Section I- Multiple Choice – 30 Points.
Select the best answer and place the letter in the
1. Which of
the following terms is used to identify the expense recognition for intangible
Company uses the allowance method to account for bad debts. An account that
hadbeen previously written-off as uncollectible was
recovered. How would the recovery affect
the company’s accounting equation?
A. Increase assets and increase equity.
B. Increase assets and decrease
C. Reduce liabilities and increase
D. Have no effect on assets,
liabilities or equity.
for Doubtful Accounts is listed on the balance sheet under the caption:
4. The main purpose of recording
depreciation is to
the cost of a tangible asset to the periods in which its use
contributes to earnings revenue.
B. estimate the remaining useful life
of the asset.
C. report the asset on the balance
sheet at the estimated amount for which the
could be sold on the balance sheet date.
D. give the bookkeeper something to do.
5. On January 1, 2015 the Accounts
Receivable and the Allowance for Doubtful Accounts
balances of $30,000 and $500, respectively.
During the year the company
$70,000 of credit sales. There were $550
of receivables written-off as
in 2015. Cash collections of receivables
amounted to $74,550. The
company estimates that it will be unable to collect one
percent (1%) of credit sales. The amount of bad debts expense recognized in the
2015 income statement will be:
6. Which of the following statements is
true with regard to depreciation expense?
A. A company should use the depreciation
method that best matches expense
with the use of the asset.
B. A company using straight line will
show a smaller book value for assets
if the same company uses double declining balance.
C. Choosing double declining balance
over straight line will produce a
total depreciation expense over the asset’s life.
companies in the same industry will always depreciate similar
by the same methods.
7. The term
“double taxation” refers to which of the following:
A. A sole
proprietorship must pay income taxes on its net income and the
owner is also required to pay income taxes on withdrawals.
B. In a
partnership, both partners are required to claim their share of net
income on their tax returns.
must pay income taxes on their net income, and their
stockholders must pay income taxes on their dividends.
D. A sole
proprietorship must pay income taxes to both the state government
and the federal government.
8. A 90-day, 12% note for $10,000, dated
May 1, is received from a customer on account.
The maturity value of the note is:
term “Retained Earnings” is best explained by which of the following
A. Money set
aside for the redemption of bonds.
B. A measure
of capital generated through operating activities.
retained in a separate bank account designated for emergency uses.
difference between total revenue and total expenses in an accounting
of the following cash flows would be included in the financing activities
section of the statement of cash flows?
A. Cash receipts from dividends.
B. Cash paid to purchase equipment.
C. Cash received from a bond issue.
D. Cash gains and losses from the sale
of operational assets.
a bond is sold at 98, its stated rate of interest would be:
A. equal to the market rate.
B. unrelated to the market rate.
C. higher than the market rate.
D. lower than the market rate.
12. ACC 501 has made me love accounting.
January 1, 2017, the Accounts Receivable balance was $9,000 and the balance in
for Doubtful Accounts was $700. On January 15, 2017 a $200 uncollectible
account was written-off. The net realizable value of
accounts receivable immediately after the write-off is:
14. Which of the following would NOT be
presented in the financing section of the
statement of cash flows?
a new office building.
payment on long-term bonds payable.
of preferred stock.
15 Which of
the following is not normally a preference given to the holders of preferred
A. the right
to vote before the common stockholders at the corporation’s
B. the right
to receive a specified amount of dividends prior any being paid to
C. the right
to receive preference over common stockholders as to the
distribution of assets during a liquidation process.
D. All of
these are preferences given to preferred stock.
16. A company that uses the allowance method
to account for bad debts
the net realizable value of its accounts receivable on the balance sheet.
B. Does not
record bad debts until the amount becomes significant.
Bad Debts Expense when a receivable is written off.
D. None of
17. Which of
the following transactions affects cash flows?
write-off of an uncollectible account
of a stock dividend
of dividends declared in a previous year
of depreciation expense
of the following accounts appear in the liability section of the balance
payable, discounts on notes payable, accounts payable.
payable, notes payable, allowance for doubtful accounts.
payable, discounts on notes payable, credit card receivables.
payable, allowance for doubtful accounts, warranties payable.
March 1, Squire Company purchased a new stamping machine with a list price
of $24,000. The company paid cash for the machine;
therefore, it was allowed a 3%
discount. Other costs associated with the machine were:
transportation costs, $550; sales
tax paid, $1,680; installation costs, $450; routine
maintenance during the first month of
operation, $500. The cost recorded for the machine was:
Co. paid $175,000 for a purchase that included land, building, and office
furniture. An appraiser provided the following estimates of
the market values of the assets if they had been purchased separately: Land,
$20,000, Building, $150,000, and Office Furniture, $30,000. Based on this
information the cost that would be allocated to the land is:
January 1, 2015 Daugherty Company purchased a truck that cost $34,000. The
truck had an expected useful life of 5 years and a $4,000
salvage value. Based on
this information alone:
amount of depreciation expense recognized in 2018 would be greater
if Daugherty depreciates the asset under the straight-line
method than if
the double declining balance method is used.
