ACCT221 Principles of Accounting II Midterm

University of Maryland University College

ACCT221 Principles of Accounting II Instructor: Anita Doherty

MID-TERM EXAM

Multiple Choice (2 points each)

1. Which one of the following is not necessary in order for a

corporation to pay a cash dividend?

a. Approval of stockholders

b. Adequate cash

c. Declaration of dividends by the board of directors

d. Retained earnings

2. Which one of the following events would not require a formal journal

entry on a corporation's books?

a. 100% stock dividend

b. 2 for 1 stock split

c. 2% stock dividend

d. $1 per share cash dividend

3. Buick, Inc. has 5,000 shares of 6%, $100 par value, noncumulative

preferred stock and 100,000 shares of $1 par value common stock

outstanding at December 31, 2012, and December 31, 2013. The board

of directors declared and paid a $20,000 dividend in 2012. In 2013,

$40,000 of dividends are declared and paid. What are the dividends

received by the preferred and common shareholders in 2013?

Preferred Common

————————— ———————

a. $0 $40,000

b. $30,000 $10,000

c. $20,000 $20,000

d. $40,000 $0

4. A prior period adjustment that corrects income of a prior period

requires that an entry be made to

a. an income statement account.

b. a current year revenue or expense account.

c. an asset account.

d. the retained earnings account

5. The discontinued operations section of the income statement refers

to

a. discontinuance of a product line.

b. the income or loss on products that have been completed and sold.

c. obsolete equipment and discontinued inventory items.

d. the disposal of a significant segment of a business.

6. Indicate the circumstances under which an item would be classified

as an extraordinary item on the income statement.

Unusual in Nature Infrequent in Occurrence

—————————————————

a. Yes No

b. No Yes

c. Yes Yes

d. No No

7. From the standpoint of the issuing company, a disadvantage of using

bonds as a means of long-term financing is that

a. bond interest is deductible for tax purposes.

b. interest must be paid on a periodic basis regardless of earnings.

c. income to stockholders may increase as a result of trading on the

equity.

d. the bondholders do not have voting rights.

8. Bonds that are secured by real estate are termed

a. mortgage bonds.

b. serial bonds.

c. debentures.

d. bearer bonds.

9. The contractual interest rate is always stated as a(n)

a. monthly rate.

b. daily rate.

c. semiannual rate.

d. annual rate.

10. If the market interest rate is greater than the contractual interest

rate, bonds will sell

a. at a premium.

b. at a discount..

c. at face value.

d. only after the stated interest rate is increased.

11. If twenty $1,000 convertible bonds with a carrying value of $25,000

are converted into 3,000 shares of $5 par value common stock, the

journal entry to record the conversion is

a. Bonds Payable ........................... 25,000

Common Stock ......................... 25,000

b. Bonds Payable ........................... 20,000

Premium on Bonds Payable ................ 5,000

Common Stock ......................... 25,000

c. Bonds Payable ........................... 20,000

Premium on Bonds Payable ................ 5,000

Common Stock ......................... 15,000

Paid-in Capital in Excess of Par ..... 10,000

d. Bonds Payable ........................... 25,000

Discount on Bonds Payable ............ 5,000

Common Stock ......................... 15,000

Paid-in Capital in Excess of Par ..... 5,000

--Page 3

12. Which of the following is not a condition which would require the

recording of a lease contract as a capital lease?

a. The lease term is less than 75% of the economic life of the

leased property.

b. The lease contains a bargain purchase option.

c. The lease transfers ownership of the property to the lessee.

d. The present value of the lease payments equals or exceeds 90% of

the fair market value of the leased property.

13. If the cost method is used to account for a long-term investment in

common stock, dividends received should be

a. credited to the Stock Investments account.

b. credited to the Dividend Revenue account.

c. debited to the Stock Investments account.

d. recorded only when 20% or more of the stock is owned.

14. When an investor owns between 20% and 50% of the common stock of a

corporation, it is generally presumed that the investor

a. has insignificant influence on the investee and that the cost

method should be used to account for the investment.

b. should apply the cost method in accounting for the investment.

c. will prepare consolidated financial statements.

d. has significant influence on the investee and that the equity

method should be used to account for the investment.

15. If the equity method is being used, cash dividends received

a. are credited to the Stock Investments account.

b. require no entry because investee net income has already been

recorded at the proper proportion on the investor's books.

c. are credited to Dividend Revenue.

d. are credited to the Revenue from Investment in Stock account.

16. If the cost of an available-for-sale security exceeds its fair value

by $40,000, the entry to recognize the loss

a. is not required since the share prices will likely rebound in the

long run.

b. will show a debit to an expense account.

c. will show a credit to a contra-asset account that appears in the

stockholder's equity section of the balance sheet.

d. will show a debit to an unrealized loss account that is deducted

in the stockholders' equity section of the balance sheet.

