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Chapter 8--Completing the Operating Cycle
Student: ___________________________________________________________________________
1. To properly recognize the expense associated with compensated absences, a company should
A. Expense these obligations in the period the employee is absent
B. Estimate and expense these obligations when a new employee is hired
C. Estimate and expense these obligations in the period that the employee earns those days
D. Not recognize any expense for compensated absences
2. Which of the following is NOT true regarding taxes deducted from an employee's earnings?
A. These items are expenses to the employer
B. These items are liabilities that must be paid to federal and state governments
C. These items are credited within the entry to record wage or salary expense
D. The employer serves as an agent for the governments for collecting these taxes
3. Which of the following taxes is NOT included in the payroll tax expense of the employer?
A. State unemployment taxes
B. Federal unemployment taxes
C. FICA taxes
D. Federal income taxes
4. Which of the following taxes must be paid by both the employee and the employer?
A. Social security tax (FICA)
B. State unemployment tax
C. State withholding tax
D. Federal unemployment tax
5. Which of the following would probably be classified as a current liability?

A. Accumulated depreciation on equipment
B. Payroll taxes payable
C. Lease obligation
D. Pension liability
6. The entry to recognize the estimated expense related to sick days would include a
A. Credit to Salaries Expense
B. Credit to Cash
C. Credit to Sick Days Payable
D. Debit to Sick Days Payable
7. The entry to record sick days taken by an employee would include a

B. Debit to Cash
8. The gross pay for all employees is debited to

A. Salaries Payable
B. Salaries Expense
C. Payroll Tax Expense
D. Cash
9. Which accounting principle requires that the expense associated with compensated absences be accounted for
in the period in which it is earned by the employee?
A. Revenue recognition principle
B. Expense recognition principle
C. Matching principle
D. Economic entity principle
10. During the first week of January, Nathan Mills earned $800. Assume that FICA taxes are 7.65 percent of
wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment
tax is 0.8 percent of wages up to $13,000. Assume that Nathan has voluntary withholdings of $40 (in addition to
taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What amount is the
check, net of all deductions, that Nathan received for the week's pay?
A. $602.80
B. $566.80
C. $560.40
D. $620.80
11. During the month of July, Joel Mayer earned $2,000. Joel has been on the payroll all year at a salary of
$2,000 per month. Salaries are paid at the end of each month. Assume that FICA taxes are 7.65 percent of
tax is 0.8 percent of wages up to $13,000. Assume that Joel has voluntary withholdings of $75 (in addition to
check, net of all deductions, that Joel received for his July pay?
A. $1,372
B. $1,256
C. $1,314
D. $1,525
taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What is the employer's
payroll tax expense for the week, assuming that Nathan Mills is the only employee?
A. $46.40
B. $107.60
C. $40.00
D. $101.20
taxes) and that federal and state income tax withholdings are $300 and $100, respectively. What is the
employer's payroll tax expense for the month of July, assuming that Joel Mayer is the only employee?
A. $58
B. $211
C. $75
D. $611
14. When managers are compensated based on the achievement of certain objectives, the company is said to be
paying a(n)
A. Incentive
B. Bonus
C. Salary
D. Post-retirement benefit
15. Which of the following is NOT true about an earnings-based bonus plan?
A. Managers are encouraged to work harder and smarter to improve the performance of the company with an
earnings-based bonus plan.
B. An earnings-based bonus plan is most often restricted to top management.
C. An earnings-based bonus plan gives managers incentive to manipulate reported earnings.
D. Auditors do not consider a company with an earnings-based bonus plan to be at a higher risk of financial
statement fraud.
16. When the right to purchase stock in the future is used as a substitute for a cash bonus, the company is
granting
A. Post-retirement benefits
B. Compensated absences
C. Stock options
D. Post-employment benefits
17. A severance package would best be termed a

A. Post-retirement benefit
B. Compensated absence
C. Stock option
D. Post-employment benefit
18. When recording the costs associated with a postemployment benefit of a employer that was just laid off in
the current period, a debit will be made to
A. Salaries expense for the total estimated cost of the postemployment benefit
B. Salaries expense for the current period cost of the unemployment benefit
C. Benefits payable for the total estimated cost of the postemployment benefit
D. Benefits payable for the current period cost of the unemployment benefit
19. Which of the following is the proper method used to account for employee stock options?
A. Fair value
B. Intrinsic value
C. Book value
D. Realizable value
20. Bernal Company laid off 10 employees during the month of May. Bernal has determined that the
postemployment cost of laying off these 10 employees will be a total of $120,000. What journal entry should
Bernal make to record the termination of these employees?
A. Salaries expense $120,000
Benefits payable $120,000
B. Benefits payable $120,000
Salaries expense $120,000
C. Salaries payable $120,000
Benefits expense $120,000
D. No journal entry should be made
21. A cash compensation received by an employee after that employee has retired is a(n)
A. Stock option
B. Severance package
C. Employee bonus
D. Pension
22. Which type of pension plan requires a company to place a certain amount of money into a pension fund
each year on behalf of the employees?
A. Defined benefit plan
B. Defined payment plan
C. Defined contribution plan
D. Defined employee plan
23. Which type of pension plan promises employees a certain monthly cash amount after they retire?
24. Which of the following is NOT true about a defined contribution plan?
A. No balance sheet liability is reported in connection with the defined contribution plan.
B. Upon retirement, the employee will receive all the money contributed to the pension fund along with the
earnings of those contributions
C. The amount distributed in the defined contribution plan is dependent upon various factors such as salary
increases, employee turnover, and employee life span.
D. Each year a company reports a pension expense of the amount contributed to the employees' pensions.
25. Which of the following is NOT a component of pension expense?
A. Interest cost
B. Pension payment
C. Service cost
D. Return on pension fund assets
26. The earnings from assets in a company's pension fund that are used to offset the cost of the pension plan is
the
A. Pension-related interest cost
B. Pension payment
C. Service cost
27. The yearly increase in the pension obligation associated with work done during the year is the
B. Pension payment
C. Service cost
28. A large investment fund of stocks and bonds that is used to pay pension benefits to employees is a
A. Pension fund
B. Pension obligation
C. Net pension asset or liability
D. Pension-related interest cost
29. Which of the following is the liability that represents a company's promise to make defined benefit pension
payments to employees?
A. Pension fund
30. A pension fund is "under-funded" when the

A. Market value of the pension fund assets is greater than the estimated pension liability
B. The pension expense is greater than the annual payment to the pension fund
C. The pension expense is less than the annual payment to the pension fund
D. Market value of the pension fund assets is less than the estimated pension liability
31. The following information relates to the defined benefit pension plan of Williams Corporation for the year
ending December 31, 2012:
Pension benefit obligation $9,200,000

Pension fund assets 6,070,000
Service cost 900,000
Interest cost 605,000
Expected return on fund assets 850,000
What is the net pension expense for Williams Corporation in 2012?

