Laforge Cement Company bought a piece of land with a building on it for a total of $4,400,000. They obtained
two appraisals to estimate the fair values of the land and building.
Appraisal 1 Appraisal 2
Land $1,200,000 $1,000,000
Building $3,600,000 $4,000,000
Required:
1. If management's objectives are to minimize the amount of income tax they pay, which of the two appraisals
should they use to allocate the purchase price? Explain your answer.
2. Based on your answer in part a calculate the amount to be allocated to the Land and the Building account.
3. Under what circumstances might management wish to use the other appraisal value?
Answer: 1. If they want to minimize taxable income and hence taxes payable, they want the maximum amount
allocated to the building, which is deductible (over time through capital cost allowance) for tax
purposes. Therefore, they would select the second appraisal Land $1,000,000 and Building $4,000,000.
2. Total appraised value = $5,000,000,
Allocated to Land: 1,000,000/5,000,000 = 20% × 4,400,000 = $880,000
Allocated to Building: 4,000,000/5,000,000 = 80% × 4,400,000 = $3,520,000
3. If management's objectives were to maximize income, in order to increase bonuses or share price,
they would want the maximum amount allocated to Land, because that amount would never be
expensed as land is not amortized. So, they would select the first appraisal that allocates 25% of
the purchase price to Land.
168) In 20X3, WD Company reported the cost of its theme parks, resorts, and other assets at $14,037 million and
the accumulated depreciation at $5,382 million. In that same year, "Toys 4 U" reported $5,610 million in
operating assets and accumulated depreciation on them of $1,398 million.
1. Estimate the approximate remaining life of the assets for WD Company and "Toys 4 U".
2. Which company appears to have newer assets with longer remaining lives?
Answer: (1) a. 62% ($14,037 - $5,382)/$14,037; b. 75% ($5,610 - $1,398)/$5,610;
(2) "Toys 4 U" appears to have "newer" assets than WD Company because 75% of their assets' value
remains in book value while "Toys 4 U" has 62% in remaining book value.
28
169) Chamber Company purchased a truck on January 1, 20X1, at a cash cost of $10,600. The estimated residual
value was $400 and the estimated useful life 4 years. The company uses straight-line depreciation computed
monthly. On July 1, 20X4, the company sold the truck for $1,700 cash.
A. What was the depreciation expense amount per month?

B. What was the amount of accumulated depreciation at July 1, 20X4?
C. Give the required journal entries on the date of disposal, July 1, 20X4. (Assume no 20X4 depreciation had
yet been recorded).
Answer: A. ($10,000 - 400)/48 - $212.50 per month
B. 212.50 × 42 months = $8,925
C.
Depreciation expense (212.50 × 6) 1,275
Cash 1,700
Trucks 10,600
Gain on Disposal 25
170) Sutter Company purchased a machine on January 1, 20X1, for $16,000. The machine has an
estimated useful life of 5 years and a $1,000 residual value. It is now December 31, 20X2, and
Sutter is in the process of preparing financial statements. Complete the following schedule assuming
declining-balance method of depreciation with a 150% acceleration rate.
Date Depreciation Expense (for the year) Book Value (end of the year)
12/31/20X1
12/31/20X2
12/31/20X1 $4,800 $11,200
12/31/20X2 $3,360 $7,840
rate = 1/5 × 1.5 = 30%

20X1 $16,000 × 30% = $4,800
20X1 book value $11,200
20X2 ($16,000 - $4,800) × 30% = $3,360
20X2 book value $16,000 — ($4,800 + $3,360) = $7,840
29
171) The financial statements of Betty Company contained the following errors:
Item December 31, 20X1 December 31, 20X2

Depreciation expense on office equipment $500 understated $600 overstated
Respond to each of the following (disregard income taxes):

A. Profit for 20X1, was understated or overstated (circle one).
B. Total combined profit for the two-year period ended December 31, 20X2, was overstated or
understated (circle one).
Answer: A. Overstated; B. Understated
172) On January 1, 20X1, Stern Company (a calendar year corporation) purchased a heavy-duty machine
having an invoice price of $13,000 plus transportation and installation costs of $3,000. The machine
is estimated to have a 4-year useful life and a $1,000 residual value. Assuming the company uses the
declining-balance method depreciation and a 150% acceleration rate, complete the following schedule
(round to the nearest dollar).
Date Depreciation Expense (for the year) Book Value (at the end of the year)
12/31/20X1
12/31/20X2
12/31/20X3
12/31/20X4
Date Depreciation Expense (for the year) Book Value (at the end of the
year)
12/31/20X1 0.375* × $16,000 = $6,000 $16,000 — 6,000 = 10,000
12/31/20X2 0.375 × 10,000 = 3,750 16,000 — 9,750 = 6,250
12/31/20X3 0.375 × 6,250 = 2,344 16,000 — 12,094 = 3,096
12/31/20X4 0.375 × 3,906 = 2,906** 16,000 — 15,000 = 1,000
* straight line rate: 1/4 = 0.25

