ACCOUNTING

1.
Accounting Management (Questions related to accrual accounting, revenues and expenses, the
balance sheet, and inventory accounts)
1.1. Accrual accounting
Accrual accounting is a financial accounting method that allows a company to record revenue before
receiving payment for goods or services sold and record expenses as they are incurred.
In other words, the revenue earned and expenses incurred are entered into the company's journal regardless
of when money exchanges hands. Accrual accounting is usually compared to cash basis of accounting,
which records revenue when the goods and services are actually paid for.
 Accrual accounting is an accounting method where revenue or expenses are recorded when a
transaction occurs vs. when payment is received or made.
 The method follows the matching principle, which says that revenues and expenses should be
recognized in the same period.
 Accrual accounting uses the double-entry accounting method.
Practices: Accrual Accounting MCQ quiz questions and answers - Question 1 (proprofs.com)
1. Which of the following is not a criterion to recognize revenue under GAAP?
A. The earnings process must be completed.
B. A product or service must be provided.
C. Cash must be collected.
D. GAAP requires that the accrual basis accounting principle be used in the revenue recognition process.
2. Which of the following best represents the matching principle criteria?
A. Expenses are reported in the period in which they were incurred.
B. Expenses may be reported in a different period than the matching revenues.
C. Revenue and expenses are matched based on when expenses are paid.
D. Revenue is recognized when an order occurs and not when the actual sale is initiated.
3. Revenue from a contract with a customer
a. is recognized when the customer receives the rights to receive consideration.
b. is recognized even if the contract is still wholly unperformed.
c. can be recognized even when a contract is still pending.
d. cannot be recognized until a contract exists.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC:
Reporting, AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
4.Revenue is recognized in the accounting period in which the performance obligation is satisfied. This
statement describes the
a. consistency characteristic.
b. expense recognition principle.
c. revenue recognition principle.
d. relevance characteristic.
Ans: c, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control: Financial
Statement Analysis, IFRS: None
1
5. Generally, revenue from sales should be recognized at a point when
a. management decides it is appropriate to do so.
b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer and there remains no further
warranty liability.
d. None of these answer choices is correct.
Ans: d, LO: 3, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
6. Revenue generally should be recognized

a. at the end of production.
b. at the time of cash collection.
c. when realized.
d. when the performance obligation is satisfied.
Ans: d, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
7.Which of the following is commonly referred to as the matching principle?
a. Revenue recognition principle
b. Measurement principle
c. Expense recognition principle
d. Full disclosure principle
Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
8. Product costs include each of the following except

a. overhead.
b. officer’s salaries.
c. material.
d. labor.
Ans: b, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
9.Recognizing expenses not when a company pays wages, but when the work contributes to revenue is in
accordance with the
a. consistency characteristic.
2
b. expense recognition principle.
c. materiality characteristics.
d. revenue recognition principle.
Reporting, AICPA PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
10. The accounting principle of expense recognition is best demonstrated by

a. not recognizing any expense unless a performance obligation is satisfied.
b. matching efforts (expenses) with accomplishments (revenues).
c. recognizing prepaid rent received as revenue.
d. expensing research and development expenditures in the period when incurred.
Ans: b, LO: 3, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
11.Which of the following serves as the justification for the periodic recording of depreciation expense?
a. association of efforts (expense) with accomplishments (revenue)
b. systematic and rational allocation of cost over the periods benefited
c. immediate recognition of an expense
d. minimization of income tax liability
12.When is revenue generally recognized?
a. when cash is received
b. when the warranty expires
c. when production is completed
d. when the company satisfies the performance obligation
13. Which of the following is a component of the revenue recognition principle?

a. Cash is received and the amount is material.
b. Recognition occurs when the performance obligation is satisfied.
c. Production is complete and there is an active market for the product.
d. Cash is realized or realizable and production is complete.
3
14.What is the general approach when product costs are recognized as expenses?
a. Expense in the period when paid
b. Expense in the period when incurred
c. Expense in the period when the vendor invoice is received
d. Expense in the period when the related revenue is recognized
Ans: d, LO: 3 Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
1.2 Balance sheet

The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and
shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for
investors and evaluating a company's capital structure.
The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities plus
shareholder equity on the other, balance out:
Assets=Liabilities+Shareholders’ EquityAssets=Liabilities+Shareholders’ Equity
Practice:
1. Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these answer choices are correct.
Ans: D,
4
2. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
Ans: C,
3. Balance sheet information is useful for all of the following except to

a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows
Ans: B,
4. Balance sheet information is useful for all of the following except

a. assessing a company's risk
b. evaluating a company's liquidity
c. evaluating a company's financial flexibility
d. determining free cash flows.
Ans: D,
5. A limitation of the balance sheet that is not also a limitation of the income statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost
Ans: D,
6. The balance sheet contributes to financial reporting by providing a basis for all of the following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.
Ans: C,
7. One criticism not normally aimed at a balance sheet prepared using current accounting and reporting
standards is
a. failure to reflect current value information.
5
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded objectively.
Ans: B,
8. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash
is referred to as
a. solvency.
b. financial flexibility.
c. liquidity.
d. exchangeability.
Ans: C,
1.3 Inventory account