A. $1,145,000
B. $605,000
C. $900,000
D. $655,000
32. The following information relates to the defined benefit pension plan of Wendy Corporation for the year

What is the net pension asset or liability for Wendy corporation in 2012?
A. $435,000 pension asset
B. $435,000 pension liability
C. $425,000 pension asset
D. $425,000 pension liability
33. Unger Sporting Goods Company sold a pair of skis for cash. It recorded the sale as:
Account 210
A
Account B 200
Account C 10
Given this entry, what would be the nature of Account C?

A. Account C is a current liability
B. Account C is a long-term liability
C. Account C is a revenue
D. Account C is an asset
34. Sales Taxes Payable is normally classified as a(n)
A. Current liability
B. Long-term liability
C. Asset
D. Expense
35. Prepaid Property Taxes would typically appear on the balance sheet as a(n)
A. Deferred liability
B. Liability
C. Asset
D. Long-term asset
36. Property taxes are usually assessed by county or city governments based on a company's
A. Owners' equity
B. Cash-basis net income
C. Accrual-basis net income
D. Land, buildings, and other assets
37. Income taxes shown on the income statement are based on

A. Net income
B. Gross margin
C. Income before taxes
D. Sales
38. Deferred income taxes arise from

A. Differences between accounting standards and IRS rules
B. The postponement of tax payments due to cash shortage
C. A special tax created by the IRS
D. A net loss
39. The period covered by the assessment of property taxes usually covers a
A. Calendar year
B. Fiscal year
C. Budgeted year
D. Taxable year
40. Which of the following is NOT a legal liability?
A. Accounts Payable
B. Pension Benefit Obligation
C. Sales Tax Payable
D. Deferred Tax Liability
41. Marino, Inc. makes a sale and collects a total of $378, which includes an 8 percent sales tax. The amount
credited to Sales Revenue is
A. $378
B. $348
C. $400
D. $350
credited to Sales Tax Payable is
A. $28
B. $30
C. $32
D. None of these are correct
43. Eldora, Inc. paid property taxes of $16,500 on June 30, 2012, for the period July 1, 2012, to June 30, 2013,
and debited prepaid property tax expense. Eldora, Inc. uses a fiscal year end of September 30 for financial
purposes. What is the adjusting entry Eldora, Inc. should make on September 30, 2012?
A. Prepaid property taxes $16,500
Property tax expense $16,500
B. Property tax expense $16,500
Prepaid property taxes $16,500
C. Property tax expense $4,125
D. Property tax expense $12,375
purposes. What journal entry should be made to recognize property tax expense for the period October 1, 2012,
to June 30, 2013?
45. On June 1, Jenni invested $4,000 into a mutual fund. By December 31, the value of the mutual fund had
decreased to $3,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income
tax rate on this investment will be 35%, the journal entry to record the income tax expense is
A. Deferred income tax asset $800
Income tax expense $800
B. Deferred income tax asset $280
C. Income tax expense $280
Deferred income tax liability $280
D. Income tax expense $800
increased to $5,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income
A. Deferred income tax asset $1,200
Income tax expense $1,200
C. Income tax expense $1,200
Deferred income tax liability $1,200
47. The accounting term for an uncertain circumstance involving a potential gain or loss that will NOT be
resolved until the future is a(n)
A. Extraordinary item
B. Contingency
C. Pension
D. Deferred liability
48. Which of the following types of contingencies would NOT be disclosed on the financial statements until it
has been resolved?
A. A lawsuit against our company and it is probable that we will lose
B. A lawsuit against our company and it is reasonably possible we will lose
C. A lawsuit we have filed against a competitor and it is probable that we will win
D. All of these must be disclosed on the financial statements
49. A contingent liability is recorded by making the appropriate journal entry if the likelihood of a loss from a
contingency is
A. Remote
B. Reasonably possible
C. Probable
D. Negligible
50. A footnote disclosure only is required if the likelihood of a loss due to a contingency is
A. Remote
C. Probable
D. Negligible
51. What makes environmental liabilities unique among contingent liabilities?

A. It is more difficult to estimate the costs
B. It is more difficult to estimate the likelihood of a loss
C. A company need not disclose environmental liabilities
D. All of these are true of environmental liabilities
52. Which of the following is the appropriate disclosure in the financial statements for a contingent gain?
A. Estimate the amount of the gain and make the appropriate journal entry
B. Provide detailed disclosure of the gain in the notes
C. No disclosure until the future event resolves itself
53. No disclosure is required for contingent liabilities that are

A. Probable
B. Remote
C. Possible
D. Reasonably possible
54. Which of the following expenditures should be expensed in the year incurred?
A. Equipment
B. Targeted advertising
C. Prepaid rent
D. Research and development
55. The required recording of research and development expenditures has which of the following effects on the
financial statements?
A. Understatement of research and development expense
B. Understatement of research and development assets
C. Overstatement of research and development assets
56. Which of the following is the required treatment of research and development costs under FASB?
A. Research and development costs are expensed as incurred
B. Research and development costs are capitalized
C. Research costs are expensed and development costs are capitalized
D. Research costs are capitalized and development costs are expensed
57. Which of the following is the required treatment of research and development costs under international
accounting rules?
58. Which of the following types of advertising is typically capitalized?

A. Specialty catalogs
B. Radio
C. Television
D. Newspaper
59. The general rule for advertising costs is

A. Advertising costs should be expensed because of the uncertainty of future events
B. Advertising costs should be capitalized because of the uncertainty of future events
C. Advertising costs should be capitalized except for target advertising which should be expensed.
60. On December 31, the trial balance of Cubico Company included the following accounts with debit balances:
Prepaid Advertising $1,500

Advertising Expense 5,400
If it is determined that the cost of advertising applicable to future periods is $3,300, the correct adjusting entry would
A. Debit Advertising Expense $3,300; credit Prepaid Advertising $3,300
B. Debit Prepaid Advertising $1,800; credit Advertising Expense $1,800
C. Debit Advertising Expense $1,800; credit Prepaid Advertising $1,800
D. Debit Prepaid Advertising $3,300; credit Advertising Expense $3,300
61. Which type of income shows how much a company earns from carrying on its normal operations?
A. Income before extraordinary items
B. Net income after taxes
C. Operating income
D. Income after extraordinary items
62. Items incurred or earned from activities peripheral to normal operations are classified as
A. Extraordinary gains and losses
B. Other revenues and expenses
C. Discontinued operations
D. Operating gains and losses
63. Which of the following is NOT a criterion for qualifying as an extraordinary item?
A. Material in amount
B. Infrequent in occurrence
C. Unusual in nature
D. Peripheral to normal operations
64. Which of the following are reported on the income statement along with their tax effects?
A. Other revenues
B. Extraordinary items
C. Operating expenses
D. Other expenses
65. Earnings per share is NOT calculated on which of the following amounts?
A. Net income
C. Other revenue and gains
D. Income before extraordinary items
66. Which of the following items would NOT be classified in the "Other Revenues and Expenses" section of the
income statement?
A. Dividends on investments
B. Gain on sale of buildings
C. Interest expense
D. Property tax expense
67. Which of the following items would be classified in the "Other Revenues and Expenses" section of the
income statement?
A. Loss due to hurricane in a location where hurricanes are very unlikely
B. Loss on sale of land
C. Administrative salaries expense
D. Income tax expense
68. Earnings per share is equal to

A. Total revenues divided by total shares of capital stock
B. Net income divided by total shares of capital stock
C. Total expenses divided by total shares of capital stock
D. Net income divided by retained earnings
69. Which of the following items should be reported as an extraordinary item?

