ACCOUNTING 202 FINAL REVIEW

CHAPTER 21D 21. Major reasons why a company may become involved in leasing to other companies is (are)

a. interest revenue.b. high residual values.c. tax incentives.d. all of these.

D 22. Which of the following is an advantage of leasing?

a. Off-balance-sheet financingb. Less costly financingc. 100% financing at fixed ratesd. All of these

B 23. Which of the following best describes current practice in accounting for leases?

a. Leases are not capitalized.b. Leases similar to installment purchases are capitalized.c. All long-term leases are capitalized.d. All leases are capitalized.

C 24. While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is thata. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.b. at the end of the lease the property usually can be purchased by the lessee.c. a lease reflects the purchase or sale of a quantifiable right to the use of property.d. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.

A 25. An essential element of a lease conveyance is that the

a. lessor conveys less than his or her total interest in the property.b. lessee provides a sinking fund equal to one year's lease payments.c. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.d. term of the lease is substantially equal to the economic life of the leased property.

B 26. What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

a. No impact as the option does not enter into the transaction until the end of the lease term.b. The lessee must increase the present value of the minimum lease payments by the present value of the option price.c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.d. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it

appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

?B P27. The amount to be recorded as the cost of an asset under capital lease is equal to the

a. present value of the minimum lease payments.b. present value of the minimum lease payments or the fair value of the asset, whichever is lower.c. present value of the minimum lease payments plus the present value of any unguaranteed residual value.d. carrying value of the asset on the lessor's books.

A 28. The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.b. operating, sales, and capital lease methods.c. operating and leveraged lease methods.d. none of these.

C 29. Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.b. The lease contains a purchase option.c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.Not A bc transfers title- not ownershipNot B bc its contains a bargain purchase optionNot D bc it’s the “PV of the MLP” – not just simply “MLP”

D 30. Minimum lease payments may include a

a. penalty for failure to renew.b. bargain purchase option.c. guaranteed residual value.d. any of these.

D 31. Executory costs include

a. maintenance.b. property taxes.c. insurance.d. all of these.

C 32. In computing the present value of the minimum lease payments, the lessee should

a. use its incremental borrowing rate in all cases.b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known

to the lessee.c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known

to the lessee.d. none of these.

**A 33. In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.b. an unguaranteed residual value and depreciate over the term of the lease.c. a guaranteed residual value and depreciate over the life of the asset.d. an unguaranteed residual value and depreciate over the life of the asset.

B 34. In the earlier years of a lease, from the lessee's perspective, the use of the

a. capital method will enable the lessee to report higher income, compared to the operating method.b. capital method will cause debt to increase, compared to the operating method.c. operating method will cause income to decrease, compared to the capital method.d. operating method will cause debt to increase, compared to the capital method.

**A P35. A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

a. asset's remaining economic life.b. term of the lease.c. life of the asset or the term of the lease, whichever is shorter.d. life of the asset or the term of the lease, whichever is longer.

D S40. If the residual value of a leased asset is guaranteed by a third party

a. it is treated by the lessee as no residual value.b. the third party is also liable for any lease payments not paid by the lessee.c. the net investment to be recovered by the lessor is reduced.d. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

C 47. The Lease Liability account should be disclosed as

a. all current liabilities.b. all noncurrent liabilities.c. current portions in current liabilities and the remainder in noncurrent liabilities.d. deferred credits.

??B 52. On December 1, 2011, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts:

Rent deposit $ 90,000First month's rent 90,000Last month's rent 90,000Installation of new walls and offices 495,000

$765,000The entire amount of $765,000 was charged to rent expense in 2011. What amount should Goetz have charged to expense for the year ended December 31, 2011?

a. $90,000

b. $94,125c. $184,125d. $495,000

C *53. On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $100,000 at the end of each year for ten years with title to pass to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2011

a. lease expense of $100,000.b. interest expense of $44,734 and depreciation expense of $38,068.c. interest expense of $53,681 and depreciation expense of $44,734.d. interest expense of $45,681 and depreciation expense of $67,101.

