ACCT 310 section 6382Fall 2011

Midterm Examination Chapters 1-5 & 7

Student Name: ____________________________________

Multiple Choice (1 point each)

1. What is a major objective of financial reporting?

a) Provide information that clearly portrays the economic resources of an enterprise.

b) Provide information that is useful to the Internal Revenue Service in determining the amount of federal income taxes payable.

c) Provide information that is comprehensible only by sophisticated investors.

d) Provide information that is useful in assessing the amounts and timing of revenue.

2. What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?

a) The SEC reviews financial statements for compliance.

b) The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.

c) The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.

d) The SEC coordinates with the AICPA in establishing accounting standards.

3. What would be an advantage of having all countries adopt and follow the same accounting standards?

a) Consistency.

b) Comparability.

c) Lower preparation costs.

d) B and C.

4. According to Statement of Financial Concepts No. 2, neutrality is an ingredient of the primary quality of:

a) Reliability.

b) Relevance.

c) Reliability and Relevance.

d) Neither Reliability nor Relevance.

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 customer.

c) The entire amount receivable has been collected from the customer and there remains no further possible liability.

d) None of the above.

6. When should an expenditure be recorded as an asset rather than an expense?

a) Never.

b) Always.

c) If the amount is material.

d) When future benefit exists.

7. According to the FASB’s conceptual framework, which of the following relates to both relevance and reliability?

a) Consistency.

b) Verifiability.

c) Consistency and Verifiability.

d) Neither Consistency nor Verifiability.

8. How do these prepaid expenses expire?

Rent Suppliesa) Through use and consumption Through use and consumption

b) Through use and consumption With the passage of time

c) With the passage of time With the passage of time

d) With the passage of time Through use and consumption

9. Unearned revenue on the books of one company is likely to be

a) A prepaid expense on the books of the company that made the advance payment.

b) An accrued expense on the books of the company that made the advance payment.

c) An unearned revenue on the books of the company that made the advance payment.

d) An accrued revenue on the books of the company that made the advance payment.

10. Maso Company recorded journal entries for the issuance of common stock for $40,000, the payment of $13,000 on accounts payable, and the payment of salaries expense of $21,000. What net effect do these entries have on owners’ equity?

a) Increase of $19,000.

b) Increase of $40,000.

c) Increase of $27,000.

d) Increase of $6,000.

11. Allen Corp’s liability account balances at June 30, 2011 included a 10% note payable in the amount of $2,400,000. The note is dated October 1, 2009 and is payable in three equal annual payments of $800,000 plus interest. The first interest and principle payment was made on October 1, 2010. In Allen’s June 30, 2011 balance sheet, what amount should be reported and accrued as interest payable for this note?

a) $40,000.

b) $180,000.

c) $60,000.

d) $120,000.

12. Olsen Company paid or collected during 2010 the following items:Insurance premiums paid $10,400Interest collected 33,900Salaries paid 120,200The following balances have been excerpted from Olsen’s balance sheets:

December 31, 2010 December 31, 2009Prepaid insurance $1,200 $1,500Interest receivable 3,700 2,900Salaries payable 12,300 10,600

The insurance expense on the income statement for 2010 was:

a) $10,100.

b) $7,700.

c) $10,700.

d) $13,100.

13. For the year ended December 31, 2010, Transformers Inc. reported the following:

Net income $60,000Preferred dividends declared 10,000Common dividend declared 2,000Unrealized holding loss, net of tax 1,000Retained earnings 80,000Common stock 40,000Accumulated Other Comprehensive Income, Beginning Balance 5,000

What would Transformers report as its ending balance of Accumulated Other Comprehensive Income?

a) $5,000.

b) $6,000.

c) $1,000.

d) $4,000.

14. Which of the following items would be reported at its gross amount on the face of the income statement?

a) Extraordinary loss.

b) Unusual gain.

c) Cumulative effect of a change in accounting principle.

d) Prior period adjustment.

15. Dole Company, with an applicable income tax rate of 30%, reported net income of $210,000. Included in income for the period was an extraordinary loss from flood damage of $30,000 before deducting the related tax effect. The company’s income before taxes and extraordinary items was:

a) $240,000.

b) $330,000.

c) $231,000.

d) $300,000.

