Ch.

3
36. Which of the following criteria must be met before an event or item should be recorded for accounting purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.
S
47. An adjusting entry should never include
a. a debit to an expense account and a credit to a liability account.
b. a debit to an expense account and a credit to a revenue account.
c. a debit to a liability account and a credit to revenue account.
d. a debit to a revenue account and a credit to a liability account.
S
76. Which of the following statements best describes the purpose of closing entries?
a. To faciliate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate
the revenues and expenses of the next period.
d. To complete the record of various transactions that were started in a prior period.
*Which of the following is false about an income statement?
It is used to measure the solvency of a company
89. Panda Corporation paid cash of $30,000 on June 1, 2012 for one year’s rent in advance and recorded the
transaction with a debit to Prepaid Rent. The December 31, 2012 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, $12,500.
b. debit Prepaid Rent and credit Rent Expense, $17,500.
c. debit Rent Expense and credit Prepaid Rent, $17,500.
d. debit Prepaid Rent and credit Cash, $12,500.
98. Big-Mouth Frog Corporation had revenues of $300,000, expenses of $180,000, and dividends of $45,000. When
Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a
a. debit of $75,000.
b. debit of $120,000.
c. credit of $75,000.
d. credit of $120,000.
110. On September 1, 2012, Lowe Co. issued a note payable to National Bank in the amount of $900,000, bearing
interest at 12%, and payable in three equal annual principal payments of $300,000. On this date, the bank's prime
rate was 11%. The first payment for interest and principal was made on September 1, 2013. At December 31,
2013, Lowe should record accrued interest payable of
a. $36,000.
b. $33,000.
c. $24,000.
d. $22,000.
Ch. 4
31. Which of the following is an advantage of the single-step income statement over the multiple-step income
statement?
a. It reports gross profit for the year.
b. Expenses are classified by function.
c. It matches costs and expenses with related revenues.
d. It does not imply that one type of revenue or expense has priority over another.
82. At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area.
The effect of these events and transactions on 2012 income from continuing operations net of tax would be
a. ($35,000).
b. ($77,000).
c. ($133,000).
d. ($833,000).
83. At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
 (3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area.
The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).
b. ($735,000).
c. ($777,000).
d. ($833,000).
97. Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
in prior years, net of tax $ 215,000
Dividends declared 160,000
Net income 500,000
Retained earnings, 1/1/12, as reported 2,000,000
Leonard should report retained earnings, 1/1/12, as adjusted at
a. $1,785,000.
b. $2,000,000.
c. $2,215,000.
d. $2,555,000.
98. Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
in prior years, net of tax $ 215,000
Dividends declared 160,000
Net income 500,000
Retained earnings, 1/1/12, as reported 2,000,000
Leonard should report retained earnings, 12/31/12, at
a. $1,785,000.
b. $2,125,000.
c. $2,340,000.
d. $2,555,000.
108. The following items were among those that were reported on Dye Co.'s income statement for the year ended
December 31, 2012:
Legal and audit fees $390,000
Rent for office space 540,000
Interest on inventory floor plan 630,000
Loss on abandoned equipment used in operations 105,000
The office space is used equally by Dye's sales and accounting departments. What amount of the above-listed
items should be classified as general and administrative expenses in Dye's multiple-step income statement?
a. $660,000.
b. $765,000.
c. $930,000.
d. $1,290,000.
Ch. 5
22. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
*Receivables are valued based on their?
Estimated amount collectible
79. Fulton Company owns the following investments:
Trading securities (fair value) $120,000
Available-for-sale securities (fair value) 70,000
Held-to-maturity securities (amortized cost) 94,000
Fulton will report investments in its current assets section of
a. $0.
b. exactly $120,000.
c. $120,000 or an amount greater than $120,000, depending on the circumstances.
d. exactly $190,000.
86. Presented below are data for Bandkok Corp.
2012 2013
Assets, January 1 $5,400 $6,480
Liabilities, January 1 3,240 ?
Stockholders' Equity, Jan. 1 ? ?
