EXAM #2

SAMPLE PROBLEMS

(Lessons 5 - 10)
 Use the following information to respond to problems 1 - 6 assuming Zee Corp. maintains
their inventory records on a perpetual basis:

1/12 Zee Corp., a wholesaler of unicycles, buys 20 unicycles on account from a

supplier at $100/unit with terms of 2/10,n/30.
1/13 Zee returns one of the unicycles to the supplier because of a defect and
receives credit on their account.
1/22 Zee pays the supplier in full (net of the discount) for the 1/12 purchase.
1/24 Zee sells 10 of the unicycles purchased on 1/12 to a customer for $200/unit
on account with terms of 1/10,n/30.
1/25 The customer returns one of the unicycles for credit on account (assume the
unicycle is in good condition and can be resold).
2/2 The customer pays in full the net amount due from the 1/24 sale, net of the
discount.

1. Zee’s journal entry to record the 1/12 transaction would be

a. Purchases 2,000
Accounts Payable 2,000
b. Inventory 2,000
Accounts Payable 2,000
c. Purchases 1,960
Accounts Payable 1,960
d. Accounts Payable 2,000
Inventory 2,000
e. None of the above

2. Zee’s journal entry to record the 1/13 transaction would include a credit to
a. Purchases for $98.
b. Purchases for $100.
c. Accounts Payable for $98.
d. Inventory for $100.
e. None of the above.

3. Zee’s journal entry to record the 1/22 transaction would include a credit to
a. Cash for $1,900.
b. Accounts Payable for $1900.
c. Inventory for $38.
d. Purchases for $38.
e. None of the above.

4. Zee’s journal entry to record the 1/24 transaction will include debits to
a. Accounts Receivable for $2,000 and Cost of Goods Sold for $1,000.
b. Sales Revenues for $2,000 and Inventory for $1,000.
c. Accounts Receivable for $1,980 and Cost of Goods Sold for $1,000.
d. Accounts Receivable for $2,000 and Cost of Goods Sold for $980.
e. None of the above.
5. Zee’s journal entry to record the 1/25 transaction will include debits to
a. Sales Returns and Allowances and Inventory.
b. Accounts Receivable and Cost of Goods Sold.
c. Accounts Receivable and Inventory.
d. Sales Revenues and Cost of Goods Sold.
e. None of the above.

6. Zee’s journal entry to record the 2/2 transaction will include a debit to
a. Cash for $1,800.
b. Accounts Receivable for $1,800.
c. Sales Discounts for $18.
d. Sales Revenues for $18.
e. None of the above.

7. Which of the following accounts is a contra asset account?

a. Sales Discounts
b. Sales Returns and Allowances
c. Unearned Rental Revenue
d. Both a and b.
e. None of the above.

8. Before closing entries at the end of any accounting period, Sales Discounts will typically
have
a. a debit balance.
b. a credit balance.
c. no balance.
d. Sales discount is not an account that is typically used.

9. Given the following information:

Sales Revenues $100,000
Sales Returns and Allowances 7,000
Sales Discounts 3,000
Selling Expenses 20,000
Administrative Expenses 15,000

and assuming Cost of Goods Sold as a percentage of Net Sales Revenues equals 40%, then
the Gross Margin would amount to:
a. $19,000.
b. $34,000.
c. $40,000.
d. $54,000.
e. $60,000.
10. Sales Discounts and Sales Returns and Allowances are accounts that are
a. utilized to improve management information on lost revenues due to sales return
policies and discount offers to customers.
b. not required under GAAP but are typically utilized by companies in their accounting
for customer returns and discounts.
c. deducted from Sales Revenues in the determination of Net Sales Revenues.
d. closed to Retained Earnings at the end of an accounting period.
e. All of the above are true.

11. An adjustment at the end of an accounting period for uncollectible accounts receivable is
necessary under GAAP to comply with the
a. Realization Concept.
b. Revenue Recognition Principle.
c. Matching Principle.
d. Cash Basis of Accounting.
e. None of the above.

12. On December 31, before adjusting for Uncollectible Accounts Receivable for the period,
Accounts Receivable has a debit balance of $80,000, and the Allowance for Uncollectible
Accounts has a credit balance of $2,500. If 6% of ending Accounts Receivable are estimated
to be uncollectible,
a. the balance of the Allowance for Uncollectible Accounts should be $2,000 after
adjustment.
b. the balance of the Allowance for Uncollectible Accounts should be $1,200 after
adjustment.
c. Uncollectible Accounts Expense for the year should be $10,800.
d. the balance of the Allowance for Uncollectible Accounts should be $4,800 after
adjustment.
e. None of these.

