Ch1
A company is considering purchasing a long term asset that was originally acquired by the seller for $86,000. While the asset is currently offered for sale at $152,000, it is considered by the purchaser as easily being worth $142,000, and is finally purchased for $139,000, the asset should be recorded in the purchaser’s books at:
$96,000.
$139,000.
$140,500.
$142,000.
$152,000.
2. $139,000
Learning Objective: 01-C2 Describe the importance of ethics and GAAP
Which of the following is not a source document?
Sales receipts.
Ledgers.
Bills from suppliers.
Purchase orders.
Bank statements.
2. Ledgers.
Learning Objective: 02-C1 Describe an account and its use in recording transactions.
The assumption that presumes that an organization’s activities can be divided into specific time periods such as a month, a three-month quarter, a six-month interval, or a year is called the:
Operating cycle of a business.
Time period assumption.
Going-concern assumption.
Expense recognition (matching) principle.
Accrual basis of accounting
2. Time period assumption
Learning Objective: 03-C1
Explain the importance of periodic reporting and the role of accrual accounting.
A merchandiser:
A. Earns net income by buying and selling merchandise.
B. Receives fees only in exchange for services.
C. Earns profit from commissions only.
D. Earns profit from fares only.
E. Buys products from consumers.
A. Earns net income by buying and selling merchandise.
Learning Objective: 04-C1 Describe merchandising activities and cost flows.
A company reported net income of $2,420 for October. Its net sales for October were $11,000. Its profit margin is:
A. 455%.
B. 22%.
C. 2%.
D. 6%.
E. 200%.
B. 22%.
Profit Margin = Net Income/Net Sales
Profit Margin = $2,420/$11,000 = 0.22 = 22%
Learning Objective: 03-A1 Compute and analyze profit margin and current ratio.
On May 31 of the current year, the assets and liabilities of Riser, Incorporated are as follows: Cash $26,500; Accounts Receivable, $7,850; Supplies, $1,200; Equipment, $12,650; Accounts Payable, $9,950. What is the amount of equity as of May 31 of the current year?
$58,150.
$13,200.
$26,500.
$38,250.
$48,200.
4. $38,250
Assets = Liabilities + Equity
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Equity
$26,500 + $7,850 + $1,200 + $12,650 = $9,950 + Equity
$48,200 = $9,950 + Equity; Equity = $38,250
Learning Objective: 01-A1 Define and interpret the accounting equation and each of its components.
A company purchased $20,100 of equipment on credit. The journal entry to record this transaction consists of a:
A. Debit to Accounts Payable for $20,100; credit to Equipment for $20,100.
B. Debit to Equipment for $20,100; credit to Accounts Payable for $20,100.
C. Debit to Equipment for $20,100; credit to Cash for $20,100.
D. Debit to Cash for $20,100; credit to Equipment for $20,100.
E. Debit to Equipment for $20,100; credit to Equipment Expense for $20,100.
B. Debit to Equipment for $20,100; credit to Accounts Payable for $20,100.
Learning Objective: 02-A1 Analyze and record transactions and their impact on financial statements.
Which of the following items does not require an adjusting entry?
Prepaid expenses.
Depreciation.
Cash.
Unearned revenues.
Accrued expenses.
3. Cash
Learning Objective: 03-P1 Prepare adjusting entries for deferral of expenses
A company's gross profit (or gross margin) was $108,080 and its net sales were $386,000. Its gross margin ratio is:
8%.
28%.
87%.
$107,830.
$275,970.
2. 28%
Gross Margin Ratio = Gross Profit/Net Sales
Gross Margin Ratio = $108,080/$386,000 = 28.0%
Learning Objective: 04-A1 Compute and analyze the acid-test ratio and gross margin ratio.
