TEST BANK ACCOUNTING TOOLS FOR BUSINESS DECISION MAKING 5TH EDITION KIMMELKimAcct 5e TB CE a

To allocate the cost of the asset to expense in the accounting periods in which the asset was used to generate revenue ca. Lansing Company paid $1,500 for a 12-month insurance policy and

COMPREHENSIVE EXAMINATION A

(Chapters 1 - 5)

Approximate

A - I Multiple Choice 20 13

A - II Matching 12 8

A - III Adjusting Entries 15 10

A - IV Financial Analysis 12 12

A - V Journal Entries 18 14

A - VI Multiple-Step Income Statement 14 12

A - VII Assumptions and Principles 9 10

Checking Work 11

90

Problem A - I — Multiple Choice (20 points)

Circle the one best answer

1 Which statement is false concerning accounting principles in the United States?

a The Securities and Exchange Commission oversees U.S financial markets and accounting standard-setting bodies

b The International Accounting Standards Board issues accounting standards that must

be followed by all companies that engage in international business

c The primary accounting standard-setting body in the U.S is the Financial Accounting Standards Board

d The Public Company Accounting Oversight Board determines auditing standards

2 Wise Company purchased 10 calculators for $20 each, one-half on May 14, and the other half on May 22, all on account Wise sold 8 of the calculators on May 25 for $30 each of which It received payment for 6 of them on May 30 and payment for the other 2 on June 4 Wise paid the supplier for 5 of the calculators on May 21 How much revenue should Wise recognize during May?

a $120

b $180

c $240

d $80

3 A corporation began the month of May with $58,000 of obligations and $180,000 of economic resources Stockholders’ equity increased by $22,000 during May The company paid $11,000 of dividends and generated revenue totaling $145,000 How much

is total stockholders’ equity at the end of May?

a $33,000

b $144,000

c $122,000

d $111,000

4 Which one of the following is a contra account with a debit balance?

a Depreciation Expense

b Accumulated Depreciation

c Sales Discounts

d Cost of Goods Sold

5 Which one of the following is not a contribution of the general journal to the recording

process?

a It discloses the complete effect of a transaction in one place

b It proves that all debits and credits have been posted

c It provides a chronological record of transactions

d It helps to prevent or locate errors

6 What is the purpose of recording depreciation on plant assets?

a To adjust the asset amount on the balance sheet to fair value

b To allocate the cost of the asset to expense in the accounting periods in which the asset was used to generate revenue

c To properly apply the cost principle

d To provide funds for the replacement of the asset when it reaches the end of its useful life

7 Lansing Company paid $1,500 for a 12-month insurance policy and increased the

Prepaid Insurance account upon payment on November 1, 2014 Lansing forgot to make

an adjusting entry at the end of its fiscal year on December 31, 2014 Which of the

following is an effect of the error?

a Assets will be overstated and net income will be understated

b Expenses will be overstated and assets will be understated

c Assets will be understated and net income will be understated

d Expenses will be understated and assets will be overstated

8 Which one of the following accounts is closed at the end of an accounting period?

a Retained Earnings

b Dividends

c Unearned Sales Revenue

d Accumulated Depreciation

9 Analysts determined that Better Buy has the ability to pay its obligations expected to come due within the next year What did the analysts measure?

a Liquidity

b Profitability

c Solvency

d Cash on hand

10 Mason Electronics determined that it generated $1.40 of cash provided by operating activities compared to each $1.00 of net income What did Mason calculate?

a Profit margin

b Quality of earnings

c Return on assets

d Gross profit rate

Problem A - II — Matching (12 points)

Match the items below by entering the appropriate letter in the space

_1 Income summary A An amount paid in advance of when the work

will be performed

2 Trial balance B The price received to sell an asset or settle a

liability _3 Liabilities C Company will remain in business long enough

to carry out its existing objectives

_ 4 Revenue recognition principle D The recognition of amounts are recorded in the

period in which they are incurred

_ 5 Solvency E An economic entity that is not a separate legal

entity

_ 6 Fair value F A chronological record listing of all transactions

recorded by a company

G Distributions of profits to owners

_ 7 Unearned revenues

H A contra revenue account

I The recognition of efforts (expenses) at the same time as accomplishments (revenues)

