MULTIPLE CHOICE QUESTIONS

1. The final step in solving an ethical dilemma is to

a. identify and analyze the principal elements in the situation.

b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.

2. Generally accepted accounting principles are

a. income tax regulations of the Internal Revenue Service.
b. standards that indicate how to report economic events.
c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.

3. The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is
true that
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist.
d. the SEC and FASB rarely cooperate in developing accounting standards.

4. GAAP stands for

a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.

5. The economic entity assumption requires that the activities

a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of an entity be kept separate from the activities of its owner.

6. In recording an accounting transaction in a double-entry system

a. the number of debit accounts must equal the number of credit accounts.
b. there must always be entries made on both sides of the accounting equation.
c. the amount of the debits must equal the amount of the credits.
d. there must only be two accounts affected by any transaction.

7. A debit is not the normal balance for which account listed below?
a. Drawing
b. Cash
c. Accounts Receivable
d. Service Revenue

8. Which of the following journal entries is recorded correctly and in the standard format?
a. Wages Expense ..................................................................................................................... 600
Cash .............................................................................................................................. 1,500
Advertising Expense .............................................................................................................. 900

b. Wages Expense ..................................................................................................................... 600

Advertising Expense .............................................................................................................. 900
Cash .............................................................................................................................. 1,500

c. Cash .......................................................................................................................................1,500
Wages Expense ............................................................................................................ 600
Advertising Expense ..................................................................................................... 900

d. Wages Expense ..................................................................................................................... 600

Advertising Expense .............................................................................................................. 900
Cash .............................................................................................................................. 1,500

9. A trial balance would only help in detecting which one of the following errors?
a. A transaction that is not journalized
b. A journal entry that is posted twice
c. Offsetting errors are made in recording the transaction
d. A transposition error when transferring the debit side of journal entry to the ledger

10.Under accrual-basis accounting

a. cash must be received before revenue is recognized.
 b. net income is calculated by matching cash outflows against cash inflows.
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. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under
generally accepted accounting principles.

11.Accrued expenses are

a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

12.Closing entries are necessary for

a. permanent accounts only.
b. temporary accounts only.
c. both permanent and temporary accounts.
d. permanent or real accounts only.

13.Stan’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.

As a result of these events, the company’s merchandise inventory

a. increased by $19,208.
b. increased by $19,700.
c. increased by $19,306.
d. increased by $19,308.

14. On July 9, Neal Company sells goods on credit to Al Dolan for $2,500, terms 1/10, n/60. Neal receives payment on July 18. The entry
by Neal on July 18 is:
a. Cash........................................................................................................................................ 2,500
Accounts Receivable................................................................................................. 2,500
b. Cash........................................................................................................................................ 2,500
Sales Discounts......................................................................................................... 25
Accounts Receivable................................................................................................. 2,475
c. Cash........................................................................................................................................ 2,475
Sales Discounts....................................................................................................................... 25
Accounts Receivable................................................................................................. 2,500
d. Cash........................................................................................................................................ 2,525
Sales Discounts......................................................................................................... 25
Accounts Receivable................................................................................................. 2,500

15. If a check correctly written and paid by the bank for $438 is
incorrectly recorded on the company's books for $483, the
appropriate treatment on the bank reconciliation would be to

a. add $45 to the bank's balance.

b. add $45 to the book's balance.
c. deduct $45 from the bank's balance.
d. deduct $438 from the book's balance.

16. Grant Company gathered the following reconciling information in

preparing its July bank reconciliation:

Cash balance per books, 7/31 $3,500

Deposits-in-transit 150
Notes receivable and interest collected by bank 850
Bank charge for check printing 20
Outstanding checks 2,000
NSF check 170

The adjusted cash balance per books on July 31 is

a. $4,160.
b. $4,010.
 c. $2,310.
d. $2,460.
17. An adjusting entry is not required for

a. outstanding checks.
b. collection of a note by the bank.
c. NSF checks.
d. bank service charges.

18. The existing balance in Allowance for Doubtful Accounts is

considered in computing bad debts expense in the

a. direct write-off method.

b. percentage of receivables basis.
c. percentage of sales basis.
d. percentage of receivables and percentage of sales basis.

