Test Bank Latest 22th_Ed Fundamental Accounting Principles by Wild

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Test Bank Latest 22th_Ed Fundamental Accounting Principles by Wild                  

SAMPLE

Chapter 03

Adjusting Accounts and Preparing Financial Statements


True / False Questions

1.

A company’s fiscal year must correspond with the calendar year. 
 
True    False

2.

The time period assumption assumes that an organization’s activities can be divided into specific time periods such as months, quarters, or years. 
 
True    False

3.

Interim financial statements report a company’s business activities for a one-year period. 
 
True    False

4.

A fiscal year refers to an organization’s accounting period that spans twelve consecutive months or 52 weeks. 
 
True    False

5.

Adjusting entries are made after the preparation of financial statements. 
 
True    False

6.

Adjusting entries result in a better matching of revenues and expenses for the period. 
 
True    False

7.

Two main accounting principles used in accrual accounting are matching and full closure. 
 
True    False

8.

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded. 
 
True    False

9.

The matching principle does not aim to record expenses in the same accounting period as the revenue earned as a result of these expenses. 
 
True    False

10.

The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues. 
 
True    False

11.

The cash basis of accounting commonly increases the comparability of financial statements from period to period. 
 
True    False

12.

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items. 
 
True    False

13.

Since the revenue recognition principle requires that revenues be recorded when earned, there are no unearned revenues in accrual accounting. 
 
True    False

14.

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid. 
 
True    False

15.

The cash basis of accounting is an accounting system in which revenues are recorded when earned and expenses are recorded when incurred. 
 
True    False

16.

The cash basis of accounting recognizes revenues when cash payments from customers are received. 
 
True    False

17.

The accrual basis of accounting recognizes revenues when cash is received from customers. 
 
True    False

18.

The accrual basis of accounting recognizes expenses when cash is paid. 
 
True    False

19.

Recording revenues early overstates current-period income; recording revenues late understates current period income. 
 
True    False

20.

Recording expenses early overstates current-period income; recording expenses late understates current period income. 
 
True    False

21.

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all transactions were properly recorded. 
 
True    False

22.

A company paid $9,000 for a twelve-month insurance policy on February 1. The policy coverage began on February 1. On February 28, $750 of insurance expense must be recorded. 
 
True    False

23.

On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October. 
 
True    False

24.

The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received. 
 
True    False

25.

The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues. 
 
True    False

26.

Adjusting entries are designed primarily to correct accounting errors. 
 
True    False

27.

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account. 
 
True    False

28.

Each adjusting entry will affect a balance sheet account. 
 
True    False

29.

Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period. 
 
True    False

30.

Accrued revenues at the end of one accounting period are expected to result in cash collections in a future period. 
 
True    False

31.

Each adjusting entry affects one or more income statements account, one or more balance sheet account, and never cash. 
 
True    False

32.

Accrued expenses reflect transactions where cash is paid before a related expense is recognized. 
 
True    False

33.

Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned revenues. 
 
True    False

34.

The entry to record a cash receipt from a customer when the service is to be provided in a future period involves a debit to an unearned revenue account. 
 
True    False

35.

Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses. 
 
True    False

36.

An adjusting entry often includes an entry to Cash. 
 
True    False

37.

Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated. 
 
True    False

38.

Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated. 
 
True    False

39.

Failure to record depreciation expense will overstate assets and understate expenses. 
 
True    False

40.

A company’s month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000. 
 
True    False

41.

Profit margin can also be called return on sales. 
 
True    False

42.

Profit margin measures the relation of debt to assets. 
 
True    False

43.

Profit margin reflects the percent of profit in each dollar of revenue. 
 
True    False

44.

Profit margin is calculated by dividing net sales by net income. 
 
True    False

45.

Torsten had total assets of $149,501,000, net income of $6,242,000, and net sales of $209,203,000. Its profit margin was 2.98%. 
 
True    False

46.

A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account. 
 
True    False

47.

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance remaining in Prepaid Rent on December 1 should be $1,500. 
 
True    False

48.

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset. 
 
True    False

49.

A salary owed to employees is an example of an accrued expense. 
 
True    False

50.

In accrual accounting, accrued revenues are recorded as liabilities. 
 
True    False

51.

Depreciation expense is an example of an accrued expense. 
 
True    False

52.

Earned but uncollected revenues are recorded during the adjusting process with a credit to a revenue account and a debit to an expense account. 
 
True    False

53.

Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to that period. 
 
True    False

54.

All plant assets, including land, are depreciated. 
 
True    False

55.

Net income for a period will be understated if accrued revenues are not recorded at the end of the accounting period. 
 
True    False

56.

Depreciation measures the decline in market value of an asset. 
 
True    False

57.

A company owes its employees $5,000 for the year ended December 31. It will pay employees on January 6 for the previous two weeks’ salaries. The year-end adjusting entry on December 31 will include a debit to Salaries Expense and a credit to Cash. 
 
True    False

58.

A company purchased $6,000 worth of supplies in August and recorded the purchase in the Supplies account. On August 31, the fiscal year-end, the physical count of supplies indicates the cost of unused supplies is $3,200. The adjusting entry would include a $2,800 debit to Supplies. 
 
True    False

59.

A company performs 20 days of work on a 30-day contract before the end of the year. The total contract is valued at $6,000 and payment is not due until the contract is fully completed. The adjusting entry includes a $4,000 debit to unearned revenue. 
 
True    False

60.

A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the contract services in April and billed the customer. The company should recognize the revenue when it receives the customer’s check. 
 
True    False

61.

The adjusted trial balance must be prepared before the adjusting entries are made. 
 
True    False

62.

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded. 
 
True    False

63.

Financial statements can be prepared directly from the information in the adjusted trial balance. 
 
True    False

64.

Asset and liability balances are transferred from the adjusted trial balance to the income statement. 
 
True    False

65.

Revenue and expense balances are transferred from the adjusted trial balance to the income statement. 
 
True    False

66.

In preparing statements from the adjusted trial balance, the balance sheet must be prepared first. 
 
True    False

67.

It is acceptable to record prepayment of expenses as debits to expense accounts if an adjusting entry is made at the end of the period to bring the asset account balance to the correct unused or unexpired amount. 
 
True    False

68.

It is acceptable to record cash received in advance of providing products or services to revenue accounts if an adjusting entry is made at the end of the period to bring the liability account balance to the correct unearned amount. 
 
True    False


Multiple Choice Questions

69.

The time period assumption assumes that an organization’s activities may be divided into specific reporting time periods including all of the following except: 
 

A.

Months.

B.

Quarters.

C.

Fiscal years.

D.

Calendar years.

E.

Days.

70.

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the: 
 

A.

Operating cycle of a business.

B.

Time period assumption.

C.

Going-concern assumption.

D.

Matching principle.

E.

Accrual basis of accounting.

71.

Interim financial statements refer to financial reports: 
 

A.

That cover less than one year, usually spanning one, three, or six-month periods.

B.

That are prepared before any adjustments have been recorded.

C.

That show the assets above the liabilities and the liabilities above the equity.

D.

Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid.

E.

Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues.

72.

The 12-month period that ends when a company’s sales activities are at their lowest level is called the: 
 

A.

Fiscal year.

B.

Calendar year.

C.

Natural business year.

D.

Accounting period.

E.

Interim period.

73.

The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the: 
 

A.

Fiscal cycle.

B.

Natural business year.

C.

Accounting period.

D.

Business cycle.

E.

Operating cycle.

74.

The accounting principle that requires revenue to be recorded when earned is the: 
 

A.

Matching principle.

B.

Revenue recognition principle.

C.

Time period assumption.

D.

Accrual reporting principle.

E.

Going-concern assumption.

75.

Adjusting entries: 
 

A.

Affect only income statement accounts.

B.

Affect only balance sheet accounts.

C.

Affect both income statement and balance sheet accounts.

D.

Affect cash accounts.

E.

Affect only equity accounts.

76.

The main purpose of adjusting entries is to: 
 

A.

Record external transactions and events.

B.

Record internal transactions and events.

C.

Recognize assets purchased during the period.

D.

Recognize debts paid during the period.

E.

Correct errors in the accounting records.

77.

The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the: 
 

A.

Recognition principle.

B.

Cost principle.

C.

Cash basis of accounting.

D.

Expense recognition (Matching) principle.

E.

Time period principle.

78.

The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called: 
 

A.

Accrual basis accounting.

B.

Operating cycle accounting.

C.

Cash basis accounting.

D.

Revenue recognition accounting.

E.

Current basis accounting.

79.

Adjusting entries made at the end of an accounting period accomplish all of the following except: 
 

A.

Updating liability and asset accounts to their proper balances.

B.

Assigning revenues to the periods in which they are earned.

C.

Assigning expenses to the periods in which they are incurred.

D.

Assuring that financial statements reflect the revenues earned and the expenses incurred.

E.

Assuring that external transaction amounts remain unchanged.

80.

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is: 
 

A.

Cash basis accounting.

B.

The matching principle.

C.

The time period assumption.

D.

Accrual basis accounting.

E.

Revenue basis accounting.

81.

Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all examples of: 
 

A.

Items that require contra accounts.

B.

Items that require adjusting entries.

C.

Asset and equity.

D.

Asset accounts.

E.

Income statement accounts.

82.

The accrual basis of accounting: 
 

A.

Is generally accepted for external reporting because it is more useful than cash basis for most business decisions.

B.

Is flawed because it gives complete information about cash flows.

C.

Recognizes revenues when received in cash.

D.

Recognizes expenses when paid in cash.

E.

Eliminates the need for adjusting entries at the end of each period.

83.

Which of the following statements is incorrect? 
 

A.

Adjustments to prepaid expenses and unearned revenues involve previously recorded assets and liabilities.

B.

Accrued expenses and accrued revenues involve assets and liabilities that had not previously been recorded.

C.

Adjusting entries can be used to record both accrued expenses and accrued revenues.

D.

Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time.

E.

Adjusting entries affect only balance sheet accounts.

84.

An adjusting entry could be made for each of the following except: 
 

A.

Prepaid expenses.

B.

Depreciation.

C.

Owner investments.

D.

Unearned revenues.

E.

Accrued expenses.

85.

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would: 
 

A.

Understate net income by $28,000.

B.

Overstate net income by $28,000.

C.

Have no effect on net income.

D.

Overstate assets by $28,000.

E.

Understate assets by $28,000.

86.

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show: 
 

A.

Assets overstated and equity understated.

B.

Assets and equity both understated.

C.

Assets overstated, net income understated, and equity overstated.

D.

Assets, net income, and equity understated.

E.

Assets, net income, and equity overstated.

87.

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Management Fees account to the Management Fees Revenue account, this omission would cause: 
 

A.

An overstatement of net income.

B.

An overstatement of assets.

C.

An overstatement of liabilities.

D.

An overstatement of equity.

E.

An understatement of liabilities.

88.

A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to move the portion of these fees that has been earned to a revenue account, one effect will be: 
 

A.

An overstatement of equity.

B.

An understatement of equity.

C.

An understatement of assets.

D.

An understatement of liabilities.

E.

An overstatement of assets.

89.

Profit margin is defined as: 
 

A.

Revenues divided by net sales.

B.

Net sales divided by assets.

C.

Net income divided by net sales.

D.

Net income divided by assets.

E.

Net sales divided by net income.

90.

A company earned $3,000 in net income for October. Its net sales for October were $10,000. Its profit margin is: 
 

A.

3%.

B.

30%.

C.

33%.

D.

333%.

E.

$7,000.

91.

All of the following statements regarding profit margin are true except: 
 

A.

Profit margin reflects the percent of profit in each dollar of revenue.

B.

Profit margin is also called return on sales.

C.

Profit margin can be used to compare a firm’s performance to its competitors.

D.

Profit margin is calculated by dividing net income by net sales.

E.

Profit margin is not a useful measure of a company’s operating results.

92.

A company had $7,000,000 in net income for the year. Its net sales were $15,200,000 for the same period. Calculate its profit margin.  
 

A.

85.4%.

B.

117.1%.

C.

53.9%.

D.

217.1%.

E.

46.1%.

93.

On July 1 Plum Co. paid $7,500 cash for management services to be performed over a two-year period. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. On July 1 Plum should record: 
 

A.

A debit to an expense and credit to a prepaid expense for $7,500.

B.

A debit to an expense and credit to Cash for $7,500.

C.

A debit to a prepaid expense and a credit to Cash for $7,500.

D.

A credit to a prepaid expense and a debit to Cash for $7,500.

E.

A debit to Cash for $7,500 and a credit to an expense for $7,500.

94.

On July 1of the current calendar year, Plum Co. paid $7,500 cash for management services to be performed over a two-year period. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Plum would include: 
 

A.

A debit to an expense and a credit to a prepaid expense for $5,625.

B.

A debit to a prepaid expense and a credit to Cash for $5,625.

C.

A debit to an expense and a credit to a prepaid expense for $1,875.

D.

A debit to a prepaid expense and a credit to an expense for $1,875.

E.

A credit to a liability and a debit to a prepaid expense for $1,875.

95.

Accrued revenues: 
 

A.

At the end of one accounting period result in cash receipts in a future period.

B.

At the end of one accounting period often result in cash payments in the next period.

C.

Are also called unearned revenues.

D.

Are listed on the balance sheet as liabilities.

E.

Are recorded at the end of an accounting period because cash has already been received for revenues earned.

96.

An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n): 
 

A.

Accrued expense.

B.

Contra account.

C.

Accrued revenue.

D.

Intangible asset.

E.

Adjunct account.

97.

The total amount of depreciation recorded against an asset over the entire time the asset has been owned: 
 

A.

Is referred to as depreciation expense.

B.

Is referred to as accumulated depreciation.

C.

Is shown on the income statement of the final period.

D.

Is only recorded when the asset is disposed of.

E.

Is referred to as an accrued asset.

98.

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called: 
 

A.

Accumulated depreciation.

B.

A contra account.

C.

The matching principle.

D.

Depreciation expense.

E.

An accrued account.

99.

Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical count of the supplies showed $105 of unused supplies available. The required adjusting entry is: 
 

A.

Debit Office Supplies $105 and credit Office Supplies Expense $105.

B.

Debit Office Supplies Expense $105 and credit Office Supplies $105.

C.

Debit Office Supplies Expense $254 and credit Office Supplies $254.

D.

Debit Office Supplies $254 and credit Office Supplies Expense $254.

E.

Debit Office Supplies $105 and credit Supplies Expense $254.

100.

If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to record the portion of those fees that has been earned is: 
 

A.

Debit Cash and credit Legal Fees Earned.

B.

Debit Cash and credit Unearned Legal Fees.

C.

Debit Unearned Legal Fees and credit Legal Fees Earned.

D.

Debit Legal Fees Earned and credit Unearned Legal Fees.

E.

Debit Unearned Legal Fees and credit Accounts Receivable.

101.

On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the year ended December 31? 
 

A.

$1,350.00.

B.

$450.00.

C.

$1,012.50.

D.

$337.50.

E.

$37.50.

102.

On July 1, a company paid the $2,400 premium on a one-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the current year ended December 31? 
 

A.

$1,200.

B.

$2,400.

C.

$1,000.

D.

$400.

E.

$1,400.

103.

A company had no office supplies available at the beginning of the year. During the year, the company purchased $250 worth of office supplies. On December 31, $75 worth of office supplies remained. How much should the company report as office supplies expense for the year? 
 

A.

$75.

B.

$125.

C.

$175.

D.

$250.

E.

$325.

104.

On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is: 
 

A.

Debit Prepaid Insurance, $1,800; credit Cash, $1,800.

B.

Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.

C.

Debit Prepaid Insurance, $360; credit Insurance Expense, $360.

D.

Debit Insurance Expense, $360; credit Prepaid Insurance, $360.

E.

Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.

105.

Unearned revenue is reported in the financial statements as: 
 

A.

A revenue on the balance sheet.

B.

A liability on the balance sheet.

C.

An unearned revenue on the income statement.

D.

An asset on the balance sheet.

E.

A financing activity on the statement of cash flows.

106.

Which of the following assets is not depreciated? 
 

A.

Store fixtures.

B.

Computers.

C.

Land.

D.

Buildings.

E.

Equipment.

107.

Which of the following does not require an adjusting entry at year-end? 
 

A.

Accrued interest on notes payable.

B.

Supplies used during the period.

C.

Cash invested by owner.

D.

Accrued wages.

E.

Expired portion of prepaid insurance.

108.

On May 1, a two-year insurance policy was purchased for $18,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company’s income statement for the first year ended December 31? 
 

A.

$750.

B.

$5,270.

C.

$6,000.

D.

$6,750.

E.

$18,000.

109.

Fragmental Co. leased a portion of its store to another company for eight months beginning on October 1, at a monthly rate of $800. Fragmental collected the entire $6,400 cash on October 1 and recorded it as unearned revenue. The journal entry made by Fragmental Co. at year-end on December 31 would be: 
 

A.

A debit to Rent Revenue and a credit to Cash for $2,400.

B.

A debit to Rent Revenue and a credit to Unearned Rent for $2,400.

C.

A debit to Cash and a credit to Rent Revenue for $6,400.

D.

A debit to Unearned Rent and a credit to Rent Earned for $2,400.

E.

A debit to Unearned Rent and a credit to Rent Earned for $4,000.

110.

On May 1, Sellers Marketing Company received $1,500 from Franco Marcelli for a marketing campaign effective from May 1 this year to April 30 of the following year. The Cash receipt was recorded as unearned fees and at year-end on December 31, $1,000 of the fees had been earned. The adjusting entry on December 31 would be: 
 

A.

A debit to Unearned Fees and a credit to Cash for $500.

B.

A debit to Fees Earned and a credit to Unearned Fees for $500.

C.

A debit to Unearned Fees and a credit to Fees Earned for $1,000.

D.

A debit to Fees Earned and a credit to Cash for $1,000.

E.

A debit to Fees Earned and a credit to Cash for $500.

111.

Incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to a liability are: 
 

A.

Intangible expenses.

B.

Prepaid expenses.

C.

Unearned expenses.

D.

Net expenses.

E.

Accrued expenses.

112.

The adjusting entry at the end of an accounting period to record the unpaid salaries of employees for work provided is:  
 

A.

Debit Unpaid Salaries and credit Salaries Payable.

B.

Debit Salaries Payable and credit Salaries Expense.

C.

Debit Salaries Expense and credit Cash.

D.

Debit Salaries Expense and credit Salaries Payable.

E.

Debit Cash and credit Salaries Expense.

113.

A company pays each of its two office employees each Friday at the rate of $100 per day for a five-day week that begins on Monday. If the monthly accounting period ends on Tuesday and the employees worked on both Monday and Tuesday, the month-end adjusting entry to record the salaries earned but unpaid is: 
 

A.

Debit Unpaid Salaries $600 and credit Salaries Payable $600.

B.

Debit Salaries Expense $400 and credit Salaries Payable $400.

C.

Debit Salaries Expense $600 and credit Salaries Payable $600.

D.

Debit Salaries Payable $400 and credit Salaries Expense $400.

E.

Debit Salaries Expense $400 and credit Cash $400.

114.

A company pays its employees $4,000 each Friday, which amounts to $800 per day for the five-day workweek that begins on Monday. If the monthly accounting period ends on Thursday and the employees worked through Thursday, the amount of salaries earned but unpaid at the end of the accounting period is:  
 

A.

$4,000.

B.

$800.

C.

$1,600.

D.

$2,400.

E.

$3,200.

115.

The adjusting entry to record the salaries earned due to employees for services provided but unpaid at the end of the accounting period affects the accounts in which of the following ways? 
 

A.

Debit Salaries Payable and credit Salaries Expense.

B.

Debit Salaries Expense and credit Cash.

C.

Debit Accrued Salaries and credit Salaries Payable.

D.

Debit Cash and credit Salaries Expense.

E.

Debit Salaries Expense and credit Salaries Payable.

116.

On January 1, Eastern College received $1,200,000 from its students for the spring semester that it recorded in Unearned Tuition and Fees. The term spans four months beginning on January 2 and the college spreads the revenue evenly over the months of the term. What amount of tuition revenue should the college recognize on February 28? 
 

A.

$300,000.

B.

$600,000.

C.

$800,000.

D.

$900,000.

E.

$1,200,000.

117.

On January 1, Fashion Forward Magazine received $15,000 from subscribers for the annual subscriptions that it recorded in Unearned Subscription Revenue. The issues of the magazine are mailed to subscribers quarterly. What amount of tuition revenue should the magazine recognize on March 31 when the first issue is sent in March? 
 

A.

$15,000.

B.

$1,250.

C.

$7,500.

D.

$3,750.

E.

$0.

118.

An adjusting entry was made on year-end December 31 to accrue salary expense of $1,200. Which of the following entries would be prepared to record the $3,000 payment of salaries in January of the following year?  
 

A.

Salaries Expense

3,000

    Cash

3,000

B.

Salaries Payable

3,000

    Cash

3,000

C.

Salaries Payable

1,200

    Cash

1,200

D.

Salaries Expense

1,200

   Salaries Payable

1,200

E.

Salaries Payable

1,200

Salaries Expense

1,800

    Cash

3,000

119.

The difference between the cost of an asset and the accumulated depreciation for that asset is called 
 

A.

Depreciation Expense.

B.

Unearned Depreciation.

C.

Prepaid Depreciation.

D.

Depreciation Value.

E.

Book Value.

120.

A company purchased a new delivery van at a cost of $45,000 on July 1. The truck is estimated to have a useful life of 6 years and a salvage value of $3,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the van during the first year ended December 31?  
 

A.

$3,250.

B.

$3,500.

C.

$4,000.

D.

$6,500.

E.

$7,000.

121.

A company’s Office Supplies account shows a beginning balance of $600 and an ending balance of $400. If office supplies expense for the year is $3,100, what amount of office supplies was purchased during the period? 
 

A.

$2,700.

B.

$2,900.

C.

$3,300.

D.

$3,500.

E.

$3,700.

122.

If a company records prepayment of expenses in an asset account, the adjusting entry when all or part of the prepaid asset is used or expired would: 
 

A.

Result in a debit to an expense and a credit to an asset account.

B.

Cause an adjustment to prior expense to be overstated and assets to be understated.

C.

Cause an accrued liability account to exist.

D.

Result in a debit to a liability and a credit to an asset account.

E.

Decrease cash.

123.

A company recorded 2 days of accrued salaries of $1,400 for its employees on January 31. On February 9, it paid its employees $7,000 for these accrued salaries and for other salaries earned through February 9. The January 31 and February 9 journal entries are:  
 

A.

1/31

Salaries Expense

1,400

      Salaries Payable

1,400

2/9

Salaries Payable

7,000

Salaries Expense

1,400

        Cash

7,000

B.

1/31

Salaries Payable

1,400

      Salaries Expense

1,400

2/9

Salaries Expense

5,600

Salaries Payable

1,400

        Cash

7,000

C.

1/31

Salaries Expense

1,400

      Cash

1,400

2/9

Salaries Expense

7,000

        Cash

7,000

D.

1/31

Salaries Expense

1,400

      Salaries Payable

1,400

2/9

Salaries Expense

7,000

        Cash

7,000

E.

1/31

Salaries Expense

1,400

      Salaries Payable

1,400

2/9

Salaries Expense

5,600

Salaries Payable

1,400

        Cash

7,000

124.

If accrued salaries were recorded on December 31 with a debit to Salaries Expense and a credit to Salaries Payable, the entry to record payment of these wages on the following January 5 would include: 
 

A.

A debit to Cash and a credit to Salaries Payable.

B.

A debit to Cash and a credit to Prepaid Salaries.

C.

A debit to Salaries Payable and a credit to Cash.

D.

A debit to Salaries Payable and a credit to Salaries Expense.

E.

No entry would be necessary on January 5.

125.

On December 1, Simpson Marketing Company received $3,600 from a customer for a marketing plan to be completed January 31 of the following year. The cash receipt was recorded as unearned fees. The adjusting entry for the year ended December 31 would include: 
 

A.

a debit to Earned Fees for $3,600.

B.

a debit to Unearned Fees for $1,800.

C.

a credit to Unearned Fees for $1,800.

D.

a debit to Earned Fees for $1,800.

E.

a credit Earned Fees for $3,600.

126.

Wilson Company paid insurance premiums for four months in advance on November 1. The balance in the prepaid insurance account before adjustment at the end of the year is $4,800 and no adjustments had been made previously. The adjusting entry required on December 31 is:  
 

A.

Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.

B.

Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.

C.

Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.

D.

Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200.

E.

Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.

127.

What is the proper adjusting entry at December 31, the end of the accounting period, if the balance in the prepaid insurance account is $7,750 before adjustment, and the unexpired amount per analysis of policies is, $3,250? 
 

A.

Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.

B.

Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.

C.

Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.

D.

Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.

E.

Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.

128.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the first year of the subscription assuming the company uses a calendar reporting period?  
 

A.

$0.

B.

$516.

C.

$387.

D.

$129.

E.

$430.

129.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the second year of the subscription assuming the company uses a calendar reporting period?  
 

A.

$0.

B.

$516.

C.

$387.

D.

$129.

E.

$430.

130.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. What is the adjusting entry that should be recorded by Griffith Publishing Company on December 31 of the first year? 
 

A.

debit Unearned Fees, $1,548; credit Fees Earned, $1,548.

B.

debit Unearned Fees, $516; credit Fees Earned, $516.

C.

debit Unearned Fees, $1,161; credit Fees Earned, $1,161.

D.

debit Unearned Fees, $129; credit Fees Earned, $129.

E.

debit Unearned Fees, $387; credit Fees Earned, $387.

131.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. What is the adjusting entry that should be recorded by Griffith Publishing Company on December 31 of the second year? 
 

A.

debit Unearned Fees, $1,548; credit Fees Earned, $1,548.

B.

debit Unearned Fees, $516; credit Fees Earned, $516.

C.

debit Unearned Fees, $1,161; credit Fees Earned, $1,161.

D.

debit Unearned Fees, $129; credit Fees Earned, $129.

E.

debit Unearned Fees, $387; credit Fees Earned, $387.

132.

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31 of the first year assuming the company is using a calendar reporting period and no previous adjustment has been made? 
 

A.

$1,548.

B.

$387.

C.

$516.

D.

$1,161.

E.

$0.

133.

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31 of the second year assuming the company is using a calendar reporting period and the previous year adjustment had been made?  
 

A.

$1,548.

B.

$387.

C.

$516.

D.

$645.

E.

$0.

134.

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What adjusting entry should be made by Santa Fe, Inc. for the adjustment on December 31 of the first year assuming the company is using a calendar reporting period and no previous adjustments had been made?  
 

A.

Debit Subscription Expense $516 and credit Prepaid Subscriptions $516.

B.

Debit Prepaid Subscriptions $516 and credit Subscription Expense $516.

C.

Debit Subscription Expense $387 and credit Cash $387.

D.

Debit Unearned Subscriptions $387 and credit Subscription Expense $387.

E.

Debit Subscription Expense $387 and credit Prepaid Subscriptions $387.

135.

A company made no adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31. Which of the following statements is true?  
 

A.

It will have no effect on income.

B.

It will overstate assets and liabilities by $9,000.

C.

It will understate net income by $9,000.

D.

It will understate assets by $9,000.

E.

It will understate expenses and overstate net income by $9,000.

136.

The correct adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31 is:  
 

A.

debit Salary Expense, $9,000; credit Cash, $9,000

B.

debit Salary Expense, $9,000; credit Fees Earned, $9,000

C.

debit Salary Expense, $9,000; credit Prepaid Salary, $9,000

D.

debit Salary Expense, $9,000; credit Salaries Payable, $9,000

E.

debit Salaries Payable, $9,000; credit Salary Expense $9,000

137.

A company purchased new furniture at a cost of $14,000 on September 30. The furniture is estimated to have a useful life of 8 years and a salvage value of $2,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the furniture for the first year ended December 31? 
 

A.

$437.50

B.

$375.00

C.

$1,500.00

D.

$500

E.

$1,750

138.

A company purchased new furniture at a cost of $14,000 on September 30. The furniture is estimated to have a useful life of 8 years and a salvage value of $2,000. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year? 
 

