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2023 Fall _ Financial Accounting

Final Exam

Music Corporation The data below is for Music Corporation for 2016.

Accounts receivable—January 1, 2016	$236,000
Credit sales during 2016	820,000
Collections from credit customers during 2016	590,000
Customer accounts written off as uncollectible during 2016	8,000
Allowance for doubtful accounts—January 1, 2016	8,700
Estimated uncollectible accounts based on an aging analysis	9,600

1. Refer to the data for Music Corporation.

What is the balance of Accounts Receivable at December 31, 2016?

	a.	$336,000
	b.	$448,400
	c.	$458,000
	d.	$466,000

2. Refer to the data for Music Corporation.

If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2016?

	a.	$8,000
	b.	$8,100
	c.	$8,700
	d.	$8,900

3. Refer to the data for Music Corporation. If the aging approach is used to estimate bad debts, what is the balance in the Allowance for Doubtful Accounts after the bad debt expense adjustment?

	a.	$8,000
	b.	$8,100
	c.	$8,900
	d.	$9,600

4. Router Inc. lends $70,000 on a 120-day, 9% promissory note. The total interest that Router will receive at maturity is

	a.	$6,300
	b.	$2,100
	c.	$525
	d.	$1,890

5. Textbooks.com accepts VISA for payments of purchases made by students. The credit card drafts are deposited directly in a bank account. VISA charges a 2% collection fee. Credit card drafts totaling $12,000 are deposited during September. The effect on the accounting equation to record the sales and deposits will include

	a.	An increase in Cash for $12,000
	b.	An increase to Sales for $11,760
	c.	An increase to Accounts Receivable for $11,760
	d.	An increase in Collection Fee Expense for $240

6. When a company discounts an interest-bearing note at a bank with recourse:

	a.	The company is assured payment at maturity.
	b.	The company will receive the full amount of the note plus interest.
	c.	The company has a contingent liability from the time the note is discounted until its maturity date.
	d.	The bank assumes the credit risk on non-payment at the maturity date.

7. Using different depreciation methods for book purposes versus tax purposes for the same asset is

	a.	not allowed since the amount can only be calculated one way or the other, not both.
	b.	the direct result of the differing goals of financial and tax accounting.
	c.	contrary to GAAP.
	d.	against the Internal Revenue Code, and as such, against the law.

8. Newco Publishing Company purchased equipment at the beginning of 2016 for $200,000. The company decided to depreciate the equipment over an 8-year period using the straight-line method. The company estimated the equipment's residual value at $20,000. The journal entry to record depreciation expense for 2016 will

	a.	increase Depreciation Expense and increase Accumulated Depreciation for $25,000.
	b.	increase Accumulated Depreciation and decrease Equipment for $25,000.
	c.	increase Depreciation Expense and decrease Equipment for $22,500.
	d.	increase Depreciation Expense and increase Accumulated Depreciation for $22,500.

9. Delmont Fire Co. purchased identical equipment having an estimated useful life of ten years. Wind Chime uses the straight-line depreciation method and Fire Hut uses the double-declining-balance method of depreciation. Assuming the two entities are similar in all other respects, which of the following statements is correct?

	a.	Wind Chime’s depreciation expense will be greater in the second year than Fire Hut’s depreciation expense.
	b.	Fire Hut’s book value will be greater than Wind Chime’s book value at the end of year one.
	c.	Wind Chime’s net income will be greater than Fire Hut’s net income in year nine.
	d.	Fire Hut’s book value will be less than Wind Chime’s book value at the end of year two.

10. Royal Company purchased a dump truck at the beginning of 2014 at a cost of $60,000. The truck had an estimated life of 6 years and an estimated residual value of $24,000. On January 1, 2016, the company made major repairs of $20,000 to the truck that extended the life 1 year. Thus, starting with 2016, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. What is the book value of the truck to be reported on the balance sheet at December 31, 2016?

	a.	$44,000
	b.	$50,000
	c.	$56,000
	d.	$62,000

11. Royal Company purchased a dump truck at the beginning of 2014 at a cost of $60,000. The truck had an estimated life of 6 years and an estimated residual value of $24,000. On January 1, 2016, the company made major repairs of $20,000 to the truck that extended the life 1 year. Thus, starting with 2016, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. What amount should be recorded as depreciation expense each year starting in 2016?

	a.	$6,000
	b.	$12,000
	c.	$13,600
	d.	$14,400

12. At the end of 2016, Clock Products, Inc. determined that one of its patents was worthless. The patent had a cost of $300,000. The patent had been amortized for 5 years of its estimated 15-year legal life. Which of the following statements is correct?

	a.	Clock Products must continue to amortize the patent over its remaining 10 years of life.
	b.	The patent must be reduced to 5/15, or 33.3% of its original cost and amortized over the remaining 10 years.
	c.	The remaining unamortized cost must be removed from the accounting records and treated as a loss on the income statement.
	d.	Clock Products must correct its financial statements for the past five years, so that the entire cost is allocated to that five-year period.

