COMPREHENSIVE EXAMINATION A

PART 1
(Chapters 1-6)
Problem A-I — Multiple Choice. Choose the best answer for each of the following questions and enter the identifying letter in the space provided. _____ 1. How does failure to record accrued revenue distort the financial reports? a. It understates revenue, net income, and current assets. b. It understates net income, stockholders’ equity, and current liabilities. c. It overstates revenue, stockholders’ equity, and current liabilities. d. It understates current assets and overstates stockholders’ equity. _____ 2. A contingent liability which is normally accrued is a. notes receivable discounted. b. accommodation endorsements on customer notes. c. additional compensation that may be payable on a dispute now being arbitrated. d. estimated claims under a service warranty on new products sold. _____ 3. Which of the following items is a current liability? a. Bonds due in three months (for which there is an adequate sinking fund classified as a long-term investment). b. Bonds due in three years. c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue. _____ 4. On June 15, 2012 Stine Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2012 would be a. assets and stockholders’ equity were overstated but liabilities were not affected. b. stockholders’ equity was the only item affected by the omission. c. assets and liabilities were understated but stockholders’ equity was not affected. d. assets and stockholders’ equity were understated but liabilities were not affected. _____ 5. Reversing entries are most commonly used in relation to year-end adjusting entries that a. allocate the expired portion of a depreciable asset to expense. b. amortize intangible assets. c. provide for bad debt expense.

Why is it necessary to make adjusting entries? a. expenses are reported as charges against the period in which incurred. correct an improper financial statement presentation. d. The entry to record the earned portion of rent received in advance. The accountant has made errors in recording external transactions. c. indicate basis for asset valuation. the premium paid on short-term bond investment. _____ 7. The entry to record expiration of prepaid insurance. The accountant wants to show the net cash flow for the year. The current assets section of a balance sheet should never include a. b. d. The accountant wants to show the largest possible net income for the period. c. c. d. b. c. _____ 10. Consistency is best demonstrated when a. d. which one would cause an increase in assets at the end of the period? a. customers' accounts with credit balances. Certain facts about the affairs of the business are not included in the ledger as built up from external transactions. extraordinary gains and losses are not reported on the income statement. goodwill arising from the purchase of a going business. a receivable from a customer not collectible for over one year. c. describe the nature and effect of a change in accounting principles. b. accrue interest revenue on notes receivable.A-2 Comprehensive Exam A d. The entry to accrue unrecorded interest expense. b. the effect of changes in accounting methods is properly disclosed. accounting procedures are adopted which give a consistent rate of net income. _____ 9. Of the following adjusting entries. _____ 6. d. . _____ 8. b. identify substantial differences between book and tax income. The entry to accrue unrecorded interest revenue. Notes to financial statements should not be used to a.

720 36. the bookkeeper incorrectly credited Sales for a receipt on account in the amount of $10. remaining cost of $2. $ 29. Acquisitions and retirements during a year are depreciated at half this rate. Policy 2. 1. 3-yr.000 32.200.400 11. taken out on Oct. A-3 The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31.600 890 11. On August 1. the balance of the Plant and Equipment account was $240. 60 $1. On September 30. 1-yr. 7% bonds of Allen Corp. Interest payment dates are July 31 and January 31.000. 5. salaries and wages accrued but unpaid were $4. 2011. 2012.550. term. Alt estimates that 1% of sales will become uncollectible. At December 31.190 500 .370 90.090 60. 2012. Alt received $21. taken out on Jan. There were no purchases during the year. term. as a short-term investment. The regular rate of depreciation is 10% per year. original cost of $1. taken out on May 1. 6.740 11.300. 2012. 2.800 154. 2011. 2012: Cash Equity Investments (trading) Accounts Receivable Allowance for Doubtful Accounts Inventory Prepaid Rent Plant Assets Accumulated Depreciation-Plan Assets Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Revenue Cost of Goods Sold Freight-Out Salaries and Wages Expense Interest Expense Rent Revenue Miscellaneous Expense Insurance Expense Additional Data: Problem A-II — (cont.180 214. The bonds mature on August 1.040 21. The balance in the Insurance Expense account contains the premium costs of three policies: Policy 1. 2012. On December 28. On December 31.000 69. original cost of $7.000 2. 2012. at par. Alt purchased.000. 1-yr. 2013.000. term.000 97. 7. 3.Comprehensive Exam A Problem A-II — Adjusting and Reversing Entries. 1.000 $ 54.000 170.190 $620.050 $620.000 160.000 14.200.600 rent from its lessee for an eighteen month lease beginning on that date.) 1. 4. 2012. Policy 3.