A.

$13,562.50

B.

$12,250.00

C.

$12,500.00

D.

$13,500.00

E.

$13,625.00

139.

A company purchased new furniture at a cost of $16,000 on January 1. The furniture is estimated to have a useful life of 6 years and a $1,000 salvage value. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year?  
 

A.

$16,000

B.

$15,000

C.

$2,500

D.

$13,500

E.

$13,333

140.

The balances in Sanchez Accounting Services’ office supplies account on February 1 and February 28 were $1,200 and $375, respectively. If the office supplies expense for the month is $1,900, what amount of office supplies was purchased during February?  
 

A.

$1,075

B.

$1,500

C.

$1,525

D.

$2,325

E.

$3,100

141.

If Regent Tax Services’ office supplies account balance on March 1 was $1,400, the company purchased $675 of supplies during the month, and a physical count of supplies on hand at the end of March indicated $1,250 unused, what is the amount of the adjusting entry for office supplies on March 31? 
 

A.

$675

B.

$825

C.

$1,250

D.

$1,975

E.

$525

142.

A physical count of supplies on hand at the end of May for Masters, Inc. indicated $1,250 of supplies on hand. The general ledger balance before any adjustment is $2,100. What is the adjusting entry for office supplies that should be recorded on May 31?  
 

A.

Debit Supplies Expense $1,250 and credit Supplies $1,250.

B.

Debit Prepaid Supplies $850 and credit Supplied Expense $850.

C.

Debit Supplies Expense $1,250 and credit Supplies $2,100.

D.

Debit Supplies $1,250 and credit Cash $1,250.

E.

Debit Supplies Expense $850 and credit Supplies $850.

143.

Which of the following statements is incorrect? 
 

A.

An income statement reports revenues earned less expenses incurred.

B.

An unadjusted trial balance shows the account balances after they have been revised to reflect the effects of end-of-period adjustments.

C.

Interim financial reports can be based on one-month or three-month accounting periods.

D.

The fiscal year is any 12 consecutive months (or 52 weeks) used by a business as its annual accounting period.

E.

Property, plant, and equipment are referred to as plant assets.

144.

A trial balance prepared after adjustments have been recorded is called a(n):  
 

A.

Balance sheet.

B.

Adjusted trial balance.

C.

Unadjusted trial balance.

D.

Classified balance sheet.

E.

Unclassified balance sheet.

145.

A trial balance prepared before any adjustments have been recorded is: 
 

A.

An adjusted trial balance.

B.

Used to prepare financial statements.

C.

An unadjusted trial balance.

D.

Correct with respect to proper balance sheet and income statement amounts.

E.

Only prepared once a year.

146.

The adjusted trial balance contains information pertaining to: 
 

A.

Asset accounts only.

B.

Balance sheet accounts only.

C.

Income statement accounts only.

D.

All general ledger accounts.

E.

Revenue accounts only.

147.

Financial statements are typically prepared in the following order: 
 

A.

Balance sheet, statement of owner’s equity, income statement.

B.

Statement of owner’s equity, balance sheet, income statement.

C.

Income statement, balance sheet, statement of owner’s equity.

D.

Income statement, statement of owner’s equity, balance sheet.

E.

Balance sheet, income statement, statement of owner’s equity.

148.

A balance sheet that places the assets above the liabilities and equity is called a(n): 
 

A.

Report form balance sheet.

B.

Account form balance sheet.

C.

Classified balance sheet.

D.

Unadjusted balance sheet.

E.

Unclassified balance sheet.

149.

A balance sheet that places the liabilities and equity to the right of the assets is a(n): 
 

A.

Account form balance sheet.

B.

Report form balance sheet.

C.

Interim balance sheet.

D.

Classified balance sheet.

E.

Unclassified balance sheet.

150.

Under the alternative method for accounting for unearned revenue, which of the following pairs of journal entry formats is correct?  
 

A.

Initial Entry

Adjusting Entry

Cash

Unearned Consulting Revenue

   Unearned Consulting Revenue

   Consulting Revenue

B.

Initial Entry

Adjusting Entry

Cash

Consulting Revenue

   Consulting Revenue

   Unearned Revenue

C.

Initial Entry

Adjusting Entry

Cash

Unearned Revenue

   Unearned Revenue

   Cash

D.

Initial Entry

Adjusting Entry

Consulting Revenue

Unearned Revenue

   Cash

   Consulting Revenue

E.

Initial Entry

Adjusting Entry

Cash

Consulting Revenue

   Unearned Revenue

   Unearned Revenue

151.

Under the alternative method for recording prepaid expenses, which is the correct set of journal entries?  
 

A.

Initial Entry

Adjusting Entry

Insurance Expense

Prepaid Insurance

   Cash

   Insurance Expense

B.

Initial Entry

Adjusting Entry

Cash

Prepaid Insurance

   Insurance Expense

   Insurance Expense

C.

Initial Entry

Adjusting Entry

Prepaid Insurance

Prepaid Insurance

   Cash

   Insurance Expense

D.

Initial Entry

Adjusting Entry

Prepaid Insurance

Insurance Expense

   Cash

   Prepaid Insurance

E.

Initial Entry

Adjusting Entry

Prepaid Insurance

Cash

   Insurance Expense

   Prepaid Insurance

152.

Which of the following statements related to U.S. GAAP and IFRS is incorrect?  
 

A.

Both U.S. GAAP and IFRS include guidance for adjusting entries.

B.

Both U.S. GAAP and IFRS prepare the same four financial statements.

C.

U.S. GAAP does not require items to be separated by current and noncurrent classifications on the balance sheet.

D.

U.S. GAAP balance sheets report current items first.

E.

IFRS balance sheets normally present noncurrent items first.

153.

On December 1, Milton Company borrowed $300,000, at 8% annual interest, from the Tennessee National Bank. Interest is paid when the loan matures one year from the issue date. What is the adjusting entry for accruing interest that Milton would need to make on December 31, the calendar year-end?  
 

A.

debit Interest Payable, $2,000; credit Interest Expense, $2,000.

B.

debit Interest Expense, $2,000; credit Interest Payable, $2,000.

C.

debit Interest Expense, $2,000; credit Cash, $2,000.

D.

debit Interest Expense, $4,000; credit Interest Payable, $4,000.

E.

debit Interest Expense, $24,000; credit Interest Payable, $24,000.

154.

All of the following are true regarding prepaid expenses except:  
 

A.

They are paid for in advance of receiving their benefits.

B.

They are assets.

C.

When they are used, their costs become expenses.

D.

The adjusting entry for prepaid expenses increases expenses and decreases liabilities.

E.

The adjusting entry for prepaid expenses increases expenses and decreases assets.

155.

An annual reporting period consisting of any twelve consecutive months is known as: 
 

A.

Fiscal year.

B.

Calendar year.

C.

Interim financial period.

D.

Natural business year.

E.

Seasonal year.

156.

Two accounting principles central to accrual accounting basis that are relied on in the adjusting process are: 
 

A.

Revenue recognition and monetary unit.

B.

Revenue recognition and going-concern.

C.

Matching and cost.

D.

Matching and business entity.

E.

Revenue recognition and matching.

157.

All of the following are true regarding unearned revenues except: 
 

A.

They are payments received in advance of services performed.

B.

The adjusting entry for unearned revenues increases assets and increases revenues.

C.

The adjusting entry for unearned revenues increases revenues and decreases liabilities.

D.

They are liabilities.

E.

As they are earned, they become revenues.

158.

Assuming prepaid expenses are originally recorded in balance sheet accounts, the adjusting entry to record use of a prepaid expense is: 
 

A.

Increase an expense; increase a liability.

B.

Increase an asset; increase revenue.

C.

Decrease a liability; increase revenue.

D.

Increase an expense; decrease an asset.

E.

Increase an expense; decrease a liability.

159.

Assuming unearned revenues are originally recorded in balance sheet accounts, the adjusting entry to record earning of unearned revenue is: 
 

A.

Increase an expense; increase a liability.

B.

Increase an asset; increase revenue.

C.

Decrease a liability; increase revenue.

D.

Increase an expense; decrease an asset.

E.

Increase an expense; decrease a liability.

160.

The adjusting entry to record an accrued expense is: 
 

A.

Increase an expense; increase a liability.

B.

Increase an asset; increase revenue.

C.

Decrease a liability; increase revenue.

D.

Increase an expense; decrease an asset.

E.

Increase an expense; decrease a liability.

161.

The adjusting entry to record an accrued revenue is: 
 

A.

Increase an expense; increase a liability.

B.

Increase an asset; increase revenue.

C.

Decrease a liability; increase revenue.

D.

Increase an expense; decrease an asset.

E.

Increase an expense; decrease a liability.

162.

On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month. The tenant paid five months’ rent in advance on that date. The collection was credited to the Unearned Rent account. The company’s annual accounting period ends on December 31. The adjusting entry needed on December 31 is: 
 

A.

Debit Rent Receivable, $12,500; credit Rent Earned, $12,500.

B.

Debit Rent Receivable, $7,500; credit Rent Earned, $7,500.

C.

Debit Unearned Rent, $7,500; credit Rent Earned, $7,500.

D.

Debit Unearned Rent, $5,000; credit Rent Earned, $5,000.

E.

Debit Unearned Rent, $12,500; credit Rent Earned, $12,500.

163.

On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month and received $12,500 for five months’ rent in advance on that date. The collection was credited to the Unearned Rent account. The company’s annual accounting period ends on December 31. The Unearned Rent account balance at the end of December, after adjustment, should be: 
 

A.

$5,000.

B.

$7,500.

C.

$12,500.

D.

$2,500.

E.

$10,000.

164.

Sanborn Company rents space to a tenant for $2,200 per month. The tenant currently owes rent for November and December. The tenant has agreed to pay the November, December, and January rents in full on January 15 and has agreed not to fall behind again. The adjusting entry needed on December 31 is: 
 

A.

Debit Rent Receivable, $6,600; credit Rent Earned, $6,600.

B.

Debit Unearned Rent, $4,400; credit Rent Earned, $4,400.

C.

Debit Unearned Rent, $2,200; credit Rent Earned, $2,200.

D.

Debit Rent Receivable, $4,400; credit Rent Earned, $4,400.

E.

Debit Rent Receivable, $2,200; credit Rent Earned, $2,200.

165.

Sanborn Company has 10 employees, who earn a total of $1,800 in salaries each working day. They are paid on Monday for the five-day workweek ending on the previous Friday. Assume that year ended December 31, is a Wednesday and all employees will be paid salaries for five full days on the following Monday. The adjusting entry needed on December 31 is: 
 

A.

Debit Salaries Expense, $5,400; credit Salaries Payable, $5,400.

B.

Debit Salaries Expense, $3,600; credit Salaries Payable, $3,600.

C.

Debit Salaries Expense, $9,000; credit Salaries Payable, $9,000.

D.

Debit Salaries Payable, $5,400; credit Salaries Expense, $5,400.

E.

Debit Salaries Expense, $5,400; credit Cash, $5,400.

166.

On January 1, Imlay Company purchases manufacturing equipment costing $95,000 that is expected to have a five-year life and an estimated salvage value of $5,000. Imlay uses the straight-line depreciation method to allocate costs. The adjusting entry needed on December 31 of the first year is: 
 

A.

Debit Depreciation Expense, $9,000; credit Accumulated Depreciation, $9,000.

B.

Debit Depreciation Expense, $18,000; credit Accumulated Depreciation, $18,000.

C.

Debit Depreciation Expense, $90,000; credit Accumulated Depreciation, $90,000.

D.

Debit Depreciation Expense, $18,000; credit Equipment, $18,000.

E.

Debit Depreciation Expense, $9,000; credit Equipment, $9,000.

167.

Holman Company owns equipment with an original cost of $95,000 and an estimated salvage value of $5,000 that is being depreciated at $15,000 per year using the straight-line depreciation method. The adjusting entry needed to record annual depreciation is:  
 

A.

Debit Depreciation Expense, $15,000; credit Equipment, $15,000.

B.

Debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.

C.

Debit Depreciation Expense, $10,000; credit Accumulated Depreciation, $10,000.

D.

Debit Depreciation Expense, $10,000; credit Equipment, $10,000.

E.

Debit Depreciation Expense, $15,000; credit Accumulated Depreciation, $15,000.

168.

On November 1, Jovel Company loaned another company $100,000 at a 6.0% interest rate. The note receivable plus interest will not be collected until March 1 of the following year. The company’s annual accounting period ends on December 31. The amount of interest revenue that should be reported in the first year is:  
 

A.

$0.

B.

$6,000.

C.

$5,000.

D.

$16,667.

E.

$1,000.

169.

On November 1, Jovel Company loaned another company $100,000 at a 6.0% interest rate. The note receivable plus interest will not be collected until March 1 of the following year. The company’s annual accounting period ends on December 31. The adjusting entry needed on December 31 is: 
 

A.

No entry required.

B.

Debit Interest Expense, $5,000; credit Interest Payable, $5,000.

C.

Debit Interest Expense, $1,000; credit Note Payable, $1,000.

D.

Debit Interest Receivable, $500; credit Interest Revenue, $500.

E.

Debit Interest Receivable, $1,000; credit Interest Revenue, $1,000.

170.

On December 1, Casualty Insurance Company borrowed $50,000 at a 6.0% interest rate from One Mutual Bank. The note payable plus interest will not be paid until April 1 of the following year. The company’s annual accounting period ends on December 31. The adjusting entry needed on December 31 is: 
 

A.

No entry required.

B.

Debit Interest Expense, $250; credit Interest Payable, $250.

C.

Debit Interest Expense, $250; credit Note Payable, $250.

D.

Debit Interest Payable, $1,000; credit Interest Expense, $1,000.

E.

Debit Interest Expense, $1,000; credit Interest Payable, $1,000.

171.

Which of the following statements is incorrect?  
 

A.

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

B.

An adjusted trial balance is a list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger.

C.

Each trial balance amount is used in preparing the financial statements.

D.

Financial statements should be prepared directly from information in the unadjusted trial balance.

E.

Financial statements can be prepared directly from information in the adjusted trial balance.

172.

On December 31, 2015 Carmack Company received a $215 utility bill for December that it will not pay until January 15. The adjusting entry needed on December 31 to accrue this expense is: 
 

A.

Debit Utilities Expense $215; credit Accounts Payable $215.

B.

Debit Accounts Payable $215; credit Utilities Expense $215.

C.

Debit Prepaid Utilities $215; credit Cash $215.

D.

Debit Utilities Expense $215; credit Prepaid Utilities $215.

E.

Debit Prepaid Utilities $215; credit Accounts Payable $215.

173.

On December 31, 2015 Winters Company received a $385 bill for the purchase of supplies in December that it will not pay for until January 15. The adjusting entry needed on December 31 to accrue this cost is: 
 

A.

Debit Supplies $385; credit Accounts Payable $385.

B.

Debit Accounts Payable $385; credit Supplies $385.

C.

Debit Accounts Payable $385; credit Cash $385.

D.

Debit Supplies Expense $385; credit Cash $385.

E.

Debit Supplies Expense $385; credit Supplies $385.

174.

On December 31, 2015 Carmack Company’s Prepaid Insurance account had a balance before adjustment of $6,000. The insurance was purchased on July 1 of the same year for one year of insurance coverage. The adjusting entry needed on December 31 is: 
 

A.

Debit Prepaid Insurance $6,000; credit Cash $6,000.

B.

Debit Insurance Expense $3,000; credit Accounts Payable $3,000.

C.

Debit Insurance Expense $3,000; credit Prepaid Insurance $3,000.

D.

Debit Cash $6,000; credit Prepaid Insurance $6,000.

E.

Debit Insurance Expense $6,000; credit Accounts Payable $6,000.

175.

On December 31, 2015 Winters Company’s Prepaid Rent account had a balance before adjustment of $6,000. Three months’ rent was paid in advance on December 1. The adjusting entry needed on December 31 is: 
 

A.

Debit Prepaid Rent $6,000; credit Cash $6,000.

B.

Debit Rent Expense $2,000; credit Accounts Payable $2,000.

C.

Debit Rent Expense $2,000; credit Prepaid Rent $2,000.

D.

Debit Cash $2,000; credit Prepaid Rent $2,000.

E.

Debit Rent Expense $6,000; credit Accounts Payable $6,000.


Matching Questions

176.

Match the following terms with the appropriate definitions.  
 

1. Any 12 consecutive months or 52 week period that a company adopts for its annual reporting period.

     Fiscal year

  ____

2. Assumes that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

     Straight-line depreciation

  ____

3. The process of allocating the costs of assets to the income statement over their expected useful lives.

     Time period assumption

  ____

4. Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses.

     Matching principle

  ____

5. A method that allocates equal amounts of an asset’s cost (less any salvage value) to depreciation expense during its useful life.

     Accrual basis accounting

  ____

6. Revenues earned in a period that are both unrecorded and not yet received in cash or other assets.

     Depreciation

  ____

7. A set of financial statements that covers less than one year, typically one, three, or six months of activity.

     Accrued revenues

  ____

8. The accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred.

     Cash basis accounting

  ____

9. The accounting system that recognizes revenue when cash is received and records expenses when cash is paid.

     Interim financial statements

  ____

177.

Match the following terms with the appropriate definitions.  
 

1. A 12-month period, used by companies with seasonal variation, that ends when a company’s sales activities are at their lowest point.

     Natural business year

  ____

2. Costs that are incurred in a period but are both unpaid and unrecorded, requiring an adjustment at the end of the period.

     Adjusting entry

  ____

3. Items paid for in advance of receiving their benefits; recorded as an asset when purchased and expensed when used.

     Contra account

  ____

4. Any length of time that an organization’s activities are divided into and reported by financial statements.

     Prepaid expenses

  ____

5. A useful measure of a company’s operating results determined by dividing net income by net sales.

     Accounting period

  ____

6. An account linked with another account and having an opposite normal balance.

     Adjusted trial balance

  ____

7. A listing of accounts and balances prepared after external transactions are recorded but before adjustments are recorded.

     Report form balance sheet

  ____

8. A balance sheet that lists items vertically in the order of assets, liabilities and equity.

     Accrued expenses

  ____

9. A listing of accounts and balances prepared after adjustments are recorded and posted to the ledger.

     Unadjusted trial balance

  ____

10. A journal entry made at the end of an accounting period to reflect a transaction or event that is not yet recorded; affects one or more income statement account and one or more balance sheet account, but never cash.

     Profit margin

  ____

178.

Match the following types of adjustments with the transactions.  
 

1. Prepaid expense

     Used to record expiration or use of prepaid insurance.

  ____

2. Accrued expense

     Used to record revenue earned for which cash was received in advance.

  ____

3. Accrued revenue

     Used to record wages owed, but not yet paid.

  ____

4. Unearned revenue

     Used to record revenue earned for which cash has not been received.

  ____


Short Answer Questions

179.

Discuss the importance of periodic reporting and the time period assumption. 
 

180.

Discuss how accrual accounting enhances the usefulness of financial statements. 
 

181.

Identify the primary differences between accrual accounting and cash basis accounting. 
 

182.

Explain the purpose of adjusting entries at the end of a period and provide an example of an adjusting entry. 
 

183.

List the three-steps of the adjusting process. 
 

184.

Identify the types of adjusting entries and explain the purpose of each type. 
 

185.

Explain how accounting adjustments affect financial statements and provide an example of an adjustment that would impact the statements if not recorded.  
 

186.

How is profit margin calculated? Discuss its use in analyzing a company’s performance. 
 

187.

Describe the types of entries required in later periods that result from accruals. 
 

188.

Describe the adjusting entries, including the accounts used, for 1) prepaid expenses, 2) depreciation and 3) unearned revenues. 
 

189.

Describe the adjusting entries, including the accounts used, for 1) accrued expenses and 2) accrued revenues. 
 

190.

Describe the two alternate methods used to account for prepaid expenses. 
 

191.

What is an adjusted trial balance? Why is it prepared? 
 

192.

Why are financial statements prepared in a specific order? What is the usual order in which financial statements are prepared from the adjusted trial balance? 
 

193.

Explain how the owner of a company uses the accrual basis of accounting. 
 


Essay Questions

194.

On December 31, the year end, a company forgot to record $6,000 of depreciation on machinery. In the current year financial statements, what is the effect of this error on assets, net income, and equity? 
 

195.

Given the table below, indicate the impact of the following errors made during the adjusting entry process. Use a “+” followed by the amount for overstatements, a “-” followed by the amount for understatements, and a “0” for no effect. The first one is done as an example.

Ex. Failed to recognize that $600 of unearned revenues, previously recorded as liabilities, had been earned by year-end.

1. Failed to accrue interest expense of $200.
2. Forgot to record $7,700 of depreciation on machinery.
3. Failed to accrue $1,300 of revenue earned but not collected.
  

Error

Revenues

Expenses

Assets

Liabilities

Equity

EX

-$600

0

0

+$600

-$600

1.

2.

3.

 
 

196.

A company issued financial statements for the year ended December 31, but failed to include the following adjusting entries:

A. Accrued interest revenue earned of $1,200.
B. Depreciation expense of $4,000.
C. Portion of prepaid insurance expired (an asset) used $1,100.
D. Accrued taxes of $3,200.
E. Revenues of $5,200, originally recorded as unearned, have been earned by the end of the year.

Determine the correct amounts for the December 31 financial statements by completing the following table:
  

Assets

Liabilities

Equity

Net Income

Reported amounts

$350,000

$200,000

$150,000

$70,000

Add (subtract) to correct for item:

A

B

C

D

E

Corrected amounts

$

$

$

$

 
 

197.

Using the table below, indicate the impact of the following errors made during the adjusting entry process. Use a “+” for overstatements, a “-” for understatements, and a “0” for no effect. The first one is provided as an example.
  

Error

Revenues

Expenses

Assets

Liabilities

Equity

Ex.

Did not record depreciation for this period

0

+

0

+

1.

Did not record unpaid telephone bill

2.

Did not adjust unearned revenue account for revenue earned this period

3.

Did not adjust shop supplies for supplies used this period

4.

Did not accrue employee salaries for this period

5.

Recorded rent expense owed with a debit to insurance expense and a credit to rent payable

 
 

198.

Andrew’s net income was $280,000; its total assets were $1,050,000; and its net sales were $3,500,000. Calculate the company’s profit margin ratio.  
 

199.

Farmers’ net income was $740,000 and its net sales were $8,000,000. Calculate its profit margin ratio. 
 

200.

From the information provided, calculate Giuseppe’s profit margin ratio for each of the three years. Comment on the results, assuming that the industry average for the profit margin ratio is 6% for each of the three years.
  

2015

2014

2013

Net income

$2,630

$2,100

$1,850

Net Sales

$36,500

$32,850

$31,200

Total Assets

400,000

385,000

350,000

 
 

201.

On December 14 Branch Company received $3,100 cash for consulting services that will be completed on January 12. Branch records all such prepayments by customers in a liability account. Prepare the January 12 adjusting journal entry.  
 

202.

On December 31, Chu Company had performed $3,000 of management services for clients that had not yet been billed. Prepare Chu’s adjusting entry to record these fees earned.  
 

203.

A company’s employees earn a total of $10,000 per week for a 5-day week that begins on Monday. December 31 of Year 1 is a Monday, and all 20 employees worked that day.

a) Prepare the required adjusting journal entry to record accrued salaries on December 31, Year 1.
b) Prepare the journal entry to record the payment of salaries on January 4, Year 2.  
 

204.

Glisten Co. leases an office to a tenant at the rate of $3,000 per month. The tenant contacted Glisten and arranged to pay the rent for December on January 8 of the following year. Glisten agrees to this arrangement.

a.) Prepare the journal entry that Glisten must make at year ended December 31 to record the accrued rent revenue.
b.) Prepare the journal entry to record the receipt of the rent on January 8 of the following year.  
 

205.

Prior to recording adjusting entries on December 31, a company’s Office Supplies account had an $780 debit balance. A physical count of the supplies showed $425 of unused supplies available as of December 31. Prepare the required adjusting entry.  
 

206.

Complete the following by filling in the blanks:

(1) The Prepaid Insurance account had a $545 debit balance at the beginning of the current year; $650 of insurance premiums were paid during the year; and the year-end balance sheet showed $420 of prepaid insurance; consequently, the income statement for the year must have shown $______________ of insurance expense.
(2) The Office Supplies account began the current year with a $235 debit balance; the income statement for the year showed $475 of office supplies expense; and the year-end balance sheet showed the current asset, office supplies, at $275; consequently, if all supplies were accounted for, $____________ of office supplies must have been purchased during the year.  
 

207.

Werner Company had $1,300 of store supplies at the beginning of the current year. During this year, Werner purchased $6,250 worth of store supplies. On December 31, $1,125 worth of store supplies remained. Calculate the amount of Werner Company’s store supplies expense for the current year.  
 

208.

Prepare general journal entries on December 31 to record the following unrelated year-end adjustments.

a. Estimated depreciation on equipment for the year, $4,500.
b. The Prepaid Insurance account has a $3,680 debit balance before adjustment. An examination of insurance policies shows $600 of insurance expired.
c. The Prepaid Insurance account has a $2,400 debit balance before adjustment. An examination of insurance policies shows $950 of unexpired insurance.
d. The company has three office employees who each earn $100 per day for a five-day workweek that ends on Friday. The employees were paid on Friday, December 26, and have worked full days on Monday, Tuesday, and Wednesday, December 29, 30, and 31.
e. On November 1, the company received 6 months’ rent in advance from a tenant whose rent is $700 per month. The $4,200 was credited to the Unearned Rent account.
f. The company collects rent monthly from its tenants. One tenant whose rent is $1,000 per month has not paid his rent for December.  
 

209.

Rogers Company’s employees are paid a total of $1,600 per day for a 5-day workweek. The employees are paid each Friday. This year the accounting period ends on Tuesday. Prepare the December 31 year-end adjusting journal entry Rogers Company should make to accrue wages.  
 

210.

Show the December 31 adjusting entry to record $750 of earned but unpaid salaries of employees at the end of the current accounting period.  
 

211.

Juno Company had $500 of office supplies available at the beginning of the current year. During the year Juno Company purchased $2,750 worth of office supplies. On December 31 of this year $375 worth of office supplies remained.

a. Calculate the amount of Juno Company’s office supplies expense for the current year. (Show your calculations.)
b. Prepare the journal entry to adjust the supplies account.  
 

212.

During the current year ended December 31, clients paid fees in advance for accounting services amounting to $15,000. These fees were recorded in an account called Unearned Accounting Fees. If $3,500 of these fees remains unearned on December 31 of this year, present the December 31 adjusting entry to bring the accounts up to date.  
 

213.

The following unadjusted and adjusted trial balances are from the current year’s accounting system for Excelsior.
  

Excelsior
Trial Balances
For Year Ended December 31

Unadjusted Trial Balance

Adjusted Trial Balance

Debit

Credit

Debit

Credit

Cash

11,300

11,300

Accounts receivable

16,340

17,140

Office supplies

1,145

645

Prepaid advertising

1,000

450

Building

26,700

26,700

Accumulated depreciation—Building

1,300

6,300

Accounts payable

3,320

3,500

Unearned services revenue

4,410

3,010

D. Ruiz, Capital

17,905

17,905

Services revenue

72,400

74,600

Salaries expense

34,500

34,500

Utilities expense

 5,450

 5,630

Advertising expense

 2,900

 3,450

Supplies expense

    500

Depreciation expense—building

             

             

   5,000

              

Totals

  99,335

  99,335

105,315

 105,315


Present the six adjusting entries in general journal form that explain the changes in the account balances from the unadjusted to the adjusted trial balance.  
 

214.

Trapper Company’s unadjusted and adjusted trial balances on December 31 of the current year are as follows:
  

Unadjusted Trial Balance

Adjusted Trial Balance

Cash

4,000

4,000

Prepaid insurance

1,500

1,200

Equipment

9,000

9,000

Accumulated depreciation—Equipment

800

1,800

Salaries payable

1,000

Unearned repair fees

2,500

600

Repair fees earned

10,000

11,900

Salaries expense

3,500

4,500

Depreciation expense—Equip.