Declining-balance rate: 0.25 × 1.5 =0.375
**Even though $3,609 × 0.375 = $1,465, the depreciation expense the last year (the fourth year) is the
amount necessary to leave book value equal to the residual value of $1,000
30
173) Tweed Feed & Seed purchased a new machine on January 1, 20X1:
Cost when acquired $26,000

Estimated residual value 2,000
Estimated useful life 10 years
Accumulated depreciation at the end of year 5 (assume straight-line depreciation) $12,000
It is now the beginning of year 6 and the management re-evaluated the estimates related to the machine.
Compute the depreciation expense for year 6 under each of the following independent cases:
Case Event Depreciation Expense

A The estimated total useful life is changed to 15 years
B The residual value is changed to $1,000; useful life
unchanged
C The estimated total useful life is changed to 7 years and the
residual value is changed to $3,000.
Answer: CASE A: (26,000 - 12,000 - 2,000) ÷ (15 years - 5 years) = $1,200 Depreciation expense
CASE B: (26,000 - 12,000 - 1,000) ÷ (10 years - 5 years) = $2,600 Depreciation expense
CASE C: (26,000 - 12,000 - 3,000) ÷ (7 years - 5 years) = $5,500 Depreciation expense
31
174) Duval Company acquired a machine on January 1, 20X1 that cost $2,700 and had an estimated residual value
of $200. Complete the following schedule using the three methods of depreciation: A.) straight-line, B.)
units-of-production, C.) declining-balance at 150% acceleration rate.
Method Estimated Useful Life Depreciation Accumulated

Expense for 20X2Depreciation
12/31/20X2
A. Straight Line 5 years
B. Units of Production 10,000 units (total)
1,000 units (20X1's actual)
1,200 units (20X2's actual)
C. Declining Balance 5 years

Expense for Depreciation
20X2 12/31/20X2
A. Straight Line $,2500 / 5 $500 $1,000
$500 × 2 years
B. Units of Production $2,500 / 10,000 $300 $550
$.25 × 1,200
(.25 × 1,000) + (.25 × 1,200)
C. Declining Balance 5 yrs = 20% rate × 150% =$567 $1,377
30%
Yr 1: $2,700 × 30% = $810
Yr 2: ($2,700 - $810) ×
30% = $810 + $567
175) On January 1, 20X2, Walton Corporation made a basket purchase of land, a building, and furniture
and fixtures. The total purchase price was $313,000. Walton also paid $3,000 for title fees and
$4,000 in legal fees related to the purchase. Appraised values at the time of the purchase were: land
$70,000; building, $227,500; and furniture and fixtures, $52,500.
Required:
1. Make the journal entry to record the purchase of the assets, with cost based on appraised values.
2. The building had an estimated useful life of 20 years and residual value of $30,000. Make the journal entry
to record depreciation for 20X2 using the declining-balance method and a 150% acceleration rate.
3. The furniture and fixtures are expected to have useful lives of 5 years and no residual value. What is the
amount of depreciation on the furniture and fixtures for 20X2, assuming that Walton uses the straight-line
method of depreciation for such assets?
4. Based on the information in part 3, what is the book value of the furniture and fixtures at the end of 20X2?
5. Under IFRS, would Walton be able to use the declining-balance method for the building and the straight-line
32
method for furniture and fixtures? Discuss briefly.
Answer: 1.
Land 64,000
Building 208,000
Furniture and Fixtures 48,000
Cash 320,000
Computations:
Total acquisition costs: $313,000 + $3,000 + $4,000 = $320,000
Total appraised value: $70,000 + $52,500 + $227,500 = $350,000
Land: ($70,000 × $320,000)/$350,000 = $64,000
Building: ($227,500 × $320,000)/$350,000 = $208,000
Furniture and Fixtures: ($52,500 × $320,000)/$350,000 = $48,000
2.
Accumulated Depreciation -Building 15,600
$208,000 × 1/20 × 150% = $15,600

3. $48,000 ÷ 5 years = $9,600
4. $48,000 - $9,600 = $38,400
5. IFRS allow a company to use different depreciation methods for different assets or groups of assets.
Walton would be able to use the declining-balance for buildings and straight-line depreciation
for furniture and fixtures.
33
176) Macon Assembly Company purchased a machine on January 2, 20X3, by paying cash of $85,000. The
machine has an estimated useful life of five years (or the production of 200,000 units) and an estimated
residual value of $5,000.
Required:
1. Determine depreciation expense (to the nearest dollar) for each year of the machine's useful life under (a).
straight-line depreciation; and (b). the declining-balance method with a 200% acceleration rate.
2. What is the book value of the machine after three years with the declining-balance method and a 200%
acceleration rate?
3. What is the book value of the machinery after three years with straight-line depreciation.
4. If the machine was used to produce and sell 48,000 units in 20X3, what would the depreciation
expense be under the units of production method?
Answer: 1. a. Straight-line depreciation for years 1 through 5 = ($85,000 - $5,000/5 years) = $16,000
b. Declining balance sheet method - 200% acceleration rate
Year Depreciation expense Book Value

