AC 116 MIDTERM QUESTIONS AND ANSWERS

Chapter 8

1. A necessary element of internal control is a. databaseb. systems designc. systems analysisd. information and communication

ANS: D

2. An example of a preventive control is a. the use of a bank accountb. separation of the Purchasing Department and Accounting Department personnelc. bonding employees who handle cashd. accepting payment in currency only

ANS: B

3. Under the voucher system, every transaction is recorded at the time of a. requisitioningb. orderingc. incurringd. paying

ANS: C

4. A debit or credit memorandum describing entries in the depositor's bank account may be enclosed with the bank statement. An example of a credit memorandum is a. deposited checks returned for insufficient fundsb. a promissory note left for collectionc. a service charged. notification that a customer's check for $375 was recorded by the depositor as $735 on the

deposit ticket

ANS: B

5. Journal entries based on the bank reconciliation are required in the depositor's accounts for a. outstanding checksb. deposits in transitc. bank errorsd. book errors

ANS: D

6. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for the customer. What entry is required in the depositor's accounts?a. debit Notes Receivable; credit Cashb. debit Cash; credit Miscellaneous Incomec. debit Cash; credit Notes Receivabled. debit Accounts Receivable; credit Cash

ANS: C

7. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer. What entry is required in the depositor's accounts?a. debit Other Income; credit Cashb. debit Cash; credit Other Incomec. debit Cash; credit Accounts Receivabled. debit Accounts Receivable; credit Cash

ANS: D

8. Which of the following would be subtracted from the balance per bank on a bank reconciliation?a. Outstanding checksb. Deposits in transitc. Notes collected by the bankd. Service charges

ANS: A

9. Marcus Company developed the following reconciling information in preparing its September bank reconciliation:

Cash balance per bank, 9/30 $11,000Note receivable collected by bank 6,000Outstanding checks 9,000Deposits-in-transit 4,500Bank service charge 75NSF 1,200

Using the above information, determine the cash balance per books (before adjustments) for the Marcus Company.a. $9,775b. $15,725c. $15,500d. $1,775

ANS: D

10. A $100 petty cash fund contains $92 in petty cash receipts, and $6.50 in currency and coins. The journal entry to record the replenishment of the fund would include a a. credit to Petty Cash for $93.50b. credit to Cash for $92c. debit to Cash Short and Over for $1.50d. credit to Cash Short and Over for $1.50

ANS: C

11. In the normal operation of business you receive a check from a customer and deposit it into your checking account. With your bank statement you are advised that this check for $450 is “NSF”. The bank also informs you that due to the amount of activity on your business account the monthly service charge is $40.During a bank reconciliation:a. subtract both values from balance according to bank.b. add both values from balance according to books.c. add both values from balance according to bank.d. subtract both values from balance according to books.

ANS: D

Chapter 9

12. The receivable that is usually evidenced by a formal instrument of credit is a(n)a. trade receivable.b. note receivable.c. accounts receivable.d. income tax receivable.

ANS: B

13. The type of account and normal balance of Allowance for Doubtful Accounts isa. contra asset, creditb. asset, debitc. liability, creditd. expense, debite. expense, credit

ANS: A

14. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible?a. Uncollectible Accounts Expenseb. Accounts Receivablec. Allowance for Doubtful Accountsd. Interest Expense

ANS: B

15. An estimate based on an analysis of receivables shows that $780 of accounts receivables are uncollectible. The Allowance for Doubtful Accounts has a debit balance of $110. After preparing the adjusting entry at the end of the year, the balance in the Allowance for Doubtful Accounts is a. $110b. $780c. $670d. $890

ANS: D

16. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible?a. Uncollectible Accounts Expenseb. Accounts Receivablec. Allowance for Doubtful Accountsd. Interest Expense

ANS: B

17. The balance in Allowance for Doubtful Accounts must be carefully considered prior to the end of the year adjustment when applying which method?a. direct write-off methodb. estimate based on salesc. estimate based on an analysis of receivablesd. both (b) and (c)

ANS: C

18. An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require aa. debit to Bad Debt Expense for $4,200.b. debit to Bad Debts Expense for $3,000.c. debit to Bad Debts Expense for $1,800.d. credit to Allowance for Doubtful Accounts for $4,000.