1,000

Insurance expense

     700

  5,400

  1,000

  5,400

Black, Capital

18,700

18,700

20,700

20,700


Present the four adjusting journal entries that were recorded by Trapper Company.  
 

215.

Record the December 31 adjusting entries for the following transactions and events in general journal form. Assume that December 31 is the end of the annual accounting period.

a. The Prepaid Insurance account shows a debit balance of $2,340, representing the cost of a two-year fire insurance policy that was purchased on October 1 of the current year and has not been adjusted to-date.
b. The Store Supplies account has a debit balance of $400; a year-end inventory count reveals $80 of supplies still on hand.
c. On November 1 of the current year, Rent Earned was credited for $1,500. This amount represented the rent earned for a three-month period beginning November 1.
d. Estimated depreciation on store equipment is $600.
e. Accrued salaries amount to $1,400.  
 

216.

Based on the unadjusted trial balance for Highlight Styling and the adjusting information given below, prepare the adjusting journal entries for Highlight Styling.
Highlight Stylings’ unadjusted trial balance for the current year follows:
  

Highlight Styling
Trial Balance
December 31

Cash

$2,200

Prepaid insurance

1,680

Shop supplies

790

Shop equipment

3,860

Accumulated depreciation—shop equipment

$770

Building

59,500

Accumulated depreciation—building

3,840

Land

55,000

Unearned rent

2,600

Long-term notes payable

50,000

Bella Hanson, Capital

48,860

Rent earned

2,400

Fees earned

23,400

Wages expense

3,200

Utilities expense

690

Property taxes expense

600

Interest expense

      4,350

                

Totals

$131,870

$131,870


Additional information:

a. An insurance policy examination showed $1,040 of expired insurance.
b. An inventory count showed $210 of unused shop supplies still available.
c. Depreciation expense on shop equipment, $350.
d. Depreciation expense on the building, $2,020.
e. A beautician is behind on space rental payments, and this $200 of accrued revenues was unrecorded at the time the trial balance was prepared.
f. $800 of the Unearned Rent account balance was still unearned by year-end.
g. The one employee, a receptionist, works a five-day workweek at $50 per day. The employee was paid last week but has worked four days this week for which she has not been paid.
h. Three months’ property taxes, totaling $450, have accrued. This additional amount of property taxes expense has not been recorded.
i. One month’s interest on the note payable, $600, has accrued but is unrecorded.  
 

217.

Based on the unadjusted trial balance for Glow Styling and the adjusting information given below, prepare the adjusting journal entries for Glow Styling. After completing the adjusting entries, prepare the trial balance for Glow Styling.

Glow Styling unadjusted trial balance for the current year follows:
  

Glow Styling
Trial Balance
December 31

Cash

$4,200

Prepaid insurance

1,480

Shop supplies

990

Shop equipment

3,860

Accumulated depreciation—shop equipment

$770

Building

57,500

Accumulated depreciation—building

3,840

Land

55,000

Unearned rent

1,600

Long-term notes payable

50,000

Bella Hanson, Capital

49,860

Rent earned

2,400

Fees earned

23,400

Wages expense

3,200

Utilities expense

690

Property taxes expense

600

Interest expense

      4,350

________

Totals

$131,870

$131,870



Additional information:

a. An insurance policy examination showed $1,240 of expired insurance.
b. An inventory count showed $210 of unused shop supplies still available.
c. Depreciation expense on shop equipment, $350.
d. Depreciation expense on the building, $2,220.
e. A beautician is behind on space rental payments, and this $200 of accrued revenues was unrecorded at the time the trial balance was prepared.
f. $800 of the Unearned Rent account balance was earned by year-end.
g. The one employee, a receptionist, works a five-day workweek at $50 per day. The employee was paid last week but has worked four days this week for which she has not been paid.
h. Three months’ property taxes, totaling $450, have accrued. This additional amount of property taxes expense has not been recorded.
i. One month’s interest on the note payable, $600, has accrued but is unrecorded.

Use the above information to prepare the adjusted trial balance for Glow Styling.  
 

218.

Using the information presented below, prepare an income statement from the adjusted trial balance of Dodson Containers.
  

DODSON CONTAINERS
Adjusted Trial Balance
December 31

Cash

$3,050

Accounts receivable

400

Prepaid insurance

830

Office supplies

80

Office equipment

4,200

Accumulated depreciation—office equipment

$1,100

Buildings

98,000

Accumulated depreciation—buildings

28,000

Land

115,000

Wages Payable

880

Property taxes payable

1,400

Interest payable

2,200

Unearned rent

460

Long-term notes payable

150,000

Frank Dodson, Capital

40,340

Frank Dodson, Withdrawals

21,000

Rent earned

67,500

Wages expense

29,000

Utilities expense

2,900

Property taxes expense

2,400

Insurance expense

5,800

Office supplies expense

250

Depreciation expense—office equipment

400

Depreciation expense—buildings

5,570

Interest expense

      3,000

               

Totals

$291,880

$291,880

219.

Using the information presented below, prepare a statement of owner’s equity and balance sheet from the adjusted trial balance of Dodson Containers. Mr. Dodson’s capital account balance of $40,340 consists of a $30,340 beginning-year balance plus a $10,000 investment during the current year.
  

DODSON CONTAINERS
Adjusted Trial Balance
December 31

Cash

$3,050

Accounts receivable

400

Prepaid insurance

830

Office supplies

80

Office equipment

4,200

Accumulated depreciation—office equipment

$1,100

Buildings

98,000

Accumulated depreciation—buildings

28,000

Land

115,000

Wages Payable

880

Property taxes payable

1,400

Interest payable

2,200

Unearned rent

460

Long-term notes payable

150,000

Frank Dodson, Capital

40,340

Frank Dodson, Withdrawals

21,000

Rent earned

67,500

Wages expense

29,000

Utilities expense

2,900

Property taxes expense

2,400

Insurance expense

5,800

Office supplies expense

250

Depreciation expense—office equipment

400

Depreciation expense—buildings

5,570

Interest expense

      3,000

               

Totals

$291,880

$291,880

 
 

220.

Using the information given below, prepare an income statement and owner’s equity statement for Rapid Car Services from the adjusted trial balance. Owner Stella Grafton did not make any additional investments in the company during the year.
  

Rapid Car Services
Adjusted Trial Balance
For the year ended December 31

Cash

$33,000

Accounts receivable

14,200

Office supplies

1,700

Vehicles

100,000

Accumulated depreciation—Vehicles

45,000

Accounts payable

11,500

Stella Grafton, Capital

71,900

Stella Grafton, Withdrawals

40,000

Fees earned

155,000

Rent expense

13,000

Office supplies expense

2,000

Utilities expense

2,500

Depreciation Expense—Vehicles

15,000

Salary expense

50,000

Fuel expense

    12,000

               

Totals

$283,400

$283,400

 
 

221.

Using the information given below, prepare a balance sheet for Rapid Car Services from the adjusted trial balance. Owner Stella Grafton did not make any additional investments in the company during the year.
  

Rapid Car Services
Adjusted Trial Balance
For the year ended December 31

Cash

$33,000

Accounts receivable

14,200

Office supplies

1,700

Vehicles

100,000

Accumulated depreciation—Vehicles

45,000

Accounts payable

11,500

Stella Grafton, Capital

71,900

Stella Grafton, Withdrawals

40,000

Fees earned

155,000

Rent expense

13,000

Office supplies expense

2,000

Utilities expense

2,500

Depreciation Expense—Vehicles

15,000

Salary expense

50,000

Fuel expense

   12,000

               

Totals

 $283,400

$283,400

 
 

222.

Abdulla Co. collected 6-months’ rent in advance from a tenant on October 1 of the current year. When it collected the cash, it recorded the following entry:
  

Nov. 01

Cash

15,000

   Rent Revenue Earned

15,000


Prepare the required adjusting entry at December 31 of the current year.  
 

223.

On November 1 of the current year, Salinger Company paid $9,600 cash for a one-year insurance policy that took effect on that day. On the date of the payment, Salinger recorded the following entry:
  

Oct. 01

Insurance Expense

9,600

     Cash

9,600


Prepare the required adjusting entry at December 31 of the current year.  
 

224.

Carroll Co. is a multi-million dollar business. The business results for the year have been impacted significantly by a slowing economy. The company wants to increase its net income. It has incurred $2,900,000 in unpaid salaries at the end of the year and wants to leave those amounts unrecorded at the end of the year. (a) How would this omission affect the financial statements of Carroll? (b) Which accrual basis of accounting principles does this omission violate? (c) Would this be considered an ethical problem?  
 

225.

The following information is available for Hatter Co.
  

2015

2014

2013

Net income

2,500

1,700

1,900

Net sales

37,000

35,000

32,000

Total assets

420,000

395,000

375,000


From the information provided, calculate Hatter’s profit margin ratio for each of the three years. In 2014, economic conditions and a slowing economy impacted the results of operations. Comment on the results, assuming that the industry average for the profit margin ratio is 7% for each of the three years.  
 

226.

The unadjusted trial balance and the adjustment data for Porter Business Institute are given below along with adjusting entry information. What is the impact on net income if these adjustments are not recorded? Show the calculation for net income without the adjustments and net income with the adjustments. Which one gives the most accurate net income? Which accounting principles are being violated if the adjustments are not made?
  

Porter Business Institute
Unadjusted Trial Balance
December 31
(in millions)

Cash

$58,000

Accounts receivable

59,000

Prepaid insurance

12,000

Equipment

8,000

Accumulated depreciation—equipment

$2,000

Buildings

57,500

Accumulated depreciation—buildings

17,500

Land

55,000

Unearned rent

16,000

Long-term notes payable

50,000

Porter, Capital

115,600

Tuition fees earned

74,000

Training fees earned

23,400

Wages expense

32,000

Utilities expense

8,000

Property taxes expense

5,000

Interest expense

       4,000

_______

Totals

$298,500

$298,500


Additional information items:

a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the insurance invoice indicates that one half of the policy has expired by the end of the December 31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.  
 

227.

The unadjusted trial balance and the adjustment data for Porter Business Institute are shown below along with adjusting entry information. What is the impact of the adjusting entries on the balance sheet? Show the calculation for total assets, total liabilities, and owner’s equity without the adjustments; show the calculation for total assets, total liabilities, and owner’s equity with the adjustments. Which one provides the most accurate presentation of the balance sheet?
  

Porter Business Institute
Unadjusted Trial Balance
December 31
(in millions)

Cash

$58,000

Accounts receivable

59,000

Prepaid insurance

12,000

Equipment

8,000

Accumulated depreciation—equipment

$2,000

Buildings

57,500

Accumulated depreciation—buildings

17,500

Land

55,000

Unearned rent

16,000

Long-term notes payable

50,000

Porter, Capital

115,600

Tuition fees earned

74,000

Training fees earned

23,400

Wages expense

32,000

Utilities expense

8,000

Property taxes expense

5,000

Interest expense

      4,000

________

Totals

$298,500

$298,500


Additional information items:

a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the insurance invoice indicates that one half of the policy has expired by the end of the December 31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.  
 

228.

Using the selected information given below for Luk Company, calculate the return on assets, debt ratio, and profit margin. Comment on the results of operations and the financial position of the company for the year.
  

Sales

1,050,000

Expenses

795,000

Assets (beginning of the year)

1,500,000

Assets (end of the year)

1,900,000

Liabilities

850,000

 
 

229.

Prepare adjusting entries for the year ended December 31, for each of these separate situations. Assume that prepaid expenses are initially recorded in asset accounts and that fees collected in advance are initially recorded as liabilities.

a. The Prepaid Rent account has a debit balance of $8,000 before adjustment, representing a prepayment for four months’ rent made on December 1 of the current year.
b. One-third of the work related to $18,000 of cash received in advance was performed during this period.
c. Unpaid accrued salaries at December 31 amounts to $15,000
d. Work was completed for a client on December 31 in the amount of $21,000, but was not previously billed or recorded.
e. Estimated depreciation on office equipment is $27,000.  
 

230.

Gracio Co. had the following transactions in the last two months of its year ended December 31. Prepare entries for these transactions under the method that records prepaid expenses as expenses and records unearned revenues as revenues. Also prepare adjusting entries at the end of the year.
  

Nov. 1

Paid $11,400 for 12 months of insurance coverage through October 31 of next year.

5

Received $8,000 cash for future services to be provided to a customer.

7

Paid $10,000 for future advertising.

Dec. 31

A portion of the insurance paid for on November 1 has expired. No adjustment was made in November to the insurance account.

31

Services of $2,500 are not yet provided to the customer who paid on November 5.

31

Of the advertising paid for on November 7, $1,500 is not yet used.

 
 

231.

For each of the following two separate situations, present both the April 30 adjusting entry and the subsequent entry during May to record the payment of the accrued expenses or receipt of the accrued revenue.

a. Nicolas Company has 5 employees, who earn a total of $2,900 in salaries each working day. They are paid on Monday for the five-day workweek ending on the previous Friday. Assume that fiscal year ended April 30, is a Thursday and all employees worked each day and will be paid salaries for five full days on the following Monday.
b. Services of $3,000 have been performed for Clevenger Company through April 30. The client will pay the entire amount of the contract when services are completed on May 23.
c. Paid the employees’ salaries on May 4.
d. Received payment from Clevenger Company for services that are now completed on May 23.  
 


Fill in the Blank Questions

232.

Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their ________________________ year.  
 
________________________________________

233.

______________________ are required at the end of the accounting period because certain internal transactions and events remain unrecorded. 
 
________________________________________

234.

Accrual accounting and the adjusting process rely on two principles: the ___________________ principle and the ________________________ principle. 
 
________________________________________

235.

__________ basis accounting means that revenues are recognized when cash is received and that expenses are recorded when cash is paid. _____________ basis accounting means that the financial effects of revenues and expenses are recorded when earned or incurred. 
 
________________________________________

236.

Adjusting is a three-step process (1) _________________, (2) ___________________, and (3) _______________________. 
 
________________________________________

237.

________________ refer to costs incurred in a period that are both unpaid and unrecorded. ___________ refer to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets). 
 
________________________________________

238.

Accrued revenues at the end of one accounting period often result in cash _______________________ in the next period. 
 
________________________________________

239.

______________ revenues are liabilities requiring delivery of products and for services. 
 
________________________________________

240.

If a prepaid expense account were not adjusted for the amount used, on the balance sheet assets would be ___________________ and equity would be ___________________. 
 
________________________________________

241.

Profit margin = ___________________ divided by net sales. 
 
________________________________________

242.

The _______________ depreciation method allocates equal amounts of an asset’s cost to depreciation during its useful life. 
 
________________________________________

243.

___________________ is the process of allocating the cost of plant assets to the income statement over their expected useful lives. 
 
________________________________________

244.

A _____________ account is an account linked with another account, having an opposite normal balance, and reported as a subtraction from that other account’s balance. 
 
________________________________________

245.

_____________ expenses are those costs that are incurred in a period but are both unpaid and unrecorded. 
 
________________________________________

246.

An _______________________ is a listing of all of the accounts in the ledger with their account balances before adjustments are made. 
 
________________________________________

247.

An _______________________ is a listing of all of the accounts in the ledger with their account balances after adjustments are made. 
 
________________________________________


Chapter 03 Adjusting Accounts and Preparing Financial Statements Answer Key
 


True / False Questions

1.

A company’s fiscal year must correspond with the calendar year. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

2.

The time period assumption assumes that an organization’s activities can be divided into specific time periods such as months, quarters, or years. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

3.

Interim financial statements report a company’s business activities for a one-year period. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

4.

A fiscal year refers to an organization’s accounting period that spans twelve consecutive months or 52 weeks. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

5.

Adjusting entries are made after the preparation of financial statements. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

6.

Adjusting entries result in a better matching of revenues and expenses for the period. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

7.

Two main accounting principles used in accrual accounting are matching and full closure. 
 
FALSE

AACSB: Communication
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AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

8.

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Adjusting entries

9.

The matching principle does not aim to record expenses in the same accounting period as the revenue earned as a result of these expenses. 
 
FALSE

AACSB: Communication
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AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

10.

The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues. 
 
TRUE

AACSB: Communication
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AICPA: FN Measurement
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

11.

The cash basis of accounting commonly increases the comparability of financial statements from period to period. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

12.

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

13.

Since the revenue recognition principle requires that revenues be recorded when earned, there are no unearned revenues in accrual accounting. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

14.

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

15.

The cash basis of accounting is an accounting system in which revenues are recorded when earned and expenses are recorded when incurred. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

16.

The cash basis of accounting recognizes revenues when cash payments from customers are received. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

17.

The accrual basis of accounting recognizes revenues when cash is received from customers. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

18.

The accrual basis of accounting recognizes expenses when cash is paid. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

19.

Recording revenues early overstates current-period income; recording revenues late understates current period income. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

20.

Recording expenses early overstates current-period income; recording expenses late understates current period income. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

21.

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all transactions were properly recorded. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

22.

A company paid $9,000 for a twelve-month insurance policy on February 1. The policy coverage began on February 1. On February 28, $750 of insurance expense must be recorded. 
 
TRUE

Expense = $9,000/12 = $750

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

23.

On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October. 
 
TRUE

Revenue = $15,000 * 10% = $1,500

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

24.

The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

25.

The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

26.

Adjusting entries are designed primarily to correct accounting errors. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

27.

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account. 
 
TRUE

AACSB: Communication
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AICPA: FN Measurement
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

28.

Each adjusting entry will affect a balance sheet account. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

29.

Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

30.

Accrued revenues at the end of one accounting period are expected to result in cash collections in a future period. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

31.

Each adjusting entry affects one or more income statements account, one or more balance sheet account, and never cash. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

32.

Accrued expenses reflect transactions where cash is paid before a related expense is recognized. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

33.

Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned revenues. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

34.

The entry to record a cash receipt from a customer when the service is to be provided in a future period involves a debit to an unearned revenue account. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

35.

Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

36.

An adjusting entry often includes an entry to Cash. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

37.

Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

38.

Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

39.

Failure to record depreciation expense will overstate assets and understate expenses. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

40.

A company’s month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

41.

Profit margin can also be called return on sales. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

42.

Profit margin measures the relation of debt to assets. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

43.

Profit margin reflects the percent of profit in each dollar of revenue. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

44.

Profit margin is calculated by dividing net sales by net income. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

45.

Torsten had total assets of $149,501,000, net income of $6,242,000, and net sales of $209,203,000. Its profit margin was 2.98%. 
 
TRUE

Profit Margin = Net Income/Net Sales
Profit Margin = $6,242,000/$209,203,000 = 2.98%

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

46.

A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

47.

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance remaining in Prepaid Rent on December 1 should be $1,500. 
 
TRUE

$18,000 * 1/12 = $1,500

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

48.

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

49.

A salary owed to employees is an example of an accrued expense. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

50.

In accrual accounting, accrued revenues are recorded as liabilities. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

51.

Depreciation expense is an example of an accrued expense. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

52.

Earned but uncollected revenues are recorded during the adjusting process with a credit to a revenue account and a debit to an expense account. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

53.

Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to that period. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

54.

All plant assets, including land, are depreciated. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

55.

Net income for a period will be understated if accrued revenues are not recorded at the end of the accounting period. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

56.

Depreciation measures the decline in market value of an asset. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

57.

A company owes its employees $5,000 for the year ended December 31. It will pay employees on January 6 for the previous two weeks’ salaries. The year-end adjusting entry on December 31 will include a debit to Salaries Expense and a credit to Cash. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

58.

A company purchased $6,000 worth of supplies in August and recorded the purchase in the Supplies account. On August 31, the fiscal year-end, the physical count of supplies indicates the cost of unused supplies is $3,200. The adjusting entry would include a $2,800 debit to Supplies. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

59.

A company performs 20 days of work on a 30-day contract before the end of the year. The total contract is valued at $6,000 and payment is not due until the contract is fully completed. The adjusting entry includes a $4,000 debit to unearned revenue. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

60.

A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the contract services in April and billed the customer. The company should recognize the revenue when it receives the customer’s check. 
 
FALSE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

61.

The adjusted trial balance must be prepared before the adjusting entries are made. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P2 Explain and prepare an adjusted trial balance.
Topic: Adjusted Trial Balance

62.

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P2 Explain and prepare an adjusted trial balance.
Topic: Adjusted Trial Balance

63.

Financial statements can be prepared directly from the information in the adjusted trial balance. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance.
Topic: Preparing Financial Statements

64.

Asset and liability balances are transferred from the adjusted trial balance to the income statement. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance.
Topic: Preparing Financial Statements

65.

Revenue and expense balances are transferred from the adjusted trial balance to the income statement. 
 
TRUE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance.
Topic: Preparing Financial Statements

66.

In preparing statements from the adjusted trial balance, the balance sheet must be prepared first. 
 
FALSE

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P3 Prepare financial statements from an adjusted trial balance.
Topic: Preparing Financial Statements

67.

It is acceptable to record prepayment of expenses as debits to expense accounts if an adjusting entry is made at the end of the period to bring the asset account balance to the correct unused or unexpired amount. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids.
Topic: Alternative Accounting of Prepayments

68.

It is acceptable to record cash received in advance of providing products or services to revenue accounts if an adjusting entry is made at the end of the period to bring the liability account balance to the correct unearned amount. 
 
TRUE

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P4 Appendix 3A-Explain the alternatives in accounting for prepaids.
Topic: Alternative Accounting of Prepayments


Multiple Choice Questions

69.

The time period assumption assumes that an organization’s activities may be divided into specific reporting time periods including all of the following except: 
 

A. 

Months.

B. 

Quarters.

C. 

Fiscal years.

D. 

Calendar years.

E.

Days.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

70.

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the: 
 

A. 

Operating cycle of a business.

B.

Time period assumption.

C. 

Going-concern assumption.

D. 

Matching principle.

E. 

Accrual basis of accounting.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

71.

Interim financial statements refer to financial reports: 
 

A.

That cover less than one year, usually spanning one, three, or six-month periods.

B. 

That are prepared before any adjustments have been recorded.

C. 

That show the assets above the liabilities and the liabilities above the equity.

D. 

Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid.

E. 

Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

72.

The 12-month period that ends when a company’s sales activities are at their lowest level is called the: 
 

A. 

Fiscal year.

B. 

Calendar year.

C.

Natural business year.

D. 

Accounting period.

E. 

Interim period.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

73.

The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the: 
 

A. 

Fiscal cycle.

B. 

Natural business year.

C.

Accounting period.

D. 

Business cycle.

E. 

Operating cycle.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C1 Explain the importance of periodic reporting and the time period assumption.
Topic: The Accounting Period

74.

The accounting principle that requires revenue to be recorded when earned is the: 
 

A. 

Matching principle.

B.

Revenue recognition principle.

C. 

Time period assumption.

D. 

Accrual reporting principle.

E. 

Going-concern assumption.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

75.

Adjusting entries: 
 

A. 

Affect only income statement accounts.

B. 

Affect only balance sheet accounts.

C.

Affect both income statement and balance sheet accounts.

D. 

Affect cash accounts.

E. 

Affect only equity accounts.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

76.

The main purpose of adjusting entries is to: 
 

A. 

Record external transactions and events.

B.

Record internal transactions and events.

C. 

Recognize assets purchased during the period.

D. 

Recognize debts paid during the period.

E. 

Correct errors in the accounting records.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

77.

The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the: 
 

A. 

Recognition principle.

B. 

Cost principle.

C. 

Cash basis of accounting.

D.

Expense recognition (Matching) principle.

E. 

Time period principle.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

78.

The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called: 
 

A. 

Accrual basis accounting.

B. 

Operating cycle accounting.

C.

Cash basis accounting.

D. 

Revenue recognition accounting.

E. 

Current basis accounting.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

79.

Adjusting entries made at the end of an accounting period accomplish all of the following except: 
 

A. 

Updating liability and asset accounts to their proper balances.

B. 

Assigning revenues to the periods in which they are earned.

C. 

Assigning expenses to the periods in which they are incurred.

D. 

Assuring that financial statements reflect the revenues earned and the expenses incurred.

E.

Assuring that external transaction amounts remain unchanged.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

80.

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is: 
 

A. 

Cash basis accounting.

B. 

The matching principle.

C. 

The time period assumption.

D.

Accrual basis accounting.

E. 

Revenue basis accounting.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

81.

Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all examples of: 
 

A. 

Items that require contra accounts.

B.

Items that require adjusting entries.

C. 

Asset and equity.

D. 

Asset accounts.

E. 

Income statement accounts.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

82.

The accrual basis of accounting: 
 

A.

Is generally accepted for external reporting because it is more useful than cash basis for most business decisions.

B. 

Is flawed because it gives complete information about cash flows.

C. 

Recognizes revenues when received in cash.

D. 

Recognizes expenses when paid in cash.

E. 

Eliminates the need for adjusting entries at the end of each period.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C2 Explain accrual accounting and how it improves financial statements.
Topic: Accrual Basis versus Cash Basis

83.

Which of the following statements is incorrect? 
 

A. 

Adjustments to prepaid expenses and unearned revenues involve previously recorded assets and liabilities.

B. 

Accrued expenses and accrued revenues involve assets and liabilities that had not previously been recorded.

C. 

Adjusting entries can be used to record both accrued expenses and accrued revenues.

D. 

Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time.

E.

Adjusting entries affect only balance sheet accounts.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

84.

An adjusting entry could be made for each of the following except: 
 

A. 

Prepaid expenses.

B. 

Depreciation.

C.

Owner investments.

D. 

Unearned revenues.

E. 

Accrued expenses.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

85.

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would: 
 

A. 

Understate net income by $28,000.

B.

Overstate net income by $28,000.

C. 

Have no effect on net income.

D. 

Overstate assets by $28,000.

E. 

Understate assets by $28,000.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

86.

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show: 
 

A. 

Assets overstated and equity understated.

B. 

Assets and equity both understated.

C. 

Assets overstated, net income understated, and equity overstated.

D. 

Assets, net income, and equity understated.

E.

Assets, net income, and equity overstated.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

87.

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Management Fees account to the Management Fees Revenue account, this omission would cause: 
 

A. 

An overstatement of net income.

B. 

An overstatement of assets.

C.

An overstatement of liabilities.

D. 

An overstatement of equity.

E. 

An understatement of liabilities.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

88.

A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to move the portion of these fees that has been earned to a revenue account, one effect will be: 
 

A. 

An overstatement of equity.

B.

An understatement of equity.

C. 

An understatement of assets.

D. 

An understatement of liabilities.

E. 

An overstatement of assets.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

89.

Profit margin is defined as: 
 

A. 

Revenues divided by net sales.

B. 

Net sales divided by assets.

C.

Net income divided by net sales.

D. 

Net income divided by assets.

E. 

Net sales divided by net income.

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

90.

A company earned $3,000 in net income for October. Its net sales for October were $10,000. Its profit margin is: 
 

A. 

3%.

B.

30%.

C. 

33%.

D. 

333%.

E. 

$7,000.

Profit Margin = Net Income/Net Sales
Profit Margin = $3,000/$10,000 = .30 = 30%

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

91.

All of the following statements regarding profit margin are true except: 
 

A. 

Profit margin reflects the percent of profit in each dollar of revenue.

B. 

Profit margin is also called return on sales.

C. 

Profit margin can be used to compare a firm’s performance to its competitors.

D. 

Profit margin is calculated by dividing net income by net sales.

E.

Profit margin is not a useful measure of a company’s operating results.

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

92.

A company had $7,000,000 in net income for the year. Its net sales were $15,200,000 for the same period. Calculate its profit margin.  
 

A. 

85.4%.

B. 

117.1%.

C. 

53.9%.

D. 

217.1%.

E.

46.1%.

Profit Margin = Net Income/Net Sales
Profit Margin = $7,000,000/$15,200,000 = .461 = 46.1%

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A2 Compute profit margin and describe its use in analyzing company performance.
Topic: Profit Margin

93.

On July 1 Plum Co. paid $7,500 cash for management services to be performed over a two-year period. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. On July 1 Plum should record: 
 

A. 

A debit to an expense and credit to a prepaid expense for $7,500.

