1. Which of the following is not a transaction to be recorded in the accounting records of an entity? 

 

A. Investment of cash by the owners.

B. Sale of product to customers.

C. Receipt of a plaque recognizing the firm’s encouragement of employee participation in the United Way fund drive.

D. Receipt of services from a “quick-print” shop in exchange for the promise to provide advertising design services of equivalent value.

 

2. A fiscal year: 

 

A. is always the same as the calendar year.

B. is frequently selected based on the firm’s operating cycle.

C. must always end on the same date each year.

D. must end on the last day of a month.

 

3. The time frame associated with a balance sheet is: 

 

A. a point in time in the past.

B. a one-year past period of time.

C. a single date in the future.

D. a function of the information included in it.

 

4. The balance sheet equation can be represented by: 

 

A. A = L + OE

B. Assets   Liabilities = Owners’ Equity

C. Net Assets = Owners’ Equity

D. All of these

 

5. Accumulated depreciation on a balance sheet: 

 

A. Is part of owners’ equity.

B. Represents the portion of the cost of an asset that is assumed to have been “used up” in the process of operating the business.

C. Represents cash that will be used to replace worn out equipment.

D. Recognizes the economic loss in value of an asset because of its age or use.

 

6. Expenses are: 

 

A. cash disbursements.

B. decreases in net assets from uninsured accidents.

C. decreases in net assets from dividends to stockholders.

D. decreases in net assets resulting from usual operating activities.

 

7. On January 31, an entity’s balance sheet showed total assets of $750 and liabilities of $250. Owners’ equity at January 31 was: 

 

A. $ 500

B. $1,000

C. $ 750

D. $ 250

 

At the beginning of the fiscal year, the balance sheet showed assets of $1,364 and owners’ equity of $836. During the year, assets increased $74 and liabilities decreased $38.

 

8. Owners’ equity at the end of the year totaled: 

 

A. $836

B. $872

C. $948

D. $1,438

 

9. Liabilities at the end of the year totaled: 

 

A. $490

B. $528

C. $836

D. $910

 

10. Matching revenues and expenses refers to: 

 

A. having revenues equal expenses.

B. recording revenues when cash is received.

C. accurately reflecting the results of operations for a fiscal period.

D. recording revenues when a product is sold or a service is rendered.

 

11. An expanded version of the accounting equation could be: 

 

A. A + Rev = L + OE – Exp

B. A   L = Paid-in Capital   Rev   Exp

C. A = L + Paid-in Capital + Beginning Retained Earnings + Rev   Exp

D. A = L + Paid-in Capital   Rev + Exp

 

12. In the seller’s records, the sale of merchandise on account would: 

 

A. Increase assets and increase expenses.

B. Increase assets and decrease liabilities.

C. Increase assets and increase paid-in capital.

D. Increase assets and decrease revenues.

 

13. A debit entry will: 

 

A. Decrease an asset account.

B. Increase a liability account.

C. Increase paid-in capital.

D. Increase an expense account.

 

14. A credit entry will: 

 

A. Increase an asset account.

B. Increase a liability account.

C. Decrease paid-in capital.

D. Increase an expense account.

 

15. An engineering consultant provided $500 of services to a client; the client paid $100 when the bill was submitted and will pay the balance within a week. The consultant will record this transaction by: 

 

A.  

 

B.  

 

C.  

 

D.  

 

16. To accrue $5,500 of employee salaries for the last week of February, the employer’s journal entry is: 

 

A.  Dr.    Cash   ———————   100

     Dr.     Fees Receivable  ——  400

     Cr.            Fee Revenue    ——————   500

 

B.  Dr.    Fee Revenue  ————- 500

     cr.         Fees Receivable   ———–  400

     Cr.         Cash                   ———–   100

 

C.  Dr.    Cash   —————- 100

     Cr.         Fee Revenue  ————- 100

 

D.  Dr.   Cash   ————————— 100

     Dr.    Fee Revenue  —————- 400

     Cr.           Fees Receivable ———————–   500

 

17. A journal entry recording an accrual: 

 

A. Results in a better matching of revenues and expenses.

B. Will involve a debit or credit to cash.

C. Will affect balance sheet accounts only.

D. Will most likely include a debit to a liability account.

 

 Martin & Associates borrowed $5,000 on April 1, 2008 at 8% interest with both principal and interest due on March 31, 2009.

