GBA 521 Midterm Review Dr. Markelevich Multiple Choice (3 points for each question) Identify the letter of the choice that best completes the statement or answers the question. Wynn Corp. Wynn Corp. reported the following information for the year ending December 31, 2005: Net income $10,000 Dividends 6,000 Retained earnings at December 31, 2005 25,000 1. Refer to Wynn Corp. What was the economic effect of the payment of Wynn's dividends? a. The dividends reduced net income for 2005. b. The dividends should be equal to net income if the company's accounting equation is in balance. c. The dividends reduce total retained earnings for the year. d. The dividends must be paid whenever Wynn Corp. reports net income. 2. Which concept is the reason the 'dollar' is used in the preparation of financial statements? a. Monetary unit b. Time period c. Going concern d. Legal entity 3. 'Claims to economic resources' are known as a. Assets and liabilities b. Liabilities and stockholders' equity c. Owners equity and stockholders' equity d. Retained earnings and revenues 4. Which of the following is not an objective of financial reporting? a. To reflect prospective cash receipts to investors and creditors. b. To reflect prospective cash flows to an enterprise. c. To reflect resources and claims to resources. d. To reflect current stock prices and information concerning stock markets. 5. What effect does providing services to customers for immediate payment have on the accounting equation? a. Liabilities increase and owners equity increases b. Assets increase and decrease c. Assets increase and liabilities increase d. Assets increase and owners equity increases 6. Payment is received from customers who were billed earlier for services provided for them. Identify the effects on the accounting equation. a. Assets increase and liabilities increase b. Assets increase and owners equity increases c. Liabilities increase and owners equity decreases d. Liabilities decrease and assets decrease e. Assets increase and decrease
7. Which one of the following is the last step in the accounting cycle? a. Journalizing business transactions b. Recording and posting adjustments c. Closing the accounts d. Preparing financial statements 8. Which one of the following is not a cash equivalent? a. 30-day certificate of deposit b. 60-day Corporate commercial paper c. 90-day U.S. Treasury bill d. 180-day note issued by a local or state government 9. When are consolidated financial statements prepared? a. At the option of an investee company b. At the option of an investor company c. If one company owns more than 50% of another company d. Only if one company owns 100% of another company 10. Which one of the following best describes the allowance for doubtful account? a. Contra Account b. Liability Account c. Income Statement Account d. More than one of the above Problems Write Your answers in the space provided. If you need more space use the back of the page. Farly Corporation The accountant for Farly Corporation prepared the following list from the company's accounting records for the year ended December 31, 2005: Sales revenue $165,000 Cash $ 30,000 Accounts receivable 14,000 Selling expenses 44,000 Equipment 42,000 Common stock 17,000 Accounts payable 12,000 Interest income 3,000 Salaries and wages expense 40,000 Cost of sales 51,000 Inventories 22,000 Prepaid expenses 2,000 Income taxes payable 5,000 Income taxes expense 18,000 Notes payable 20,000 Retained earnings 56,000 11. Determine the following amounts for Farly Corporation: (6 points) A. Total assets at the end of 2005 $ B. Total liabilities at the end of 2005 $ C. What parties have a claim on Farly's assets? Explain this in terms of the accounting equation.
12. Prepare an income statement for Farly Corp. in good form. (8 points) 13. Prepare a balance sheet for Farly Corp. in good form. (8 points)
14. Gala, Inc. incurred a net loss of $20,000 for 2005. The balance sheet at December 31, 2005, for Gala, Inc., includes the following items: Cash $23,000 Accounts receivable 13,000 Inventory 45,000 Prepaid insurance 1,000 Land 21,000 Building 80,000 Accounts payable 55,000 Salaries payable 2,000 Capital stock 100,000 Retained earnings 25,000 Determine Gala's current ratio and working capital. (8 points) 15. Several transactions are listed below with the accounting equation stated to the right side of each. Use the following identification codes to indicate the effects of each transaction on the accounting equation. Write your answers in the space provided under the accounting equation. An example is given before the first transaction. (8 points) I - Increase D - Decrease NE - No Effect Transactions Assets Liabilities Owners Equity Example: Capital stock is issued to investors in I NE I the company a. Cash sales are made b. Equipment is purchased on credit c. Payment is made for the equipment that was purchased on credit d. Sales are made on account e. Cash is collected from customers for accounts receivable balances f. Dividends are declared and paid to stockholders g. Land and a building are acquired in exchange for shares of the company's common stock h. A utility bill is received and recorded; payment will be made later
16. Rocks Company purchased a delivery van at a cost of $30,000 cash on January 1, 2004. The van has an estimated useful life of 6 years and a $6,000 estimated residual value. (10 points) A. Show the effects on the accounting equation of the purchase of the van. Assets = Liab. + owners Equity + Revenues - Expenses B. How much depreciation expense should be reported for 2005? C. What is the total amount of accumulated depreciation at December 31, 2005?
Mac Corp. Mac Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for October, 2005, indicated the following: Balance, October 31, 2005 $7,920 Service charge for October 20 Interest earned during October 30 NSF check from Green Corp. (deposited by Mac) 32 Note ($1,000) and interest ($40) collected for Mac from a customer of Mac's 1,040 An analysis of canceled checks and deposits and the records of Mac revealed the following items: Checking account balance per Mac books $7,170 Outstanding checks as of October 31 952 Deposit in transit at October 31 1,310 Error in recording a check issued by Mac. (Correct amount of the check is $450, but was recorded as a cash disbursement of $540. The check was issued to pay for merchandise purchases.) 90 17. Refer to Mac Corp. Prepare a bank reconciliation at October 31, 2005 in proper form. (10 points)
Carpenter Associates The following information is for Carpenter Associates at the end of 2005. Sales $800,000 Sales returns & allowances 8,000 Accounts receivable, 12/31/05 175,000 Allowance for doubtful accounts, 12/31/05 (before adjustment for bad debts) 1,000 Estimated uncollectible accounts per aging schedule at 12/31/05 7,500 18. Refer to Carpenter Associates. Assume that the net realizable value is $170,000 after the adjustment for bad debts in 2005. How much is the net realizable value of accounts receivable after a customer's account of $2,500 is written off? Explain why. (6 points) 19. Refer to Carpenter Associates. If bad debts are estimated at 1% of net sales, how much will Carpenter report as bad debts expense for 2005? (6 points)