PRACTICE QUESTIONS – CHAPTER 1 & 2

____ 1. Howard Company had a transaction that caused a $5,000 increase in both assets and total liabilities. This
transaction could have been a(n):
A. Purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable
for the balance.
B. Investment of $5,000 cash in the business by the stockholders.
C. Purchase of office equipment for $5,000 cash.
D. Repayment of a $5,000 bank loan.

____ 2. Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in
the opposite manner?
A. Salary Expense and Notes Payable
B. Common Stock and Unearned Rent
C. Prepaid Rent and Advertising Expense
D. Service Revenue and Wages Payable

____ 3. On October 1, Metz Industries had an Accounts Payable balance of $30,000. During October, the company
made cash payments on account of $25,000 and on October 31, the Accounts Payable balance is $15,000.
Determine the amount of purchases on account for the month of October.
A. $40,000
B. $20,000
C. $10,000
D. $0

____ 4. On September 1, 2010, Baxter Inc. reported Retained Earnings of $136,000. During the month of September,
Baxter generated revenues of $20,000, incurred expenses of $12,000, purchased equipment for $5,000 and
paid dividends of $2,000. What is the balance in Retained Earnings on September 31, 2010?
A. $136,000 debit
B. $8,000 credit
C. $137,000 credit
D. $142,000 credit

____ 6. A trial balance will not balance if

A. a journal entry is posted twice.
B. a wrong amount is used in journalizing.
C. incorrect account titles are used in journalizing.
D. a journal entry is only partially posted.

____ 7. During January 2011, Wells Corporation purchased $80,000 of inventory; they paid one-fourth in cash, and
signed a note for the remaining balance. This transaction will be recorded as:
A. Inventory 80,000
Cash 60,000
Notes Payable 20,000
B. Inventory 80,000
Cash 20,000
Accounts Payable 60,000
 C. Inventory 80,000
Accounts Payable 60,000
Cash 20,000
D. Inventory 80,000
Cash 20,000
Notes Payable 60,000

____ 9. A trial balance will NOT balance if

A. a journal entry is posted twice
B. a $350 payment of rent is debited to Rent Expense for $350 and credited to Cash for $35
C. a $500 payment on accounts payable is debited to Accounts Payable for $50 and credited
to Cash for $50
D. a transaction is not posted at all

____ 11. Chaffin Consulting performed consulting services during June 2012 on account and collections for these
services were not received until August 2012. What effect did performing these services have on the
accounting equation for June 2012?
A. Increase in assets and decrease in stockholder’s equity
B. Increase in assets and increase in stockholder’s equity
C. Decrease in assets and decrease in stockholder’s equity
D. Decrease in assets and increase in stockholder’s equity

____ 12. If ONLY the debit amount of an entry to record the purchase of supplies on account was NOT posted:
A. liabilities would be understated
B. liabilities would be overstated
C. assets would be overstated
D. assets would be understated

____ 16. On December 31, the accounting records of Waldman Company contain the following items (in random
order):
Accounts Payable $8,000
Land 120,000
Common Stock 132,000
Building 84,000
Accounts Receivable 20,000
Notes Payable 94,000
Retained Earnings 84,000
Equipment 60,000
Prepaid Rent ?
Determine the amount of Prepaid Rent.
A. $318,000.
B. $154,000.
C. $ 34,000.
D. $ 74,000.
____ 17. During its first month of operations, Stephen Company borrowed $80,000 from a bank, and then purchased an
equipment costing $40,000 by paying cash of $20,000 and signing a long term note for the remaining amount.
During the month, the company also purchased Supplies for $30,000 on credit, performed services for clients
for $40,000 on account, paid $15,000 cash for accounts payable, and received $10,000 from its credit
customers. What is the company’s amount of total assets at the end of the month?
A. $155,000
B. $165,000
C. $145,000
D. $175,000

____ 18. The ending balance of Accounts Receivable was $12,000. Services billed to customers during the year were
$21,500, and collections on account from customers were $23,600. What was the beginning balance of
Accounts Receivable?
A. $14,100
B. $33,500
C. $9,900
D. $33,100

____ 19. Tesser Company’s Accounts Payable account had a balance of $3,700 on September 1, 2011, and a balance of
$4,500 on September 30, 2011. During the month of September 2011, the company made total payments of
$32,800 on accounts payables. What must have been their total purchases on account during September 2011?
A. $33,600
B. $32,000
C. $37,300
D. $29,100

____ 20. The accountant at Error Prone Company recorded the purchase of $100 of supplies for cash as a debit to
Supplies for $100 and a credit to Accounts Payable for $100. Determine the effect of this error on the
accounting equation of Error Prone Company.
A. Total Equity would be overstated by $100
B. Total Liabilities will be understated by $100
C. Total Assets would be overstated by $100
D. Total Equity would be understated by $100

____ 21. In terms of debits and credits, which accounts below will have the same normal balances?
A. expenses, assets, dividends
B. assets, capital stock, revenues
C. retained earnings, dividends, liabilities
D. expenses, liabilities, capital stock