13. If the 12/31/X3 balance of Accounts Receivable is $40,000 and the balance of the Allowance
for Uncollectible Accounts Receivable is a debit balance of $1,500 before any year-end
adjustment, the adjusting entry required given uncollectible accounts receivable are
estimated a 10% of the balance of Accounts Receivable would require a debit to
a. Bad Debt Expense for $4,000.
b. Bad Debt Expense for $5,500.
c. Bad Debt Expense for $3,500.
d. Allowance for Uncollectible Accounts Receivable for $4,000.
e. None of the above.

14. The net realizable value of accounts receivable amounts to

a. Accounts Receivable less Bad Debt Expense.
b. Bad Debt Expense plus the Allowance for Uncollectible Accounts Receivable.
c. Accounts Receivable less the Allowance for Uncollectible Accounts Receivable.
d. Net Sales Revenues less Bad Debt Expense.
e. None of the above.
15. Given the following information at the end of the year:

Days Past Due Accounts Receivable Est. Uncollectible

Current $100,000 1%
0 - 30 days $ 50,000 3%
30 - 60 days $ 20,000 5%
60 - 90 days $ 10,000 20%
90 + days $ 8,000 40%
$188,000

And assuming Net Credit Sales Revenues for the year amounted to $800,000 and the balance
in the Allowance for Uncollectible Accounts Receivable account is a credit balance of $500
before adjustment, then the adjusting entry for Bad Debt Expense at the end of the year will
include a credit to
a. Bad Debt Expense for $8,700.
b. Allowance for Uncollectible Accounts Receivable for $9,200.
c. Allowance for Uncollectible Accounts Receivable for $8,700
d. Bad Debt Expense for $9,200.
e. None of the above.

16. At the beginning of the year Jones Company had a $50,000 balance in Accounts Receivable.
During the year, total sales made on account amounted to $210,000 and total cash collections
from customers on accounts receivable amounted to $199,000. In addition, $3,000 in
uncollectible accounts receivable were actually written off the books. Determine the balance
of accounts receivables before any adjustment for estimated uncollectible accounts
receivable for the year.
a. $61,000
b. $58,000
c. $64,000
d. $36,000
e. None of these.

17. The entry to record the writeoff of an uncollectible account receivable would be
a. Bad Debt Expense xxx
Allowance for Uncollectible A/R xxx
b. Allowance for Uncollectible A/R xxx
Accounts Receivable xxx
c. Bad Debt Expense xxx
Accounts Receivable xxx
d. Sales Revenues xxx
Allowance for Uncollectible A/R xxx
e. None of the above.

18. If a company has a debit balance in the Allowance for Uncollectible Accounts Receivable
before any year-end adjustment and fails to make an adjusting entry to record estimated
uncollectible accounts receivable at the end of a period, then this error
a. understates assets.
b. overstates net income.
c. overstates expenses.
d. understates owners' equity.
e. Both a and b are true.
19. The amount of Bad Debt Expense in any year will always
a. equal the amount of estimated uncollectible accounts receivable at the end of the
year.
b. equal the balance in the Allowance for Uncollectible Accounts Receivable account at
the end of the year after adjustment.
c. equal the amount of estimated uncollectible accounts receivable at the end of the year
plus or minus the prior year’s under or overestimation, respectively, of uncollectible
accounts receivable.
d. equal the net realizable value of accounts receivable at the end of the year.
e. None of the above.

20. A credit balance in the Allowance for Uncollectible Accounts Receivable account at the end
of the year prior to any adjusting entry for the current year’s uncollectible accounts
receivable means the prior year’s estimated uncollectible accounts receivables were
a. overestimated.
b. underestimated.
c. has nothing to do with the prior year estimation of uncollectibles.

21. An entry to record a sale to a customer who uses a credit card to pay will typically include
a. a credit to Sales Revenues.
b. a debit Credit Card Expense.
c. a debit to Cash.
d. Both a and b.
e. All of the above.

The following data represent the beginning inventory and, in order of occurrence, the purchases and
sales of Simpson, Inc., for an operating period. Use this information to answer questions 22-24.
Units Unit Cost Total Cost Units Sold
Beginning inventory 20 $ 40 $ 800
Sale No. 1 11
Purchase No. 1 12 46 552
Sale No. 2 14
Purchase No. 2 14 36 504
Totals 46 $1,856 25

22. Assuming Simpson, Inc., uses FIFO perpetual inventory procedures, it records sale No. 2 as
an entry to Cost of Goods Sold for
a. $590
b. $644
c. $504
d. $560
e. None of these.
23. Assuming ,Simpson Inc., uses LIFO perpetual inventory procedures, sale No. 2 is recorded as
an entry to Cost of Goods Sold for
a. $504
b. $632
c. $644
d. $590
e. None of these.