B. 

A debit to an expense and credit to Cash for $7,500.

C.

A debit to a prepaid expense and a credit to Cash for $7,500.

D. 

A credit to a prepaid expense and a debit to Cash for $7,500.

E. 

A debit to Cash for $7,500 and a credit to an expense for $7,500.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

94.

On July 1of the current calendar year, Plum Co. paid $7,500 cash for management services to be performed over a two-year period. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Plum would include: 
 

A. 

A debit to an expense and a credit to a prepaid expense for $5,625.

B. 

A debit to a prepaid expense and a credit to Cash for $5,625.

C.

A debit to an expense and a credit to a prepaid expense for $1,875.

D. 

A debit to a prepaid expense and a credit to an expense for $1,875.

E. 

A credit to a liability and a debit to a prepaid expense for $1,875.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

95.

Accrued revenues: 
 

A.

At the end of one accounting period result in cash receipts in a future period.

B. 

At the end of one accounting period often result in cash payments in the next period.

C. 

Are also called unearned revenues.

D. 

Are listed on the balance sheet as liabilities.

E. 

Are recorded at the end of an accounting period because cash has already been received for revenues earned.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

96.

An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n): 
 

A. 

Accrued expense.

B.

Contra account.

C. 

Accrued revenue.

D. 

Intangible asset.

E. 

Adjunct account.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

97.

The total amount of depreciation recorded against an asset over the entire time the asset has been owned: 
 

A. 

Is referred to as depreciation expense.

B.

Is referred to as accumulated depreciation.

C. 

Is shown on the income statement of the final period.

D. 

Is only recorded when the asset is disposed of.

E. 

Is referred to as an accrued asset.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

98.

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called: 
 

A. 

Accumulated depreciation.

B. 

A contra account.

C. 

The matching principle.

D.

Depreciation expense.

E. 

An accrued account.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

99.

Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical count of the supplies showed $105 of unused supplies available. The required adjusting entry is: 
 

A. 

Debit Office Supplies $105 and credit Office Supplies Expense $105.

B. 

Debit Office Supplies Expense $105 and credit Office Supplies $105.

C.

Debit Office Supplies Expense $254 and credit Office Supplies $254.

D. 

Debit Office Supplies $254 and credit Office Supplies Expense $254.

E. 

Debit Office Supplies $105 and credit Supplies Expense $254.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

100.

If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to record the portion of those fees that has been earned is: 
 

A. 

Debit Cash and credit Legal Fees Earned.

B. 

Debit Cash and credit Unearned Legal Fees.

C.

Debit Unearned Legal Fees and credit Legal Fees Earned.

D. 

Debit Legal Fees Earned and credit Unearned Legal Fees.

E. 

Debit Unearned Legal Fees and credit Accounts Receivable.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

101.

On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the year ended December 31? 
 

A. 

$1,350.00.

B. 

$450.00.

C. 

$1,012.50.

D.

$337.50.

E. 

$37.50.

$1,350 * 9/36 = $337.50

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

102.

On July 1, a company paid the $2,400 premium on a one-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the current year ended December 31? 
 

A.

$1,200.

B. 

$2,400.

C. 

$1,000.

D. 

$400.

E. 

$1,400.

$2,400 * 6/12 = $1,200

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

103.

A company had no office supplies available at the beginning of the year. During the year, the company purchased $250 worth of office supplies. On December 31, $75 worth of office supplies remained. How much should the company report as office supplies expense for the year? 
 

A. 

$75.

B. 

$125.

C.

$175.

D. 

$250.

E. 

$325.

$250 – $75 = $175

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

104.

On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is: 
 

A. 

Debit Prepaid Insurance, $1,800; credit Cash, $1,800.

B. 

Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.

C. 

Debit Prepaid Insurance, $360; credit Insurance Expense, $360.

D.

Debit Insurance Expense, $360; credit Prepaid Insurance, $360.

E. 

Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.

$1,800 * 1/5 = $360 per year

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

105.

Unearned revenue is reported in the financial statements as: 
 

A. 

A revenue on the balance sheet.

B.

A liability on the balance sheet.

C. 

An unearned revenue on the income statement.

D. 

An asset on the balance sheet.

E. 

A financing activity on the statement of cash flows.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

106.

Which of the following assets is not depreciated? 
 

A. 

Store fixtures.

B. 

Computers.

C.

Land.

D. 

Buildings.

E. 

Equipment.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

107.

Which of the following does not require an adjusting entry at year-end? 
 

A. 

Accrued interest on notes payable.

B. 

Supplies used during the period.

C.

Cash invested by owner.

D. 

Accrued wages.

E. 

Expired portion of prepaid insurance.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

108.

On May 1, a two-year insurance policy was purchased for $18,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company’s income statement for the first year ended December 31? 
 

A. 

$750.

B.

$5,270.

C. 

$6,000.

D. 

$6,750.

E. 

$18,000.

$18,000 * 8/24 = $6,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

109.

Fragmental Co. leased a portion of its store to another company for eight months beginning on October 1, at a monthly rate of $800. Fragmental collected the entire $6,400 cash on October 1 and recorded it as unearned revenue. The journal entry made by Fragmental Co. at year-end on December 31 would be: 
 

A. 

A debit to Rent Revenue and a credit to Cash for $2,400.

B. 

A debit to Rent Revenue and a credit to Unearned Rent for $2,400.

C. 

A debit to Cash and a credit to Rent Revenue for $6,400.

D.

A debit to Unearned Rent and a credit to Rent Earned for $2,400.

E. 

A debit to Unearned Rent and a credit to Rent Earned for $4,000.

$6,400 * 3/8 = $2,400 earned by December 31

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

110.

On May 1, Sellers Marketing Company received $1,500 from Franco Marcelli for a marketing campaign effective from May 1 this year to April 30 of the following year. The Cash receipt was recorded as unearned fees and at year-end on December 31, $1,000 of the fees had been earned. The adjusting entry on December 31 would be: 
 

A. 

A debit to Unearned Fees and a credit to Cash for $500.

B. 

A debit to Fees Earned and a credit to Unearned Fees for $500.

C.

A debit to Unearned Fees and a credit to Fees Earned for $1,000.

D. 

A debit to Fees Earned and a credit to Cash for $1,000.

E. 

A debit to Fees Earned and a credit to Cash for $500.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

111.

Incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to a liability are: 
 

A. 

Intangible expenses.

B. 

Prepaid expenses.

C. 

Unearned expenses.

D. 

Net expenses.

E.

Accrued expenses.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-C3 Identify the types of adjustments and their purpose.
Topic: Framework for Adjustments

112.

The adjusting entry at the end of an accounting period to record the unpaid salaries of employees for work provided is:  
 

A. 

Debit Unpaid Salaries and credit Salaries Payable.

B. 

Debit Salaries Payable and credit Salaries Expense.

C. 

Debit Salaries Expense and credit Cash.

D.

Debit Salaries Expense and credit Salaries Payable.

E. 

Debit Cash and credit Salaries Expense.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

113.

A company pays each of its two office employees each Friday at the rate of $100 per day for a five-day week that begins on Monday. If the monthly accounting period ends on Tuesday and the employees worked on both Monday and Tuesday, the month-end adjusting entry to record the salaries earned but unpaid is: 
 

A. 

Debit Unpaid Salaries $600 and credit Salaries Payable $600.

B.

Debit Salaries Expense $400 and credit Salaries Payable $400.

C. 

Debit Salaries Expense $600 and credit Salaries Payable $600.

D. 

Debit Salaries Payable $400 and credit Salaries Expense $400.

E. 

Debit Salaries Expense $400 and credit Cash $400.

2 employees * 2 days * $100/employee/day = $400

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

114.

A company pays its employees $4,000 each Friday, which amounts to $800 per day for the five-day workweek that begins on Monday. If the monthly accounting period ends on Thursday and the employees worked through Thursday, the amount of salaries earned but unpaid at the end of the accounting period is:  
 

A. 

$4,000.

B. 

$800.

C. 

$1,600.

D. 

$2,400.

E.

$3,200.

4 days * $800/day = $3,200

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

115.

The adjusting entry to record the salaries earned due to employees for services provided but unpaid at the end of the accounting period affects the accounts in which of the following ways? 
 

A. 

Debit Salaries Payable and credit Salaries Expense.

B. 

Debit Salaries Expense and credit Cash.

C. 

Debit Accrued Salaries and credit Salaries Payable.

D. 

Debit Cash and credit Salaries Expense.

E.

Debit Salaries Expense and credit Salaries Payable.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

116.

On January 1, Eastern College received $1,200,000 from its students for the spring semester that it recorded in Unearned Tuition and Fees. The term spans four months beginning on January 2 and the college spreads the revenue evenly over the months of the term. What amount of tuition revenue should the college recognize on February 28? 
 

A.

$300,000.

B. 

$600,000.

C. 

$800,000.

D. 

$900,000.

E. 

$1,200,000.

$1,200,000/4 = $300,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

117.

On January 1, Fashion Forward Magazine received $15,000 from subscribers for the annual subscriptions that it recorded in Unearned Subscription Revenue. The issues of the magazine are mailed to subscribers quarterly. What amount of tuition revenue should the magazine recognize on March 31 when the first issue is sent in March? 
 

A. 

$15,000.

B. 

$1,250.

C. 

$7,500.

D.

$3,750.

E. 

$0.

$15,000/4 = $3,750

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

118.

An adjusting entry was made on year-end December 31 to accrue salary expense of $1,200. Which of the following entries would be prepared to record the $3,000 payment of salaries in January of the following year?  
 

A. 

Salaries Expense

3,000

    Cash

3,000

B. 

Salaries Payable

3,000

    Cash

3,000

C. 

Salaries Payable

1,200

    Cash

1,200

D. 

Salaries Expense

1,200

   Salaries Payable

1,200

E.

Salaries Payable

1,200

Salaries Expense

1,800

    Cash

3,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

119.

The difference between the cost of an asset and the accumulated depreciation for that asset is called 
 

A. 

Depreciation Expense.

B. 

Unearned Depreciation.

C. 

Prepaid Depreciation.

D. 

Depreciation Value.

E.

Book Value.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

120.

A company purchased a new delivery van at a cost of $45,000 on July 1. The truck is estimated to have a useful life of 6 years and a salvage value of $3,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the van during the first year ended December 31?  
 

A. 

$3,250.

B.

$3,500.

C. 

$4,000.

D. 

$6,500.

E. 

$7,000.

[($45,000 – $3,000)/6 years] * 6/12 months = $3,500

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

121.

A company’s Office Supplies account shows a beginning balance of $600 and an ending balance of $400. If office supplies expense for the year is $3,100, what amount of office supplies was purchased during the period? 
 

A. 

$2,700.

B.

$2,900.

C. 

$3,300.

D. 

$3,500.

E. 

$3,700.

$600 + Supplies Purchased – $3,100 = $400
Supplies Purchased – $2,500 = $400
Supplies Purchased = $2,900

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

122.

If a company records prepayment of expenses in an asset account, the adjusting entry when all or part of the prepaid asset is used or expired would: 
 

A.

Result in a debit to an expense and a credit to an asset account.

B. 

Cause an adjustment to prior expense to be overstated and assets to be understated.

C. 

Cause an accrued liability account to exist.

D. 

Result in a debit to a liability and a credit to an asset account.

E. 

Decrease cash.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

123.

A company recorded 2 days of accrued salaries of $1,400 for its employees on January 31. On February 9, it paid its employees $7,000 for these accrued salaries and for other salaries earned through February 9. The January 31 and February 9 journal entries are:  
 

A. 

1/31

Salaries Expense

1,400

      Salaries Payable

1,400

2/9

Salaries Payable

7,000

Salaries Expense

1,400

        Cash

7,000

B. 

1/31

Salaries Payable

1,400

      Salaries Expense

1,400

2/9

Salaries Expense

5,600

Salaries Payable

1,400

        Cash

7,000

C. 

1/31

Salaries Expense

1,400

      Cash

1,400

2/9

Salaries Expense

7,000

        Cash

7,000

D. 

1/31

Salaries Expense

1,400

      Salaries Payable

1,400

2/9

Salaries Expense

7,000

        Cash

7,000

E.

1/31

Salaries Expense

1,400

      Salaries Payable

1,400

2/9

Salaries Expense

5,600

Salaries Payable

1,400

        Cash

7,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

124.

If accrued salaries were recorded on December 31 with a debit to Salaries Expense and a credit to Salaries Payable, the entry to record payment of these wages on the following January 5 would include: 
 

A. 

A debit to Cash and a credit to Salaries Payable.

B. 

A debit to Cash and a credit to Prepaid Salaries.

C.

A debit to Salaries Payable and a credit to Cash.

D. 

A debit to Salaries Payable and a credit to Salaries Expense.

E. 

No entry would be necessary on January 5.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

125.

On December 1, Simpson Marketing Company received $3,600 from a customer for a marketing plan to be completed January 31 of the following year. The cash receipt was recorded as unearned fees. The adjusting entry for the year ended December 31 would include: 
 

A. 

a debit to Earned Fees for $3,600.

B.

a debit to Unearned Fees for $1,800.

C. 

a credit to Unearned Fees for $1,800.

D. 

a debit to Earned Fees for $1,800.

E. 

a credit Earned Fees for $3,600.

$3,600/2 = $1,800 per month

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

126.

Wilson Company paid insurance premiums for four months in advance on November 1. The balance in the prepaid insurance account before adjustment at the end of the year is $4,800 and no adjustments had been made previously. The adjusting entry required on December 31 is:  
 

A.

Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.

B. 

Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.

C. 

Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.

D. 

Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200.

E. 

Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.

$4,800 * 2/4 = $2,400

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

127.

What is the proper adjusting entry at December 31, the end of the accounting period, if the balance in the prepaid insurance account is $7,750 before adjustment, and the unexpired amount per analysis of policies is, $3,250? 
 

A. 

Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.

B.

Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.

C. 

Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.

D. 

Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.

E. 

Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.

$7,750 – $3,250 = $4,500

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

128.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the first year of the subscription assuming the company uses a calendar reporting period?  
 

A. 

$0.

B. 

$516.

C.

$387.

D. 

$129.

E. 

$430.

$1,548/36 = $43 per month
Year 1: $43 * 9 = $387
Year 2: $43 * 12 = $516
Year 3: $43 * 12 = $516
Year 4: $43 * 3 = $129

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

129.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the second year of the subscription assuming the company uses a calendar reporting period?  
 

A. 

$0.

B.

$516.

C. 

$387.

D. 

$129.

E. 

$430.

$1,548/36 = $43 per month
Year 1: $43 * 9 = $387
Year 2: $43 * 12 = $516
Year 3: $43 * 12 = $516
Year 4: $43 * 3 = $129

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

130.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. What is the adjusting entry that should be recorded by Griffith Publishing Company on December 31 of the first year? 
 

A. 

debit Unearned Fees, $1,548; credit Fees Earned, $1,548.

B. 

debit Unearned Fees, $516; credit Fees Earned, $516.

C. 

debit Unearned Fees, $1,161; credit Fees Earned, $1,161.

D. 

debit Unearned Fees, $129; credit Fees Earned, $129.

E.

debit Unearned Fees, $387; credit Fees Earned, $387.

$1,548 * 9/36 = $387

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

131.

On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. What is the adjusting entry that should be recorded by Griffith Publishing Company on December 31 of the second year? 
 

A. 

debit Unearned Fees, $1,548; credit Fees Earned, $1,548.

B.

debit Unearned Fees, $516; credit Fees Earned, $516.

C. 

debit Unearned Fees, $1,161; credit Fees Earned, $1,161.

D. 

debit Unearned Fees, $129; credit Fees Earned, $129.

E. 

debit Unearned Fees, $387; credit Fees Earned, $387.

$1,548 * 12/36 = $516

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

132.

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31 of the first year assuming the company is using a calendar reporting period and no previous adjustment has been made? 
 

A. 

$1,548.

B. 

$387.

C. 

$516.

D.

$1,161.

E. 

$0.

$1,548/36 = $43 per month
Year 1 = $1,548 – (43 * 9) = $1,161

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

133.

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31 of the second year assuming the company is using a calendar reporting period and the previous year adjustment had been made?  
 

A. 

$1,548.

B. 

$387.

C. 

$516.

D.

$645.

E. 

$0.

$1,548/36 = $43 per month
Year 1 = $1,548 – (43 * 9 months expired) = $1,161
Year 2 = $1,161 – ($43 * 12 months expired) = $645

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

134.

On April 1, Santa Fe, Inc. paid Griffith Publishing Company $1,548 for 36-month subscriptions to several different magazines. Santa Fe debited the prepayment to a Prepaid Subscriptions account, and the subscriptions started immediately. What adjusting entry should be made by Santa Fe, Inc. for the adjustment on December 31 of the first year assuming the company is using a calendar reporting period and no previous adjustments had been made?  
 

A. 

Debit Subscription Expense $516 and credit Prepaid Subscriptions $516.

B. 

Debit Prepaid Subscriptions $516 and credit Subscription Expense $516.

C. 

Debit Subscription Expense $387 and credit Cash $387.

D. 

Debit Unearned Subscriptions $387 and credit Subscription Expense $387.

E.

Debit Subscription Expense $387 and credit Prepaid Subscriptions $387.

$1,548/36 = $43 per month
Year 1 = $43 * 9 months expired = $387

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

135.

A company made no adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31. Which of the following statements is true?  
 

A. 

It will have no effect on income.

B. 

It will overstate assets and liabilities by $9,000.

C. 

It will understate net income by $9,000.

D. 

It will understate assets by $9,000.

E.

It will understate expenses and overstate net income by $9,000.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-A1 Explain how accounting adjustments link to financial statements.
Topic: Links to Financial Statements

136.

The correct adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31 is:  
 

A. 

debit Salary Expense, $9,000; credit Cash, $9,000

B. 

debit Salary Expense, $9,000; credit Fees Earned, $9,000

C. 

debit Salary Expense, $9,000; credit Prepaid Salary, $9,000

D.

debit Salary Expense, $9,000; credit Salaries Payable, $9,000

E. 

debit Salaries Payable, $9,000; credit Salary Expense $9,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

137.

A company purchased new furniture at a cost of $14,000 on September 30. The furniture is estimated to have a useful life of 8 years and a salvage value of $2,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the furniture for the first year ended December 31? 
 

A. 

$437.50

B.

$375.00

C. 

$1,500.00

D. 

$500

E. 

$1,750

($14,000 – $2,000)/8 years = $1,500 per year.
Year one = $1,500 * 3/12 = $375.

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

138.

A company purchased new furniture at a cost of $14,000 on September 30. The furniture is estimated to have a useful life of 8 years and a salvage value of $2,000. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year? 
 

A. 

$13,562.50

B. 

$12,250.00

C. 

$12,500.00

D. 

$13,500.00

E.

$13,625.00

($14,000 – $2,000)/8 years = $1,500 per year.
Year one depreciation expense = $1,500 * 3/12 = $375.
$14,000 – $375 = $13,625

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

139.

A company purchased new furniture at a cost of $16,000 on January 1. The furniture is estimated to have a useful life of 6 years and a $1,000 salvage value. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year?  
 

A. 

$16,000

B. 

$15,000

C. 

$2,500

D.

$13,500

E. 

$13,333

($16,000 – $1,000)/6 years = $2,500 per year.
$16,000 – $2,500 = $13,500

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

140.

The balances in Sanchez Accounting Services’ office supplies account on February 1 and February 28 were $1,200 and $375, respectively. If the office supplies expense for the month is $1,900, what amount of office supplies was purchased during February?  
 

A.

$1,075

B. 

$1,500

C. 

$1,525

D. 

$2,325

E. 

$3,100

$1,200 + Supplies Purchased – $1,900 = $375
Supplies Purchased – $700 = $375
Supplies Purchased = $1,075

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

141.

If Regent Tax Services’ office supplies account balance on March 1 was $1,400, the company purchased $675 of supplies during the month, and a physical count of supplies on hand at the end of March indicated $1,250 unused, what is the amount of the adjusting entry for office supplies on March 31? 
 

A. 

$675

B.

$825

C. 

$1,250

D. 

$1,975

E. 

$525

Beginning Supplies + Supplies Purchased – Ending Supplies = Supplies Used
$1,400 + 675 – $1,250 = $825

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

142.

A physical count of supplies on hand at the end of May for Masters, Inc. indicated $1,250 of supplies on hand. The general ledger balance before any adjustment is $2,100. What is the adjusting entry for office supplies that should be recorded on May 31?  
 

A. 

Debit Supplies Expense $1,250 and credit Supplies $1,250.

B. 

Debit Prepaid Supplies $850 and credit Supplied Expense $850.

C. 

Debit Supplies Expense $1,250 and credit Supplies $2,100.

D. 

Debit Supplies $1,250 and credit Cash $1,250.

E.

Debit Supplies Expense $850 and credit Supplies $850.

General Ledger balance – Supplies on hand = Supplies used
$2,100 – $1,250 = $850

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-P1 Prepare and explain adjusting entries.
Topic: Adjusting entries

143.

Which of the following statements is incorrect? 
 

A. 

An income statement reports revenues earned less expenses incurred.

B.

An unadjusted trial balance shows the account balances after they have been revised to reflect the effects of end-of-period adjustments.

C. 

Interim financial reports can be based on one-month or three-month accounting periods.

D. 

The fiscal year is any 12 consecutive months (or 52 weeks) used by a business as its annual accounting period.

E. 

Property, plant, and equipment are referred to as plant assets.

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-P2 Explain and prepare an adjusted trial balanc

Fundamental Accounting Principles 22nd Edition by John Wild,Ken Shaw, Barbara Chiappetta Solutions Manual

Fundamental Accounting Principles 22nd Edition by John Wild, Ken Shaw , Barbara Chiappetta Solutions Manual

SAMPLE

Chapter 5

Accounting for Merchandising Operations

QUESTIONS

1. Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not.  Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies do not.

2. Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense).

3. A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise.

4. A cash discount can be offered to encourage customers to promptly pay. This provides cash more quickly to the seller and avoids the costs of additional collection activities. Of course, the seller must perform a costs vs. benefits analysis on the merits and terms of any cash discount offered to customers.

5. For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account.

6. Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price.  Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory). Trade discounts are deducted from the list or catalog price to determine the purchase (negotiated) price.  Trade discounts are not recorded in the accounting records.

7. Sales discount is a term used by a seller to describe a cash discount granted to a customer.  Purchase discount is a term used by a purchaser to describe a cash discount received from a seller. (It is a matter of perspective: seller versus buyer.)

8. A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise.  More returns create more expenses.  By knowing more about returns, the manager can decide if they are a problem and how they can be minimized.

9. The sender (maker) of a debit memorandum records a debit in an account of the recipient; and the recipient records a credit in an account maintained for the sender.

10. The single-step income statement format presents cost of goods sold and expenses in one list, totals the list, and subtracts the total from net sales in one step.  The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold) and sub-categories of expenses (often by key activities).

11. Apple calls its inventory account “Inventories.”  A detailed calculation of cost of goods sold is not presented by Apple.

12. Google titles its cost of sales accounts as “Cost of revenues”  Google presents costs of sales separate for “Google (advertising and other)” and “Motorola Mobile (hardware and other)”.

13. Samsung titles its cost of goods sold account “Cost of sales.”

14. Samsung reports a separate gross margin figure on its consolidated income statement.  Its 2013 gross profit is ₩90,996,358 (in millions of Korean won).

15. A buyer should attempt to negotiate the shipping terms FOB destination. In this case, title will pass after the goods are safely delivered to the buyer’s business and transportation charges will be the responsibility of the supplier (seller).

QUICK STUDIES

Quick Study 5-1 (10 minutes)

1. G. 6. H.

2. B. 7. I.

3. A. 8. F.

4. J. 9. C.

5. E. 10. D.

Quick Study 5-2 (5 minutes)

Answer:  d

Quick Study 5-3 (15 minutes)

Computation of net income:

Krug Service Co.

Revenues

$14,000

Less: Expenses

    8,500

Net income

$  5,500

Kleiner Merchandising Co.

Sales

$ 9,500

Less: Cost of goods sold (see below*)

  7,200

Gross profit

2,300

Less: Operating expenses

  1,450

Net income

  850

*Computation of cost of goods sold:                                   _

Beginning inventory

$ 5,000

Plus: Purchases

   3,900

Goods available for sale

8,900

Less: Ending inventory

   1,700

Cost of goods sold

$ 7,200

Quick Study 5-4  (15 minutes)

Nov.   5 Merchandise Inventory 6,000

Accounts Payable 6,000

  To record credit purchase [(600 x $10].

   

Nov.   7 Accounts Payable 250

Merchandise Inventory 250

  Returned defective units [(25 x $10].

Nov. 15 Accounts Payable 5,750

Cash 5,635

Merchandise Inventory* 115

  Paid for purchase less cash discount
    *[(6,000 – $250) x 2%].

Quick Study 5-5 (10 minutes)

a)

Aug. 1 Merchandise Inventory 60,000

Accounts Payable 60,000

  To record credit purchase.

   

b)

Aug. 11 Accounts Payable 60,000

Cash* 58,800

Merchandise Inventory 1,200

  Paid for purchase less cash discount.
    * [(60,000 x (100% – 2%)].

Quick Study 5-6 (10 minutes)

a)

Sept. 15 Merchandise Inventory 35,000

Accounts Payable 35,000

  To record credit purchase.

   

b)

Sept. 28 Accounts Payable 35,000

Cash 35,000

  Paid for purchase and discount period missed.

Quick Study 5-7  (10 minutes)

Apr.   1 Accounts Receivable 3,000

Sales 3,000

  To record credit sale.

          1 Cost of Goods Sold 1,800

Merchandise Inventory 1,800

  To record cost of credit sale.

          4 Sales Returns and Allowances 600

Accounts Receivable 600

  To record sales return.

          4 Merchandise Inventory 360

Cost of Goods Sold 360

  Restore cost of returned goods to inventory.

        11 Cash 2,352

Sales Discounts* 48

Accounts Receivable 2,400

    Received payment less cash discount
  *[($3,000 – $600) x 2%].

Quick Study 5-8  (10 minutes)

July 31 Cost of Goods Sold 1,900

Merchandise Inventory 1,900

  To adjust for shrinkage based on
  physical count [$37,800 – $35,900].

Quick Study 5-9  (10 minutes)

July 31 Sales 160,200

Income Summary 160,200

  To close temporary accounts with credit balances.

July 31 Income Summary 165,900

Sales Discounts 4,700

Sales Returns and Allowances 6,500

Cost of Goods Sold* 106,900

Depreciation Expense 10,300

Salaries Expense 32,500

Miscellaneous Expenses 5,000

  To close temporary accounts with debit

  balances. (*$105,000 + $1,900 —from QS 5-8)

Quick Study 5-10 (10 minutes)

a

b

a

a

Quick Study 5-11 (10 minutes)

Acid-test ratio = ($1,490 + $2,800) / ($5,750 + $850) = 0.65

Explanation of acid-test ratio:  The acid-test ratio is used to evaluate (reflect on) the liquidity of a company.  It helps in determining whether a company will be able to meet its current obligations as they come due with its most liquid assets.  In this case, the company only has 65 cents available in quick assets to pay $1.00 in current liabilities as they come due.  An acid-test ratio less than one usually suggests some concern and encourages further analysis of liquidity.

Quick Study 5-12 (10 minutes)

Similarities:  Both the acid-test ratio and current ratio are used to assess liquidity.  Both ratios are computed with current liabilities as the denominator.

Differences:  The current ratio includes all current assets in the numerator. The acid-test ratio includes current assets less inventories and prepaids in its numerator (leaving cash & equivalents, current receivables, and short-term investments).

Comparison and Description:  Compared with the current ratio, the acid-test ratio is a more stringent test of a company’s ability to meet its current obligations. The acid-test ratio is more stringent as it does not assume a company relies on prepaids and inventory to pay current liabilities.  This is because prepaids and inventory assets are not generally available to satisfy current obligations.