____ 22. Which of the following direct effects on the fundamental accounting equation is not possible as a result of
transactional analysis?
A. An increase in an asset and a decrease in another asset.
B. A decrease in a liability and an increase in an asset.
C. A decrease in stockholders' equity and a decrease in an asset.
D. An increase in an asset and an increase in stockholders' equity.
____ 23. The normal balance of the Supplies account is a because it is a(n)
account.
A. credit, liability
B. debit, asset
C. debit, expense
D. credit, stockholders’ equity

____ 26. Dulany Company’s Accounts Payable had a balance of $95,300 on December 31, 2011, and a balance of
$87,900 on December 31, 2012. During the year, 2012, the company made cash payments for accounts
payable of $53,700. Determine the company’s purchases on account for the year 2012.
A. $129,500
B. $46,300
C. $61,100
D. Cannot be determined

___ 27. On December 31, 2011, Wesam Company had a $61,275 balance in Accounts Receivable. During the year
2012, the company collected $102,050 from its credit customers. The December 31, 2012 balance of the
Accounts Receivable was $85,325. Determine the amount of Wesam Company’s sales on accounts for 2012.
A. $44,550
B. $78,000
C. $126,100
D. Cannot be determined

____ 28. Which of the following errors, each considered individually, would cause the trial balance to be out of
balance?
A. A payment of $148 to a creditor was posted as a debit to Accounts Payable for $148 and a
debit of $148 to Cash.
B. Cash of $530 received from a customer on account was posted as a debit of $350 to Cash
and as a credit of $350 to Accounts Payable.
C. A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95
to Cash.
D. A transaction was not posted.
ANSWER SECTION

1. ANS: A
2. ANS: A
3. ANS: C
4. ANS: D
6. ANS: D
7. ANS: D
9. ANS: B
11. ANS: B
12. ANS: D
16. ANS: C
17. ANS: A
18. ANS: A
19. ANS: A
20. ANS: C
21. ANS: A
22. ANS: B
23. ANS: B
26. ANS: B
27. ANS: C
28. ANS: A
 PRACTICE QUESTIONS – CHAPTER 3

____ 1. Under the accrual basis of accounting:

A. cash must be received before revenue is recognized.
B. net income is calculated by matching cash outflows against cash inflows.
C. events that change a company's financial statements are recognized in the period they occur
rather than in the period in which cash is paid or received.
D. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial
statements are prepared under generally accepted accounting principles.

____ 2. Which of the following reflect the balances of unearned revenue prior to adjustment?
A. Balance sheet accounts are understated and income statement accounts are understated.
B. Balance sheet accounts are overstated and income statement accounts are overstated.
C. Balance sheet accounts are overstated and income statement accounts are understated.
D. Balance sheet accounts are understated and income statement accounts are overstated.

____ 3. On March 1, Retro Inc. reported a balance in Supplies of $200. During March, the company purchased supplies
for $950 and consumed supplies of $800. If no adjusting entry is made for supplies:
A. stockholders' equity will be overstated by $800.
B. expenses will be understated by $950.
C. assets will be understated by $350.
D. net income will be understated by $800.

____ 4. Green Realty Company received a check for $24,000 on July 1 which represents a 6 month advance payment
of rent on a building it rents to a client. Unearned Rent was credited for the full $24,000. Financial statements
will be prepared on July 31. Green Realty should make the following adjusting entry on July 31:
A. debit Unearned Rent, $4,000; credit Rental Revenue, $4,000.
B. debit Rental Revenue, $4,000; credit Unearned Rent, $4,000.
C. debit Unearned Rent, $24,000; credit Rental Revenue, $24,000.
D. debit Cash, $24,000; credit Rental Revenue, $24,000.

____ 5. Draxon Company borrowed $30,000 from the bank signing a 6%, 3-month note on September 1. Principal and
interest are payable to the bank on December 1. If the company prepares monthly financial statements, the
adjusting entry that the company should make for interest on September 30, would be:
A. debit Interest Expense, $1,800; credit Interest Payable, $1,800.
B. debit Interest Expense, $150; credit Interest Payable, $150.
C. debit Note Payable, $1,800; credit Cash, $1,800.
D. debit Interest Expense, $450; credit Interest Payable, $450.

____ 6. Mary Richards has performed $500 of CPA services for a client but has not billed the client as of the end of the
accounting period. What adjusting entry must Mary make?
A. Debit Cash and credit Unearned Revenue
B. Debit Accounts Receivable and credit Unearned Revenue
C. Debit Accounts Receivable and credit Service Revenue
D. Debit Unearned Revenue and credit Service Revenue

____ 7. What effect does an accrued expense adjustment have on a company’s net income?
A. The adjustment increases net income for the period.
B. The adjustment decreases net income for the period.
C. The adjustment has no effect on net income.
D. The effect of the adjustment cannot be determined with the information given.
____ 8. What is the liability called that arises from an expense that the business has incurred but has not yet paid?
A. It is known as an unearned expense.
B. It is known as a deferred expense.
C. It is known as a prepaid expense.
D. It is known as an accrued expense.