Always Use Estimated USEFUL LIFE OF ASSET when determining depreciation – not life of lease

C 60. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at

a. $509,256.b. $488,661.c. $434,366.d. $416,799.

C?61. On December 31, 2011, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2019. Equal annual payments of $200,000 are due on December 31 of each year, beginning with December 31, 2011. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2011 of the eight lease payments over the lease term discounted at 10% is $1,173,685. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2012 balance sheet is

a. $1,091,054.b. $1,000,159.c. $871,054.d. $1,200,000.12/31/11: 1173685-200,000= 97368512/31/12: 200,000 – (973685* .10) = 102631.5 973685 – 102631.5= 871054

Use the following information for questions 62 and 63.On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.

A 62. In 2011, Sauder should record interest expense of

a. $15,849.b. $29,151.c. $20,849.d. $34,151.(208493-50,000) *.10

B 63. In 2012, Sauder should record interest expense of

a. $10,849.b. $12,434.c. $15,849.d. $17,434.

D 64. On December 31, 2011, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 30, 2019. Equal annual payments of $150,000 are due on December 31 of each year, beginning with December 31, 2011. The lease is properly classified as a capital lease on Kuhn’s books. The present value at December 31, 2011 of the eight lease payments over the lease term discounted at 10% is $880,264. Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on its December 31, 2011 balance sheet is

a. $880,264.b. $818,290.c. $792,238.

d. $730,264.(880,264 – 150,000)

Use the following information for questions 65 and 66.

On January 1, 2011, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $60,000 at the end of each year for five years with title to pass to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $227,448 at an effective interest rate of 10%.

C 65. With respect to this capitalized lease, for 2011 Ogleby should record

a. rent expense of $60,000.b. interest expense of $22,745 and depreciation expense of $45,489.c. interest expense of $22,745 and depreciation expense of $32,493.d. interest expense of $30,000 and depreciation expense of $45,489.*Interest taken off of 227,448 bc Annual Payments are at END of yr (at same time as interest… If it were BEG of every year, interest

would be taken from 227.448-60,000

C 66. With respect to this capitalized lease, for 2012 Ogleby should record

a. interest expense of $22,745 and depreciation expense of $32,493.b. interest expense of $20,469 and depreciation expense of $32,493.c. interest expense of $19,019 and depreciation expense of $32,493.d. interest expense of $14,469 and depreciation expense of $32,493.60,000- 22744= 37225 227448-37225 = 190192 * .1 = 19019

D?67. Emporia Corporation is a lessee with a capital lease. The asset is recorded at $450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a market value of $150,000 at the end of 5 years, and a market value of $50,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of depreciation expense would the lessee record for the first year of the lease?

a. $90,000b. $80,000 c. $60,000d. $50,000

*A68. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception?

PV Annuity Due PV Ordinary Annuity8%, 4 periods 3.57710 3.3121310%, 4 periods 3.48685 3.16986

a. $307,767b. $272,728c. $284,969d. $300,000

C 69. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset’s life?

PV Annuity Due PV Ordinary Annuity8%, 4 periods 3.57710 3.3121310%, 4 periods 3.48685 3.16986

a. $0b. $24,621c. $17,738d. $22,798((86,038*3.57710) – 86038) *.08

D70. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2?

PV Annuity Due PV Ordinary Annuity8%, 4 periods 3.57710 3.3121310%, 4 periods 3.48685 3.16986

a. $86,038b. $61,417c. $63,240d. $68,300(86038 – 17738)

C 71. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Pisa, Inc. uses the straight-line method to depreciate similar assets. What is the amount of depreciation expense recorded by Pisa, Inc. in the first year of the asset’s life?

PV Annuity Due PV Ordinary Annuity8%, 4 periods 3.57710 3.3121310%, 4 periods 3.48685 3.16986

a. $0 because the asset is depreciated by Tower Company.b. $71,242c. $76,942d. $75,000

?C72. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of $200,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2011?