(end of the year)
$85,000
1 $85,000 × 1/5 × 200% = $34,000 51,000
2 $51,000 × 1/5 × 200% = $20,400 30,600
3 $30,600 × 1/5 × 200% = $12,240 18,360
4 $18,360 × 1/5 × 200% = $7,344 11,016
5 $80,000 - $73,984 accumulated depreciation = $6,016*
5,000
2. $85,000 - 34,000 - 20,400 - 12,240 = 18,360

3. $85,000 - (16,000 × 3) = 37,000
4. ($85,000 - 5,000)/200,000 = $.40/unit
$.40 × 48,000 = $19,200
177) On September 7, 20X2, Belverd Corporation purchased a building and land at a total acquisition cost of
$500,000. An appraiser estimated that 80% of the purchase price should be assigned to the building and the
remainder to the land.
Required:
1. Make the journal entry for the acquisition of the land and building.
2. Make the journal entry to record depreciation of the building for 20X2. Belverd takes a full month of
depreciation for assets acquired in the first half of the month and uses the straight-line method. The building
has a residual value of $40,000 and an estimated useful life of 20 years.
3. Based on the information in part 2, what will the book value of the building be at the end of 20X3?
4. Why was it important for Belverd to separate the cost of the land and the cost of the building?
34
Answer: 1.
Building 400,000
Land 100,000
Cash 500,000
2.

Accumulated Depreciation Building 6,000
Computation:
($400,000 - 40,000)/20 years = $18,000/year

$18,000/yr × 4 months/12 months = $6,000
3. Book value = $400,000 - 24,000 accumulated depreciation = $376,000
4. Belverd separated the cost of the building and the cost of the land when it made the original
entry to record the acquisition because depreciation must be recorded for the building and not
for the land. Recording the assets in separate accounts simplifies the process of properly
recording depreciation.
178) Hilman Company purchased a truck on January 1, 20X1, at a cost of $34,000. The company estimated that the
truck would have a useful life of four years and a residual value of $4,000.
Required:
1. Complete the following table:
Depreciation
Year Depreciation Declining balance method
Straight-line method 200% acceleration rate
20X1
20X2
20X3
20X4
2. Which of the two methods in part 1 would result in:

a. Lower profit in 20X1? ________
b. Lower profit in 20X4? ________
Declining balance method

20X1 $7,500 $17,000
35
20X2 $7,500 $8,500
20X3 $7,500 $4,250
20X4 $7,500 $250
Straight-line: ($34,000 - 4,000)/4 years = $7,500
Declining-balance:
20X1 1/4 × 200% × $34,000 = $17,000
20X2 1/4 × 200% × ($34,000 - $17,000) = $8,500
20X3 1/4 × 200% × ($34,000 - $25,500) = $4,250
20X4 Book value $4,250 - $4,000 target book value = $250
2. Lower profit: (a) 20X1 Declining-balance 200% acceleration rate; (b) 20X4 Straight-line
36
179) FAL Corporation purchased a robot to be used in manufacturing. The purchase was made at the
beginning of 20X1 by paying cash of $500,000. The robot has an estimated residual value of
$20,000 and an expected useful life of ten years. At the beginning of 20X3, FAL concluded that the
total useful life of the robot will be eight years rather than ten, and that the residual value will be zero.
FAL uses the straight-line method for depreciation.
Required:
1. Make the journal entry to record depreciation on the robot for 20X2.
2. Make the journal entry to record depreciation on the robot for 20X3, including the effect of the changes in
estimates.
3. Describe how a business should account for a change in the estimated useful life and/or residual value
of a depreciable asset.
Answer: 1.
Computations:
($500,000 - $20,000)/10 years = $48,000/year
2.
Computations:
$500,000 - $48,000 amortization/year × 2 years = $404,000 remaining amortizable value $404,000/6 ye

remaining useful life = $67,333
3. A change in estimate of residual value or useful life requires the company to calculate a new annual
depreciation amount. The change in estimates affects the amount of depreciation for current and future
years. There is no restatement of financial statements for prior years.
180) Here are selected 20X3 transactions of Avery Corporation.
Jan. 1 Retired a piece of machinery that had been purchased ten years earlier on
January 1. The machine cost $62,000 and had a useful life of 10 years with no
residual value.
June 30 Sold a computer that was purchased on January 1, 20X1. The computer cost
$39,000 and had a useful of 3 years with no residual value. The computer was
sold for $5,000 cash.
Dec. 31 Sold a delivery truck for $9,000 cash. The truck cost $25,000 when it was
purchased on January 1, 20X0, and was depreciated based on a 5-year useful life
with a $3,000 residual value.
37
Avery Corporation uses straight-line depreciation.
Required:
Prepare all entries required on the above dates, including entries to update depreciation on assets
disposed of, where applicable.
Date Account Titles and Explanation Debit Credit