A. Gains or losses from major foreign currency revaluations
B. The effects of a strike
C. Earthquake damage
D. Gain or loss on disposal of a business segment
70. What effect does an extraordinary item have on the taxes of a company?
A. Taxes are increased with an extraordinary gain or loss
B. Taxes are decreased with an extraordinary gain or loss
C. Taxes are increased with an extraordinary loss and decreased with an extraordinary gain
D. Taxes are increased with an extraordinary gain and decreased with an extraordinary loss
71. Diluted earnings per share includes stock transactions that might occur in the future such as
A. Sale of additional shares of stock
B. Exercise of stock options
C. Declaration of dividends
D. All of these are correct
72. Which of the following events would be considered an extraordinary item?

A. An airline experienced a significant loss due to a strike by employees of the company who provide its
aircraft maintenance.
B. A food cannery was faced with a large loss of inventory of canned soups due to government condemnation
because of possible botulism contamination; the company had never experienced a similar situation in its
history.
C. A company, located on an island which has experienced severe flooding three times in the past 25 years, was
subjected to a heavy loss of physical plant due to flooding.
D. A medical corporation was required to pay a patient damages equal to three times its average net income.
The corporation had experienced suits of this nature in the past, but the amount of the losses had never exceeded
5 percent of the corporation's average net income.
73. Under which of the following conditions would hurricane damage be considered an extraordinary item for
financial reporting purposes?
A. Under any circumstance, hurricane damage should be classified as an extraordinary item
B. Only if hurricanes are unusual in nature and infrequent in occurrence in the geographic area
C. Only if hurricanes are normal in the geographic area but do not occur frequently
D. Only if hurricanes occur frequently in the geographic area but have been insured against
74. Dike Corporation incurred the following losses during 2012:
· Loss of $480,000 was incurred in the abandonment of equipment

· Accounts receivable of $96,000 were written off as uncollectible
· Several factories were shut down during a strike at a cost of $768,000
· Loss of $320,000 was sustained as a result of flood damage, an unusual and infrequent occurrence
Ignoring income taxes, what amount of loss should Dike report as extraordinary on its annual income statement?
A. $320,000
B. $480,000
C. $864,000
D. $1,664,000
75. During the year, Perez Company earned revenues of $113,625 and incurred $98,000 for various operating
expenses. There are 1,250 shares of stock outstanding. Earnings per share is
A. $12.50
B. $12.80
C. $8.80
D. $8.50
76. Assante Corporation reported the following data for the period: earnings per share, $4.80; retained earnings,
$54,000; revenues, $150,000; capital stock, $30,000; expenses, $126,000. Given the above information, how
many shares of stock are outstanding?
A. 9,000
B. 5,000
C. 4,000
D. 3,500
77. The following information was taken from the records of Elton Corporation for the period ending December
31, 2012:
Advertising expense $1,200

Equipment 800
Depreciation expense 50
Accounts receivable 1,500
Notes payable 6,000
Retained earnings 8,420
Utilities expense 1,335
Revenues 4,865
Dividends 975
Interest receivable 125
Rent expense 660
Assuming that 6,000 shares of stock are outstanding, earnings per share is approximately
A. $1.40
B. $0.40
C. $0.27
D. $0.23
78. The following information is from Everly Corp.'s records at December 31, 2012:
Advertising expense $ 30,440

Income tax expense 28,250
Accounts payable 26,900
Dividends paid 19,600
Retained earnings (12/1/12) 115,720
Consulting fees revenue 195,350
Rent expense 25,520
Supplies expense 20,900
If Everly has 4,000 shares of stock outstanding, earnings per share is approximately
A. $34.62
B. $22.56
C. $16.94
D. $15.59
79. On December 31, 2012, Johnson Corporation reported total revenue of $750,000 and total expenses of
$425,000. Johnson had 4,000 shares of stocks outstanding. Also, as of January 1, 2012, Johnson had issued
stock options that allowed employees to receive 1,000 shares of stock for free at a time of their choosing in the
future. As of December 31, none of these stock options had been exercised. What is basic earnings per share for
Johnson Corporation?
A. $106.25
B. $85
C. $81.25
D. $75
80. Romulus Corporation incurred the following losses during 2012:

Assuming that Romulus has a 40% income tax rate, what amount of net loss should Romulus report as extraordinary on its annual income
statement?
A. $96,000
B. $144,000
C. $259,200
D. $499,200
future. As of December 31, none of these stock options had been exercised. What is diluted earnings per share
for Johnson Corporation?
A. $106.25
B. $85
C. $81.25
D. $65
82. Amy Tan earns $7,200 per month as the only employee of a small shop. FICA taxes on her salary are 7.65
percent of the first $50,000. Federal income taxes are withheld at the rate of 30 percent and state income taxes
at the rate of 7 percent. Her employer is subject to 0.8 percent FUTA tax and 3.0 percent SUTA tax.
Prepare the journal entries to be made by her employer for the month of January. (Round to the nearest dollar.)
83. John Ackley and Susan Baldwin are employees of Clarion Company. Both John and Susan work 8 hours a
day and are paid monthly on the last day of the month. John is paid at a rate of $15 per hour and Susan is paid
$12 per hour. John and Susan accrue compensated absences throughout the year at a rate of 1.5 days per month.
In March, John missed three days of work due to illness and Susan missed one day of work. Both John and
Susan have payroll withholdings of 25%.
a. Prepare the journal entries to record the monthly accrual of compensated absences on January 31 and February 28.
b. Prepare the journal entries for March 31 to record the accrual of compensated absences and the use of John and Susan's accrued
compensated absences. Use the account Various Taxes Payable for the payroll withholdings.
84. Bristol Company's accounting records contained the following information for a current year:
Pension service cost $ 285,000

Pension fund assets, year-end 3,515,000
Pension related interest cost for the year 304,000
Pension obligation, year-end 3,306,000
Return on pension fund assets for the year 380,000
a. Indicate what pension amount Bristol will report in its balance sheet at year-end.
b. Compute the amount of pension expense shown on the income statement for the year.
85. Fonda Company's fiscal year is the calendar year. During the month of June 2012, Fonda received a bill for
$46,500 of property tax assessed that is due on July 15, 2012 for the period July 1, 2012 through June 30, 2013.
Prepare journal entries to record
a. The payment of the property taxes on July 15, 2012.

