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QUESTION 1 (40 marks)

Multiple-Choice questions: Choose the most appropriate answer for each question andmark your answers in MCQ scoring sheets provided. Each question carries 2 marks. Nomarks will be deducted for incorrect answers.

1. The Retained Earnings account has a debit balance of $1,200 before closing entriesare made. If total revenues for the period are $55,200, total expenses are $39,800,and dividends are $9,000, what is the ending balance in the Retained Earningsaccount after all closing entries are made?

A. $ 5,200.B.

$ 7,600.C.

$14,200.D. $16,600.

2. According to generally accepted accounting principles, a company's balance sheetshould show the company's assets at:

A. The cash equivalent value of what was given up or the asset received,whichever is more clearly evident.

B.

The market value of the asset received in all cases.C. The cash outlay only, even if part of the consideration given was

something other than cash.D. The best estimate of a certified internal auditor.

3. A company has several insurance policies in force with payments due at varioustimes. The following information refers to prepaid insurance and insurance expenseon two successive dates.

Dec. 31, Year 1 Dec. 31, Year 2

Prepaid insurance ............................................. $5,000 $4,250Insurance expense ............................................ 3,200 4,500

The amount of cash paid for insurance by this company in Year 2 was:

A. $5,000.

B.

$4,250.C.

$3,750.D. $4,500.

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4. If a period-end inventory amount is reported in error, it can cause a misstatement in:

A.

Gross profit.B.

Net income.C. Current assets.D.

All of the above.

5. A company markets a climbing kit and uses a perpetual inventory system to accountfor its merchandise. The beginning balance of the inventory and its transactionsduring January were as follows:

January 1: Beginning balance of 18 units at $13January 12: Purchased 30 units at $14January 19: Sold 24 units at $30 priceJanuary 20: Purchased 24 units at $17

January 27: Sold 27 units at $30 price

If the ending inventory is reported at $276, what inventory method was used?

A. LIFO method.B.

FIFO method.C. Weighted-average method.D.

Specific identification method.

6. A depreciation method in which a plant asset's depreciation charge for the period is

determined by applying a constant depreciation rate each period to the asset'sbeginning book value is called:

A. Book value depreciation.B.

Declining-balance depreciation.C.

Straight-line depreciation.D. Units-of-production depreciation.

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7. A company purchased a delivery van for $23,000 with a salvage value of $3,000 onSeptember 1. It has an estimated useful life of 5 years. Using the straight-linemethod, how much depreciation should the company recognize on December 31 ofthe year when the van is acquired?

A.

$1,000.B.

$1,333.C. $1,533.D. $4,000.

8. A company sold a machine that originally cost $100,000 for $60,000 cash. Theaccumulated depreciation on the machine was $40,000. The company shouldrecognize:

A.

$0 gain or loss.

B.

$20,000 gain.C. $20,000 loss.D. $40,000 loss.

9. The matching principle requires:

A. That expenses be ignored if their effect on the financial statements is lessimportant than revenues to the financial statement user.

B. The use of the direct write-off method for bad debts.C.

The use of the allowance method of accounting for bad debts.D.

That bad debts be disclosed in the financial statements.

10. If the balance of the Allowance for Doubtful Accounts account exceeds the amountof a bad debt being written off, the entry to record the write-off against theallowance account results in:

A. An increase in the expenses of the current period.B.

A reduction in current assets.C.

A reduction in equity.D. No effect on the expenses of the current period.

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11. 1n 1997 Wile Co. sold 2,000 microwave ovens for $150 each. The ovens carry atwo year warranty for repairs. Wile Co. estimates that the repair costs will average3% of the total selling price. What is the amount that would be recorded in thewarranty liability account during 1997?

A.

$9,000B.

$12,000C. $15,000D. No liability should be recorded until the ovens are brought back for

repairs.

12. Gabby Inc. issues a $50,000, 4 month note payable to First State Bank at interest of9% per year on November, 30th, 1995. The company follows a year end ofDecember 31

st. The interest expense in 1995 is:

A.

$1,500B. $375C. $1,125D.

$750.