1.3.1 Classification
- Merchadising company: Inventory
- Manufacturing company: Raw Materials, Work in Process, and Finished Goods, supplies (phụ liệu).
1.3.2 Cost flow and cost flow assumptions and inventory systems
- Perpetual system:
o Purchases of merchandise are debited to Inventory.
o Freight-in is debited to Inventory. Purchase returns and allowances and purchase
discounts are credited to Inventory.
o Cost of Goods Sold is debited and Inventory is credited for each sale.
o Subsidiary records show quantity and cost of each type of inventory on hand.
- Periodic system: a company determines the quantity of inventory on hand only periodically. To
do so, a company does the following:
6
- Cost flow assumptions: Fifo, lifo, average cost (Average-Cost Inventory Cost Flow; Moving –
Average Method), Specific Identification
In Out Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
1-Jul 100 7
5-Jul 120 7.2
10-Jul 80
12-Jul 50 6.9
15-Jul 70
20-Jul 50
25-Jul 110 7.1
Practices:
7
1. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a
retailer?
a. Raw materials
b. Work-in-process
c. Finished goods
d. Supplies
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
2. A company with high rate of return on sales should consider the inventory sold when
a. when it can reasonably estimate the amount of returns.
b. when the retailer gives a confirmation that the goods won’t be returned.
c. when the goods are sold on installment.
d. when the payment for goods is received.
Ans: A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Statement Preparation, IFRS: None
3. In a perpetual inventory system, the inventory account

a. is debited for purchases and credited when the goods are sold and the cost is transferred to cost of
goods sold
b. is debited for purchases and credited for purchase returns and freight-in.
c. is not adjusted for cost of goods sold until the end of the accounting period.
d. is debited for purchases and credited for sales returns.
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
4. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
5. Which of the following is a characteristic of a periodic inventory system?

a. Inventory purchases are debited to a Purchases account.
8
b. Inventory records are updated for each purchase and sale
c. Cost of goods sold is recorded each time a sale is made.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.
Ans: A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
6. When a perpetual inventory system is used,

a. no Purchases account is used.
b. Cost of Goods Sold account is debited when goods are sold.
c. two entries are required to record a sale.
d. All of the choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
7. When a periodic inventory system is used,
a. purchases of inventory are charged to the Inventory account.
b. the balance in the inventory account should approximate inventory on hand.
c. two entries are required to record a sale.
d. a physical count of inventory is required at the end of the accounting period to determine cost of
goods sold.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
8. 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. included in the inventory of the buyer or the seller, depending on what type of inventory system each
uses.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA .PC: None, IMA: Reporting & Control: Financial
9. Goods in transit which are shipped f.o.b. destination 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.
9
d. included in the inventory of the buyer or the seller, depending on what type of inventory system each
uses.
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
10. Which of the following should be included in a company's inventory at the balance sheet date?
a. goods in transit which were purchased f.o.b. destination
b. goods received from another company for sale on consignment
c. goods sold to a customer which are being held for the customer to call for at his or her convenience
d. goods sold to a customer and shipped f.o.b. destination.
2. Assets and Liabilities (Questions related to accounts receivable, write-offs, collectable accounts,
and buyer’s records)
2.1. Account receivable
2.2. Write-offs
- Direct Write-Off Method for Uncollectible Accounts: When a company determines a particular account
to be uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz Co. writes off as uncollectible Yusado’s $8,000
balance. The entry is:
Bad Debt Expense 8,000
Accounts Receivable (Yusado) 8,000
- Allowance Method for Uncollectible Accounts:

• Involves estimating uncollectible accounts at end of each period
• Ensures that companies state receivables on balance sheet at net realizable value
• Companies estimate uncollectible accounts and net realizable value using information about past and
current events as well as forecasts of future collectibility
• Assume that Brown Furniture in 2025, its first year of operations, has credit sales of $1,800,000. At
December 31, 2025, the company reported accounts receivable of $150,000 from those sales. The credit
manager estimates that $10,000 of these sales will be uncollectible. The adjusting entry to record the
estimated uncollectibles (assuming a zero balance in the allowance account) is:
Bad Debt Expense 10,000
Allowance for Doubtful Accounts 10,000
10
The financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by
Randall Co. on March 1, 2026. The entry to record the write-off is:
Accounts Receivable (Randall Co.) 1,000
- Adjusting Entry to Record Estimate Credit Balance Before Adjustment

What entry would Aloha make assuming the allowance account had a credit balance of $800 before
adjustment?
Bad Debt Expense ($26,610 – $800) 25,810
2.3. Collectable accounts

Allowance Method for Uncollectible Accounts
2.4. Buyer’s records
- Accounts receivable generally arise as part of a revenue arrangement
- Revenue recognition principle indicates that a company should recognize revenue when it satisfies its
performance obligation by transferring the good or service to the customer.
Accounts Receivable 100
Sales Revenue 100
- Variable Consideration:
o Trade discount:
 Reductions from the list price
 Not recognized in the accounting records
 Customers are billed net of discounts
o Cash Discounts (Sales Discounts)
 Offered to induce prompt payment
 Presented in terms
- 2/10, n/30
11
- 2/10, E.O.M.,
- net 30, E.O.M.
 Gross Method vs. Net Method
FACTS Armour Company sells goods for $10,000 to Ohara Inc. on April 1 with terms 1/10, net 15.
a. Gross method:
Accounts Receivable 10,000
Sales Revenue 10,000
b. Net method:
Accounts Receivable [$10,000 – (.01 × $10,000)] 9,900
Sales Revenue 9,900
o Sale returns and allowance