Quick Study 5-13  (10 minutes)

(a)

(b)

(c)

(d)

Sales

$150,000

$550,000

$38,700

$255,700

Sales discounts

(5,000)

(17,500)

(600)

(4,800)

Sales returns and allowances

  (20,000)

    (6,000)

   (5,100)

        (900)

Net sales

125,000

526,500

33,000

250,000

Cost of goods sold

  (79,750)

(329,589)

(24,453)

(126,500)

Gross profit

$  45,250

$196,911

$  8,547

$123,500

Gross margin ratio:

(Gross profit / Net sales) 36.2% 37.4% 25.9% 49.4%

Interpretation of gross margin ratio for case a:  The ratio of 36.2% implies that for each dollar in net sales the company earns 36.2 cents in gross profit.  The company must still deduct other expenses that it incurs in running the business when computing net income.

Quick Study 5-14 (20 minutes) 

1. Multiple-step income statement

adidas Group

Income Statement (€ millions)

For Year Ended December 31, 2013

Net sales €14,492

Cost of sales   7,352

Gross profit 7,140

Operating expenses

Royalty and commission income   €    104

Other operating income 143

Other operating expenses   6,185

Operating profit 1,202

Other revenues and gains (expenses and losses)

Financial income 26

Financial expenses         94

Income before taxes 1,134

Income taxes       344

Net income     790

2. Single-step income statement

adidas Group

Income Statement (€ millions)

For Year Ended December 31, 2013

Revenues

Net sales €14,492

Royalty and commission income   104

Other operating income 143

Financial income         26

Total revenues 14,765

Expenses

Cost of sales €7,352

Other operating expenses   6,185

Financial expenses       94

Income taxes     344

Total expenses   13,975

Net income €     790

Quick Study 5-15A (5 minutes)

a.       Periodic inventory system

b.       Perpetual inventory system

c. Perpetual inventory system

d.       Perpetual inventory system

e.       Perpetual inventory system

Quick Study 5-16A (10 minutes)

Nov. 5 Purchases 6,000

Accounts Payable 6,000

  To record credit purchase [(600 x $10].

   

7 Accounts Payable 250

Purchases Returns & Allowances 250

  Returned defective units [(25 x $10].

15 Accounts Payable 5,750

Cash 5,635

Purchases Discounts* 115

  Paid for purchase less cash discount
    * [(6,000 – $250) x 2%)].

Quick Study 5-17A (10 minutes)

Apr.   1 Accounts Receivable 3,000

Sales 3,000

  To record credit sale.

          4 Sales Returns and Allowances 600

Accounts Receivable 600

  To record sales return.

        11 Cash 2,352

Sales Discounts* 48

Accounts Receivable 2,400

  Received payment less cash discount

*($3,000 – $600) x 2%.

Quick Study 5-18 (10 minutes)

a. Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales.

b. Under IFRS, reference to finance costs usually refers to interest expense.

c. IFRS permits alternative measures of income to be reported as part of the income statement.

EXERCISES

Exercise 5-1 (30 minutes)

Note: The original missing numbers are blocked.

(a)(b)(c)(d)(e)Sales $62,000$43,500$46,000$79,000$25,600Cost of goods sold Merch. inv. (beg.) 8,00017,0507,5008,0004,560 Total cost of merch.   purchases 38,0001,95043,75032,0006,600 Merch. inv. (end.)(11,950)   (3,000)   (9,000)   (6,600)   (4,160) Cost of goods sold   34,050  16,000  42,250  33,400    7,000Gross profit 27,95027,5003,75045,60018,600Expenses   10,000  10,650 12,150    3,600    6,000Net income (loss) $17,950$16,850$ (8,400)$42,000$12,600

Explanations:

a. Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale.  Find gross profit as the difference between the sales and cost of goods sold.  Find net income as the gross profit less the expenses.

b. Find total cost of merchandise purchases by finding the number that makes the total equal the cost of goods sold.  Find gross profit from sales less cost of goods sold.

c. Find cost of goods sold from sales less gross profit.  Find cost of merchandise purchases by finding the number to make the calculation equal cost of goods sold. 

Calculate cost of goods sold as usual. Calculate sales as gross profit plus cost of goods sold.

e. Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale.  Find gross profit from sales less cost of goods sold.  Find net income as gross profit less expenses.

Exercise 5-2 (10 minutes)

Operating cycle of a merchandiser with credit sales follows (chronological):

(a) inventory made available for sale

(b) cash collections from customers

(c) credit sales to customers

(d) purchases of merchandise

(e) accounts receivable accounted for

Exercise 5-3 (20 minutes)

In today’s competitive world, organizations must concentrate on meeting their customers’ needs and avoiding dissatisfaction.  If these needs are not met and dissatisfaction grows, the customers will deal with other companies or entities.  One measure of dissatisfaction of customers is the amount of sold goods that are later returned.  Customer dissatisfaction needs to be understood and then dealt with promptly to encourage them to remain loyal.  The reasons for the return also need to be determined to allow the problem to be avoided in the future.  For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale, or fickle customers.

An important early step in controlling returns is to have information about their dollar amount.  In addition, managers can set goals for reducing the dollar amount of sales returns.  Both objectives can be helped by having the company’s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account.  This approach captures the information at the time of the return and allows it to be easily reported.

While a company’s sales return record is important for managers, it is also valuable information for external decision makers.  This information can help external users identify organizations focusing on customer satisfaction and product quality.  Although management might choose to report the amount of sales returns as evidence of sales satisfaction, their amount is rarely reported in financial statements provided to investors, creditors, and other external users.

Exercise 5-4 (30 minutes)

Apr.   2 Merchandise Inventory 4,600

Accounts Payable—Lyon 4,600

Purchased merchandise on credit.

          3 Merchandise Inventory 300

Cash 300

Paid shipping charges on purchased merchandise.

          4 Accounts Payable—Lyon 600

Merchandise Inventory 600

Returned unacceptable merchandise.

        17 Accounts Payable—Lyon 4,000

Merchandise Inventory* 80

Cash 3,920

*[($4,600 – $600) x 2%]

Paid balance (less 2%) within discount period.

        18 Merchandise Inventory 8,500

Accounts Payable—Frist 8,500

Purchased merchandise on credit.

        21 Accounts Payable—Frist 1,100

Merchandise Inventory 1,100

Received an allowance on purchase.

        28 Accounts Payable—Frist 7,400

Merchandise Inventory* 148

Cash 7,252

*[($8,500 – $1,100) x 2%]

Paid balance (less 2%) within discount period.

Exercise 5-5 (30 minutes)

May  5 Accounts Receivable 21,000

Sales 21,000

Sold merchandise on credit (1,500 x $14).

         5 Cost of Goods Sold 15,000

Merchandise Inventory 15,000

To record cost of sale (1,500 x $10).

a.

May  7 Sales Returns and Allowances 2,800

Accounts Receivable 2,800

Accepted a return from a customer (200 x $14).

         7 Merchandise Inventory 2,000

Cost of Goods Sold 2,000

Returned merchandise to inventory (200 x $10).

b.

May  8 Sales Returns and Allowances 600

Accounts Receivable 600

Granted allowance for damaged merchandise.

c.

May 15 Sales Returns and Allowances 680

Accounts Receivable 680

Granted allowance for mis-colored merchandise and accepted a return from a customer for the mis-colored merchandise [$120 + (40 x $14)].

        15 Merchandise Inventory 400

Cost of Goods Sold 400

Returned merchandise to inventory (40 x $10).

Exercise 5-6 (15 minutes)

May  5 Merchandise Inventory 21,000

Accounts Payable 21,000

Purchased merchandise on credit (1,500 x $14).

a.

May  7 Accounts Payable 2,800

Merchandise Inventory 2,800

Returned unwanted merchandise (200 x $14).

b.

May  8 Accounts Payable 600

Merchandise Inventory 600

To record allowance for damaged merchandise.

c.

May 15 Accounts Payable 680

Merchandise Inventory 680

To record allowance for mis-colored goods and return of mis-colored merchandise

$120 + (40 x $14).

Exercise 5-7 (30 minutes)

1. BUYER- Santa Fe Company

a) Credit Purchase

Merchandise Inventory 24,000

Accounts Payable 24,000

Purchased merchandise on credit.

b) Cash Payment

Accounts Payable 24,000

Merchandise Inventory* 720

Cash 23,280

    *[24,000 x 3%]

Paid account payable within 3% discount period.

2. SELLER – Mesa Company

a) Credit Sale

Accounts Receivable 24,000

Sales 24,000

Sold merchandise on account.

Cost of Goods Sold 16,000

Merchandise Inventory 16,000

To record cost of sale.

b) Cash Collection

Cash 23,280

Sales Discounts 720

Accounts Receivable 24,000

Collected account receivable.

3. Amount borrowed to pay with discount $   23,280

Annual rate of interest        x 8%

Interest per year $1,862.40

Interest per day ($1,862.40 / 365 days) $5.10*

Savings from discount taken ($24,000 – $23,280) $   720.00

Interest paid on 50-day loan (50 days x $5.10)     (255.00)

Net savings from borrowing to pay in discount period   465.00

*Rounded; if not rounded, the net savings are $464.88 instead of $465.00.

Exercise 5-8 (25 minutes)

1.  Entries for Sydney Company (BUYER):

May  11 Merchandise Inventory 40,000

Accounts Payable 40,000

Purchased merchandise on credit.

         11 Merchandise Inventory 345

Cash 345

Paid shipping charges on purchased merchandise.

         12 Accounts Payable 1,400

Merchandise Inventory 1,400

Returned unacceptable merchandise.

         20 Accounts Payable 38,600

Merchandise Inventory* 1,158

Cash 37,442

Paid balance within the 3% discount period.

*($38,600 x .03).

2.  Entries for Troy Corporation (SELLER):

May  11 Accounts Receivable 40,000

Sales 40,000

Sold merchandise on account.

         11 Cost of Goods Sold 30,000

Merchandise Inventory 30,000

To record cost of sale.

         13 Sales Returns and Allowances 1,400

Accounts Receivable 1,400

Accepted a return from a customer.

         13 Merchandise Inventory 800

Cost of Goods Sold 800

Returned goods to inventory.

         21 Cash 37,442

Sales Discounts 1,158

Accounts Receivable 38,600

Collected account receivable.

Exercise 5-9 (30 minutes)

Merchandise Inventory

Balance, Dec. 31, 2014

25,000

Purchase discounts received

1,700

Invoice cost of purchases

192,500

Purchase returns and allow.

4,000

Returns by customers

2,100

Cost of sales transactions

196,000

Transportation-in

2,900

Shrinkage

800

Balance, Dec. 31, 2015

20,000

Cost of Goods Sold

Cost of sales transactions

Inventory shrinkage

  recorded in December 31,

  2015, adjusting entry

196,000

800

Returns by customers and

   restored to inventory


2,100

Balance, Dec. 31, 2015

194,700

Exercise 5-10 (20 minutes)

Perpetual

1)

Nov.   1 Merchandise Inventory 1,500

Accounts Payable 1,500

To record merchandise purchases on credit.

2)

Nov.   5 Accounts Payable 1,500

Merchandise Inventory 30

Cash 1,470

To record cash payment in discount period.

3)

Nov.   7 Cash 196

Merchandise Inventory 196

To record check received for return of purchases previously paid for with discount already taken.

4) 

Nov. 10 Merchandise Inventory 90

Cash 90

To record payment of freight charges.

5)

Nov. 13 Accounts Receivable 1,600

Sales 1,600

To record sale of merchandise on credit.

Cost of Goods Sold 800

Merchandise Inventory 800

To record cost of merchandise sold.

6)  

Nov. 16 Sales Returns and Allowances 300

Accounts Receivable 300

To record return of merchandise sold on credit.

Merchandise Inventory 130

Cost of Goods Sold 130

To record return of merchandise to inventory.

Instructor note: This second entry changes if the goods returned are defective. In this case the returned inventory is recorded at its estimated value, not its cost. To illustrate, if the goods (costing $130) returned are defective and estimated to be worth, say, $50, the following entry is made: Dr. Merchandise Inventory for $50, Dr. Loss from Defective Merchandise for $80, and Cr. Cost of Goods Sold for $130.

Exercise 5-11 (25 minutes)

Adjusting entries

Dec. 31 Sales Salaries Expense 1,700

Salaries Payable 1,700

  To record accrued salaries.

Dec. 31 Selling Expenses 3,000

Prepaid Selling Expenses 3,000

  To record expired prepaid selling expenses.

Dec. 31 Cost of Goods Sold 1,550

Merchandise Inventory 1,550

  To record inventory shrinkage

  ($30,000 – $28,450).

Closing entries

Dec. 31 Sales 529,000

Income Summary 529,000

To close temporary accounts with credit balances.

Dec. 31 Income Summary 444,750

Sales Returns and Allowances 17,500

Sales Discounts 5,000

Cost of Goods Sold ($212,000 + $1,550) 213,550

Sales Salaries Exp. ($48,000 + $1,700) 49,700

Utilities Expense 15,000

Selling Expenses ($36,000 + $3,000) 39,000

Administrative Expenses 105,000

To close temporary accounts with debit balances.

Dec. 31 Income Summary 84,250

K. Emiko, Capital 84,250

To close Income Summary account.

Dec. 31 K. Emiko, Capital 33,000

K. Emiko, Withdrawals 33,000

To close the withdrawals account.

Exercise 5-12 (10 minutes)

Multiple-Step Income Statement — Sales Related Information Only

Sales (gross) $200,000

Less: Sales discounts $ 4,000

Sales returns and allowances 16,000     20,000

Net sales 180,000

Exercise 5-13 (20 minutes)

The employee’s oversight in omitting these goods from the physical count would cause the cost of the physical count of ending inventory to be understated.  Therefore, the comparison of the perpetual inventory records with the physical count would incorrectly indicate an additional shrinkage of $3,000.  An entry would be made to debit Cost of Goods Sold and credit Merchandise Inventory for this amount.  As a result, the company’s ending inventory, current assets, total assets, equity, and net income would all be understated by $3,000.

As a result of this error:

Return on assets would be understated (numerator impact outweighs the denominator impact).

Debt ratio would be overstated because its denominator would be understated.

Current ratio would be understated because its numerator would be understated.

Acid-test ratio would be unaffected because inventory is not a quick asset.

Exercise 5-14 (20 minutes)

See the solution explanation in Exercise 5-13.  As a result of this error:

Gross margin (gross profit/sales) would be understated because the gross profit would be understated.

Profit margin (net income/sales) would be understated because the net income would be understated.

Exercise 5-15 (15 minutes)

           Case X

           Case Y

           Case Z

Current ratio computation

Current assets

$5,200

$3,500

$7,410

Current liabilities

$2,000

$1,000

$3,800

Current ratio

2.60

3.50

1.95

Acid-test ratio computation

Cash

$2,000

  110

$1,000

Short-term investments

50

0

580

Current receivables

     350

     470

     700

Quick assets

$2,400

  580

$2,280

Current liabilities

$2,000

$1,000

$3,800

Acid-test ratio

1.20

0.58

0.60

Interpretation:

Case X has the highest acid-test ratio and a healthy current ratio.  Since Case X has enough current assets to cover its current liabilities by more than two times and enough liquid assets to cover its current liabilities by more than one time, Case X appears to be in the best position to meet its short-term obligations.

More specifically, Case Y exhibits superior ability to meet current year obligations using the current ratio and Case X has the superior ability to meet near-term obligations using the acid-test ratio.  The three companies’ current ratios range from marginally adequate (such as Case Z’s 1.95) to strong (such as Case Y’s 3.50).  Further, Case X is the only company whose acid-test ratio exceeds the common benchmark (rule-of-thumb) of 1.0.  Although Case Y has a higher current ratio than Case X, Case X would appear to be in a better position to meet its current obligations since it has a higher percentage of its most liquid assets, demonstrated by a higher acid-test ratio.

In summary, Case Z looks the worst for its ability to pay its immediate and current year obligations.  Case X looks the strongest.   Case Y is in between with a strong current ratio and the lowest acid-test ratio.

Exercise 5-16A (30 minutes)

Apr.   2 Purchases 4,600

Accounts Payable—Lyon 4,600

Purchased merchandise on credit.

          3 Transportation-In 300

Cash 300

Paid shipping charges on purchased merchandise.

          4 Accounts Payable—Lyon 600

Purchases Returns & Allowances 600

Returned unacceptable merchandise.

        17 Accounts Payable—Lyon 4,000

Purchases Discounts 80

Cash 3,920

Paid balance (less 2%) within discount period.

        18 Purchases 8,500

Accounts Payable—Frist 8,500

Purchased merchandise on credit

        21 Accounts Payable—Frist 1,100

Purchases Returns & Allowances 1,100

Received an allowance on purchase.

        28 Accounts Payable—Frist 7,400

Purchases Discounts 148

Cash 7,252

Paid balance (less 2%) within discount period.

Exercise 5-17A (30 minutes)

1. BUYER – Santa Fe Company

Credit Purchase

Purchases 24,000

Accounts Payable 24,000

Purchased merchandise on credit.

Cash Payment

Accounts Payable 24,000

Purchases Discounts 720

Cash 23,280

Paid account payable within 3% discount period.

2. SELLER – Mesa Company

Credit Sale

Accounts Receivable 24,000

Sales 24,000

Sold merchandise on account.

Cash Collection

Cash 23,280

Sales Discounts 720

Accounts Receivable 24,000

Collected account receivable.

Exercise 5-18A (25 minutes)

1.  Entries for Sydney Company (BUYER):

May  11 Purchases 40,000

Accounts Payable 40,000

Purchased merchandise on credit.

         11 Transportation-In 345

Cash 345

Paid shipping charges on purchased merchandise.

         12 Accounts Payable 1,400

Purchases Returns and Allowances 1,400

Returned unacceptable merchandise.

         20 Accounts Payable 38,600

Purchases Discounts 1,158

Cash 37,442

Paid balance within the 3% discount period.

2.  Entries for Troy Corporation (SELLER):

May  11 Accounts Receivable 40,000

Sales 40,000

Sold merchandise on account.

         13 Sales Returns and Allowances 1,400

Accounts Receivable 1,400

Accepted a return from a customer.

         21 Cash 37,442

Sales Discounts 1,158

Accounts Receivable 38,600

Collected account receivable.

Exercise 5-19A (20 minutes)

Periodic Inventory System

1) 

Nov.   1 Purchases 1,500

Accounts Payable 1,500

To record purchases on credit.

2) 

Nov.   5 Accounts Payable 1,500

Purchases Discount* 30

Cash 1,470

To record cash payment in discount period.

* [$1,500 x 2%]

3)

Nov.   7 Cash 196

Purchases Returns and Allowances* 196

To record check received for return of purchases previously paid for with discount already taken.

* [$200 – ($200 x 2%)]

4) 

Nov. 10 Transportation-In 90

Cash 90

To record payment of freight charges.

5)

Nov. 13 Accounts Receivable 1,600

Sales 1,600

To record sale of merchandise on credit.

6)  

Nov. 16 Sales Returns and Allowances 300

Accounts Receivable 300

To record return of merchandise sold on credit.

Exercise 5-20 (20 minutes)

L´Oréal

Income Statement (€ millions)

For Year Ended December 31, 2013

Net sales €22,976.6

Cost of sales     6,601.8

Gross profit 16,374.8

Research and development expense   (857.0)

Advertising and promotion expense (6,886.2)

Selling, general and administrative expense (4,756.8)

Finance costs (29.1)

Finance income 33.5

Other income       145.2

Profit before tax expense 4,024.4

Income tax expense     1,063.0

Net profit   2,961.4

PROBLEM  SET  A

Problem 5-1A (40 minutes)

July  1 Merchandise Inventory 6,000

Accounts Payable—Boden 6,000

Purchased goods on credit, terms 1/15, n/30.

         2 Accounts Receivable—Creek 900

Sales 900

Sold goods on credit, terms 2/10, n/60.

         2 Cost of Goods Sold 500

  Merchandise Inventory 500

To record cost of the July 2 sale.

         3 Merchandise Inventory 125

Cash 125

Paid freight on incoming goods.

         8 Cash 1,700

Sales 1,700

Sold goods for cash.

         8 Cost of Goods Sold 1,300

Merchandise Inventory 1,300

To record cost of the July 8 sale.

         9 Merchandise Inventory 2,200

Accounts Payable—Leight 2,200

Purchased goods on credit, terms 2/15, n/60.

       11 Accounts Payable—Leight 200

Merchandise Inventory 200

Received credit memo from returning

goods to supplier.

       12 Cash 882

Sales Discounts (2%) 18

Accounts Receivable—Creek 900

Collected receivable within the discount period.

Problem 5-1A (Concluded)

July 16 Accounts Payable—Boden 6,000

Merchandise Inventory (1%) 60

Cash 5,940

Paid payable within discount period.

        19 Accounts Receivable—Art 1,200

Sales 1,200

Sold goods on credit, terms 2/15, n/60.

        19 Cost of Goods Sold 800

Merchandise Inventory 800

To record cost of the July 19 sale.

        21 Sales Returns and Allowances 200

Accounts Receivable—Art 200

Issued credit memo for allowance on goods sold to customer.

        24 Accounts Payable—Leight 2,000

Merchandise Inventory * 40

Cash 1,960

Paid payable in discount period (*2% x $2,000).

        30 Cash 980

Sales Discounts (2%)* 20

Accounts Receivable—Art 1,000

Collected receivable within discount period.

*([$1,200 – $200] x .02)

        31 Accounts Receivable—Creek 7,000

Sales 7,000

Sold goods on credit with terms 2/10, n/60.

        31 Cost of Goods Sold 4,800

Merchandise Inventory 4,800

  To record cost of the July 31 sale.

Problem 5-2A (40 minutes)

Aug.  1 Merchandise Inventory 7,500

Accounts Payable—Arotek 7,500

Purchased goods on credit, terms 1/10, n/30.

          5 Accounts Receivable—Laird 5,200

Sales 5,200

Sold goods on credit, terms 2/10, n/60.

          5 Cost of Goods Sold 4,000

Merchandise Inventory 4,000

To record the cost of August 5 sale.

          8 Merchandise Inventory 5,540

Accounts Payable—Waters 5,540

Purchased goods on credit, terms 1/10, n/45.

          9 Delivery Expense 125

Cash 125

Paid shipping charges on August 5 sale.

        10 Sales Returns and Allowances 600

Accounts Receivable—Laird 600

Customer returned merchandise.

        10 Merchandise Inventory 400

Cost of Goods Sold 400

Returned goods to inventory.

        12 Accounts Payable—Waters 700

Merchandise Inventory 700

Received a credit memorandum for August 8 purchase.

        14 Accounts Payable—Arotek 200

Cash 200

Paid freight for Arotek.

Problem 5-2A (Concluded)

Aug. 15 Cash 4,508

Sales Discounts* 92

Accounts Receivable—Laird 4,600

Collected receivable within 2% discount period.

*[($5,200 – $600) x 2%]

         18 Accounts Payable—Waters 4,840

Merchandise Inventory * 47

Cash 4,793

Paid payable within discount period

*(1% x $4,700).

         19 Accounts Receivable—Tux 4,800

Sales 4,800

Sold goods on credit, terms 1/10, n/30.

         19 Cost of Goods Sold 2,400

Merchandise Inventory 2,400

To record cost of the August 19 sale.

         22 Sales Returns and Allowances 500

Accounts Receivable—Tux 500

Issued credit memorandum.

         29 Cash 4,257

Sales Discounts* 43

Accounts Receivable—Tux 4,300

Collected receivable within discount period.

*[($4,800 – $500) x 1%]

         30 Accounts Payable—Arotek 7,300

Cash 7,300

Paid payable ($7,500 – $200).

(Discount period has lapsed.)

Problem 5-3A (40 minutes)

1. Net sales

Sales

$225,600

Less: Sales discounts

(2,250)

Sales returns and allowances

  (12,000)

Net sales

$211,350

2. Cost of Merchandise purchased

Invoice cost of merchandise purchased

$  92,000

Purchase discounts received

(2,000)

Purchase returns and allowances

(4,500)

Costs of transportation-in

      4,600

Total cost of merchandise purchased

$  90,100

Problem 5-3A (Continued)

3.  Multiple-step income statement

VALLEY COMPANY

Income Statement

For Year Ended August 31, 2015

Sales $225,600

Less: Sales discounts $  2,250

           Sales returns and allowances 12,000   14,250

Net sales 211,350

Cost of goods sold *   74,500

Gross profit 136,850

Expenses

  Selling expenses

    Sales salaries expense 32,000

    Rent expense—Selling space 8,000

    Store supplies expense 1,500

    Advertising expense   13,000

    Total selling expenses 54,500

  General and administrative expenses

    Office salaries expense 28,500

    Rent expense—Office space 3,600

    Office supplies expense       400

    Total general and administrative expenses     32,500 

  Total expenses     87,000

Net income $  49,850

*Cost of goods sold (alternative computation):

  Merchandise inventory, August 31, 2014 $  25,400

  Total cost of merchandise purchased (from part 2)     90,100

  Merchandise available for sale 115,500

  Merchandise inventory, August 31, 2015     41,000

  Cost of goods sold   $  74,500

Problem 5-3A (Concluded)

4.  Single-step income statement

VALLEY COMPANY

Income Statement

For Year Ended August 31, 2015

Net sales $211,350

Expenses

Cost of goods sold $74,500

Selling expenses 54,500

General and administrative expenses 32,500

Total expenses 161,500

Net income $ 49,850

Problem 5-4A (30 minutes)

Part 1

Closing entries

Aug. 31 Sales 225,600

Income Summary 225,600

To close temporary accounts with credit balances.

Aug. 31 Income Summary 175,750

Sales Discounts 2,250

Sales Returns and Allowances 12,000

Cost of Goods Sold 74,500

Sales Salaries Expense 32,000

Rent Expense—Selling Space 8,000

Store Supplies Expense 1,500

Advertising Expense 13,000

Office Salaries Expense 28,500

Rent Expense—Office Space 3,600

Office Supplies Expense 400

To close temporary accounts with debit balances.

Aug. 31 Income Summary 49,850

K. Valley, Capital 49,850

To close the Income Summary account.

Aug. 31 K. Valley, Capital 8,000

K. Valley, Withdrawals 8,000

To close the withdrawals account.

Problem 5-4A (Concluded)

Part 2

The first step is to determine the amount of purchases that are subject to a discount during the year:

Invoice cost of merchandise purchases

$92,000

Purchase returns and allowances

   (4,500)

Total cost of merchandise payable

$87,500

This amount is used to determine the maximum discount, which is then compared to the actual discount:

Maximum discount available (3% x $87,500)

$  2,625

Purchase discounts received

   (2,000)

Purchase discounts missed

    625

As a percent of available discounts ($625/$2,625) 23.8%

This analysis suggests that nearly 24% of available discounts have been missed.  As a result, it would appear that cash is not being well managed.  Management should try to identify a better system for ensuring that all favorable discounts are taken. It is possible that the 24% of discounts not taken are actually at rates not favorable to the company (meaning that management is worse off expending resources on those discounts)—further information is required to assess this possibility.

Part 3

The first step is to compute this year’s sales returns and allowances rate:

Sales

$225,600

Sales returns and allowances

$  12,000

Percent of returns and allowances to sales

5.3%

This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 4% rate observed in prior years.  It appears that management should investigate the situation to see why there are more dissatisfied customers this year than in prior years.

Problem 5-5A (60 minutes)

Part 1

Adjustment (a)

Jan 31 Store Supplies Expense 4,050

Store Supplies 4,050

To record store supplies expense

($5,800 – $1,750).

Adjustment (b)

Jan 31 Insurance Expense 1,400

Prepaid Insurance 1,400

To record expired insurance.

Adjustment (c)

Jan 31 Depreciation Expense—Store Equip 1,525

Accumulated Deprec.—Store Equip 1,525

To record depreciation expense.

Adjustment (d)

Jan 31 Cost of Goods Sold 1,600

Merchandise Inventory 1,600

To adjust inventory for shrinkage

($12,500 – $10,900).