A company purchased $20,100 of supplies on credit. The journal entry to record this transaction consists of a:
A. Debit Supplies for $20,100; credit Cash for $20,100.
B. Debit Cash for $20,100; credit Supplies for $20,100.
C. Debit Supplies for $20,100; credit Prepaid Expense for $20,100.
D. Debit Supplies for $20,100; credit Accounts Payable for $20,100.
E. Debit Accounts Payable for $20,100; credit Supplies for $20,100.
D. Debit Supplies for $20,100; credit Accounts Payable for $20,100.
Learning Objective: 02-A1 Analyze and record transactions and their impact on financial statements.
If a company receives $12,000 from a client for services provided, the effect on the accounting equation would be:
A. Assets decrease $12,000 and equity decreases $12,000.
B. Assets increase $12,000 and liabilities decrease $12,000.
C. Assets increase $12,000 and liabilities increase $12,000.
D. Liabilities increase $12,000 and equity decreases $12,000.
E. Assets increase $12,000 and equity increases $12,000.
E. Assets increase $12,000 and equity increases $12,000.
Learning Objective: 01-P1 Analyze business transactions using the accounting equation.
Identify the statement below that is correct.
A. When a future expense is paid in advance, the payment is normally recorded in a liability account called Prepaid Expense.
B. Prepaid revenue accounts are used to record when customers pay in advance for products or services.
C. Accounts receivable are held by a seller and are promises of payment from customers to sellers.
D. A liability account is commonly used to record increases and decreases in both the land and buildings owned by a business.
E. Accrued liabilities include accounts receivable.
C. Accounts receivable are held by a seller and are promises of payment from customers to sellers.
Learning Objective: 02-C1 Describe an account and its use in recording transactions.
On December 1, Oren Marketing Company received $7,500 from a customer for a 2-month marketing plan to be completed January 31 of the following year. The cash receipt was recorded as unearned revenue. The adjusting entry for the year ended December 31 would include:
A. a credit to Services Revenue for $5,000.
B. a debit to Services Revenue for $7,500.
C. a debit to Unearned Revenue for $3,750.
D. a debit to Services Revenue for $5,000.
E. a credit to Unearned Revenue for $2,500.
C. a debit to Unearned Revenue for $3,750.
$7,500/2 = $3,750 per month
Learning Objective: 03-P2 Prepare adjusting entries for deferral of revenues.
Cushman Company had $830,000 in sales, sales discounts of $12,450, sales returns and allowances of $18,675, cost of goods sold of $394,250, and $285,520 in operating expenses. Gross profit equals:
$798,875.
$119,105.
$404,625.
$417,075.
$423,300.
3. $404,625
Gross Profit (Margin)
Sales - sales discounts - sales returns and allowances = Gross Profit
$830,000 − $12,450 − $18,675 − $394,250
= $404,625
Learning Objective: 04-P4 Define and prepare multiple-step and single-step income statements.
Using the following year-end information for Work-Fit calculate the acid-test ratio:
Cash $ 60,230
Short-term investments 16,000
Accounts receivable (all current) 62,000
Inventory 310,000
Supplies 7,770
Accounts payable 110,000
Wages payable 33,600
0.46
0.55
0.66
0.87
0.96
5. 0.96
Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = (60,230 + 16,000 + 62,000)/(110,000 + 33,600)
138,230/143,600
= 0.96
Learning Objective: 04-A1 Compute and analyze the acid-test ratio and gross margin ratio.
Determine the net income of a company for which the following information is available for the month of September.
Service revenue $ 302,000
Rent expense 49,000
Utilities expense 3,300
Salaries expense 82,000
A. $265,700.
B. $436,300.
C. $171,000.
D. $167,700.
E. $253,000.
D. $167,700.
Revenues − Expenses = Net Income
Service Revenue − Rent Expense − Utilities Expense − Salaries Expense
$302,000 − $49,000 − $3,300 − $82,000 = $167,700
Learning Objective: 01-P2 Identify and prepare basic financial statements and explain how they interrelate.
