Accounting 303 Exam 1, Chapters 1 3 & 5 Fall 2014 Section Row

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1 1 Accounting 303 Name Exam 1, Chapters 1 3 & 5 Fall 2014 Section Row I. Multiple Choice Questions. (2 points each, 54 points in total) Read each question carefully and indicate your answer by circling the letter preceding the one best answer. 1. Credit, as used in accounting, always means a. the right side of an account. b. an increase. c. a decrease. d. the left side of an account. 2. A journal entry to record the sale of inventory on account will include a a. debit to Inventory. b. debit to Accounts Receivable. c. debit to Sales Revenue. d. credit to Cost of Goods Sold. 3. A journal entry to record a payment on account will include a a. debit to Accounts Receivable. b. debit to Accounts Payable. c. credit to Accounts Receivable. d. credit to Accounts Payable. 4. Which of the following errors will cause an imbalance in the trial balance? a. Omission of a transaction in the journal. b. Posting an entire journal entry twice to the ledger. c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable. d. Listing the balance of an account with a debit balance in the credit column of the trial balance. 5. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 6. Which type of account is always debited during the closing process? a. Dividends b. Expense c. Revenue d. Retained earnings

2 7. Messi Company recorded journal entries for the issuance of common stock for $160,000, the payment of $52,000 on accounts payable, and the payment of salaries expense of $84,000. What net effect do these entries have on owners equity? a. Increase of $160,000. b. Increase of $108,000. c. Increase of $76,000. d. Increase of $24, The income statement of Dolan Corporation for 2014 included the following: Salaries and wages expense $180,000 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2014 December 31, 2013 Salaries and wages payable $17,800 8,400 The cash paid for salaries and wages during 2014 was a. $189,400. b. $170,600. c. $171,600. d. $197, Lopez Company received $14,400 on April 1, 2014 for one year's rent received in advance and recorded the transaction with a credit to an income statement account. The December 31, 2014 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $3,600. b. debit Rent Revenue and credit Unearned Rent Revenue, $10,800. c. debit Unearned Rent Revenue and credit Rent Revenue, $3,600. d. debit Unearned Rent Revenue and credit Rent Revenue, $10, The process of identifying, measuring, analyzing, and communicating financial information needed by external users of the organization is called a. financial accounting. b. managerial accounting. c. tax accounting. d. auditing. 11. What is due process in the context of standard setting at the FASB? a. The FASB operates in full view of the public. b. Public hearings are held on proposed accounting standards. c. Interested parties can make their views known. d. All of the answer choices are correct. 12. What is the purpose of the Emerging Issues Task Force? a. Provide new accounting standards for public companies. b. Provide a consensus on how to account for new and unusual financial transactions. c. Provide interpretive guidance. d. Provide detailed guidance on select issues. 2

3 3 13. The body that has the power to prescribe the accounting practices and standards to be employed by public companies is the a. Emerging Issues Task Force. b. AICPA. c. SEC. d. APB. 14. Which of the following pronouncements were issued by the Accounting Principles Board? a. Accounting Research Bulletins b. Opinions c. Statements of Financial Accounting Standards d. Statements of Financial Accounting Concepts 15. Which of the following is a primary quality of useful accounting information? a. Conservatism. b. Comparability. c. Relevance. d. Consistency. 16. Which of the following is an ingredient of faithful representation? a. Neutrality. b. Predictive value. c. Materiality. d. Confirmatory value. 17. Completeness is an ingredient of which fundamental quality of information? a. Faithful representation. b. Comparability. c. Relevance. d. Understandability. 18. In classifying the elements of financial statements, the primary distinction between revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions involved. 19. The calculation of comprehensive income includes which of the following? Revenues Distributions to Owners a. Yes Yes b. No No c. No Yes d. Yes No

4 4 20. During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of Relevance Periodicity a. No No b. No Yes c. Yes No d. Yes Yes 21. 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. 22. Which of the following is a contra account? a. Bonds payable b. Unearned revenue c. Patents d. Accumulated depreciation 23. The correct order to present current assets is a. cash, accounts receivable, prepaid items, inventories. b. cash, accounts receivable, inventories, prepaid items. c. cash, inventories, accounts receivable, prepaid items. d. cash, inventories, prepaid items, accounts receivable. 24. Which of the following is a balance sheet account? a. patents b. service revenue c. cost of goods sold d. insurance expense 25. Fulton Company owns the following investments: Trading securities (fair value) $140,000 Available-for-sale securities (fair value) 70,000 Held-to-maturity securities (amortized cost) 94,000 Fulton will report investments in its current assets section of a. $0. b. exactly $140,000. c. $140,000 or an amount greater than $140,000, depending on the circumstances. d. exactly $210,000.