PV Annuity Due PV Ordinary Annuity PV Single Sum8%, 5 periods 4.31213 3.99271 .6850810%, 5 periods 4.16986 3.79079 .62092

a. $29,250b. $23,400c. $26,000d. $32,500

?C73. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of $200,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $73,259 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2011, and what is the balance in the Lease Liability account?

Book Value of Balance in Lease Leased Asset Liability________

a. $325,000 $219,243b. $260,000 $248,491c. $195,000 $242,643d. $208,000 $248,491

?A74. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of $200,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, what are the equal annual payments?

PV Annuity Due PV Ordinary Annuity PV Single Sum8%, 5 periods 4.31213 3.99271 .6850810%, 5 periods 4.16986 3.79079 .62092

a. $73,259b. $67,831c. $75,822

d. $81,398

Use the following information for questions 75 through 80. (Annuity tables on page 21-25.)Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $155,213 are due on December 31 of each year.(b) The fair value of the machine on January 1, 2011, is $400,000. The machine has a remaining economic life of 10 years, with no salvage

value. The machine reverts to the lessor upon the termination of the lease.(c) Alt depreciates all machinery it owns on a straight-line basis.(d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make

collectibility of future lease payments doubtful.B 75. What type of lease is this from Alt Corporation's viewpoint?

a. Operating leaseb. Capital leasec. Sales-type leased. Direct-financing lease

B 76. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2011?

a. Depreciation Expenseb. Rent Expensec. Interest Expensed. Depreciation Expense and Interest Expense

C77. If the present value of the future lease payments is $400,000 at January 1, 2011, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.)

a. $115,213b. $123,213c. $126,734d. $133,070YR 1: 400,000- (155213- 400,000 *.10) = 284787YR 2: 155213 – (284787* .1)

C100. Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?

Lease A Lease B a. Operating lease Capital leaseb. Operating lease Operating leasec. Capital lease Capital leased. Capital lease Operating lease

A 101. On December 31, 2011, Burton, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2011. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2011 balance sheet, Burton should report a lease liability ofa. $606,528.b. $680,000.c. $751,344.d. $766,528.(160,000*4.7008) – 160,000

D102. On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2010, and the second payment was made on December 31, 2011. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2,502,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2011 balance sheet, Harris should report a lease liability of

a. $1,902,000.b. $1,872,000.c. $1,711,800.d. $1,492,200.2010: Right Away, 2,502,000-600,000= 1,902,000 New Lease Liability 2011:Then 600,000 – (1,902,000*10%)=409,800… & New Lease Liab=1,902,000-409,800

A103. A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal

a. the current liability shown for the lease at the end of year 1.b. the current liability shown for the lease at the end of year 2.c. the reduction of the lease liability in year 1.d. one-tenth of the original lease liability.

Use the following information for questions 104 and 105.

On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $900,000, based on implicit interest of 10%.

D104. In its 2011 income statement, what amount of interest expense should Hernandez report from this lease transaction?

a. $0b. $56,250c. $75,000d. $90,000900,000*10%

D105. In its 2011 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?

a. $150,000b. $100,000c. $90,000d. $60,000

CHAPTER 22:C 37. An example of a correction of an error in previously issued financial statements is a change

a. from the FIFO method of inventory valuation to the LIFO method.b. in the service life of plant assets, based on changes in the economic environment.c. from the cash basis of accounting to the accrual basis of accounting.d. in the tax assessment related to a prior period.

B 38. Counterbalancing errors do not include

a. errors that correct themselves in two years.b. errors that correct themselves in three years.c. an understatement of purchases.d. an overstatement of unearned revenue.

C39. A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?

Assets Liabilities Stockholders' Equity Net Incomea. No effect Understate Overstate Overstate.b. No effect Overstate Understate Understate.c. Understate Understate No effect No effect.d. Understate No effect Understate Understate.

C40. If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause

a. the ending inventory and retained earnings to be understated.b. the ending inventory, cost of goods sold, and retained earnings to be understated.c. no effect on net income, working capital, and retained earnings.d. cost of goods sold and net income to be understated.

