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Which of the following is the most important internal control over cash from payments on accounts receivable?
Separate cash-handling duties from cash-accounting duties
A separate account for each customer is kept in a:
Under the allowance method, the entry to write off a $2,600 uncollectible account includes a:
debit to Allowance for Uncollectible Accounts for $2,600.
There are two parties to a note and the creditor
has a note receivable and the debtor has a note payable.
The net realizable value of accounts receivable is the amount:
the company expects to collect from customers.
Trading securities purchased for $400,000 were valued at $410,000 at the end of the year. The adjusting entry to record this difference included a credit to
Unrealized Gain on Investments.
The allowance method that brings the balance of the allowance account to the needed amount as
determined by the aging schedule is
the aging-of-receivables method.
Allowance for Uncollectible Accounts is classified as:
a contra-asset account.
The percent-of-sales method of computing uncollectible accounts is used for:
interim statements because it is easier to use than the aging method.
Unrealized gains and losses occur when:
the cost of the investment differs from the current market value.
the investment has not been sold.
During the current year, Hampton Company purchased 200 shares of Hilton stock for $15,000 as a short-term investment. At the end of the year, the market value of the stock was $11,000. The Hampton Company’s financial statements for the current year show
an unrealized loss of $4,000 on the income statement and short-term investments of $11,000 on the balance sheet.
An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $7,200. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $2,000. The amount of the adjusting entry should be
Calculations: 7,200 (Final credit balance in the account) + 2,000 (Prior debt balance in the account = 9,200
The way to estimate uncollectible accounts by analyzing individual accounts receivable according to the length of time they have been outstanding is known as the
Alley Corporation uses the percent-of-sales method to estimate uncollectibles. For the year, uncollectible accounts expense is estimated to be $90,000. Given that the Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $16,000, what is the balance in Allowance for Uncollectible Accounts after all necessary adjusting entries are made?
- Calculations: 90,000 (Uncollectible accounts expense + 16,000 (Allowance credit balance) = 106,000
- LO: 5.3
Unrealized gains or losses on trading securities are reported on
the Income Statement as Other Revenue, Gains, and Losses.
The ABC Company is preparing its financial statements on December 31. During the year, they purchased IBM stock for $20,000. On December 31, the market value of the IBM stock is $8,000. The journal entry on December 31 will include a debit to
unrealized loss on investment for $12,000.
The following account balances were extracted from the accounting records of AD Corporation:
What is the net realizable value of the accounts receivable?
Allowance for Uncollectible Accounts $35,000
Uncollectible-Account Expense $60,000
- Calculations: 110,000 (A/R) - 35,000 (Allowance for uncollectible accounts) = 75,000
- LO: 5.3
The biggest risk of selling on credit is
the risk of not collecting some of the receivables
Trading securities purchased in 2010 for $85,000 were valued at $80,000 on December 31, 2010. The securities were sold at the beginning of 2011 for $83,000. The 2011 income statement should report a(n)
gain of $3,000.
Bigg and Talle Corporation uses the percent-of-sales method to estimate uncollectibles. Net credit sales for the current year amount to $5,000,000, and management estimates 2% will be uncollectible. Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $16,000. The amount of uncollectible account expense reported on the income statement will be
- Calculations: 5,000,000 (Credit sales) *.02 (Estimate of uncollectibles) = 100,000
- LO: 5.3
When a company sells a trading investment, the gain or loss on the sale is reported in the
other revenue, gains, and losses section of the Income Statement.
When a company receives a cash dividend from a trading investment, the journal entry includes a debit to
cash and a credit to dividend revenue.
A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the following:
1 - 30 days $40,000 1.5%
31 - 60 days $10,000 8.0%
Over 60 days$6,000 22.0%
Amounts over 90 days past due are written off. The credit balance in Allowance for Uncollectible Accounts was $520. The uncollectible-account expense for the year is
- Calculations: (40,000 * .015) + (10,000 * .08) + (6,000 * .22) = 600 + 800 + 1,320 = 2,720
- 2,720 - 520 (Credit already in allowance account) = 2,200
- LO: 5.3
Investments in trading securities are reported on the Balance Sheet at their _________ value.