Problem 5-5A (Continued)

Part 2  Multiple-step income statement

NELSON COMPANY

Income Statement

For Year Ended January 31, 2015

Sales $111,950

Less: Sales discounts $  2,000

Sales returns and allowances   2,200       4,200

Net sales 107,750

Cost of goods sold*     40,000

Gross profit 67,750

Expenses

  Selling expenses

  Depreciation expense—Store equipment 1,525 

  Sales salaries expense** 17,500 

  Rent expense—Selling space** 7,500 

  Store supplies expense 4,050 

  Advertising expense    9,800 

  Total selling expenses 40,375

  General and administrative expenses

  Insurance expense 1,400 

  Office salaries expense** 17,500 

  Rent expense—Office space**   7,500 

  Total general and administrative expenses 26,400

  Total expenses     66,775

Net income       975

* $40,000 = $38,400 + $1,600 (shrinkage)

**Salaries and rent expenses are equally divided between selling activities

   and general and administrative activities.

Problem 5-5A (Concluded)

Part 3  Single-step income statement

NELSON COMPANY

Income Statement

For Year Ended January 31, 2015

Net sales   $107,750

Expenses

Cost of goods sold $40,000

Selling expenses 40,375*

General and administrative expense 26,400*

Total expenses       106,775

Net income           975

  *From Part 2

Part 4

Current assets

   Cash

$    1,000

   Merchandise inventory

10,900

   Store supplies

1,750

   Prepaid insurance

      1,000*

   Total current assets

$  14,650

Current liabilities

$  10,000

Current ratio ($14,650 / $10,000)

1.47

  *$2,400 – $1,400 = $1,000

Quick assets (Cash)

$    1,000

Current liabilities

$  10,000

Acid-test ratio ($1,000 / $10,000)

0.10

Net Sales

$107,750

Cost of Goods Sold

    40,000    

Gross margin

$  67,750

Gross margin ratio ($67,750 / $107,750)

0.63

Problem 5-6AB (50 minutes)

NELSON COMPANY

Work Sheet

For Year Ended January 31, 2015

Unadjusted
Trial Balance
AdjustmentsAdjusted
Trial BalanceIncome
Statement

Balance Sheet Account TitleDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Cash 1,0001,0001,000Merchandise inventory 12,500(d)1,60010,90010,900Store supplies 5,800(a)4,0501,7501,750Prepaid insurance 2,400(b)1,4001,0001,000Store equipment 42,90042,90042,900Accum. depreciation—Store eq 15,250(c)1,52516,77516,775Accounts payable 10,00010,00010,000J.  Nelson, Capital 32,00032,00032,000J. Nelson, Withdrawals 2,2002,2002,200Sales 111,950111,950111,950Sales discounts 2,0002,0002,000Sales returns and allowances 2,2002,2002,200Cost of goods sold 38,400(d)1,60040,00040,000Depreciation expense—Store eq 0(c)1,5251,5251,525Salaries expense 35,00035,00035,000Insurance expense 0(b)1,4001,4001,400Rent expense 15,00015,00015,000Store supplies expense 0(a)4,0504,0504,050Advertising expense     9,800______________     9,800______     9,800__________________Totals 169,200169,2008,5758,575170,725170,725110,975111,95059,75058,775Net income       975____________       975Totals 111,950111,95059,75059,750

PROBLEM  SET  B

Problem 5-1B (40 minutes)

May    2 Merchandise Inventory 10,000

Accounts Payable—Havel 10,000

Purchased goods on credit, terms 1/15, n/30.

           4 Accounts Receivable—Heather 11,000

Sales 11,000

Sold goods on credit, terms 2/10, n/60.

           4 Cost of Goods Sold 5,600

Merchandise Inventory 5,600

To record cost of the May 4 sale.

           5 Merchandise Inventory 250

Cash 250

Paid freight on incoming goods.

           9 Cash 2,500

Sales 2,500

Sold goods for cash.

           9 Cost of Goods Sold 2,000

Merchandise Inventory 2,000

To record cost of the May 9 sale.

         10 Merchandise Inventory 3,650

Accounts Payable—Duke 3,650

Purchased goods on credit, terms 2/15, n/60.

         12 Accounts Payable—Duke 400

Merchandise Inventory 400

Received credit memo from returning goods to supplier.

         14 Cash 10,780

Sales Discounts* 220

Accounts Receivable—Heather 11,000

Collected receivable within discount period.

*$11,000 x 2%

Problem 5-1B (Concluded)

May  17 Accounts Payable—Havel 10,000

Merchandise Inventory * 100

Cash 9,900

Paid payable in discount period (*10,000 x 1%).

          20 Accounts Receivable—Tameron 2,800

Sales 2,800

Sold goods on credit, terms 2/15, n/60.

          20 Cost of Goods Sold 1,450

Merchandise Inventory 1,450

To record cost of the May 20 sale.

          22 Sales Returns and Allowances 400

Accounts Receivable—Tameron 400

Issued credit memo for allowances on goods sold to customers.

          25 Accounts Payable—Duke 3,250

Merchandise Inventory * 65

Cash 3,185

Paid payable in discount period

[($3,650 – $400)x 2%].

          30 Cash 2,352

                Sales Discounts (2%) 48

Accounts Receivable—Tameron 2,400

Collected receivable within discount period.

([$2,800 – $400] x 2%)

          31 Accounts Receivable—Heather 7,200

Sales 7,200

Sold goods on credit with terms 2/10, n/60.

          31 Cost of Goods Sold 3,600

Merchandise Inventory 3,600

        To record cost of the May 31 sale.

Problem 5-2B (40 minutes)

July   3 Merchandise Inventory 15,000

Accounts Payable—OLB 15,000

Purchased goods on credit, terms 1/10, n/30.

          7 Accounts Receivable—Brill 11,500

Sales 11,500

Sold goods on credit, terms 2/10, n/60.

          7 Cost of Goods Sold 7,750

Merchandise Inventory 7,750

To record cost of the July 7 sale.

        10 Merchandise Inventory 14,700

Accounts Payable—Rupert 14,700

Purchased goods on credit, terms 1/10, n/45.

        11 Delivery Expense 300

Cash 300

Paid shipping charges on July 7 sale.

        12 Sales Returns and Allowances 1,850

Accounts Receivable—Brill 1,850

Customer returned merchandise.

        12 Merchandise Inventory 1,450

Cost of Goods Sold 1,450

Returned goods to inventory.

        14 Accounts Payable—Rupert 2,000

Merchandise Inventory 2,000

Received a credit memorandum for July 10 purchase.

        15 Accounts Payable—OLB 150

Cash 150

Paid freight for OLB Corp.

Problem 5-2B (Concluded)

July 17 Cash 9,457

Sales Discounts* 193

Accounts Receivable—Brill 9,650

Collected receivable within discount period.

*($11,500 – $1,850) x 2%

        20 Accounts Payable—Rupert* 12,700

Merchandise Inventory** 122

Cash 12,578

Paid payable within discount period.

    *$14,200 + $500 – $2,000 = $12,700

**($14,200 – $2,000) x 1% = $122

        21 Accounts Receivable—Brown 11,000

Sales 11,000

Sold goods on credit, terms 1/10, n/30.

        21 Cost of Goods Sold 7,000

Merchandise Inventory 7,000

To record cost of the July 21 sale.

        24 Sales Returns and Allowances 1,300

Accounts Receivable—Brown 1,300

Issued credit memo.

        30 Cash 9,603

Sales Discounts* 97

Accounts Receivable—Brown 9,700

Collected receivable within discount period.

*($11,000 – $1,300) x 1%

        31 Accounts Payable—OLB 14,850

Cash 14,850

Paid $15,000 invoice less $150 freight paid by Mason on request of OLB.

Problem 5-3B (40 minutes)

1.

Net sales

Sales

$332,650

Less: Sales discounts

(5,875)

  Sales returns and allowances

   (20,000)

Net sales

$306,775

2.

Cost of merchandise purchased

Invoice cost of merchandise purchases

$138,500

Purchase discounts received

(2,950)

Purchase returns and allowances

(6,700)

Costs of transportation-in

      5,750

Total cost of merchandise purchases

$134,600

Problem 5-3B (Continued)

3.  Multiple-step income statement

BARKLEY COMPANY

Income Statement

For Year Ended March 31, 2015

Sales $332,650

Less: Sales discounts $  5,875

Sales returns and allowances   20,000   25,875

Net sales 306,775

Cost of goods sold *   115,600

Gross profit 191,175

Expenses

  Selling expenses

    Sales salaries expense 44,500

    Rent expense—Selling space 16,000

    Store supplies expense 3,850

    Advertising expense   26,000

    Total selling expenses 90,350

  General and administrative expenses

    Office salaries expense 40,750

    Rent expense—Office space 3,800

    Office supplies expense     1,100

    Total general and administrative expenses   45,650 

Total expenses 136,000

Net income $ 55,175

*Cost of goods sold (alternative computation):

  Merchandise inventory, March 31, 2014 $  37,500

  Total cost of merchandise purchases (from part 2)   134,600

  Goods available for sale 172,100

  Merchandise inventory, March 31, 2015     56,500

  Cost of goods sold $115,600

Problem 5-3B (Concluded)

4.  Single-step income statement

BARKLEY COMPANY

Income Statement

For Year Ended March 31, 2015

Net sales $306,775

Expenses

Cost of goods sold $115,600

Selling expenses* 90,350

General and administrative expenses*   45,650

Total expenses   251,600

Net income $  55,175

*From Part 3.

Problem 5-4B (30 minutes)

Part 1

Closing entries

March 31  Sales 332,650

Income Summary 332,650

  To close temporary accounts with credit balances.

March 31  Income Summary 277,475

Sales Discounts 5,875

Sales Returns and Allowances 20,000

Cost of Goods Sold 115,600

Sales Salaries Expense 44,500

Rent Expense, Selling Space 16,000

Store Supplies Expense 3,850

Advertising Expense 26,000

Office Salaries Expense 40,750

Rent Expense, Office Space 3,800

Office Supplies Expense 1,100

  To close temporary accounts with debit balances.

March 31  Income Summary 55,175

C. Barkley, Capital 55,175

  To close the Income Summary account.

March 31  C. Barkley, Capital 3,000

C. Barkley, Withdrawals 3,000

  To close the withdrawals account.

Problem 5-4B (Concluded)

Part 2

The first step is to determine the amount of purchases that were subject to a discount during the year:

Invoice cost of merchandise purchases $138,500

Purchase returns and allowances     (6,700)

Total cost of merchandise purchases payable $131,800

This amount is used to determine the maximum discount, which is then compared to the actual discount:

Maximum discount available (3% x $131,800) $    3,954

Purchase discounts received     (2,950)

Purchase discounts missed $    1,004

As a percent of available discounts ($1,004/$3,954) 25.4%

This analysis suggests that about 25% of available discounts have been missed.  As a result, it would appear that cash is not being well managed.  Management should try to identify a better system for ensuring that all favorable discounts are taken.  It is possible that the 25% of discounts not taken are actually at rates not favorable to the company (meaning that management is worse off expending resources on those discounts)—further information is required to assess this possibility. It is possible that the discounts not taken are actually not favorable to the company.

Part 3

First, we compute this year’s sales returns and allowances rate:

Sales $ 332,650

Sales returns and allowances $  20,000

Percent of returns and allowances to sales 6.0%

This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 5% rate observed in prior years.  It appears that management should investigate the situation to see why there are more dissatisfied customers this year than in prior years.

Problem 5-5B (60 Minutes)

Part 1

Adjustment (a)

Oct. 31 Store Supplies Expense 6,000

Store Supplies 6,000

To record store supplies expense

($9,700 – $3,700).

Adjustment (b)

Oct. 31 Insurance Expense 2,800

Prepaid Insurance 2,800

To record expired insurance.

Adjustment (c)

Oct. 31 Depreciation Expense—Store Equip 3,000

Accumulated Deprec.—Store Equip 3,000

To record depreciation expense.

Adjustment (d)

Oct. 31 Cost of Goods Sold 2,700

Merchandise Inventory 2,700

To adjust inventory for shrinkage

($24,000 – $21,300).

Problem 5-5B (Continued)

Part 2  Multiple-step income statement

FOSTER PRODUCTS COMPANY

Income Statement

For Year Ended October 31, 2015

Sales $227,100

Less: Sales discounts $  1,000

Sales returns and allowances   5,000       6,000

Net sales 221,100

Cost of goods sold *     78,500

Gross profit 142,600

Expenses

Selling expenses

    Depreciation expense—Store equipment 3,000 

    Sales salaries expense** 31,500 

    Rent expense—Selling space** 13,000 

    Store supplies expense 6,000 

    Advertising expense 17,800 

    Total selling expenses 71,300

General and administrative expenses

    Insurance expense 2,800 

    Office salaries expense** 31,500 

    Rent expense—Office space** 13,000 

    Total general and administrative expenses 47,300

Total expenses   118,600

Net income $  24,000

* $78,500 = $75,800 + $2,700 (shrinkage)

** Salaries and rent expenses are equally divided between selling and general and administrative.

Part 3  Single-step income statement

FOSTER PRODUCTS COMPANY

Income Statement

For Year Ended October 31, 2015

Net sales $221,100

Expenses

Cost of goods sold $78,500

Selling expenses 71,300*

General and administrative expense   47,300*

Total expenses   197,100

Net income $  24,000

  * From part 2

Problem 5-5B (Concluded)

Part 4

Current assets

  Cash $   7,400

  Merchandise inventory 21,300

  Store supplies  3,700

  Prepaid insurance      3,800*

  Total current assets $ 36,200

Current liabilities $ 18,000

Current ratio ($36,200 / $18,000) 2.01

*$6,600 – $2,800 = $3,800

Quick assets (Cash in this case) $   7,400

Current liabilities $ 18,000

Acid-test ratio ($7,400 / $18,000) 0.41

Net Sales $221,100

Cost of goods sold     78,500

Gross margin $142,600

Gross margin ratio ($142,600 / $221,100) 0.64

Problem 5-6BB (50 minutes)

FOSTER PRODUCTS COMPANY

Work Sheet

For Year Ended October 31, 2015

Unadjusted
Trial Balance
AdjustmentsAdjusted
Trial BalanceIncome
Statement

Balance Sheet Account TitleDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Cash 7,4007,4007,400Merchandise inventory 24,000(d)2,70021,30021,300Store supplies 9,700(a)6,0003,7003,700Prepaid insurance 6,600(b)2,8003,8003,800Store equipment 81,80081,80081,800Accum. depreciation—Store eq 32,000(c)3,00035,00035,000Accounts payable 18,00018,00018,000D. Foster, Capital 43,00043,00043,000D. Foster, Withdrawals 2,0002,0002,000Sales 227,100227,100227,100Sales discounts 1,0001,0001,000Sales returns and allowances 5,0005,0005,000Cost of goods sold 75,800(d)2,70078,50078,500Depreciation expense—Store eq 0(c)3,0003,0003,000Salaries expense 63,00063,00063,000Insurance expense 0(b)2,8002,8002,800Rent expense 26,00026,00026,000Store supplies expense 0(a)6,0006,0006,000Advertising expense   17,800________________   17,800______   17,800__________________Totals 320,100320,10014,50014,500323,100323,100203,100227,100120,00096,000Net income   24,000____________24,000Totals 227,100227,100120,000120,000

SERIAL PROBLEM  — SP  5

Serial Problem — SP 5, Business Solutions (150 minutes) Part 1

Journal entries

Jan. 4 Wages Expense 623 125

Wages Payable 210 500

Cash 101 625

Paid employee.

5 Cash 101 25,000

S. Rey, Capital 301 25,000

Additional investment by owner.

7 Merchandise Inventory 119 5,800

Accounts Payable 201 5,800

Purchased merchandise on credit.

9 Cash 101 2,668

Accounts Receivable—Gomez Co. 106.6 2,668

Collected accounts receivable.

        11 Accounts Receivable—Alex’s Eng. Co 106.1 5,500

Unearned Computer Services Revenue 236 1,500

Computer Services Revenue 403 7,000

Completed work on project.

        13 Accounts Receivable—Liu Corp. 106.5 5,200

Sales 413 5,200

Sold merchandise on credit.

        13 Cost of Goods Sold 502 3,560

Merchandise Inventory 119 3,560

To record cost of Jan. 13 sale.

        15 Merchandise Inventory 119 600

Cash 101 600

  Paid freight on incoming merchandise.

        16 Cash 101 4,000

Computer Services Revenue 403 4,000

Collected cash revenue from customer.

Serial Problem — SP 5 (Continued)

Jan. 17 Accounts Payable 201 5,800

Merchandise Inventory 119 58

Cash 101 5,742

Paid account payable within discount period. (Discount taken = $5,800 x .01 = $58)

        20* Sales Returns and Allowances 414 500

Accounts Receivable—Liu Corp. 106.5 500

Customer returned defective goods.

* Business Solutions leaves the cost of defective products in its costs of goods sold.  If it did not, the following entry would have been recorded:

Loss from Defective Merchandise 808 320

Cost of Goods Sold 502 320

        22 Cash 101 4,653

Sales Discounts 415 47

Accounts Receivable—Liu Corp 106.5 4,700

Collected accounts receivable.

January 13 sale $5,200

January 20 return     500

Amount due from Liu $4,700

Discount at 1%       47

Cash received from Liu $4,653

        24 Accounts Payable 201 496

Merchandise Inventory 119 496

Returned merchandise for credit.

        26 Merchandise Inventory 119 9,000

Accounts Payable 201 9,000

Purchased merchandise for resale.

        26 Accounts Receivable—KC, Inc 106.8 5,800

Sales 413 5,800

Sold merchandise on credit.

        26 Cost of Goods Sold 502 4,640

Merchandise Inventory 119 4,640

To record cost of Jan. 26 sale.

        31 Wages Expense 623 1,250

Cash 101 1,250

Paid employee wages.

Serial Problem — SP 5 (Continued)

Feb.   1 Prepaid Rent 131    2,475

Cash 101 2,475

Paid three months’ rent in advance.

          3 Accounts Payable 201 8,504

Merchandise Inventory 119 90

Cash 101 8,414

Paid account payable within discount period.

January 26 purchase $9,000

Less credit allowed     (496)

Accounts payable to Kansas Corp. $8,504

Less discount at 1% x $9,000       (90)

Amount due to Kansas Corp. $8,414

          5 Advertising Expense 655 600

Cash 101 600

Purchased ad in local newspaper.

        11 Cash 101 5,500

Accounts Receivable—Alex’s Eng. Co. 106.1 5,500

Collected accounts receivable.

        15 S. Rey, Withdrawals 302 4,800

Cash 101 4,800

Owner withdrew cash.

23 Accounts Receivable—Delta Co. 106.7 3,220

Sales 413 3,220

Sold merchandise on credit.

  23 Cost of Goods Sold 502 2,660

Merchandise Inventory 119 2,660

To record cost of Feb. 23 sale.

        26 Wages Expense 623 1,000

Cash 101 1,000

Paid employee.

27 Mileage Expense 676 192

Cash 101 192

Reimbursed Rey for business mileage.

Serial Problem — SP 5 (Continued)

Mar. 8 Computer Supplies 126 2,730

Accounts Payable 201 2,730

Purchased supplies on credit.

9 Cash 101 3,220

      Accounts Rec.—Delta Co. 106.7 3,220

Collected accounts receivable.

11 Repairs Expense–Computer 684 960

Cash 101 960

Paid for computer repairs.

16 Cash 101 5,260

Computer Services Revenue 403 5,260

Collected cash revenue from customer.

19 Accounts Payable 201 3,830

Cash 101 3,830

Paid accounts payable ($1,100 + $2,730).

24 Accounts Receivable—Easy Leasing 106.3 9,047

Computer Services Revenue 403 9,047

Billed customer for services.

        25 Accounts Receivable—Wildcat Services 106.2 2,800

Sales 413 2,800

Sold merchandise on credit.

        25 Cost of Goods Sold 502 2,002

Merchandise Inventory 119 2,002

To record cost of March 25 sale.

        30 Accounts Receivable—IFM Co. 106.4 2,220

Sales 413 2,220

Sold merchandise on credit.

        30 Cost of Goods Sold 502 1,048

Merchandise Inventory 119 1,048

To record cost of March 30 sale.

        31 Mileage Expense 676 128

Cash 101 128

Reimbursed Rey for business mileage.

Serial Problem — SP 5 (Continued)

Part 2

Ledger accounts as of March 31 before posting of March 31 adjusting entries

Cash      Acct. No. 101

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 48,372

Jan.   4 625 47,747

  5 25,000 72,747

  9 2,668 75,415

15 600 74,815

16 4,000 78,815

17 5,742 73,073

22 4,653 77,726

31 1,250 76,476

Feb.   1 2,475 74,001

  3 8,414 65,587

  5 600 64,987

11 5,500 70,487

15 4,800 65,687

26 1,000 64,687

27 192 64,495

Mar.   9 3,220 67,715

11 960 66,755

16 5,260 72,015

19 3,830 68,185

31 128 68,057

           Accounts Receivable—Alex’s Engineering Co. Acct. No. 106.1

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Jan. 11 5,500 5,500

Feb. 11  5,500 0

Accounts Receivable—Wildcat Services   Acct. No. 106.2

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Mar. 25 2,800 2,800

Serial Problem — SP 5 (Continued)

Accounts Receivable—Easy Leasing Acct. No. 106.3

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Mar. 24 9,047 9,047

Accounts Receivable—IFM Co. Acct. No. 106.4

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 3,000

Mar. 30 2,220 5,220

Accounts Receivable—Liu Corporation Acct. No. 106.5

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Jan. 13 5,200 5,200

20 500 4,700

22 4,700 0

Accounts Receivable—Gomez Co. Acct. No. 106.6

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 2,668

Jan.     9 2,668 0

Accounts Receivable—Delta Co. Acct. No. 106.7

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Feb.  23 3,220 3,220

Mar.   9  3,220 0

Accounts Receivable—KC, Inc. Acct. No. 106.8

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Jan. 26 5,800 5,800

Serial Problem — SP 5 (Continued)

Accounts Receivable—Dream, Inc. Acct. No. 106.9

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Merchandise Inventory Acct. No. 119

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 0

Jan.   7 5,800 5,800

13 3,560 2,240

15 600 2,840

17 58 2,782

24 496 2,286

26 9,000 11,286

26 4,640 6,646

Feb.   3 90 6,556

23 2,660 3,896

Mar. 25 2,002 1,894

30 1,048 846

Computer Supplies Acct. No. 126

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 580

Mar.   8 2,730 3,310

Prepaid Insurance Acct. No. 128

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 1,665

Prepaid Rent Acct. No. 131

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 825

Feb.   1  2,475 3,300

Office Equipment Acct. No. 163

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 8,000

Serial Problem — SP 5 (Continued)

                      Accumulated Depreciation—Office Equipment Acct. No. 164

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 400

Computer Equipment Acct. No. 167

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 20,000

          Accumulated Depreciation—Computer Equipment Acct. No. 168

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 1,250

Accounts Payable Acct. No. 201

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 1,100

Jan.   7 5,800 6,900

17 5,800 1,100

24 496 604

26 9,000 9,604

Feb.   3 8,504 1,100

Mar.   8 2,730 3,830

19 3,830 0

Wages Payable Acct. No. 210

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 500

Jan.   4 500 0

Unearned Computer Services Revenue Acct. No. 236

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 1,500

Jan. 11 1,500 0

Serial Problem — SP 5 (Continued)

S. Rey, Capital Acct. No. 301

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 80,360

Jan.   5  25,000 105,360

S. Rey, Withdrawals Acct. No. 302

Date Explanation PR Debit Credit Balance

Feb. 15 4,800 4,800

Computer Services Revenue Acct. No. 403

Date Explanation PR Debit Credit Balance

Jan. 11 7,000 7,000

16 4,000 11,000

Mar. 16 5,260 16,260

24 9,047 25,307

Sales Acct. No. 413

Date Explanation PR Debit Credit Balance

Jan. 13 5,200 5,200

26 5,800 11,000

Feb. 23 3,220 14,220

Mar. 25 2,800 17,020

30 2,220 19,240

Sales Returns and Allowances Acct. No. 414

Date Explanation PR Debit Credit Balance

Jan. 20 500 500

Serial Problem — SP 5 (Continued)

Sales Discounts Acct. No. 415

Date Explanation PR Debit Credit Balance

Jan. 22 47 47

Cost of Goods Sold Acct. No. 502

Date Explanation PR Debit Credit Balance

Jan. 13 3,560 3,560

26 4,640 8,200

Feb. 23 2,660 10,860

Mar. 25 2,002 12,862

30 1,048 13,910

Depreciation Expense—Office Equipment Acct. No. 612

Date Explanation PR Debit Credit Balance

Depreciation Expense—Computer Equipment Acct. No. 613

Date Explanation PR Debit Credit Balance

Wages Expense Acct. No. 623

Date Explanation PR Debit Credit Balance

Jan.   4 125 125

31 1,250 1,375

Feb. 26 1,000 2,375

Insurance Expense Acct. No. 637

Date Explanation PR Debit Credit Balance

Rent Expense Acct. No. 640

Date Explanation PR Debit Credit Balance

Serial Problem — SP 5 (Continued)

Computer Supplies Expense Acct. No. 652

Date Explanation PR Debit Credit Balance

Advertising Expense Acct. No. 655

Date Explanation PR Debit Credit Balance

Feb.   5 600 600

Mileage Expense Acct. No. 676

Date Explanation PR Debit Credit Balance

Feb. 27 192 192

Mar. 31 128 320

Miscellaneous Expenses Acct. No. 677

Date Explanation PR Debit Credit Balance

Repairs Expense—Computer Acct. No. 684

Date Explanation PR Debit Credit Balance

Mar.  11 960 960

Serial Problem — SP 5 (Continued)    Part 3

BUSINESS SOLUTIONS

Partial Work Sheet

March 31, 2016

Acct.
No.


Account Title

Unadjusted

Trial Balance


Adjustments

Adjusted
Trial Balance

101Cash 68,05768,057106.1Alex’s Engineering Co00106.2Wildcat Services 2,8002,800106.3Easy Leasing 9,0479,047106.4IMF Co. 5,2205,220106.5Liu Corporation 00106.6Gomez Co. 00106.7Delta Co. 00106.8KC, Inc. 5,8005,800106.9Dream, Inc. 00119Merchandise inventory 846(g)142704126Computer supplies 3,310(a)1,3052,005128Prepaid insurance 1,665(b)5551,110131Prepaid rent 3,300(d)2,475825163Office equipment 8,0008,000164Accumulated depreciation– 
   Office equipment 
400(f)400800167Computer equipment 20,00020,000168Accumulated depreciation–
   Computer equip. 1,250(e)1,2502,500201Accounts payable 00210Wages payable 0(c)875875236Unearned computer
   services revenue 
00301 S. Rey, Capital 105,360105,360302S. Rey, Withdrawals 4,8004,800403Computer services revenue 25,30725,307413Sales 19,24019,240414Sales returns and allow. 500500415Sales discounts 4747502Cost of goods sold 13,910(g)14214,052612Depreciation expense–
   Office equipment 
0(f)400400613Depreciation expense–
   Computer equipment 
0(e)1,2501,250623Wages expense 2,375(c)8753,250637Insurance expense 0(b)555555640Rent expense 0(d)2,4752,475652Computer supplies expense 0(a)1,3051,305655Advertising expense 600600676Mileage expense 320320677Miscellaneous expenses 00684Repairs expense–Computer       960______________       960______Totals 151,557151,5577,0027,002154,082154,082Serial Problem — SP 5(Continued)

Part 4

BUSINESS SOLUTIONS

Income Statement

For Three Months Ended March 31, 2016

Revenues

Computer services revenue $25,307

Net sales* 18,693

Total revenues 44,000

Expenses

Cost of goods sold $14,052

Depreciation expense—Office equipment 400 

Depreciation expense—Computer equipment 1,250 

Wages expense 3,250 

Insurance expense 555 

Rent expense 2,475 

Computer supplies expense 1,305 

Advertising expense 600 

Mileage expense 320 

Repairs expense—Computer       960 

Total expenses   25,167

Net income $18,833

Net sales = $19,240 – $500 – $47 = $18,693

Part 5

BUSINESS SOLUTIONS

Statement of Owner’s Equity

For Three Months Ended March 31, 2016

S. Rey, Capital, Dec. 31, 2015 $  80,360

Plus: Investments by owner   25,000

Net income     18,833

124,193

Less: Withdrawals by owner       4,800

S. Rey, Capital, March 31, 2016 $119,393

Serial Problem — SP 5 (Concluded)

Part 6

BUSINESS SOLUTIONS

Balance Sheet

March 31, 2016

Assets

Current assets

  Cash $  68,057

  Accounts receivable* 22,867

  Merchandise inventory 704

  Computer supplies 2,005

  Prepaid insurance 1,110

  Prepaid rent         825

  Total current assets 95,568

Plant assets

  Office equipment $8,000 

  Accumulated depreciation—Office equipment     (800) 7,200 

  Computer equipment 20,000 

  Accumulated depreciation—Computer equipment   (2,500    17,500 

  Total plant assets     24,700

Total assets $120,268

Liabilities

Current liabilities

  Wages payable $       875

Equity

S. Rey, Capital   119,393

Total liabilities and equity $120,268

*Accounts receivable = $2,800 + $9,047 + $5,220 + $5,800 = $22,867

Reporting in Action  — BTN  5-1

1. Compute cost of sales for 2013 as follows ($ millions)

September 29, 2012 inventory $     791

Plus cost of goods purchased ?  