Jan. 1 Accumulated Depreciation — Machinery 62,000
Machinery 62,000
June 30 Depreciation Expense 6,500
Accumulated Depreciation — Computer 6,500
($39,000 / 3 years × 6/12)
June 30 Cash 5,000
($39,000 × 2/3 = $26,000; $26,000 + $6,500)
Loss on Disposal $5,000 — ($39,000 - $32,500)1,500
Computer 39,000
Dec. 31 Depreciation Expense 4,400
Accumulated Depreciation — Truck 4,400
($25,000 - $3,000) / 5 years
Cash 9,000
Accumulated Depreciation — Truck
($25,000 - $3,000) × 4/5 17,600
Truck 25,000
Gain on Disposal 1,600
38
181) Give the required adjusting entry at December 31, 20X6, the end of the annual accounting period for the three
items below. If no entry is required, explain why.
A. Web Company acquired a patent that cost $4,260 on January 1, 20X6. The patent was registered on January
1, 20X1. The legal life of a patent is 17 years from registration. Web expects to use the patent the remaining
legal life.
B. Web Company acquired a gravel pit on January 1, 20X6, that cost $24,000. The company estimates that
30,000 tons of gravel can be extracted economically. During 20X6 4,000 tons were extracted and sold.
C. On January 1, 20X6, Web Company acquired a dump truck that cost $6,000 to use hauling gravel. The
company estimated a residual value of 10% of cost and a useful life 4 years. The company uses
straight-line depreciation.
A. Patent amortization expense 355

Patents 355
$4,260 / (17 — 5) years = $355
B. Depletion expense 3,200
Gravel pit 3,200
$.80 × 4,000 tons = $3,200
C. Depreciation expense 1,350
$6,000 × .90 = $5,400 to be depreciated
$5,400/ 4 = $1,350
182) For each of the following three independent situations determine the gain or loss on the sale or disposal of the
asset. Prepare the journal entry required at the time of sale or disposal. Assume that all assets are depreciated
using the straight-line method and in every case, a year-end of December 31.
1. Equipment purchased July 1, 20X4, for $75,000 was sold for $9,500 on June 30, 20X9. At the time of
purchase, it was estimated to have a $5,000 residual value and a five-year useful life. Assume that a half-year
depreciation is taken in the year the equipment was acquired and in the year it was sold.
2 Calibrating equipment was purchased on July 10, 20X8, for $120,000. At the time, it was estimated to have a
six-year useful life and no residual value. On September 30, 20X9, there was a fire in the plant, and the
equipment suffered water damage and is beyond repair. The company received $50,000 from the insurance
company for the equipment. Assume depreciation is applied monthly.
3. Office furniture was purchased on February 11, 20X0 for $25,000 and was estimated to have a useful
life of ten years and a salvage value of$2,500. On August 1, 20X7, the company moved to new
offices and donated the old furniture to charity. Assume that a half-year depreciation is taken in the
year the furniture was acquired and in the year it was donated.
Answer: 1. ($75,000 — $5,000)/ 5 = $14,000 depreciation per year. 4 full years (20X5-X6-X7-X8) and 2
half-years (20X4 & 20X9) = 5 full years.
NBV = $75,000 — (5 × $14,000) = $5,000, which equals the residual value. Gain: $9,500 — $5,000 =
$4,500
39
Cash 9,500
Equipment 75,000
Gain on disposal 4,500
2. $120,000/6 = $20,000 depreciation per year, ½ year in 20X8 and 9 months in 20X9 = 20,000 × 15/12
$25,000 of depreciation taken, NBV = 120,000 — 25,000 = $95,000
Proceeds from insurance 50,000 — 95,000 = $45,000 loss

Cash 50,000
Loss on recording equipment 45,000
Calibrating Equipment 120,000
3. ($25,000-$2,500)/10 = $2,250 depreciation expense a year.

Two half-years in 20X0 and 20X7, 6 years 20X1 to 20X6 = 7 yrs depreciation
(7 × 2,250) = $15,750
NBV = 25,000 — 15,750 = $9,250


Loss on office furniture donated 9,250
Office furniture 25,000
40
183) Weaver Mining Company purchased a site containing a mineral deposit in 20X3. The purchase price
was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Weaver
constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted.
When the ore reserves are gone, the building will have no further value.
Required:
1. Explain the purpose for recording depletion on natural resources.