Sales discounts appear in the financial statements
as a deduction from sales.
Under a perpetual inventory system, when a sale is made:
the company makes a journal entry to record the sale and the cost of goods sold.
Given the following data, what is the value of the cost of goods sold as determined by the FIFO method?
Sales revenue300 units at $15 per unit
Purchases240 units at $10 per unit
Beginning inventory120 units at $9 per unit
- 120 units @ 9= 1,080
- 180 units @10= 1,800
- 300 2,880
When using the average-cost method to determine the cost of inventory, the average cost per unit is calculated as the cost of goods:
available for sale, divided by the number of units available for sale.
Happy House Corporation reported net income of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been overstated by $25,000. The correct net income was:
Calculations: 425,000 (Net income) - 25,000 (Ending inventory overstated) = 400,000
The use of the FIFO method generally increases taxable income:
when prices are increasing.
Bronx Company’s ending inventory (at cost) was greater than the market value of the ending inventory. What adjusting entry is required to account for this difference?
Dr. Cost of Goods Sold; Cr. Inventory
In a merchandising business, gross profit is equal to sales revenue minus:
cost of goods sold only
A perpetual inventory system offers which of the following advantages?
This system helps to determine if there is a sufficient supply of inventory on hand to fill customer orders, just by reviewing the inventory records
Exter Co. receives terms of 2/10, n/30 on all invoices from Garn Industries. On January 15, 2011, Exter purchased items from Garn for $4,200, excluding taxes and shipping costs. What amount should Exter use as the purchase discount if the invoice was paid on January 28, 2011?
If the cost of goods sold is understated for the year, then
ending inventory is overstated for the year.
A company purchased inventory for $800 per unit. The inventory was sold for $1,000 per unit. The entries to record the sale for cash and the cost of a unit of inventory include debits to which of the following accounts?
Cash, $1,000; Cost of Goods Sold, $800
When the FIFO method is used, ending inventory is assumed to consist of the
most recently purchased units.
Crazy Fred’s sells item XJ15 for $1,000 per unit, and has a cost of goods sold percentage of 80%. The gross profit for selling 20 items
- Calculations: Revenue = 1,000 (Sales) * 20 (Price) = 20,000
- 20,000 (Revenue * (1 - .8) = 4,000
If ending inventory is overstated, then
stockholders’ equity is overstated.
Pat Company’s ending inventory (at cost) was $87,500. The company would have had to pay $100,000 to replace the ending inventory. Before consideration of the lower-of-cost-or-market rule, the company’s cost of goods sold was $60,000. Which of the following statements reflect the correct application of the lower-of-cost-or-market rule?
The ending Inventory balance will be $87,500, and Cost of Goods Sold will be $60,000.
When inventory prices are increasing, the FIFO costing method will generally yield a cost of goods sold that is
lower than cost of goods sold under the LIFO method.
An error in the ending inventory for the year ended December 31, 2010
automatically creates errors in cost of goods in the 2010 and 2011 financial statements.
Bonz, Inc. is using a perpetual inventory system with a December 31 year end date. The balance in the inventory account as of September 30 is equal to
beginning inventory as of January 1 plus all purchases from the beginning of the year through September 30, less all items sold from the beginning of the year through September 30.
The two main types of inventory accounting systems are
perpetual and periodic.
The cost of inventory that is still on hand and has not been sold to customers is called
inventory, a current asset that appears on the balance sheet.
Alberta Company has net purchases of $75,000, purchase returns of $7,000 and purchase discounts of $4,000. What were Alberta's gross purchases?
- Explanation: D) gross purchases - purchase returns - purchase discounts = net purchases
- gross purchases - 7,000 -4,000 = 75,000 gross purchases = 86,000
When comparing the results of LIFO and FIFO if inventory costs are decreasing
ending inventory will be higher using LIFO.
What happens when a LIFO liquidation occurs?