ANS: C

19. A 60-day, 10% note for $8,000, dated April 15, is received from a customer on account. The face value of the note is a. $8,600b. $7,200c. $8,800d. $8,000

ANS: D

20. The journal entry to record a note received from a customer to apply on account is a. debit Notes Receivable; credit Accounts Receivableb. debit Accounts Receivable; credit Notes Receivablec. debit Cash; credit Notes Receivabled. debit Notes Receivable; credit Notes Payable

ANS: A

21. Pane Company receives a $3,000, 3-month, 6% promissory note from Dag Company in settlement of an open accounts receivable. What entry will Pane Company make upon receiving the note?a. Notes Receivable 3,000

Accounts Receivable—Dag Company 3,000b. Notes Receivable 3,045

Accounts Receivable—Dag Company 3,045c. Notes Receivable 3,045

Accounts Receivable—Dag Company 3,000 Interest Revenue 45

d. Notes Receivable 3,000 Interest Receivable 45 Accounts Receivable—Dag Company 3,000 Interest Revenue 45

ANS: A

22. A 60-day, 12% note for $10,000, dated May 1, is received from a customer on account. If the note is discounted on May 21 at 15%, the proceeds are a. $170b. $9,830c. $10,000d. $10,030

ANS: D

Chapter 10

23. Land acquired so it can be resold in the future is listed in the balance sheet as a(n) a. fixed assetb. current assetc. investmentd. intangible asset

ANS: C

24. A used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation costs of $5,000, and special acquisition fees of $2,000, would have a cost basis of a. $92,000b. $91,000c. $87,000d. $86,000

ANS: A

25. In a lease contract, the party who legally owns the asset is the a. lesseeb. lessorc. operatord. banker

ANS: B

26. Equipment with a cost of $160,000 has an estimated residual value of $10,000 and an estimated life of 5 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?a. $30,000b. $32,500c. $34,000d. $40,000

ANS: A

27. Equipment with a cost of $80,000, an estimated residual value of $5,000, and an estimated life of 15 years was depreciated by the straight-line method for 5 years. Due to obsolescence, it was determined that the useful life should be shortened by 5 years and the residual value changed to zero. The depreciation expense for the current and future years is a. $5,500b. $11,000c. $10,000d. $5,000

ANS: B

28. The proper journal entry to purchase a computer on account to be utilized within the business would be:a. Jan 2 Office Supplies 1,250.00

Accounts Payable 1,250.00b. Jan 2 Office Equipment 1,250.00

Accounts Payable 1,250.00c. Jan 2 Office Supplies 1,250.00

Accounts Receivable 1,250.00d. Jan 2 Office Equipment 1,250.00

Accounts Receivable 1,250.00

ANS: B29. The calculation for annual depreciation using the units-of-production method is

a. (initial cost/estimated output) * the actual yearly outputb. (depreciable cost / yearly output) * estimated outputc. depreciable cost / yearly outputd. (depreciable cost / estimated output) * the actual yearly output

ANS: D

30. A fixed asset with a cost of $42,000 and accumulated depreciation of $38,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $5,000, the cost basis of the new asset is a. $58,000b. $58,500c. $60,000d. $61,500

ANS: B

31. The Brock Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. In recording this transaction, Brock Company should record a. the new machinery at $16,700b. the new machinery at $12,700c. a gain of $1,500d. a loss of $1,500

ANS: D

32. On December 31, Reach It Batting Cages Company has decided to discard one of its batting cages. The initial cost of the equipment was $225,000 with an accumulated depreciation of $195,000. Depreciation has been taken up to the end of the year. The following will be included in the entry to record the disposal.a. Accumulated Depreciation Dr. $225,000b. Loss on Disposal of Asset $195,000c. Equipment Cr. $225,000d. Gain on Disposal of Asset $30,000

ANS: C

33. Which intangible assets are amortized over their useful life?a. trademarksb. goodwillc. patentsd. all of the above

ANS: C

Chapter 11

34. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable on an overdue account payable to Still Co. Assume that the fiscal year of Acme Co. ends June 30. Which of the following relationships is true?a. Acme is the creditor and credits Accounts Receivableb. Still is the creditor and debits Accounts Receivablec. Still is the borrower and credits Accounts Payabled. Acme is the borrower and debits Accounts Payable