Dividends 1,080 810
Common Stock 972 864
Stockholders' Equity, Dec. 31 ? ?
Net Income 1,280 864
Stockholders' Equity at January 1, 2013 is
a. $3,332.
b. $2,160.
c. $2,360.
d. $3,440.
101. On January 4, 2012, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an annual rental of
$100,000. At inception of the lease, Dodd received $400,000 covering the first two years' rent of $200,000 and a
security deposit of $200,000. This deposit will not be returned to Dodd upon expiration of the lease but will be
applied to payment of rent for the last two years of the lease. What portion of the $400,000 should be shown as a
current and long-term liability in Kiley's December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $400,000
b. $100,000 $200,000
c. $200,000 $200,000
d. $200,000 $100,000
Ch. 6
21.Which of the following transactions would require the use of the present value of an annuity due concept in order to
calculate the present value of the asset obtained or liability owed at the date of incurrence?
a. A capital lease is entered into with the initial lease payment due upon the signing of the lease
agreement.
b. A capital lease is entered into with the initial lease payment due one month subse-quent to the signing of the
lease agreement.
c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1
yielding 7%.
d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1
yielding 9%.
P
40. On December 1, 2012, Richards Company sold some machinery to Fleming Company. The two companies
entered into an installment sales contract at a predetermined interest rate. The contract required four equal
annual payments with the first payment due on December 1, 2012, the date of the sale. What present value
concept is appropriate for this situation?
a. Future amount of an annuity of 1 for four periods
b. Future amount of 1 for four periods
c. Present value of an ordinary annuity of 1 for four periods
d. Present value of an annuity due of 1 for four periods.
48. Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of
$23,000 payable on the first day of work or a signing bonus of $26,000 payable after one year of employment.
Assuming that the relevant interest rate is 10%, which option should Jerry choose?
a. The options are equivalent.
b. Insufficient information to determine.
c. The signing bonus of $23,000 payable on the first day of work.
d. The signing bonus of $26,000 payable after one year of employment.
63. Charlie Corp. is purchasing new equipment with a cash cost of $150,000 for an assembly line. The manufacturer
has offered to accept $34,440 payment at the end of each of the next six years. How much interest will Charlie
Corp. pay over the term of the loan?
a. $34,440.
b. $150,000.
c. $184,440.
d. $56,640.
77. Barber Company will receive $800,000 in 7 years. If the appropriate interest rate is 10%, the present value of the
$800,000 receipt is
a. $408,000.
 b. $410,528.
c. $1,208,000.
d. $1,558,976.
93. Pearson Corporation makes an investment today (January 1, 2012). They will receive $6,000 every December
31st for the next six years (2012 – 2017). If Pearson wants to earn 12% on the investment, what is the most they
should invest on January 1, 2012?
a. $24,668.
b. $27,629.
c. $48,691.
d. $54,534.
Ch. 7
S
36. When a customer purchases merchandise inventory from a business organization, she may be given a discount
which is designed to induce prompt payment. Such a discount is called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.
38. If a company employs the gross method of recording accounts receivable from customers, then sales discounts
taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
46. What is the normal journal entry for recording bad debt expense under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
*Which of the following accounts is credited in the loss method of writing down of inventory to its market value
Inventory
81. AG Inc. made a $15,000 sale on account with the following terms: 2/10, n/30. If the company uses the net method
to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?
a. Debit Accounts Receivable for $14,700.
b. Debit Accounts Receivable for $14,700 and Sales Discounts for $300.
c. Debit Accounts Receivable for $15,000.
d. Debit Accounts Receivable for $15,000 and Sales Discounts for $300.
84. Wellington Corp. has outstanding accounts receivable totaling $5 million as of
December 31 and sales on credit during the year of $25 million. There is also a debit balance of $20,000 in the
allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be
uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to
record bad debt expense?
a. $2,000,000.
b. $ 380,000.
c. $ 400,000.
d. $ 420,000.