January 24, 2025
Sales Returns and Allowances 200
Accounts Receivable (2 ×
200
$100)
Returned Inventory 120
Cost of Goods Sold (2 × $60) 120
Practices:
1. Which of the following statements is correct regarding receivables?
a. Receivables are written promises of the purchaser to pay for goods or services.
b. Receivables are claims held against customers and others for money, goods, or services.
c. Receivables are non-financial assets.
d. Receivables that are expected to be collected within a year are classified as noncurrent.
12
2. The category "trade receivables" includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. amounts owed by customers for goods bought or services rendered
3. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. Oral promises from customers to pay for goods or services sold
S
4. When a customer purchases inventory from a business organization, they 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.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
5. Trade discounts are

a. recorded as other revenues and gains.
b. used to induce prompt payment.
c. presented in terms such as 2/10, n/30.
d. used to avoid frequent changes in catalogs.
Ans: d, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
6. If a company uses 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.
13
c. a deduction from accounts receivable in determining the accounts receivable amount expected to be
collected.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
Ans: a, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
7. Why do companies provide trade discounts?

a. To avoid frequent changes in catalogs only
b. To induce prompt payment only
c. To easily alter prices for different customers only
d. To avoid frequent changes in catalogs and to easily alter prices for different customers
Record Keeping, IFRS: None
8. The accounting for cash discounts and trade discounts are

a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the account.
9. Of the approaches to record cash discounts related to accounts receivable, which is more theoretically
correct?
a. Net approach
b. Gross approach
c. Allowance approach
d. Contra revenue approach
Ans: a, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
10. The amount of consideration that a company expects to receive from a customer in exchange for
transferring goods or services is
a. the transaction price.
b. an amount specified and determined in the contract.
14
c. easily determined because it is a fixed amount.
d. all of these answers are correct.
Ans: d, LO: 3, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
11. All of the following are problems associated with valuing accounts receivable except
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.
Ans: c, LO: 3, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
12. All of the following are types of variable consideration except