___ 9. Mason Company always collects rent in advance from its customers. The 2011 income statement for Mason
reports rent revenue of $18,000. The related balance sheet accounts for the beginning and end of the year
were:
Jan. 1, 2011 Dec. 31, 2011
Unearned Rent $3,750 $6,500
Based on this information, the amount of cash collected during 2011 from Mason's customers was:
A. $28,250
B. $26,500
C. $20,750
D. $7,750

____ 10. At the beginning of the period, Stanger Corporation had $400 of supplies on hand. During the period, it
purchased $900 of supplies and at the end of the period, Stanger determined that only $800 of supplies were
still on hand. What adjusting entry should Stanger Corporation make at the end of the period?
A. Supplies 1,300
Supplies Expense 1,300
B. Supplies 500
Supplies Expense 500
C. Supplies Expense 1,300
Supplies 1,300
D. Supplies Expense 500
Supplies 500

____ 11. Mathis Company always pays for rent in advance, and reported the following balances in the Prepaid Rent
account at the beginning and end of 2011:
Jan. 1, 2011 Dec. 31, 2011
Prepaid $600 $3,200
Rent
If rent expense reported on the 2011 income statement was $29,300, how much cash was paid for prepaid rent
during 2011?
A. $26,700
B. $33,100
C. $31,900
D. $25,500

____ 12. On June 1, 2012, Marino Corporation received $1,800 as advance payment for 12 months' advertising. The
receipt was recorded as a credit to Unearned Fees. What adjusting entry is required on December 31, 2012?
A. Unearned Fees 1,050
Advertising Revenue 1,050
B. Advertising Revenue 1,050
Unearned Fees 1,050
C. Unearned Fees 900
Advertising Revenue 900
D. Unearned Fees 750
Advertising Revenue 750
____ 13. On June 1, 2011, Allnut Landscaping Service received cash of $1,800 in advance for an agreement to provide
service to a client for three months, starting that day. As of June 30, 2011, Allnut:
A. would have a $1,200 liability to its client under accrual accounting, and would have a
$1,800 liability to its client under cash-basis accounting
B. would have recognized $600 revenue under accrual accounting, and would have
recognized $1,800 revenue under cash-basis accounting
C. would have a $0 liability to its client under accrual accounting, and would have a $1,200
liability to its client under cash-basis accounting
D. would have recognized $1,800 revenue under accrual accounting, and would have
recognized 600 revenue under cash-basis accounting

____ 14. Cheng Company obtained a $25,000, one-year, 12 percent bank loan on November 1 of the current year.
Interest is payable at the end of the loan term. The company’s adjusting entry needed on December 31 is:
A. A debit to Interest Expense of $500 and a credit to Interest Payable of $500
B. A debit to Interest Expense of $3,000 and a credit to Interest Payable of $3,000
C. A debit to Interest Receivable of $500 and a credit to Interest Revenue of $500
D. A debit to Interest Expense of $250 and a credit to Interest Payable of $250

____ 15. Which of the following is an example of an adjusting entry?

A. Recording the purchase of supplies on account
B. Recording depreciation on a truck
C. Recording the payment of interest to a bank
D. Recording the payment of wages to employees

____ 16. Joshua Company sent a check for $36 to Readers Digest magazine on May 1 toward a one year subscription,
starting on the same day. If the company’s financial year ends on September 30, their financial statements will
report:
A. Prepaid Subscription of $12, and Subscription Expense of $24
B. Prepaid Subscription of $18, and Subscription Expense of $18
C. Prepaid Subscription of $24, and Subscription Expense of $12
D. Prepaid Subscription of $21, and Subscription Expense of $15

____ 17. Collegiate Fitness Centers have 15,000 members whose monthly dues are $30 each. The company does not
send individual bills to customers, who have until the 10th day of the month following the month of service to
pay their monthly dues. On December 31, 2011, the company’s records show that 7,000 customers have
already paid their December dues, and the payments were properly recorded. The adjusting entry to be
recorded on December 31 will include:
A. A credit to Membership Revenue of $210,000
B. A credit to Membership Revenue of $450,000
C. A debit to Accounts Receivable of $240,000
D. A debit to Accounts Receivable of $210,000
____ 18. Spagnola Company's weekly payroll of $25,000 is paid every Friday for a 5-day workweek. Assume that the
last day of the fiscal year falls on Wednesday. Which of the following journal entries would be made on the
first Friday following the year-end?
A. Salaries Expense 15,000
Salaries Payable 10,000
Cash 25,000
B. Salaries Expense 10,000
Salaries Payable 15,000
Cash 25,000
C. Salaries Expense 15,000
Salaries Payable 15,000
D. Salaries Expense 10,000
Cash 10,000

____ 19. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was erroneously
omitted. Which of the following statements is true?
A. The total of the liabilities at the end of the year was overstated.
B. Owner's equity at the end of the year was understated.
C. Net income for the year was understated.
D. Net income for the year was overstated.

____ 20. Bank of Maryland received a 7-month, 9% note for $13,000 from a customer on October 1, 2011. The note is
due on April 30, 2012. If the bank’s accounting period ends on December 31, 2011, how much interest
revenue from this note should be recognized by the bank in the years 2011 and 2012?
2011 2012
A. $292.50 $390
B. $292.50 $682.50
C. $390 $292.50
D. $292.50 $1,170

____ 21. Nikhil Company showed the following balances at the end of its first year:
Cash $5,000
Prepaid insurance ?
Accounts receivable 2,500
Accounts payable 2,000
Notes payable 3,000
Common stock 1,000
Dividends 500
Revenues 15,000
Expenses 11,500

What amount did Nikhil Company report for Prepaid Insurance on its trial balance?
A. $1,500
B. $2,000
C. $2,500
D. $500
____ 22. In applying the revenue recognition principle to a given transaction, the most important moment or period in
time is when the
A. related cash inflows occur.
B. related expenses are incurred.
C. related sales transaction is completed.
D. related customer is billed.