87. During the year, Kiner Company made an entry to write off a $16,000 uncollectible account. Before this entry was
made, the balance in accounts receivable was $200,000 and the balance in the allowance account was $18,000.
The net realizable value of accounts receivable after the write-off entry was
a. $200,000.
b. $198,000.
c. $166,000.
d. $182,000.
103. Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the
terms of the loan with a bank are that it would have to make one $80,000 payment in two years?
a. $80,000.
b. $72,563.
c. $72,727.
d. $66,116.
Ch. 8
32. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
 b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.
P
60. Which inventory costing method most closely approximates current cost for each of the following:
Ending Inventory Cost of Goods Sold
a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO
67. In a period of rising prices, the inventory method which tends to give the highest reported inventory is
a. FIFO.
b. moving average.
c. LIFO.
d. weighted-average.
69. In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is
a. FIFO.
b. average cost.
c. LIFO.
d. none of these.
88. Bell Inc. took a physical inventory at the end of the year and determined that $780,000 of goods were on hand. In
addition, Bell, Inc. determined that $60,000 of goods that were in transit that were shipped f.o.b. shipping point
were actually received two days after the inventory count and that the company had $90,000 of goods out on
consignment. What amount should Bell report as inventory at the end of the year?
a. $780,000.
b. $840,000.
c. $870,000.
d. $930,000.
110. June Corp. sells one product and uses a perpetual inventory system. The beginning inventory consisted of 20
units that cost $20 per unit. During the current month, the company purchased 120 units at $20 each. Sales
during the month totaled 90 units for $43 each. What is the cost of goods sold using the LIFO method?
a. $400.
b. $1,800.
c. $2,400.
d. $3,870.
112. Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of 300
units that cost $65 each. During the month, the company made two purchases: 450 units at $68 each and 225
units at $70 each. Chess Top also sold 750 units during the month. Using the average cost method, what is the
amount of ending inventory?
a. $15,750.
b. $50,655.
c. $50,100.
d. $15,197.
Ch. 9
31. What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?
a. Prevents understatement of the inventory value.
b. Allows for a normal profit to be earned.
c. Allows for items to be valued at replacement cost.
d. Prevents overstatement of the value of obsolete or damaged inventories.
S
47. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases,
the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively unchanged from the
comparable previous period.
71. Given the acquisition cost of product Z is $64, the net realizable value for product Z is $58, the normal profit for
product Z is $5, and the market value (replacement cost) for product Z is $60, what is the proper per unit inventory
price for product Z?
a. $64.
b. $60.
c. $53.
d. $58.
85. At a lump-sum cost of $72,000, Pratt Company recently purchased the following items for resale:
Item No. of Items Purchased Resale Price Per Unit
M 4,000 $3.75
N 2,000 12.00
O 6,000 6.00
The appropriate cost per unit of inventory is:
M N O
a. $3.75 $12.00 $6.00
b. $3.11 $19.86 $3.32
c. $3.60 $11.52 $5.76
d. $6.00 $6.00 $6.00
101. On January 1, 2012, the merchandise inventory of Glaus, Inc. was $1,000,000. During 2012 Glaus purchased
$2,000,000 of merchandise and recorded sales of $2,500,000. The gross profit rate on these sales was 25%.
What is the merchandise inventory of Glaus at December 31, 2012?
a. $500,000.
b. $625,000.
c. $1,125,000.
d. $1,875,000.
Ch. 10
22. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years
23. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
32. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
48. When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by
the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. fair value of the stock.
57.Which of the following is not a capital expenditure?
a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
Use the following information for questions 94 and 95.
Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a
book value of $48,000 and a fair value of $60,000. The asset given up by Armstrong Co. has a book value of $80,000 and
a fair value of $76,000. Boot of $16,000 is received by Armstrong Co.
94. What amount should Glen Inc. record for the asset received?
a. $60,000
b. $64,000
c. $76,000
d. $80,000

95. What amount should Armstrong Co. record for the asset received?
a. $60,000
b. $64,000
c. $76,000
d. $80,000