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  1. Glaus
    Corp. signed a three-month, zero-interest-bearing note on November 1, 2010 for
    the purchase of $150,000 of inventory. The face value of the note was $152,205.
    Assuming Glaus used a “Discount on Note Payable” account to initially record
    the note and that the discount will be amortized equally over the 3-month
    period, the adjusting entry made at December 31, 2010 will include a

    a. debit to Discount on
    Note Payable for $735.

    b. debit to Interest
    Expense for $1,470.

    c. credit to Discount on
    Note Payable for $735.

    d. credit to Interest
    Expense for $1,470.
  2. The
    effective interest on a 12-month, zero-interest-bearing note payable of
    $300,000, discounted at the bank at 10% is

    a. 10.87%.

    b. 10%.

    c. 9.09%.

    d. 11.11%.
  3. On
    September 1, Hydra purchased $9,500 of inventory items on credit with the terms
    1/15, net 30, FOB destination. Freight charges were $200. Payment for the
    purchase was made on September 18. Assuming Hydra uses the perpetual inventory
    system and the net method of accounting for purchase discounts, what amount is
    recorded as inventory from this purchase?

    a. $9,405.

    b. $9,605.

    c. $9,700.

    d. $9,500.
  4. Sodium Inc. borrowed $175,000 on April 1. The
    note requires interest at 12% and principal to be paid in one year. How much
    interest is recognized for the period from April 1 to December 31?

    a. $0.

    b. $21,000.

    c. $5,250.

    d. $15,750.
  5. Collier borrowed $175,000 on October 1 and is
    required to pay $180,000 on March 1. What amount is the note payable recorded
    at on October 1 and how much interest is recognized from October 1 to December
    31?

    a. $175,000 and $0.

    b. $175,000 and $3,000.

    c. $180,000 and $0.

    d. $175,000 and $5,000.
  6. Purest owes $1 million that is due on February
    28. The company borrows $800,000 on February 25 (5-year note) and uses the
    proceeds to pay down the $1 million note and uses other cash to pay the
    balance. How much of the $1 million note is classified as long-term in the
    December 31 financial statements.

    a. $1,000,000.

    b. $0.

    c. $800,000.

    d. $200,000.
  7. Vista newspapers sold 4,000 of annual
    subscriptions at $125 each on September 1. How much unearned revenue will exist
    as of December 31?

    a. $0.

    b. $333,333.

    c. $166,667.

    d. $500,000.
  8. Purchase Retailer made cash sales during the
    month of October of $132,600. The sales are subject to a 6% sales tax that was
    also collected. Which of the following would be included in the summary journal
    entry to reflect the sale transactions?

    a. Debit Cash for
    $132,600.

    b. Credit Sales Tax
    Payable for $7,506.

    c. Credit Sales for
    $125,094.

    d. Credit Sales Tax
    Payable for $7,956.
  9. On
    February 10, 2010, after issuance of its financial statements for 2009, House
    Company entered into a financing agreement with Lebo Bank, allowing House
    Company to borrow up to $4,000,000 at any time through 2012. Amounts borrowed
    under the agreement bear interest at 2% above the bank's prime interest rate
    and mature two years from the date of loan. House Company presently has
    $1,500,000 of notes payable with First National Bank maturing March 15, 2010.
    The company intends to borrow $2,500,000 under the agreement with Lebo and
    liquidate the notes payable to First National. The agreement with Lebo also
    requires House to maintain a working capital level of $6,000,000 and prohibits
    the payment of dividends on common stock without prior approval by Lebo
    Bank. From the above information
    only, the total short-term debt of House Company as of the December 31, 2010
    balance sheet date is

    a. $0.

    b. $1,500,000.

    c. $2,000,000.

    d. $4,000,000.
  10. On December 31, 2010, Irey Co. has $2,000,000
    of short-term notes payable due on February 14, 2011. On January 10, 2011, Irey
    arranged a line of credit with County Bank which allows Irey to borrow up to
    $1,500,000 at one percent above the prime rate for three years. On February 2,
    2011, Irey borrowed $1,200,000 from County Bank and used $500,000 additional
    cash to liquidate $1,700,000 of the short-term notes payable. The amount of the
    short-term notes payable that should be reported as current liabilities on the
    December 31, 2010 balance sheet which is issued on March 5, 2011 is

    a. $0.

    b. $300,000.

    c. $500,000.

    d. $800,000.
  11. Stine Co. is a retail store operating in a state
    with a 6% retail sales tax. The retailer may keep 2% of the sales tax
    collected. Stine Co. records the sales tax in the Sales account. The amount
    recorded in the Sales account during May was $148,400.