a. trade discounts.
b. deferred payment contracts.
c. cash discounts.
d. allowance for doubtful accounts.
13. Alli ordered ceiling tiles online from Lowes and charged the purchase to her Lowes credit card. Lowes
will deliver the ceiling tiles the next day. Evidence that transfer of control from Lowes to Alli is
complete is indicated by all of the following except
a. Lowes has the right to receive payment from Alli.
b. Alli has physical possession of the goods.
c. the period in which the ceiling tiles can be returned has expired.
d. Alli has inspected the ceiling tiles and has approved that the quantity is correct and the quality is
acceptable.
Ans: c, LO: 3, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
14. Tessa ordered a refrigerator online from Lowes on November 20 and charged the purchase to her Lowes
credit card so that she received a 5% discount. The refrigerator was back-ordered so was not delivered
and installed until December 23. The charge was included on Tessa’s December Lowes credit card
15
statement which she paid in full on January 7. The 90-day warranty of the refrigerator expired on March
20. Lowes should recognize revenue from the sale of
a. November 20.
b. December 23.
c. January 7.
d. March 20.
Ans: b, LO: 3, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
15. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under the direct write-off method is difficult to do
d. Improved matching of bad debt expense with revenue
16. Which of the following concepts relates to using the allowance method in accounting for accounts
receivable?
a. Bad debt expense is an estimate that is based on historical and prospective information.
b. Bad debt expense is based on the actual amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
d. Bad debt expense is management's determination of which accounts will be sent to the attorney for
collection.
17. How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off
b. Changing the percentage of receivables recorded as bad debt expense
c. Using an aging of the accounts receivable balance to determine bad debt expense
d. Reversing previous write-offs
16
18. 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
19. What is the normal journal entry when writing off an account as uncollectible under the allowance
method?
20. Which of the following is included in the normal journal entry to record the collection of accounts
receivable previously written off when using the allowance method?
21. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of
the cash to be received in the future, failure to follow this practice usually does not make the balance
sheet misleading because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
Ans: c, LO: 3, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC:
17
22. Which of the following methods of determining bad debt expense does not properly match expense and
revenue?
a. Charging bad debts with a percentage of sales under the allowance method
b. Charging bad debts with an amount derived from a percentage of accounts receivable under the
allowance method
c. Charging bad debts with an amount derived from aging accounts receivable under the allowance
method
d. Charging bad debts as accounts are written off as uncollectible
23. Which of the following methods of determining annual bad debt expense does not satisfy the matching
concept?
a. Direct write-off
b. Percentage of ending accounts receivable
c. Aging of accounts receivable
d. All of these methods satisfy the matching concept
24. Which of the following is a generally accepted method of determining the amount of the adjustment for
bad debt expense?
a. Actual losses from uncollectible accounts
b. A percentage of accounts receivable adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance
25. The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that
this approach
a. gives a reasonably correct statement of receivables in the balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
18
26. Which of the following statements is true regarding GAAP for receivables?
a. Companies can choose between the direct write-off and the allowance methods to account for bad
debts.
b. Companies are required to use the current expected credit loss (CECL) model that
measures expected uncollectible accounts and record bad debt expense on all
receivables.
c. Companies use the allowance method to estimated credit losses on accounts receivable while notes
receivable are reported at gross amounts without consideration of credit losses.
d. Companies generally use one composite rate to estimate uncollectible accounts and notes receivable.
3. Balance Sheet (Questions related to time frames associated with balance sheets, the statement of
financial position, accounts receivable, and valuation of inventories)
Above
4. Business Organization Types (Questions related to forms of business organizations)
- Of the three primary forms of business organization—the proprietorship, the partnership, and the
corporation.
4.1. Proprietorship
This popular form of business structure is the easiest to set up. Sole proprietorships have one owner who makes
all of the business decisions, and there is no distinction between the business and the owner.
Advantages of a sole proprietorship include:
 Total control of the business: As the sole owner of your business, you have full control of business
decisions and spending habits.
 No public disclosure required: Sole proprietorships are not required to file annual reports or other
financial statements with the state or federal government.
 Easy tax reporting: Owners don't need to file any special tax forms with the IRS other than the
Schedule C (Profit or Loss from Business) form.
 Low start-up costs: While you may need to register your business and obtain a business occupancy
permit in some places, the costs of maintaining a sole proprietorship are much less than other business
structures.
Disadvantages include:
 Unlimited liability: You are personally responsible for all business debts and company actions under
this business structure.
 Lack of structure: Since you are not required to keep financial statements, there is a risk of becoming
too relaxed when managing your money.
19
 Difficulty in raising funds: Investors typically favor corporations when lending money because they
know that those businesses have strong financial records and other forms of security.
Some typical examples of sole proprietorships include the personal businesses of freelancers, artists, consultants
and other self-employed business owners who operate on a solo basis.
4.2. Partnership
You can classify a business partnership as either general or limited. General partnerships allow both partners to
invest in a business with 100% responsibility for any business debts. They don't require a formal agreement. In
comparison, limited partnerships require owners to file paperwork with the state and compose formal
agreements that describe all of the important details of the partnership, such as who is responsible for certain
debts.
Some advantages of partnerships include:
 Easy to establish: Compared to other business structures, partnerships require minimal paperwork and
legal documents to establish.
 Partners can combine expertise: With more than one like-minded individual, there are more
opportunities to increase their collaborative skillset.
 Distributed workload: People in partnerships commonly share responsibilities so that one person
doesn't have to do all the work.
Disadvantages to consider:
 Possibility for disagreements: By having more than one person involved in business decisions,
partners may disagree on some aspects of the operation.