2. Calculate Weaver's depletion rate per ton of ore for this deposit.
3. Make the journal entry to record depletion for the year 20X3, when Weaver mined and sold 150,000 tons of
ore.
4. Make the journal entry to record depreciation on the building for 20X3. Weaver calculates depreciation
on the building using the units of production method based on the amount of ore extracted (150,000
tons in 20X3).
Answer: 1. The purpose of recording depletion is to match the cost of a natural resource with revenues earned
from extracting and selling the resource.
2. $820,000/400,000 tons = $2.05/ton
3.
Depletion Expense 307,500
Mineral Depositor( Accumulated Depletion) 307,500
4.
Amortization Expense 187,500
Accumulated Depreciation, Building 187,500
184) Listed below are various methods of allocating the cost of certain capital assets over their useful lives, each
followed by a descriptive statement. Match the methods to the statements by placing the appropriate letter in
the space provided.
METHODS
A. Capitalized and depreciated/amortized/depleted
B. Capitalized
C. Evaluated for impairment
D. Expensed
E. None of these methods
1. Purchased patent
2. Basket purchase of two commercial buildings
3. Advertising costs
4. Intangible assets with indefinite live
5. Legal costs incurred to defend a copyright from infringement
6. Research costs incurred internally
7. Cost of timberland
8. Five-acre parcel of land where a firm's headquarters is located
9. Purchased drilling equipment
41
10. Goodwill acquired in a business combination
11. Interest on self-constructed assets
12. Development costs for a proven new product
A 1. Purchased patent
A 2. Basket purchase of two commercial buildings
D 3. Advertising costs
C 4. Intangible assets with indefinite live
A 5. Legal costs incurred to defend a copyright from infringement
D 6. Research costs incurred internally
A 7. Cost of timberland
E 8. Five-acre parcel of land where a firm's headquarters is located
A 9. Purchased drilling equipment
C 10. Goodwill acquired in a business combination
A 11. Interest on self-constructed assets
B 12. Development costs for a proven new product
185) On January 2, 20X4, Daintry Company purchased a patent for $380,000 from an inventor who had developed a
new manufacturing process. At the time of the purchase, the patent had a remaining legal life of 12 years, but
Daintry estimated the useful life to the company to be only 10 years.
Required:
1. Prepare the journal entry to record Daintry's purchase of the patent.

2. Prepare the journal entry to record amortization of the patent for 20X4, assuming that no contra account is
used.
3. At the start of 20X7, after amortization had been recorded for three years, Daintry concluded that the
useful life of the patent would be 7 years, rather than 10. Record Daintry's amortization expense for
20X7.
1. Patent 380,000
Cash 380,000
2. Amortization Expense 38,000
Patent 38,000
Patent 66,500
Computations:
[$380,000 — (38,000 × 3)/4 years remaining life = $66,500 amortization/year
42
186) Pied Piper Pies has been in business 8 years with 4 stores in the San Francisco bay area. Their local
reputation for making savory pies such as curried potatoes is well recognized. A national food
distributor has offered to purchase the company. Pied Piper has $1.2 million of assets on their books
but those assets have $1.5 million in value at fair market value and $.3 million of liabilities. If the
distributor offers to buy Pied Piper for $3.5 million and assume the liabilities of Pied Piper. How
much goodwill, if any, is included in the purchase price?
Answer: $2.3 million ($3.5 million minus {$1.5 million minus $.3 million})
187) A company purchased equipment for $800,000 and has depreciated it for the past 5 years Its original
life was estimated to be 10 years with a $200,000 residual value. However, the equipment's utility to
the company has since declined and they expect it to generate a net cash flow over the remaining
years of $200,000 from its operation. If the asset has been impaired, how much will be recorded as a
loss in the current year?
Answer: $300,000 (Remaining book value $500,000 minus $200,000 expected cash flow)
43
Answer Key
1) D
2) D
3) A
4) D
5) D
6) B
7) A
8) A
9) A
10) B
11) B
12) A
13) B
14) C
15) D
16) D
17) D
18) B
19) C
20) C
21) D
22) B
23) A
24) C
25) D
26) C
27) C
28) D
29) B
30) A
31) C
32) B
33) C
34) D
35) A
36) C
37) B
38) A
39) C
40) D
41) D
42) A
43) C
44) B
45) A
46) D
47) D
48) D
49) A
50) D
44
Answer Key
51) A
52) B
53) D
54) C
55) A
56) D
57) A
58) A
59) B
60) D
61) A
62) D
63) C
64) B
65) D
66) C
67) A
68) D
69) A
70) C
71) C
72) C
73) B
74) D
75) A
76) D
77) B
78) A
79) D
80) A
81) C
82) D
83) C
84) A
85) D
86) C
87) B
88) A
89) B
90) D
91) D
92) A
93) A
94) B
95) A
96) A
97) C
98) A
99) A
100) B
45
Answer Key
101) FALSE
102) FALSE
103) FALSE
104) FALSE
105) TRUE
106) TRUE
107) TRUE
108) TRUE
109) FALSE
110) FALSE
111) TRUE
112) FALSE
113) FALSE
114) TRUE
115) FALSE
116) TRUE
117) FALSE
118) TRUE
119) FALSE
120) TRUE
121) FALSE
122) TRUE
123) TRUE
124) FALSE
125) FALSE
126) FALSE
127) FALSE
128) FALSE
129) TRUE
130) FALSE
131) FALSE
132) FALSE
133) TRUE
134) FALSE
135) FALSE
136) FALSE
137) FALSE
138) TRUE
139) TRUE
140) TRUE
141) FALSE
142) TRUE
143) TRUE
144) TRUE
145) TRUE
146) TRUE
147) FALSE
148) FALSE
149) FALSE
150) TRUE
46
Answer Key
151) TRUE
152) FALSE
153) TRUE
154) FALSE
155) TRUE
156) FALSE
157) TRUE
158) TRUE
159) FALSE
160) FALSE
161) FALSE
162) C Co. is 5.08 ($18,813/[$3,743 + $3,669]/2);
P Co. is 3.29 ($22,348/[$6,261 + $7,318]/2)
Machinery* 10,900
Cash 10,900
*Computations:
Invoice less cash discount ($10,000 × 98%) $9,800
Transportation 300
Installation 600
Sales tax 200
Total $10,900
Plant 200,000
Land 100,000
Cash 300,000
Plant: $300,000 × $220,000 / ($220,000 + $110,000) = $200,000