 

18. Which of the following journal entries should the firm use to accrue interest at the end of each month? 

 

A.  Dr.   Interest Payable ——————- XXX

     Cr.             Cash           ————————— XXX

 

B.  Dr.  Interest Receivable ————— XXX

     Cr.        Interest Payable  ———————- XXX

 

C.  Dr.   Interest Expense  —————-  XXX

     Cr.         Interest Payable  —————- XXX

 

D.  Dr.  Interest Payable —————-  XXX

     Cr.       Interest Expense  ———————-  XXX

 

19. How much should be in the firm’s interest payable account at December 31, 2008? 

A. $300

B. $400

C. $0

D. $333

 

20. Which of the following journal entries should the firm use to record the payment of interest on March 31, 2009? 

 

A.  Dr.  Interest Expense  ————-  XXX

     Dr.  Interest Payable   ————-  XXX

     Cr.          Cash                ————————-  XXX

 

B.  Dr.  Interest Receivable    ——- XXX

     Cr.          Interest Payable  ——————–  XXX

 

C.  Dr.  Interest Expense   ——— XXX

     Cr.         Interest Payable    —————- XXX

 

D.  Dr.  Interest Expense  ———-  XXX

     Cr.       Interest Payable    —————- XXX

 

21. The current assets of most companies are usually made up of: 

A. assets that are currently used in the operations of the company.

B. cash and assets expected to be converted to cash within a year.

C. a very small proportion (less than 10%) of the total assets of the entity.

D. cash, marketable securities, and accounts and notes receivable.

 

22. Which of the following is the correct balance sheet presentation for current assets? 

 

A. Cash, inventories, account receivables, prepaid expenses.

B. Cash equivalents, cash, other current assets, accounts receivable.

C. Accounts receivable, inventories, prepaid expenses, other current assets.

D. Marketable securities, cash, notes receivable, prepaid expenses.

 

23. A cash equivalent is a current asset that: 

 

A. Will be converted to cash within one year.

B. Will be converted to cash within one month.

C. Is readily convertible into cash with a minimal risk.

D. Is readily convertible into cash with a substantial risk.

E. None of these.

 

24. The accounting concept or principle applied when an allowance is provided for estimated uncollectible accounts receivable is: 

 

A. consistency.

B. matching revenue and expense.

C. original cost.

D. objectivity.

 

25. The allowance for collectable accounts is a(n): 

 

A. asset.

B. contra current asset.

C. expense.

D. contra revenue.

 

26. Trading and Available-for-Sale securities are reported on the balance sheet at: 

 

A. Net realizable value.

B. Historical cost.

C. Weighted average cost.

D. Market value.

 

27. When a firm uses the LIFO inventory cost flow assumption: 

 

A. cost of goods sold will be greater than if FIFO were used.

B. net income will be greater than if FIFO were used.

C. cost of goods sold will be the same as if FIFO were used.

D. better matching of revenue and expense is achieved than under FIFO.

 

28. One inventory cost flow assumption will result in different cost of goods sold from another inventory cost flow assumption only if: 

 

A. inventory quantities change from the beginning to end of the year.

B. a new product is added to inventory during the year.

C. the cost of inventory items changes during the year.

D. price levels do not change during the year.

 

29. In an inflationary economic environment, the selling price set for a firm’s products will: 

 

A. not be affected by the cost flow assumption used.

B. be higher if LIFO is used than if FIFO is used.

C. be higher if FIFO is used than if LIFO is used.

D. be derived from the weighted average cost of inventory.

 

30. The balance sheet valuation of inventories is: 

 

A. lower of cost or market.

B. lower of selling price or cost.

C. lower of realizable value or selling price.

D. cost, regardless of the cost of replacing the inventory.

 

31. A firm has used LIFO for several years during which costs have trended higher. If this firm achieves a substantial reduction in inventory quantities in 2009 by selling more merchandise than it purchases, the effect on 2009 net income of the inventory reduction, compared to having no change in inventory quantity from the beginning to the end of 2009, is: 

 

A. net income for 2009 will be greater if the inventory quantity declines.

B. net income for 2009 will be less if the inventory quantity declines.

C. net income for 2009 will not be affected because of the inventory quantity decline.

D. can’t tell from the information given.

 

32. Which of the following is NOT an example of an inventory account a manufacturing firm might use? 

 

A. Work in process inventory.

B. Finished goods inventory.

C. Merchandise inventory.

D. Raw materials inventory.

 

33. Deferred tax assets: 

 

A. represent a reduction in the income tax liability of a future year when an expense will become deductible for income tax purposes.

B. are always classified as current assets.

C. arise when the company makes a prepayment of its income taxes.

D. are less likely to be reported than deferred tax liabilities for most firms.

 

34. When a firm buys land on which there is a building, and the building is torn down so that an appropriate new building can be constructed on the land: 

 

A. any of the purchase cost allocated to the old building is reported as a loss.

B. the cost assigned to the land excludes the cost of the old building.

C. the total cost of the land and old building are capitalized as land cost.

D. any of the purchase cost allocated to the old building is capitalized as part of the cost of the new building.

 

35. Expenditures capitalized as long-lived assets generally include those expenditures that: 

 

A. are made for normal repairs to maintain the usefulness of the asset over a number of years.

B. are for items that have a physical life of more than a year, regardless of their cost.

C. are material and that have an economic benefit to the entity only in the current year.

D. are material and that have an economic benefit to the entity that extends beyond the current year.

 

36. Which of the following statements best describes the process of accounting for depreciation? 

 

A. A process that attempts to recognize loss in economic value over a period of time.

B. A process for setting aside cash so funds will be available to replace the asset.

C. A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset.

D. A process for recognizing all of the cost associated with using an asset in a revenue generating activity.

 

37. The present value concept is widely applied in business because: 

 

A. inflation erodes the purchasing power of money.

B. money has value over time.

C. accounting for operating leases requires its use.

D. most obligations are settled within a year.

 

Moped, Inc. purchased machinery at a cost of $22,000 on January 1, 2009 The expected useful life is 5 years and the asset is expected to have salvage value of $2,000. Moped depreciates its assets via the double-declining balance method.

 

38. What is the firm’s depreciation expense for the year ended December 31, 2009? 

 

A. $ 2,000

B. $ 4,400

C. $ 6,000

D. $ 8,800

 

39. What is the accumulated depreciation for this asset on December 31, 2010? 

 

A. $ 4,400

B. $ 5,280

C. $ 8,800

D. $14,080

 

40. What is the firm’s gain or loss if the machinery is sold for $11,000 on December 31, 2010? 

 

A. Gain of $4,000

B. Gain of $3,080

C. Loss of $600

D. Loss of $4,000

 

41. Which of the following could be a correct journal entry to record the disposition of equipment? 

 

A.    Dr.   Accounts Payable    ————  XXX

       Cr.          Accumulated depreciation  ——– XXX

       Cr.          Depreciation  ————————— XXX

 

B.   Dr.  Cash ———————————— XXX

      Dr.  Loss on sale of equipment ——XXX

      Dr.  Accumulated depreciation——  XXX

      Cr.         Equipment ——————————- XXX

 

C.  Dr.   Gain on sale of equipment —– XXX

     Dr.   Accumulated depreciation —— XXX

     Cr.         Equipment ———————————– XXX

 

D.  Dr.    Cash ———— XXXX

      Dr.   Loss on sale of equipment —- XXX

      Cr.           Accumulated depreciation ———————– XXX

      Cr.           Equipment ———————————————XXX

 

42. Leasehold is an example of which of the following types of assets? 

 

A. Current asset.

B. Property, plant & equipment.

C. Goodwill.

D. Intangible asset.

 

43. When a depreciable asset is sold: 

 

A. a gain arises if the sales proceeds exceed the net book value.

B. a loss arises if the sales proceeds exceed the net book value.

C. any cash received results in a gain.

D. depreciation expense is adjusted so there is no gain or loss.

 

44. When a machine having a net book value of $5,000 is sold for $4,000: 

 

A. current assets increase, equipment (net) increases, and net income increases.

B. current assets increase, equipment (net) decreases, and net income increases.

C. current assets increase, equipment (net) decreases, and net income decreases.

D. current assets increase, equipment (net) increases, and net income decreases.

 

45. Depreciation, in accounting, is a process that results in: 

 

A. depreciable assets being reported in the balance sheet at their fair market value.

B. accumulating cash for the replacement of the asset.

C. an accurate measurement of the economic usefulness of an asset.

D. spreading the cost of an asset over its useful life to the entity. 

 

Problems

 

46. Ann Kimber is thinking about going out of business and retiring. Her firm has $25,000 in cash, other assets totaling $35,700, and total liabilities of $25,500. The other assets can be sold for an estimated $34,000 cash in a liquidation sale. Calculate the amount of cash that would be available upon Ann’s retirement if the other assets were sold and the liabilities were paid off. 

 

47. Using the column headings provided below, show the effect, if any, of the transaction entry or adjusting entry on the appropriate balance sheet category or on the income statement by entering the account name, amount, and indicating whether it is an addition (+) or subtraction (   ). Column headings reflect the expanded balance sheet equation; items that affect net income should not be shown as affecting owners’ equity. 

 

(1.) The firm borrowed $2,000 from the bank; a short-term note was signed.

(2.) Merchandise inventory costing $750 was purchased; cash of $200 was paid and the balance is due in 30 days.

(3.) Employee wages of $1,000 were accrued at the end of the month.

(4.) Merchandise that cost $350 was sold for $450 in cash.

(5.) This month’s rent of $700 was paid.

(6.) Revenues from services during month totaled $6,500. Of this amount, $2,000 was received in cash and the balance is expected to be received within 30 days.

(7.) During the month, supplies were purchased at a cost of $520, and debited into the Supplies (asset) account. A total of $400 of supplies were used during the month.

(8.) Interest of $240 has been earned on a note receivable, but has not yet been received.

 

 

48. Lone Star Sales & Service acquired a new machine that cost $42,000 in early 2010. The machine is expected to have a five-year useful life and is estimated to have a salvage value of $7,000 at the end of its life. (Round your final answers to the nearest dollar). 

 

(a.) Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the second year of the machine’s life and calculate the accumulated depreciation after the third year of the machine’s life.

 

(b.) Using the double declining balance depreciation method, calculate the depreciation expense for the third year of the machine’s life and the net book value of the machine at this point in time.

 

(c.) Using the sum-of-the-years digits depreciation method, calculate the amount of accumulated depreciation after the third year of the machine’s life.