19. Seely Company receives a $4,000, 3-month, 8% promissory note from

Dodd Company in settlement of an open accounts receivable. What
entry will Seely Company make upon receiving the note?

a. Notes Receivable ........................ 4,080

Accounts Receivable——Dodd Company ... 4,080
b. Notes Receivable ........................ 4,080
Accounts Receivable——Dodd Company ... 4,000
Interest Revenue .................... 80
c. Notes Receivable ........................ 4,000
Interest Receivable ..................... 80
Accounts Receivable——Dodd Company ... 4,000
Interest Revenue .................... 80
d. Notes Receivable ........................ 4,000
Accounts Receivable——Dodd Company ... 4,000

20. Voight Company's account balances at December 31 for Accounts

Receivable and Allowance for Doubtful Accounts were $1,400,000 and
$70,000 (Cr.), respectively. An aging of accounts receivable
indicated that $128,000 are expected to become uncollectible. The
amount of the adjusting entry for bad debts at December 31 is
a. $128,000.
b. $58,000.
c. $198,000.
d. $70,000.

21. Renn Company acquires land for $56,000 cash. Additional costs are
as follows:

Removal of shed $ 300

Filling and grading 1,500
Salvage value of lumber of shed 120
Broker commission 1,130
Paving of parking lot 10,000
Closing costs 560

Renn will record the acquisition cost of the land as

a. $56,000.
b. $57,690.
c. $59,610.
d. $59,370.

22. The book value of an asset is equal to the

a. asset's market value less its historical cost.
b. blue book value relied on by secondary markets.
c. replacement cost of the asset.
d. asset's cost less accumulated depreciation.

23. A company purchased factory equipment on April 1, 2009 for $48,000.

It is estimated that the equipment will have a $6,000 salvage value
at the end of its 10-year useful life. Using the straight-line
method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2009 is
a. $4,800.
b. $4,200.
c. $3,150.
d. $3,600.
24. A company purchased office equipment for $20,000 and estimated a
salvage value of $4,000 at the end of its 5-year useful life. The
constant percentage to be applied against book value each year if
the double-declining-balance method is used is
a. 20%.
b. 25%.
c. 40%.
d. 4%.

25. Depletion is
a. a decrease in market value of natural resources.
b. the amount of spoilage that occurs when natural resources are
extracted.
c. the allocation of the cost of natural resources to expense.
d. the method used to record unsuccessful patents.

26. All of the following are reported as current liabilities except

a. accounts payable.
b. bonds payable.
c. notes payable.
d. unearned revenues.

27. Sales taxes collected by the retailer are recorded as a(n)

a. revenue.
b. liability.
c. expense.
d. asset.

28. Which one of the following payroll taxes does not result in a
payroll tax expense for the employer?

a. FICA tax
b. Federal income tax
c. Federal unemployment tax
d. State unemployment tax

29. The net income of the Stone and Holt partnership is $150,000. The
partnership agreement specifies that profits and losses will be
shared equally after salary allowances of $120,000 (Stone) and
$90,000 (Holt) have been allocated. At the beginning of the year,
Stone's Capital account had a balance of $300,000 and Holt's Capital
account had a balance of $390,000. What is the balance of Holt's
Capital account at the end of the year after profits and losses have
been distributed?

a. $390,000.
b. $60,000.
c. $450,000.
d. $465,000.

30. When a partner invests noncash assets in a partnership, the assets should be recorded at their
a. book value.
b. carrying value.
c. fair market value.
d. original cost.

PROBLEM 1

Before month-end adjustments are made, the February 28 trial balance of Alice’s Adventures contains revenue of $9,000 and expenses of
$4,400. Adjustments are necessary for the following items:
 Depreciation for February is $1,800.
 Revenue earned but not yet billed is $2,300.
 Accrued interest expense is $700.
 Revenue collected in advance that is now earned is $3,500.
 Portion of prepaid insurance expired during February is $400.
INSTRUCTIONS:

(a) Prepare the Adjusting Entries

(b) Calculate the correct net income for Alice’s Income Statement for February.