Land: $300,000 × $110,000 / ($220,000 + $110,000) = $100,000
47
Answer Key
Machine A 22,500
Machine B 67,500
Cash 90,000
Computations:
Allocated Lump-Sum Cost

Amount Ratio Computation Allocated Cost
A. $25,000 25% $90,000 × 25% $22,500
B. 75,000 75% 90,000 × 25% 67,500
Total $100,000 100% $90,000
Land [$160,000 × ($22,500 / $90,000)] 40,000

Building [$160,000 × ($58,500 / $90,000)] 104,000
Fixtures [$160,000 × ($9,000 / $90,000)] 16,000
Cash 160,000
167) 1. If they want to minimize taxable income and hence taxes payable, they want the maximum amount allocated to
the building, which is deductible (over time through capital cost allowance) for tax purposes. Therefore, they would
select the second appraisal Land $1,000,000 and Building $4,000,000.
2. Total appraised value = $5,000,000,
Allocated to Land: 1,000,000/5,000,000 = 20% × 4,400,000 = $880,000
Allocated to Building: 4,000,000/5,000,000 = 80% × 4,400,000 = $3,520,000
3. If management's objectives were to maximize income, in order to increase bonuses or share price, they would
want the maximum amount allocated to Land, because that amount would never be expensed as land is not
amortized. So, they would select the first appraisal that allocates 25% of the purchase price to Land.
168) (1) a. 62% ($14,037 - $5,382)/$14,037; b. 75% ($5,610 - $1,398)/$5,610;
(2) "Toys 4 U" appears to have "newer" assets than WD Company because 75% of their assets' value remains in
book value while "Toys 4 U" has 62% in remaining book value.
48
Answer Key
169) A. ($10,000 - 400)/48 - $212.50 per month

B. 212.50 × 42 months = $8,925
C.
Depreciation expense (212.50 × 6) 1,275
Cash 1,700
Trucks 10,600
Gain on Disposal 25
12/31/20X1 $4,800 $11,200
12/31/20X2 $3,360 $7,840
rate = 1/5 × 1.5 = 30%

20X1 $16,000 × 30% = $4,800
20X1 book value $11,200
20X2 ($16,000 - $4,800) × 30% = $3,360
20X2 book value $16,000 — ($4,800 + $3,360) = $7,840
171) A. Overstated; B. Understated
Date Depreciation Expense (for the year) Book Value (at the end of the
year)
12/31/20X1 0.375* × $16,000 = $6,000 $16,000 — 6,000 = 10,000
12/31/20X2 0.375 × 10,000 = 3,750 16,000 — 9,750 = 6,250
12/31/20X3 0.375 × 6,250 = 2,344 16,000 — 12,094 = 3,096
12/31/20X4 0.375 × 3,906 = 2,906** 16,000 — 15,000 = 1,000
* straight line rate: 1/4 = 0.25

Declining-balance rate: 0.25 × 1.5 =0.375
**Even though $3,609 × 0.375 = $1,465, the depreciation expense the last year (the fourth year) is the amount
necessary to leave book value equal to the residual value of $1,000
173) CASE A: (26,000 - 12,000 - 2,000) ÷ (15 years - 5 years) = $1,200 Depreciation expense
CASE B: (26,000 - 12,000 - 1,000) ÷ (10 years - 5 years) = $2,600 Depreciation expense
CASE C: (26,000 - 12,000 - 3,000) ÷ (7 years - 5 years) = $5,500 Depreciation expense
49
Answer Key

