Accounting 303 Exam 1, Chapters 1 3 & 5 Fall 2011 Section Row

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1 1 Accounting 303 Name Exam 1, Chapters 1 3 & 5 Fall 2011 Section Row I. Multiple Choice Questions. (2 points each, 52 points in total) Read each question carefully and indicate your answer by circling the letter preceding the one best answer. 1. What is due process in the context of standard setting at the FASB? a. FASB operates in full view of the public. b. Public hearings are held on proposed accounting standards. c. Interested parties can make their views known. d. All of the above. 2. Which organization was responsible for issuing Accounting Research Bulletins? a. Accounting Principles Board. b. Committee on Accounting Procedure. c. SEC. d. FASB. 3. Which of the following is a characteristic of generally accepted accounting principles? a. common set of standards and principles. b. standards and principles are based on federal statutes. c. acceptance requires an affirmative vote of Certified Public Accountants. d. practices that become accepted for at least a year by all industry members. 4. The Financial Accounting Standards Board a. has issued a series of pronouncements entitled Statements on Auditing Standards. b. is appointed by the Financial Accounting Foundation. c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards. d. was the forerunner of the current Accounting Principles Board. 5. Which of the following pronouncements were issued by the Accounting Principles Board? a. Accounting Research Bulletins b. Opinions c. Statements of Position d. Statements of Financial Accounting 6. According to the FASB's conceptual framework, which of the following relates to both relevance and faithful representation? Comparability Neutrality a. Yes Yes b. Yes No c. No Yes d. No No

2 2 7. The underlying theme of the conceptual framework is a. decision usefulness. b. understandability. c. faithful representation. d. comparability. 8. Which of the following is an ingredient of relevance? a. Verifiability. b. Neutrality. c. Timeliness. d. Materiality. 9. Which of the following is an ingredient of faithful representation? a. Predictive value. b. Materiality. c. Neutrality. d. Confirmatory value. 10. What is the quality of information that enables users to better forecast future operations? a. Faithful representation. b. Materiality. c. Timeliness. d. Relevance. 11. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is a. relevance. b. faithful representation. c. verifiability. d. neutrality. 12. In classifying the elements of financial statements, the primary distinction between revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions involved. 13. The economic entity assumption a. does not apply to sole proprietorships. b. recognizes the legal aspects of business organizations. c. is applicable to all forms of business organizations. d. requires periodic income measurement. 14. What accounting concept justifies the usage of depreciation and amortization policies? a. Going concern assumption b. Fair value principle c. Full disclosure principle d. Monetary unit assumption

3 3 15. Which of the following errors will cause an imbalance in the trial balance? a. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable. b. Listing the balance of an account with a debit balance in the credit column of the trial balance. c. Omission of a transaction in the journal. d. Posting an entire journal entry twice to the ledger. 16. The failure to properly record an adjusting entry to accrue a revenue item will result in an: a. understatement of revenues and an understatement of liabilities. b. understatement of revenues and an understatement of assets. c. overstatement of revenues and an overstatement of liabilities. d. overstatement of revenues and an overstatement of assets. 17. Olsen Company paid or collected during 2012 the following items: Insurance premiums paid $ 20,800 Interest collected 67,800 Salaries paid 240,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2012 December 31, 2011 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 Insurance expense on the income statement for 2012 should be a. $15,400. b. $20,200. c. $21,400. d. $26, Lopez Company received $9,600 on April 1, 2012 for one year's rent in advance and recorded the transaction with a credit to an income statement account. The December 31, 2012 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $2,400. b. debit Rent Revenue and credit Unearned Rent Revenue, $7,200. c. debit Unearned Rent Revenue and credit Rent Revenue, $2,400. d. debit Unearned Rent Revenue and credit Rent Revenue, $7,200.

4 4 19. Presented below are data for Bangkok Corp Assets, January 1 $5,400 $6,480 Liabilities, January 1 3,240? Stockholders' Equity, Jan. 1?? Dividends 1, Common Stock Stockholders' Equity, Dec. 31?? Net Income 1, Stockholders' Equity at January 1, 2013 is a. $3,332. b. $2,160. c. $2,360. d. $3, Stine Corp.'s trial balance reflected the following account balances at December 31, 2012: Accounts receivable (net) $24,000 Trading securities 6,000 Accumulated depreciation on 15,000 equipment and furniture Cash 16,000 Inventory 30,000 Equipment 25,000 Patent 4,000 Prepaid expenses 2,000 Land held for future business site 18,000 On Stine's December 31, 2012 balance sheet, the current assets total is a. $78,000. b. $82,000. c. $87,000. d. $95, In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from a. operating activities. b. financing activities. c. investing activities. d. selling activities.

5 22. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for a. operating activities. b. borrowing activities. c. lending activities. d. financing activities. 23. In a statement of cash flows, proceeds from issuing common stock should be classified as cash inflows from a. lending activities. b. operating activities. c. investing activities. d. financing activities. 24. Which of the following is not an acceptable major asset classification on a balance sheet? a. Current assets b. Long-term investments c. Property, plant, and equipment d. Deferred charges 25. Koehler Company owns the following investments: Trading securities (fair value) $120,000 Available-for-sale securities (fair value) 70,000 Held-to-maturity securities (amortized cost) 94,000 Koehler will report securities in its long-term investments section of a. exactly $190,000. b. exactly $214,000. c. exactly $284,000. d. $164,000 or an amount less than $164,000, depending on the circumstances. 26. The balance sheet is useful for analyzing all of the following except a. liquidity. b. solvency. c. profitability. d. financial flexibility. 5