Use the following information for questions 55 and 56.Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/10 and 12/31/11 contained the following errors:

2010 2011 Ending inventory $15,000 overstatement $24,000 understatementDepreciation expense 6,000 understatement 12,000 overstatement

A55. Assume that the 2010 errors were not corrected and that no errors occurred in 2009. By what amount will 2010 income before income taxes be overstated or understated?

a. $21,000 overstatementb. $9,000 overstatementc. $21,000 understatementd. $9,000 understatement

C 56. Assume that no correcting entries were made at 12/31/10, or 12/31/11. Ignoring income taxes, by how much will retained earnings at 12/31/11 be overstated or understated?

a. $24,000 overstatementb. $21,000 overstatementc. $30,000 understatementd. $9,000 understatement

Use the following information for questions 57 through 59.Langley Company's December 31 year-end financial statements contained the following errors:

Dec. 31, 2010 Dec. 31, 2011 Ending inventory $7,500 understated $11,000 overstatedDepreciation expense 2,000 understated

An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012. There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors. Ignore income tax considerations.

D57. What is the total net effect of the errors on Langley's 2011 net income?

a. Net income understated by $14,500.b. Net income overstated by $7,500.c. Net income overstated by $13,000.d. Net income overstated by $15,000.

C 58. What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2011?

a. Working capital overstated by $5,000b. Working capital overstated by $1,500c. Working capital understated by $4,500d. Working capital understated by $12,000

C59. What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2011?

a. Retained earnings understated by $10,000b. Retained earnings understated by $4,500c. Retained earnings understated by $2,500d. Retained earnings overstated by $3,500

A60. Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office supplies on hand of $24,000 at December 31, 2011 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would causea. 2011 net income to be understated $75,000 and December 31, 2011 retained earnings to be understated $24,000.b. 2010 net income and December 31, 2010 retained earnings to be understated $51,000 each.c. 2010 net income to be overstated $27,000 and 2011 net income to be understated $24,000.d. 2011 net income and December 31, 2011 retained earnings to be understated $24,000 each.

Use the following information for questions 61 through 63.Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors:

Dec. 31, 2010 Dec. 31, 2011 Ending inventory $132,000 too high $156,000 too lowDepreciation expense 84,000 too high —Insurance expense 60,000 too low 60,000 too highPrepaid insurance 60,000 too high —

In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012. No corrections have been made for any of the errors. Ignore income tax considerations.

A 61. The total effect of the errors on Bishop's 2011 net income is

a. understated by $376,800.b. understated by $244,800.

c. overstated by $115,200.d. overstated by $199,200.

B62. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by

a. $328,800.b. $268,800.c. $184,800.d. $136,800.

C63. The total effect of the errors on the amount of Bishop's working capital at December 31, 2011 is understated by

a. $400,800.b. $316,800.c. $184,800.d. $124,800.(156,000 + 28,800)

Use the following information for questions 64 and 65.Link Co. purchased machinery that cost $810,000 on January 4, 2009. The entire cost was recorded as an expense. The machinery has a nine-year life and a $54,000 residual value. The error was discovered on December 20, 2011. Ignore income tax considerations.

D 64. Link's income statement for the year ended December 31, 2011, should show the cumulative effect of this error in the amount of

a. $726,000.b. $642,000.c. $558,000.d. $0.

C65. Before the correction was made, and before the books were closed on December 31, 2011, retained earnings was understated by

a. $810,000.b. $726,000.c. $642,000.d. $558,000.

Use the following information for questions 66 and 67.

Ernst Company purchased equipment that cost $750,000 on January 1, 2010. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2012. Ernst is subject to a 40 % tax rate.

A66. Ernst’s net income for the year ended December 31, 2010, was understated by

a. $402,000.b. $450,000.c. $670,000.d. $750,000.

C 67. Before the correction was made and before the books were closed on December 31, 2012, retained earnings was understated by

a. $332,000.b. $336,000.c. $354,000.d. $450,000.

CHAPTER 23

C21. It is an objective of the statement of cash flows to

a. disclose changes during the period in all asset and all equity accounts.b. disclose the change in working capital during the period.c. provide information about the operating, investing, and financing activities of an entity during a period.d. none of these.

C22. The primary purpose of the statement of cash flows is to provide information

a. about the operating, investing, and financing activities of an entity during a period.b. that is useful in assessing cash flow prospects.c. about the cash receipts and cash payments of an entity during a period.d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.

C23. Of the following questions, which one would not be answered by the statement of cash flows?

a. Where did the cash come from during the period?b. What was the cash used for during the period?c. Were all the cash expenditures of benefit to the company during the period?d. What was the change in the cash balance during the period?

B24. The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial statements?

a. Statements of cash flowsb. Balance sheetsc. Income statementsd. Statements of retained earnings

D 25. Cash equivalents are

a. treasury bills, commercial paper, and money market funds purchased with excess cash.b. investments with original maturities of three months or less.c. readily convertible into known amounts of cash.d. all of these.

D 26. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as a(n)

a. addition adjustment to net income in the cash flows from operating activities section.b. cash outflow from investing activities.c. cash inflow from investing activities.d. cash inflow from financing activities.

C27. To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by

a. re-recording all income statement transactions that directly affect cash in a separate cash flow journal.b. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to

the entire array of income statement transactions.c. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

B 28. An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)

a. addition to net income in arriving at net cash flow from operating activities.b. deduction from net income in arriving at net cash flow from operating activities.c. cash outflow from investing activities.d. cash outflow from financing activities.

B29. A statement of cash flows typically would not disclose the effects of

a. capital stock issued at an amount greater than par value.b. stock dividends declared.c. cash dividends paid.d. a purchase and immediate retirement of treasury stock.

B30. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities?

a. A change in interest payableb. A change in dividends payablec. A change in income taxes payabled. All of these are adjustments.

D31.Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows:Direct Method Indirect Method

a. Outflow Inflowb. Inflow Inflowc. Outflow Outflowd. No effect No effect

C32. In a statement of cash flows, the cash flows from investing activities section should report

a. the issuance of common stock in exchange for a factory building.b. stock dividends received.c. a major repair to machinery charged to accumulated depreciation.d. the assignment of accounts receivable.

??C33. Xanthe Corporation had the following transactions occur in the current year:1. Cash sale of merchandise inventory.2. Sale of delivery truck at book value.3. Sale of Xanthe common stock for cash.4. Issuance of a note payable to a bank for cash.5. Sale of a security held as an available-for-sale investment.6. Collection of loan receivable.

How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year?

a. Five itemsb. Four itemsc. Three itemsd. Two items

?B34. Which of the following would be classified as a financing activity on a statement of cash flows?

a. Declaration and distribution of a stock dividendb. Deposit to a bond sinking fundc. Sale of a loan receivabled. Payment of interest to a creditor

B35.The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as a(n)

a. addition to net income.b. deduction from net income.c. investing activity.d. financing activity.

C 44. When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is added to net income to compute cash provided by/used by operating activities?

a. Increase in accounts receivable.b. Gain on sale of land.c. Amortization of patent.d. All of the above are added to net income to arrive at cash flow from operating activities.

B45. When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is deducted from net income to compute cash provided by/used by operating activities?

a. Decrease in accounts receivable.b. Gain on sale of land.c. Amortization of patent.d. All of the above are deducted from net income to arrive at cash flow from operating activities.

D47.Dolan Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Moss Co. during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cash flows (indirect method), the $25,000 should

a. not be shown.b. be shown as cash inflow from investing activities.c. be shown as cash outflow from financing activities.d. be shown as a deduction from net income in the cash flows from operating activities section.

C50.How should significant noncash transactions be reported in the statement of cash flows according to FASB Statement No. 95?

a. They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions."b. Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major

component of the transaction.c. These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule

at the bottom of the statement or appear in a separate supplementary schedule to the financials.d. They should be handled in a manner consistent with the transactions that affect cash flows.

Use the following information for questions 51 and 52.Napier Co. provided the following information on selected transactions during 2011:

Purchase of land by issuing bonds $250,000Proceeds from issuing bonds 500,000Purchases of inventory 950,000Purchases of treasury stock 150,000Loans made to affiliated corporations 350,000Dividends paid to preferred stockholders 100,000Proceeds from issuing preferred stock 400,000Proceeds from sale of equipment 50,000

A51. The net cash provided (used) by investing activities during 2011 is

a. $50,000.b. $(300,000).c. $(550,000).d. $(1,250,000).(50,000 – 350,000)

B52. The net cash provided by financing activities during 2011 is

a. $550,000.b. $650,000.c. $800,000.d. $900,000.(500-150-100+400)

The balance sheet data of Kohler Company at the end of 2011 and 2010 follow: 2011 2010

Cash $ 50,000 $ 70,000Accounts receivable (net) 120,000 90,000Merchandise inventory 140,000 90,000Prepaid expenses 20,000 50,000Buildings and equipment 180,000 150,000Accumulated depreciation—buildings and equipment (36,000) (16,000)Land 180,000 80,000

Totals $654,000 $514,000Accounts payable $136,000 $110,000Accrued expenses 24,000 36,000Notes payable—bank, long-term 80,000Mortgage payable 60,000Common stock, $10 par 418,000 318,000Retained earnings (deficit) 16,000 (30,000)

$654,000 $514,000Land was acquired for $100,000 in exchange for common stock, par $100,000, during the year; all equipment purchased was for cash. Equipment costing $10,000 was sold for $4,000; book value of the equipment was $8,000 and the loss was reported as an ordinary item in net income. Cash dividends of $20,000 were charged to retained earnings and paid during the year; the transfer of net income to retained earnings was the only other entry in the Retained Earnings account. In the statement of cash flows for the year ended December 31, 2011, for Naley Company:

C 53. The net cash provided by operating activities was

a. $52,000.b. $66,000.c. $56,000.d. $48,000.

$16,000 + $20,000 + $30,000 = $66,000 (NI)??($10,000 – $2,000) – $4,000 = $4,000 (Loss)$36,000 + $2,000 – $16,000 = $22,000 (Depr. exp.)$66,000 – $30,000 – $50,000 + $30,000 + $4,000 + $22,000 + $26,000 –$12,000 56,000.

D54. The net cash provided (used) by investing activities was

a. $26,000.b. $(40,000).c. $(136,000).d. $(36,000).

$4,000 loss – ($180,000 + $10,000 – $150,000) = ($36,000). … [No land bc was exchanged for common stock – not effecting cash]

C55. The net cash provided (used) by financing activities was

a. $ -0-.b. $(20,000).c. $(40,000).d. $60,000.

-$80,000 + $60,000 – $20,000 = ($40,000).

A56. The following information on selected cash transactions for 2011 has been provided by Mancuso Company:Proceeds from sale of land $160,000Proceeds from long-term borrowings 400,000Purchases of plant assets 144,000Purchases of inventories 680,000Proceeds from sale of Mancuso common stock 240,000

What is the cash provided (used) by investing activities for the year ended December 31, 2011, as a result of the above information?

a. $16,000b. $256,000.c. $160,000.d. $800,000.

D57. Selected information from Dinkel Company's 2011 accounting records is as follows:Proceeds from issuance of common stock $ 400,000Proceeds from issuance of bonds 1,200,000Cash dividends on common stock paid 160,000Cash dividends on preferred stock paid 60,000Purchases of treasury stock 120,000Sale of stock to officers and employees not included above 100,000

Dinkel's statement of cash flows for the year ended December 31, 2011, would show net cash provided (used) by financing activities of

a. $60,000.b. $(220,000).c. $160,000.d. $1,360,000.$400,000 + $1,200,000 – $160,000 – $60,000 – $120,000 + $100,000 = $1,360,000.

C 63. During 2011, Stout Inc. had the following activities related to its financial operations:Carrying value of convertible preferred stock in Stout, converted into common shares of Stout $ 360,000Payment in 2011 of cash dividend declared in 2010 to preferred shareholders 186,000Payment for the early retirement of long-term bonds payable (carrying amount $2,220,000) 2,250,000Proceeds from the sale of treasury stock (on books at cost of $258,000) 300,000

The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2011 should be

a. $1,590,000.b. $1,776,000.c. $2,136,000.d. $2,148,000.$300,000 – $186,000 – $2,250,000 = $2,136,000.

C64.Hager Company sold some of its plant assets during 2011. The original cost of the plant assets was $750,000 and the accumulated depreciation at date of sale was $700,000. The proceeds from the sale of the plant assets were $105,000. The information concerning the sale of the plant assets should be shown on Hager's statement of cash flows (indirect method) for the year ended December 31, 2011, as a(n)

a. subtraction from net income of $55,000 and a $50,000 increase in cash flows from financing activities.b. addition to net income of $55,000 and a $105,000 increase in cash flows from investing activities.c. subtraction from net income of $55,000 and a $105,000 increase in cash flows from investing activities.d. addition of $105,000 to net income.

$105,000 – ($750,000 – $700,000) = $55,000, $105,000 (proceeds).

B65. An analysis of the machinery accounts of Noller Company for 2011 is as follows:Machinery, Net of

Accumulated Accumulated Machinery Depreciation Depreciation

Balance at January 1, 2011 $500,000 $125,000 $375,000Purchases of new machinery in 2011

for cash 200,000 — 200,000Depreciation in 2011 — 100,000 (100,000)Balance at Dec. 31, 2011 $700,000 $225,000 $475,000

The information concerning Noller's machinery accounts should be shown in Noller's statement of cash flows (indirect method) for the year ended December 31, 2011, as a(n)

a. subtraction from net income of $100,000 and a $200,000 decrease in cash flows from financing activities.b. addition to net income of $100,000 and a $200,000 decrease in cash flows from investing activities.c. $100,000 increase in cash flows from financing activities.d. $200,000 decrease in cash flows from investing activities.

C66. Equipment which cost $213,000 and had accumulated depreciation of $114,000 was sold for $111,000. This transaction should be shown on the statement of cash flows (indirect method) as a(n)

a. addition to net income of $12,000 and a $111,000 cash inflow from financing activities.b. deduction from net income of $12,000 and a $99,000 cash inflow from investing activities.c. deduction from net income of $12,000 and a $111,000 cash inflow from investing activities.d. addition to net income of $12,000 and a $99,000 cash inflow from financing activities.$111,000 – ($213,000 – $114,000) = $12,000, $111,000 (proceeds).

C 67. During 2011, equipment was sold for $156,000. The equipment cost $252,000 and had a book value of $144,000. Accumulated Depreciation—Equipment was $687,000 at 12/31/10 and $735,000 at 12/31/11. Depreciation expense for 2011 was

a. $60,000.b. $96,000.c. $156,000.d. $192,000.$735,000 – $687,000 + ($252,000 – $144,000) = $156,000.

Use the following information for questions 68 and 69.Equipment that cost $300,000 and had a book value of $156,000 was sold for $180,000. Data from the comparative balance sheets are:

12/31/11 12/31/10 Equipment $2,160,000 $1,950,000Accumulated Depreciation 660,000 570,000

B68. Depreciation expense for 2011 was

a. $258,000.b. $234,000.c. $54,000.d. $36,000.$660,000 – $570,000 + ($300,000 – $156,000) = $234,000.

A 69. Equipment purchased during 2011 was

a. $510,000.b. $300,000.c. $210,000.d. $90,000.

The balance in retained earnings at December 31, 2010 was $720,000 and at December 31, 2011 was $582,000. Net income for 2011 was $500,000. A stock dividend was declared and distributed which increased common stock $200,000 and paid-in capital $110,000. A cash dividend was declared and paid.

B75. The amount of the cash dividend was

a. $248,000.b. $328,000.c. $442,000.d. $638,000.

$720,000 + $500,000 – ($200,000 + $110,000) – X = $582,000 X = $328,000.

