2. The balance in a deferred revenue account represents an amount that is Earned Collected a. Yes Yes b. Yes No c. No Yes d. No No.

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1 Multiple choice (36%, 2%each): 1. Failure to record the expired amount of prepaid rent expense would not a. understate expense. b. overstate net income. c. overstate owners' equity. d. understate liabilities. 2. The balance in a deferred revenue account represents an amount that is Earned Collected a. Yes Yes b. Yes No c. No Yes d. No No. 3. Iowa Cattle Company uses a periodic inventory system. Iowa purchased cattle from Big D Ranch at a cost of $27,000 on credit. The entry to record the receipt of the cattle would be a. Purchases... 27,000 Accounts Payable... 27,000 b. Inventory... 27,000 Accounts Payable... 27,000 c. Purchases... 27,000 Cash... 27,000 d. Inventory... 27,000 Cash... 27, Which of the following items would be added to the book balance on a bank reconciliation? a. Outstanding checks b. A check written for $63 entered as $36 in the accounting records c. Interest paid by the bank d. Deposits in transit 5. Goods on consignment should be included in the inventory of a. the consignor but not the consignee. b. both the consignor and the consignee. c. the consignee but not the consignor. d. neither the consignor nor the consignee. 6. If the ending inventory balance is understated, net income of the same period a. will be overstated. b. will be understated. c. will be unaffected. d. cannot be determined from the above information. 1

2 7. The following information is available for the Becca Company for the three months ended June 30 of this year: Inventory, April 1 of this year... $1,200,000 Purchases... 4,500,000 Freight-in ,000 Sales... 6,400,000 The gross margin was 25 percent of sales. What is the estimated inventory balance at June 30? a. $880,000 b. $933,000 c. $1,200,000 d. $1,500, A company purchased land to be used as the site for the construction of a plant. Timber was cut from the building site so that construction of the plant could begin. The proceeds from the sale of the timber should be a. classified as other income. b. netted against the costs to clear the land and expensed as incurred. c. deducted from the cost of the plant. d. deducted from the cost of the land. 9. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will be equal to a. the face amount of the bond. b. the present value of the bond maturity value plus the present value of the interest payments to be made during the life of the bond. c. the face amount of the bond plus the present value of the interest payments made during the life of the bond. d. the sum of the face amount of the bond and the periodic interest payments. 10. Nimbus Inc. purchased certain plant assets under a deferred payment contract. The agreement was to pay $30,000 per year for ten years. The plant assets should be valued at a. $300,000. b. $300,000 plus imputed interest. c. present value of $30,000 annuity for ten years at an imputed interest rate. d. future value of $30,000 annuity for ten years at an imputed interest rate. 11. When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof, which of the following types of expenditure has occurred? a. Ordinary repairs and maintenance b. Addition c. Rearrangement d. Betterment 2

3 The financial statements of Block, Inc. for 2000 and 2001 contained the following errors: Ending inventory $5,000 overstated $8,000 understated Insurance expense 2,400 understated 1,300 overstated 12. Assuming that none of the errors was detected or corrected, by what amount will 2000 income before taxes be overstated or understated? a. $2,600 understated b. $2,600 overstated c. $7,400 understated d. $7,400 overstated 13. Assuming that none of the errors was detected or corrected, by what amount will 2001 income before taxes be overstated or understated? a. $6,700 understated b. $6,700 overstated c. $11,900 understated d. $14,300 understated 14. Included in Kaiser Corporation's liability account balances at December 31, 2008, were the following: 14 percent note payable issued October 1, 2008, maturing September 30, $250, percent note payable issued April 1, 2006, payable in six annual installments of $100,000 beginning April 1, ,000 Kaiser's December 31, 2008, financial statements were issued on March 31, On January 15, 2009, the entire $400,000 balance of the 16 percent note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2009, Kaiser consummated a noncancelable agreement with the lender to refinance the 14 percent, $250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement's provisions. On the December 31, 2008, balance sheet, the amount of the notes payable that Kaiser should classify as noncurrent obligations is a. $100,000 b. $250,000 c. $350,000 d. $650,000 3