b. The adjusting entry for property taxes on December 21, 2012.
86. Gribble's fiscal year is the calendar year. During the month of July 2012, the following tax related events
occurred at the Gribble Company:
· Received a property tax summary from the county government for the period July 1, 2011 through June 30, 2012. The property tax for that
period was $7,500. This bill was prepaid on December 30, 2011.
· Sales of $100,000 were made during the month. The sales tax rate is 6 percent and the sales tax liability was recorded as sales were
recorded.
· Income before taxes for the second quarter (ended on June 30, 2012) was $70,000 and the income tax rate is 30 percent.
a. The proper amount of property tax expense on June 30, 2012

b. The payment of the sales tax collected during June
c. The recognition of the income taxes for the second quarter
87. Gowrie, Inc. began operations on January 1, 2012. At the end of its first year of business, Gowrie reported
$465,000 income before taxes on its income statement. At the end of 2012, Gowrie also had $45,000 of incurred
expenses that were not yet tax deductible according to income tax regulations. Gowrie's tax rate is 35%.
a. Compute the amount of income tax expense to be reported on Gowrie, Inc.'s income statement for 2012.
b. Compute the amount of income tax that Gowrie, Inc. legally owes for taxable income generated during 2012.
c. Determine the amount of deferred income tax liability or deferred income tax asset that Gowrie, Inc. has as of the end of 2012.
88. A contingency is an uncertain circumstance involving a potential gain or loss that will not be resolved until
some future event occurs. The following table lists the possible outcomes of a contingency. Complete the table
by filling in the definition and required accounting for each possible outcome.
Term Definition Accounting

Probable loss
Reasonably possible loss
Remote loss
Gain
89. Indicate the appropriate accounting treatment for each independent situation shown below.
a. Assante Corporation is the defendant in an age-discrimination lawsuit for $10 million. The company's lawyers believe there is a 95 percent
probability that Assante will lose the case and that the loss will more than likely be $9 million.
b. Otay, Inc. has been accused of violating several federal regulatory laws. If found guilty, the company will incur significant fines and
penalties. The company's attorneys feel the accusations are baseless and that there is only a 5 percent chance that the company will be
found guilty.
c. Grammar Company is being accused of fraudulent reporting. The company's lawyers believe there is a 45 percent chance of losing the
case.
d. Ortiz Corporation is suing another company for patent infringement. The attorneys for Ortiz feel there is an 80 percent chance that they
will win the case and that the court will award them a $5 million judgment.
90. Accounting rules give specific instructions on whether to expense or capitalize research and development
costs and advertising costs. List the rules associated with these two costs.
91. Indicate whether the following independent expenditures should be capitalized or expensed. Explain your
answers.
a. Cruz Company spent $500,000 on new equipment. The equipment has an estimated useful life of 12 years.
b. Carver Corporation spent $5 million researching a new production process. The company expects to reduce operating costs significantly
when the result of the research is implemented next year.
c. Kids Klothes, Inc. has spent $2 million creating a targeted advertising campaign that will motivate regular customers of the company's
on-line service to buy new clothes.
d. Hype.com is paying $400,000 for newspaper advertising on its new product line. The company expects the ad will generate increased sales
for the next 2 years.
92. On December 31, 2012, Rippey Corporation reported total revenue of $3,750,000 and total expenses of
$2,125,000. Rippey had 50,000 shares of stocks outstanding. Also, as of January 1, 2012, Rippey had issued
future. As of December 31, none of these stock options had been exercised.
a. What is basic earnings per share for Rippey Corporation?

b. What is diluted earnings per share for Rippey Corporation?
93. Kline Corporation has taken the following information from the accounting records on December 31, 2012.
Prepare an income statement, in good form, for the year ended December 31, 2012. Assume that there are
50,000 shares of capital stock outstanding.
Gross sales revenue $1,721,500

Insurance expense (general and administrative) 950
Automobile expense (selling) 1,750
Miscellaneous selling expense 6,600
Payroll tax expense (selling) 1,550
Rent expense (selling) 9,000
Sales salaries expense 150,000
Cost of goods sold 1,270,500
Interest expense 23,000
Interest revenue 6,500
Advertising and promotion expense (selling) 80,000
Sales returns and allowances 6,000
Office supplies expense 5,550
Administrative salaries expense 70,000
Earthquake loss (net of taxes) 20,000
Chapter 8--Completing the Operating Cycle Key
1. To properly recognize the expense associated with compensated absences, a company should
A. Expense these obligations in the period the employee is absent
B. Estimate and expense these obligations when a new employee is hired
C. Estimate and expense these obligations in the period that the employee earns those days
D. Not recognize any expense for compensated absences
2. Which of the following is NOT true regarding taxes deducted from an employee's earnings?
A. These items are expenses to the employer
B. These items are liabilities that must be paid to federal and state governments
C. These items are credited within the entry to record wage or salary expense
D. The employer serves as an agent for the governments for collecting these taxes
3. Which of the following taxes is NOT included in the payroll tax expense of the employer?
A. State unemployment taxes
B. Federal unemployment taxes
C. FICA taxes
D. Federal income taxes
4. Which of the following taxes must be paid by both the employee and the employer?
A. Social security tax (FICA)
B. State unemployment tax
C. State withholding tax
D. Federal unemployment tax
5. Which of the following would probably be classified as a current liability?

A. Accumulated depreciation on equipment
B. Payroll taxes payable
C. Lease obligation
D. Pension liability
6. The entry to recognize the estimated expense related to sick days would include a
B. Credit to Cash
7. The entry to record sick days taken by an employee would include a

B. Debit to Cash
8. The gross pay for all employees is debited to

A. Salaries Payable
B. Salaries Expense
C. Payroll Tax Expense
D. Cash
9. Which accounting principle requires that the expense associated with compensated absences be accounted for
in the period in which it is earned by the employee?
A. Revenue recognition principle
B. Expense recognition principle
C. Matching principle
D. Economic entity principle
check, net of all deductions, that Nathan received for the week's pay?
A. $602.80
B. $566.80
C. $560.40
D. $620.80
check, net of all deductions, that Joel received for his July pay?
A. $1,372
B. $1,256
C. $1,314
D. $1,525
taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What is the employer's
payroll tax expense for the week, assuming that Nathan Mills is the only employee?
A. $46.40
B. $107.60
C. $40.00
D. $101.20
taxes) and that federal and state income tax withholdings are $300 and $100, respectively. What is the
employer's payroll tax expense for the month of July, assuming that Joel Mayer is the only employee?
A. $58
B. $211
C. $75
D. $611
14. When managers are compensated based on the achievement of certain objectives, the company is said to be
paying a(n)
A. Incentive
B. Bonus
C. Salary
D. Post-retirement benefit
15. Which of the following is NOT true about an earnings-based bonus plan?
A. Managers are encouraged to work harder and smarter to improve the performance of the company with an
earnings-based bonus plan.
B. An earnings-based bonus plan is most often restricted to top management.
C. An earnings-based bonus plan gives managers incentive to manipulate reported earnings.
D. Auditors do not consider a company with an earnings-based bonus plan to be at a higher risk of financial
statement fraud.
16. When the right to purchase stock in the future is used as a substitute for a cash bonus, the company is
granting
A. Post-retirement benefits
B. Compensated absences
C. Stock options
D. Post-employment benefits
17. A severance package would best be termed a