Expense for Depreciation
20X2 12/31/20X2
A. Straight Line $,2500 / 5 $500 $1,000
$500 × 2 years
B. Units of Production $2,500 / 10,000 $300 $550
$.25 × 1,200
(.25 × 1,000) + (.25 × 1,200)
C. Declining Balance 5 yrs = 20% rate × 150% =$567 $1,377
30%
Yr 1: $2,700 × 30% = $810
Yr 2: ($2,700 - $810) ×
30% = $810 + $567
175) 1.
Land 64,000
Building 208,000
Furniture and Fixtures 48,000
Cash 320,000
Computations:
Total acquisition costs: $313,000 + $3,000 + $4,000 = $320,000
Total appraised value: $70,000 + $52,500 + $227,500 = $350,000
Land: ($70,000 × $320,000)/$350,000 = $64,000
Building: ($227,500 × $320,000)/$350,000 = $208,000
Furniture and Fixtures: ($52,500 × $320,000)/$350,000 = $48,000
2.
Accumulated Depreciation -Building 15,600
$208,000 × 1/20 × 150% = $15,600

3. $48,000 ÷ 5 years = $9,600
4. $48,000 - $9,600 = $38,400
5. IFRS allow a company to use different depreciation methods for different assets or groups of assets. Walton wou
be able to use the declining-balance for buildings and straight-line depreciation for furniture and fixtures.
50
Answer Key
176) 1. a. Straight-line depreciation for years 1 through 5 = ($85,000 - $5,000/5 years) = $16,000
b. Declining balance sheet method - 200% acceleration rate
Year Depreciation expense Book Value

(end of the year)
$85,000
1 $85,000 × 1/5 × 200% = $34,000 51,000
2 $51,000 × 1/5 × 200% = $20,400 30,600
3 $30,600 × 1/5 × 200% = $12,240 18,360
4 $18,360 × 1/5 × 200% = $7,344 11,016
5 $80,000 - $73,984 accumulated depreciation = $6,016*
5,000
2. $85,000 - 34,000 - 20,400 - 12,240 = 18,360

3. $85,000 - (16,000 × 3) = 37,000
4. ($85,000 - 5,000)/200,000 = $.40/unit
$.40 × 48,000 = $19,200
177) 1.
Building 400,000
Land 100,000
Cash 500,000
2.

Accumulated Depreciation Building 6,000
Computation:
($400,000 - 40,000)/20 years = $18,000/year

$18,000/yr × 4 months/12 months = $6,000
3. Book value = $400,000 - 24,000 accumulated depreciation = $376,000
4. Belverd separated the cost of the building and the cost of the land when it made the original entry to record
the acquisition because depreciation must be recorded for the building and not for the land. Recording the
assets in separate accounts simplifies the process of properly recording depreciation.
51
Answer Key
Declining balance method

20X1 $7,500 $17,000
20X2 $7,500 $8,500
20X3 $7,500 $4,250
20X4 $7,500 $250
Straight-line: ($34,000 - 4,000)/4 years = $7,500
Declining-balance:
20X1 1/4 × 200% × $34,000 = $17,000
20X2 1/4 × 200% × ($34,000 - $17,000) = $8,500
20X3 1/4 × 200% × ($34,000 - $25,500) = $4,250
20X4 Book value $4,250 - $4,000 target book value = $250
2. Lower profit: (a) 20X1 Declining-balance 200% acceleration rate; (b) 20X4 Straight-line
179) 1.
Computations:
($500,000 - $20,000)/10 years = $48,000/year
2.
Computations:
$500,000 - $48,000 amortization/year × 2 years = $404,000 remaining amortizable value $404,000/6 year remainin
useful life = $67,333
3. A change in estimate of residual value or useful life requires the company to calculate a new annual depreciation
amount. The change in estimates affects the amount of depreciation for current and future years. There is no
restatement of financial statements for prior years.
52
Answer Key
Date Account Titles and Explanation Debit Credit

Jan. 1 Accumulated Depreciation — Machinery 62,000
Machinery 62,000
June 30 Depreciation Expense 6,500
($39,000 / 3 years × 6/12)
June 30 Cash 5,000
($39,000 × 2/3 = $26,000; $26,000 + $6,500)
Loss on Disposal $5,000 — ($39,000 - $32,500)1,500
Computer 39,000
Dec. 31 Depreciation Expense 4,400
Accumulated Depreciation — Truck 4,400
($25,000 - $3,000) / 5 years
Cash 9,000
Accumulated Depreciation — Truck
($25,000 - $3,000) × 4/5 17,600
Truck 25,000
Gain on Disposal 1,600
A. Patent amortization expense 355

Patents 355
$4,260 / (17 — 5) years = $355
B. Depletion expense 3,200
Gravel pit 3,200
$.80 × 4,000 tons = $3,200
C. Depreciation expense 1,350
$6,000 × .90 = $5,400 to be depreciated
$5,400/ 4 = $1,350
182) 1. ($75,000 — $5,000)/ 5 = $14,000 depreciation per year. 4 full years (20X5-X6-X7-X8) and 2 half-years (20X4 &
20X9) = 5 full years.
NBV = $75,000 — (5 × $14,000) = $5,000, which equals the residual value. Gain: $9,500 — $5,000 = $4,500