13. At the end of 2016, Mirror Productions determined that one of its copyrights was worthless. The copyright had a cost of $320,000. The copyright had been amortized for 8 years of its estimated 25-year legal life. Which of the following statements is the justification for removing the remaining cost of the copyright from the accounting records?

	a.	The copyright no longer represents a future benefit to the company.
	b.	The federal government does not allow copyrights to be recorded as assets once they are deemed worthless.
	c.	The cost of the copyright represents an obligation to return capital contributions to the stockholders.
	d.	The cost of the copyright has usefulness that will impact the net income of future accounting periods.

14. A bank loaned Darden Company $10,000 on a 1-year, 6% note, but deducted the interest in advance. The journal entry made by Darden to record receipt of the cash would include a

	a.	an increase in Cash for $9,400
	b.	an increase in Cash for $600
	c.	a decrease in Notes Payable for $10,600
	d.	a decrease in Notes Payable for $9,400

15. Assume the current ratio is 2 to 1. Payment on accrued salaries payable would cause the current ratio to

	a.	increase
	b.	decrease
	c.	be unchanged since the effects offset one another
	d.	be unchanged since it has no impact on any current accounts

16. Proctor Inc. has a weekly payroll of $8,000 for a 5-day workweek, Monday through Friday. If December 31, the last day of the accounting year, falls on Wednesday, Proctor would make an adjusting entry that would

	a.	increase wages expense $4,800.
	b.	decrease wages payable $4,800.
	c.	decrease cash $4,800.
	d.	increase wages payable $8,000.

17. On May 1, the Chris Company borrowed $30,000 from the Third Street Bank on a 1-year, 6% note. If the company keeps its records on a calendar year, an entry is needed on December 31 to increase

	a.	Interest Expense, $600.
	b.	Interest Expense, $1,800.
	c.	Interest Payable, $900.
	d.	Interest Payable, $1,200.

18. Almost all current liabilities affect the operating category of the statement of cash flows, but one that does not affect cash provided by operating activities is

	a.	accounts payable.
	b.	interest payable.
	c.	notes payable.
	d.	taxes payable.

19. Which of the following is an example of a contingent liability?

	a.	A liability for notes payable with interest included in the face amount.
	b.	The liability for future warranty repairs on computers sold during the current period.
	c.	A lawsuit pending against a restaurant chain for improper preparation of food.
	d.	A corporate long-term employment contract with the chief executive officer.

20. To determine whether a lottery winner would prefer to receive the money in a single lump sum immediately or receive an equal amount over a period of years, you would use which type of time value of money calculation?

	a.	The future value of a single amount.
	b.	The present value of a single amount.
	c.	The future value of an annuity.
	d.	The present value of an annuity.

21. If a company's bonds are callable,

	a.	the investor or buyer of the bonds has the right to retire the bonds.
	b.	the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while the market rate of interest is 6%.
	c.	the bonds are never allowed to remain outstanding until the maturity date.
	d.	the investor never knows what the redemption price will be until the bonds are actually called.

22. Which of the following statements about bond accounting under the effective interest method is correct?

	a.	The cash interest paid is calculated as the bond face value × the effective rate.
	b.	The interest expense is calculated as the carrying value × the effective rate.
	c.	The difference between the cash interest paid and the interest expense is added to the carrying value of the bonds if bonds were sold at a premium.
	d.	The difference between the interest expense and the interest paid is deducted from the carrying value of the bonds if bonds were sold at a discount.

23. Which of the following terms does not describe an interest rate used to calculate the interest expense on the income statement?

	a.	Nominal rate
	b.	Market rate
	c.	Effective rate
	d.	Yield rate

24. If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will

	a.	decrease as the bonds approach their maturity date.
	b.	increase as the bonds approach their maturity date.
	c.	remain constant throughout the bonds’ life.
	d.	fluctuate throughout the bonds’ life.

25. On January 2, 2016, Concrete Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying value of the bonds after the first interest payment is made on June 30, 2016?

	a.	$574,540
	b.	$571,776
	c.	$568,920
	d.	$500,000

26. Surplus Mining Company has leased a machine from Craft Machinery Company. The annual payments are $6,000 and the life of the lease is 8 years. It is estimated that the useful life of the machine is 9 years. How would Surplus Mining record the acquisition of the machine?

	a.	The machine would be recorded as an asset with a cost of $48,000.
	b.	The company would not record the machine as an asset but would record rent expense of $6,000 per year.
	c.	The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 8 years.
	d.	The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 9 years.

27. Tampa Corporation's balance sheet showed the following amounts for their liabilities and stockholders’ equity accounts: Current Liabilities, $20,000; Bonds Payable, $60,000; Lease Obligations, $12,000; and Deferred Income Taxes, $2,000. Total stockholders' equity was $42,000. The debt-to-equity ratio is

	a.	0.45
	b.	0.58
	c.	1.76
	d.	2.24

28. Use the incomplete stockholders' equity section of Box Company’s balance sheet as of December 31, 2016, to answer the following question.