A. Post-retirement benefit
B. Compensated absence
C. Stock option
D. Post-employment benefit
18. When recording the costs associated with a postemployment benefit of a employer that was just laid off in
the current period, a debit will be made to
A. Salaries expense for the total estimated cost of the postemployment benefit
B. Salaries expense for the current period cost of the unemployment benefit
C. Benefits payable for the total estimated cost of the postemployment benefit
D. Benefits payable for the current period cost of the unemployment benefit
19. Which of the following is the proper method used to account for employee stock options?
A. Fair value
B. Intrinsic value
C. Book value
D. Realizable value
20. Bernal Company laid off 10 employees during the month of May. Bernal has determined that the
postemployment cost of laying off these 10 employees will be a total of $120,000. What journal entry should
Bernal make to record the termination of these employees?
A. Salaries expense $120,000
Benefits payable $120,000
B. Benefits payable $120,000
Salaries expense $120,000
C. Salaries payable $120,000
Benefits expense $120,000
D. No journal entry should be made
21. A cash compensation received by an employee after that employee has retired is a(n)
A. Stock option
B. Severance package
C. Employee bonus
D. Pension
22. Which type of pension plan requires a company to place a certain amount of money into a pension fund
each year on behalf of the employees?
23. Which type of pension plan promises employees a certain monthly cash amount after they retire?
24. Which of the following is NOT true about a defined contribution plan?
A. No balance sheet liability is reported in connection with the defined contribution plan.
B. Upon retirement, the employee will receive all the money contributed to the pension fund along with the
earnings of those contributions
C. The amount distributed in the defined contribution plan is dependent upon various factors such as salary
increases, employee turnover, and employee life span.
D. Each year a company reports a pension expense of the amount contributed to the employees' pensions.
25. Which of the following is NOT a component of pension expense?
A. Interest cost
B. Pension payment
C. Service cost
26. The earnings from assets in a company's pension fund that are used to offset the cost of the pension plan is
the
B. Pension payment
C. Service cost
27. The yearly increase in the pension obligation associated with work done during the year is the
B. Pension payment
C. Service cost
28. A large investment fund of stocks and bonds that is used to pay pension benefits to employees is a
A. Pension fund
29. Which of the following is the liability that represents a company's promise to make defined benefit pension
payments to employees?
A. Pension fund
30. A pension fund is "under-funded" when the

A. Market value of the pension fund assets is greater than the estimated pension liability
B. The pension expense is greater than the annual payment to the pension fund
C. The pension expense is less than the annual payment to the pension fund
D. Market value of the pension fund assets is less than the estimated pension liability
31. The following information relates to the defined benefit pension plan of Williams Corporation for the year

What is the net pension expense for Williams Corporation in 2012?

A. $1,145,000
B. $605,000
C. $900,000
D. $655,000
32. The following information relates to the defined benefit pension plan of Wendy Corporation for the year

What is the net pension asset or liability for Wendy corporation in 2012?
A. $435,000 pension asset
B. $435,000 pension liability
C. $425,000 pension asset
D. $425,000 pension liability
33. Unger Sporting Goods Company sold a pair of skis for cash. It recorded the sale as:
Account 210
A
Account B 200
Account C 10
Given this entry, what would be the nature of Account C?

A. Account C is a current liability
B. Account C is a long-term liability
C. Account C is a revenue
D. Account C is an asset
34. Sales Taxes Payable is normally classified as a(n)
A. Current liability
B. Long-term liability
C. Asset
D. Expense
35. Prepaid Property Taxes would typically appear on the balance sheet as a(n)
A. Deferred liability
B. Liability
C. Asset
D. Long-term asset
36. Property taxes are usually assessed by county or city governments based on a company's
A. Owners' equity
B. Cash-basis net income
C. Accrual-basis net income
D. Land, buildings, and other assets
37. Income taxes shown on the income statement are based on

A. Net income
B. Gross margin
C. Income before taxes
D. Sales
38. Deferred income taxes arise from

A. Differences between accounting standards and IRS rules
B. The postponement of tax payments due to cash shortage
C. A special tax created by the IRS
D. A net loss
39. The period covered by the assessment of property taxes usually covers a
A. Calendar year
B. Fiscal year
C. Budgeted year
D. Taxable year
40. Which of the following is NOT a legal liability?
A. Accounts Payable
B. Pension Benefit Obligation
C. Sales Tax Payable
D. Deferred Tax Liability
credited to Sales Revenue is
A. $378
B. $348
C. $400
D. $350
credited to Sales Tax Payable is
A. $28
B. $30
C. $32
purposes. What is the adjusting entry Eldora, Inc. should make on September 30, 2012?
purposes. What journal entry should be made to recognize property tax expense for the period October 1, 2012,
to June 30, 2013?
decreased to $3,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income
A. Deferred income tax asset $800
C. Income tax expense $280
increased to $5,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income
A. Deferred income tax asset $1,200
Income tax expense $1,200
C. Income tax expense $1,200
Deferred income tax liability $1,200
47. The accounting term for an uncertain circumstance involving a potential gain or loss that will NOT be
resolved until the future is a(n)
A. Extraordinary item
B. Contingency
C. Pension
D. Deferred liability
48. Which of the following types of contingencies would NOT be disclosed on the financial statements until it
has been resolved?
A. A lawsuit against our company and it is probable that we will lose
B. A lawsuit against our company and it is reasonably possible we will lose
C. A lawsuit we have filed against a competitor and it is probable that we will win
D. All of these must be disclosed on the financial statements
49. A contingent liability is recorded by making the appropriate journal entry if the likelihood of a loss from a
contingency is
A. Remote
C. Probable
D. Negligible
50. A footnote disclosure only is required if the likelihood of a loss due to a contingency is
A. Remote
C. Probable
D. Negligible
51. What makes environmental liabilities unique among contingent liabilities?