    The amount of sales taxes (to the nearest
    dollar) for May is

    a. $8,726.

    b. $8,400.

    c. $8,904.

    d. $9,438.
  12. Stine Co. is a retail store operating in a state
    with a 6% retail sales tax. The retailer may keep 2% of the sales tax
    collected. Stine Co. records the sales tax in the Sales account. The amount
    recorded in the Sales account during May was $148,400.

    The amount of sales taxes payable (to the
    nearest dollar) to the state for the month of May is

    a. $8,551.

    b. $8,232.

    c. $8,726.

    d. $9,249.
  13. Vopat, Inc., is a retail store operating in a
    state with a 5% retail sales tax.
    The state law provides that the retail sales tax collected during the
    month must be remitted to the state during the following month. If the amount collected is remitted to
    the state on or before the twentieth of the following month, the retailer may
    keep 3% of the sales tax collected.
    On April 10, 2010, Vopat remitted $81,480 tax to the state tax division
    for March 2010 retail sales. What was Vopat 's March 2010 retail sales subject
    to sales tax?

    a. $1,629,600.

    b. $1,596,000.

    c. $1,680,000.

    d. $1,645,000.
  14. Jenkins
    Corporation has $2,500,000 of short-term debt it expects to retire with
    proceeds from the sale of 75,000 shares of common stock. If the stock is sold for $20 per share
    subsequent to the balance sheet date, but before the balance sheet is issued,
    what amount of short-term debt could be excluded from current liabilities?

    a. $1,500,000

    b. $2,500,000

    c. $1,000,000

    d. $0
  15. Ermler
    Corporation has $1,800,000 of short-term debt it expects to retire with
    proceeds from the sale of 60,000 shares of common stock. If the stock is sold for $20 per share
    subsequent to the balance sheet date, but before the balance sheet is issued,
    what amount of short-term debt could be excluded from current liabilities?

    a. $1,200,000

    b. $1,800,000

    c. $600,000

    d. $0
  16. Ermler
    Corporation has $1,800,000 of short-term debt it expects to retire with
    proceeds from the sale of 60,000 shares of common stock. If the stock is sold for $20 per share
    subsequent to the balance sheet date, but before the balance sheet is issued,
    what amount of short-term debt could be excluded from current liabilities?

    a. $1,200,000

    b. $1,800,000

    c. $600,000

    d. $0
  17. Preston
    Co., which has a taxable payroll of $500,000, is subject to FUTA tax of 6.2%
    and a state contribution rate of 5.4%. However, because of stable employment
    experience, the company’s state rate has been reduced to 2%. What is the total amount of federal and
    state unemployment tax for Preston Co.?

    a. $58,500

    b. $41,000

    c. $20,000

    d. $14,000
  18. Roark
    Co., which has a taxable payroll of $400,000, is subject to FUTA tax of 6.2%
    and a state contribution rate of 5.4%. However, because of stable employment
    experience, the company’s state rate has been reduced to 2%. What is the total
    amount of federal and state unemployment tax for Roark Co.?

    a. $46,800

    b. $32,800

    c. $16,000

    d. $11,200
  19. A
    company gives each of its 50 employees (assume they were all employed
    continuously through 2010 and 2011) 12 days of vacation a year if they are
    employed at the end of the year.
    The vacation accumulates and may be taken starting January 1 of the next
    year. The employees work 8 hours
    per day. In 2010, they made $14
    per hour and in 2011 they made $16 per hour. During 2011, they took an average of 9 days of vacation
    each. The company’s policy is to
    record the liability existing at the end of each year at the wage rate for that
    year. What amount of
    vacation liability would be reflected on the 2010 and 2011 balance sheets,
    respectively?

    a. $67,200; $93,600

    b. $76,800; $96,000

    c. $67,200; $96,000

    d. $76,800; $93,600
  20. A company gives each of its
    50 employees (assume they were all employed continuously through 2010 and 2011)
    12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken
    starting January 1 of the next year.
    The employees work 8 hours per day. In 2010, they made $17.50 per hour and in 2011 they made $20
    per hour. During 2011, they took
    an average of 9 days of vacation each.
    The company’s policy is to record the liability existing at the end of
    each year at the wage rate for that year.
    What amount of vacation liability would be reflected on the 2010 and
    2011 balance sheets, respectively?