.000 per month. Instructions (a) Record the necessary correcting and adjusting entries. (b) Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period.000 in advance. paying $36. On April 30. 2012.A-4 Comprehensive Exam A 8. Alt rented a warehouse for $3.

i. constraints. l. See item 19 above. c. ______ 11.Comprehensive Exam A Problem A-III — Key Conceptual Terms. e. past. d. ______ 10. Preparing consolidated statements. n. Use of estimating procedures for amortization policies. b. o. . Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the space(s) provided. and future events. Reporting those items which are significant enough to affect decisions. See item 11 above. neutrality. and characteristics are listed below. Information must make a difference or a company need not disclose it. Revenue recognition Full disclosure Cost constraint Industry practices Faithful representation ______ 1. ______ 20. Chose the solution that will be least likely to overstate assets or income. ______ 2. Describing the depreciation methods used in the financial statements. and being free from error. Recording a transaction when goods or services are exchanged for cash or claims to cash. Applying the same accounting treatment to similar accounting events. m. ______ 18. a. ______ 16. Ignoring the phenomenon of price-level changes (do not use "historical cost"). ______ 4. Characterized by completeness. ______ 3. j. Carrying inventories at sales price less distribution costs. Historical cost Relevance Monetary unit Going concern Consistency f. Economic entity Materiality Conservatism Periodicity Expense recognition k. ______ 5. ______ 12. ______ 17. ______ 19. Not reporting assets at liquidation prices (do not use "historical cost"). Select two (do not use "periodicity") (19 and 20). h. ______ 6. The preparation of timely reports on continuing operations. g. ______ 8. A letter may be used more than once or not at all. Select two (11 and 12). principles. ______ 13. ______ 15. ______ 9. Establishment of an allowance for doubtful accounts. A-5 Various accounting assumptions. ______ 14. Additivity of financial statement figures relating to different time periods. The quality which helps users make predictions about present. Provides the figure at which to record a liability. Accrual accounting (do not use "going concern"). ______ 7.

003 120.000 42. Do not concern yourself with the arithmetic. If an item can be classified in more than one category. Tanner Corporation Balance Sheet For the year ended December 31.000 153.A-6 Problem A-IV — Balance Sheet Form. Errors include misclassifications.000 $243.997 24.000 54.000 .000) Accounts receivable Inventory Supplies inventory Investment in subsidiary company Investments: Treasury stock Tangible Fixed Assets: Buildings and land Less: Reserve for depreciation Deferred Charges: Discount on bonds payable Other Assets: Cash surrender value of life insurance Liabilities and Capital Current Liabilities: Accounts payable Reserve for income taxes Customer's accounts with credit balances Long-Term Liabilities: Bonds payable Total Liabilities Capital Stock: Capital stock Earned surplus Cash dividends declared 225. and poor terminology.000 74.000 27.000 213. lack of adequate disclosure.000 60.000 $ 87.000 207.000 $ 45.000 75. select the category most favored by the authors of your textbook.000 $531.000 3 $ 18.000 3.000 60. Comprehensive Exam A List the corrections needed to present in good form the balance sheet below.000 78. $32.003 323.997 $531. 2012 Assets Current Assets: Cash Equity investments-trading (fair value.000 60.000 3.

A-7 Specify. Dividends ______ 13. n. Depreciation—Buildings ______ 8. Use only the classifications shown. o. to the left of each account. Long-term Debt h. Insurance Expense ______ 24. $10 par ______ 2. Sales Revenue Cost of Goods Sold Operating Expenses Other Revenues and Gains Other Expenses and Losses Extraordinary Item Retained Earnings Section Not on the Statements Account balances taken from the ledger of Morin Company on December 31. m. Mortgage Payable due 2014 ______ 9. Current Liabilities g. Accounts Receivable ______ 27. Depletion Expense ______ 10. Office Expense ______ 5. Property. 2011 ______ 14. Loss on Disposal of Equipment ______ 3. Accum. Interest Expense ______ 22. Income Taxes Payable ______ 23. Investments c. Retained Earnings Income and Retained Earnings j. Error made in computing 2010 depreciation expense ______ 30. the letter of the financial statement classification the account would appear in. Accounts Payable ______ 29. Common Stock. Salaries and Wages Expense ______ 18. 2012 follow: ______ 1. Cash ______ 15. Equity Investments ______ 26. Current Assets b. Advertising Expense ______ 25. Sales Discounts ______ 16. Land ______ 28. Retained Earnings Dec. Merchandise on order with supplier ______ 19. Capital Stock i. Inventory ______ 17. Other Assets f. Allowance for Doubtful Accounts ______ 6. k. and Equipment d. Notes Payable (Short Term) ______ 7. Interest Revenue ______ 20. Buildings ______ 4. 31. Balance Sheet Statement a. q. Selling Expenses ______ 21. Freight-Out ______ 11. l. Intangible Assets e. Plant. Sales Revenue ______ 12. p.Comprehensive Exam A Problem A-V — Balance Sheet and Income Statement Classifications. Gain on Redemption of Debt .