A. It is more difficult to estimate the costs
B. It is more difficult to estimate the likelihood of a loss
C. A company need not disclose environmental liabilities
D. All of these are true of environmental liabilities
52. Which of the following is the appropriate disclosure in the financial statements for a contingent gain?
A. Estimate the amount of the gain and make the appropriate journal entry
B. Provide detailed disclosure of the gain in the notes
C. No disclosure until the future event resolves itself
53. No disclosure is required for contingent liabilities that are

A. Probable
B. Remote
C. Possible
D. Reasonably possible
54. Which of the following expenditures should be expensed in the year incurred?
A. Equipment
B. Targeted advertising
C. Prepaid rent
D. Research and development
55. The required recording of research and development expenditures has which of the following effects on the
financial statements?
A. Understatement of research and development expense
B. Understatement of research and development assets
C. Overstatement of research and development assets
56. Which of the following is the required treatment of research and development costs under FASB?
57. Which of the following is the required treatment of research and development costs under international
accounting rules?
58. Which of the following types of advertising is typically capitalized?

A. Specialty catalogs
B. Radio
C. Television
D. Newspaper
59. The general rule for advertising costs is

A. Advertising costs should be expensed because of the uncertainty of future events
B. Advertising costs should be capitalized because of the uncertainty of future events
C. Advertising costs should be capitalized except for target advertising which should be expensed.
60. On December 31, the trial balance of Cubico Company included the following accounts with debit balances:
Prepaid Advertising $1,500

Advertising Expense 5,400
If it is determined that the cost of advertising applicable to future periods is $3,300, the correct adjusting entry would
A. Debit Advertising Expense $3,300; credit Prepaid Advertising $3,300
B. Debit Prepaid Advertising $1,800; credit Advertising Expense $1,800
C. Debit Advertising Expense $1,800; credit Prepaid Advertising $1,800
D. Debit Prepaid Advertising $3,300; credit Advertising Expense $3,300
61. Which type of income shows how much a company earns from carrying on its normal operations?
A. Income before extraordinary items
B. Net income after taxes
C. Operating income
D. Income after extraordinary items
62. Items incurred or earned from activities peripheral to normal operations are classified as
A. Extraordinary gains and losses
B. Other revenues and expenses
C. Discontinued operations
D. Operating gains and losses
63. Which of the following is NOT a criterion for qualifying as an extraordinary item?
A. Material in amount
B. Infrequent in occurrence
C. Unusual in nature
D. Peripheral to normal operations
64. Which of the following are reported on the income statement along with their tax effects?
A. Other revenues
C. Operating expenses
D. Other expenses
65. Earnings per share is NOT calculated on which of the following amounts?
A. Net income
C. Other revenue and gains
D. Income before extraordinary items
66. Which of the following items would NOT be classified in the "Other Revenues and Expenses" section of the
income statement?
A. Dividends on investments
B. Gain on sale of buildings
C. Interest expense
D. Property tax expense
67. Which of the following items would be classified in the "Other Revenues and Expenses" section of the
income statement?
A. Loss due to hurricane in a location where hurricanes are very unlikely
B. Loss on sale of land
C. Administrative salaries expense
D. Income tax expense
68. Earnings per share is equal to

A. Total revenues divided by total shares of capital stock
B. Net income divided by total shares of capital stock
C. Total expenses divided by total shares of capital stock
D. Net income divided by retained earnings
69. Which of the following items should be reported as an extraordinary item?

A. Gains or losses from major foreign currency revaluations
B. The effects of a strike
C. Earthquake damage
D. Gain or loss on disposal of a business segment
70. What effect does an extraordinary item have on the taxes of a company?
A. Taxes are increased with an extraordinary gain or loss
B. Taxes are decreased with an extraordinary gain or loss
C. Taxes are increased with an extraordinary loss and decreased with an extraordinary gain
D. Taxes are increased with an extraordinary gain and decreased with an extraordinary loss
71. Diluted earnings per share includes stock transactions that might occur in the future such as
A. Sale of additional shares of stock
B. Exercise of stock options
C. Declaration of dividends
D. All of these are correct
72. Which of the following events would be considered an extraordinary item?

A. An airline experienced a significant loss due to a strike by employees of the company who provide its
aircraft maintenance.
B. A food cannery was faced with a large loss of inventory of canned soups due to government condemnation
because of possible botulism contamination; the company had never experienced a similar situation in its
history.
C. A company, located on an island which has experienced severe flooding three times in the past 25 years, was
subjected to a heavy loss of physical plant due to flooding.
D. A medical corporation was required to pay a patient damages equal to three times its average net income.
The corporation had experienced suits of this nature in the past, but the amount of the losses had never exceeded
5 percent of the corporation's average net income.
73. Under which of the following conditions would hurricane damage be considered an extraordinary item for
financial reporting purposes?
A. Under any circumstance, hurricane damage should be classified as an extraordinary item
B. Only if hurricanes are unusual in nature and infrequent in occurrence in the geographic area
C. Only if hurricanes are normal in the geographic area but do not occur frequently
D. Only if hurricanes occur frequently in the geographic area but have been insured against
74. Dike Corporation incurred the following losses during 2012:

Ignoring income taxes, what amount of loss should Dike report as extraordinary on its annual income statement?
A. $320,000
B. $480,000
C. $864,000
D. $1,664,000
75. During the year, Perez Company earned revenues of $113,625 and incurred $98,000 for various operating
expenses. There are 1,250 shares of stock outstanding. Earnings per share is
A. $12.50
B. $12.80
C. $8.80
D. $8.50
76. Assante Corporation reported the following data for the period: earnings per share, $4.80; retained earnings,
$54,000; revenues, $150,000; capital stock, $30,000; expenses, $126,000. Given the above information, how
many shares of stock are outstanding?
A. 9,000
B. 5,000
C. 4,000
D. 3,500
77. The following information was taken from the records of Elton Corporation for the period ending December
31, 2012:
Advertising expense $1,200

Equipment 800
Depreciation expense 50
Accounts receivable 1,500
Notes payable 6,000
Retained earnings 8,420
Utilities expense 1,335
Revenues 4,865
Dividends 975
Interest receivable 125
Rent expense 660
Assuming that 6,000 shares of stock are outstanding, earnings per share is approximately
A. $1.40
B. $0.40
C. $0.27
D. $0.23
78. The following information is from Everly Corp.'s records at December 31, 2012:
Advertising expense $ 30,440

Accounts payable 26,900
Dividends paid 19,600
Retained earnings (12/1/12) 115,720
Consulting fees revenue 195,350
Rent expense 25,520
Supplies expense 20,900
If Everly has 4,000 shares of stock outstanding, earnings per share is approximately
A. $34.62
B. $22.56
C. $16.94
D. $15.59
future. As of December 31, none of these stock options had been exercised. What is basic earnings per share for
Johnson Corporation?
A. $106.25
B. $85
C. $81.25
D. $75
80. Romulus Corporation incurred the following losses during 2012:

Assuming that Romulus has a 40% income tax rate, what amount of net loss should Romulus report as extraordinary on its annual income
statement?
A. $96,000
B. $144,000
C. $259,200
D. $499,200
future. As of December 31, none of these stock options had been exercised. What is diluted earnings per share
for Johnson Corporation?
A. $106.25
B. $85
C. $81.25
D. $65
82. Amy Tan earns $7,200 per month as the only employee of a small shop. FICA taxes on her salary are 7.65
percent of the first $50,000. Federal income taxes are withheld at the rate of 30 percent and state income taxes
at the rate of 7 percent. Her employer is subject to 0.8 percent FUTA tax and 3.0 percent SUTA tax.
Prepare the journal entries to be made by her employer for the month of January. (Round to the nearest dollar.)
January 31 Salaries 7,200

Expense
Federal Withholding Taxes Payable 2,160
State Withholding Taxes Payable 504
FICA Taxes Payable (employee) 551*
Cash (or Wages Payable) 3,985
January 31 Payroll 825

Tax
Expense
FICA Taxes Payable (employer) 551*
Federal Unemployment Taxes Payable 58*
State Unemployment Taxes Payable 216
*
rounded
83. John Ackley and Susan Baldwin are employees of Clarion Company. Both John and Susan work 8 hours a
day and are paid monthly on the last day of the month. John is paid at a rate of $15 per hour and Susan is paid
$12 per hour. John and Susan accrue compensated absences throughout the year at a rate of 1.5 days per month.
In March, John missed three days of work due to illness and Susan missed one day of work. Both John and
Susan have payroll withholdings of 25%.
a. Prepare the journal entries to record the monthly accrual of compensated absences on January 31 and February 28.
b. Prepare the journal entries for March 31 to record the accrual of compensated absences and the use of John and Susan's accrued
compensated absences. Use the account Various Taxes Payable for the payroll withholdings.
a. January 31 Salarie 324
s
Expens
e
Sick Days Payable - John (8 ´ $15 ´ 1.5) 180
Sick Days Payable - Susan (8 ´ $12 ´ 1.5) 144
February 28 Salarie 324

s
Expens
e
Sick Days Payable - John 180
Sick Days Payable - Susan 144
b. March 31 Salarie 324

s
Expens
e
Sick Days Payable - John 180
Sick Days Payable - Susan 144
Sick 360
Days
Payabl
e-
John
(8 ´
$15 ´
3)
Various Taxes Payable ($360 ´ 25%) 90
Cash 270
Sick 96
Days
Payabl
e-
Susan
(8 ´
$12 ´
1)
Various Taxes Payable ($96 ´ 25%) 24
Cash 72
84. Bristol Company's accounting records contained the following information for a current year:
Pension service cost $ 285,000

Pension fund assets, year-end 3,515,000
Pension related interest cost for the year 304,000
Pension obligation, year-end 3,306,000
Return on pension fund assets for the year 380,000
a. Indicate what pension amount Bristol will report in its balance sheet at year-end.
b. Compute the amount of pension expense shown on the income statement for the year.
a. Pensio
n fund
assets
and
pension
obligati
on are
offset
against
each
other to
show a
net
pension
asset or
net
pension
obligati
on.
$3,515,
000 -
3,306,0
00 =
$209,0
0 net
pension
asset
b. Pensio $285,000
n
service
cost
Pensio 304,000
n
related
interest
Return (380,000)
on fund
assets
Pension expense $209,000
85. Fonda Company's fiscal year is the calendar year. During the month of June 2012, Fonda received a bill for
$46,500 of property tax assessed that is due on July 15, 2012 for the period July 1, 2012 through June 30, 2013.
a. The payment of the property taxes on July 15, 2012.

b. The adjusting entry for property taxes on December 21, 2012.
a. Prepaid 46,500
property
tax
Cash 46,500
b. Property 23,250
tax
expense
Prepaid property tax 23,250
($46,500
´ 6/12)
86. Gribble's fiscal year is the calendar year. During the month of July 2012, the following tax related events
occurred at the Gribble Company:
· Received a property tax summary from the county government for the period July 1, 2011 through June 30, 2012. The property tax for that
period was $7,500. This bill was prepaid on December 30, 2011.
· Sales of $100,000 were made during the month. The sales tax rate is 6 percent and the sales tax liability was recorded as sales were
recorded.
· Income before taxes for the second quarter (ended on June 30, 2012) was $70,000 and the income tax rate is 30 percent.
a. The proper amount of property tax expense on June 30, 2012

b. The payment of the sales tax collected during June
c. The recognition of the income taxes for the second quarter
a. Property 3,750
Tax
Expense
Prepaid Property Taxes 3,750
($7,500 ´
6/12)
b. Sales 6,000
Tax
Payable
Cash 6,000
($100,00
0 ´ 6%)
c. Income 21,000
Tax
Expense
Income Taxes Payable 21,000
($70,000
´ 30%)
87. Gowrie, Inc. began operations on January 1, 2012. At the end of its first year of business, Gowrie reported
$465,000 income before taxes on its income statement. At the end of 2012, Gowrie also had $45,000 of incurred
expenses that were not yet tax deductible according to income tax regulations. Gowrie's tax rate is 35%.
a. Compute the amount of income tax expense to be reported on Gowrie, Inc.'s income statement for 2012.
b. Compute the amount of income tax that Gowrie, Inc. legally owes for taxable income generated during 2012.
c. Determine the amount of deferred income tax liability or deferred income tax asset that Gowrie, Inc. has as of the end of 2012.
a. Income tax expense: $465,000 ´ 35% = $162,750

b. Income tax payable: ($465,000 + $45,000) ´ 35% = $178,500
c. Deferred income tax asset: $45,000 ´ 35% = $15,750
88. A contingency is an uncertain circumstance involving a potential gain or loss that will not be resolved until
some future event occurs. The following table lists the possible outcomes of a contingency. Complete the table
by filling in the definition and required accounting for each possible outcome.