ANS: D

35. The maturity value of a $40,000, 90-day, 6% note payable is a. $40,600b. $42,400c. $600d. $2,400

ANS: A

36. The journal entry a company uses to record the payment of a discounted note is a. debit Notes Payable and Interest Expense; credit Cashb. debit Notes Payable; credit Cashc. debit Cash; credit Notes Payabled. debit Accounts Payable; credit Cash

ANS: B

37. Gray County Bank agrees to lend the Starkwood Building Company $100,000 on January 1. Starkwood Building Company signs a $100,000, 9%, 9-month note. What entry will Starkwood Building Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

a. Notes Payable 106,750 Cash 106,750

b. Notes Payable 100,000Interest Payable 6,750 Cash 106,750

c. Interest Expense 6,750Notes Payable 100,000 Cash 106,750

d. Interest Payable 9,000Notes Payable 100,000 Cash 109,000

ANS: B

38. The total payroll of a business is usually significant for all the reasons below except a. employees are sensitive to payroll errors and irregularitiesb. payroll is subject to various federal and state regulationsc. businesses find it difficult to develop and maintain good internal controls on the payroll

system d. payroll and related payroll taxes have a significant effect on the net income of most

businesses

ANS: C

39. Prior to the last weekly payroll period of the calendar year, the cumulative earnings of employees A and B are $99,350 and $91,000 respectively. Their earnings for the last completed payroll period of the year are $850 each. The amount of earnings subject to social security tax at 6% is $100,000. All earnings are subject to Medicare tax of 1.5%. Assuming that the payroll will be paid on December 29, what will be the employer's total FICA tax for this payroll period on the two salary amounts of $850 each?a. $127.50b. $115.50c. $112.50d. $0

ANS: B

40. Manning Company has the following information for the pay period of December 15 - 31, 20xx.Gross payroll $15,000 Federal income tax withheld $3,000Social security rate 6% Federal unemployment tax rate .8%Medicare rate 1.5% State unemployment tax rate 5.4%

Salaries Payable would be recorded for a. $15,000b. $11,100c. $10,875d. $9,945

ANS: C

41. The following totals for the month of June were taken from the payroll register of ABC Company:

Salaries expense $13,000Social security and Medicare Taxes withheld 975Income Taxes withheld 2,600Retirement Savings 500

Salaries subject to federal and state unemployment taxes of 6.2 percent

4,000

The entry to record the accrual of employer’s payroll taxes would include aa. debit to Payroll Taxes Expense for $1,223b. credit to Social Security and Medicare Tax Payable for $1,950c. debit to Payroll Taxes Expense for $248d. Debit to Payroll Tax Expense for $975

ANS: A

42. An aid in internal control over payrolls that indicates employee attendance is a. "clock card"b. voucher systemc. payroll registerd. employee's earnings record

ANS: A

43. The journal entry a company uses to record pension rights that have not been funded for its salaried employees, at the end of the year is a. debit Salary Expense; credit Cashb. debit Pension Expense; credit Unfunded Pension Liabilityc. debit Pension Expense; credit Unfunded Pension Liability and Cashd. debit Pension Expense; credit Cash

ANS: B

44. During June, CircuitSound sold 800 portable CD players for $50 each. Each CD player cost CircuitSound $25 to purchase and carried a one-year warranty. If 10 percent typically need to be replaced over the warranty period, what amount should CircuitSound debit Product Warranty Expense for in June?a. $4,000b. $400c. $2,000d. $1,000

ANS: C

Chapter 13

45. Under the corporate form of business organizationa. ownership rights are easily transferred.b. a stockholder is personally liable for the debts of the corporation.c. stockholders’ acts can bind the corporation even though the stockholders have not been

appointed as agents of the corporation.d. stockholders wishing to sell their corporation shares must get the approval of other

stockholders.

ANS: A

46. The two ways that a corporation can be classified by ownership area. stock and non-stock.b. inside and outside.c. majority and minority.d. for profit or not-for-profit.

ANS: D

47. The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to a. Organizational Expensesb. Goodwillc. Common Stockd. Cash

ANS: C

48. Alliance Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to:a. Common Stock $14,000.b. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $4,000.c. Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $4,000.d. Common Stock $10,000 and Retained Earnings $4,000.