4 RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1, 2008, with interest payable on January 1 and July 1 of each year If the bonds were issued on April 1, 2008, the amount of accrued interest on the date of sale is a. $2,500 b. $5,000 c. $10,000 d. $ If the bonds were issued at 97 on April 1, 2008, plus accrued interest, the amount of cash received by RCM Corporation would be a. $194,000 b. $199,000 c. $200,000 d. $204, If the bonds were issued at 97 on April 1, 2008, the amount of the discount amortized on July 1 (using the straight-line method) would be approximately a. $25 b. $ 67 c. $75 d. $ Information obtained prior to the issuance of the current period s financial statements of a company indicates that it is probable that, at the date of the financial statements, a liability will be incurred for obligations related to product warranties on products sold during the current period. During the past three years, product warranty costs have been approximately 1 1/2 percent of annual sales revenue. An estimated loss contingency should be a. neither accrued nor disclosed in the financial statements. b. recognized as an appropriation of retained earnings. c. accrued in the accounts and reported in the financial statements. d. disclosed in the financial statements but not accrued. Questions: 1. Cash, the most liquid of all assets, must be safeguarded. Cash can be easily concealed, bears no marks of ownership, and is universally valued and accepted. Risk of theft of cash is directly correlated to the accessibility of cash and cash records. Businesses address these problems through a system of internal control. Required: 1. Discuss generally what a system of internal control is designed to accomplish and identify general controls over cash that should be implemented. (5%) 2. Identify internal control procedures for cash receipts. (5%) 3. Identify internal control procedures for cash disbursements.( 4%) 4

5 2. The data below relate to Raw Material F, which is stocked by Dixon Inc. in its warehousing operation: Raw Material F Units Dollars Date Received Issued Balance Price Received Issued Balance Jan. 1 1,600 $16 $25,600 Jan. 11 2, $28,000 Feb Mar June ,700 Aug Sept Oct. 8 1, ,670 Dec Dec ,200 From these data, provide answers for the following [show computations for (1)]: (1) Assuming a perpetual inventory system is used, compute the ending inventory under (a) FIFO and (b) LIFO. (8%) (2) If a perpetual inventory of Raw Material F is kept on a moving average basis, the ending inventory will be: (a) lower than the LIFO basis. (b) higher than the FIFO basis. (c) lower than the FIFO basis. (d) impossible to determine. (2%) 3. Aviery Inc., is considering between issuing 3,000,000 shares of common stock and $75,000,000 bonds. What are the pros and cons of these two alternatives? You may use current market rate in Tai\wan to illustrate your points. (8%) 4. Footnote disclosures for long-term liabilities provide information that is not conveniently presented in the balance sheet. Although detailed disclosure requirements exist for certain specialized obligations, a set of general disclosure requirements is applicable to most enterprises. Identify the general disclosure requirements for long-term liabilities.(8%) 5

6 5. (I) A trial balance before adjustment included the following: Debit Credit Accounts receivable $90,000 Allowance for doubtful accounts 730 Sales $360,000 Sales returns and allowances 8,000 Give journal entries assuming that the estimate of uncollectibles is determined by taking (a)5% of gross accounts receivable and (b) 1% of net sales. (8%) (II) When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (a) direct write-off method, and (b) allowance method. Instructions (a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense. (4%) (b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles. (4%) 6. Slone Company sells TVs. The perpetual inventory was stated as $30,500 on the books at December 31, At the close of the year, a new approach for compiling inventory was used and apparently a satisfactory cut-off for preparation of financial statements was not made. Some events that occurred are as follows. 1. TVs shipped to a customer January 2, 2002, costing $5,000 were included in inventory at December 31, The sale was recorded in TVs costing $15,000 received December 30, 2001, were recorded as received on January 2, TVs received during 2001 costing $4,600 were recorded twice in the inventory account. 4. TVs shipped to a customer December 28, 2001, f.o.b. shipping point, which cost $12,000, were not received by the customer until January, The TVs were included in the ending inventory. 5. TVs on hand that cost $6,100 were never recorded on the books. Instructions Compute the correct inventory at December 31, (8%) 6

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