Solution: Problem 1
Part (a): Adjusting Entries

Dr. Depreciation Expense* 1,800

Cr. Accumulated Depreciation** 1,800
__________________________________

Dr. Revenue Billable (Receivable)** 2,300

Cr. Revenues Earned* 2,300
__________________________________

Dr. Interest Expense* 700

Cr. Accrued Interest (Payable)** 700
__________________________________

Dr. Revenues Collected in Advance** 3,500

Cr. Revenues Earned 3,500
___________________________________

Dr. Insurance Expense* 400

Cr. Prepaid Insurance** 400

Part (b): Computation of the Correct Income

Net Income before Adjustments ($9,000 – 4,400) $ 4,600

Add: Unearned Revenues now earned $3,500

Accrued Revenues 2,300 5,800
10,400

Subtract: Depreciation Expense 1,800

Interest Expense 700
Insurance Expense 400 2,900

Net Income after Adjustments $ 7,500

PROBLEM 2

At March 31, account balances after adjustments for Rogers Cinema are as follows:

Account Balances
Accounts (After Adjustment)

Cash $ 6,000
Concession Supplies 4,000
Theatre Equipment 50,000
Accumulated Depreciation—Theatre Equipment 12,000
Accounts Payable 5,000
Rogers, Capital 20,000
Rogers, Drawing 12,000
Admission Ticket Revenues 60,000
Popcorn Revenues 32,000
Candy Revenues 19,000
Advertising Expense 12,000
Concession Supplies Expense 19,000
Depreciation Expense 4,000
Film Rental Expense 16,000
Rent Expense 12,000
Salaries Expense 18,000
Utilities Expense 5,000

INSTRUCTIONS:

Prepare the closing journal entries for Rogers Cinema.

Solution: Problem 2

Mar. 31 Admission Ticket Revenues...................................................................................................... 60,000

Popcorn Revenues.................................................................................................................... 32,000
Candy Revenues....................................................................................................................... 19,000
Income Summary...................................................................................................... 111,000

(To close revenue accounts)

31 Income Summary..................................................................................................................... 86,000

Advertising Expense................................................................................................. 12,000
Concession Supplies Expense................................................................................... 19,000
Depreciation Expense............................................................................................... 4,000
Film Rental Expense................................................................................................. 16,000
Rent Expense............................................................................................................ 12,000
Salaries Expense....................................................................................................... 18,000
Utilities Expense....................................................................................................... 5,000

(To close expense accounts)

31 Income Summary..................................................................................................................... 25,000

Rogers, Capital.......................................................................................................... 25,000

(To transfer net income to capital)

31 Rogers, Capital.......................................................................................................................... 12,000

Rogers, Drawing....................................................................................................... 12,000

(To close drawings to capital)

PROBLEM 3

Clarke Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost

1/1 Beginning Inventory 100 $4 $ 400

1/20 Purchase 400 $5 2,000
7/25 Purchase 200 $7 1,400
10/20 Purchase 300 $8 2,400

1,000 $6,200

A physical count of inventory on December 31 revealed that there were 400 units on hand.

INSTRUCTIONS:

Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.

2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________.

3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the
LIFO method. Would income have been greater or less?

Solution: Problem 3
1. FIFO: Ending inventory $3,100

300 units @ $8 = $2,400

100 units @ $7 = 700

400 units $3,100

2. Average Cost: Ending inventory $2,480

$6,200 ÷ 1,000 = $6.20 per unit

$.6.20 × 400 units = $2,480

3. LIFO: Ending Inventory $1,900

100 units @ $4 = $ 400

300 units @ $5 = 1,500

400 units $1,900

4. FIFO: Cost of goods sold $3,100 LIFO:Cost of goods sold $4,300

100 units @ $4 = $ 400 300 units @ $8 = $2,400

400 units @ $5 = 2,000 200 units @ $7 = 1,400

100 units @ $7 = 700 100 units @ $5 = 500

600 units $3,100 600 units $4,300

Income would have been $1,200 ($4,300 vs. $3,100) greater if the company used FIFO instead of LIFO.