B. The total
amount of depreciation expense recognized over the five year
useful life will be greater under the double declining
balance method than
the straight-line method.
C. At the
end of 2018, the amount in accumulated depreciation account will
be less if the double declining balance method is used than
it would be if
the straight-line method is used.
D. None of
these statements is true.
22. Which of the following assets are
considered to have indefinite useful lives?
D. All of these
Company issued at 97 bonds with a face value of $500,000. As a result of
and liabilities would both increase by $500,000.
would increase by $485,000 and liabilities would increase by
and liabilities would both increase by $485,000.
would increase by $500,000, and liabilities would increase by
bonds payable when the market interest rate is less than the stated interest
the effective interest rate above the stated rate of interest.
in bonds being issued at less than their face value.
in bonds being issued at a premium.
D. B and C.
25. On January 1, 2015, The Harrigan
Corporation issued $35,250 of 8%, 5-year
bonds at 97. The interest payments are due on December 31
each year. Based on the above, how much
interest expense will Harrigan report on its income statement on December 31,
2015? Round up to the nearest dollar.
Section II – Problems (75 points total)
Problem 1: Bad Debts Expense (15 Points)
The following information is available for K.M.R. Company,
which uses the allowance method
of accounting for bad debts.
Accounts receivable balance, 1/1/15 $77,000
Allowance for Doubtful Accounts, 1/1/15 1,500
Sales on account, 2015 254,200
Collection on accounts receivable, 2015 224,900
estimated that 2% of sales on account will be uncollectible. After several attempts at
collection, K.M.R. wrote off an account of $400 that could
not be collected.
Prepare horizontal analysis entries for the following
2015 collections on account
Write-off of the uncollectible account
Bad debt expense for 2015
Event Assets = Liab. + Stk. Equity Rev. â€“ Exp. = Net
Cash A. Rec. All
for DA = + Ret. Earn.
Bonus (1 point extra credit):
Show how would accounts receivable and the allowance for
doubtful accounts (including correct balances) would appear on the balance
Problem 2: Property, Plant and Equipment (20 points)
James Co purchases a new machine on January1, 2015 for
$625,000. James paid $5,000 to have the
machine transported to the factory and $19,000 for training of staff that will
operate the machine. The machine has an
estimated life of 20 years and 200,000 units of output, and residual value of
$10,000. Assume that the fiscal year-end
is December 31.
Part 1) Calculate the depreciation for 2015 and 2016 using
each of the following methods:
units-of-output method, assuming that output for the first year was 17,500
units and output for the second year was 12,500units,
(C) the declining-balance method.
Bonus (1 point extra credit)Assume the double declining
method of deprecation was used. How
would James Company report the machine and accumulated depreciation on the December
21, 2016 balance sheet?
Problem 3: Stockholdersâ€™ Equity (20 Points)
Lindsay Co. was organized to operate as a car
dealership. The charter authorized the
following capital stock: common stock, par value $2 per share. During the first year of operations, the
following transactions were completed.
Jan. 5 Sold and issued 10,000
shares of common stock for $20 per share.
June 12 Purchased 1,000
shares of treasury stock at $25 per share.
Oct. 1 Declared
cash dividends of $5,000
Oct. 17 Sold 100
shares of treasury stock at $30 per share
Nov. 1 Recorded
the names of shareholders to receive dividend declared Oct. 1
Nov.15 Paid cash
dividends declared on Oct 1.
Use horizontal analysis to record the above transactions.
Assets = Liab + Stockholdersâ€™
Problem 4: Statement of Cash Flows (20 Points)
Duncan Corp. prepares its statement of cash flows using the
INDIRECT METHOD. Indicate where the cash flow effect for each transaction or
event would be classified on the company’s statement of cash flows using the
following answer choices:
A. Operating activities–ADD to net income
B. Operating activities–DEDUCT from net income
C. Investing activities
D. Financing activities
expense was recorded.
was purchased for cash.
were issued for cash.
receivable increased during the year.
stock was reacquired as treasury stock.
payable increased during the year.
building was sold for cash.
were sold for cash, including a gain (see the next item for the gain).
_____ A gain on the
sale of investments (see previous item) was recorded and included in net
cash dividend was paid.