 Difficulty in transferring ownership: Without a formal agreement that explicitly states processes, a
business may come to a halt if partners disagree and choose to end their partnership.
 Full liability: In a partnership, all members are personally liable for business-related debts and may be
pursued in a lawsuit.
An example of a partnership is a business set up between two or more family members, friends or colleagues in
an industry that supports their skill sets. The partners of a business typically divide the profits among
themselves.
4.3. Corporation
A corporation is a business organization that acts as a unique and separate entity from its shareholders. A
corporation pays its own taxes before distributing profits or dividends to shareholders. There are three main
forms of corporations: a C corporation, an S corporation and an LLC, or limited liability corporation.
Advantages of corporations include:
 Owners aren't responsible for business debts: In general, the shareholders of a corporation are not
liable for its debts. Instead, shareholders risk their equity.
 Tax exemptions: Corporations can deduct expenses related to company benefits, including health
insurance premiums, wages, taxes, travel, equipment and more.
 Quick capital through stocks: To raise additional funds for the business, shareholders may sell shares
in the corporation.
Disadvantages include:
 Double taxation for C-corporations: The corporation must pay income tax at the corporate rate before
profits transfer to the shareholders, who must then pay taxes on an individual level.
20
 Annual record-keeping requirements: With the exception of an S-corporation, the corporate business
structure involves a substantial amount of paperwork.
 Owners are less involved than managers: When there are several investors with no clear majority
interest, the management team may direct business operations rather than the owners.
Common examples of corporations include a business organization that possesses a board of directors and a
large company that employs hundreds of people. About half of all corporations have at least 500 employees.
5. Capital (Questions related to paid-in-capital, value of stock, distributions of earnings, and par
value)
1.Presented below is information related to Hale Corporation:
Common Stock, $1 par $3,500,000
Paid-in Capital in Excess of Par—Common Stock 550,000
8 1/2% preferred Stock, $50 par 2,000,000
Paid-in Capital in Excess of Par—Preferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000
The total stockholders' equity of Hale Corporation is
a. $7,800,000.
b. $7,950,000.
c. $6,300,000.
d. $6,450,000.
Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement, Interpretation and Analysis, AICPA PC: None, IMA: Reporting and Control:
Financial Recordkeeping, IFRS: None
Solution: $3,500,000 + $400,000 + $550,000 + $2,000,000 + $1,500,000 – $150,000 = $7,800,000.
2. Presented below is information related to Hale Corporation:
Common Stock, $1 par $3,500,000
Paid-in Capital in Excess of Par—Common Stock 550,000
Preferred 8 1/2% Stock, $50 par 2,000,000
Paid-in Capital in Excess of Par—Preferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000
The total paid-in capital (cash collected) related to the common stock is
a. $3,500,000.
b. $4,050,000.
c. $5,450,000.
d. $3,900,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None,
21
Solution: $3,500,000 + $550,000 = $4,050,000.
3. Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per
share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum
of $520,000. How much of the proceeds would be allocated to the common stock?
a. $250,000
b. $236,364
c. $283,636
d. $276,250
Solution: (10,000  $25) + (15,000  $20) = $550,000; ($250,000 ÷ $550,000)  $520,000 = $236,364.
4. Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share
and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of
$205,000. What amount of the proceeds should be allocated to the preferred stock?
a. $167,727
b. $128,125
c. $111,818
d. $93,181
Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None,
Solution: (4,000  $25) + (6,000  $20) = $220,000; ($120,000 ÷ $220,000)  $205,000 = $111,818.
5.Berry Corporation has 100,000 shares of $10 par common stock authorized. The following transactions took
place during 2025, the first year of the corporation’s existence:
Sold 20,000 shares of common stock for $13.50 per share.
Issued 20,000 shares of common stock in exchange for a patent valued at $300,000.
At the end of Berry’s first year, total paid-in capital was
a. $120,000.
b. $270,000.
c. $300,000.
d. $570,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None,
Financial Statement Preparation, IFRS: None
Solution: (20,000  $13.50) + $300,000 = $570,000.
22
6. Glavine Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per
of $310,000. The amount of the proceeds allocated to the common stock is
a. $124,000.
b. $140,909.
c. $150,000.
d. $169,091.
Solution: [(6,000  $25) ÷ [(6,000  $25) + (9,000  $20)]]  $310,000 = $140,909.
7. Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair value of $25 per
of $253,000. The proceeds allocated to the preferred stock is
a. $151,800.
b. $150,000.
c. $138,000.
d. $115,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement, Interpretation and Analysis, AICPA PC: None, IMA: Reporting and Control: Financial
Recordkeeping, IFRS: None
Solution: [(7,500  $20) ÷ [(5,000  $25) + (7,500  $20)]]  $253,000 = $138,000.
8. Pember Corporation started business in 2015 by issuing 200,000 shares of $20 par common stock for
$27 each. In 2025, 25,000 of these shares were purchased for $39 per share by Pember Corporation and held as
treasury stock. On June 15, 2026, these 25,000 shares were exchanged for a piece of property that had an
assessed value of $760,000. Pember’s stock is actively traded and had a market price of $45 on June 15, 2026.
The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock
transactions resulting from the above events is
a. $750,000.
b. $450,000.
c. $215,000.
d. $150,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement, Interpretation and Analysis, AICPA PC: None, IMA: Reporting and Control: Financial Statement
Preparation, IFRS: None
Solution: ($45 – $39)  25,000 = $150,000.
9. On September 1, 2025, Valdez Company reacquired 30,000 shares of its $10 par value common stock
for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the
reacquisition of the stock should debit
23
a. Treasury Stock for $300,000.
b. Common Stock for $300,000.
c. Common Stock for $300,000 and Paid-in Capital in Excess of Par for $150,000.
d. Treasury Stock for $450,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Recordkeeping, IFRS: None
Solution:30,000  $15 = $450,000.
6. Debit and Credit Entries (Questions related to accounts receivable, transactions, last in first out,
first in first out, and notes receivable)
1. AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the
gross 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 $24,750
b. Debit Accounts Receivable for $24,750 and Sales Discounts for $250
c. Debit Accounts Receivable for $25,000
d. Debit Accounts Receivable for $25,000 and Sales Discounts for $250
Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control:
Solution: $25,000 × 100% = $25,000.
2. AG Inc. made a $25,000 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 $24,500
b. Debit Accounts Receivable for $24,500 and Sales Discounts for $500
d. Debit Accounts Receivable for $25,000 and Sales Discounts for $500
Ans: a, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None,
Solution: $25,000 × (1 – .02) = $24,500.