Compute the amount of each of these contributions assuming the annual interest rate is 12%. Case 3: On January 2. instead.000 to Holt Company. Compute the amount of each of these contributions assuming the interest rate is 8% compounded annually. The terms of this loan agreement stipulate that Holt is to make 5 equal annual payments to Nelson at 10% interest compounded annually. Since Gray was in a tight cash position during the years 2006 through 2011. 2012. Case 4: Jim Marsh. due January 1. Use the following information in answering Cases 1 and 2 below: On January 1. that starting with the January 1. To provide this fund. Gray desires to make a total of five equal semiannual contributions into this fund.000 per year beginning June 30. Gray must establish a sinking fund for the retirement of the bond principal starting no later than January 1.A-8 Problem A-VI — Future Value and Present Value. Assume the payments are to begin on December 31. Gray Company sold $800. 2019. a lawyer contemplating retirement on his 65th birthday. Case 1: Assume that. Gray desires to make a total of four equal annual contributions into this fund. and ending June 30. Case 2: Assume. decides to create a fund on an 8% basis which will enable him to withdraw $50. 2014. According to the terms of the bond contract. 2015. 2016. Interest on these bonds is paid on July 1 and January 1 each year. 2014 contribution. the first contribution into the fund was made on January 1. compounded semiannually. Present value tables are provided on the next page. Comprehensive Exam A In computing your answers to the cases below. he intends to make equal contributions on June 30 of each of the years 2010 through 2014. 2012 contribution. (a) How much must the balance of the fund equal after the last contribution on June 30. 2012. starting with the January 1. 2006. 2012. Nelson Company loaned $90.000 of 10% bonds. you can round your answer to the nearest dollar. Compute the amount of each of these payments. 2014 in order for him to satisfy his objective? (b) What are each of his contributions to the fund? .

5735 1.79209 0.4018 3.70843 0.94340 0.33823 10% 1.75911 2.46511 1.18360 4.77218 0.48685 4.08000 1.4049 1.0373 3.79079 12% 0.94340 1.78326 3.08000 3.4018 4.73554 3.2544 1.25971 1.46933 1.6355 0.57313 5.98471 10% 1.06000 1.67301 4.53130 3.00000 1.5674 Periods 1 2 3 4 5 Table 3 Future Value of an Ordinary Annuity of 1 6% 8% 9% 1.84168 0.46511 4.46410 1.1200 1.57710 3.90909 0.23972 3.88965 10% 0.53862 A-9 Periods 1 2 3 4 5 6% 1.62092 12% 0.90909 1.1200 3.6900 3.75132 0.36049 1.78326 2.6047 Periods 1 2 3 4 5 Table 5 Present Value of an Annuity Due of 1 6% 8% 9% 1.18810 1.37462 5.94340 2.92593 2.10000 1.68301 0.82645 0.16986 12% 1.41158 1.10510 12% 1.29503 1.3744 4.7971 0.10000 3.31000 4.0373 .00000 2.16986 3.89000 0.06000 3.0000 2.92593 1.48685 3.00000 2.09000 1.83339 2.68058 0.24640 4.91743 2.23972 10% 1.00000 2.64993 10% 0.91743 1.00000 1.91743 0.63709 1.3528 Periods 1 2 3 4 5 Table 4 Present Value of an Ordinary Annuity of 1 6% 8% 9% 0.19102 1.67301 3.7117 0.83962 0.61051 12% 1.26248 1.73503 0.73554 2.7793 6.8928 1.12360 1.8928 0.09000 3.64100 6.31213 3.53130 4.50611 5.00000 1.21236 0.83339 3.Comprehensive Exam A Table 1 Future Value of 1 8% 9% 1.00000 2.92593 0.31213 1.21000 1.85734 0.33100 1.27810 4.0000 1.99271 0.00000 1.16640 1.86660 1.8928 2.79383 0.57710 4.6900 2.74726 Table 2 Present Value of 1 8% 9% 0.75911 3.7623 Periods 1 2 3 4 5 6% 0.90909 2.