24. Assuming Simpson, Inc., uses moving weighted average (perpetual) inventory procedures,
sale No. 2 is recorded as an entry to Cost of Goods Sold for (round all calculations to the
nearest hundredth)
a. $591.50
b. $595.25
c. $602.75
d. $608.02
e. None of these.

Use this information to respond to questions 25-26. Inventory data for Newport Surfboard Company
for December consists of the following:
Date Units Cost Total
12/1 Beginning Inventory 10 $120 $1,200
12/5 Purchased 25 130 3,250
12/8 Sold 18
12/12 Purchased 10 145 1,450
12/19 Sold 18
12/27 Purchased 20 150 3,000
12/29 Sold 9

25. Assuming Newport uses a perpetual inventory system with a LIFO cost flow, what is the
value of ending inventory on 12/31?
a. $1,650
b. $2,730
c. $3,000
d. $6,170
e. None of these.

26. Assuming Newport uses a perpetual inventory system with a FIFO cost flow, what is the
amount of Cost of Goods Sold for the month of December?
a. $1,650
b. $2,730
c. $3,000
d. $6,170
e. None of these.
27. Which of the following inventory costing methods most closely matches the actual physical
flow of goods in a grocery store?
a. Perpetual FIFO
b. Perpetual LIFO
c. Moving weighted average
d. Specific identification
e. None of these.

28. In a period of deflation in the prices of inventory purchases throughout the period, which
inventory costing method will yield the lowest income tax liability assuming there is a
balance of inventory on hand at the end of the period?
a. FIFO
b. LIFO
c. Moving weighted average
d. They would all yield the same result.

29. In a period of inflation in the prices of inventory purchases throughout the period, which
inventory costing method will yield the lowest net income assuming there is a balance of
inventory on hand at the end of the period?
a. FIFO
b. LIFO
c. Moving weighted average
d. They would all yield the same result.

30. In a period of inflation in the prices of inventory purchases throughout the period, which
inventory costing method will yield the lowest ending inventory balance at the end of the
period?
a. FIFO
b. LIFO
c. Moving weighted average
d. They would all yield the same result.

31. In a period of stable prices for inventory purchases throughout the period, which inventory
costing method will yield the highest income tax liability assuming there is a balance of
inventory on hand at the end of the period?
a. FIFO
b. LIFO
c. Moving weighted average
d. They would all yield the same result.

32. For Unique Antiques, Inc. which carries an inventory of one of a kind antique items, which
of the following perpetual inventory methods should be used?
a. LIFO
b. FIFO
c. Specific Identification
d. Moving Weighted Average
e. A periodic rather than perpetual inventory method should be used.
33. Internal controls are policies and procedures
a. designed to safeguard a company’s assets.
b. designed to ensure accurate accounting records.
c. designed and implemented by the company’s external auditors.
d. Both a and b.
e. All of the above.

34. Which of the following policies or procedures should be included in a system of internal
accounting controls over cash?
a. Monthly bank reconciliations are to be prepared by a person not involved in the
handling of cash.
b. All cash disbursements are to be made by pre-numbered, sequenced checks.
c. All receipts are deposited daily in the bank.
d. Cash handling responsibilities are separated from those responsible for the recording
of cash transactions.
e. All of the above are part of a good system of internal accounting control over cash.

35. Payroll information for the week is:

Gross wages $10,000
Employee FICA withholding 600
Employee FIT withholding 1,800
Employee SIT withholding 900
Employee Union Dues withheld 300
Net wages $ 6,400

Employer FICA $ 600

Employer Fed. Unemployment Insurance 120
Employer State Unemployment Insurance 80

Given the above, the journal entry to record the obligation for all payroll related costs for the
week would include a debit to:
a. Wage Expense for $6,400.
b. Payroll Tax Expense for $800.
c. Wages Payable for $6,400.
d. Employee FIT Expense for $1,800.
e. Both a and b.