____ 23. Which of the following would not be a correct form for an adjusting entry?
A. A debit to an expense and a credit to a liability
B. A debit to an asset and a credit to a revenue
C. A debit to a liability and a credit to a revenue
D. A debit to an asset and a credit to a liability

____ 24. Regan Corporation received cash of $13,500 on September 1, 2012 for one year’s rent in advance and recorded
the transaction with a credit to Unearned Rent. The December 31, 2012 adjusting entry is
A. debit Rent Revenue and credit Unearned Rent, $4,500.
B. debit Unearned Rent and credit Rent Revenue, $4,500.
C. debit Rent Revenue and credit Unearned Rent, $9,000.
D. debit Unearned Rent and credit Rent Revenue, $3,375.

___ 25. Gradone Company borrowed $9,000 from Bank of College Park on March 1, 2012 and signed a 3-year, 8%
interest-bearing note, requiring interest payments on March 1 every year. What journal entry should Gradone
Company make on March 1, 2013? Assume Gradone Company’s accounting period ends on December 31.
A. Debit Interest Payable $540, Debit Interest Expense $180 and credit Cash $720
B. Debit Interest Payable $720, Debit Interest Expense $1,440 and credit Cash $2,160
C. Debit Interest Payable $600, Debit Interest Expense $120 and credit Cash $720
D. Debit Interest Payable $1,440, Debit Interest Expense $720 and credit Cash $2,160

____ 26. Eckard Company records wages expense one week before it actually pays its employees. The company’s
Wages Expense account had a $510,000 balance at the end of the year. The Wages Payable account had a
$23,000 balance at the beginning of the year and a $45,000 balance at the end of the year. How much cash
was paid for wages during the year?
A. $488,000
B. $510,000
C. $532,000
D. $555,000

____ 27. Forakis Company's Insurance Expense account had a $10,000 balance at the end of the year. The Prepaid
Insurance account had a $3,000 balance at the beginning of the year and a $5,000 balance at the end of the year.
How much cash was paid by Forakis Company for insurance during the year?
A. $ 8,000
B. $10,000
C. $15,000
D. $12,000

____ 28. A company’s accountant forgot to record four adjustments during 2012. Which one of the following
omissions of adjustments will overstate assets?
A. Consulting service provided during the last week of the period are not recorded
B. Interest on monies borrowed has not yet been recorded
C. The portion of an auto insurance policy that has expired during the period is not
recognized
 D. Income taxes owed but not yet paid are ignored

____ 29. Which one of the following adjustments decreases net income for the period?
A. Recognition of rent as earned that had been received in advance from customers
B. Recognition of interest on a note receivable
C. Recognition of services that had been provided to customers but the cash has not yet been
received
D. Recognition of depreciation on plant assets

ANSWER SECTION

1. ANS: C
2. ANS: C
3. ANS: A
4. ANS: A
5. ANS: B
6. ANS: C
7. ANS: B
8. ANS: D
9. ANS: C
10. ANS: D
11. ANS: C
12. ANS: A
13. ANS: B
14. ANS: A
15. ANS: B
16. ANS: D
17. ANS: C
DR AR 240,000
CR Membership Revenue 240,000
18. ANS: B
19. ANS: D
20. ANS: A
21. ANS: A
22. ANS: C
23. ANS: D
24. ANS: B
25. ANS: C
26. ANS: A
27. ANS: D
28. ANS: C
29. ANS: D
PRACTICE QUESTIONS – CHAPTER 5

____ 2. The matching principle

A. necessitates the recording of an estimated amount for bad debts.
B. results in the recording of a known amount for bad debt losses.
C. requires that all credit losses be recorded when an individual customer cannot pay.
D. is not involved in the decision of when to expense a credit loss.

____ 3. Prior to the write off of a $100 customer account, Hawks Company had the following account balances:
Accounts receivable $9,800
Allowance for doubtful accounts 500
The net realizable value of the Accounts Receivable before and after the write-off was:
BEFORE AFTER
A. $9,300 $9,300
B. $9,400 $9,300
C. $9,300 $9,200
D. $9,300 $9,100

____ 4. Buck Company’s Accounts Receivable account has a balance of $400,000 at the end of the year, and the company
estimates the Cash Realizable Value of Accounts Receivable to be $384,000. The Allowance for Doubtful Accounts
has a credit balance of $9,000 at the beginning of the current year, and during the year, the company wrote off $7,500 of
accounts receivable. The year-end adjusting entry would require a:
A. a credit to Allowance for Doubtful Accounts for $17,500
B. a debit to Bad Debts Expense for $7,000
C. a debit to Bad Debts Expense for $14,500 .
D. a credit to Allowance for Doubtful Accounts for $16,000

____ 5. A debit balance in the Allowance for Doubtful Accounts

A. is the normal balance for that account.
B. indicates that actual bad debt write-offs have exceeded previous allowances for bad debts.
C. indicates that actual bad debt write-offs have been less than what was estimated.
D. cannot occur if the percentage of receivables method of estimating bad debts is used.