    a. $84,000; $117,000

    b. $96,000; $120,000

    c. $84,000; $120,000

    d. $96,000; $117,000
  21. The total payroll of Teeter Company for the
    month of October, 2010 was $360,000, of which $90,000 represented amounts paid
    in excess of $100,000 to certain employees. $300,000 represented amounts paid to employees in excess of
    the $7,000 maximum subject to unemployment taxes. $90,000 of federal income
    taxes and $9,000 of union dues were withheld. The state unemployment tax is 1%,
    the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on
    an employee’s wages to $100,000 and 1.45% in excess of $90,000. What amount should Teeter record as
    payroll tax expense?

    a. $118,620.

    b. $113,040.

    c. $23,040.

    d. $28,440.



  22. What is the amount of expense relative to
    compensated absences that should be reported on Vargas’s income statement for
    2009?

    a. $0.

    b. $68,880.

    c. $75,600.

    d. $72,240.



  23. What is the amount of the accrued liability for
    compensated absences that should be reported at December 31, 2011?

    a. $94,920.

    b. $90,720.

    c. $79,800.

    d. $95,760.
  24. CalCount pays a weekly payroll of $85,000 that
    includes federal taxes withheld of $12,700, FICA taxes withheld of $7,890, and
    401(k) withholdings of $9,000. What is the effect of assets and liabilities
    from this transaction?

    a. Assets decrease
    $85,000 and liabilities do not change.

    b. Assets decrease
    $64,410 and liabilities increase $20,590.

    c. Assets decrease
    $64,410 and liabilities decrease $20,590.

    d. Assets decrease
    $55,410 and liabilities increase $29,590.
  25. CalCount provides its employees two weeks of
    paid vacation per year. As of December 31, 65 employees have earned two weeks
    of vacation time to be taken the following year. If the average weekly salary
    for these employees is $950, what is the required journal entry?

    a. Debit Wages Expense
    for $123,500 and credit Vacation Wages Payable for $123,500.

    b. No journal entry
    required.

    c. Debit Vacation Wages
    Payable for $123,000 and credit Wages Expense for $123,000.

    d. Debit Wages Expense
    for $61,750 and credit Vacation Wages Payable for $61,750.
  26. Tender Foot Inc. is involved in litigation
    regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined
    that it is possible that they may lose the case. The attorneys estimated that
    there is a 40% chance of losing. If this is the case, their attorney estimated
    that the amount of any payment would be $500,000. What is the required journal
    entry as a result of this litigation?

    a. Debit Litigation
    Expense for $500,000 and credit Litigation liability for $500,000.

    b. No journal entry is
    required.

    c. Debit Litigation
    Expense for $200,000 and credit Litigation Liability for $200,000.

    d. Debit Litigation
    Expense for $300,000 and credit Litigation Liability for $300,000.
  27. Recycle Exploration is involved with innovative
    approaches to finding energy reserves. Recycle recently built a facility to
    extract natural gas at a cost of $15 million. However, Recycle is also legally
    responsible to remove the facility at the end of its useful life of twenty
    years. This cost is estimated to be $21 million (the present value of which is
    $8 million). What is the journal entry required to record the asset retirement
    obligation?

    a. No journal entry
    required.

    b. Debit Natural Gas
    Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000

    c. Debit Natural Gas
    Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000.

    d. Debit Natural Gas
    Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.
  28. Warranty4U provides extended service contracts
    on electronic equipment sold through major retailers. The standard contract is
    for three years. During the current year, Warranty4U provided 21,000 such
    warranty contracts at an average price of $81 each. Related to these contracts,
    the company spent $200,000 servicing the contracts during the current year and
    expects to spend $1,050,000 more in the future. What is the net profit that the
    company will recognize in the current year related to these contracts?

    a. $451,000.

    b. $1,501,000.

    c. $150,333.

    d. $367,000.
  29. Electronics4U manufactures high-end whole home
    electronic systems. The company provides a one-year warranty for all products
    sold. The company estimates that the warranty cost is $200 per unit sold and
    reported a liability for estimated warranty costs $6.5 million at the beginning
    of this year. If during the current year, the company sold 50,000 units for a
    total of $243 million and paid warranty claims of $7,500,000 on current and
    prior year sales, what amount of liability would the company report on its
    balance sheet at the end of the current year?