3.On July 22, Petrie Inc. sold $23,500 of inventory items on credit with the terms 2/15, net
30. Payment on $15,000 sales was received on August 1 and the remaining payment was
received on August 12. Assuming Petrie uses the gross method of accounting for sales
discounts, which one of the following entries was made on August 1 to record the cash
received?
a. Cash.................................................................... 14,700
Sales Discount.................................................... 300
Accounts Receivable.................................. 15,000
24
b..........................................................................Cash 15,000
c..........................................................................Cash 14,700
d..........................................................................Accounts Receivable 300
Sales Discount Forfeited............................. 300
Ans: a, LO: 2, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control: Financial
4. On April 2, Kelvin Company sold $40,000 of inventory items on credit with the terms 1/10, net 30.
Payment on $24,000 sales was received on April 8 and the remaining payment on $16,000 sales was received on
April 27. Assuming Kelvin uses the net method of accounting for sales discounts, the entry recorded on April 27
would include a
a. debit to Cash and credit to Accounts Receivable for $15,840.
b. debit to Accounts Receivable and credit to Sales Revenue for $40,000.
c. debit to Cash for $15,840 and debit to Sales Discounts Forfeited for $160.
d. debit to Cash and credit to Sales Discounts Forfeited for $400.
5. Legend Company sold $80,000 worth of goods on account to Destiny Inc. on June 20. Legend marks all
goods up 25% on cost. Destiny has 45 days to return the goods for any reason. On July 1, Destiny returns
$7,000 worth of goods. Legend expects to be able to resell the returned goods at a profit.
The journal entries for Legend to record the initial sales on June 20 included debits to
a. Accounts Receivable for $80,000, and Cost of Goods Sold for $64,000.
b. Accounts Receivable for $80,000, and Sales of $64,000.
c. Inventory for $80,000, and Cash for $64,000.
d. No entry can be made because the items can be returned.
Ans: a, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None,
Financial Record Keeping, IFRS: None
Solution: $80,000/(1 + .25) = $64,000 cost
6.Legend Company sold $80,000 worth of goods on account to Destiny Inc. on June 20. Legend marks all
goods up 25%. Destiny has 45 days to return the goods for any reason. On July 1, Destiny returns $7,000
worth of goods. Legend expects to be able to resell the returned goods at a profit.
The journal entries for Legend to record the return on July 1 included debits to
a. Accounts Receivable for $7,000, and Sales Returns and Allowance for $5,600.
b. Accounts Receivable for $7,000, and Cost of Goods Sold of $5,600.
c. Sales Returns and Allowance for $7,000, and Returned Inventory for $5,600.
d. Returned Inventory for $7,000, and Sales Returns and Allowance for $5,600.
25
Ans: c, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None,
Financial Record Keeping, IFRS: None
Solution: $7,000/(1 + .25) = $5,600
7. Equestrian Roads sold $120,000 of goods and accepted the customer's $120,000 10%,
1-year notes receivable in exchange. Assuming 10% approximates the market rate of return, what would
be the debit in this journal entry to record the sale?
a. No journal entry until cash is collected
b. Debit Notes Receivable for $120,000
d. Debit Notes Receivable for $108,000
Ans: b, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None,
Solution: ($900,000 × .90) = $810,000.
8. Red Wing & Co. sold goods with a market price of $150,000 on April 1. They accepted a note from
Shoreline Inc. for $150,000 due in two years, with interest paid each year on April 1, bearing 8%
interest. If 8% interest approximates the market rate of interest for this transaction, what journal entry
should be recorded to record the sale (ignore Cost of Goods sold) when the sale takes place?
a. Debit Notes Receivable $150,000, credit Sales Revenue $150,000
b. Debit Notes Receivable $174,000, credit Sales Revenue $174,000
c. Debit Interest Receivable $12,000, credit Interest Revenue $12,000
d. Debit Interest Receivable $9,000, credit Interest Revenue $9,000
Ans: a, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC:
9. Niles Co. has the following data related to an item of inventory:
Inventory, March 1 400 units @ $2.10
Purchase, March 7 1,400 units @ $2.20
Purchase, March 16 280 units @ $2.25
Inventory, March 31 520 units
The value assigned to ending inventory if Niles uses LIFO is
a. $1,160.
b. $1,104.
c. $1,092.
d. $1,168.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
26
Solution: (400 × $2.10) + (120 × $2.20) = $1,104.
10. Niles Co. has the following data related to an item of inventory:
Inventory, March 1 400 units @ $2.10
Purchase, March 7 1,400 units @ $2.20
Purchase, March 16 280 units @ $2.25
Inventory, March 31 520 units
The value assigned to cost of goods sold if Niles uses FIFO is
a. $1,160.
b. $1,104.
c. $3,448.
d. $3,392.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control: Financial Statement
Preparation, IFRS: None
Solution: 400 + 1,400 + 280 – 520 = 1,560 units; (400 × $2.10) + (1,160 × $2.20) = $3,392.
11. Emley Company has been using the LIFO method of inventory valuation for 10 years since it began
operations. The company’s 2025 ending inventory was $60,000, but it would have been $90,000 if FIFO
had been used. Thus, if FIFO had been used, Emley's income before income taxes would have been
a. $30,000 greater over the 10-year period.
b. $30,000 less over the 10-year period.
c. $30,000 greater in 2025.
d. $30,000 less in 2025.
Ans: A, LO: 3, Bloom: AN, Difficulty: Difficult, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution: ($90,000 – $60,000) = $30,000.
12. Zahler Company had the following transactions for the month of June:
Purchases Sales
June 1 (balance) 3,200 @ $3.20 June 2 2,400 @ $5.50
3 8,800 @ 3.10 6 6,400 @ 5.50
7 4,800 @ 3.30 9 4,000 @ 5.50
15 7,200 @ 3.40 10 1,600 @ 6.00
22 2,000 @ 3.50 18 5,600 @ 6.00
25 800 @ 6.00
Assuming that perpetual inventory records are kept in units only, the ending inventory on a LIFO basis
is
a. $16,440.
b. $16,640.
27
c. $17,160.
d. $17,880.
Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution: Available (purchases) = 26,000 units; Sales = 20,800 units; EI = 26,000 – 20,800 = 5,200 units; (3,200
× $3.20) + (2,000 × $3.10) = $16,440.
13. . Pierson Corporation owned 15,000 shares of Hunter Corporation. These shares were purchased in 2022
for $135,000. On November 15, 2026, Pierson declared a property dividend of one share of Hunter for
every ten shares of Pierson held by a stockholder. On that date, when the market price of Hunter was
$28 per share, there were 135,000 shares of Pierson outstanding. What gain and net reduction in retained
earnings would result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $378,000
b. $0 $121,500
c. $256,500 $121,500
d. $256,500 $34,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution: ($135,000 ÷ 10)  $28 = $378,000; [$28 – ($135,000 ÷ 15,000)]  13,500 = $256,500; $378,000 –
$256,500 = $121,500.
14. Stinson Corporation owned 40,000 shares of Matile Corporation. These shares were purchased in 2022
for $360,000. On November 15, 2026, Stinson declared a property dividend of one share of Matile for
every ten shares of Stinson held by a stockholder. On that date, when the market price of Matile was $28
per share, there were 360,000 shares of Stinson outstanding. What gain and net reduction in retained