____ 6. Young Company lends Dobson Company $30,000 on August 1, 2010, accepting a 9-month, 12% interest note. If Young
accrued interest at its December 31, 2010 year-end, what entry must it make to record the collection of the note and
interest at its maturity date?
A. Cash 32,700
Notes Receivable 30,000
Interest Receivable 1,200
Interest Revenue 1,500
B. Notes Receivable 30,000
Interest Receivable 1,500
Interest Revenue 1,200
Cash 32,700
C. Cash 32,700
Notes Receivable 30,000
Interest Revenue 2,700
D. Cash 32,700
Notes Receivable 30,000
Interest Receivable 1,500
Interest Revenue 1,200
____ 8. When an uncollectible account is written off using the allowance method, accounts receivable
A. is unchanged and the allowance for doubtful accounts increases.
B. increases and the allowance for doubtful accounts increases.
C. decreases and the allowance for doubtful accounts increases.
D. decreases and the allowance for doubtful accounts decreases.

____ 9. An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for
Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a
A. debit to Bad Debts Expense for $9,000.
B. debit to Allowance for Doubtful Accounts for $7,900.
C. debit to Bad Debts Expense for $7,900.
D. credit to Allowance for Doubtful Accounts for $9,000.

____ 11. Rodgers Company lends Lanier Company $40,000 on April 1, accepting a four-month, 9% interest note. Rodgers
Company prepares financial statements on April 30. What adjusting entry should be made by Rodgers Company before
the financial statements can be prepared?
A. Note Receivable 40,000
Cash 40,000
B. Interest Receivable 1,200
Interest Revenue 1,200
C. Cash 300
Interest Revenue 300
D. Interest Receivable 300
Interest Revenue 300

____ 12. On February 1, Platt Company received a $5,000, 10%, four-month note receivable. The cash to be received by Platt
Company when the note becomes due is
A. $167.
B. $5,000.
C. $5,167.
D. $5,500.

____ 13. If a company fails to make an adjusting entry to estimate bad debts, then this error:
A. Understates owners’ equity
B. Understates assets
C. Overstates net income
D. Overstates expenses

____ 14. Under the allowance method of accounting for losses due to delinquent accounts, the entry to write off a specific
account:
A. Will increase net assets.
B. Debits Bad Debts Expense and credits Allowance for Doubtful Accounts.
C. Will decrease net assets.
D. Does not affect net assets.
____ 16. Waldman Company’s $80,000 Accounts Receivable balance at December 31 consisted of $70,000 current accounts and
$10,000 past-due accounts. On December 31, the Allowance for Doubtful Accounts had a credit balance of $800. The
firm estimated that 2% of current balances and 15% of past-due balances will prove uncollectible. The adjusting entry to
record bad debts expense is:
A. Bad Debts Expense 2,900
Allowance for Doubtful Accounts 2,900
B. Bad Debts Expense 2,100
Allowance for Doubtful Accounts 2,100
C. Bad Debts Expense 9,900
Allowance for Doubtful Accounts 9,900
D. Bad Debts Expense 3,700
Allowance for Doubtful Accounts 3,700

____ 17. Tesser Company’s Accounts Receivable balance on December 31 was $90,000, and there was a debit balance of $600 in
the Allowance for Doubtful Accounts. The firm estimates that 3% of the Accounts Receivable will prove to be
uncollectible. After the appropriate adjusting entry is made for bad debts expense, what is the cash realizable value of
accounts receivable included in the current assets at year-end?
A. $87,900
B. $86,700
C. $87,300
D. $90,000

____ 18. Ropelewski Company received an $8,000 90-day, 9% note dated December 1, 2011. On December 31, 2011, the
company made the necessary adjusting entry to accrue interest on the note. The journal entry to record the receipt of
the note on March 1, 2012 will be:
A. Cash 8,180
Interest revenue 180
Notes receivable 8,000
B. Cash 8,120
Interest revenue 120
Notes receivable 8,000
C. Cash 8,180
Interest receivable 60
Interest revenue 120
Notes receivable 8,000
D. Cash 8,180
Interest revenue 60
Interest receivable 120
Notes receivable 8,000

____ 19. Andy Company has the following unadjusted account balances on December 31, of the current year. The
preadjustment balance of Allowance for Doubtful Accounts is $1,600 debit. This company uses the following aging of
accounts receivable to estimate its bad debts.
Accounts Age Balance Estimated Uncollectible %
Current (not yet due) $96,000 1.0%
1-30 past due $64,000 3.5%
31-60 past due $16,000 12.0%
61-90 past due $6,500 42.0%
Over 90 days past due $3,200 67.0%
Total $185,700
The Cash Realizable Value of Accounts Receivable reported on the year-end Balance Sheet will be:
A. $177,306
B. $195,694
 C. $175,706
D. $174,106

____ 21. The following information is taken from the financial statements of Apple Inc.
09/24/2011 09/25/2010
Net Sales $108,249 $65,225
Cost of sales 64,431 39,541
Gross Profit 43,818 25,684
Accounts Receivable 5,369 5,510

Assuming all sales are on credit, compute the Average Collection Period of Apple, Inc. for the year ending on September
24, 2011.
A. 22.90 days
B. 19.90 days
C. 18.34 days
D. 30.83 days