..048 2............................ 1% of $204....................... d 6........000 10.. c Problem A-II — Solution........... 24..A-10 Problem A-I — Solution.........000 20....000 [(Equipment retired during 2012 = $240.....................................200 ÷ 36 = $200.................000 (To record 8 months' of rent expired at $3......... Allowance for Doubtful Accounts ............600....... 1....... The monthly premium on Policy 2 is $7..000 = $80.................... Prepaid Insurance .......................................... 5 months' accrued interest is $1.) 7..... d 3..... c 9... a 2..000........ Insurance Expense ...............200 4..................................... b 8......000 5% of $80.. Salaries and Wages Payable ......................................................... Depreciation Expense ....... Sales .. of insurance...................... Accounts Receivable ............................. Unearned Rent .......07 × 1/12 = $350........................000 Prepaid Rent .......000 Total depreciation = $20..... At 12/31/12................. b Comprehensive Exam A Solutions — Comprehensive Examination A 10.... 10..................750 8......... (Both Policies 1 and 3 have expired and their costs belong in Insurance Expense.... c 7.......... 33 mos.600 18...................000] 4...800 is $2.......000 (To correct the entry made in error) 5....600 6....... Salaries and Wages Expense .. 15 mos...... (Corrected Sales balance is $214...... Rent Revenue ...................... remains unearned) 3. Interest Receivable ....000 – $160....200 2................ Accumulated Depreciation ........ of rent...800......600 ÷ 18 = $1......................................000 = 4...... Bad Debt Expense .................... At 12/31/12....................................000 = $204....................048... c 5.............................. 18........ c 4... or $18..... (a) 1........... (Monthly interest is $60.................000) 10% of $160.........................000 = $16..........000 (Monthly rent is $21...................000 × .............800 – $10..048 1... 20.............................. 24............................. Interest Revenue ..... remains unexpired) 2................750) 6....000 4..000 per month) ........200..........750 1....................... or $6. 6.... Rent Expense ........

f g a i j or k 11. h l e b k 6.Comprehensive Exam A A-11 (b) 1. 3. 3. 14. 7. 2. 7. 5. 18.) should be disclosed. etc. Items No. 13. 19. 4. 17. "Reserve" for Income Taxes should be titled Income Taxes Payable. 12. Equity investments should be reported at their fair value. while not erroneously classified. The small balance of $3 for customer's accounts with credit balances. 1 and No. 10. 15. It should appear as a deduction from the Stockholders' Equity section.” 13. FIFO. Buildings and Land should be separated. might be offset against and buried in the Accounts Receivable account because it is so small in amount." "Capital stock" listed as account should be “Common stock. 9. j c n d j Problem A-IV — Solution. 2. 12. 7 represent accrued items. Problem A-III — Solution. 5 and No. 5. 2. 4. Investment in Subsidiary should be classified as an investment. 11. "Capital Stock" listed as title should be "Stockholders' Equity. 8. 9. 1. 6. "Reserve for" Depreciation should be either "Allowance for" or "Accumulated" Depreciation. . The amount of Allowance for Doubtful Accounts should be disclosed and deducted from Accounts Receivable. 14. 1. 5. The maturity date and the interest rate should be disclosed for the Bonds Payable. lower of cost or market) and the basis for pricing the inventory (LIFO. and 7. Discount on Bonds Payable should be classified with and deducted from Bonds Payable. Cash Surrender Value of Life Insurance should be classified among Investments. 10. "For the year ended" in the title should be deleted. 8. l g or b c d o 16. The inventory costing method (cost. Treasury Stock is misclassified under Investments. 20. 2 represent prepaid items that were initially recorded in nominal accounts. Items No.

issued. Cash dividends declared is actually Dividends Payable and should be classified as a current liability. Use the table factor for the future value of an 8% ordinary annuity for 4 periods. a. $199.000 ÷ 3.08) = 4. Retained Earnings is the preferred title.000 for 5 periods. 2014. q 19.000 is the amount of an 8% annuity due for 4 periods. such as par value and the number of shares authorized. k 17.636 is the future value of an 8% ordinary annuity for five periods.50611 × (1. 27. 29. j 16. 1.A-12 15. Periodic payments = $800.029 . f 23. 28.386 Case 2.79079 = $23. 17.636 ÷ 5. a 15.742 Case 4. p 13. 2014.636 (b) At June 30. 16. Problem A-VI — Solution. m 20.000 ÷ 4. b 2. Case 1. 30. a 3. l 18. k 10. n 22. l 25. 26. and multiply by (1. the balance in the fund is the present value of an 8% ordinary annuity of $50. f 5. l 24.86660 = $164.99271 = $199. Comprehensive Exam A More information relative to the capital stock. l 21.86660. Problem A-V — Solution. $90. "Earned surplus" should not be used. Periodic payments = $90. p 14. j 12. Balance in the fund = $50. Since interest is compounded semiannually. and outstanding should be disclosed. divide the 12% annual interest rate by 2. l 11.8666 = $34. m h n c l a f 7.08): 4. p 6. Periodic payments = $800.000 is the present value of a 10% ordinary annuity for 5 periods.917 Case 3.000 ÷ 5.000 × 3. c 4. $800. c 8.63709 = $141. (a) At June 30. Periodic payments = $199. and use the table factor for the future value of a 6% ordinary annuity for 5 periods. g 9.