Part 1: True or False
Problem 1. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.
Problem 2. Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.
Problem 3. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.
Problem 4. In preparing a statement of cash flows, cash equivalents are subtracted from cash in order to compute the net change in cash during a period.
Problem 5. The payment of interest on bonds payable is classified as a cash outflow from operating activities.
Problem 6. The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.
Problem 7. A $15,000, 8%, 9-month note payable requires an interest payment of $900 at maturity.
Problem 8. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000.
Problem 9. Allowance for Doubtful Accounts is a contra asset account.
Problem 10. An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.
Problem 11. Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.
Problem 12. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.
Problem 13. When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.
Problem 14. Using the units of activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.
Problem 15. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.
Problem 16. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.
Problem 17. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.
Problem 18. The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
Problem 19. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset's sale is less than the asset's book value.
Problem 20. Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.
Part 2: Multiple Choice
Problem 1. Notes or accounts receivables that result from sales transactions are often called
a Sales receivables.
b Non-trade receivables.
c Trade receivables.
d Merchandise receivables.
Problem 2. Which one of the following is not a primary problem associated with accounts receivable?
a Depreciating accounts receivable
b Recognizing accounts receivable
c Valuing accounts receivable
d Disposing of accounts receivable
Problem 3. Which of the following would require a compound journal entry?
a To record merchandise returned that was previously purchased on account.
b To record sales on account.
c To record purchases of inventory when a discount is offered for prompt payment.
d To record collection of accounts receivable when a cash discount is taken.
Problem 4. On the statement of cash flows using the indirect method, patent amortization expense will
a Be added to net income in the operating section.
b Be deducted from net income in the operating section.
c Appear as an inflow of cash in the investing section.
d Appear as an outflow of cash in the investing section.
Problem 5. If $500,000 of bonds are issued during the year but $300,000 of old bonds are retired during the year, the statement of cash flows will show a(n)
a Net increase in cash of $200,000.
b Net decrease in cash of $200,000.
c Increase in cash of $500,000 and a decrease in cash of $300,000.
d Net gain on retirement of bonds of $200,000.
Problem 6. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by
a Average current liabilities.
b Net sales.
c Average long-term liabilities.
d Average total liabilities.
Use the following information for questions 7 - 8.
A customer charges a treadmill at Fred's Sport Shop. The price is $1,000 and the financing charge is 18% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account.
Problem 7. What is the amount of the finance charge?
a $30
b $15
c $180
d $6
Problem 8. The accounts affected by the journal entry made by Fred's Sport Shop to record the finance charge are
a Dr: Accounts Receivable
Cr: Cash
b Dr: Cash
Cr: Finance Receivable
c Dr: Accounts Receivable
Cr: Interest Payable
d Dr: Accounts Receivable
Cr: Interest Revenue
Problem 9. Hardy Clinic purchases land for $90,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Hardy Clinic record as the cost for the land?
a $92,200.
b $90,000.
c $94,700.
d $92,500.
Problem 10. Goodwill
a Is only recorded when generated internally.
b Can be sold individually.
c Can be identified only with the business as a whole.
d Is the excess of cost over the fair market value of total assets.
Problem 11. A computer company has $4,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,500,000. What is the amount of net income or loss after these research and development costs are accounted for?
a $1,500,000 loss.
b $2,500,000 net income.
c $0.
d Cannot be determined from the information provided.
Problem 12. On July 1, 2003, Morrow Company purchased a patent for $81,000. The patent had a remaining legal life of 12 years. It is estimated that the patent will have a useful life of 5 years with an estimated salvage value of $6,000. The amount of Amortization Expense recognized for the year 2003 would be
a $16,200.
b $7,500.
c $6,750.
d $3,375.
Problem 13. Which of the following is not an intangible asset arising from a government grant?
a Goodwill
b Patent
c Trademark
d Trade name
Problem 14. In the balance sheet, the account, Premium on Bonds Payable, is
a Added to bonds payable.
b Deducted from bonds payable.
c Classified as a stockholders' equity account.
d Classified as a revenue account.
Problem 15. Bond discount should be amortized to comply with
a The historical cost principle.
b The matching principle.
c The revenue recognition principle.
d Conservatism.
Problem 16. The per share amount normally assigned by the board of directors to a large stock dividend is
a The market value of the stock on the date of declaration.
b The average price paid by stockholders on outstanding shares.
c The par or stated value of the stock.
d Zero.
Problem 17. Identify the effect the declaration of a stock dividend has on the par value per share and book value per share.
Par Value per Share Book Value Per Share
a Increase Decrease
b No effect Increase
c Decrease Decrease
d No effect Decrease
Problem 18. If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is
a Common Stock Dividends Distributable.
b Common Stock.
c Paid-in Capital in Excess of Par.
d Retained Earnings.
Problem 19. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:
Total Assets Total Liabilities Total Stockholders' Equity
a Increase Decrease No Change
b No change Increase Decrease
c Decrease Increase Decrease
d Decrease No Change Increase
Problem 20. Long-term creditors are usually most interested in evaluating
a Liquidity and solvency.
b Solvency and marketability.
c Liquidity and profitability.
d Profitability and solvency.