36. Chang's Chinese Restaurant accepts a VISA card payment from a customer for $20
electronically processed for immediate credit to their bank account. Chang is charged a 3%
fee on an processed transaction. The journal entry to record this receipt would include a
debit to
a. Cash for $20.
b. Sales Revenues for $20.
c. Credit Card Expense for $ .60.
d. Accounts Receivable for $19.40.
e. None of the above.
37. A $100 sale of merchandise requires collection of a state sales tax of $7. If the full $107 is
received from the customer in cash, the journal entry on the merchant's books would include
a credit to:
a. Sales Revenues for $107.
b. Sales Taxes Payable for $7.
c. Cash for $107.
d. Sales Tax Revenues for $7.
e. None of the above.

38. A used truck is purchased for $20,000 ($5,000 cash down and execution of a note payable for
$15,000) with additional cash acquisition costs of $1,200 for state sales tax. In addition,
$2,000 is incurred and paid for engine overhaul deemed necessary prior to the truck’s initial
use. $1,000 of insurance on the truck is prepaid for one year’s coverage. The total
capitalized cost for the truck is
a. $ 8,200.
b. $20,000.
c. $21,200.
d. $23,200.
e. $24,200.

Use the following information for problems 39 and 40. On July 1, 20X1, ABC, Inc., acquired a new
machine for $70,000. Its estimated useful life is ten years with an expected salvage value of $3,100.

39. Assuming straight-line depreciation, 20X1 depreciation expense is

a. $3,500.
b. $7,000
c. $3,345.
d. $6,690.
e. None of these.

40. Assuming straight-line depreciation, the balance of accumulated depreciation at 12/31/X2

would be
a. $ 7,000.
b. $10,500.
c. $ 6,690.
d. $13,380
e. None of the above.

41. Using the information provided for problem #39 above and assuming the total anticipated
production of the machine during its useful life is 100,000 units of production with the same
$3,100 salvage value, what would the 12/31/X1 book value of the machine be using the units
of production method of calculating depreciation and assuming 10,000 units of actual
production in 20X1?
a. $63,310
b. $60,210
c. $63,000
d. $59,900
e. None of the above.
42. A truck which originally cost $25,000 has an estimated salvage value of $5,000 at the end of
its 10 year estimated useful life and accumulated depreciation after 3 years of $6,000.
Assuming that at the end of 3 years the truck's appraised fair market value is $21,000, then
the net amount to be reflected on the balance sheet for the truck would be
a. $19,000
b. $20,000
c. $21,000
d. $25,000
e. None of the above.

43. Normal repair and maintenance costs incurred in the recurring maintenance of equipment
should be
a. capitalized in the period incurred.
b. expensed in the period incurred.
c. allocated to expense in the future periods of benefit.
d. Both a and c.
e. None of the above.

44. Major equipment refurbishment costs that extend the equipment’s original anticipated useful
life should be
a. capitalized in the period incurred.
b. expensed in the period incurred.
c. allocated to expense in the future periods of benefit.
d. Both a and c.
e. None of the above.

45. On January 1, 20X2, Wilbur Company purchased equipment for $82,000. Wilbur uses
straight-line depreciation and estimates a sixteen-year useful life and a $6,000 salvage value
for the equipment. On December 31, 20X9, Wilbur sells the equipment for $40,000. In
recording this sale, Wilbur should reflect
a. a $2,000 gain.
b. an $8,000 loss.
c. a $4,000 loss.
d. no gain or loss.
e. None of these.

46. If equipment which originally cost $50,000 has accumulated depreciation of $25,000 through
the date of its resale at a price of $27,000, the journal entry to record this resale would
include a
a. credit to Equipment for $25,000.
b. credit to Gain on Sale for $2,000.
c. credit to Accumulated Depreciation for $25,000.
d. Both a and b.
e. None of the above.
47. If fully depreciated equipment that had no salvage value is disposed of at no additional cost,
then the journal entry to reflect the disposal would include a
a. debit to Accumulated Depreciation.
b. debit to Loss on Disposal.
c. debit to Equipment.
d. credit to Gain on Disposal.
e. None of the above.

48. The allocation of an intangible asset’s capitalized cost to expense over its anticipated useful
life is referred to as
a. amortization.
b. depreciation.
c. depletion.
d. matching.
e. None of the above.

49. The research and development costs incurred by a company in the development of
technology that results in a patent that has probable future benefit should be
a. capitalized as part of the cost of the asset (“Patent”).
b. expensed in the the period incurred.
c. expensed in the future when the benefits of the patent are realized.
d. None of the above.

50. The amount of Goodwill reflected on a company’s balance sheet

a. represents the true fair market value of the company above the book value of its
assets less liabilities at the end of each year.
b. is allocated to expense over a period not to exceed 20 years.
c. represents the costs associated with the purchase of another business in excess of the
fair market value of that business’ acquired assets less assumed liabilities, less any
accumulated amortization to date.
d. Both b and c are true.
e. None of the above.

51. The following information is available for a company currently considered for potential
acquisition:

Appraised
Book Value Fair Market Value

Assets $550,000 $900,000

Liabilities $350,000 $350,000

Determine the amount of goodwill to be recorded on the acquiring company’s books if all of
this business’ assets were acquired and liabilities were assumed at a price of $1,000,000
cash.
a. $ 100,000
b. $ 200,000
c. $ 450,000
d. $ 550,000
e. None of the above.
52. On 4/1/X7 ABC Corp. borrows $1,000,000 under a note payable to a bank due in two years
with interest at an annual rate of 8% all due at maturity. Interest expense under this note for
the calendar years 20X7, 20X8, and 20X9, respectively would be:
a. $0, $0, $160,000
b. $60,000, $80,000, $20,000
c. $80,000, $80,000, $0
d. $0, $0, $1,160,000
e. None of the above.

53. On 10/1 Jones borrowed $70,000 on a 30-year, fully amortizing mortgage note from Zion's
Bank at a fixed annual interest rate of 8%, compounding monthly, with monthly payments of
$513.64 due on the 31st of each month. Assuming payments are made on a timely basis, the
journal entry to be made with the second monthly payment on 11/30 would include a debit to
a. Interest Expense for $466.46.
b. Interest Expense for $513.64.
c. Mortgage Payable for $46.97.
d. Mortgage Payable for $47.29.
e. None of the above.

54. Given the information in problem #54, the balance in the Mortgage Note Payable following
the second monthly payment made on 11/30 would amount to
a. $69,533.54
b. $69,486.36
c. $69,999.53
d. $69,952.71
e. None of the above.
55. Bonds are issued by a company:
a. to raise capital through equity financing.
b. to raise capital from the sale of ownership interests in the company.
c. to invest excess funds in financial markets.
d. to borrow funds from financial markets.
e. to secure themselves against legal liability for their actions.

56. Debentures are

a. secured or mortgage-backed bonds.
b. convertible bonds.
c. the terms governing a bond issuance.
d. unsecured bonds.
e. serial bonds.

57. The par value of a company’s common stock reflects

a. the fair market value of the stock at the date of issuance.
b. the fair market value at the date of financial statement preparation.
c. the amount of cash received upon the issuance of the stock.
d. None of the above.
58. River, Inc. issued for $13 per share 6,000 shares of $1 par value common stock. The journal
entry to record this transaction is
a. Cash 78,000
Common Stock, par value 6,000
Gain on Sale of Stock 72,000
b. Cash 78,000
Common Stock 78,000
c. Cash 78,000
Common Stock, par value 6,000
Retained Earnings 72,000
d. Cash 78,000
Common Stock, par value 6,000
Paid-in Capital in Excess
of Par Value 72,000

59. The issuance of preferred stock at a price above its par value would result in total capital
contributions reflected on the balance sheet equal to the number of shares issued times the
a. par value.
b. issuance price.
c. either the par value or issuance price, whichever is lower.
d. None of the above.

60. Benji, Inc. has outstanding 5,000 shares of 5% $100 par value, cumulative preferred stock,
and 10,000 shares of $50 par value common stock. If dividends in arrears amount to
$25,000, and the total cash dividend declared this year is $110,000, the total amounts
distributed to preferred and common stockholders are, respectively,
a. $25,000 and $85,000.
b. $50,000 and $60,000.
c. $35,000 and $75,000.
d. $36,667 and $73,333.
e. None of these.

61. Dividends in arrears applies only to

a. common stock.
b. cumulative preferred stock.
c. non-cumulative preferred stock.
d. Both a and b.
e. All of the above.

62. Which of the following sequences of dividend-related dates is in the correct chronological
order (earliest date first)?
a. Declaration date, payment date, record date
b. Payment date, declaration date, record date
c. Record date, declaration date, payment date
d. Declaration date, record date, payment date
e. None of these.
63. Dividends in arrears on preferred stock are recorded as a liability
a. in each year the arrearage is created.
b. on the date dividends are declared sufficient to pay the arrears.
c. on the date of record for dividends declared to pay the arrears.
d. dividends in arrears are never recorded as a liability.

64. Given the following information:

20X6 20X7
Sales Revenues $10,000 $30,000
Cost of Goods Sold $ 5,000 $10,000

the increase in sales revenues from 20X6 to 20X7 are said to have
a. increased by 200%.
b. increased by 300%.
c. doubled.
d. tripled.
e. Both a and c.
f. Both a and d.

65. Vertical analysis

a. is typically used on the balance sheet rather than the income statement.
b. eliminates the effects of changes in volume in analyzing the relationship of income
statement categories.
c. is not commonly used by financial analysts.
d. reflects the percentage changes from one year to the next in categories of the
financial statements.

66. If gross margin as a percentage of sales revenues decreases over the year and the cost per unit
of inventory purchases was stable throughout the year (no inflation or deflation in inventory
costs), then
a. sales prices per unit must have decreased during the year.
b. sales volume must have decreased during the year.
c. sales prices per unit must have increased during the year.
d. sales volume must have increased during the year.
The following is to be used to respond to problems 67-76.

XYZ Corp.
Balance Sheet
As of December 31, 20X6 & 20X7
20X6 20X7
Assets:
Current Assets—
Cash $10,000 $ 12,000
Accounts Receivable 25,000 32,000
Inventories 15,000 20,000
Total Current Assets 50,000 64,000
Operating Assets— 30,000 40,000
Total Assets $80,000 $104,000

Liabilities & Stockholders' Equity:

Current Liabilities
Accounts Payable $15,000 $ 16,000
Other Payables 10,000 14,000
Total Current Liabilities 25,000 30,000
Long Term Liabilities 19,000 29,000
Total Liabilities 44,000 59,000
Stockholders' Equity:
Common Stock (10,000 shares outstanding,
no par) 25,000 25,000
Retained Earnings 11,000 20,000
Total Liabilities and Stockholders' Equity $80,000 $104,000

XYZ Corp.
Income Statement
For the years ended December 31, 20X6 & 20X7

20X6 20X7
Sales Revenues $250,000 $325,000
Cost of Goods Sold 175,000 234,000
75,000 91,000
Selling and Administrative Expenses 70,000 82,000
Net Income $ 5,000 $ 9,000

67. Calculate the percentage increase in total assets from 12/31/X6 to 12/31/X7.
a. 23% increase.
b. 30% increase.
c. 130% increase.
d. None of the above.
68. Calculate the 20X7 current ratio (round to the nearest tenth).
a. .4
b. 1.5
c. 1.8
d. 2.1
e. None of the above.

69. Calculate the 20X7 acid test ratio (round to the nearest tenth).
a. .4
b. 1.5
c. 1.8
d. 2.1
e. None of the above.

70. Calculate the 20X7 number of days sales in receivables (average receivable collection
period) assuming all sales are made on account (round to the nearest tenth of day).
a. 10.2
b. 11.4
c. 32.0
d. 35.8
e. None of the above.

71. Calculate the 20X7 inventory turnover (round to the nearest tenth).
a. 11.7
b. 13.4
c. 15.6
d. 18.6
e. None of the above.

72. Calculate the debt to total asset ratio at 12/31/X7 (round to the nearest tenth).
a. .3
b. .6
c. 1.3
d. 1.8

73. Calculate the total debt to total equity ratio at 12/31/X7 (round to the nearest tenth).
a. .4
b. .6
c. .7
d. 1.3
e. None of the above.

74. Calculate the book value per share at 12/31/X7.

a. $ 4.50 per share.
b. $ 5.90 per share.
c. $10.40 per share.
d. None of the above.
75. Calculate the P/E ratio (price/earnings) at 12/31/X7 for the XYZ, Corp. common stock if it is
trading at a price of $18.00 per share on that date (round to the nearest tenth).
a. 10
b. 20
c. 30
d. 40
e. None of the above.

76. Calculate the market price of a share of XYZ Corp. common stock at 12/31/X7 at a P/E ratio
of 30.
a. $9
b. $18
c. $27
d. $36
e. None of the above.

77. Generally speaking, improved efficiency in managing inventory will be reflected in the
inventory turnover ratio by
a. a decrease in the ratio from one period to the next.
b. an increase in the ratio from one period to the next.
c. no change in the ratio from one period to the next.
d. The inventory turnover ratio does not reflect management efficiency.

78. The current ratio measures a company’s

a. profitability.
b. leverage.
c. liquidity.
d. value.
e. None of the above.