    a. $2,500,000.

    b. $3,500,000.

    c. $9,000,000.

    d. $10,000,000.
  30. A
    company offers a cash rebate of $1 on each $4 package of light bulbs sold
    during 2010. Historically, 10% of
    customers mail in the rebate form.
    During 2010, 4,000,000 packages of light bulbs are sold, and 140,000 $1
    rebates are mailed to customers.
    What is the rebate expense and liability, respectively, shown on the
    2010 financial statements dated December 31?

    a. $400,000; $400,000

    b. $400,000; $260,000

    c. $260,000; $260,000

    d. $140,000; $260,000
  31. A
    company buys an oil rig for $1,000,000 on January 1, 2010. The life of the rig is 10 years and the
    expected cost to dismantle the rig at the end of 10 years is $200,000 (present
    value at 10% is $77,110). 10% is
    an appropriate interest rate for this company. What expense should be recorded
    for 2010 as a result of these events?

    a. Depreciation expense
    of $120,000

    b. Depreciation expense
    of $100,000 and interest expense of $7,711

    c. Depreciation expense
    of $100,000 and interest expense of $20,000

    d. Depreciation expense
    of $107,710 and interest expense of $7,711
  32. Ziegler
    Company self insures its property for fire and storm damage. If the company were to obtain insurance
    on the property, it would cost them $1,000,000 per year. The company estimates that on average
    it will incur losses of $800,000 per year. During 2010, $350,000 worth of losses were sustained. How
    much total expense and/or loss should be recognized by Ziegler Company for
    2010?

    a. $350,000 in losses
    and no insurance expense

    b. $350,000 in losses
    and $450,000 in insurance expense

    c. $0 in losses and
    $800,000 in insurance expense

    d. $0 in losses and
    $1,000,000 in insurance expense
  33. A
    company offers a cash rebate of $1 on each $4 package of batteries sold during
    2010. Historically, 10% of
    customers mail in the rebate form.
    During 2010, 6,000,000 packages of batteries are sold, and 210,000 $1
    rebates are mailed to customers.
    What is the rebate expense and liability, respectively, shown on the
    2010 financial statements dated December 31?

    a. $600,000; $600,000

    b. $600,000; $390,000

    c. $390,000; $390,000

    d. $210,000; $390,000
  34. A
    company buys an oil rig for $2,000,000 on January 1, 2010. The life of the rig is 10 years and the
    expected cost to dismantle the rig at the end of 10 years is $400,000 (present
    value at 10% is $154,220). 10% is
    an appropriate interest rate for this company. What expense should be recorded
    for 2010 as a result of these events?

    a. Depreciation expense
    of $240,000

    b. Depreciation expense
    of $200,000 and interest expense of $15,422

    c. Depreciation expense
    of $200,000 and interest expense of $40,000

    d. Depreciation expense
    of $215,422 and interest expense of $15,422
  35. Palmer
    Frosted Flakes Company offers its customers a pottery cereal bowl if they send
    in 3 boxtops from Palmer Frosted Flakes boxes and $1.00. The company estimates
    that 60% of the boxtops will be redeemed. In 2010, the company sold 675,000
    boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000
    bowls. If the bowls cost Palmer Company $2.50 each, how much liability for
    outstanding premiums should be recorded at the end of 2010?

    a. $25,000

    b. $37,500

    c. $62,500

    d. $87,500
  36. LeMay
    Frosted Flakes Company offers its customers a pottery cereal bowl if they send
    in 4 boxtops from LeMay Frosted Flakes boxes and $1.00. The company estimates
    that 60% of the boxtops will be redeemed. In 2010, the company sold 500,000
    boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000
    bowls. If the bowls cost LeMay Company $2.50 each, how much liability for
    outstanding premiums should be recorded at the end of 2010?

    a. $20,000

    b. $30,000

    c. $50,000

    d. $70,000




  37. The premium expense for 2010 is

    a. $25,000.

    b. $30,000.

    c. $35,000.

    d. $50,000.