16. Chase Corp. had the following infrequent transactions during 2010:

A $150,000 gain from selling the only investment Chase has ever ownedA $210,000 gain on the sale of equipmentA $70,000 loss on the write-down of inventories

In its 2010 income statement, what amount should Chase report as total infrequent net gains that are not considered extraordinary?

a) $140,000.

b) $290,000.

c) $80,000.

d) $360,000.

17. Working capital is:

a) Capital which has been reinvested in the business.

b) Unappropriated retained earnings.

c) Current assets less current liabilities.

d) None of these.

18. Presented below are data for Antwerp Corp.

2010 2011 2012Assets, January 1 $2,800 $3,360 ?Liabilities, January 1 1,680 ? 2,016Stockholders’ Equity, January 1 ? ? 2,100Dividends 560 420 476Common Stock 504 448 500Stockholders’ Equity, December 31 ? ? 1,596Net income 560 448 ?

Stockholders’ Equity at January 1, 2010 is:

a) $1,624.

b) $504.

c) $560.

d) $1,120.

19. A general description of the depreciation methods applicable to major classes of depreciable assets:

a) Is needed in financial reporting when company policy differs from income tax policy.

b) Is not essential to a fair presentation of financial position.

c) Is not a current practice in financial reporting.

d) Should be included in corporate financial statements or notes thereto.

20. Stine Corp.’s trial balance reflected the following account balances at December 31, 2010:

Accounts receivable, net $24,000Trading securities 6,000Accumulated depreciation on equipment and furniture 15,000Cash 11,000Inventory 30,000Equipment 25,000Patent 4,000Prepaid expenses 2,000Land held for future business site 18,000

In Stine’s December 31, 2010 balance sheet, the current assets total is:

a) $77,000

b) $90,000

c) $73,000

d) $82,000

21. Under which section of the balance sheet is “cash restricted for plant expansion” reported?

a) Stockholders’ equity.

b) Current assets.

c) Non-current assets.

d) Current liabilities.

22. Which of the following methods of determining annual bad debt expense best achieves the matching concept?

a) Percentage of average accounts receivable.

b) Percentage of ending accounts receivable.

c) Direct write-off.

d) Percentage of sales.

23. Equestrian Roads accepted a customer’s $50,000 zero-interest-bearing six-month note payable in a sales transaction. The product sold normally sells for $46,000. If the sale was made on June 30, how much interest revenue from this transaction would be recorded for the year ending December 31?

a) $2,000.

b) $4,000.

c) $5,000.

d) $0. Exercises & Problems

24. Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Assets Distributions to owners ExpensesLiabilities Comprehensive income GainsEquity Revenues LossesInvestments by owners

Identify the element or elements associated with the 12 items below (a through l). (12 points)(a) Arises from peripheral or incidental transactions(b) Obligation to transfer resources arising from a

past transaction(c) Increases ownership interest(d) Declares and pays cash dividend to owners(e) Increases net assets in a period from nonowner

sources(f) Items characterized by service potential or future

economic benefit(g) Equals increase in assets less liabilities during the

year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity’s ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company’s own stock.

(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

25. Flynn Design Agency was founded by Kevin Flynn in January 2006. Presented below is the adjusted trial balance as of December 31, 2010.

Flynn Design AgencyAdjusted Trial Balance

December 31, 2010Debit Credit

Cash $10,126Accounts Receivable 21,626Art Supplies 5,126Prepaid Insurance 2,626Printing Equipment 60,126Accumulated Depreciation 35,126Accounts Payable 8,126Interest Payable 150Notes Payable 5,000Unearned Advertising Revenue 5,726Salaries Payable 1,479Common Stock 10,126Retained Earnings 3,626Advertising Revenue 58,626Salaries Expense 12,426Insurance Expense 1,029Interest Expense 500Depreciation Expense 7,000Art Supplies Expense 3,400Rent Expense 4,000

127,985 127,985

Prepare a balance sheet at December 31 and an income statement and a statement of retained earnings for the year ended December 31. (18 points)

26. Corinne Dunbar, M.D. , maintains the accounting records of Dunbar Clinic on a cash basis. During 2010, Dr. Dunbar collected $144,305 from her patients and paid $55,608 in expenses. At January 1, 2010, and December 31, 2010, she had accounts receivable, unearned service revenue, accrued expenses, and prepaid expenses as follows:

January 1, 2010 December 31, 2010Accounts Receivable 9,255 16,020Unearned Service Revenue 2,961 4,131Accrued Expenses 3,445 2,460Prepaid Expenses 1,980 3,242

How much revenue under the accrual basis did Corinne Dunbar earn during 2010? (3 points)

27. At December 31, 2009, Schroeder Corporation had the following stock outstanding.

8% cumulative preferred stock, $100 par, 109,203 shares $10,920,300Common stock, $5 par, 4,058,960 shares $20,924,800

During 2010, Schroeder did not issue any additional stock. The following also occurred during 2010.

Income from continuing operations before taxes $30,603,500Discontinued operations (loss before taxes) 3,315,600Preferred dividends declared 873,624Common dividends declared 2,380,300Effective tax rate 35%

Compute earnings per share data as it should appear in the 2010 income statement of Schroeder Corporation. (6 points)

28. The major classifications of activities reported in the statement of cash flows are operating, investing and financing. Classify each of the transactions listed below as:

1. Operating activity – add to net income.2. Operating activity – deduct from net income.3. Investing activity.4. Financing activity.5. Reported as significant noncash activity.

(13 points)

The transactions are as follows:(a) Issuance of capital stock(b) Purchase of land and building(c) Redemption of bonds(d) Sale of equipment(e) Depreciation of machinery(f) Amortization of patent(g) Issuance of bonds for plant assets(h) Payment of cash dividends(i) Exchange of furniture for office equipment(j) Purchase of treasury stock(k) Loss on sale of equipment(l) Increase in accounts receivable during the year(m)Decrease in accounts payable during the year

29. Presented below are a number of independent situations (numbered 1 through 5). For each situation, determine the amount that should be reported as cash. (10 points)

(1) Checking account balance $940,880; certificate of deposit $1,419,690; cash advance to subsidiary of $992,900; utility deposit paid to gas company $193.

(2) Checking account balance $512,870; an overdraft in special checking account at same bank as normal checking account of $21,730; cash held in bond sinking fund $209,170; petty cash fund $316; coins and currency on hand $1,450.

(3) Checking account balance $592,670; postdated check from customer $12,950; cash restricted due to maintaining compensating balance requirement of $107,570; certified check from customer of $9,850; postage stamps on hand $719.

(4) Checking account balance at bank $46,380; money market balance at mutual fund (has checking privileges) $51,040; NSF check received from customer $813.

(5) Checking account balance $719,830; cash restricted for future plant expansion $516,430; short-term treasury bills $185,340; cash advance received from customer $963 (not included in checking account balance); cash advance of $8,060 to company executive, payable on demand; refundable deposit of $28,980 paid to federal government to guarantee performance on construction contract.

30. Your accounts receivable clerk, Mary Herman, to whom you pay a salary of $1,500 per month, has just purchased a new Buick. You decided to test the accuracy of the accounts receivable balance of $95,940 as shown in the ledger. The following information is available for your first year in business:

(1) Collections from customers $231,600(2) Merchandise purchased $374,400(3) Ending merchandise inventory $105,300(4) Goods are marked to sell at 40% above cost

Compute an estimate of the ending accounts receivable balance from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account. (5 points)

31. Sandel Company reports that following financial information before adjustments.

Dr. Cr.Accounts Receivable $127,300Allowance for Doubtful Accounts $2,300Sales (all on credit) $900,000Sales Returns & Allowances $50,800

Prepare the journal entry to record Bad Debts Expense assuming Sandel Company estimates bad debts at 1% of net sales.Prepare the journal entry to record Bad Debts Expense assuming Sandel Company estimates bad debts at 5% of accounts receivable.(4 points)

32. At the end of 2010 Sorter Company has accounts receivable of $838,870 and an allowance for doubtful accounts of $43,280. On January 16, 2011, Sorter Company determined that its receivable from Ordonez Company of $6,550 will not be collected, and management authorized its write-off. (6 points)

a.) Prepare the journal entry for Sorter to write off the Ordonez receivable.

b.) What is the net realizable value of Sorter Company’s accounts receivable before the write-off of the Ordonez receivable?

c) What is the net realizable value of Sorter Company’s accounts receivable after the write-off of the Ordonez receivable?