Probable loss
Reasonably possible loss
Remote loss
Gain

Probable loss The future event is likely to create a loss. Estimate the amount of the contingency and
make the appropriate journal entry; provide
detailed disclosure in the notes.
Reasonably possible loss The chance of the future event occurring is Provide detailed disclosure of the possible
more than remote but less than likely to cause a liability in the notes.
loss.
Remote loss The chance of the future event occurring and No disclosure is required.
causing a loss is slight.
Gain The future event will cause a gain for the No disclosure is required.
company.
89. Indicate the appropriate accounting treatment for each independent situation shown below.
a. Assante Corporation is the defendant in an age-discrimination lawsuit for $10 million. The company's lawyers believe there is a 95 percent
probability that Assante will lose the case and that the loss will more than likely be $9 million.
b. Otay, Inc. has been accused of violating several federal regulatory laws. If found guilty, the company will incur significant fines and
penalties. The company's attorneys feel the accusations are baseless and that there is only a 5 percent chance that the company will be
found guilty.
c. Grammar Company is being accused of fraudulent reporting. The company's lawyers believe there is a 45 percent chance of losing the
case.
d. Ortiz Corporation is suing another company for patent infringement. The attorneys for Ortiz feel there is an 80 percent chance that they
will win the case and that the court will award them a $5 million judgment.
a. A 95 percent probability is likely to be interpreted as probable. The liability and associated loss should be formally recorded in the
accounting records, and a footnote disclosure should be made as well.
b. A 5 percent chance is likely to be interpreted as remote. No information need be disclosed in the notes to the financial statements.
c. A 45 percent probability falls somewhere between remote and probable. This would typically be interpreted as reasonably possible. If so, a
footnote disclosure is appropriate.
d. Gain contingencies are not recognized.
90. Accounting rules give specific instructions on whether to expense or capitalize research and development
costs and advertising costs. List the rules associated with these two costs.
Research and development costs: Expense costs as incurred
Advertising costs: Expense costs as incurred unless costs are due to targeted advertising directed at specific past
customers.
91. Indicate whether the following independent expenditures should be capitalized or expensed. Explain your
answers.
a. Cruz Company spent $500,000 on new equipment. The equipment has an estimated useful life of 12 years.
b. Carver Corporation spent $5 million researching a new production process. The company expects to reduce operating costs significantly
when the result of the research is implemented next year.
c. Kids Klothes, Inc. has spent $2 million creating a targeted advertising campaign that will motivate regular customers of the company's
on-line service to buy new clothes.
d. Hype.com is paying $400,000 for newspaper advertising on its new product line. The company expects the ad will generate increased sales
for the next 2 years.
a. Capitalize. This is a depreciable asset whose service will help generate future revenues over its useful life.
b. Expense. Research and development costs are expensed as incurred.
c. Capitalize. This is targeted advertising directed at specific past customers.
d. Expense. This is advertising pertaining to a new product and not directed at specific past customers.
92. On December 31, 2012, Rippey Corporation reported total revenue of $3,750,000 and total expenses of
$2,125,000. Rippey had 50,000 shares of stocks outstanding. Also, as of January 1, 2012, Rippey had issued
future. As of December 31, none of these stock options had been exercised.
a. What is basic earnings per share for Rippey Corporation?

b. What is diluted earnings per share for Rippey Corporation?
a. Basic earnings per share: ($3,750,000 - $2,125,000) ¸ 50,000 = $32.50

b. Diluted earnings per share: ($3,750,000 - $2,125,000) ¸ (50,000 + 15,000) = $25
93. Kline Corporation has taken the following information from the accounting records on December 31, 2012.
Prepare an income statement, in good form, for the year ended December 31, 2012. Assume that there are
50,000 shares of capital stock outstanding.
Gross sales revenue $1,721,500

Insurance expense (general and administrative) 950
Automobile expense (selling) 1,750
Miscellaneous selling expense 6,600
Payroll tax expense (selling) 1,550
Rent expense (selling) 9,000
Sales salaries expense 150,000
Cost of goods sold 1,270,500
Interest expense 23,000
Interest revenue 6,500
Advertising and promotion expense (selling) 80,000
Sales returns and allowances 6,000
Administrative salaries expense 70,000
Earthquake loss (net of taxes) 20,000
Kline
Corporat
ion
Income
Stateme
nt
For the
Year
ended
Decemb
er 31,
2012
Gross $1,721,500
sales
revenue
Less: 6,000
Sales
returns
and
allowanc
es
Net $1,715,500
sales
revenue
Less: 1,270,500
Cost of
goods
sold
Gross $ 445,000
margin
Operatin
g
Expense
s
Selling
expenses
:
Sales salaries expense $ 150,000
Advertising and promotion expense 80,000
Automobile expense 1,750
Rent expense 9,000
Payroll tax expense 1,550
Miscellaneous selling expenses 6,600
Total selling expenses $ 248,900
General
and
administ
rative
expenses
:
Administrative salaries expense $ 70,000
Insurance expense 950
Total general and administrative expenses $ 76,500
Total 325,400
selling,
general
and
administ
rative
expenses
Test Bank for Financial Accounting, 11th Edition: Albrecht
Operatin $ 119,600
g
income
Other
expenses
and
revenues
:
Interest $ 6,500
revenue
Interest (23,000) (16,500)
expense
Income $ 103,100
before
taxes
Income 48,000
tax
expense
Income $ 55,100
before
extraordi
nary
items
Earthqua 20,000
ke loss
(net of
taxes)
Net $ 35,100
income
Earning
s per
share:
Before extraordinary items $1.10
Extraordinary loss 0.40
Net income $0.70
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Test Bank for Financial Accounting, 11th Edition: Albrecht

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5. Which of the following would probably be classified as a current liability?

7. The entry to record sick days taken by an employee would include a

8. The gross pay for all employees is debited to

17. A severance package would best be termed a

30. A pension fund is "under-funded" when the

Pension benefit obligation $9,200,000

What is the net pension expense for Williams Corporation in 2012?

Pension benefit obligation $4,600,000

Given this entry, what would be the nature of Account C?

37. Income taxes shown on the income statement are based on

38. Deferred income taxes arise from

51. What makes environmental liabilities unique among contingent liabilities?

53. No disclosure is required for contingent liabilities that are

58. Which of the following types of advertising is typically capitalized?

59. The general rule for advertising costs is

Prepaid Advertising $1,500

68. Earnings per share is equal to

69. Which of the following items should be reported as an extraordinary item?

72. Which of the following events would be considered an extraordinary item?

74. Dike Corporation incurred the following losses during 2012:

· Loss of $480,000 was incurred in the abandonment of equipment

Advertising expense $1,200

Advertising expense $ 30,440

80. Romulus Corporation incurred the following losses during 2012:

· Loss of $240,000 was incurred in the abandonment of equipment

Pension service cost $ 285,000

Prepare journal entries to record

a. The payment of the property taxes on July 15, 2012.

Prepare journal entries to record

a. The proper amount of property tax expense on June 30, 2012

Term Definition Accounting

Reasonably possible loss

a. What is basic earnings per share for Rippey Corporation?

Gross sales revenue $1,721,500

5. Which of the following would probably be classified as a current liability?

7. The entry to record sick days taken by an employee would include a

8. The gross pay for all employees is debited to

17. A severance package would best be termed a

30. A pension fund is "under-funded" when the

Pension benefit obligation $9,200,000

What is the net pension expense for Williams Corporation in 2012?

Pension benefit obligation $4,600,000

Given this entry, what would be the nature of Account C?

37. Income taxes shown on the income statement are based on

38. Deferred income taxes arise from

51. What makes environmental liabilities unique among contingent liabilities?

53. No disclosure is required for contingent liabilities that are

58. Which of the following types of advertising is typically capitalized?

59. The general rule for advertising costs is

Prepaid Advertising $1,500

68. Earnings per share is equal to

69. Which of the following items should be reported as an extraordinary item?

72. Which of the following events would be considered an extraordinary item?

74. Dike Corporation incurred the following losses during 2012:

· Loss of $480,000 was incurred in the abandonment of equipment

Advertising expense $1,200

Advertising expense $ 30,440

80. Romulus Corporation incurred the following losses during 2012: