M30A: PRINCIPLES OF ACCOUNTING

PRACTICE FINAL EXAM

CHAPTERS 8, 9, 10, 11 AND 12

CHAPTER 8

1. An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require aa. debit to Bad Debt Expense for $4,500.b. debit to Allowance for Doubtful Accounts for $3,300.c. debit to Bad Debt Expense for $3,300.d. credit to Allowance for Doubtful Accounts for $4,500.

Solution: $4,500 $1,200 $3,300

2. An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 debit balance, the adjustment to record bad debts for the period will require aa. debit to Bad Debt Expense for $4,500.b. debit to Bad Debt Expense for $6,100.c. debit to Bad Debt Expense for $2,900.d. credit to Allowance for Doubtful Accounts for $4,500.

Solution: $4,500 + $1,600 $6,100

3. The financial statements of the Melton Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?a. 96.1b. 48.7c. 36.5d. 60.8

Solution: $300,000 [($50,000 + $30,000) 2] 7.5; 365 7.5 48.7

4. The financial statements of the Phelps Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Phelps?a. 8.3 timesb. 12.5 timesc. 6.3 timesd. 4.2 times

Solution: $500,000 [($80,000 + $40,000) 2] 8.3

5. Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period?a. $9,000b. $31,000c. $40,000d. $49,000

Solution: $40,000 + $9,000 $49,000

CHAPTER 9

6. Arnold Company purchases a new delivery truck for $40,000. The sales taxes are $2,500. The logo of the company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck undergoes safety testing for $220. What does Arnold record as the cost of the new truck?

a. $44,040.

b. $43,920.

c. $42,500.

d. $41,920.

Solution: $40,000 + $2,500 + $1,200 + $220 $43,920

7. Equipment was purchased for $68,000 on January 1, 2013. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used?

a. $26,720.

b. $13,360.

c. $11,440.

d. $22,880.

Solution: [($68,000 + $2,800 + $8,000 $12,000) 5] 2 $26,720

8. A company purchased factory equipment on April 1, 2014, for $96,000. It is estimated that the equipment will have a $12,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2014, is

a. $9,600.b. $8,400.c. $6,300.d. $7,200.

Solution: [($96,000 $12,000) 10] 9/12 $6,300

9. Bates Company purchased equipment on January 1, 2013, at a total invoice cost of $900,000. The equipment has an estimated salvage value of $22,500 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used?

a. $180,000.

b. $360,000.

c. $175,500.

d. $351,000.

Solution: [($900,000 $22,500) 5] 2 $351,000

10.Jack's Copy Shop bought equipment for $150,000 on January 1, 2013. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2014, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2014?

a. $50,000.

b. $20,000.

c. $25,000.

d. $37,500.

Solution: ($150,000 0) 3 $50,000; ($150,000 $50,000) (5 1) $25,000

11.A company sells a plant asset that originally cost $225,000 for $75,000 on December 31, 2014. The accumulated depreciation account had a balance of $90,000 after the current year's depreciation of $22,500 had been recorded. The company should recognize aa. $150,000 loss on disposal.b. $60,000 gain on disposal.c. $60,000 loss on disposal.d. $37,500 loss on disposal.

Solution: $75,000 ($225,000 $90,000) ($60,000)

12. In 2014, Blanchard Corporation has plant equipment that originally cost $90,000 and has accumulated depreciation of $36,000. A new processing technique has rendered the equipment obsolete, so it is retired. Which of the following entries should Blanchard use to record the retirement of the equipment?

a. Loss on Disposal of Plant Assets 54,000Equipment 54,000

b. Accumulated Depreciation – Equipment 36,000Loss on Disposal of Plant Assets 54,000

Equipment 90,000c. Loss on Disposal of Plant Assets 54,000

Accumulated Depreciation – Equipment 54,000d. Plant Equipment 90,000

Accumulated Depreciation – Equipment 36,000Loss on Disposal of Plant Assets 54,000

13.A company purchased land for $84,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the

demolished building was $1,200. Under the historical cost principle, the cost of land would be recorded at

a. $94,800.

b. $84,000.

c. $89,800.

d. $96,000.

14.Ramirez Company acquires land for $210,000 cash. Additional costs are as follow.

Removal of shed $ 2,000Filling and grading 6,000Salvage value of lumber of shed 1,280Broker commission 4,520Paving of parking lot 40,000Closing costs 3,400

Ramirez will record the acquisition cost of the land asa. $224,640.b. $227,200.c. $225,920.d. $210,000.

Solution: $210,000 + ($2,000 $1,280) + $6,000 + $4,520 + $3,400 $224,640

15.Rodgers Company purchased equipment and these costs were incurred:

Cash price $45,000

Sales taxes 3,600

Insurance during transit 640

Installation and testing 860

Total costs $50,100

Rodgers will record the acquisition cost of the equipment as

a. $45,000.

b. $48,600.

c. $49,240.

d. $50,100.

CHAPTER 10

16.Bonds with a face value of $400,000 and a quoted price of 104¼ have a selling price ofa. $417,000.

b. $416,100.

c. $401,700.

d. $416,000.

Solution: $400,000 $1.0425 $417,000

17.Bonds with a face value of $400,000 and a quoted price of 98½ have a selling price ofa. $393,000.

b. $392,200.

c. $392,020.

d. $394,000.

Solution: $400,000 .985 $394,000

18.On January 1, 2014, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount isa. $19,400.

b. $6,000.

c. $1,616.

d. $500.

Solution: [($2,000,000 $1,940,000) 10] 12 $500

19.Molina Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 103. The journal entry to record the issuance will show aa. debit to Cash of $4,000,000.

b. debit to Premium on Bonds Payable for $120,000.

c. credit to Bonds Payable for $4,000,000.

d. credit to Cash for $4,120,000.

20.Four thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance isa. Cash ................................................................4,080,000

Bonds Payable........................................................ 4,080,000

b. Cash ................................................................4,000,000

Premium on Bonds Payable...................................80,000

Bonds Payable........................................................ 4,080,000

c. Cash ................................................................4,080,000

Premium on Bonds Payable.................................... 80,000

Bonds Payable........................................................ 4,000,000

d. Cash ................................................................4,080,000

Discount on Bonds Payable.................................... 80,000

Bonds Payable........................................................ 4,000,000

21.Four thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record the issuance isa. Cash ................................................................3,880,000

Bonds Payable........................................................ 3,880,000

b. Cash ................................................................3,880,000

Discount on Bonds Payable..................................120,000

Bonds Payable........................................................ 4,000,000

c. Cash ................................................................3,880,000

Premium on Bonds Payable.................................... 120,000

Bonds Payable........................................................ 4,000,000

d. Cash ................................................................4,000,000

Discount on Bonds Payable.................................... 120,000

Bonds Payable........................................................ 3,880,000

($330,000 × 96% = $316,800)

22.McDonald's financial statements contain the following selected data (in millions).

Current assets $ 3,881.9

Total assets 29,391.7

Current liabilities 4,498.5

Total liabilities 13,611.9

Interest expense $ 410.1

Income taxes 1,237.1

Net Income 2,395.1

Instructions

Compute the following values and provide a brief interpretation of each.

(1) Working capital. (2) Current ratio

Solution

(1) Working capital = $3,881.9 – $4,498.5 = - $616.6

(2) Current ratio = $3,881.9 $4,498.5 = .86:1

CHAPTER 11

23.What is the total stockholders’ equity based on the following account balances?

Common Stock $1,800,000

Paid-In Capital in Excess of Par 120,000

Retained Earnings 570,000

Treasury Stock 60,000

a. $2,190,000.

b. $2,430,000.

c. $2,550,000.

d. $1,680,000.

24.1A corporation purchases 20,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders’ equity?a. Increase by $200,000.b. Decrease by $500,000.c. Increase by $500,000.d. Decrease by $200,000.

25.Tomlinson Packaging Corporation began business in 2014 by issuing 30,000 shares of $5 par common stock for $8 per share and 5,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2014 balance sheet, Tomlinson Packaging would reporta. Common Stock of $300,000.b. Common Stock of $150,000.c. Common Stock of $240,000.d. Paid-in Capital of $200,000.

26.Holden Packaging Corporation began business in 2014 by issuing 80,000 shares of $5 par common stock for $8 per share and 20,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2014 balance sheet, Holden Packaging would reporta. Common Stock of $800,000.b. Common Stock of $400,000.c. Common Stock of $640,000.d. Paid-In Capital of $600,000.

27.The board of directors of Yancey Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The effects of the journal entry to record the declaration of the dividend on July 15, 2014, are toa. decrease stockholders’ equity and increase liabilities.b. decrease stockholders’ equity and decrease assets.c. increase stockholders’ equity and increase liabilities.d. increase stockholders’ equity and decrease assets.

28.The net effects on the corporation of the declaration and payment of a cash dividend are toa. decrease liabilities and decrease stockholders’ equity.b. increase stockholders’ equity and decrease liabilities.c. decrease assets and decrease stockholders’ equity.d. increase assets and increase stockholders’ equity.

29.The board of directors of Benson Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The correct entry to be recorded on August 15, 2014, will include aa. debit to Cash Dividends.b. credit to Cash Dividends.c. credit to Dividends Payable.d. debit to Dividends Payable.

CHAPTER 12

30.Annapolis Company reported net income of $365,000 for the current year. Depreciation recorded on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year Beginning of Year

Cash $22,000 $15,000

Accounts receivable 17,000 32,000

Inventory 55,000 65,000

Prepaid insurance 7,500 5,000

Accounts payable 11,000 18,000

Income taxes payable 600 1,200

Instructions

Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method.

Solution

Net income ................................................................................................ $365,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense ....................................................................... 73,000

Decrease in accounts receivable ...................................................... 15,000

Decrease in inventory ....................................................................... 10,000

Increase in prepaid insurance ........................................................... (2,500)

Decrease in accounts payable .......................................................... (7,000)

Decrease in income taxes payable ................................................... (600 )

Net cash provided by operating activities .......................................... $452,900

31.Selected transactions of the Carolina Company are listed below.

1. Common stock is sold for cash above par value.

2. Bonds payable are issued for cash at a discount.

3. Interest on a short-term note receivable is collected.

4. Merchandise is sold to customers for cash.

5. Cash is paid to purchase inventory.

6. Equipment is purchased by signing a 3-year, 10% note payable.

7. Cash dividends on common stock are declared and paid.

8. One hundred shares of Amazon.com common stock are purchased for cash.

9. Land is sold for cash at book value.

10.Bonds payable are converted into common stock.

Instructions

Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.

Solution

1. (c) Financing activity 6. (d) Noncash actitity

2. (c) Financing activity 7. (c) Financing activity

3. (a) Operating activity 8. (b) Investing activity

4. (a) Operating activity 9. (b) Investing activity

5. (a) Operating activity 10. (d) Noncash actitity

32. Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters.

Code

Add to Net Income A

Deduct from Net Income D

1. Increase in accounts receivable

2. Increase in inventory

3. Decrease in prepaid expenses

4. Decrease in accounts payable

5. Increase in accrued liabilities

6. Increase in income taxes payable

7. Depreciation expense

8. Loss on sale of investment

9. Gain on disposal of equipment

10. Amortization expense

Solution

1. D 6. A2. D 7. A3. A 8. A4. D 9. D5. A 10. A

33. Assuming a statement of cash flows is prepared using the indirect method, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows.

Code

Cash Flows From Operating Activities

Add to Net Income A

Deduct from Net Income D

Cash Flows From Investing Activities IA

Cash Flows From Financing Activities FA

Category

1. Common stock is issued for cash at an amount above par value ______

2. Inventory increased during the period ______

3. Depreciation expense recorded for the period ______

4. Building was purchased for cash ______

5. Bonds payable were acquired and retired at their carrying value ______

6. Accounts payable decreased during the period ______

7. Prepaid expenses decreased during the period ______

8. Treasury stock was acquired for cash ______

9. Land is sold for cash at an amount equal to book value ______

10. Patent amortization expense recorded for a period ______

Solution

Category

1. Common stock is issued for cash at an amount above par value FA

2. Inventory increased during the period D

3. Depreciation expense recorded for the period A

4. Building was purchased for cash IA

5. Bonds payable were acquired and retired at their carrying value FA

6. Accounts payable decreased during the period D

7. Prepaid expenses decreased during the period A

8. Treasury stock was acquired for cash FA

9. Land is sold for cash at an amount equal to book value IA

10. Patent amortization expense recorded for a period A