Less September 28, 2013 inventory       (1,764)

Cost of goods sold $106,606

Then, solve for:

Cost of goods purchased * $107,579

*($106,606 – $791 + $1,764)

2.

2013

2012

($ millions)

Current
Ratio

Acid-Test
Ratio

Current
Ratio

Acid-Test
Ratio

Current assets

  Cash and equivalents

$14,259

$14,259

$10,746

$10,746

  Short-term marketable sec

26,287

26,287

18,383

18,383

  Accounts receivables, net

13,102

13,102

10,930

10,930

  Inventories, net

1,764

791

  Deferred tax assets

     3,453      

     2,583      

  Vendor non-trade receivables

7,539

7,762

  Other current assets

     6,882      

_______

     6,458      

_______

Total current assets

$73,286

$57,653

Total quick assets

$53,648

$40,059

Total current liabilities

$43,658

$43,658

$38,542

$38,542

Ratio

1.68

1.23

1.50

1.04

Interpretation:  The current ratio increased from 1.50 in 2012 to 1.68 in 2013.  The acid-test ratio increased from 1.04 in 2012 to 1.23 in 2013.  The year-to-year comparison shows that Apple’s liquidity position has improved slightly when considering the current ratio and the acid-test ratio.  In both years its current ratio is at or above the industry average of 1.5 but below the rule-of-thumb ratio of 2.0. A similar interpretation applies to its acid-test ratio, which is below the industry average of 1.25 but is above the rule-of-thumb ratio of 1.0.

3.  Solution depends on the financial statement data obtained.

Comparative Analysis  — BTN  5-2

1.

Apple

Google

($ millions)

Current

Prior

Current

Prior

Net sales

$170,910

$156,508

$59,825

$50,175

Cost of sales

    106,606

    87,846

  25,858

  20,634

Gross margin

$  64,304

$  68,662

$33,967

$29,541

Gross margin ratio

37.6%

43.9%

56.8%

58.9%

2. In both years, Google’s gross margin ratio was higher than that for Apple.  For both years, Apple’s gross margin ratio was below the industry average of 45.0%, whereas in both years Google’s gross margin exceeded the industry average. 

3. Apple’s gross margin ratio declined from 43.9% to 37.6% and Google’s gross margin ratio declined from 58.9% to 56.8%. 

Ethics Challenge  — BTN  5-3

1. A few students sometimes feel that Amy has devised a clever way to beat the system.  She appears to be succeeding in getting something for free.  However, most students fortunately feel that Amy is abusing the system and that her ethical conduct needs an overhaul.  The instructor may wish to point out that customer abuses such as Amy’s usually result in stores adopting stringent return policies that impact all customers who have legitimate needs to return unused products.  At some point, Amy will probably suffer discomfort when questioned about items that are returned in less than new condition.  Also, if store managers suspect Amy is abusing the system, they may no longer allow her to shop at their store.  If Amy is banned from the store, she will likely suffer humiliation for herself, her family, and her friends.

Ethics Challenge, BTN 5-3 — (Concluded)

2. The merchandising company accounts for sales returns using a contra revenue account called Sales Returns and Allowances.  A dress returned with a sales bill of $200 would be accounted for as follows:

Sales Returns and Allowances 200

Accounts Receivable 200

Also, if the item is returned to inventory (and it had cost $160), the following entry is made:

Merchandise Inventory 160

Cost of Goods sold 160

Communicating in Practice  — BTN  5-4

Note: While responses will vary, the essence of its content follows:

TO: Mr. V. Velakturi

FROM:

DATE:

SUBJECT: Reply to inventory shrinkage question

You are correct in noting that Music Plus has lost inventory as a result of shoplifting and other forms of shrinkage. However, you will be pleased to know your investment in security has paid off.  Let me explain.

We maintain a perpetual inventory system, which continuously updates inventory account balances as goods are purchased, sold, and returned.  At the end of each accounting period, we take an actual physical inventory and compare this amount to our inventory records. These accounting procedures for verifying inventory available have disclosed that the amount of inventory loss is not abnormally large.  Accounting procedures allow this immaterial shrinkage to be directly charged to cost of goods sold.  This is why you do not see a specific deduction for shrinkage on the income statement. Instead, the deduction has been taken in the form of increased cost of goods sold

I hope this addresses your concern and that you are now confident that net income is not overstated.  If you have any additional questions or require more specific information regarding inventory shrinkage, please let me know.  The supporting information is available in the accounting records.

Taking It to the Net  — BTN  5-5

Fiscal Year ($ thousands)

2012

2013

2014

Net sales

$1,721,750

$2,227,717

$2,428,257

Cost of goods sold

  1,042,197

  1,240,989

  1,422,143

Gross margin

  679,553

  986,728

$1,006,114

Gross margin ratio

39.5%

44.3%

41.4%

Analysis:  J. Crew’s gross margin ratio improved from 39.5% in 2012 to 44.3% in 2013, but declined to 41.4% in 2014.  Its net sales increased in 2014, albeit with a lower gross margin percentage.

Teamwork in Action  — BTN  5-6

1.

a.  Net sales computation

Sales $600,000

Less:  Sales discounts $ 13,000

            Sales returns and allowances   20,000     33,000

Net sales $567,000

b.  Total cost of merchandise purchases computation

Invoice cost of merchandise purchases

$360,000

Less:  Purchase discounts received

(9,000)

            Purchase returns and allowances

(11,000)

Add costs of transportation-in

    22,000

Total cost of merchandise purchases

$362,000

c.  Cost of goods sold computation

Merchandise inventory, Beginning $ 98,000

Total cost of merchandise purchased (from b362,000

Merchandise available for sale $460,000

Merchandise inventory, Ending   (84,000)

Cost of goods sold   $376,000

d. Gross profit computation

Net sales (from a) $567,000

Less: Cost of goods sold (from c  376,000

Gross profit $191,000

Teamwork in Action (Concluded)

e.  Net income computation

Gross profit from sales (from d) $191,000

Operating expenses (given)     50,000

Net income $141,000

2. Net income is $141,000.

3. The inventory account balance is $84,000.  If actual (physical) inventory is $76,000, an $8,000 loss from inventory shrinkage occurred.  This would result in an adjustment necessitating a reduction (credit) to the inventory account and an increase (debit) to cost of goods sold. This $8,000 increase in cost of goods sold would result in a corresponding decrease in both gross profit and net income. This means that net income would decline to $133,000.

Entrepreneurial Decision  — BTN  5-7

1.

Sseko Designs

Forecasted Income Statement

For Year Ended January 31, 2015

Net sales ($1,000,000 x 1.09)   $1,090,000

Cost of sales* ($1,090,000 x 61%) 664,900

Expenses ($200,000 x 1.06)     212,000

Net income $  213,100

*Gross profit ratio = ($1,000,000 – $610,000) / $1,000,000 = 39%; therefore the ratio of cost of sales to sales = 100% – 39% = 61%

2. The proposal yields a forecasted net income of $213,100. This compares favorably to the prior year’s net income of $190,000. Accordingly, based on these facts alone, the company should implement the proposal.

3. There are many issues that should be considered.  Among them are:

First, there is the issue of the prediction itself. That is, are estimates reasonable or could reality be markedly different from these estimates?

Second, and related to the first, there is a need to consider “ranges” of possible scenarios since the future is unpredictable. This would involve looking at alternative possibilities and then assessing the range of outcomes.

Third, there is a concern with the impact of these changes on customer attitudes. For example, one concern might be with the proposed change to an FOB shipping point policy from FOB destination. We need to be certain that our customers will not object to this change and look elsewhere for their merchandise.

In addition to issues of confidence in prediction, one should also consider that there may be speeding up of cash collections.  Customers currently have 15 days to earn a 1% discount.  By changing the terms, customers will have only 10 days to earn a 3% discount.  That additional discount may motivate some customers to pay sooner.

Currently, the company sends a signal to customers through terms of n/60 that it is willing to wait 60 days for payment.  By changing the terms to n/30, the company signals that it is now only willing to wait 30 days before payments are overdue.  This may motivate customers to pay sooner.

In sum, we must consider alternative possibilities, both good and bad, with these proposed policy changes.

Hitting the Road  — BTN  5-8

There is no formal solution for this field activity.  As the discussion facilitator, the instructor should try to develop a sense of how willing retail managers are in granting sales allowances, the range of return policies employed, and strategies managers use to stem return abuses.

Global Decision  — BTN  5-9

1.

(in millions)

Samsung*

Apple

Google

Net sales ₩228,692,667

$170,910

$59,825

Cost of sales

   137,696,309

  106,606

  25,858

Gross margin ₩  90,996,358

$  64,304

$33,967

Gross margin ratio

39.8%

37.6%

56.8%

*millions of Korean won

Gross Margin %

Rank

Google

56.8%

1

Samsung

39.8%

2

Apple

37.6%

3

2. Samsung, Apple and Google each use the multiple-step format for their income statements. Google’s income statement is a mix between multiple-step and single-step as it does not report a measure of gross profit separately however other items such as Income from operations are reported.  Samsung’s income statement is somewhat different from what most U.S. companies use in that the term Profit for the year is used instead of net income or net earnings and they report in Korean won instead of dollars.

Chapter 05 – Accounting for Merchandising Operations

Chapter 05 – Accounting for Merchandising Operations

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5- PAGE 363

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Financial Accounting Fundamentals 4th Edition by John J. Wild Test Bank

Financial Accounting Fundamentals 4th Edition by  John J. Wild  Test Bank

SAMPLE

Chapter 05

Accounting for Inventories

True / False Questions

[Question]

1. Goods in transit are automatically included in a company’s inventory account.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Goods in Transit

[Question]

2. If damaged and obsolete goods cannot be sold, they are not included in inventory.

Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Damaged and Obsolete Goods

[Question]

3. Goods on consignment are goods shipped by their owner, called the consignee, to another party called the consignor.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Goods on Consignment

[Question]

4. If obsolete or damaged goods can be sold, they will be included in inventory at their net realizable value.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C1
Topic: Damaged and Obsolete Goods

[Question]

5. If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C1
Topic: Goods in Transit
Topic: FOB Destination

[Question]

6. Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Net Realizable Value

[Question]

7. The cost of an inventory item includes its invoice cost and any added or incidental costs necessary to make it saleable less any discount.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C2
Topic: Inventory Costs

[Question]

8. When taking a physical count of inventory, the use of prenumbered inventory tickets assists in the control process.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Physical Inventory Count

[Question]

9. Incidental costs most commonly added to the costs of inventory include import duties, freight, storage, and insurance.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Incidental Costs

[Question]

10. The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each individual product.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Merchandise Inventory

[Question]

11. Not many companies take a physical count of inventory each year as they rely primarily on inventory records alone to determine the inventory value.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Physical Inventory Count

[Question]

12. All incidental costs of inventory acquisition and handling, whether necessary or not, are assigned to inventory.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Remember
Learning Objective: 05-C2
Topic: Incidental Costs

[Question]

13. The matching principle is used by some companies to avoid allocating incidental inventory costs to cost of goods sold.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Matching Principle

[Question]

14. The consistency concept requires a company to use the same accounting methods period after period, so that financial statements are comparable across periods.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A1

[Question]

15. A company can change its inventory costing method without mentioning this change in its financial statements since it is a decision made by internal management.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A1
Topic: Full Disclosure Principle

[Question]

16. Whether prices are rising or falling, FIFO always will yield the highest gross profit and net income.
Answer:  FALSE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: FIFO

[Question]

17. An advantage of the weighted-average inventory method is that it tends to smooth out the effects of price changes.
Answer:  TRUE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Marketing
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A
Topic: Weighted Average1

[Question]

18. In a period of rising prices, FIFO usually gives a lower taxable income, which leads to an advantage when it comes to paying income tax.
Answer:  FALSE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: FIFO

[Question]

19. LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income. When income is higher, managers may earn bonuses and have more job security and a better reputation.
Answer:  FALSE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: LIFO

[Question]

20. LIFO inventory value is often less than the inventory’s replacement cost because LIFO inventory is valued using the oldest purchase cost.
Answer:  TRUE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: LIFO

[Question]

21. The full disclosure principle requires that the notes to the financial statements report a change in accounting method for inventory costing.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A1
Topic: Full Disclosure Principle

[Question]

22. An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.
Answer:  TRUE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A1
Topic: LIFO

[Question]

23. According to IRS requirements, companies are allowed to use FIFO for financial reporting and LIFO for tax reporting.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A1
Topic: LIFO
Topic: FIFO

[Question]

24. GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A2
Topic: Generally Accepted Accounting Principles
Topic: International Financial Reporting Standards 

[Question]

25. Errors in the period-end inventory balances only have an impact on the current period’s records and financial statements.
Answer:  FALSE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Ending Inventory

[Question]

26. An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next period.
Answer:  TRUE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A2
Topic: Inventory Errors

[Question]

27. Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and, as a result, are less serious.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A2
Topic: Inventory Errors

[Question]

28. An understatement of the ending inventory balance will understate cost of goods sold and overstate net income.
Answer:  FALSE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Ending Inventory

[Question]

29. Neither GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Global
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A2
Topic: Generally Accepted Accounting Principles
Topic: International Financial Reporting Standards

[Question]

30. An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.
Answer:  TRUE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Ending Inventory

[Question]

31. An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.
Answer:  FALSE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Ending Inventory

[Question]

32. A company’s ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Inventory Turnover

[Question]

33. The inventory turnover ratio is computed by dividing average merchandise inventory by cost of goods sold.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Inventory Turnover

[Question]

34. The days’ sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Days Sales in Inventory

[Question]

35. There is no simple rule for inventory turnover, except that a high ratio is preferable provided inventory is adequate to meet demand.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-A3
Topic: Inventory Turnover
 

[Question]

36. It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-A3
Topic: Inventory Turnover

[Question]

37. A company’s cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.
Answer:  TRUE

Feedback: 15,500/4,500 = 3.4

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A3
Topic: Inventory Turnover

[Question]

38. Toys “R” Us had cost of goods sold of $8,321 million and ending inventory of $2,027 million. Based on this, its days’ sales in inventory is equal to 89 days.
Answer:  TRUE

Feedback: (2,027/8,321) x 365 = 89 days

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A3
Topic: Days Sales in Inventory

[Question]

39. One of the most important decisions in accounting for inventory is determining the unit costs assigned to each inventory item.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P1
Topic: Inventory Costs

[Question]

40. The four methods of inventory valuation are SIFO, FIFO, LIFO, and average cost.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P1
Topic: Inventory Costs

[Question]

41. When units are purchased at different costs over time, it is simple to determine the cost per unit assigned to inventory.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P1
Topic: Inventory Costs

[Question]

42. LIFO assumes that inventory costs flow in the order they were incurred.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P1
Topic: Inventory Costs

[Question]

43. The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used
Answer:  TRUE

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Weighted Average
Topic: Perpetual Inventory System
Topic: Periodic Inventory System

[Question]

44. The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P1
Topic: FIFO

[Question]

45. Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Inventory Costs

[Question]

46. The assignment of costs to cost of goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Specific Identification
Topic: Perpetual Inventory System
Topic: Periodic Inventory System

[Question]

47. The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification, FIFO, LIFO, and weighted average.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Inventory Costs

[Question]

48. The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: FIFO
Topic: Perpetual Inventory System
Topic: Periodic Inventory System

[Question]

49. Under LIFO, the most recent costs are assigned to ending inventory.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic; LIFO

[Question]

50. The matching principle requires that the inventory valuation method follow the physical flow of inventory.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Matching Principle

[Question]

51. The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Inventory Valuation

[Question]

52. In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

53. In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

54. A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.
Answer:  TRUE

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

55. The lower of cost or market rule for inventory valuation must be applied to each individual unit separately and not to major categories of inventory or to the entire inventory.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

56. The conservatism constraint requires that when more than one estimate of the amounts that are to be received or paid in the future exist and these estimates are about equally likely, then the less optimistic amount is used.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 05-P2
Topic: Conservatism Constraint

[Question]

57. A company’s cost of inventory was $317,500. Due to phenomenal demand for this product, the market value of its inventory increased to $323,000. According to the consistency principle, this company should write up the value of its inventory.
Answer:  FALSE

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

58. When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P3
Topic: Periodic Inventory System
Topic: LIFO

[Question]

59. Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statement dates.
Answer:  TRUE

Blooms Taxonomy: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P4
Topic: Interim Statements

[Question]

60. The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.
Answer:  FALSE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P4
Topic: Retail Inventory Method

[Question]

61. The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made, it can be multiplied by the ending inventory at retail to estimate ending inventory at cost.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P4
Topic: Retail Inventory Method

[Question]

62. The reliability of the gross profit method depends on a good estimate of the gross profit ratio.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

63. In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured by looking at the selling prices of inventory items.
Answer:  TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P4
Topic: Retail Inventory Method

[Question]

64. To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.
Answer:  FALSE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-P4
Topic: Gross Profit Method
Topic: Physical Inventory Count

[Question]

65. Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000.
Answer:  TRUE

Feedback: 45,000 x .6 = 27,000

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Retail Inventory Method

Multiple Choice Questions

[Question]

66. Damaged and obsolete goods:
A. Are never included in inventory.
B. Are included in inventory at their full cost.
C. Are included in inventory at their net realizable value.
D. Should be disposed of immediately.
E. Are assigned a value of zero.

Answer:  C

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Damaged and Obsolete Goods
Topic: Net Realizable Value

 

[Question]

67. Merchandise inventory includes:
A. All goods owned by a company and held for sale.
B. All goods in transit.
C. All goods on consignment.
D. Only damaged goods.
E. Only items that are on the shelf.

Answer:  A

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Merchandise Inventory

[Question]

68. Goods in transit are included in a purchaser’s inventory:
A. At any time during transit.
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination.
E. After the halfway point between the buyer and seller.

Answer:  B

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C1
Topic: Goods in Transit
Topic: FOB Shipping Point

[Question]

69. Goods on consignment:
A. Are goods shipped by the owner to the consignee who sells the goods for the owner.
B. Are reported in the consignee’s books as inventory.
C. Are goods shipped to the consignor who sells the goods for the owner.
D. Are not reported in the consignor’s inventory since they do not have possession of the inventory.
E. Are always paid for by the consignee when they take possession of the goods.

Answer:  A

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C1
Topic: Goods on Consignment

[Question]

70. Given the following items and costs as of the balance sheet date, determine the value of Faltron Company’s merchandise inventory.
– $1,000 goods sold by Faltron to another company. The goods are in transit and shipping terms are FOB destination.
– $2,000 goods sold by another company to Faltron. The goods are in transit and shipping terms are FOB destination.
– $3,000 owned by Faltron but in the possession of another company, the consignee.
– Damaged goods owned by Faltron that originally cost $4,000 but now have a $500 net realizable value.

A. $10,000
B. $6,500
C. $5,500
D. $5,000
E. $4,500

Answer:  E

Feedback:  1,000 + 3,000 + 500

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-C1
Topic: FOB Destination
Topic: Consigned Goods
Topic: Lower of Cost or Market

[Question]

71. Given the following items and costs as of the balance sheet date, determine the value of Light Company’s merchandise inventory.
– $2,000 goods sold by Light to another company. The goods are in transit and shipping terms are FOB shipping point.
– $3,000 goods sold by another company to Light. The goods are in transit and shipping terms are FOB shipping point.
– $4,000 owned by Light but in the possession of another company, the consignee.
– Damaged goods owned by Light that originally cost $5,000 but now have an $800 net realizable value.
A. $7,000
B. $7,800
C. $9,800
D. $9,000
E. $6,800
Answer:  B

Feedback:  3,000 + 4,000 + 800 = 7,800

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-C1
Topic: FOB Shipping Point
Topic: Consigned Goods
Topic: Lower of Cost or Market

[Question]

72. Physical inventory counts:
A. Are not necessary under the perpetual system.
B. Are necessary to measure and adjust for inventory shrinkage.
C. Must be taken at least once a month.
D. Require the use of hand-held portable computers.
E. Are not necessary under the cost-to benefit constraint.

Answer:  B

Blooms Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Physical Inventory Count

[Question]

73. During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:
A. Specific identification method
B. Average cost method
C. Weighted-average method
D. FIFO method
E. LIFO method

Answer:  E

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: LIFO

 

[Question]

74. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO
B. Weighted average
C. LIFO
D. Specific identification
E. WIFO

Answer:  B

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: Weighted Average

[Question]

75. Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?
A. FIFO
B. Weighted average
C. LIFO
D. Specific identification
E. First in still here

Answer:  A

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A1
Topic: FIFO

[Question]

76. The inventory valuation method that results in the lowest taxable income in a period of inflation is:
A. LIFO method
B. FIFO method
C. Weighted-average cost method
D. Specific identification method
E. Gross profit method

Answer:  A

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: LIFO

[Question]

77. The consistency concept:
A. Requires a company to consistently use the same accounting method of inventory valuation unless a change will improve financial reporting.
B. Requires a company to use one method of inventory valuation exclusively.
C. Requires that all companies in the same industry use the same accounting methods of inventory valuation.
D. Is also called the full disclosure concept.
E. Is also called the matching concept

Answer:  A

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A1
Topic: Consistency Concept

[Question]

78. The full disclosure principle:
A. Requires that when a change in inventory valuation method is made, the notes to the financial statements report the type of change, why it was made, and its effect on net income.
B. Requires that companies use the same accounting method for inventory valuation period after period.
C. Is not subject to the materiality principle.
D. Is only applied to retailers.
E. Is also called the consistency principle.

Answer:  A

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: Full Disclosure Principle

[Question]

79. An error in the period-end inventory causes an offsetting error in the next period and therefore:
A. Managers can ignore the error.
B. It is sometimes said to be self-correcting.
C. It affects only income statement accounts.
D. If affects only balance sheet accounts.
E. Is immaterial for managerial decision making.

Answer:  B

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A2
Topic: Inventory Errors

[Question]

80. The understatement of the ending inventory balance causes:
A. Cost of goods sold to be overstated and net income to be understated.
B. Cost of goods sold to be overstated and net income to be overstated.
C. Cost of goods sold to be understated and net income to be understated.
D. Cost of goods sold to be understated and net income to be overstated.
E. Cost of goods sold to be overstated and net income to be correct.

Answer:  A

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Ending Inventory

[Question]

81. The understatement of the beginning inventory balance causes:
A. Cost of goods sold to be understated and net income to be understated.
B. Cost of goods sold to be understated and net income to be overstated.
C. Cost of goods sold to be overstated and net income to be overstated.
D. Cost of goods sold to be overstated and net income to be understated.
E. Cost of goods sold to be overstated and net income to be correct.

Answer:  B

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Beginning Inventory

[Question]

82. An overstatement of ending inventory will cause
A. An overstatement of assets and equity on the balance sheet.
B. An understatement of assets and equity on the balance sheet.
C. An overstatement of assets and an understatement of equity on the balance sheet.
D. An understatement of assets and an overstatement of equity on the balance sheet.
E. No effect on the balance sheet.

Answer:  A

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A2
Topic: Inventory Errors
Topic: Ending Inventory

[Question]

83. The inventory turnover ratio:
A. Is used to analyze profitability.
B. Is used to measure solvency.
C. Measures how quickly a company turns over its merchandise inventory.
D. Validates the acid-test ratio.
E. Calculation depends on the company’s inventory valuation method.

Answer:  C

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Inventory Turnover Ratio

[Question]

84. Days’ sales in inventory:
A. Is also called days’ stock on hand.
B. Focuses on average inventory rather than ending inventory.
C. Is used to measure solvency.
D. Is calculated by dividing cost of goods sold by ending inventory.
E. Is a substitute for the acid-test ratio.

Answer:  A

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Days Sales in Inventory

[Question]

85. The inventory turnover ratio is calculated as:
A. Cost of goods sold divided by average merchandise inventory.
B. Sales divided by cost of goods sold.
C. Ending inventory divided by cost of goods sold.
D. Cost of goods sold divided by ending inventory.
E. Cost of goods sold divided by ending inventory times 365.

Answer:  A

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Inventory Turnover Ratio

[Question]

86. Days’ sales in inventory is calculated as:
A. Ending inventory divided by sales times 365.
B. Cost of goods sold divided by ending inventory.
C. Ending inventory divided by cost of goods sold times 365.
D. Cost of goods sold divided by ending inventory times 365.
E. Ending inventory divided by cost of goods sold.

Answer:  C

 

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-A3
Topic: Days Sales in Inventory

[Question]

87. Toys “R” Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. The inventory turnover equals:
A. 0.21
B. 4.51
C. 4.79
D. 76.1 days
E. 80.9 days

Answer:  C

Feedback:  $9,421/$1,965 = 4.79

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A3
Topic: Inventory Turnover Ratio

[Question]

88. A company had gross profit of $134,200 on net sales of $205,000. If ending inventory was $8,000 and average inventory was $7,080, what is the company’s inventory turnover?
A. 10.0
B. 8.85
C. 16.77
D. 18.95
E. 28.95

Answer:  A

Feedback:
$205,000 – $134,200 = $70,800 cost of goods sold
$70,800/$7,080 = 10

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A3
Topic: Inventory Turnover Ratio

 

[Question]

89. Toys “R” Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its days’ sales in inventory equals:
A. 0.21
B. 4.51
C. 4.79
D. 76.1 days
E. 80.9 days

Answer:  E

Feedback:  ($2,089/$9,421) x 365 = 80.9 days

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A3
Topic: Days Sales in Inventory

[Question]

90. The inventory valuation method that identifies the invoice cost of each item in ending inventory to determine the cost assigned to that inventory is the:
A. Weighted-average inventory method,
B. First-in, first-out method,
C. Last-in, first-out method,
D. Specific identification method,
E. Retail inventory method,

Answer:  D

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P1
Topic: Specific Identification

[Question]

91. A company had the following purchases during the current year:

January:

10 units at $120

February:

20 units at $130

May:

15 units at $140

September:

12 units at $150

November:

10 units at $160

On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4 from February, 6 from May, 4 from September and 10 from November. Using the specific identification method, what is the cost of the ending inventory?
A. $3,500
B. $3,800
C. $3,960
D. $3,280
E. $3,640

Answer:  B

Feedback:
(2 x $120) + (4 x $130) + (6 x $140) + (4 x $150) + (10 x $160) = $3,800
$240 + $520 + $840 + $600 + $1,600 = $3,800

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Specific Identification

[Question]

92. A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6, they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276

Answer:  E

Feedback:

Nov 1

  @ $20

Nov 2

10 @ $22

Nov 6

  @ $25

Nov 8

Sold:     @ $25
           2    @ $22

End Inv:    @  $20 = $100
                  @  $22 = $176
                                     $276

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

93. A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6, they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each. Using the FIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276

Answer:  A

Feedback:

Nov 1

  @ $20

Nov 2

10 @ $22

Nov 6

  @ $25

Nov 8

Sold:     @ $20
           3    @ $22

End Inv:    @  $22 = $154
                  @  $25 = $150
                                     $304

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: FIFO

[Question]

94. A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each. On November 5, 8 units were sold for $55 each. Using the weighted-average perpetual inventory method, what was the value of the inventory on November 30?
A. $304.00
B. $404.00
C. $299.33
D. $280.00
E. $276.00

Answer:  C

Feedback:

Date

Purchases

Sales

Ending Inventory

Units

Unit Cost

Units

Unit Cost

Total $ Sold

Units

Total EI $

1-Nov

5

20

5

100

2-Nov

10

22

15

320

5-Nov

8

21.33333

170.67

7

149.33

6-Nov

6

25

13

299.33

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

95. Acme-Jones Corporation uses a weighted-average perpetual inventory system.
August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $14 per unit.
August 29, 12 units were sold.
What was the amount of the cost of goods sold for this sale?
A. $148.00
B. $150.50
C. $158.40
D. $210.00
E. $330.00

Answer:  C

Feedback:
(10 x $12) + (15 x $14) = $330 goods available for sale
$330/(10 + 15) = $13.20 weighted-average cost per unit
$13.20 x 12 = $158.40 cost of goods sold

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

96. A corporation uses a FIFO perpetual inventory system.
August 2, 25 units were purchased at $12 per unit.

August 5, 10 units were purchased at $13 per unit.