ANS: B

49. The journal entry to issue 1,000,000 shares of $5 par common stock for $6.25 per share on January 2nd would be:a. Jan 2 Cash 6,250,000

Common Stock 5,000,000 Paid-In Capital in Excess of Par - C/S 1,250,000

b. Jan 2 Cash 5,000,000 Common Stock 5,000,000

c. Jan 2 Cash 5,000,000 Paid-In Capital in Excess of Par - C/S 1,250,000 Common Stock 6,250,000

d. Jan 2 Cash 1,000,000 Common Stock 1,000,000

ANS: A

50. Which of the following is not a prerequisite to paying a cash dividend?a. formal action by the board of directorsb. market value in excess of par value per sharec. sufficient cashd. sufficient retained earnings

ANS: B

51. A corporation purchases 10,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders' equity?a. increase, $100,000b. increase, $250,000c. decrease, $100,000d. decrease, $250,000

ANS: D

52. Retained earnings a. is the same as contributed capitalb. cannot have a debit balancec. changes are summarized in the retained earnings statementd. over time will have a direct relationship with the amount of cash on hand if the

corporation is profitable

ANS: C

53. When a corporation completes a 3-for-1 stock split a. the ownership interest of current stockholders is decreasedb. the market price per share of the stock is decreasedc. the par value per share is decreasedd. b and c

ANS: D

54. If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is toa. decrease total assets and total stockholders’ equity.b. reduce the amount of retained earnings available for dividend declarations.c. increase stockholders’ equity and to decrease total liabilities.d. decrease total retained earnings and increase total liabilities.

ANS: B

Chapter 14

55. Which of the following is an example of a temporary difference between taxable income and reported income?a. using the installment method of determining revenue for taxable income and for income

statement reportingb. using the straight-line depreciation method for income statement reporting and MACRS

depreciation for taxable incomec. using the straight-line depreciation method for some assets and MACRS depreciation for

other assetsd. including tax-exempt municipal bond interest in net income and not including any tax-

exempt municipal bond interest in taxable income

ANS: B

56. Income tax allocation procedures are justified by what concept?a. Revenue recognitionb. Matchingc. Conservatismd. Cash basis accounting

ANS: B

57. ABC Company has incurred a period income tax expense of $500,000. The tax accountants inform the financial accountants that 60% of this value will be paid on March 15th, 2 1/2 months away, while the balance will be paid in 14 1/2 months. The journal entry to recognize these obligations is:a. Dec 31 Income Tax Expense 300,000

Income Tax Payable 200,000 Cash 500,000

b. Dec 31 Income Tax Expense 500,000 Income Tax Payable - Current 300,000 Income Tax Payable - Non Current 200,000

c. Dec 31 Income Tax Expense 500,000 Cash 500,000

d. Dec 31 Income Tax Payable 500,000 Income Tax Expense 500,000

ANS: B

58. Which of the following items should be classified as an extraordinary item on a corporate income statement?a. Gain on the retirement of a bond payableb. Gain from land condemned for public usec. Loss due to an discontinued operationd. Selling treasury stock for more than the company paid for it

ANS: B

59. For the year that just ended, a company reports net income of $3,200,000. There are 750,000 shares authorized, 600,000 shares issued, and 500,000 shares of common stock outstanding. What is the earnings per share?a. $6.40b. $3.20c. $5.33d. $3.33

ANS: A

60. The Lange Company has a simple capital structure. The company has 20,000 shares of common stock outstanding. Net income for the year was $65,000. Lange declared and paid a preferred stock dividends of $4,000 during the year. Earnings per share for the year is:a. $3.25b. $.125c. $3.05d. $3.45

ANS: C

61. Long-term investments are held for all of the listed reasons below except a. their incomeb. long-term gain potentialc. influence over another business entityd. meet current cash needs

ANS: D

62. Bean Corporation purchased 35% of the outstanding shares of common stock of Williams Corporation as a long-term investment. Subsequently, Williams Corporation reported net income and declared and paid cash dividends. What journal entry would Bean Corporation use to record its share of the earnings of Williams Corporation?a. debit Investment in Williams Corporation Stock; credit Cashb. debit Cash; credit Dividend Revenuec. debit Investment in Williams Corporation; credit Income of Williams Corporationd. debit Cash; credit Investment in Williams Corporation

ANS: C

63. For 2008, net income is $240,000, shares outstanding are 80,000, and the market price is $24. What is the price-earnings ratio on common stock (round to one decimal point?)a. 8.0b. 7.7c. 10.0d. 3.0

ANS: A

64. For accounting purposes, the method used to account for investments in common stock is determined bya. the amount paid for the stock by the investor.b. whether the acquisition of the stock by the investor was "friendly" or "hostile."c. the extent of an investor's influence over the operating and financial affairs of the

investee.d. whether the stock has paid dividends in past years.