PROBLEM 4

Compute bad debts expense based on the following information:

(a) Ramsey Company estimates that 1% of net credit sales will become uncollectible. Sales are $600,000, sales returns and allowances are
$30,000, and the allowance for doubtful accounts has a $6,000 credit balance.

(b) Ramsey Company estimates that 3% of accounts receivable will become uncollectible. Accounts receivable are $100,000 at the end of
the year, and the allowance for doubtful accounts has a $500 debit balance.

Solution: Problem 4

(a) Bad debts expense = $5,700 [($600,000 – $30,000) × .01]

REMEMBER

1. You must deduct sales returns and allowances $30,000 from sales BEFORE multiplying by 1%

2. Under the Percentage of Sales method, existing balance in the Allowance for Doubtful Debts account is IGNORED.

(b) Bad debts expense = $3,500 [($100,000 × .03) + $500]

PROBLEM 5

Stone Furniture Store has credit sales of $400,000 in 2008 and a debit balance of $600 in the Allowance for Doubtful Accounts at
year end. As of December 31, 2008, $130,000 of accounts receivable remain uncollected. The credit manager prepared an aging schedule
of accounts receivable and estimates that $5,000 will prove to be uncollectible.
On March 4, 2009, the credit manager authorizes a write-off of the
$1,000 balance owed by A. Lowell.

INSTRUCTIONS:
 (a) Prepare the adjusting entry to record the estimated
uncollectible accounts expense in 2008.

(b) Show the balance sheet presentation of accounts receivable on

December 31, 2008.

(c) On March 4, before the write-off, assume the balance of Accounts

Receivable account is $160,000 and the balance of Allowance for
Doubtful Accounts is a credit of $3,000. Make the appropriate
entry to record the write-off of the Lowell account. Also show
the balance sheet presentation of accounts receivable before and
after the write-off.

Solution: Problem 5

(a) Bad Debts Expense ($5,000 + $600) ............... 5,600

Allowance for Doubtful Accounts ............... 5,600

(b)Balance Sheet Presentation

Accounts Receivable $130,000

Less: Allowance for Doubtful Accounts 5,000
————————
$125,000

(c) Allowance for Doubtful Accounts ................. 1,000

Accounts Receivable——A. Lowell ................. 1,000

Before After
Write-off Write-off
————————— —————————
Accounts Receivable $160,000 $159,000
Less: Allowance for Doubtful Accounts 3,000 2,000
———————— ————————
Cash Realizable Value $157,000 $157,000

PROBLEM 6

Greig Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions:

January 5 Sold merchandise to Jane Harder for $1,000, terms n/15.

April 15 Received $200 from Jane Harder on account.

August 21 Wrote off as uncollectible the balance of the Jane Harder account when she declared bankruptcy.

October 5 Unexpectedly received a check for $250 from Jane Harder.

Solution: Problem 6

January 5 Accounts Receivable—J. Harder........................................................................................ 1,000

Sales..................................................................................................................... 1,000

April 15 Cash .............................................................................................................................. 200

Accounts Receivable—J. Harder.......................................................................... 200

August 21 Allowance for Doubtful Accounts...................................................................................... 800

Accounts Receivable—J. Harder.......................................................................... 800

October 5 Accounts Receivable—J. Harder........................................................................................ 250

Allowance for Doubtful Accounts........................................................................ 250

Cash .............................................................................................................................. 250

Accounts Receivable—J. Harder.......................................................................... 250
PROBLEM 7

A plant asset acquired on October 1, 2010, at a cost of $300,000 has

an estimated useful life of 10 years. The salvage value is estimated
to be $30,000 at the end of the asset's useful life.
INSTRUCTIONS:

Determine the depreciation expense and book value for the first two
years using:

(a) the straight-line method.

(b) the double-declining-balance method.