____ 22. Davis Company uses the allowance method for recording its bad debt expenses. The company wrote off a delinquent
customer’s account in the amount of $5,000 that was subsequently collected. The company reinstated the account
before recording the collection. What is the net effect of these events on the accounting equation?
A. Increase total assets by $5,000
B. Decrease total assets by $5,000
C. Decrease total assets by $10,000
D. There is no effect on total assets

____ 23. Before adjusting for uncollectible accounts, Minderman Company has accounts receivable of $90,000 and a debit
balance of $900 in the Allowance for Doubtful Accounts. The company estimates that 2 percent of one-half of its
accounts receivable and 5 percent of the other half of accounts receivable will prove to be uncollectible. Determine the
bad debt expense for the current period.
A. $2,250
B. $3,150
C. $4,050
D. $2,150

____ 25. A partial balance sheet for Fontana Company appears below.

December 31, 2011

Accounts receivable, net of allowance of $5,600 $560,000

Which one of the following statements is true concerning the company’s accounts receivable as of December 31?
A. The company expects to collect $565,600 from its customers.
B. The net realizable value of the company’s accounts receivable is $554,400
C. The company thinks its customers will not pay $5,600 of the amount owed.
D. The company wrote off $5,600 of uncollectible accounts during the year.

____ 26. Davis Company performs an aging analysis to determine the amount of its bad debts expense to record at the end of each
year. At the end of the current year the company’s aging schedule appeared as follows:
 Accounts Fraction estimated
Receivable to be uncollectible
Current receivables $11,000 1%
Past-due receivables
1-30 days 1,650 2%
31-60 days 3,050 6%
61-90 days 980 25%
91+ days 630 40%

Davis's Allowance for Doubtful Accounts had a credit balance of $260 before adjustment. What is the amount of Davis’s
bad debt expense for the year?
A. $ 815
B. $ 563
C. $ 823
D. $ 1,083

ANSWER SECTION

2. ANS: A
3. ANS: A
4. ANS: C
5. ANS: B
6. ANS: D
8. ANS: D
9. ANS: C
11. ANS: D
12. ANS: C
13. ANS: C
14. ANS: D
16. ANS: B
17. ANS: C
18. ANS: C
19. ANS: C
21. ANS: C
22. ANS: D
23. ANS: C
25. ANS: C
26. ANS: B
PRACTICE QUESTIONS – CHAPTER 6

____ 1. Which of the following is a true statement about inventory systems?

A. Periodic inventory systems require more detailed inventory records.
B. Perpetual inventory systems require more detailed inventory records.
C. A periodic system requires cost of goods sold be determined after each sale.
D. A perpetual system determines cost of goods sold only at the end of the accounting period.

____ 2. Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct?
A. Returns of merchandise inventory by Adams Company to a manufacturer are credited to merchandise
inventory.
B. Freight paid to get merchandise inventory to Adams Company’s store is debited to Freight Expense.
C. A return of merchandise inventory by one of Adams Company’s customers is credited to merchandise
inventory.
D. Discounts taken by Adams Company’s customers are credited to merchandise inventory.

____ 3. Piper Company sells merchandise on account for $1,500 to Morton Company with credit terms of 2/10, n/30. Morton
Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount
period. What entry does Piper Company make upon receipt of the check?
A. Cash 1,000
Accounts Receivable 1,000
B. Cash 980
Sales Returns and Allowances 520
Accounts Receivable 1,500
C. Cash 980
Sales Returns and Allowances 500
Sales Discounts 20
Accounts Receivable 1,500
D. Cash 1,470
Sales Discounts 30
Sales Returns and Allowances 500
Accounts Receivable 1,000

____ 4. Tony’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s merchandise inventory
A. increased by $19,208.
B. increased by $19,300.
C. increased by $19,306.
D. increased by $19,308.
____ 5. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales 300,000
Cost of Goods Sold 134,000
Gross profit would be:
A. $154,000.
B. $128,000.
C. $140,000.
D. $166,000.

____ 6. When merchandise that was sold on account is returned by a customer, using the perpetual inventory system which
accounts are affected in the books of the seller?
A. Cash, accounts receivable, cost of goods sold, and sales returns
B. Sales returns, accounts receivable, merchandise inventory, and cost of goods sold
C. Sales returns, accounts receivable, purchases, and cost of goods sold
D. Sales returns, accounts receivable, purchases, and merchandise inventory

____ 7. Malone Corporation uses the perpetual inventory method. On March 1, it purchased $30,000 of merchandise inventory,
terms 2/10, n/30. On March 3, Malone returned goods (not damaged) that cost $3,000. On March 9, Malone paid the
supplier. On March 9, Malone should credit
A. purchase discounts for $600.
B. merchandise inventory for $600.
C. purchase discounts for $540.
D. merchandise inventory for $540.

____ 8. Seller Company sold merchandise in the amount of $5,800 to Buyer Company on February 1, with credit terms of
2/10, n/30. The cost of the items sold is $2,400. On February 4, Buyer Company returns some of the merchandise, which
were restored into Seller’s inventory. The selling price and the cost of the returned merchandise are $800 and $500,
respectively. The entries that Seller Company must make on February 4 will NOT include: (assume both companies
use the perpetual inventory method)
A. Credit to Cost of Goods Sold for $800
B. Debit to Merchandise Inventory for $500
C. Debit to Sales Returns and Allowances for $800
D. Credit to Accounts Receivable for $800.