79. Increased volume of credit sales will always

a. increase the accounts receivable turnover ratio.
b. decrease gross margin as a percentage of sales revenues.
c. decrease the number of days sales in inventory.
d. Both a and c.
e. None of the above.
SOLUTIONS
1. b Inventory 2,000
Accounts Payable 2,000

2. d Accounts Payable 100

Inventory 100

3. c Accounts Payable 1,900

Cash 1,862
Inventory 38

4. d Accounts Receivable 2,000

Sales Revenues 2,000
Cost of Goods Sold 980
Inventory 980

5. a Sales Returns and Allowances 200

Accounts Receivable 200
Inventory 98
Cost of Goods Sold 98

6. c Cash 1,782
Sales Discounts 18
Accounts Receivable 1,800

7. e Sales Returns and Allowances and Sales Discounts are both contra-revenue
accounts.

8. a

9. d Sales Revenues $100,000

Less: Sales Returns and Allow. (7,000)
Sales Discounts (3,000)
Net Sales Revenues $ 90,000
Less: Cost of Goods Sold
( .4 × 90,000) (36,000)
Gross Margin $ 54,000

10. e

11. c
12. d

Allowance for
Uncollectible Accounts
2,500 Balance before
adjustment
2,300
Adjustment
4,800a Balance after adjustment

a
Accounts Receivable × Est. Uncollectible Accounts
80,000 × .06 = 4,800

13. b
Allowance for
Uncollectible Accounts
1,500 Balance before
adjustment
5,500
Adjustment
4,000a Balance after adjustment

a
Accounts Receivable Balance × % Est. Uncollectible Accounts
($40,000 × .10 = $4,000)

Bad Debt Expense 5,500

Allowance for Uncollectible A/R 5,500

14. c
15. e Calculation of Estimated Uncollectible A/R:

Days Past Due Accounts Receivable Est. Uncollectible Amount

Current $100,000 1% $1,000
0 - 30 days $ 50,000 3% $1,500
30 - 60 days $ 20,000 5% $1,000
60 - 90 days $ 10,000 20% $2,000
90 + days $ 8,000 40% $3,200
$188,000 $8,700

Allowance for
Uncollectible Accounts
500 Balance before
adjustment
8,200
Adjustment
8,700 Balance after adjustment

Bad Debt Expense 8,200

Allowance for Uncollectible A/R 8,200

16. b

Accounts Receivable
Beg. Balance 50,000
Sales on A/R 210,000
199,000 Collections on A/R
3,000 Writeoffs of A/R

End. Balance 58,000

17. b

18. b A failure to make an adjusting entry for

Bad Debt Expense xxx

Allowance for Uncollectible A/R xxx

Would overstate assets and understate expenses and therefore overstate net income.

19. c
20. a

Allowance for Uncollectible

A/R
xxx Prior year’s estimate of
uncollectible A/R
Actual writeoffs in xxx
current year
xxx Balance before adjustment
Prior year at the end of the current
overestimation
year

21. e Cash 97
Credit Card Expense 3
Sales Revenues 100

22. a FIFO: 9 units @ $40/ea. = $360

5 units @ $46/ea. = $230
14 units $590

23. b LIFO: 12 units @ $46/ea. = $552

2 units @ $40/ea. = $ 80
14 units $632

24. d Moving Weighted Average:

9 units @ $40/ea. = $360
12 units @ $46/ea. = $552
21 units $912

Average Cost: $912 ÷ 21 = $ 43.43/ea.

Sale #2- 14 units × $43.43 = $608.02

25. b

Inventory
Beg. Balance 1,200
Purchase 3,250
2,340 Sale (18@ $130)
Purchase 1,450
2,480 Sale (10@ $145)
( 7@ $130)
( 1@ $120)
Purchase 3,000
1,350 Sale ( 9@ $150)
End. Balance 2,730

26. e

Cost of Goods Sold

12/5 Sale:
(10@ $120)
( 8@ $130) 2,240

12/19 Sale:
(17@ $130)
( 1@ $145) 2,355

12/29 Sale:
( 9@$145) 1,305
5,900

27. a Oldest inventory is sold first.

28. a Method Cost of Goods Sold Net Income Tax Liability

FIFO Higher Lower Lower
LIFO Lower Higher Higher

29. b Method Cost of Goods Sold Net Income

FIFO Lower Higher
LIFO Higher Lower

30. b Method Cost of Goods Sold Ending Inventory

FIFO Lower Higher
LIFO Higher Lower

31. d
32. c

33. d

34. e

35. b Wage Expense 10,000

Employee FICA WH Payable 600
Employee FIT WH Payable 1,800
Employee SIT WH Payable 900
Employee Union Dues Payable 300
Wages Payable 6,400

Payroll Tax Expense 800

Employer FICA Payable 600
FUI Payable 120
SUI Payable 80

36. c Cash 19.40

Credit Card Expense .60
Sales Revenues 20.00

37. b Cash 107

Sales Revenues 100
Sales Tax Payable 7

38. d The $1,000 of prepaid insurance is reflected as a separate asset “Prepaid Insurance”
rather than capitalized as part of the cost of the truck.