August 15, 12 units were sold at $25 per unit.
August 18, 15 units were purchased at $14 per unit.

What was the amount of the ending inventory for the month of August?
A. $496.00
B. $486.00
C. $492.57
D. $300.00
E. $510.00

Answer:  A

Feedback:

Aug 1

25   @ $12

Aug 5

10   @ $13

Aug 15

Sold:  12 @ $12

Aug 18

15   @ $14

End Inv:  13   @  $12 = $156
                10   @  $13 = $130
                15   @  $14 = $210
                                       $496

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: FIFO

[Question]

97. A corporation uses a LIFO perpetual inventory system.
August 2, 25 units were purchased at $12 per unit.

August 5, 10 units were purchased at $13 per unit.

August 15, 12 units were sold at $25 per unit.
August 18, 15 units were purchased at $14 per unit.

What was the amount of the ending inventory for the month of August?
A. $496.00
B. $486.00
C. $492.57
D. $300.00
E. $510.00

Answer:  B

Feedback

Aug 1

25   @ $12

Aug 5

10   @ $13

Aug 15

Sold:  10 @ $13
            2  @ $12

Aug 18

15   @ $14

End Inv:  23   @  $12 = $276
                15   @  $14 = $210
                                       $486

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

98. Acme-Jones Corporation uses a LIFO perpetual inventory system.
August 2, 25 units were purchased at $12 per unit.

August 5, 10 units were purchased at $13 per unit.

August 15, 12 units were sold at $25 per unit.
August 18, 15 units were purchased at $14 per unit.

What was the amount of the cost of goods sold?
A. $184.53
B. $163.00
C. $174.43
D. $154.00
E. $144.00

Answer:  D

Feedback

Aug 1

25   @ $12

Aug 5

10   @ $13

Aug 15

Sold:  10 @ $13 = $130
            2  @ $12 = $  24
                               $154

Aug 18

15   @ $14

End Inv:  23   @  $12
                15   @  $14

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

99. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, they purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO perpetual inventory method, what is the cost of the 12 units that were sold?
A. $120
B. $124
C. $128
D. $130
E. $140

Answer:  B

Feedback:  (10 units x $10) + (2 units x $12) = $124

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: FIFO

[Question]

100. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, they purchased 10 units at $13 per unit. On August 12, they purchased 20 units at $14 per unit. On August 15, they sold 30 units. Using the FIFO perpetual inventory method, what is the value of the inventory on August 15 after the sale?
A. $140
B. $160
C. $210
D. $380
E. $590

Answer:  C

Feedback

Aug 1

15   @ $12

Aug 5

10   @ $13

Aug 12

20 @ $14

Aug 15

Sold: 15 @ $12
          10 @ $13
            5 @ $14

End Inv:  15   @  $14 = $210

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: FIFO 

[Question]

101. A company had inventory of 5 units at a cost of $20 each on November 1. On November 2, they purchased 10 units at $22 each. On November 6, they purchased 6 units at $25 each. On November 8, they sold 18 units for $54 each. Using the LIFO perpetual inventory method, what was the cost of the 18 units sold?
A. $395
B. $410
C. $450
D. $510
E. $520

Answer:  B

Feedback:  (6 x $25) + (10 x $22) + (2 x $20) = $410

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

102. A company markets a climbing kit and uses the perpetual inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during
January were as follows:

January 1:

Beginning balance of 18 units at $13 each.

January 12:

Purchased 30 units at $14 each.

January 19:

Sold 24 units at $30 selling price each.

January 20:

Purchased 24 units at $17 each.

January 27:

Sold 27 units at $30 selling price each.

If the ending inventory is reported at $276, which inventory method was used?
A. LIFO method
B. FIFO method
C. Weighted-average method
D. Specific identification method
E. Retail inventory method

Answer:  A

Feedback:

Purchases

Sales

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Jan 1

18

$13

$234

Jan 12

30

$14

$420

18

$13

$234

30

$14

$420

Jan 19

24

$14

$336

18

$13

$234

6

$14

$84

Jan 20

24

$17

$408

18

$13

$234

6

$14

$84

24

$17

$408

Jan 27

24

$17

$408

18

$13

$234

3

$14

$ 42

3

$14

$ 42

21

$276

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

103. A company uses a weighted-average perpetual inventory system.
August 2: 10 units were purchased at $12 per unit.
August 18: 15 units were purchased at $15 per unit.
August 29: 20 units were sold.
August 31: 14 units were purchased at $16 per unit.
What is the per-unit value of ending inventory on August 31?
A. $12.00
B. $13.80
C. $15.42
D. $16.00
E. $17.74

Answer:  C

Feedback:  *$345/25 units = $13.80/unit
†$293/19 units = $15.42/unit

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Aug. 2

10

$12

$120

10

$12.00

$120

Aug.18

15

$15

$225

25

$13.80*

$345

Aug.20

20

$13.80

$276

5

$13.80

$69

Aug.31

14

$16

$224

19

$15.42†

$293

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

104. Given the following events, what is the per-unit value of ending inventory on November 30 if this company uses a weighted-average perpetual inventory system?
November 1: 5 units were purchased at $6 per unit.
November 12: 10 units were purchased at $7.50 per unit.
November 14: 7 units were sold for $14 per unit.
November 24: 12 units were purchased at $10 per unit.
A. $6.00
B. $7.00
C. $8.80
D. $13.00
E. $21.80

Answer:  C

Feedback:  * $105/15 units = $7.00/unit
**$176/20 units = $8.80/unit

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Nov.1

5

$6.00

$30

5

$6.00

$30

Nov.12

10

$7.50

$75

15

$7.00*

$105

Nov.14

7

$7.00

$49

8

$7.00

$56

Nov.24

12

$10.00

$120

20

$8.80**

$176

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

105. Given the following information, determine the cost of ending inventory at June 30 using the LIFO perpetual inventory method. Assume this is the first month of the company’s operations.
June 1: 15 units were purchased at $20 per unit.
June 15: 12 units were sold.
June 29: 8 units were purchased for $25 per unit.
A. $200
B. $220
C. $260
D. $275
E. $300

Answer:  C

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

June 1

15

$20

$300

15

$20

$300

June 15

12

$20

$240

3

$20

$60

June 29

8

$25

$200

3

$20

$60

8

$25

$200

11

$260

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

106. Given the following information, determine the cost of ending inventory at December 31 using the weighted-average perpetual inventory method. Assume this is the first month of the company’s operations.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 12: 2 units were sold.
A. $17.20
B. $111.80
C. $129.00
D. $94.00
E. $8.60

Answer:  B

Feedback:  * $129/15 units = $8.60 per unit

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec. 2

5

$7

$35

5

$7

$35

Dec. 9

10

$9.40

$94

15

$8.60*

$129

Dec. 12

2

$8.60

$17.20

13

$8.60

$111.80

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

107. Given the following information, determine the cost of ending inventory at December 31 using the FIFO perpetual inventory method.

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $51.75
B. $83.22
C. $41.30
D. $94.00
E. $50.75

Answer:  E

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 11

5
7

$7
$9.4

$35
$65.8

3

$9.40

$28.20

Dec 15

20

$10.15

$203

3
20

$9.40
$10.15

$28.20
$203

Dec 22

3
15

$9.40
$10.15

$28.20
$152.25

5

$10.15

$50.75

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: FIFO

[Question]

108. Given the following information, determine the cost of ending inventory at December 31 using the LIFO perpetual inventory method.

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $51.75
B. $83.22
C. $41.30
D. $94.00
E. $50.75

Answer:  C

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 11

10
2

$9.40
$7

$94
$14

3

$7

$21

Dec 15

20

$10.15

$203

3
20

$7
$10.15

$21
$203

Dec 22

18

$10.15

$182.70

3
2

$7
$10.15

$21.00
$20.30

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

109. Given the following information, determine the cost of ending inventory at December 31 using the weighted-average perpetual inventory method.

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $51.75
B. $83.22
C. $41.30
D. $49.75
E. $50.75

Answer:  D

Feedback:

Purchases

Cost of goods sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

15

$7
$9.40

($129/15)

$8.60

$35
94

$129

Dec 11

12

$8.60

$103.20

3

$8.60

$25.80

Dec 15

20

$10.15

$203

3
20

23

$8.60
$10.15

($228.80/23)

$9.95

$25.80
$203

$228.80

Dec 22

18

$9.95

$179.10

5

$9.95

$49.75

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

110. Given the following information, determine the cost of goods sold for December 31 using the FIFO perpetual inventory method.

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $282.15
B. $332.10
C. $281.25
D. $290.70
E. $210.30

Answer:  C

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 11

5
7

$7
$9.40

$35
$65.80

3

$9.40

$28.20

Dec 15

20

$10.15

$203

3
20

$9.40
$10.15

$28.20
$203

Dec 22

3
15

$9.40
$10.15

$28.20
$152.25

5

$10.15

$50.75

Dec
Total

$281.25

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: FIFO

[Question]

111. Given the following information, determine the cost of goods sold at December 31 using the LIFO perpetual inventory method.

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $282.15
B. $332.10
C. $281.25
D. $290.70
E. $210.30

Answer:  D

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 11

10
2

$9.40
$7

$94
$14

3

$7

$21

Dec 15

20

$10.15

$203

3
20

$7
$10.15

$21
$203

Dec 22

18

$10.15

$182.70

3
2

$7
$10.15

$21.00
$20.30

Dec
Total

$290.70

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: LIFO

[Question]

112. Given the following information, determine the cost of goods sold at December 31 using the weighted-average perpetual inventory method.

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $282.30
B. $332.10
C. $281.25
D. $290.70
E. $210.30

Answer:  A

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

15

$7
$9.40

($129/15)

$8.60

$35
94

$129

Dec 11

12

$8.60

$103.20

3

$8.60

$25.80

Dec 15

20

$10.15

$203

3
20

23

$8.60
$10.15

($228.80/23)

$9.95

$25.80
$203

$228.80

Dec 22

18

$9.95

$179.10

5

$9.95

$49.75

Dec
Total

$282.30

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P1
Topic: Weighted Average

[Question]

113. In applying the lower of cost or market method to inventory valuation, market is defined as:
A. Historical cost
B. Current replacement cost
C. Current sales price
D. FIFO
E. LIFO

Answer:  B

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

114. Generally accepted accounting principles require that the inventory of a company be reported at:
A. Market value
B. Historical cost
C. Lower of cost or market
D. Replacement cost
E. Retail value

Answer:  C

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Technology
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

115. The conservatism constraint:
A. Requires that when more than one equally likely estimate of amounts is expected to be received or paid in the future, then the less optimistic amount should be used.
B. Requires that a company use the same accounting methods period after period.
C. Requires that revenues and expenses be reported in the period in which they are earned or incurred.
D. Requires that all items of a material nature be included in financial statements.
E. Requires that all inventory items be reported at full cost.

Answer:  A

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-P2
Topic: Conservatism Constraint

[Question]

116. A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company’s current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this company’s inventory at the lower of cost or market.
A. $2,550
B. $2,600
C. $2,700
D. $3,000
E. $3,200

Answer:  B

Feedback:  200 units @ $13 per unit = $2,600

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

117. A company has the following per unit original costs and replacement costs for its inventory:
Part A: 50 units with a cost of $5 and replacement cost of $4.50.
Part B: 75 units with a cost of $6 and replacement cost of $6.50.
Part C: 160 units with a cost of $3 and replacement cost of $2.50.
Under the lower of cost or market method, the total value of this company’s ending inventory must be reported as:
A. $1,180.00.
B. $1,075.00.
C. $1,112.50 or $1075.00, depending upon whether LCM is applied to individual items or the inventory as a whole.
D. $1,112.50.
E. $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to the inventory as a whole.

Answer:  C

Feedback:

Per Unit

Total

LCM Applied to

Units

Cost

Market

Cost

Market

Items

Whole

A

50

$5

$4.50

$ 250

$ 225.00

$225

B

75

$6

$6.50

450

487.50

450

C

160

$3

$2.50

480

400.00

400

$1,180

$1,112.50

$1,075

$1,112.50

 

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P2
Topic: Lower of Cost or Market
 

[Question]

118. A company has the following per unit original costs and replacement costs for its inventory:
Part A: 10 units with a cost of $3 and replacement cost of $2.50.
Part B: 40 units with a cost of $9 and replacement cost of $9.50.
Part C: 75 units with a cost of $8 and replacement cost of $7.50.
Under the lower of cost or market method, the total value of this company’s ending inventory must be reported as:
A. $990.00.
B. $947.50.
C. $967.50 or $947.50, depending upon whether LCM is applied to individual items or the inventory as a whole.
D. $967.50.
E. $990.00 or $947.50, depending upon whether LCM is applied to individual items or to the inventory as a whole.

Answer:  C

Feedback:

Per Unit

Total

LCM Applied to

Units

Cost

Market

Cost

Market

Items

Whole

A

10

$3

$2.50

$ 30.00

$ 25.00

$ 25.00

B

40

$9

$9.50

360.00

380.00

360.00

C

75

$8

$7.50

600.00

562.50

562.50

$990.00

$967.50

$947.50

$967.50

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P2
Topic: Lower of Cost or Market

[Question]

119. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, they purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic inventory method, what is the cost of the 12 units that were sold?
A. $120
B. $124
C. $128
D. $130
E. $140

Answer:  B

Feedback:  (10 units x $10) + (2 units x $12) = $124

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P3
Topic: Periodic Inventory System
Topic: FIFO

[Question]

120. Given the following information, determine the cost of goods sold for December 31 using the FIFO periodic inventory method:

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $282.15
B. $332.10
C. $281.25
D. $297.00
E. $284.70

Answer:  C

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 15

20

$10.15

$203

5
10
20

$7
$9.40
$10.15

$35
$94
$203

Sold in Dec

5
10
15

$7
$9.40
$10.15

$35.00
$94.00
$152.25

5 $10.15 $50.75

Dec
Total

$281.25

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P3
Topic: Periodic Inventory System
Topic: FIFO

[Question]

121. Given the following information, determine the cost of goods sold at December 31 using the LIFO periodic inventory method:

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $284.70
B. $332.10
C. $281.25
D. $290.70
E. $297.00

Answer:  E

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 15

20

$10.15

$203

5
10
20

$7
$9.40
$10.15

$35
$94
$203

Sold in Dec

20
10

$10.15
$9.40

$203.00
$94.00

5

$7

$35

Dec
Total

$297.00

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard

Learning Objective: 05-P3
Topic: Periodic Inventory System
Topic: LIFO

[Question]

122. Given the following information, determine the cost of goods sold at December 31 using the weighted-average periodic inventory method:

December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.

December 11:  12 units were sold at $35 per unit.

December 15:  20 units were purchased at $10.15 per unit.
December 22: 18 units were sold at $35 per unit.
A. $282.15
B. $332.10
C. $284.70
D. $290.70
E. $210.30

Answer:  C

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Dec 2

5

$7

$35

5

$7

$35

Dec 9

10

$9.40

$94

5
10

$7
$9.40

$35
$94

Dec 15

20

$10.15

$203

5
10
20

$7
$9.40
$10.15

$35
$94
$203

Weighted  average
Per Unit

35

(332/35)
$9.49

$332

Dec
Total

30

$9.49

$284.70

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard

Learning Objective: 05-P3
Topic: Periodic
Topic: Weighted Average

[Question]

123. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, they purchased 10 units at $13 per unit. On August 12, they purchased 20 units at $14 per unit. On August 15, they sold 30 units. Using the FIFO periodic inventory method, what is the value of the inventory at August 15 after the sale?
A. $140
B. $160
C. $210
D. $380
E. $590

Answer:  C

Feedback:

Purchases

Cost of Goods Sold

Balance

Date

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

Total

Aug 1

15

$12

$180

15

$12

$180

Aug 5

10

$13

$130

15
10

$12
$13

$180
$130

Aug 12

20

$14

$280

15
10
20

$12
$13
$14

$180
$130
$280

Sold in Aug

15
10
5

$12
$13
14

$180
$130
$70

15 $14 $210

Aug
Total

$380

$210

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P3
Topic: Periodic Inventory
Topic: FIFO

[Question]

124. A company had inventory of 5 units at a cost of $20 each on November 1. On November 2, they purchased 10 units at $22 each. On November 6, they purchased 6 units at $25 each. On November 8, they sold 18 units for $54 each. Using the LIFO perpetual inventory method, what was the cost of the 18 units sold?
A. $395
B. $410
C. $450
D. $510
E. $520

Answer:  B

Feedback:  (6 x $25) + (10 x $22) + (2 x $20) = $410

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P3
Topic: Periodic Inventory
Topic: LIFO

[Question]

125. A company uses the periodic inventory system and had the following activity during the
current monthly period:.

November 1:

Beginning inventory

100 units @ $20

November 5:

Purchased

100 units @ $22

November 8:

Purchased

50 units @ $23

November 16:

Sold

200 units @ $45

November 19:

Purchased

50 units @ $25

Using the weighted-average inventory method, the company’s ending inventory would be reported at:
A. $2,000
B. $2,200
C. $2,250
D. $2,400
E. $4,400

Answer:  B

Feedback:

100 @ $20

$2,000

11/5

100 @ $22

2,200

11/8

50 @ $23

1,150

11/19

50 @ $25

1,250

Total

300

$6,600

 6,600/300 = 22*100 = 2,200

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P3
Topic: Periodic Inventory
Topic: Weighted Average

[Question]

126. A company sells a climbing kit and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows:

January 1:

Beginning balance of 18 units at $13 each

January 12:

Purchased 30 units at $14 each

January 19:

Sold 24 units at a selling price of $30 each

January 20:

Purchased 24 units at $17 each

January 27:

Sold 27 units at a selling price of $30 each

If the ending inventory is reported at $357, what inventory method was used?
A. LIFO
B. FIFO
C. Weighted average
D. Specific identification
E. Retail inventory method

Answer:  B

Feedback:

18 @ $13

$234

1/12

30 @ $14

420

1/20

24 @ $17 =

408

Total

72

$1,062

Sold

51

EI

21 @ $17 = $357

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P3
Topic: Periodic Inventory
Topic: FIFO

[Question]

127. Interim statements:
A. Are required by Congress.
B. Are necessary to achieve full disclosure about a business’s operations.
C. Are usually monthly or quarterly statements prepared in between the traditional, annual statement dates.
D. Require the use of the perpetual method for inventories.
E. Cannot be prepared if the company follows the conservatism principle.

Answer:  C

Blooms Taxonomy: Remember
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 1 Easy
Learning Objective: 05-P4
Topic: Interim Financial Statements

[Question]

128. A company’s warehouse was destroyed by a tornado on March 15. The following information was salvaged from the ruins:
Inventory, beginning: $28,000
Purchases for the period: $17,000
Sales for the period: $55,000
Sales returns for the period: $700
The company’s average gross profit ratio is 35%. What is the estimated cost of the lost inventory?
A. $9,705
B. $25,995
C. $29,250
D. $44,000
E. $45,000

Answer:  A

Feedback:

$28,000  Beginning inventory
  17,000  Purchases
  45,000  Goods available
(35,295) COGS (54,300 x .65)
$  9,705  Cost of lost inventory

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

129. A company reported the following information regarding its inventory.
Beginning inventory: cost is $70,000; retail is $130,000.
Net purchases: cost is $65,000; retail is $120,000.
Sales at retail: $145,000.
The year-end inventory showed $105,000 worth of merchandise available at retail prices. What is the cost of the ending inventory?
A. $48,300
B. $56,700
C. $56,441
D. $78,300
E. $105,000

Answer:  B

Feedback:

At Cost

At Retail

Beginning inventory

$  70,000

$130,000

Purchases

65,000

120,000

Goods available

$135,000

$250,000

Cost / retail ratio

$135,000/$250,000 = 54%

EI at cost

$105,000 x 54% = $56,700

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

130. On September 30 a company needed to estimate its ending inventory to prepare its third quarter financial statements. The following information is available:
Beginning inventory, July 1: $4,000
Net sales: $40,000
Net purchases: $41,000
The company’s gross margin ratio is 15%. Using the gross profit method, the cost of goods sold would be:
A. $4,000
B. $5,000
C. $21,000
D. $25,000
E. $34,000

Answer:  E

Feedback:  40,000 x .85 = 34,000

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

131. On June 30 a company needed to estimate its ending inventory to prepare its second quarter financial statements. The following information is available:
Beginning inventory, April 1: $6,000
Net sales: $70,000
Net purchases: $36,000
The company’s gross margin ratio is 12%. Using the gross profit method, the cost of goods sold would be:
A. $8,400
B. $34,000
C. $61,600
D. $40,000
E. $35,200

Answer:  C

Feedback:  70,000 x .88 = 61,600

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

132. A company that has operated with a 30% average gross profit ratio for a number of years had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory using the gross profit method is:
A. $30,000
B. $21,000
C. $20,000
D. $18,000
E. $27,000

Answer:  C

Feedback:

Beginning inventory

18,000

+ Purchases

72,000

– COGS

(70,000)

(100,000 x .70)

= Ending inventory

20,000

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

133. On December 31, a company needed to estimate its ending inventory to prepare its fourth quarter financial statements. The following information is currently available:
Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500
The company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:
A. $4,000
B. $6,000
C. $10,000
D. $16,000
E. $34,000

Answer:  B

Feedback:

Beginning inventory

12,500

+ Purchases

27,500

– COGS

(34,000)

(40,000 x .85)

= Ending inventory

6,000

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Gross Profit Method

[Question]

134. Use the following information to estimate the third quarter ending inventory under the gross profit method. This company’s gross profit ratio is 20%.
Third quarter beginning inventory: $54,000
Net sales for third quarter: $85,000
Net purchases for third quarter: $21,000
A. $101,000
B. $58,000
C. $35,000
D. $7,000
E. $14,000

Answer:  D

Feedback:

Beginning inventory

54,000

+ Purchases

21,000

– COGS

(68,000)

(85,000 x .80)

= Ending inventory

7,000

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Retail Inventory Method

Matching Questions

[Question]

135. Match each of the following terms with the appropriate definition.

1. The number of times a company’s inventory is sold during a period.

Conservatism constraint

  5

2. A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail price.

Net realizable value

  3

3. The expected sales price of an item minus the cost of making the sale.

Retail inventory method

  2

4. An inventory pricing method that assumes the unit prices of the beginning inventory and of each purchase are weighted by the number of units of each in inventory; the calculation occurs at the time of each sale.

Days’ sales in inventory

  10

5. The accounting principle that aims to select the less optimistic estimate when two or more estimates are about equally likely.

Weighted average inventory method

  4

6. Financial statements prepared for periods of less than one year.

Interim statements

  6

7. An inventory valuation method that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

LIFO method

  7

8. An inventory valuation method that assumes that inventory items are sold in the order acquired.

Specific identification method

  9

9. An inventory valuation method where the purchase cost of each item in ending inventory is identified and used to determine the cost assigned to inventory.

FIFO method

  8

10. An estimate of days needed to convert the inventory at the end of the period into receivables or cash.

Inventory turnover

  1

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: 2 Medium
Learning Objective: 05-A1
Learning Objective: 05-C1
Learning Objective: 05-P1
Learning Objective: 05-P2
Learning Objective: 05-P4
Topic: Conservatism Constraint
Topic: Net Realizable Value
Topic: Retail Inventory Method
Topic: Days Sales in Inventory
Topic: Weighted Average
Topic: Interim Financial Statements
Topic: LIFO
Topic: Specific Identification
Topic: FIFO
Topic: Inventory Turnover

Essay Questions

[Question]

136. Identify the inventory valuation method that is being described for each situation below. In all cases, assume a period of rising prices. Use the following to identify the inventory valuation method:

FIFO

First in, first out

LIFO

Last in, first out

SI

Specific identification

WA

Weighted average

a. The method that can only be used if each inventory item can be matched with a specific purchase and its invoice.
b. The method that will cause the company to have the lowest income taxes.
c. The method that will cause the company to have the lowest cost of goods sold.
d. The method that will assign a value to inventory that approximates its current cost.
e. The method that will tend to smooth out erratic changes in costs.

Answer:

a. SI; b. LIFO; c. FIFO; d. FIFO; e. WA

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Learning Objective: 05-P1
Topic: Specific Identification
Topic: LIFO
Topic: FIFO
Topic: Weighted Average

 

[Question]

137. Identify the items that are included in merchandise inventory. (In your answer address the special situations of goods in transit, consigned goods, and damaged goods.)

Answer:

Merchandise inventory consists of goods owned by a company and held for resale. Three special cases involving ownership decisions are goods in transit, consigned goods, and damaged goods. Goods in transit are included in the inventory of the company that owns the goods. Consigned goods are included in the inventory of the consignor. Damaged goods are valued at net realizable value.

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-C1
Topic: Inventory Costs

[Question]

138. What costs are assigned to merchandise inventory?

Answer:

The costs of merchandise inventory include the invoice price minus any discounts, plus any added or incidental costs necessary to put the inventory in a place and condition for sale.

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 05-C2
Topic: Inventory Costs

[Question]

139. Describe the internal controls that must be applied when taking a physical count of inventory.

Answer:

The internal controls should include (1) prenumbered tickets that are all accounted for; (2) counters who are not responsible for the inventory; (3) counters who must confirm the validity of inventory’s existence, amounts, and quality; (4) a second count by a different counter; and (5) confirmation that all inventories are ticketed only once by a manager.

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-C2
Topic: Physical Inventory Count

[Question]

140. Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes.

Answer:

The specific identification method identifies the exact costs of the inventory items sold. The weighted-average method evens out changes in costs by “averaging” inventory costs. However, LIFO and FIFO provide different amounts in periods of rising or falling costs. For example, in periods of rising costs, LIFO provides a lower income and thus lower taxes. In periods of falling costs, LIFO provides a higher income and thus higher taxes. FIFO calculations provide both higher income and taxes in periods of rising costs and lower income and taxes in periods of declining costs.

Blooms Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 05-A1
Topic: Ending Inventory
Topic: Net Income
Topic: Specific Identification
Topic: LIFO
Topic: FIFO
Topic: Weighted Average

[Question]

141. How do the consistency concept and the full disclosure principle affect inventory valuation?

Answer:

The consistency concept requires that companies use the same accounting method for inventory valuation from period to period so that the financial statements are comparable across periods. The only exception is when a change for one method to another will improve its financial reporting. The consistency concept does not require a company to use one inventory valuation method for all categories of inventory.
If a company does change its inventory valuation method, the full disclosure principle requires that the notes to the financial statements report the type of change, its justification, and its effect on net income.

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 05-A1
Topic: Consistency Concept
Topic: Inventory Valuation
Topic: Full Disclosure Pr