Common stock, $7 par, 100,000 shares authorized	$ 700,000
Additional paid-in capital—common	160,000
Retained earnings	?
Treasury stock (2,000 shares at cost)	(16,000)
Total stockholders' equity	974,000

How many shares of common stock are outstanding?

	a.	100,000
	b.	98,000
	c.	78,000
	d.	68,000

29. Walton Corporation shows the following in the stockholders' equity section of its balance sheet: The stated value of its common stock is $0.50 and the total balance in the common stock account is $37,500. Also noted is that 5,000 shares are currently designated as treasury stock. The number of shares outstanding is

	a.	80,000.
	b.	75,000.
	c.	72,500.
	d.	70,000.

Anole Company

Anole Company was incorporated as a new business on January 1, 2016. The company is authorized to issue 20,000 shares of $5 par value common stock and 10,000 shares of 6%, $10 par value, cumulative, participating preferred stock. On January 1, 2016, the company issued 8,000 shares of common stock for $15 per share and 2,000 shares of preferred stock for $30 per share. Net income for the year ended December 31, 2016, was $375,000.

30. Refer to the information about Anole Company.

The amount of Anole’s total contributed capital at December 31, 2016, is

	a.	$60,000.
	b.	$120,000.
	c.	$180,000.
	d.	$555,000.

31. Refer to the information about Anole Company.

The number of Anole’s unissued shares of common stock at December 31, 2016, is

	a.	6,000.
	b.	8,000.
	c.	10,000.
	d.	12,000.

32. Refer to the information about Anole Company.

Anole’s total stockholders' equity reported on the balance sheet at December 31, 2016, is

	a.	$60,000.
	b.	$120,000.
	c.	$180,000.
	d.	$555,000.

33. Vegas Finance Company reported the following: Common stock, $10 par, 100,000 shares authorized, 80,000 shares issued and outstanding What is the effect of issuing 1,000 shares of common stock at $15 per share?

	a.	Cash increases $10,000.
	b.	Common Stock increases $15,000.
	c.	Additional Paid-in Capital increases $5,000.
	d.	Retained Earnings increases $5,000.

34. A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first month of business. The lawyer’s normal fee is $15,000 for similar work. Which of the following would be recorded if the stock is not currently trading?

	a.	A debit to Common Stock for $10,000
	b.	A credit to Common Stock for $15,000
	c.	A debit to Additional Paid-In Capital—Common Stock of $5,000
	d.	A credit to Additional Paid-In Capital—Common Stock of $5,000

35. Upon review of Jerry’s Canoe Gallery statement of cash flows, the following was noted:

Cash flows from operating activities	$ 75,000
Cash flows from investing activities	(135,000)
Cash flows from financing activities	125,000

From this information, the most likely explanation is that Jerry is

	a.	using cash from operations and selling long-term assets to pay back debt.
	b.	using cash from operations and borrowing to purchase long-term assets.
	c.	using its profits to expand growth.
	d.	using cash from investors to provide for operations.

36. Eduardo’s Texas Cantina had the following results for December 31, 2016 and 2017, respectively:

	2016	2017
Cash	$ 42,000	$ 49,000
Noncash current assets	162,000	175,000
Cash flows from financing activities		313,000
Cash flows from operating activities		72,000

What was the amount of cash flows from investing activities for 2017?

	a.	Cash inflow of $378,000
	b.	Cash outflow of $378,000
	c.	Cash outflow of $7,000
	d.	Cash outflow of $391,000

37. Which of the following statements is true?

	a.	The method of preparing the operating activities section of a statement of cash flows which adjusts net income to remove the effects of deferrals and accruals for revenues and expenses is the direct method.
	b.	The method of preparing the operating activities section of a statement of cash flows which reports major classes of gross cash receipts and cash payments for revenues and expenses is the indirect method.
	c.	The FASB prefers the indirect method of preparing the operating activities section of the statement of cash flows.
	d.	Most companies use the indirect method of preparing the operating activities section of the statement of cash flows.

38. Which of the following statements is false?

	a.	The method of preparing the operating activities section of a statement of cash flows which adjusts net income to remove the effects of deferrals and accruals for revenues and expenses is the indirect method.
	b.	The method of preparing the operating activities section of a statement of cash flows which reports major classes of gross cash receipts and cash payments for revenues and expenses is the direct method.
	c.	The FASB prefers the direct method of preparing the operating activities section of the statement of cash flows.
	d.	Most companies use the direct method of preparing the operating activities section of the statement of cash flows.

39. Which of the following activities is most likely to have a cash flow effect?

	a.	Investing in money market funds
	b.	Declaring cash dividends
	c.	Reissuing treasury stock
	d.	Issuing stock to acquire a patent

40. Use the information below for Soho Inc. for 2016 and 2017 to answer the following question.

Equipment, December 31, 2016	$65,000
Equipment, December 31, 2017	72,000
Accumulated depreciation, December 31, 2016	39,000
Accumulated depreciation, December 31, 2017	30,000

During 2016, Soho Inc. sold equipment with a cost of $30,000 and accumulated depreciation of $25,000. A gain of $3,000 was recognized on the sale of the equipment This was the only equipment sale during the year. What amount would be reported as the cash proceeds from the sale of equipment?

	a.	$2,000
	b.	$3,000
	c.	$5,000
	d.	$8,000