D76. The stock dividend should be reported on the statement of cash flows (indirect method) as

a. an outflow from financing activities of $200,000.b. an outflow from financing activities of $310,000.c. an outflow from investing activities of $310,000.d. Stock dividends are not shown on a statement of cash flows.

C77. The following information was taken from the 2011 financial statements of Dunlop Corporation:Bonds payable, January 1, 2011 $ 500,000Bonds payable, December 31, 2011 2,000,000

During 2011 A $450,000 payment was made to retire bonds payable with a face amount of $500,000. Bonds payable with a face amount of $200,000 were issued in exchange for equipment.

In its statement of cash flows for the year ended December 31, 2011, what amount should Dunlop report as proceeds from issuance of bonds payable?

a. $1,500,000b. $1,750,000c. $1,800,000d. $2,200,000$2,000,000 – $500,000 + $500,000 – $200,000 = $1,800,000.

78.Lindsay Corporation had net income for 2011 of $3,000,000. Additional information is as follows:Depreciation of plant assets $1,200,000Amortization of intangibles 240,000Increase in accounts receivable 420,000Increase in accounts payable 540,000

Lindsay's net cash provided by operating activities for 2011 was

a. $4,560,000.b. $4,440,000.c. $4,320,000.d. $1,680,000.$3,000,000 + $1,200,000 + $240,000 - $420,000 + $540,000 = $4,560,000.

A79. Net cash flow from operating activities for 2011 for Spencer Corporation was $300,000. The following items are reported on the financial statements for 2011:

Cash dividends paid on common stock 20,000Depreciation and amortization 12,000Increase in accounts receivables 24,000

Based on the information above, Spencer’s net income for 2011 was

a. $312,000.b. $296,000.c. $264,000.d. $256,000.X + $12,000 – $24,000 = $300,000; X = $312,000.

A 80. During 2011, Orton Company earned net income of $384,000 which included deprecia-tion expense of $78,000. In addition, the company experienced the following changes in the account balances listed below:

Increases DecreasesAccounts payable $45,000 Accounts receivable $12,000Inventory 36,000 Accrued liabilities 24,000

Prepaid insurance 33,000Based upon this information what amount will be shown for net cash provided by operating activities for 2011?

a. $492,000b. $465,000c. $285,000d. $267,000

$384,000 + $78,000 + $45,000 – $36,000 + $12,000 – $24,000 + $33,000 = $492,000.

A81. Minear Company reported net income of $340,000 for the year ended 12/31/11. Included in the computation of net income were: depreciation expense, $60,000; amortization of a patent, $32,000; income from an investment in common stock of Brett Inc., accounted for under the equity method, $48,000; and amortization of a bond discount, $12,000. Minear also paid an $80,000 dividend during the year. The net cash provided by operating activities would be reported at:

a. $396,000.

b. $316,000.c. $284,000.d. $204,000.

$340,000 + $60,000 + $32,000 – $48,000 + $12,000 = $396,000.

Ex. 23-127—Preparation of statement of cash flows (format provided).

The balance sheets for Kinder Company showed the following information. Additional information concerning transactions and events during 2011 are presented below.

Kinder CompanyBalance Sheet

December 31 2011 2010

Cash $ 30,900$ 10,200Accounts receivable (net) 43,300 20,300Inventory 35,000 42,000Long-term investments 0 15,000Property, plant & equipment 236,500 150,000Accumulated depreciation (37,700) (25,000)

$308,000 $212,500

Accounts payable $ 17,000 $ 26,500Accrued liabilities 21,000 17,000Long-term notes payable 70,000 50,000Common stock 130,000 90,000Retained earnings 70,000 29,000

$308,000 $212,500

Additional data:1. Net income for the year 2011, $76,000.2. Depreciation on plant assets for the year, $12,700.3. Sold the long-term investments for $28,000 (assume gain or loss is ordinary).4. Paid dividends of $35,000.5. Purchased machinery costing $26,500, paid cash.6. Purchased machinery and gave a $60,000 long-term note payable.7. Paid a $40,000 long-term note payable by issuing common stock.