____ 9. In a perpetual inventory system, two journal entries usually are made to record each sales transaction. The purposes of
these entries are best described as follows:
A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B. One entry records the purchase of the merchandise, and the other records the sale.
C. One entry records the cost of goods sold, and the other reduces the balance in the Merchandise
Inventory account.
D. One entry updates the general ledger, and the other updates the subsidiary ledgers.

____ 10. In a multiple step income statement, Sales returns and allowances and Sales discounts have the following impact:
A. Gross profit is reduced by Sales returns and allowances and Sales discounts
B. Gross profit is increased by Sales returns and allowances and Sales discounts
C. Gross profit is not affected by Sales returns and allowances and Sales discounts
D. None of the above is correct
____ 11. On August 1, Chavis Company bought goods with a list price of $4,800, terms 2/10, n/30. The company uses the
perpetual inventory system. On August 5, Chavis returned goods with a list price of $600, and was granted credit. If
Chavis paid the supplier the amount due on August 9, the appropriate journal entry for Chavis on August 9 would be
A. Accounts Payable 4,800
Merchandise Inventory 684
Cash 4,116
B. Accounts Payable 4,116
Cash 4,116
C. Accounts Payable 4,200
Merchandise Inventory 84
Cash 4,116
D. Accounts Payable 4,200
Merchandise Inventory 96
Cash 4,104

____ 12. Waldman Company (seller) sold inventory to Davis Company (buyer) for $6,000. The inventory was sold under the
terms 1/10, n/30. The goods were delivered FOB shipping point and freight costs of $200 were paid in cash. Also, the
receivable was collected within the discount period. Based on this information alone, determine the value of
merchandise inventory on Davis Company’s balance sheet at the end of the accounting period. Assume both companies
use the perpetual method for recording merchandising transactions.
A. $6,200
B. $5,940
C. $6,138
D. $6,140

____ 13. Selected account information from Ropelewski Company is presented below:
Cost of Goods Sold $77,000
Sales Returns & Allowances 19,000
Sales Revenue 150,000
Operating Expenses 45,000
Net Income 5,000
Based on the information presented above, determine the Other Expenses and Losses.
A. $3,000
B. $4,000
C. $2,000
D. $5,000

____ 14. Seller Company sold merchandise in the amount of $5,800 to Buyer Company on September 1, with
credit terms of 2/10, n/30. The cost of the merchandise is $2,400. On September 4, Buyer Company
returns some of the merchandise, which were put back into Seller’s inventory. The selling price and
the cost of the returned merchandise are $800 and $500, respectively. Buyer Company’s journal
entry on September 8, when they pay the amount due, will include: (assume both companies use the
perpetual inventory method)
A. Credit Purchase Discounts $100
B. Credit Cash $5,194
C. Debit Accounts Payable of $5,000
D. Credit Sales Discounts $100

____ 15. Terps Company purchased merchandise inventory on account on January 1, returned some defective
merchandise on January 5, sold the remaining merchandise on account on January 10, and paid for the
merchandise on January 15. Which of the following is NOT true?
A. An Expense account will be debited, and a Liability account will be credited on January 10
 B. An Asset account will be debited, and a Revenue account will be credited on January 10
C. An Asset account will be debited, and a Liability account will be credited on January 1
D. A Liability account will be debited, and an Asset account will be credited on January 15

____ 16. Which of the following statements is false regarding a perpetual inventory system?
A. Physical counts are never needed because records are maintained on a transaction-by-transaction
basis
B. The inventory records are updated with each inventory purchase, sale or return transaction
C. Cost of Goods Sold is increased as sales are recorded
D. A perpetual inventory system can be used to detect shrinkage

____ 17. On December 31, 2011, Yellowstone Hardware has an inventory of $30,000. The owner wants to increase inventory on
hand to $35,000 on December 31, 2012. If net sales for 2012 are expected to be $150,000, and the gross profit is
expected to be 35% of net sales, compute the net cost of merchandise the owner should expect to purchase during 2012.
A. $92,500
B. $97,500
C. $102,500
D. $57,500

____ 18. On November 4, Wally Mart Company made a sale of $1,000 of merchandise to a customer on account, with terms of
1/10, n/30. On November 6 the customer returned $200 of merchandise as defective and was given credit. The journal
entry by Wally Mart to record receipt of payment from the customer on November 10 will include?
A. A debit to Sales Discounts of $8
B. A debit to Sales Discount of $10
C. A debit to Sales Returns of $200
D. A debit to Cash of $790

____ 19. A retailer sold merchandise to a customer on credit for $10,000 with credit terms of 1/10, n/30. The invoice was dated
April 14. Which one of the following statements is true?
A. The customer can take a $100 discount if the invoice is paid by May 13.
B. The customer should pay $9,000 if the invoice is paid by April 24.
C. The customer must pay $10,000 if paid after April 24.
D. The customer must pay a $100 penalty if payment is made after May 13.