  38. The estimated liability for premiums at
    December 31, 2010 is

    a. $7,500.

    b. $10,000.

    c. $17,500.

    d. $20,000.
  39. The estimated liability for premiums at
    December 31, 2011 is

    a. $11,250.

    b. $21,250.

    c. $22,500.

    d. $42,500.
  40. Winter Co. is being sued for illness caused to
    local residents as a result of negligence on the company's part in permitting
    the local residents to be exposed to highly toxic chemicals from its plant.
    Winter's lawyer states that it is probable that Winter will lose the suit and
    be found liable for a judgment costing Winter anywhere from $1,200,000 to
    $6,000,000. However, the lawyer states that the most probable cost is
    $3,600,000. As a result of the above facts, Winter should accrue

    a. a loss contingency of
    $1,200,000 and disclose an additional contingency of up to $4,800,000.

    b. a loss contingency of
    $3,600,000 and disclose an additional contingency of up to $2,400,000.

    c. a loss contingency of
    $3,600,000 but not disclose any
    additional contingency.

    d. no loss contingency
    but disclose a contingency of $1,200,000 to $6,000,000.
  41. . On January 3, 2010, Boyer Corp. owned a machine
    that had cost $200,000. The accumulated depreciation was $120,000, estimated
    salvage value was $12,000, and fair market value was $320,000. On January 4,
    2010, this machine was irreparably damaged by Pine Corp. and became worthless.
    In October 2010, a court awarded damages of $320,000 against Pine in favor of
    Boyer. At December 31, 2010, the final outcome of this case was awaiting appeal
    and was, therefore, uncertain. However, in the opinion of Boyer’s attorney,
    Pine’s appeal will be denied. At December 31, 2010, what amount should Boyer
    accrue for this gain contingency?

    a. $320,000.

    b. $260,000.

    c. $200,000.

    d. $0.
  42. Presented below is information available for
    Morton Company.

    Current Assets

    Cash $ 4,000

    Short-term
    investments 75,000

    Accounts
    receivable 61,000

    Inventories 110,000

    Prepaid
    expenses 30,000

    Total current assets $280,000

    Total current liabilities are
    $120,000. The acid-test ratio for Morton is

    a. 2.33 to 1.

    b. 2.08 to 1.

    c. 1.17 to 1.

    d. .54 to 1.
  43. On September 1, 2010, Herman Co. issued a note
    payable to National Bank in the amount of $1,200,000, bearing interest at 12%,
    and payable in three equal annual principal payments of $400,000. On this date,
    the bank's prime rate was 11%. The first payment for interest and principal was
    made on September 1, 2011. At December 31, 2011, Herman should record accrued
    interest payable of

    a. $48,000.

    b. $44,000.

    c. $32,000.

    d. $29,334.
  44. Included in Vernon Corp.'s liability account
    balances at December 31, 2010, were the following:

    7% note payable issued October 1, 2010, maturing
    September 30, 2011 $250,000

    8% note payable issued April 1, 2010, payable in
    six equal annual

    installments
    of $150,000 beginning April 1, 2011 600,000

    Vernon's December 31, 2010 financial
    statements were issued on March 31, 2011. On January 15, 2011, the entire
    $600,000 balance of the 8% note was refinanced by issuance of a long-term
    obligation payable in a lump sum. In addition, on March 10, 2011, Vernon consummated a noncancelable
    agreement with the lender to refinance the 7%, $250,000 note on a long-term
    basis, on readily determinable terms that have not yet been implemented. On the
    December 31, 2010 balance sheet, the amount of the notes payable that Vernon should classify as short-term
    obligations is

    a. $175,000.

    b. $125,000.

    c. $50,000.

    d. $0.
  45. Neer
    Co. has a probable loss that can only be reasonably estimated within a range of
    outcomes. No single amount within the range is a better estimate than any other
    amount. The loss accrual should be

    a. zero.

    b. the maximum of the
    range.

    c. the mean of the
    range.

    d. the minimum of the
    range.
  46. In March 2011, an explosion occurred at Kirk
    Co.'s plant, causing damage to area properties. By May 2011, no claims had yet
    been asserted against Kirk. However, Kirk's management and legal counsel
    concluded that it was reasonably possible that Kirk would be held responsible
    for negligence, and that $4,000,000 would be a reasonable estimate of the
    damages. Kirk's $5,000,000 comprehensive public liability policy contains a
    $400,000 deductible clause. In Kirk's December 31, 2010 financial statements,
    for which the auditor's fieldwork was completed in April 2011, how should this
    casualty be reported?

    a. As a note disclosing
    a possible liability of $4,000,000.

    b. As an accrued
    liability of $400,000.

    c. As a note disclosing
    a possible liability of $400,000.

    d. No note disclosure of
    accrual is required for 2010 because the event occurred in 2011.

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