A company must dip into the older layers of inventory cost to compute the cost of goods sold
When determining the international aspects of inventory valuation
it can be difficult to compare a U.S. company against a foreign company if different inventory methods are used
Company A has inventory at the end of the year with a cost of $75,000. Under the lower-of-cost-or-market (LCM) rules, the value of the inventory is $72,600.The journal entry to record the write-down to LCM will
increase cost of goods sold and decrease ending inventory.
Potential liabilities that depend on future events arising out of past events are called
Amortizing the discount on bonds payable
increases the carrying amount of the bonds.
The accounting principle requiring that a company record the warranty expense in the same period that it records sales revenue is the
The Oven Store has a short-term note payable of $3,000. At maturity, the interest on the note is $200 and has not been accrued. The journal entry to record the payment of the note includes
all of the above.
The organization that purchases the bonds from an issuing corporation and resells them to its clients or sells the bonds for a commission is the
At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction current liabilities
increase and equity decreases.
The beginning balance in the Warranty Payable account was $50,000. Sales were $900,000 and warranty costs were estimated at 7% of sales. During the year, $55,000 was paid to settle warranty claims. As a result of these transactions, what is the amount of warranty expense for the year and what is the ending balance in Warranty Payable?
Calculations: Warranty expense for year = 900,000 (Sales * .07 (Warranty estimate) = 63,000 Warranty payable = 50,000 (Beginning balance) + 63,000 (Warranty expense) - 55,000 (Warranty claims paid) = 58,000 (Ending balance)
Sam’s Shoe Emporium issued a $10,000, 10-year, 10% bond dated January 1, at 97. The journal entry to record the issuance of the bond includes a
debit to cash for $9,700.
Coleman Company paid $750 cash to replace a part on equipment sold under warranty. To recognize the payment, which of the following are correct?
Debit Warranty Payable and credit Cash
A company has a contingent loss that can be estimated, but the chance of it occurring is remote. How should this contingency be reported?
It should not be accrued or reported in the notes to the financial statements
On December 12, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30-day, 9% note payable. The total cash paid for interest at maturity of the note (using a 360 day year) is
Calculations: 13,000 x .09 x 30/360 = $97.50
The discount on bonds payable
increases interest expense on the income statement.
Failure to record an accrued liability causes a company to
A company has a probable contingent gain that can be reasonably estimated. How should this contingency be reported?
It should be ignored until the actual gain materializes
Under the effective-interest method of amortization, interest expense each period can be calculated by multiplying the
carrying value of the bonds times the effective-interest rate for the appropriate time period.
Which of the following accounts represents a deferred or prepaid revenue?
Unearned Subscription Revenue
A $3,000, 7.5% bond is quoted at 97.5. How much cash is received when the bond is issued?
Calculations: 3,000 x.975 =2,925
The Salary Expense account is debited for
gross pay only.
The part of the bond that obligates the issuing company to pay the par value of the bond at a specific future time is called the
If at the end of the year, a company has a short-term note payable outstanding that was entered into earlier in the current year
short-term notes payable and interest payable will appear on the balance sheet and interest expense will appear on the income statement.
Monthly sales were $150,000. Warranty costs are estimated at 5% of monthly sales. In the month of sale, the company should record a debit to
Calculations: 150,000 x .03= 7,500
Kosovo Company has $45 million in long-term debt, payable in annual installments of $15 million. How much of the debt should be reported as current liabilities? How much as long-term liabilities?
$15 million $30 million
Which of the following is not a term for the face value of a bond?
Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The entry made by Canton Furniture Company on December 31 to record the accrued interest on the note would be
100,000 X.08/4 = 2,000
Current liabilities fall into two categories which are referred to as
liabilities of a known amount and estimated liabilities
Depreciation expense is reported on the Income Statement and accumulated depreciation is reported on the Balance Sheet.
Double-declining balance depreciation
- is an accelerated method of depreciation.
- ignores the residual value in computing depreciation, except during the last year.
- is based on book value.