53
Answer Key
Cash 9,500
Equipment 75,000
Gain on disposal 4,500
2. $120,000/6 = $20,000 depreciation per year, ½ year in 20X8 and 9 months in 20X9 = 20,000 × 15/12 = $25,000
depreciation taken, NBV = 120,000 — 25,000 = $95,000
Proceeds from insurance 50,000 — 95,000 = $45,000 loss

Cash 50,000
Loss on recording equipment 45,000
Calibrating Equipment 120,000
3. ($25,000-$2,500)/10 = $2,250 depreciation expense a year.

Two half-years in 20X0 and 20X7, 6 years 20X1 to 20X6 = 7 yrs depreciation
(7 × 2,250) = $15,750
NBV = 25,000 — 15,750 = $9,250


Loss on office furniture donated 9,250
Office furniture 25,000
183) 1. The purpose of recording depletion is to match the cost of a natural resource with revenues earned from extractin
and selling the resource.
2. $820,000/400,000 tons = $2.05/ton
3.
Depletion Expense 307,500
Mineral Depositor( Accumulated Depletion) 307,500
4.
Amortization Expense 187,500
Accumulated Depreciation, Building 187,500
54
Answer Key
A 1. Purchased patent
A 2. Basket purchase of two commercial buildings
D 3. Advertising costs
C 4. Intangible assets with indefinite live
A 5. Legal costs incurred to defend a copyright from infringement
D 6. Research costs incurred internally
A 7. Cost of timberland
E 8. Five-acre parcel of land where a firm's headquarters is located
A 9. Purchased drilling equipment
C 10. Goodwill acquired in a business combination
A 11. Interest on self-constructed assets
B 12. Development costs for a proven new product
1. Patent 380,000
Cash 380,000
Patent 38,000
Patent 66,500
Computations:
[$380,000 — (38,000 × 3)/4 years remaining life = $66,500 amortization/year
186) $2.3 million ($3.5 million minus {$1.5 million minus $.3 million})
187) $300,000 (Remaining book value $500,000 minus $200,000 expected cash flow)
55

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) What is the primary purpose of the statement of financial position?

9) The common characteristic possessed by all assets is

10) Expenses are incurred

12) Retained earnings at the end of the period is equal to

22) Theprimary purpose of the statement of cash flows is to report

24) Themost significant expense for a merchandising company is

25) Onthe statement of financial position, assets may be presented

26) Retained earnings are

27) What are business liabilities?

Total assets of $3,500,000

33) Which of the following is not a principal type of business activity?

41) What are the categories

42) Borrowing money is an example of a(n)

44) When would a company report a net loss?

46) What events cause changes in a corporation's retained earnings?

47) The statement of financial position

60) Which of the following statements is TRUE?

64) Under IFRS, income includes increases in economic beneﬁts from

69) What isthe purpose of an audit?

70) Why do the managers of a corporation hire independent auditors?

72) What isone of the disadvantages of a corporation, when compared to a partnership?

73) Which of the following statements is true about a sole proprietorship?

85) The purchase of equipment is an example of a financing activity.

103) Accounting is based on man-made rules that sometimes undergo change.

(a) Service revenue

________ 1. Rent expense ________ 7. Trade receivables

Answer: Please review the following information:

________ 1. Rent receivable ________ 6. Cash

Answer: Please review the following information:

Term or Abbreviation Definition

Case Total Total Total Shareholders'

Answer: Please review the following information:

Case Total Total Total Total Profit Shareholders'

Sales of plants for cash $50,000

Cash expenditures during January:

Revenue ($50,000 + $3,000) $53,000

Assets Liabilities Shareholders' Equity

Answer: (a) $262,000 ($360,000 - $98,000 = $262,000).

Salary expense $180,000

2. $974,000 - 860,000 = $114,000 trade receivables at the end of the year.

4. Amount of cash at the end of January:

Wages and salary expense $825,000

Prepare an income statement for the year.

1. What is the amount of Empire's total assets at the end of 20X2?

$ 270,000 Collected from customers

Answer: Purchased equipment by paying cash: I

2. What was the amount of Fulton's profit for the year?

3. Was Fulton successful during its first year in operation?

Sales revenue $5,500,000

The income tax rate is 35%.

Prepare an income statement for Baggerly Fashions.

Cost of goods sold $15,300 Selling & admin expense $3,500

Prepare an income statement for Amelmen Inc.

118) Please review the following information:

Case Total Total Total Total Profit Shareholders'

121) Plants Supreme, Inc.

Revenue ($50,000 + $3,000) $53,000

1. Rent expense 7. Trade receivables

1. Rent receivable 6. Cash