____ 20. This year, a company purchased less expensive merchandise inventory but sold them at last year’s selling prices. What
effect will this change have on the company’s gross profit rate this year, in comparison to last year?
A. The ratio will not change
B. The ratio will increase
C. The ratio will decrease
D. The change cannot be determined

____ 21. When inventory prices are falling, using the LIFO costing method will generally result in a:
 A. lower ending inventory value than under FIFO
B. lower income tax expense than under FIFO
C. lower cost of goods sold than under FIFO
D. lower net income than under FIFO

____ 22. A company discovered in 2010 that it had overstated the inventory balance for Dec 31, 2008 by $10,000.
The company had (incorrectly) reported Net Income to be $300,000 for 2008, and $400,000 for 2009. What
should be the corrected Net Incomes for 2008 and 2009?
Corrected 2008 Net Income Corrected 2009 Net Income
A. $310,000 $390,000
B. $290,000 $390,000
C. $290,000 $410,000
D. $310,000 $410,000

Use the following information for Sue's Soups for the next three questions:
On September 1, 2010, the beginning inventory was 110 units at $50 each. Purchases and sales during
September 2010 were:

Purchases During Sept 2010 Sales During Sept 2010

Sept 7 120 units @ $56
Sept 17 70 units @ $44
Sept 25 100 units @$42 Sept 29 270 units

____ 23. What is the cost of ending inventory for September if the AVERAGE costing alternative is used? (round your
answer to the nearest penny)
A. $965.52
B. $6,337.50
C. $5,362.50
D. $6.275.86

____ 24. What is the cost of inventory on September 30 if the LIFO costing alternative is used?
A. $7,160
B. $5,520
C. $6,620
D. $6,500

____ 25. What is the cost of goods sold for September if the FIFO costing alternative is used?
A. $13,920
B. $12,880
C. $13,980
D. $13,900
____ 26. Nelson Corporation sells three different products. The following information is available on December 31:

Inventory Units Cost per unit Market value per

Item unit
X 100 $4.00 $3.50
 Y 200 $2.00 $1.50
Z 500 $3.00 $4.00

When applying the lower of cost or market rule to each item, what will Nelson report as its cost of ending
inventory on December 31?
A. $2,300
B. $2,200
C. $2,650
D. $2,150

____ 27. Goods in transit which are shipped f.o.b. shipping point should be
A. included in the inventory of the shipping company.
B. included in the inventory of the buyer.
C. included in the inventory of the seller.
D. none of the above.

____ 28. What is consigned inventory?

A. Goods that are sold, but payment is not required until the goods are sold.
B. Goods that are shipped, and title transfers to the buyer.
C. Goods that have been segregated for shipment to a customer.
D. Goods that are shipped, but title remains with the seller.

____ 29. Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of
1,200 units that cost $12 each. During the month, the company made two purchases: 500 units at $13 each
and 2,000 units at $13.50 each. Checkers also sold 2,150 units during the month. Using the FIFO method,
what is the cost of ending inventory?
A. $20,925.
B. $18,950.
C. $20,073.
D. $18,600.

____ 30. Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of
200 units that cost $65 each. During the month, the company made two purchases: 300 units at $69 each and
150 units at $70 each. Chess Top also sold 500 units during the month. Using the average cost method, what
is the cost of ending inventory?
A. $33,770.
B. $10,200.
C. $10,500.
D. $33,400.

____ 31. Which inventory costing method most closely approximates current cost for each of the following?
Ending Inventory Cost of Goods Sold
A. FIFO LIFO
B. LIFO LIFO
C. LIFO FIFO
D. FIFO FIFO
____ 32. In its 2010 income statement, Risers Inc. reported cost of goods sold of $85,000. Later, Risers determined that
beginning inventory for 2010 was understated by $23,000, and the ending inventory for 2010 was understated
by $10,000. What should be the corrected amount for cost of goods sold for 2010?
A. $98,000.
B. $72,000.
C. $95,000.
D. $85,000.

____ 33. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold
computed when inventory is valued using the FIFO method exceeds cost of goods sold when ending
inventory is valued using the LIFO method?
A. Prices decreased during the year
B. Prices remained unchanged during the year.
C. Prices increased during the year
D. Price trend cannot be determined from information given.

____ 34. During its first and second years of operations, Tesser Company, made undiscovered errors in taking its year-
end inventories that understated year 1 ending inventory by $30,000 and overstated year 2 ending inventory
by $45,000. The combined effect of these errors on reported net income is
Year 1 Year 2 Year 3
A. Understated Overstated Not affected
by $30,000 by $45,000 -
B. Understated Overstated Overstated
by $30,000 by $15,000 by $45,000
C. Understated Overstated Understated
by $30,000 by $75,000 by $45,000
D. Overstated Understated Overstated
by $30,000 by $45,000 by $15,000

ANSWER SECTION

1. ANS: B
2. ANS: A
3. ANS: C
4. ANS: D
5. ANS: B
6. ANS: B
7. ANS: D
8. ANS: A
9. ANS: A
10. ANS: A
11. ANS: C
12. ANS: D
13. ANS: B
14. ANS: C
15. ANS: A
16. ANS: A
17. ANS: C
18. ANS: A
19. ANS: C
20. ANS: B
21. C
22. C
23. B
24. C
25. C
26. D
27. B
28. D
29. A
30. B
31. A
32. A
33. A
34. C