39. c Partial year depreciation in 20X1 (purchased on 7/1/X1):

$70,000 - $3,100 = $6,690 depreciation per year
10
Partial year = $6,690 × ½ year = $3,345

40. e

Accumulated Depreciation
3,345 20X1 Depreciation
6,690 20X2 Depreciation
10,035 12/31/X2 Balance
41. a 20X1 Depreciation: $70,000 - $3,100 = $ .669/per unit
100,000 units depreciation

20X1 units of production = 10,000 units × $ .669 = $6,690 depreciation

Book Value @ 12/31/X1: Cost $ 70,000

Less: Accumulated Depreciation 6,690
$ 63,310

42. a Book value is to be reflected on the balance sheet.

Book Value: Cost $ 25,000
Less: Accumulated Depreciation 6,000
$ 19,000

43. b

44. d

45. c Book value at the date of sale:

Cost $82,000
Less: Accumulated Depreciation
$82,000 - $6,000 × 8 yrs. 38,000
16 yrs.
$44,000

Gain(Loss) on sale is calculated as:

Sales Price $40,000
Less: Book Value 44,000
Loss on Sale $( 4,000)

Cash 40,000
Accumulated Depreciation 38,000
Loss on Sale 4,000
Equipment 82,000

46. b Cash 27,000

Accumulated Depreciation 25,000
Equipment 50,000
Gain on Sale 2,000

47. a Accumulated Depreciation xxx

Equipment xxx

48. a

49. b

50. c
51. c Purchase Price for Business $1,000,000
Less; FMV of Assets less Liabilities:
Assets $900,000
Liabilities ( 350,000)

Net Assets
Purchased 550,000
Goodwill purchased $ 450,000

52. b 20X7 1,000,000 × 8% × 9/12 = $60,000

20X8 1,000,000 × 8% × 12/12 = 80,000
20X9 1,000,000 × 8% × 3/12 = 20,000

53. d 10/31/97 payment:

Interest = 70,000 × 8% × 1/12 = 466.67
Principal = 513.64 - 446.64 = 46.97

11/30/97 payment
Interest = 69,953.03 × 8% × 1/12 = 466.35
Principal = 513.64 - 446.35 = 47.29

entry:
Interest Expense 466.35
Mortgage Payable 47.29
Cash 513.64

54. e

Mortgage Note Payable

70,000 Beg. Balance
Payment 10/31 46.97
Payment 11/30 47.29
69,905.74 Balance @ 11/30

55. d

56. d

57. d

58. d

59. b Total capital contributions equal any par value contributed plus paid in capital in excess
of par.
60. b Preferred Common
Preferred: Arrears $25,000
Current (5% × 5,000 × $100) x 2 years $25,000
Remainder to Common $60,000
$50,000 $60,000

61. b

62. d

63. b

64. f % increase = 30,000 - 10,000 = 2.0 or 200%

10,000

65. b

66. a

67. b % increase = 104,000 - 80,000 = .3 or 30%

80,000

68. d Current Assets = 64,000 = 2.1

Current Liabilities 30,000

69. b Quick Assets = 12,000 + 32,000 = 1.5

Current Liabilities 30,000

70. c
365 365
= = 32.01
A/R Turnover 11.4

A/R Turnover = Sales Revenues = 325,000 = 11.4

Ave. A/R Balance
( 25,000 + 32,000
)
2
71. b

Inventory = Cost of Goods Sold = 234,000 = 13.4

Turnover Ave. Inv. Balance 15,000 + 20,000
( )
2

72. b Total Liabilities = 59,000 = .57

Total Assets 104,000

73. d Total Liabilities = 59,000 = 1.31

Total Stockholder’s Equity 45,000

74. a
Total Owners’ Equity 45,000
Book Value Per Share = = = $ 4.50
# of Shares of Stock 10,000

75. b
Market Price per Share $18.00
Price/Earnings Ratio = = = 20
EPS $ .90

Net Income 9,000

EPS = = = .90
# Shares Common Stock 10,000

76. c Market Price Per Share = EPS × P/E Ratio

27 = .90 × 30

77. b

78. c

79. e Increased credit sales will not necessarily increase the turnover ratio if the average
balance of accounts receivable also increases significantly.