Paula’s Pets recently paid to have the engine in its delivery van overhauled. The estimated useful life of the van was originally estimated to be 7 years. The overhaul is expected to extend the useful life of the van to 9 years. The overhaul is regarded as a(n)
Intangible assets with indefinite lives
- are not amortized.
- include goodwill.
- are checked annually for any loss in value.
On January 1, 2010, KJ Corporation acquired equipment for $260,000. The estimated life of the equipment is 5 years or 40,000 hours. The estimated residual value is $20,000. If KJ Corporation uses the units-of-production method of depreciation, what will be the debit to Depreciation Expense for the year ended December 31, 2011, assuming that during this period, the asset was used 8,250 hours?
- Calculations: cost - residual value/total units to be produced = depreciation per unit
- (260,000 - 20,000)/40,000 = 6 per hour
- 8,250 hours * 6 per hour = 49,500 total deprecation for the year
Which of the following is the only plant asset that does not depreciate?
The correct journal entry to record depletion of an oil well includes
a credit to oil well.
Marco Company acquired land and buildings for $1,000,000. The land is appraised at $450,000 and the buildings are appraised at $800,000. The debits to the Land and Buildings accounts will be
- Calculations: Land (450,000/1,250,000) * 1,000,000 = 360,000
- Building (800,000/1,250,000) * 1,000,000 = 640,000
The entry to amortize a patent includes a credit to
Treating a capital expenditure as an immediate expense
overstates expenses and understates net income.
In 2011, Lance Company purchased Rick Company for $16,000,000 cash. At the time of purchase Rick
Company had $18,500,000 in assets and liabilities of $11,000,000. The 2011 balance sheet for Lance
Company should show goodwill of
- Calculations: 18,500,000 - 11,000,000 = 7,500,000 net value of the assets
- Goodwill = purchase price – net value of the assets
- Goodwill = 16,000,000 - 7,500,000
- Goodwill = 8,500,000
An asset with no physical form, but that has special rights to current and expected future benefits is a(n)
All of the following are classified as natural resources and are depleted except for
Which of the following statements about goodwill is false?
In rare cases, companies can record goodwill that they create for their own business
At the end of an asset’s useful life, the balance in Accumulated Depreciation will be the same as the
total depreciation expense over its useful life.
Costs included with the purchase of a plant asset are
the sum of all of the costs incurred to bring the asset to its intended use.
A capital expenditure
adds to an asset.
Frankenstein Pharmaceutical Company has many scientists working in the labs trying to develop an anti-aging drug. The cost of this research and development must be
expensed as incurred.
All amounts paid to acquire a plant asset and to get it ready for its intended use are referred to as
the cost of an asset.
Using an accelerated depreciation method will cause a profitable company to incur
less taxes in early years of the asset’s use as compared to later years.
When an asset is fully depreciated the
book value is equal to the salvage value, and the asset has reached the end of its estimated useful life.
Carl’s Cigar Corporation’s net income before depreciation and taxes is $310,000. Using double-declining-balance depreciation, the current year’s depreciation expense would be $36,000. Assuming a tax rate of 35%, what is Carl’s Cigar Corporation’s net income?
- Calculations: 310,000 - 36,000 = 274,000 income before taxes
- 274,000 * .35 = 95,900 income tax expense
- 274,000 - 95,900 = 178,100 net income
A loss is recorded on the sale of a plant asset when the
asset’s book value is greater than the amount of cash received from the sale.
If a machine has been fully depreciated and has no residual value
there will be no gain or loss on the disposal.
When a company sold its office equipment for $4,800 cash, the office equipment originally costing $31,500 had accumulated depreciation of $29,300. The journal entry to record the sale of the office equipment includes a
- Calculations: Cost - Accum. Depreciation = BV
- 31,500 - 29,300 = 2,200
- Cash – BV = gain
- 4,800 - 2,200 = 2,600
Equipment costing $47,500 with a book value of $22,500 is sold for $26,000. The journal entry will involve a ___________ to Accumulated Depreciation.
- Calculations: Cost - Book value = Accum. Depreciaton
- 47,500 - 22,500 = 25,000
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