5 5 II. Problems (50 points in total) 1. (9 points) Below is a list of basic accounting principles and assumptions. Following the list is a series of descriptive statements that illustrate the violation of a basic accounting principle. In the space provided, indicate the principle being violated by writing the appropriate letter. NOTE: Each letter may be used once, more than once, or not at all. A. Economic entity B. Expense recognition C. Fair value D. Going concern E. Historical cost F. Monetary unit G. Periodicity H. Materiality I. Revenue recognition a. Andrei Corporation s accountant increased the book value of a patent from its original cost of $1 million to its recently appraised value of $6 million. b. Corina Corporation s accountant quit near the end of the current year and they could not hire a new accountant until the middle of the following year. So, Corina decided not to prepare the financial statements this year but to just wait until the end of next year and prepare a single set of financial statements covering both years together. c. Near the end of 2014, Luca, Inc. received an order from a customer for $60,000. The merchandise will ship early in Because the sale was made to a long-time customer that makes frequent purchases and the invoice was paid in 2014, the controller recorded the sale in d. In the middle of its 2014 fiscal year, Mihai Company paid $12,000 to its insurance company for a one-year comprehensive insurance policy. Mihai Company recorded the entire expenditure as an expense of e. The Radu Pharmaceutical Company has suffered recurring losses during the last few years and its prospects do not look any better going forward. In fact it is expected that Radu will go bankrupt during the next 12 months. The CEO of Radu decides to prepare the year-end financial statements without any mention of the financial difficulties. f. The Rodica Corporation paid for a brick fence around the estate of its CFO and recorded it in the corporation s land improvements account.

6 2. (15 points) Selected accounts from Mileştii Mici Winery's December 31, 2014, trial balance appear below. All of the accounts have their standard, normal debit or credit balance. 1. Accounts Payable $160, Accounts Receivable 150, Accumulated Depreciation Equipment 200, Allowance for Doubtful Accounts 20, Bonds Payable 500, Cash 150, Common Stock 60, Equipment 960, Prepaid Insurance 30, Interest Expense 10, Inventory 300, Notes Payable (due 6/1/15) 200, Prepaid Rent 180, Retained Earnings 818, Salaries and Wages Expense 328,000 Prepare adjusting journal entries at December 31, 2014, based on the following supplemental information. No monthly adjustments have been made. a. The equipment was purchased three ago and has a useful life of 15 years with no salvage value. (Straightline method used.) 6 b. The bonds payable were outstanding all year and have a 7% interest rate. c. Prepaid insurance at December 31, 2014, is $25,000. d. On November 30, 2014, a rent payment of $180,000 was made and debited to prepaid rent and covered the six months rent from November 30, 2014, through May 31, e. Salaries and wages earned but unpaid at December 31, 2014, $22,000.

7 7 3. (12 points) Use the 15 accounts from Mileștii Mici Winery's December 31, 2014, trial balance given in problem 2. For each of the 15 numbered accounts in the trial balance before adjustments, indicate the proper balance sheet classification by placing appropriate account numbers after each of the following classifications. If the account title would appear on the income statement, do not put the number in any of the classifications. Cash, which is account number 6, is given as an example. a. Current assets 6, b. Property, plant, and equipment c. Current liabilities d. Long-term liabilities e. Stockholders' equity

8 4. (14 points) The balance sheet of Cricova Winery as of December 31, 2014, is shown below: Cricova Winery Balance Sheet as of December 31, 2014 Cash $ 95,000 Accounts payable $ 85,000 Accounts receivable (net) 52,200 Bonds payable 100,000 Inventory 62,000 Stockholders' equity 238,500 Investments 76,300 Equipment (net) 106,000 Intangible assets 32,000 $423,500 $423,500 Use the following additional information to answer the questions. a. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank overdraft of $2,500 has been deducted. What is the correct balance of Cash to be shown on the balance sheet? 8 b. The net accounts receivable balance includes, accounts receivable with debit balances of $60,000; accounts receivable with credit balances of $4,000; and the allowance for doubtful accounts is $3,800. What is the correct balance of net Accounts Receivable (net of allowance for doubtful accounts) to be shown on the balance sheet? c. Investments include investments in common stock, trading $19,000 and available-for-sale (current) $48,300, and franchises $9,000. What is the correct amount of investments to be show as Current Assets? d. What is the correct amount of intangible assets to be show on the balance sheet? e. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is $40,000. i. What is the correct amount of Equipment included in the balance sheet? (Do not net it with accumulated depreciation.) ii. What is the correct amount of Accumulated Depreciation-Equipment included in the balance sheet?

9 9 Answers Multiple Choice Question Answer Question Answer 1 a 15 c 2 b 16 a 3 b 17 a 4 d 18 c 5 d 19 d 6 c 20 b 7 c 21 d 8 b 22 d 9 a 23 b 10 a 24 a 11 d 25 c 12 b 13 c 14 b Solution to Problem 2 a. E b. G c. I d. B e. D f. A Solution to Problem 2 a. Depreciation Expense... 64,000 Accumulated Depreciation... 64,000 b. Interest Expense... 35,000 Interest Payable... 35,000 c. Insurance Expense... 5,000 Prepaid Insurance... 5,000 d. Rent Expense... 30,000 Prepaid Rent... 30,000 e. Salaries Expense... 22,000 Salaries Payable... 22,000

10 10 Solution Problem 3 a. 6,2,4,9,11,13 b. 3,8 c. 1,12 d. 5 e. 7,14 Solution Problem 4 a = 88,100 b = 56,200 c = 67,300 d = 41,000 e. i.? = ;? = ; = 145,000 ii = 40,000