17. Short-term investments are securities that are readily marketable

and intended to be converted into cash within the next

a. year.

b. two years.

c. year or operating cycle, whichever is shorter.

d. year or operating cycle, whichever is longer.

18. The primary purpose of the statement of cash flows is to

a. provide information about the investing and financing activities

during a period.

b. prove that revenues exceed expenses if there is a net income.

c. facilitate banking relationships.

d. provide information about the cash receipts and cash payments

during a period.

19. The acquisition of land by issuing common stock is

a. a noncash transaction which is not reported in the body of a

statement of cash flows.

b. a cash transaction and would be reported in the body of a

statement of cash flows.

c. a noncash transaction and would be reported in the body of a

statement of cash flows.

d. only reported if the statement of cash flows is prepared using

the direct method.

20. The order of presentation of activities on the statement of cash

flows is

a. operating, financing, and investing

b. operating, investing, and financing.

c. financing, operating, and investing.

d. financing, investing, and operating.

21. Cash receipts from interest and dividends are classified as

a. financing activities.

b. investing activities.

c. operating activities.

d. either financing or investing activities.

22. When equipment is sold for cash, the amount received is reflected as

a cash

a. inflow in the operating section.

b. inflow in the financing section.

c. inflow in the investing section.

d. outflow in the operating section.

23. Assume the following sales data for a company:

2013 $1,200,000

2012 960,000

2011 840,000

2010 600,000

If 2010 is the base year, what is the percentage increase in sales

from 2010 to 2012?

a. 100%

b. 160%

c. 70%

d. 60.0%

24. In performing a vertical analysis, the base for cost of goods sold

is

a. total selling expenses.

b. net sales.

c. total revenues.

d. total expenses.

------------------------------

Johnson Corporation had net income of $200,000 and paid dividends to

common stockholders of $40,000 in 2013. The weighted average number

of shares outstanding in 2013 was 50,000 shares. Terry Corporation's

common stock is selling for $60 per share on the New York Stock

Exchange.

25. Johnson Corporation's price-earnings ratio is

a. 3.8 times.

b. 15 times.

c. 18.8 times.

d. 6 times.

26. King Corporation's stockholders' equity section at December 31,

2012 appears below: (15 Points)

Stockholders' equity

Paid-in capital

Common stock, $10 par, 50,000 outstanding $500,000

Paid-in capital in excess of par 150,000

————————

Total paid-in capital $650,000

Retained earnings 150,000

————————

Total stockholders' equity $800,000

On June 30, 2013, the board of directors of King Corporation

declared a 15% stock dividend, payable on July 31, 2013, to

stockholders of record on July 15, 2013. The fair market value of

King Corporation's stock on June 30, 2013, was $12.

On December 1, 2013, the board of directors declared a 2 for 1 stock

split effective December 15, 2013. King Corporation's stock was

selling for $20 on December 1, 2013, before the stock split was

declared. Par value of the stock was adjusted. Net income for 2013

was $240,000 and there were no cash dividends declared.

INSTRUCTIONS

(a) Prepare the journal entries on the appropriate dates to record

the stock dividend and the stock split.

(b) Fill in the amount that would appear in the stockholders' equity

section for King Corporation at December 31, 2013, for the

following items:

1. Common stock $____________

2. Number of shares outstanding ____________

3. Par value per share $____________

4. Paid-in capital in excess of par $____________

5. Retained earnings $____________

6. Total stockholders' equity $____________

27. On January 1, 2013, Leary Corporation issued $800,000, 9%, 5-year

bonds dated January 1, 2013, at 96. The bonds pay semiannual

interest on January 1 and July 1. The company uses the

straight-line method of amortization and has a calendar year end. (10 points)

INSTRUCTIONS

Prepare all the journal entries that Leary Corporation would make

related to this bond issue through January 1, 2014. Be sure to

indicate the date on which the entries would be made.

28. Bane Corporation had the following comparative current assets and

current liabilities: (15 points)

Dec. 31, 2013 Dec. 31, 2012

—————————————

Current assets

Cash $ 60,000 $ 30,000

Marketable securities 40,000 10,000

Accounts receivable 55,000 95,000

Inventory 10,000 90,000

Prepaid expenses 35,000 20,000

————— ————

Total current assets 300,000 $245,000

Current liabilities

Accounts payable $140,000 $110,000

Salaries payable 40,000 30,000

Income tax payable 20,000 15,000

—————— ————

Total current liabilities $200,000 $155,000

During 2013, credit sales and cost of goods sold were $750,000 and

$400,000, respectively.

INSTRUCTIONS

Compute the following liquidity measures for 2013:

1. Current ratio.

2. Working capital.

3. Acid-test ratio.

4. Receivables turnover.

5. Inventory turnover.

29. Annapolis Company reported net income of $365,000 for the current year. Depreciation recorded on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: (10 points)

Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method