_ 8 Ledger

_ 9 Journal J Creditors’ claims on total assets

K The ability of a company to pay obligations that are expected to become due within the next year

L Contains all of a company’s accounts and tracks the balances of each

M The ability of a company to survive over a long period of time

N Noncurrent assets that do not have physical substance

P A proof of the mathematical equality of debits and credits after posting

Q Economic resources that are expected to provide future benefits

_10 Assets

11 Accrual

12 Dividends

R Requires that companies recognize amounts in the accounting period in which the amounts are earned

S A temporary account used in closing revenue and expense accounts

Problem A - III — Adjusting Entries (15 points)

The following information for Station Products is available on June 30, 2014, the end of a monthly accounting period Prepare the necessary adjusting journal entries for Station Products for the month of June for each situation given Adjusting entries are recorded at the end of every quarter prior to the preparing financial statements You may omit journal entry explanations

1 Station purchased a 1-year insurance policy on June 1, 2014, and debited an asset account for $3,600

2 On May 1, 2014, a tenant in an office building owned by Station Products paid $6,600, which represents three months' rent in advance The amount received was credited to the Unearned Rent Revenue account

3 On June 1, 2014, the balance in the Supplies account was $420 During June, office supplies costing $840 were purchased and half was paid in cash, with the balance on account A physical count of office supplies at June 30 revealed that there was $125 of supplies still on hand

4 On March 31, 2014, Station Products purchased equipment for $30,000 The company calculated annual depreciation to be $6,000

5 Station Products has 7 employees who earn $120 per day, and 3 employees who earn $200 per day, respectively Employees are paid each Friday for a five-day work week that begins each Monday June 30 is a Thursday

Problem A - IV — Financial Analysis (12 points)

The following data are taken from the financial statements of JB Edwards, Inc The average number of shares of common stock outstanding for the year was 4,000 The following data are in are provided:

Accounts payable $ 16,000 Net sales $294,000 Accounts receivable 21,000 Other current liabilities 11,000 Cash 42,000 Salaries and wages payable 3,000 Gross profit 114,000 Total stockholders’ equity 132,000

Instructions: Compute the following:

1 Current ratio

2 Debt to assets ratio

3 Earnings per share

4 Profit margin

Problem A - V — Journal Entries (18 points)

Instructions: Prepare the necessary general journal entries for the month of October for

DynaCore Retail for each situation given below DynaCore uses a perpetual inventory system Oct 5 Paid cash of $12,600 for operating expenses that were incurred and properly recorded

in the previous period

9 Purchased merchandise for $22,000 on account Credit terms: 3/10, n/30

12 Paid a freight bill of $110 for merchandise purchased on October 9

17 Paid for merchandise purchased on October 9 The company takes all discounts to which it is entitled

20 Sold merchandise for $8,000 to Rattles Distribution on account The cost of the

merchandise sold was $3,200 Credit terms: 2/10, n/30

26 Issued a credit memo to Rattles Distribution for $300 for merchandise returned from the sale on October 20 The cost of the merchandise returned was $180

Problem A - VI — Multiple-Step Income Statement (14 points)

Below is a partial listing of the adjusted account balances of Barnett Cabinets at year-end on December 31, 2014:

Selling expenses (includes depreciation) 48,000

Accumulated depreciation—Building 15,000

Administrative expenses (includes depreciation) 65,000

Instructions: Using whatever data you believe appropriate, prepare a multiple-step income

statement for the Barnett Cabinets for the year ended December 31, 2014

Problem A - VII — Assumptions and Principles (9 points)

Instructions: Each of the situations below may illustrate a violation of an accounting assumption

or principle Indicate the assumption or principle that is most clearly violated using the following codes:

Codes

A Economic entity assumption G Materiality

B Monetary unit assumption H Full disclosure principle

C Periodicity assumption I Cost principle

D Going concern assumption J Comparability

E Revenue recognition principle K No violation of operating guidelines

F Expense recognition principle

Situations

1 Dollar Saver has 20,000 Model 44G cell phones in inventory at a cost of $64 each

Due to the advancement of technology and newer models available, only 4 of Model 44G phones were sold last month To avoid recognizing a loss on writing off this inventory, Dollar Saver has decided not to issue financial statements until at least half

of the remaining Model 44G phones have been sold

2 Homer Bates, president of Bates Machinery, took an iPod Touch out of inventory to

use as a birthday present for his son The cost was debited to Supplies Expense 3 Wilson, Inc made no entry to record depreciation on its equipment for 2014

4 Stockholders invested an additional $43,000 cash in the business in 2014 This

investment was reported as revenue on the 2014 income statement

5 Toys, Inc is being liquidated because it has sustained losses for the past few years It

continues to depreciate its assets and prepare financial statements on the cost basis 6 Counters Galore values its pre-made granite it has on hand at its expected selling

price since this is the amount the company will receive from customers when it sells the counters to customers The granite's expected selling price exceeds the price Counters Galore paid for it

7 Rand Enterprises developed a fuel cell that will run on sea water, while providing

equal performance to other fuels Rand has chosen to defer the release of the new product to the public until it has enough capital to fund the production

8 Darzion Products reports its inventory based on euros for its stores in Great Britain

when issuing financial statements for British banks when loans are needed

9 Dalani Water bought 700 new desk chairs, one for each of its employees Each chair

cost $180 and was decorated with the company's logo Dalani’s policy is to expense all assets costing less than $200 Dalani recorded the cost of the chairs as an expense due to its policy

Solutions — Comprehensive Examination A

Problem A - I — Solution

Problem A - II — Solution

Problem A - III — Solution

1 Insurance Expense 300

Prepaid Insurance 300

2 Unearned Rent Revenue 2,200

Rent Revenue 2,200

3 Supplies Expense 1,135

Supplies 1,135

4 Depreciation Expense 500

Accumulated Depreciation—Equipment 500

5 Salaries and Wages Expense 5,760

Salaries and Wages Payable 5,760

Problem A - IV — Solution

1 Current ratio = Current assets ÷ Current liabilities

= ($42,000 + $21,000) ÷ ($16,000 + $11,000 + $3,000) = 2.1 : 1

2 Debt to assets ratio = Total debt ÷ Total assets

= ($240,000 – $132,000) ÷ $240,000 = 45.0%

3 Earnings per share = (Net income – Preferred stock dividends) ÷ Average number of common shares outstanding = $20,800 ÷ 4,000 = $5.20 per share

4 Profit margin = Net income ÷ Sales

= $20,800 ÷ $294,000 = 7.1%

Problem A - V — Solution

Oct 5 Accounts Payable 12,600

Cash 12,600 Oct 9 Inventory 22,000

Accounts Payable 22,000

Oct 12 Inventory 110

Cash 110

Oct 17 Accounts Payable 22,000 Inventory 660

Cash 21,340 Oct 20 Accounts Receivable 8,000 Sales 8,000 Cost of Goods Sold 3,200 Inventory 3,200 Oct 26 Sales Returns and Allowances 300

Accounts Receivable 300

Inventory 180

Cost of Goods Sold 180

Problem A - VI — Solution Barnett Cabinets Income Statement For Year Ended December 31, 2014 Sales revenues Sales revenue $418,000 Less: Sales discounts 5,000 Net sales 413,000 Cost of goods sold 256,000 Gross profit 157,000 Operating expenses Selling expenses $48,000 Administrative expenses 65,000 Total operating expenses 113,000 Income from operations 44,000 Other revenues and gains Interest revenue 500

Other expenses and losses

Interest expense 3,000 (2,500) Net income $ 41,500

Problem A - VII — Solution

5 D