Use the information below to answer questions 13, 14, and 15:

Zeff Inc. started business on January 1st1999 for the first time. The following

information is shown in its balance sheet and income statements for 1999 and 2000regarding investment in A Inc common stock, which Zeff purchased for trading purposes.The balance sheet at the end of 1999 for Zeff showed the value of investment in A Inc. to

be $45,000. The balance sheet at the end of 2000 for Zeff showed the value of

investment in A Inc to be $25,500. During 2000, Zeff Inc sold half the shares that itpurchased in 1999. During 1999 there was an unrealized gain relating to the investmentin A Inc shown in the income statement of Zeff Inc. of $15,000. Further the incomestatement of Zeff Inc for 2000 showed a realized loss of $2,500, relating to the investmentin A Inc. No new shares are purchased in 2000.

13. The cost of acquisition of shares in A Inc. is

A.

$45,000B. $60,000C. $30,000D.

$57,500

14.

Cash received for the sale of shares in A Inc. by Zeff Inc in 2000 is:

A. $22,500B.

$15,000C.

$30,000D. $20,000

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15. The unrealized gain or loss for 2000 relating to Investment in A Inc. is

A.

$2,500B.

$3,000C. $25,500D.

$5,500

16. Albert Inc. reported plant assets net of accumulated depreciation on 1/1/95 at$427,500 and $579,300 on 12/31/95. The income statement showed a depreciationof $38,700 for 1995 on plant assets. Albert Inc. purchased some plant assets in1995. They sold no plant assets. The amount shown in the cash flow statement asoutflow for purchase of plant assets in 1995 is:

A. $151,800B.

$38,700

C.

$190,500D. $1,006,800

17. Treasury stock balance on 1/1/98 is $45,000 and on 12/31/98 is 72,500. $57,000worth of treasury stock is purchased. During the year treasury stock was sold for$1,800 over cost. The cash received from sale of treasury stock is:

A.

$31,300B. $57,000C.

$27,700D.

$72,500

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Use the following information for questions 18, 19, and 20:

The following information is given to you regarding Wright Brothers Inc. for the yearended 12/31/97.Cash $50,000Average Accounts Receivable $150,000Average Inventory $150,000Equipment $300,000Accounts payable $120,000Bonds payable $350,000Average total assets $2,600,000Retained Earnings end of the year $190,000

Net income $160,000P/E ratio end of the year 30

Net profit margin ratio 15%Interest expense $0Operating expense $20,000

Average total liabilities $1,700,000# shares outstanding 70,000 shares

18. Taking a 365-day year, the days-sales-in-receivable for 1997, if sales are all forcredit is

A. 51 daysB.

65 daysC. 7 daysD.

95 days

19. The price per share at the end of the year (rounded up) is

A. $69 per shareB.

$99 per shareC.

$13 per shareD. $2 per share

20. The return to common shareholders (there are no preferred shareholders) is

A.

17.78%

B.

32.67%C. 6.15%D.

84.21%

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For the following questions, all answers must be written in the spaces provided for

each of the questions. Be concise in your answers and write legibly.

QUESTION 2 (30 marks)

Argon Inc. presents the following figures from its balance sheets.1996 1995

Cash $177,000 $78,000Accounts receivable 140,000 165,000Inventory 40,000 20,000Investments 52,000 74,000Equipment 298,000 240,000Accumulated depreciation (106,000) (89,000)Current liabilities 134,000 151,000Capital stock 160,000 160,000

Provision for bad debts 35,000 27,000Retained earnings 272,000 150,000

Investments were sold at a loss of $9,000. Cash dividend of $20,000 was declared andpaid. Equipment with original cost of $32,000 was sold for a gain of $3,000.Accumulated depreciation on equipment sold was $8,000. Actual bad debts are $2,000.

Required:

Prepare a statement of cash flows, showing clearly:

(a) the cash flows from operations (18 marks).

(b) the cash flows from investing (7 marks).

(c) the cash flows from financing (5 marks).

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Write your answers to Question 2 here.

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Answers to Question 2 (continued)

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QUESTION 3 (30 marks)

IBM issues a bond with a face value of $500, and a coupon interest rate of 8% paidannually, on 1/1/1998. The bond matures after 5 years and will be paid off at the end of 5years. The market expects a return of 6% for the risk level of the bond issued by IBM.

Required:

(a) Find the price of the bond (15 marks).

(b) Calculate the interest expense for the first two years using the straight-line methodand journalize (5 marks).

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QUESTION 3 (continued)

(c) Calculate the interest expense for the first two years using the effective interestrate method and journalize (10 marks).

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