Solution: Problem 7

(a) Straight-line method

STEP 1

$300,000 – 30,000 = $270,000

STEP 2

$270,000/10 Years = $27,000

STEP 3

($27,000/12 Months) x 3 Months = $6,750

YEAR 1:

Depreciation Expense ………………………. $6,750

Book Value ($300,000 – 6,750) = $293,250

YEAR 2:

Depreciation Expense ………………………………… $27,000

Book Value ($300,000–6,750–27,000) = $266,250

REMEMBER

Book Value = Cost – Accumulated Depreciation

Therefore, in computing Book Value, Salvage Value is NOT deducted from the cost.

(b) Double-declining-balance method

Double Declining Rate:

100/10 5ears = 10%
10 x 2 = 20%
YEAR 1

Depreciation Expense: $300,000 × 20% × 3 ÷ 12 = $15,000

Book Value: $300,000- 15,000 ………………………… = $285,000

YEAR 2

Depreciation Expense: $285,000 × 20% = $57,000

Book Value: $300,000 - 15,000 - 57,000……………………… = $228,000
PROBLEM 8

Wellington Company had the following transactions involving notes payable.

Nov. 1, 2010 Borrows $90,000 from Olathe State Bank by signing a 3-month, 10% note.

Dec. 31, 2010 Prepares the adjusting entry.

Feb. 1, 2011 Pays principal and interest to Olathe State Bank.

INSTRUCTIONS:
Prepare journal entries for each of the transactions.

Solution: Problem 8
November 1, 2010

Cash............................................................................................................................................................. 90,000
Notes Payable........................................................................................................................................... 90,000

December 31, 2010

Interest Expense
($90,000  10%  2/12)........................................................................................................................ 1,500
Interest Payable..................................................................................................................................... 1,500
February 1, 2011

Notes Payable.............................................................................................................................................. 90,000

Interest Payable........................................................................................................................................... 1,500
Interest Expense............................................................................................................................................ 750
Cash................................................................................................................................................. 92,250

PROBLEM 9

Pam Norman had earned (accumulated) salary of $96,000 through November 30. Her December salary amounted to $8,500. Sam Hall began
employment on December 1 and will be paid his first month's salary of $5,000 on December 31. Income tax withholding for December for each
employee is as follows:

Pam Norman Sam Hall

Federal Income Tax $2,180 $990

State Income Tax 390 180

The following payroll tax rates are applicable:

FICA tax on first $100,000 8%

FUTA tax on first $7,000 6.2%*

SUTA tax on first $7,000 5.4%

*Less a credit equal to the state unemployment contribution

Solution: Problem 9

Dec. 31 Salaries Expense (8,500 + 5,000)........................................................................................... 13,500

Federal Income Taxes Payable (2,180+990)............................................................. 3,170
State Income Taxes Payable (390+180)................................................................... 570
FICA Taxes Payable................................................................................................... 720
Salaries Payable........................................................................................................ 9,040
(To record December 31 payroll)

FICA Taxes

Pam Norman ($100,000 – $96,000 = $4,000 × 8%) = $320

Sam Hall ($5,000 × 8%) = 400
$720
 Payroll Tax Expense................................................................................................................ 1,030

FICA Taxes Payable................................................................................................... 720

Federal Unemployment Taxes Payable*.................................................................. 40
State Unemployment Taxes Payable (5,000 x5.4%)................................................. 270
(To record employer's share of payroll taxes for
Dec. 31 payroll)

*[(5,000 x6.2%)- 270]

= 310 -270 = $40

PROBLEM 10

Fink & Elston Co. reports net income of $34,000. The partnership agreement provides for annual salaries of $24,000 for Fink and $15,000 for
Elston and interest allowances of $4,000 to Fink and $6,000 to Elston. Any remaining income or loss is to be shared 70% by Fink and 30% by
Elston.

Solution: Problem 10

Fink Elston Total

Salary allowance $24,000 $15,000 $39,000

Interest allowance 4,000 6,000 10,000

Total salaries and interest 28,000 21,000 49,000

Remaining deficiency ($15,000)*

Fink ($15,000 × 70%) (10,500) (10,500)

Elston ($15,000 × 30%) (4,500) (4,500)

Total Division $17,500 $16,500 $34,000

*$34,000 – 39,000 – 10,000 = -$15,000