Intermediate Accounting 19th Edition Earl K Stice James D Stice- Test Bank
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Sample Test
Chapter 3—The Balance Sheet and Notes to the Financial
Statements
MULTIPLE CHOICE
1. Analysis
of a firm’s balance sheet provides information on its liquidity, which is the
ability to
2. satisfy
short-term obligations.
3. maintain
profitable operations.
4. maintain
past levels of preferred and common dividends.
5. survive
a major economic downturn.
ANS:
A
PTS: 1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
2. In
order for a liability to exist,
3. there
must be a past transaction or event.
4. the
exact amount must be known.
5. the identity
of the party to whom the liability is owed must be known.
6. there
must be an obligation to pay cash in the future.
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
3. Accrued
revenues would normally appear on the balance sheet as
4. plant
assets.
5. current
liabilities.
6. long-term
liabilities.
7. current
assets.
ANS:
D
PTS: 1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
4. Which
of the following would NOT be classified as a current asset on a classified
balance sheet?
5. Investment
securities (trading)
6. Short-term
investments
7. Intangible
assets
8. Prepaid
expenses
ANS:
C
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
5. The
correct order to present current assets is
6. cash,
inventories, prepaid items, accounts receivable.
7. cash,
inventories, accounts receivable, prepaid items.
8. cash,
accounts receivable, prepaid items, inventories.
9. cash,
accounts receivable, inventories, prepaid items.
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
6. Unearned
rent would normally appear on the balance sheet as a
7. plant
asset.
8. current
liability.
9. long-term
liability.
10.
current asset.
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
7. Investment
securities held for the purpose of retiring bonds should be classified on a
balance sheet as
8. investments.
9. current
assets.
10.
deferred bond liability.
11.
intangible assets.
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
8. Which
of the following is NOT a long-term investment?
9. Stock
held to exert influence on another company
10.
Land held for speculation
11.
Trademarks
12.
Cash surrender value of life insurance
ANS:
C
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
9. Which
of the following characteristics may result in the classification of a
liability being changed from current to noncurrent?
10.
Violation of a subjective acceleration clause
11.
Violation of an objective acceleration clause
12.
A demand provision for payment
13.
Refinancing after the balance sheet date
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
10.
Which of the following characteristics may result in the
classification of a liability as current?
11.
Short-term obligations expected to be refinanced with long-term
debt
12.
Debts to be liquidated from funds that have been accumulated and
are reported as noncurrent assets
13.
Violation of provisions of a debt agreement
14.
Obligations for advance collections that involve long-term
deferment of the delivery of goods or services
ANS:
C
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
11.
Which of the following would NOT be classified as a current
liability on a classified balance sheet?
12.
Unearned revenue
13.
Mandatory redeemable preferred stock
14.
The currently maturing portion of long-term debt
15.
Accrued salaries payable to management
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
12.
Which of the following would NOT be considered an element of
working capital?
13.
Investment securities (current)
14.
Work in process inventories
15.
Accrued interest on notes payable
16.
Organization costs
ANS:
D
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
13.
Pending litigation would generally be considered a(n)
14.
nonmonetary liability.
15.
contingent liability.
16.
estimated liability.
17.
current liability.
ANS:
B
PTS: 1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
14.
Which of the following statements regarding assets is NOT true?
15.
An asset represents a probable future economic benefit.
16.
Assets are obtained or controlled as a result of past or
probable future transactions or events.
17.
Assets reported on the balance sheet include both monetary and
nonmonetary resources.
18.
Assets include costs that have not yet been matched with
revenues.
ANS:
C
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
15.
Which of the following would NOT be reported for capital stock
in the contributed capital section of a classified balance sheet?
16.
Dividends per share
17.
Shares authorized
18.
Shares issued
19.
Shares outstanding
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
16.
Which of the following circumstances would require recording an
accrual for a loss contingency under current generally accepted accounting
principles?
17.
Event is unusual in nature and occurrence of event is probable
18.
Event is unusual in nature and event occurs infrequently
19.
Amount of loss is reasonably estimable and occurrence of event
is probable
20.
Amount of loss is reasonably estimable and event occurs
infrequently
ANS:
C
PTS: 1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
17.
Which of the following would NOT be reported in the
stockholders’ equity section of the balance sheet?
18.
Retained earnings appropriated for future plant expansion
19.
Dividends declared on preferred stock
20.
Paid-in capital in excess of par value
21.
Deficit in retained earnings
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
18.
Which of the following best describes contributed capital?
19.
The amount of capital provided by stockholders’ investments
20.
The amount that would be distributed to the stockholders in a
liquidation of the corporation
21.
The amount of capital provided by stockholders’ investments and
undistributed earnings
22.
The value of the common and preferred stock
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
19.
A contingent liability should be recorded when
20.
any lawsuit is actually filed against a company.
21.
it is certain that funds are available to pay the amount of the
claim.
22.
it is probable that a liability has been incurred even though
the amount of the loss cannot be reasonably estimated.
23.
the amount of the loss can be reasonably estimated and it is
probable prior to issuance of financial statements that a liability has been
incurred.
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
20.
How should a contingent liability be reported in the financial
statements when it is “reasonably possible” the company will have to pay the
liability at a future date?
21.
As a deferred liability
22.
As an accrued liability
23.
As a disclosure only
24.
As an account payable with an additional disclosure explaining
the nature of the transaction
ANS:
C
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
21.
Which of the following statements best describes a subsequent
event?
22.
A subsequent event affects only subsequent reporting periods.
23.
A subsequent event is, in some cases, reflected in the
statements of the preceding period.
24.
A subsequent event may occur any time after financial statements
are issued.
25.
A subsequent event is not covered by the independent auditor’s
report.
ANS:
B
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
22.
Which of the following generally is considered a limitation of
the balance sheet?
23.
The balance sheet reflects the current value of a business.
24.
The balance sheet reflects the instability of the dollar.
25.
Balance sheet formats and classifications do not vary to reflect
industry differences.
26.
Due to measurement problems, some enterprise resources and
obligations are not reported on the balance sheet.
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 5
TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
23.
The operating cycle
24.
measures the time elapsed between cash disbursement for
inventory and cash collection of the sales price.
25.
refers to the seasonal variations experienced by business
enterprises.
26.
should be used to classify assets and liabilities as current if
it is less than one year.
27.
cannot exceed one year.
ANS:
A
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
24.
Wolfe Co. was incorporated on July 1, 2014, with $200,000 from
the issuance of stock and borrowed funds of $30,000. During the first year of
operations, net income was $10,000. On December 15, Wolfe paid an $800 cash
dividend. No additional activities affected owners’ equity in 2014. At December
31, 2014, Wolfe’s liabilities had increased to $37,600. In Wolfe’s December 31,
2014, balance sheet, total assets should be reported at
25.
$239,200.
26.
$240,000.
27.
$246,800.
28.
$276,800.
ANS:
C
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
25.
Major Co.’s adjusted trial balance at December 31, 2014,
includes the following account balances:
Common Stock, $3 par
……………………………………………………………………
$360,000
Additional Paid-In Capital
……………………………………………………………….
480,000
Treasury Stock, at cost
…………………………………………………………………..
30,000
Net Unrealized Loss on Available-for-Sale Securities
…………………………… 12,000
Retained Earnings: Appropriated for Uninsured Earthquake Losses
…………. 90,000
Retained Earnings: Unappropriated
…………………………………………………… 120,000
What amount should Major report as total stockholders’ equity in
its December 31, 2014, balance sheet?
1. $1,008,000
2. $1,032,000
3. $1,068,000
4. $1,092,000
ANS:
A
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA FN-Measurement
MSC: AACSB Analytic
26.
The following changes in American Corporation’s account balances
occurred during 2014:
Increase
Assets
………………………………………………………………………………………
$267,000
Liabilities …………………………………………………………………………………..
81,000
Capital Stock
……………………………………………………………………………..
198,000
American paid dividends of $39,000 during the year. There were
no changes in Retained Earnings for 2014 except dividends and net income. What
was American’s net income for 2014?
1. $12,000
2. $27,000
3. $39,000
4. $51,000
ANS:
B
PTS:
1
DIF:
Challenging
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
27.
Songbird Corporation’s trial balance included the following
account balances at December 31, 2014:
Accounts Payable ………………………………….
$45,000
Bonds Payable, due 2015 …………………………… 75,000
Discount on Bonds Payable, due 2015
………………… 9,000
Dividends Payable January 31, 2015
…………………. 24,000
Notes Payable, due January 31, 2018
………………… 60,000
What amount should be included in the current liability section
of Songbird’s December 31, 2014, balance sheet?
1. $135,000
2. $153,000
3. $195,000
4. $234,000
ANS:
A
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
28.
Hondo Co. has total debt of $252,000 and stockholders’ equity of
$420,000. Hondo is seeking capital to fund an expansion. Hondo is planning to
issue an additional $180,000 in common stock, and is negotiating with a bank to
borrow additional funds. The bank requires a maximum debt ratio of .75. What is
the maximum additional amount Hondo will be able to borrow after the common
stock is issued?
29.
$639,000
30.
$852,000
31.
$1,236,000
32.
$1,548,000
ANS:
D
PTS:
1
DIF: Medium
OBJ: LO 3
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
29.
The following data were taken from the financial statements of
Howard Corporation for the year ended December 31, 2014:
Net sales
………………………………………..
$120,000
Net income
………………………………………. 30,000
Total assets, January 1, 2014 ……………………… 400,000
Total assets, December 31, 2014
…………………….
600,000
What was Howard’s rate of return on assets for 2014?
1. 5
percent
2. 6
percent
3. 20 percent
4. 24
percent
ANS:
B
PTS:
1
DIF:
Easy
OBJ: LO 3
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
30.
Barron Co.’s current ratio is 2:1. Which of the following
transactions would normally increase Barney’s current ratio?
31.
Purchasing inventory on account
32.
Borrowing money by signing a long-term note
33.
Collecting an account receivable
34.
Purchasing land for cash
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 3
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
31.
The accounts and balances shown below were gathered from Primer
Corporation’s trial balance on December 31, 2014. All adjusting entries have
been made.
Wages Payable
……………………………………. $ 25,600
Cash
…………………………………………….
17,700
Mortgage Payable …………………………………. 151,600
Dividends Payable …………………………………
14,000
Prepaid Rent
…………………………………….. 13,600
Inventory ………………………………………..
81,800
Sinking Fund Assets ……………………………….
52,400
Short-Term Investments
…………………………….
15,200
Premium on Bonds Payable
…………………………..
4,600
Stock Investment in Subsidiary
……………………..
102,400
Taxes Payable …………………………………….
22,800
Accounts Payable ………………………………….
24,800
Accounts Receivable ………………………………. 36,600
The amount that should be reported as current assets on Primer
Corporation’s balance sheet is
300.
$151,300.
301.
$164,900.
302.
$217,300.
303.
$267,300.
ANS:
B
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
32.
Goddard Corporation’s trial balance contained the following
account balances at December 31, 2014:
Accumulated Depreciation–Equipment …………………
$45,000
Short-Term Investments
…………………………….
15,000
Prepaid Insurance …………………………………
3,000
Cash
…………………………………………….
33,000
Merchandise Inventory …………………………..
90,000
Equipment and Furniture
……………………………
54,000
Patent
…………………………………………..
12,000
Accounts Receivable (net) …………………………. 48,000
Land Held for Future Business Site
………………….
75,000
On Goddard’s December 31, 2014, balance sheet, the current
assets total should be
1. $189,000.
2. $201,000.
3. $219,000.
4. $243,000.
ANS:
A
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
The accounts and balances shown below were gathered from Pastel
Corporation’s trial balance on December 31, 2014. All adjusting entries have
been made.
Wages Payable
……………………………………. $ 25,600
Cash
…………………………………………….
17,700
Mortgage Payable …………………………………. 151,600
Dividends Payable …………………………………
14,000
Prepaid Rent
…………………………………….. 13,600
Inventory
………………………………………..
81,800
Sinking Fund Assets ……………………………….
52,400
Short-Term Investments
…………………………….
15,200
Premium on Bonds Payable
…………………………..
4,600
Stock Investment in Subsidiary
……………………..
102,400
Taxes Payable
……………………………………. 22,800
Accounts Payable ………………………………….
24,800
Accounts Receivable ………………………………. 36,600
33.
See information for Pastel Corporation above. The amount that
should be reported as current liabilities on Pastel Corporation’s balance sheet
is
34.
$73,200.
35.
$91,800.
36.
$87,200.
37.
$238,800.
ANS:
C
PTS: 1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
34.
See information for Pastel Corporation above. Pastel
Corporation’s working capital is
35.
$77,700.
36.
$73,100.
37.
$62,500.
38.
$125,700.
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 2
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
35.
Sonar Company prepared a draft of its 2014 balance sheet. The
draft statement reported total assets of $437,500. Included in this total
assets figure were the following items:
Treasury stock of Sonar Company at cost, which approximates
market value on December 31 …………….
$12,000
Unamortized patents ………………………………. 5,600
Cash surrender value of life insurance on corporate executives
……………………………………….
6,850
Unrealized holding losses on available-for-sale
securities ……………………………………..
4,200
At which amount should Sonar’ total assets be correctly reported
in the December 31, 2014, balance sheet?
1. $420,850
2. $421,300
3. $425,050
4. $425,500
ANS:
D
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
36.
Volta Electronics Inc. reported the following items on its
December 31, 2014, trial balance:
Accounts Payable ………………………………….
$108,900
Advances to Employees
……………………………..
4,500
Unearned Rent Revenue
……………………………..
28,800
Estimated Liability Under Warranties ………………..
25,800
Cash Surrender Value of Officers’ Life Insurance
…….. 7,500
Bonds Payable
……………………………………. 555,000
Discount on Bonds Payable
………………………….
22,500
Trademarks
………………………………………. 3,900
The amount that should be recorded on Volta’s balance sheet as
total liabilities is
1. $696,000.
2. $700,500.
3. $703,500.
4. $741,000.
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
37.
Helena Co. began operations on January 1, 2014, with $100,000
from the issuance of stock and borrowed funds of $15,000. Net income for 2014
was $5,000 and Helena paid a $400 cash dividend on December 15. No additional activities
affected owners’ equity in 2014. At December 31, 2014, Helena’s liabilities had
increased to $18,800. In Helena’s December 31, 2014, balance sheet, total
assets should be reported at
38.
$119,600.
39.
$120,000.
40.
$123,400.
41.
$138,400.
ANS:
C
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
38.
Hawk Corp. prepared a draft of its 2014 balance sheet. The draft
statement reported current liabilities totaling $200,000. However, none of the
following items were included in this preliminary total at December 31, 2014:
Accounts payable ………………………………….
$30,000
Bonds payable, due 2015 …………………………… 50,000
Discount on bonds payable, due 2015
………………… 6,000
Dividends payable on January 31, 2015
………………. 16,000
Notes payable, due 2016 …………………………… 40,000
At which amount should Hawk’s current liabilities be correctly
reported in the December 31, 2014, balance sheet?
1. $230,000
2. $290,000
3. $296,000
4. $302,000
ANS:
B
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
39.
The December 31, 2014, balance sheet of Giorgio Inc., reported
total assets of $1,050,000 and total liabilities of $680,000. The following
information relates to the year 2015:
- Madden
Inc. issued an additional 5,000 shares of common stock at $25 per share on
July 1, 2015.
- Madden
Inc. paid dividends totaling $80,000.
- Net
income for 2015 was $110,000.
- No
other changes occurred in stockholders’ equity during 2015.
The stockholders’ equity section of the December 31, 2015,
balance sheet would report a balance of
1. $400,000.
2. $685,000.
3. $525,000.
4. $835,000.
ANS: C
PTS:
1
DIF: Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
40.
Information from Brian Company’s balance sheet is as follows:
Current assets:
Cash …………………………………………….
$ 1,200,000
Investment securities …………………………….. 3,750,000
Accounts receivable ……………………………….
28,800,000
Inventories
………………………………………
33,150,000
Prepaid expenses ………………………………….
600,000
Total current assets ………………………………
$67,500,000
Current liabilities:
Notes payable
……………………………………. $ 750,000
Accounts payable ………………………………….
9,750,000
Accrued expenses …………………………………. 6,250,000
Income taxes payable ……………………………… 250,000
Payments due within one year on long-term debt
……….
1,750,000
Total current liabilities
………………………..
$18,750,000
What is Brian’s current ratio?
1. 0.26
to 1
2. 0.30
to 1
3. 1.80
to 1
4. 3.60
to 1
ANS:
D
PTS:
1
DIF:
Easy
OBJ: LO 3
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
41.
Southeast Company’s adjusted trial balance at December 31, 2015,
includes the following account balances:
Common Stock, $3 par ……………………………… $300,000
Additional Paid-In Capital ………………………… 400,000
Treasury Stock, at cost
…………………………… 25,000
Net Unrealized Holding Loss on Available-For-Sale
Securities ……………………………………..
10,000
Retained Earnings–Appropriated for Uninsured Earthquake
Losses …………………………………………
75,000
Retained Earnings–Unappropriated
………………….. 100,000
What amount should Southeast report as total owners’ equity in
its December 31, 2015, balance sheet?
1. $840,000
2. $860,000
3. $890,000
4. $910,000
ANS:
A
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Reflective Thinking
Laramie Corporation was organized on January 3, 2015. Laramie
was authorized to issue 50,000 shares of common stock with a par value of $10
per share. On January 4, Laramie issued 30,000 shares of common stock at $25
per share. On July 15, Laramie issued an additional 10,000 shares at $20 per
share. Laramie reported income of $33,000 during 2015. In addition, Laramie declared
a dividend of $.50 per share on December 31, 2015.
42.
See Laramie Corporation information above. The amount reported
on Laramie Corporation’s December 31, 2015, balance sheet as additional paid-in
capital was
43.
$400,000.
44.
$550,000.
45.
$563,000.
46.
$950,000.
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
43.
See Laramie Corporation information above. The amount reported
on Laramie Corporation’s December 31, 2015, balance sheet as stockholders’
equity was
44.
$400,000.
45.
$550,000.
46.
$950,000.
47.
$963,000.
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
44.
Information from Osborne Company’s balance sheet is as follows:
Current assets:
Current assets:
Cash
…………………………………………….
$ 1,200,000
Investment securities …………………………….. 3,750,000
Accounts receivable ……………………………….
28,800,000
Inventories
………………………………………
33,150,000
Prepaid expenses ………………………………….
600,000
Total current assets
……………………………… $67,500,000
Current liabilities:
Notes payable
……………………………………. $ 750,000
Accounts payable ………………………………….
9,750,000
Accrued expenses …………………………………. 6,250,000
Income taxes payable ……………………………… 250,000
Payments due within one year on long-term debt
……….
1,750,000
Total current liabilities ………………………….
$18,750,000
What is Osborne’s acid-test (quick) ratio?
1. 0.26
to 1
2. 0.30
to 1
3. 1.80
to 1
4. 3.60
to 1
ANS:
C
PTS:
1
DIF:
Easy
OBJ: LO 3
TOP: AICPA FN-Measurement
MSC: AACSB Analytic
45.
What is the effect of the collection of accounts receivable on
the current ratio and net working capital, respectively?
Current
Ratio
Net Working Capital
1. No
effect No effect
2. Increase
Increase
3. Increase
No effect
4. No
effect Increase
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 3
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
46.
Which of the following is an appropriate computation for return
on investment?
47.
Net income divided by sales
48.
Net income divided by total assets
49.
Sales divided by total assets
50.
Sales divided by stockholders’ equity
ANS:
B
PTS:
1
DIF:
Easy
OBJ: LO 3
TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
47.
Which item describes whether the following accounts would be
included in the calculation of the acid-test (quick) ratio?
Accounts Receivable
Inventories
1. No
No
2. No
Yes
3. Yes
No
4. Yes
Yes
ANS:
C
PTS:
1
DIF:
Easy
OBJ: LO 3
TOP: AICPA FN-Measurement
MSC: AACSB Analytic
48.
Which of the following statements regarding intangible assets is
NOT correct?
49.
Intangible assets represent long-term rights and privileges of a
nonphysical nature.
50.
Intangible assets should be amortized over a period not to
exceed 40 years.
51.
Intangible assets must be tested regularly to determine if their
value has been impaired.
52.
A trademark is an example of an intangible asset.
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Measurement
MSC: AACSB Reflective Thinking
49.
Treasury stock should be reported
50.
as a current asset only if it will be sold within the next year
or the operating cycle, whichever is longer.
51.
as a current asset only if it will be sold within the next year
or the operating cycle, whichever is shorter.
52.
in the Investments and Funds section of the balance sheet.
53.
as a deduction from total stockholders’ equity on the balance
sheet.
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
50.
The disclosure of accounting policies
51.
may describe policies that are peculiar to the reporting
company’s industry.
52.
should not appear in the notes to the financial statements.
53.
should not describe unusual or innovative applications of GAAP.
54.
is encouraged but not required.
ANS:
A
PTS:
1
DIF: Medium
OBJ: LO 4
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
51.
An operating cycle
52.
is twelve months or less in length.
53.
is the average time required for a company to collect its
receivables.
54.
is used to determine current assets when the operating cycle is
longer than one year.
55.
starts with inventory and ends with cash.
ANS:
C
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
52.
Which of the following items is usually classified as a
noncurrent asset?
53.
Prepaid rent
54.
Plant expansion fund
55.
Supplies
56.
Goods that are in the process of being completed for another
company
ANS: B
PTS:
1
DIF: Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
53.
Which of the following items would normally be excluded from the
computation of working capital?
54.
Advances from customers for goods that will be shipped three
months after the balance sheet date
55.
The portion of long-term debt that matures six months after the
balance sheet date and will be paid from the regular cash account
56.
Prepaid insurance
57.
Cash surrender value of life insurance
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
54.
The term “deficit” refers to
55.
an excess of current assets over current liabilities.
56.
an excess of current liabilities over current assets.
57.
a debit balance in Retained Earnings.
58.
a loss that is reported as a prior period adjustment.
ANS:
C PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
55.
In relation to a set of 2015 basic financial statements, a
subsequent event is one that
56.
occurs before the 2015 financial statements are issued.
57.
involves uncertainty as to possible gain or loss that will
ultimately be resolved in 2016 or later.
58.
occurs after the 2015 financial statements are issued.
59.
requires an appropriate adjusting entry to be made as of the end
of 2015.
ANS:
A
PTS:
1
DIF:
Medium
OBJ: LO 4
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
56.
The balance sheet category receivables represents claims to
cash. Accounts receivable typically constitutes the largest dollar value of
receivables. An estimated allowance for doubtful accounts should be deducted
from the gross amount of accounts receivable to arrive at the estimated amount
collectible. Plant assets are reported on the balance sheet at their historical
cost less any accumulated depreciation. The allowance for doubtful accounts and
accumulated depreciation are both termed contra-asset accounts. Which of the
following statements regarding these two contra-asset accounts is true?
57.
Both result in the valuation of their related asset account at
net realizable value.
58.
Accumulated depreciation deducted from the related asset account
shows the unallocated portion of the historical cost of the related asset.
59.
Accumulated depreciation deducted from the related asset account
shows the net realizable value of the related asset.
60.
Accumulated depreciation deducted from the related asset account
shows the current replacement cost of the related asset.
ANS:
B
PTS:
1
DIF:
Medium
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
57.
A general principle of disclosure is that material related-party
transactions should be disclosed. As the auditor of the Clarence Company, you
have noted the following transactions entered into by Clarence during the past
fiscal year:
1. Clarence
borrowed $1,000,000 from the Southwest Bank issuing a noninterest-bearing note.
2. Clarence
borrowed $2,000,000 from BH Savings at a rate significantly above the market
rate prevailing at that time for such a borrowing.
III.
Clarence borrowed $500,000 from First Bank with no scheduled terms for how or
when funds will be repaid.
Assuming all of the above transactions are material, which
transaction or transactions above most likely would be a related party
transaction requiring disclosure in Clarence’s financial statements?
1. Only
I above.
2. Both
II and III above.
3. Both
I and III above.
4. Only
III above.
ANS:
D
PTS:
1
DIF:
Medium
OBJ: LO 4
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
58.
In a consolidated balance sheet, the minority interest is
reported
59.
as part of long-term liabilities.
60.
between liabilities and stockholders’ equity
61.
as part of stockholders’ equity.
62.
as part of long-term assets.
ANS:
C
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
59.
Which of the following is not true regarding reserves that
appear in the equity section of the balance sheet of foreign companies?
60.
Reserves represent cash set aside to fund capital projects.
61.
Reserves are different categories found in the equity section of
the balance sheet.
62.
The balances in reserve accounts can affect an entity’s legal
ability to pay cash dividends.
63.
An extensive description of each reserve shown on the balance
sheet is provided.
ANS:
A
PTS:
1
DIF:
Easy
OBJ: LO 1
TOP: AICPA
FN-Reporting
MSC: AACSB Reflective Thinking
PROBLEM
1. The
following information is provided for Rodriguez Enterprises. (Amounts in
$1,000’s)
December 31
2014
2013
Assets
Current Assets:
Cash
$
95
$105
Investment
Securities
50
30
Receivables
(net)
140
90
Inventories
180
195
Total Current
Assets
465
420
Noncurrent Assets
Land
60
60
Building &
Equipment
40
10
Total Noncurrent
Assets
100
70
Total
Assets
$565
$490
Liabilities
Current Liabilities:
Notes Payable
$
90
$ 65
Accounts
Payable
80
55
Accrued
Expenses
15
15
Total Current
Liabilities
185
135
Noncurrent Liabilities:
Notes Payable
145
130
Long-term Lease
Obligations
120
125
Total Noncurrent
Liabilities
265
255
Total
Liabilities
$450
$390
Required:
Compute the ratios listed below for years 2013 and 2014 and
determine which year had the most favorable ratios. Show supporting
computations.
1. Current
ratio
2. Quick
ratio
3. Debt
ratio
4. Asset
mix
ANS:
1. Current
ratio:
2014
2013
=
=
2.51
= 3.11
2013 better
1. Quick
ratio:
=
= 1.54
= 1.66
2013 better
1. Debt
ratio:
=
=
0.79
= 0.79
Both years equal
1. Asset
mix:
=
=
0.07
= 0.02
2013 better
PTS:
1
DIF:
Easy
OBJ: LO 3
TOP: AICPA FN- Measurement
MSC: AACSB Analytic
2. Below
are selected accounts and their balances for the Beehive Company as of December
31, 2015:
Accounts Payable …………………………………. $
98,000
Accounts Receivable ………………………………. 216,000
Allowance for Doubtful Notes and Accounts …………… 25,000
Cash …………………………………………….
22,400
Wages Payable
……………………………………. 10,800
Trademarks
………………………………………. 45,000
Long-Term Advances to Officers
…………………….. 150,000
Inventory
………………………………………..
83,000
Income Taxes Payable ……………………………… 72,000
Notes Receivable (short-term)
………………………
97,000
Bond Redemption Fund
………………………………
180,000
Bonds Payable
……………………………………. 500,000
Premium on Bonds Payable
…………………………..
40,000
Treasury Stock
…………………………………… 57,600
Based on the above information, determine the amount of working
capital at December 31, 2015.
ANS:
Beehive Company
Schedule of Working Capital
December 31, 2015
Current assets:
Cash ………………………
$ 22,400
Notes receivable …………… $
97,000
Accounts receivable ………… 216,000
$313,000
Less allowance for doubtful
notes and accounts ………..
25,000
288,000
Inventory
………………….
83,000 $393,400
Current liabilities: ………….
Accounts payable
……………
$ 98,000
Wages payable
………………
10,800
Income taxes payable
………..
72,000 180,800
Working capital
………………
$212,600
PTS:
1
DIF:
Medium
OBJ: LO
2 TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
3. Account
balances and supplemental information for the Alain Corporation as of December
31, 2015, are given below:
Accounts Payable
………………………………… $ 75,900
Accounts Receivable ……………………………… 141,600
Accumulated Depreciation–Equipment
……………….. 84,000
Bonds Payable
…………………………………… 300,000
Cash …………………………………………… 243,900
Common Stock …………………………………….
1,560,000
Deferred Income Tax Liability (noncurrent)
…………. 6,900
Dividends Payable
……………………………….. 45,000
Equipment
……………………………………….
840,000
Income Taxes Payable …………………………….. 91,500
Inventory ……………………………………….
395,100
Investment in Land
………………………………. 510,000
Investment in Stock of Subsidiary
………………….
492,000
Note Payable
……………………………………. 120,000
Notes Receivable
………………………………… 150,000
Prepaid Insurance ………………………………..
7,200
Retained Earnings
……………………………….. 453,600
Salaries and Wages Payable ……………………….. 42,900
(a)
$300,000 of 12% bonds were sold on November 1, 2015, at par.
(b) 40,000
shares of $30 par value common stock were sold for $1,560,000.
(c)
All the equipment was purchased on January 2, 2014. The depreciation rate is 10
percent per year.
(d) 5
percent of accounts receivable are expected to be uncollectible.
(e) A
two-year insurance policy was purchased on May 1, 2015, for $7,200.
(f)
Accrued interest on $150,000 of short-term notes receivable from customers was
$5,100 at December 31, 2015.
(g)
$120,000 was borrowed from the bank on a 5-year, 10% note payable dated July 1,
2015. The loan is to be repaid in 10 semiannual payments of $12,000 plus
interest, with the first payment due January 1, 2016.
Prepare a properly classified balance sheet in report form for
Alain Corporation as of December 31, 2015.
ANS:
Alain Corporation
Balance Sheet
December 31, 2015
Assets
Current assets:
Cash
…………………………………
$243,900
Notes receivable ………………………
150,000
Accounts receivable, less allowance for
doubtful accounts of $7,080 …………..
134,520
Interest receivable ……………………
5,100
Inventory
…………………………….
395,100
Prepaid insurance ……………………..
4,800 $ 933,420
Investments:
Investment in land …………………….
$510,000
Investment in stock of subsidiary
……….
492,000
1,002,000
Equipment
……………………………… $840,000
Less accumulated depreciation–equipment
…..
168,000
672,000
Total assets
……………………………
$2,607,420
Liabilities:
Current liabilities:
Accounts payable ……………………… $ 75,900
Dividends payable …………………….. 45,000
Income taxes payable ………………….. 91,500
Salaries and wages payable
……………..
42,900
Interest payable
……………………… 6,000
Current portion of long-term note payable ..
24,000 $ 285,300
Noncurrent liabilities:
Long-term debt:
Note payable
……………………….. $ 96,000
Bonds payable
………………………. 300,000
Deferred income tax liability ………….. 6,900
$ 402,900
Total liabilities
……………………….
$688,200
Owners’ Equity:
Contributed capital:
Common stock, $30 par
………………….
$1,200,000
Additional paid-in capital ……………..
360,000
Retained earnings ($453,600 – $7,080 + $5,100
– $2,400 – $84,000 – $6,000 = $359,220)
….
359,220
1,919,220
Total liabilities and owners’ equity
………
$2,607,420
PTS:
1
DIF:
Medium
OBJ: LO
1 TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
4. McCallister,
Inc., a nonpublic enterprise, is negotiating a loan for expansion purposes and
the bank requires audited financial statements. Before closing the accounting
records for the year ended December 31, 2015, McCallister’ controller prepared
the following comparative financial statements for 2015 and 2014:
McCallister, Inc.
Balance Sheets
December 31, 2015 and 2014
2015 2014
Cash ……………………………….. $ 550,000
$ 300,000
Investment securities (reported at market;
cost, $142,000) …………………….
156,000
0
Accounts receivable
…………………..
974,000
784,000
Allowance for doubtful accounts
………..
(100,000)
(64,000)
Inventories
………………………….
850,000
770,000
Property and equipment ………………..
620,000
434,000
Accumulated depreciation ………………
(300,000)
(242,000)
Total assets
……………………….
$2,750,000 $1,982,000
Accounts payable
…………………….. $ 180,000
$ 154,000
Accrued expenses ……………………..
160,000
40,000
Note payable, 5-year
………………….
600,000
600,000
Estimated contingent liability …………
200,000
0
Common stock, $10 par …………………
420,000
420,000
Additional paid-in capital
…………….
260,000
260,000
Retained earnings
……………………. 930,000
508,000
Total liabilities & owners’ equity
…… $2,750,000
$1,982,000
McCallister, Inc.
Income Statements
For the Years Ended December 31, 2015 and 2014
2015 2014
Net sales
……………………………
$3,160,000
$2,500,000
Operating expenses:
Cost of sales
………………………..
$1,510,000
$1,380,000
Selling & administrative
………………
984,000
730,000
Depreciation
…………………………
58,000
36,000
Estimated loss from lawsuit ……………
200,000
0
$2,752,000
$2,146,000
Operating income
…………………….. $
408,000
$ 354,000
Unrealized gain on investment securities
..
14,000
0
Net income
…………………………..
$
422,000
$ 354,000
During the audit, the following additional information was
obtained:
(a) The
investment portfolio consists of investments in trading securities with a total
market value of $156,000 at December 31, 2015. The securities were purchased
February 3, 2015, at a cost of $142,000.
(b) As a
result of errors in physical count, inventories were overstated by $30,000 at
December 31, 2015.
(c)
On January 2, 2015, the cost of equipment purchased for $80,000 was mistakenly
charged to repairs and maintenance. McCallister depreciates this type of
equipment over a 5-year life using the straight-line method, with no residual
or salvage value.
(d)
McCallister was named as a defendant in a lawsuit in October 2015. McCallister’
counsel is of the opinion that McCallister has a good defense and does not
anticipate any impairment of McCallister’ assets or that any significant
liability will be incurred. However, McCallister’ counsel admits that loss of
the suit is “possible.” McCallister’ management wished to be conservative and
established a loss contingency of $200,000 at December 31, 2015.
(e) On
January 24, 2016, before the 2015 financial statements were issued, McCallister
was notified that one of its largest customers had filed for bankruptcy as the
result of a flood that destroyed a substantial portion of the company’s assets
on January 16, 2016. The customer’s accounts receivable balance at December 31,
2015, was $144,000.
(f)
$100,000 of 5-year notes payable will mature September 30, 2016. In view of
McCallister’ plans for expansion, management is seriously considering
refinancing the notes when they become due.
(1)
Prepare a properly classified balance sheet for McCallister, Inc., as of
December 31, 2015. (Income tax considerations should be ignored.)
(2)
Identify the events and other information that should be disclosed in the notes
to McCallister’ financial statements. (Do not prepare the notes.)
ANS:
(1)
McCallister, Inc.
Balance Sheet
December 31, 2015
Assets
Current assets:
Cash
……………………………….
$ 550,000
Investment securities (reported at market; cost, $142,000)
……………………..
156,000
(a)
Accounts receivable
…………………. $974,000
Less allowance for doubtful accounts
…..
100,000
874,000
Inventories
…………………………
820,000
(b)
Total current assets
…………………
$2,400,000
Property and equipment ………………. $700,000
Less accumulated depreciation …………
316,000
384,000
(c)
Total assets
………………………..
$2,784,000
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable
…………………….
$ 180,000
Accrued expenses
…………………….
160,000
Notes payable (due September 30, 2016)
…
100,000
Total current liabilities
…………….
$ 440,000
Long-term notes payable
………………
500,000
Total liabilities
……………………
$ 940,000
Contributed capital:
Common stock, $10 par ……………….. $420,000
Additional paid-in capital
……………
260,000
680,000
Retained earnings [$930,000 – $30,000 (b)
+ $80,000 (c) – $16,000 (c) + $200,000 (d)]
1,164,000
Total liabilities & stockholders’ equity
.
$2,784,000
Note: Letters correspond to letters in problem identifying
additional information.
(2)
Notes to the financial statements of McCallister, Inc. should include:
- Summary
of significant accounting policies. A description of accounting principles
and methods used in recognizing revenues and allocating asset costs to
current and future periods. Specifically, McCallister should disclose
accounting policies relating to valuation of receivables, inventories, and
depreciable assets and any other policies that would influence the
decisions of users.
- Information
regarding loss contingency. A description of the pending legal action,
including information and data to assist users in evaluating the risk of
potential loss. Based on the opinion of McCallister’ counsel, the
estimated loss of $200,000 should not be reported in the financial
statements, but the contingency should be described in a note, since the
incurrence of a loss is “reasonably possible.”
- Information
regarding the bankruptcy of a major customer. This type of subsequent
event does not affect the amounts reported in the financial statements,
because the casualty giving rise to the bankruptcy occurred after
McCallister’ balance sheet date.
- Additional
information to support totals in financial statements. For example,
McCallister might present additional detail for inventory and cost of
sales, property and equipment, and/or selling and administrative expenses.
PTS:
1
DIF:
Challenging
OBJ: LO
1 TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
5. The
following balance sheet was prepared by the accountant for Lawnwood Farms
Corp.:
Lawnwood Farms Corp.
Balance Sheet
December 31, 2015
Assets
Cash …………………………………………… $ 271,500
Investment securities …………………………….
315,000
Accounts receivable ………………………………
270,000
Inventories
……………………………………..
501,000
Total current assets
…………………………… $1,357,500
Land, buildings, and equipment
…………………….
1,452,000
Total assets
…………………………………….
$2,809,500
Liabilities and Stockholders’ Equity
Accounts payable
………………………………… $ 342,420
Estimated losses from future crop failures
…………. 360,000
Salaries payable
…………………………………
150,000
Total current liabilities
………………………. $
852,420
10% Bonds payable (due in 10 years)
……………….. 525,000
Capital stock ……………………………………
450,000
Retained earnings
……………………………….. 982,080
Total liabilities and stockholders’ equity
………….
$2,809,500
Additional information:
(a) Cash
is held in a checking account and a savings account with balances of $69,450
and $202,050, respectively. The cash in the savings account will be used to
support operations in the event of a crop failure.
(b) A loan
to the president for $180,000 that is to be repaid in quarterly installments of
$15,000 is included in “Accounts receivable.” Other accounts receivable are
considered to be 95 percent collectible.
(c)
Inventories include:
Finished products
…………………………..
$390,000
Supplies ………………………………….. 19,500
Storage buildings (net of $30,480 depreciation)
..
91,500
Total
…………………………………… $501,000
(d) “Land,
buildings, and equipment” includes 5 tractors that were purchased near the end
of the year for $360,000 (shown net of a $300,000, 5-year loan used to buy the
tractors). The balance of the account consists of land that was purchased for
$1,200,000 and buildings that were purchased for $255,000 (shown net of
depreciation of $63,000).
(e)
Included in “Accounts payable” are $105,000 of advances from customers for
delivery of goods in August of the next year.
(f)
The company has 90,000 shares of $5 par common stock issued and outstanding.
The common stock was originally sold for $7 per share, and the premium was
included in “Retained earnings.”
(g) After
reading a U.S. Meteorological Service report, the president believes that next
year will be a bad crop year due to freak hailstorms and estimates the company
will lose about $360,000. An appropriation of Retained Earnings has been made for
this amount.
Using the balance sheet and the additional information, prepare
a properly classified and corrected balance sheet.
ANS:
Lawnwood Farms Corp.
Balance Sheet
December 31, 2015
Assets
Current assets:
Cash ……………………………….
$ 69,450
Investment securities
………………..
315,000
Accounts receivable ………………….
$ 90,000
Less allowance for doubtful accounts
…..
4,500
85,500
Inventories …………………………
390,000
Advances to officers (due in 1 year)
…..
60,000
Supplies
……………………………
19,500
Total current assets
…………………
$ 939,450
Investments:
Cash fund for future losses
…………..
202,050
Land, buildings, and equipment:
Land ………………………………. $1,200,000
Buildings
…………………………..
376,980
Equipment
…………………………..
360,000
Less accumulated depreciation–buildings
and equipment
……………………….
(93,480)
1,843,500
Other noncurrent assets:
Advances to officers (long-term)
………
120,000
Total assets
………………………….
$3,105,000
Liabilities
Current liabilities:
Accounts payable
…………………….
$ 237,420
Salaries payable
…………………….
150,000
Advances from customers
………………
105,000
Total current liabilities …………….
$ 492,420
Long-term debt:
5-year loan payable
…………………. $ 300,000
10% bonds payable ……………………
525,000
825,000
Total liabilities
……………………..
$1,317,420
Stockholders’ Equity
Contributed capital:
Common stock ($5 par, 90,000 shares issued
and outstanding) …………………..
$ 450,000
Additional paid-in capital
……………
180,000
$ 630,000
Retained earnings:
Appropriated for future losses ……….. $ 360,000
Unappropriated [$982,080 – $4,500(b) –
$180,000(f) = $797,580 …….
797,580
1,157,580
Total stockholders’ equity
……………..
$1,787,580
Total liabilities and stockholders’ equity
.
$3,105,000
PTS:
1
DIF:
Challenging
OBJ: LO
1 TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
6. The
following totals are taken from the December 31, 2015, balance sheet of Mentor
Company:
Current assets …………………………………
$350,000
Long-term assets
……………………………….
800,000
Current liabilities
…………………………….
240,000
Long-term liabilities
…………………………..
270,000
Additional information:
(a) Cash
of $38,000 has been placed in a fund for the retirement of long-term debt. The
cash and long-term debt have been offset and are not reflected in the financial
statements.
(b)
Long-term assets include $50,000 in treasury stock.
(c)
Cash of $14,000 has been set aside to pay taxes due. The cash and taxes payable
have been offset and do not appear in the financial statements.
(d)
Advances on salespersons’ commissions in the amount of $21,000 have been made.
Also, sales commissions payable total $24,000. The net liability of $3,000 is
included in Current Liabilities.
After making any necessary changes, what are the totals for
Mentor’s current assets and current liabilities?
ANS:
Current
Assets Current
Liabilities
Beginning …………………………. $350,000
$240,000
(a) No
adjustment …………………
(b) No
adjustment …………………
(c)
Offsetting cash and taxes payable
. 14,000 14,000
(d) Netting
commission advances and
commissions payable …………. 21,000 21,000
Totals
……………………….
$385,000
$275,000
PTS:
1
DIF:
Medium
OBJ: LO
1 TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
7. The
following totals are taken from the December 31, 2014, balance sheet of Roanoke
Company:
Current assets
…………………………………
$350,000
Long-term assets
……………………………….
800,000
Current liabilities
…………………………….
240,000
Long-term liabilities
…………………………..
270,000
Additional information:
(a) A
building costing $100,000 was purchased by taking out a $100,000 mortgage.
Since the building serves as collateral on the mortgage loan, both have been
excluded from the financial statements.
(b) Cash in
the amount of $45,000 is in a restricted fund for the purchase of equipment.
This cash has been included in Current Assets.
(c)
Long-term liabilities include a bank loan of $80,000. Of this loan, $15,000
must be repaid within the coming year.
(d)
Investment securities totaling $27,000 are included in Current Assets. These
securities represent stock purchases made as a long-term equity investment in a
major supplier.
After making any necessary changes, what are the totals for
Roanoke’s long-term assets and long-term liabilities?
ANS:
Long-Term
Assets Long-Term
Liabilities
Beginning ………………………….
$800,000
$270,000
(a) Offsetting
building and mortgage ..
100,000
100,000
(b) Restricted
fund ………………. 45,000
(c)
Current portion of long-term debt
.
(15,000)
(d) Long-term
investment
…………..
27,000
Totals
……………………….
$972,000
$355,000
PTS:
1
DIF:
Medium
OBJ: LO
1 TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
8. Bowman
Company reported assets totaling $870,000 as of December 31, 2014. The
following information relates to those assets:
(a)
Tristan Labs, a rival company, recently offered to give a $100,000 signing
bonus to the head of Bowman’s fabrication department if she would leave Bowman
and join Breakstone. She declined. Bowman has consequently recorded a long-term
asset, “Employees Under Contract,” for $100,000.
(b) Bowman
purchased a patent from a small research firm for $75,000. Subsequent research
has shown that the patented technology doesn’t work as well as originally
thought and the technology actually has no economic use. Bowman reports the
patent at its amortized cost of $60,000.
(c)
An independent appraiser recently set Bowman’s market value at $500,000. This
exceeded the book value of equity by $120,000. Accordingly, Bowman recorded Goodwill
totaling $120,000.
(d) Near
the end of the year, Bowman paid $30,000 for the exclusive right to market
electronic equipment to be imported from abroad. Bowman reported this as a
$30,000 “Intangible Asset.”
(e) When
Bowman started business three years ago, it was required to deposit $5,000 with
the local electric utility. The deposit is refundable if Bowman cancels its
electric service. Bowman earns no interest on the deposit. The deposit is
recorded as an “Other Long-Term Asset.”
After considering the items above, what should be the total of
Bowman’s reported assets?
ANS:
Reported Assets
Beginning …………………………………… $870,000
(a) Employees
under contract
…………………
(100,000)
(b) Obsolete
patent ………………………… (60,000)
(c)
Unpurchased goodwill
…………………….
(120,000)
(d) No
adjustment …………………………..
(e) No
adjustment …………………………..
Total
………………………………..
$ 590,000
PTS:
1
DIF: Challenging
OBJ: LO
1 TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
9. Heartland
Company reported liabilities totaling $1,230,000 as of December 31, 2014. The
following information relates to those liabilities:
(a) Heartland
reported a $100,000 bank loan payable. However, Heartland intends to repay this
loan on January 10, 2015.
(b)
Heartland has reported a $40,000 liability for the estimated cost of future
warranty repairs based on product sales for the past year.
(c)
Heartland is being sued for $350,000 by a disgruntled employee. Heartland’s
attorney thinks that it is possible that Heartland will lose the case.
Heartland has not yet recorded any liability for this potential loss.
(d)
Heartland receives consulting services from a local CPA. Expected services by
the CPA for the coming year will cost $35,000. No liability has been recorded.
(e)
Heartland has reached an agreement with a major customer. Heartland expects to
provide services totaling $400,000 over the coming three years. The customer
has already paid Heartland $100,000. No liability has been recorded.
After considering these items, what should be the total of
Heartland’ reported liabilities?
ANS:
Reported Liabilities
Beginning …………………………………… $1,230,000
(a) No
adjustment …………………………..
(b) No
adjustment …………………………..
(c) No
adjustment …………………………..
(d) No
adjustment …………………………..
(e) Unearned
revenue ……………………….. 100,000
Total
………………………………..
$1,330,000
PTS:
1
DIF:
Challenging
OBJ: LO
1 TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
10.
Knowledgeable users of financial statements recognize that the
numbers reported in a company’s financial statements depend on the accounting
policies used to generate the numbers. Various choices of accounting policies
exist, such as LIFO vs. FIFO for inventory costing and straight-line vs.
double-declining balance for depreciation. APB Opinion No. 22 requires that a
company disclose the accounting policies used to ensure that statement users
have the information they need to make sound decisions.
What problems arise from the large variety of accounting choices
available?
ANS:
The greatest problem posed by the array of accounting choices
available is the difficulty of achieving comparability between firms (and even
among firms in the same industry). A statement user not only must be informed
of the basic differences that exist, but also must adjust balances to achieve
comparability. As might be expected, differences between financial statement
items (such as inventory) can be significant as a result of the use of
different accounting policies and procedures.
PTS:
1
DIF:
Medium
OBJ: LO
4 TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
11.
Certain assets currently are omitted from the balance sheet. For
example, the value of the human resources of the firm are not reported.
Nevertheless, investors and others might greatly benefit from a knowledge of
the extent to which human assets have increased or decreased during a given
period. Values certainly may be attributed to individuals or groups based on
their ability to render future economic services. A major issue is the method
that should be employed in measuring human assets.
Identify some possible ways of measuring human resources.
ANS:
Possible methods for measuring human assets would include:
1. The
historical-cost method in which the costs associated with recruiting,
selecting, hiring, training, and developing an employee are capitalized and
amortized over the expected period over which the enterprise expects to benefit
from the employee’s services.
2. The
replacement cost method in which estimated costs of replacing a firm’s existing
human resources are estimated and recorded. Such costs include all of the costs
of recruiting, selecting, hiring, training, and developing new employees until
they reach the competence of old employees.
3. The
present value of the remaining earnings to be paid an employee.
PTS:
1
DIF:
Medium
OBJ: LO
4 TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
12.
As a member of the audit staff of Redman & Co., CPAs, you
have been assigned to the audit of a new client, Auburn Corporation. Upon
arriving at the client’s offices, the controller provides you with copies of
the company’s annual financial statements. You quickly observe that the balance
of accounts receivable has increased materially over the amount reported on the
prior year’s balance sheet. Your inquiry of the controller produces the
following response:
“This year we have included several other items with our trade
receivables. All of these items represent receivables and include:
(a)
Advances made to officers and employees,
(b)
Advances to our subsidiary company, and
(c)
A refund from the Internal Revenue Service resulting from the favorable
resolution of a disputed tax matter.
I have included a description of the tax item in the note to the
financial statements. Since the other two items represent internal matters, I
saw no reason to disclose them or present them as separate items on the balance
sheet.”
Do you concur with the controller’s treatment of these items?
Explain.
ANS:
Trade receivables represent amounts owed by customers for goods
sold and services rendered as part of normal business operations. The term
“accounts receivable: is assumed to connote trade receivables. Inclusion of
other forms of receivables under the caption “accounts receivable” thus may be
confusing and misleading. The nature of the items included with accounts
receivable on the Auburn Corporation statements suggests that they be
classified and reported as separate items on the balance sheet and in the notes
to the financial statements where necessary. This is particularly true of
advances to officers, employees, and subsidiaries since these represent
transactions with related parties which may not have been conducted at
arm’s-length.
PTS:
1
DIF:
Medium
OBJ: LO
1 TOP: AICPA
FN-Measurement
MSC: AACSB Analytic
13.
The balance sheet provides information concerning liquidity,
financial flexibility, and information for calculating various financial
ratios. The balance sheet serves as a major indicator of an enterprise’s
ability to survive. Nevertheless, the analysis of the balance sheet should be
approached with a clear understanding of the limitations of the statement.
What are the major limitations of the balance sheet that should
be recognized in analyzing the statement?
ANS:
Values reported in the balance sheet may represent a mixture of
values. Cash is a current value item but plant assets are not. A summation of
these numbers is thus questionable as are the ratios using these mixed values.
Some entity resources and obligations are not reported on the
balance sheet. Many intangible assets, such as a reputation for superior
products or customer service, are not recognized on the balance sheet. As a
result, the numbers on the balance sheet frequently are not a good reflection
of what a company is worth.
Dollar amounts shown on the balance sheet represent different
levels of purchasing power. Assets, liabilities, and equities shown on the
balance sheet are reflected in terms of unequal purchasing power units.
Variations in purchasing power of the amounts reported on the balance sheet
make comparisons among companies, and even within single companies, difficult.
Finally, all companies do not classify and report all like items
similarly. Titles and account classifications vary, some companies provide more
detail than others, and different companies report similar transactions in
different manners. Comparisons between companies thus are made more difficult.
PTS:
1
DIF:
Medium
OBJ: LO
5 TOP: AICPA
FN-Reporting
MSC: AACSB Analytic
14.
You have just joined the public accounting firm of Johnson,
Boyd, and Winters upon graduating from the University of High Numbers. You are
assigned to the audit of the Wild Notes Company, a manufacturer of electronic
musical instruments. Part of your responsibility on the audit will be the
examination of the property, plant, and equipment of the client.
Required:
Use your knowledge of financial statements plus your experience
in your principles of accounting course to develop a list of questions
regarding property, plant, and equipment you feel you should answer as an
independent auditor in order to ensure that the statements provide relevant and
reliable information to the users of Wild Notes Company’s financial statements.
ANS:
The following list is representative of questions to which the
independent auditor would seek answers:
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