6 6 II. Problems (48 points in total) 1. (9 points) Match the letter preceding the organizations names or the basic accounting concepts with the descriptions listed below by placing the appropriate letter in the space provided. NOTE: Each letter may be used once, more than once, or not at all. A B C D E F G H I J Accounting Principles Board American Accounting Association American Institute of CPAs Committee on Accounting Procedure Emerging Issues Task Force Financial Accounting Foundation Financial Accounting Standards Boards Governmental Acct Standards Board Internal Revenue Service International Acct Standards Board K L M N O P Q R S Conservatism convention Economic Entity assumption Going Concern Assumption Historical Cost Principle Matching Principle Monetary-unit assumption Periodicity Assumption Revenue Recognition Principle Securities and Exchange Commission a. This was the first organization in the U.S. to be given authority to issue pronouncements on accounting procedures and practice. They issued 51 Bulletins during their 21 year existence. b. This organization began over 100 years ago, prepares the Uniform CPA Exam, and was the parent organization of the CAP. c. This organization has the most legal authority to establish accounting standards in the U.S. d. This is the organization that has the current authority to establish GAAP for U.S. businesses. e. In the absence of evidence to the contrary, it is assumed that a business will continue into the future. f. Traditionally, the dollar has been treated by accountants as a stable monetary unit, and thus is used as the measuring unit for financial statements. g. A business's resources, transactions, and financial records are kept separate from those of its owners for accounting purposes. h. The cost of merchandise inventory is charged to cost of goods sold in the same period that the sale is recorded. i. Financial information should be separated into specific time periods for reporting purposes to make the information more useful.

7 7 2. (15 points) Presented below are several transactions ITS Systems, Inc. entered into during For each one, prepare the December 31, 2011 adjusting entry. ITS has made no adjusting entries during a. On August 1, 2011, ITS rented a warehouse from Phillips Company by paying $78,012. The payment was for a three-year rental period. ITS recorded the payment of cash with a debit to Prepaid Rent. b. On February 1, 2011, ITS received $20,160 from a customer who prepaid for a four-year service contract. Assume the services are provided evenly over the life of the contract. ITS recorded the receipt of cash with a credit to Service Revenue. c. On May 1, 2011, ITS borrowed $250,000 from a bank. The loan is for a term of five years, has an interest rate of 7.75%, interest is to be paid every May 1 starting in 2012, and the principle is to be repaid at the maturity date. d. On January 1, 2011, ITS purchased some testing equipment at a cost of $78,600. ITS uses the straightline depreciation method and assigned a life of 4 years and no residual value to the equipment. e. ITS s December 2011 utility expense bill was received on December 31, 2011, and amounted to $630. ITS will not pay the bill until in January 2012.

8 8 3. (8 points) Given the following selected accounts from a company s year-end trial balance, prepare the appropriate closing entries. Accounts DR CR Common Stock 10,000 Retained Earnings 1,000 Service Fee Revenue 28,000 Interest Revenue 2,500 Wages Expense 24,300 Rent Expense 4,200 Tax Expense 2,800

9 4. (16 points) Given the following account information for Leong Corporation, prepare a balance sheet for the company as of December 31, You may omit the title. All accounts have normal balances. 9 Accumulated Depr. - Bldg. & Equip. 25,000 Advertising Expense 1,560 Bonds Payable (due in 2015) 78,000 Buildings 130,400 Cash 35,000 Common Stock 60,000 Depreciation Expense 8,000 Dividends 50,400 Interest Expense 2,400 Interest Payable 1,500 Inventory 102,000 Land 137,320 Notes Payable (due in 6 months) 19,400 Retained Earnings? Revenue 341,400 Salaries and Wages Expense 53,040 Supplies 6,860 Taxes Payable 3,000 Utilities Expense 1,320

10 10 Solutions Multiple Choice Que. No. Answer Que. No. Answer 1 d 14 a 2 b 15 b 3 a 16 b 4 b 17 c 5 b 18 a 6 b 19 c 7 a 20 a 8 d 21 c 9 c 22 a 10 d 23 d 11 c 24 d 12 c 25 d 13 c 26 c Problems 1. Que. No. a b c d e f g h i Answer D C S G M P L O Q 2. a. Rent Expense Prepaid Rent (78012 x 5/36 = 10835) b. Service Revenue Unearned Service Revenue (20160 x 37/48 = 15540) c. Interest Expense Interest Payable ( x.0775 x 8/12 = 12917)

11 11 d. Depreciation Expense Accumulated Depreciation (78600/4 = 19650) e. Utilities Expense 630 Utilities Payable Service Fee Revenue 28,000 Interest Revenue 2,500 Retained Earnings 800 Wages Expense 24,300 Rent Expense 4,200 Tax Expense 2,800

12 12 4. Leong Corporation Balance Sheet December 31, 2011 Assets Current Assets Cash $ 35,000 Inventory 102,000 Supplies 6,860 Total Current Assets $ 143,860 Property, Plant, and Equipment Land 137,320 Building $ 130,400 Accumulated depreciation Bldg (25,000) 105,400 Total Property, Plant, and Equipment 242,720 Total assets $ 386,580 Liabilities & Stockholders' Equity Current Liabilities Notes payable $ 19,400 Taxes payable 3,000 Interest payable 1,500 Total current liabilities $ 23,900 Long-term liabilities Bond payable 78,000 Total liabilities 101,900 Stockholders Equity Common stock 60,000 Retained earnings* 224,680 Total stockholders' equity 284,680 Total liabilities & stockholders' equity $ 386,580 * Net Income: $341,400 - $53,040 - $8,000 - $2,400 - $1,560 - $1,320 = $275,080 Net Income less dividends: = $275,080 - $50,400 = $224,680