ANS: C

Chapter 15

65. A corporation would not be successfully trading on equity if it gathered funds by a. issuing common stockb. issuing preferred stockc. issuing notesd. issuing bonds

ANS: A

66. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at a. a premiumb. their face valuec. their maturity valued. a discount

ANS: D

67. If $3,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is a. $3,300,000b. $3,000,000c. $3,090,000d. $2,910,000

ANS: D

68. When the market rate of interest was 11%, Waverly Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was a. $1,052,310b. $1,154387c. $1,000,000d. $ 720,495

ANS: A

69. If the market rate of interest is greater than the contractual rate of interest, bonds will sella. at a premium.b. at face value.c. at a discount.d. only after the stated rate of interest is increased.

ANS: C

70. Bonds with a face amount $1,000,000, are sold at 97. The entry to record the issuance isa. Cash 1,000,000

Premium on Bonds Payable 30,000 Bonds Payable 970,000

b. Cash 970,000Premium on Bonds Payable 30,000 Bonds Payable 1,000,000

c. Cash 970,000Discount on Bonds Payable 30,000 Bonds Payable 1,000,000

d. Cash 970,000 Bonds Payable 970,000

ANS: C

71. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 99, what is the amount of gain or loss on redemption?a. $5,500 lossb. $15,500 lossc. $15,500 gaind. $5,500 gain

ANS: A

72. The balance in Discount on Bonds Payable that is applicable to bonds due in 2015 would be reported on the balance sheet in the section entitled a. current liabilitiesb. long-term liabilitiesc. current assetsd. intangible assets

ANS: B

73. The Raymore Company issued 10-year bonds on January 1, 2007. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Raymore uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2007, Raymore should record interest expense (round to the nearest dollar) ofa. $7,032b. $7,500c. $8,790d. $14,065

ANS: A

Chapter 16

74. Cash paid to purchase long-term investments would be reported in the statement of cash flows in a. the cash flows from operating activities sectionb. the cash flows from financing activities sectionc. the cash flows from investing activities sectiond. a separate schedule

ANS: C

75. Cash paid for preferred stock dividends should be shown on the statement of cash flows under a. investing activitiesb. financing activitiesc. noncash investing and financing activitiesd. operating activities

ANS: B

76. Investing activities includea. collecting cash on loans made.b. obtaining cash from creditors.c. obtaining capital from owners.d. repaying money previously borrowed.

ANS: A

77. Accounts receivable arising from trade transactions amounted to $45,000 and $52,000 at the beginning and end of the year, respectively. Net income reported on the income statement for the year was $105,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows prepared by the indirect method is a. $105,000b. $112,000c. $98,000d. $140,000

ANS: C

78. Equipment with an original cost of $50,000 and accumulated depreciation of $20,000 was sold at a loss of $7,000. As a result of this transaction, cash would a. increase by $23,000b. decrease by $7,000c. increase by $43,000d. decrease by $30,000

ANS: A

79. Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method?a. a decrease in inventoryb. a decrease in accounts payablec. preferred dividends declared and paidd. a decrease in accounts receivable

ANS: B

80. Mega Sales sells some used store fixtures. The acquisition cost of the fixtures is $12,500, the accumulated depreciation on these fixtures is $9,750 at the time of sale. The fixtures are sold for $3,000. The value of this transaction in the Investing section of the statement of cash flows is:a. $12,500b. $3,000c. $2,750d. $250

ANS: B

81. Free cash flow is cash from operations, less cash for a. dividends and cash for fixed assets needed to maintain productivityb. dividends and cash to redeem bonds payablec. fixed assets needed to maintain productivityd. dividends, cash for fixed assets needed to maintain productivity, and cash to redeem bonds

payable

ANS: A