earnings would result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $324,000
b. $0 $1,008,000
c. $684,000 $144,000
d. $684,000 $324,000
28
Solution: ($360,000 ÷ 10)  $28 = $1,008,000; [$28 – ($360,000 ÷ 40,000)]  36,000 = $684,000; $1,008,000 –
$684,000 = $324,000.
15. Winger Corporation owned 900,000 shares of Fegan Corporation stock. On December 31, 2026, when
Winger's account “Equity Investments (Fegan Corporation”) had a carrying value of $5 per share,
Winger distributed these shares to its stockholders as a dividend. Winger originally paid $8 for each
share. Fegan has 5,000,000 shares issued and outstanding, which are traded on a national stock
exchange. The quoted market price for a Fegan share was $7 on the declaration date and $9 on the
distribution date.
What would be the reduction in Winger's stockholders' equity as a result of the above transactions?
a. $3,600,000
b. $4,500,000
c. $7,200,000
d. $8,100,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution: (900,000  $7) – [($7 – $5)  900,000] = $4,500,000.
16. Gibbs Corporation owned 20,000 shares of Oliver Corporation’s $5 par value common stock. These
shares were purchased in 2022 for $225,000. On September 15, 2026, Gibbs declared a property
dividend of one share of Oliver for every ten shares of Gibbs held by a stockholder. On that date, when
the market price of Oliver was $35 per share, there were 180,000 shares of Gibbs outstanding. What
NET reduction in retained earnings would result from this property dividend?
a. $202,500
b. $630,000
c. $213,750
d. $427,500
Ans: A, LO: 3, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution: (180,000 ÷ 10)  $35 = $630,000; $630,000 – [$630,000 – ($225,000  18/20)] = $202,500.
17. Melvern’s Corporation has an investment in 20,000 shares of Wallace Company common stock with a
cost of $872,000. These shares are used in a property dividend to stockholders of Melvern’s. The
property dividend is declared on May 25 and scheduled to be distributed on July 31 to stockholders of
record on June 15. The fair value per share of Wallace stock is $63 on May 25, $66 on June 15, and $68
on July 31. The net effect of this property dividend on retained earnings is a reduction of
a. $1,360,000.
b. $1,320,000.
c. $1,260,000.
d. $ 872,000.
29
Solution: (20,000  $63) = $1,260,000; $1,260,000 – ($1,260,000 – $872,000) = $872,000.
18. Hernandez Company has 560,000 shares of $10 par value common stock outstanding. During the year,
Hernandez declared a 15% stock dividend when the market price of the stock was $30 per share. Four
months later Hernandez declared a $.50 per share cash dividend. As a result of the dividends declared
during the year, retained earnings decreased by
a. $2,842,000.
b. $1,260,000.
c. $462,000.
d. $ 420,000.
Solution:560,000  .15 × $30 = $2,520,000; $2,520,000 + (560,000  1.15  $.50) = $2,842,000.
19. On June 30, 2026, when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as
follows:
Capital stock (par value $50; 60,000 shares issued) $3,000,000
Premium on capital stock 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, capital stock would be
a. $3,000,000.
b. $3,600,000.
c. $6,000,000.
d. $7,800,000.
Solution: (60,000  $50) + $3,000,000 = $6,000,000.
20. The stockholders' equity section of Gunkel Corporation as of December 31, 2025, was as follows:
Common stock, par value $2; authorized 20,000 shares;
issued and outstanding 10,000 shares $ 20,000
Paid-in capital in excess of par 30,000
Retained earnings 85,000
$135,000
30
On March 1, 2026, the board of directors declared a 15% stock dividend, and accordingly 1,500
additional shares were issued. On March 1, 2026, the fair value of the stock was $6 per share. For the
two months ended February 28, 2026, Gunkel sustained a net loss of $15,000.
What amount should Gunkel report as retained earnings as of March 1, 2026?
a. $61,000.
b. $67,000.
c. $71,000.
d. $77,000.
Solution:$85,000 – $15,000 – (1,500  $6) = $61,000.
21.The stockholders' equity of Howell Company at July 31, 2026 is presented below:
Common stock, par value $20, authorized 400,000 shares;
issued and outstanding 160,000 shares $3,200,000
Paid-in capital in excess of par 160,000
$4,010,000
On August 1, 2026, the board of directors of Howell declared a 15% stock dividend on common stock,
to be distributed on September 15th. The market price of Howell's common stock was $70 on August 1,
2026, and $76 on September 15, 2026. What is the amount of the debit to retained earnings as a result of
the declaration and distribution of this stock dividend?
a. $ 960,000.
b. $1,680,000.
c. $1,824,000.
d. $ 1,200,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution:160,000  .15  $70 = $1,680,000.
22. On January 1, 2026, Dodd, Inc. declared a 10% stock dividend on its common stock when the fair value
of the common stock was $30 per share. Stockholders' equity before the stock dividend was declared
consisted of:
Common stock, $10 par value, authorized 200,000 shares;
issued and outstanding 120,000 shares $1,200,000
Additional paid-in capital on common stock 150,000
Total stockholders' equity $2,050,000
What was the effect on Dodd’s retained earnings as a result of the above transaction?
31
a. $180,000 decrease
b. $360,000 decrease
c. $600,000 decrease
d. $300,000 decrease
Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution:120,000  .10  $30 = $360,000.
23.On January 1, 2026, Culver Corporation had 110,000 shares of its $5 par value common stock outstanding.
On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1,
when the market price of the stock was $15, the corporation declared a 15% stock dividend to be issued
to stockholders of record on December 16, 2026 What was the impact of the 15% stock dividend on the
balance of the retained earnings account?
a. $82,500 decrease
b. $225,000 decrease
c. $247,500 decrease
d. No effect
Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution:100,000  .15  $15 = $225,000.
24. At the beginning of 2026, Flaherty Company had retained earnings of $400,000. During the year
Flaherty reported net income of $100,000, sold treasury stock at a “gain” of $36,000, declared a cash
dividend of $60,000, and declared and issued a small stock dividend of 3,000 shares ($10 par value)
when the fair value of the stock was $20 per share. The amount of retained earnings available for
dividends at the end of 2026 was
a. $380,000.
b. $410,000.
c. $416,000.
d. $446,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution:$400,000 + $100,000 – $60,000 – (3,000  $20) = $380,000.
25. Masterson Company has 490,000 shares of $10 par value common stock outstanding. During the year
Masterson declared a 15% stock dividend when the market price of the stock was $36 per share. Three
months later Masterson declared a $.60 per share cash dividend. As a result of the dividends declared
during the year, retained earnings decreased by
32
a. $2,984,100.
b. $2,646,000.
c. $485,100.
d. $462,000.
Ans: A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Solution: (490,000  .15  $36) + (490,000  1.15  $.60) = $2,984,100.
26. Layne Corporation had the following information in its financial statements for the years ended 2025
and 2026:
Cash dividends for the year 2026 $ 10,000
Net income for the year 2026 93,000
Market price of stock, 12/31/25 10
Market price of stock, 12/31/26 12
Common stockholders’ equity, 12/31/25 1,600,000
Common stockholders’ equity, 12/31/26 1,980,000
Outstanding shares, 12/31/26 160,000
Preferred dividends for the year 2026 15,000
What is the payout ratio for Layne Corporation for the year ended 12/31/2026?
a. 18.1%
b. 16.1%
c. 12.8%
d. 10.8%
Solution:$10,000 ÷ ($93,000 – $15,000) = 12.8%.
11. Example Questions:

a. The beginning inventory of the current year is overstated by €5,000 and closing inventory is
overstated by €12,000. These errors will cause the net income for the current year to be .
i. A. overstated by €17,000
ii. B. understated by €12,000
iii. C. overstated by €7,000
iv. D. understated by €7,000
 Correct Response: C
b. There are five main types of current assets. Which one of the following is not a current asset?
i. A. Cash and equivalents
ii. B. Accounts receivable
33
iii. C. Deferred income
iv. D. Prepaid expense
34

ACCOUNTING

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACCOUNTING

Uploaded by

Copyright:

Available Formats

1.

6. Revenue generally should be recognized

8. Product costs include each of the following except

10. The accounting principle of expense recognition is best demonstrated by

13. Which of the following is a component of the revenue recognition principle?

1.2 Balance sheet

3. Balance sheet information is useful for all of the following except to

4. Balance sheet information is useful for all of the following except

1.3 Inventory account

3. In a perpetual inventory system, the inventory account

4. Which of the following is a characteristic of a perpetual inventory system?

5. Which of the following is a characteristic of a periodic inventory system?

6. When a perpetual inventory system is used,

8. Goods in transit which are shipped f.o.b. shipping point should be

9. Goods in transit which are shipped f.o.b. destination should be

Accounts Receivable (Yusado) 8,000

- Allowance Method for Uncollectible Accounts:

Allowance for Doubtful Accounts 10,000

- Adjusting Entry to Record Estimate Credit Balance Before Adjustment

Allowance for Doubtful Accounts 25,810

2.3. Collectable accounts

Sales Revenue 100

o Sale returns and allowance

3. Which of the following should be recorded in Accounts Receivable?

5. Trade discounts are

7. Why do companies provide trade discounts?

8. The accounting for cash discounts and trade discounts are

12. All of the following are types of variable consideration except

11. Example Questions:

You might also like