On January 1 of the current year, Jimmy's Sandwich Company reported total equity of $122,500. During the current year, total revenues were $96,000, while total expenses were $105,500. No other changes in equity occurred during the year. The change in total equity during the year was:
A. A decrease of $9,500.
B. An increase of $9,500.
C. An increase of $30,500.
D. A decrease of $30,500.
E. An increase of $73,500.
A. A decrease of $9,500.
Beginning Total Equity + Revenues − Expenses = Ending Total Equity
$122,500 + $96,000 − $105,500 = Ending Total Equity
Ending Total Equity = $113,000
Change in Equity = Beginning Total Equity − Ending Total Equity
Change in Equity = $122,500 − $113,000 = $9,500 Decrease
Learning Objective: 02-A1 Analyze and record transactions and their impact on financial statements.
Harrod Company paid $6,300 for a 4-month insurance premium in advance on November 1, with coverage beginning on that date. The balance in the prepaid insurance account before adjustment at the end of the year is $6,300, and no adjustments had been made previously. The adjusting entry required on December 31 is:
A. Debit Insurance Expense, $1,575; credit Prepaid Insurance, $1,575.
B. Debit Cash, $6,300; Credit Prepaid Insurance, $6,300.
C. Debit Insurance Expense, $3,150; credit Prepaid Insurance, $3,150.
D. Debit Prepaid Insurance, $1,575; credit Insurance Expense, $1,575.
E. Debit Prepaid Insurance, $3,150; credit Insurance Expense, $3,150.
C. Debit Insurance Expense, $3,150; credit Prepaid Insurance, $3,150.
$6,300 × 2/4 = $3,150
Learning Objective: 03-P1 Prepare adjusting entries for deferral of expenses.
A company purchased $2,700 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $295 worth of merchandise. On July 8, it paid the full amount due. The amount of the cash paid on July 8 equals:
$295.
$2,351.
$2,357.
$2,405.
$2,700.
3. $2,357
Cash Paid = ($2,700 − $295) × 0.98 = $2,357
Learning Objective: 04-P1 Analyze and record transactions for merchandise purchases using a perpetual system
On October 1, Vista View Company rented warehouse space to a tenant for $2,500 per month. The tenant paid five months' rent in advance on that date, with the lease beginning immediately. The cash receipt was credited to the Unearned Revenue account. The company's annual accounting period ends on December 31. The year-end adjusting entry needed on December 31 is:
A. Debit Accounts Receivable, $12,500; credit Rent Revenue, $12,500.
B. Debit Accounts Receivable, $7,500; credit Rent Revenue, $7,500.
C. Debit Unearned Revenue, $7,500; credit Rent Revenue, $7,500.
D. Debit Unearned Revenue, $5,000; credit Rent Revenue, $5,000.
E. Debit Unearned Revenue, $12,500; credit Rent Revenue, $12,500.
C. Debit Unearned Revenue, $7,500; credit Rent Revenue, $7,500.
$2,500 × 3 = $7,500
Learning Objective: 03-P2 Prepare adjusting entries for deferral of revenues.
Samsung has beginning equity of $52,000 and net income of $23,000. The company has no other transactions impacting equity. Calculate the ending equity.
A. $(5,000).
B. $29,000.
C. $5,000.
D. $99,000.
E. $75,000.
E. $75,000.
Ending Equity = Beginning Equity + Net Income
Ending Equity = $52,000 + $23,000 = $75,000
Learning Objective: 01-A1 Define and interpret the accounting equation and each of its components.
A company opened on January 1 of the current year. During January, the following transactions occurred and were recorded in the company’s books:
1. The company received $13,700 cash for services provided.
2. The company paid $2,300 cash for an insurance policy covering the next 24 months.
3. The company received $5,900 cash for services provided.
4. The company purchased $6,400 of office equipment on credit.
5. The company provided $2,950 of services to customers on account.
6. The company paid cash of $1,700 for monthly rent.
7. The company paid $3,300 on the office equipment purchased in transaction #5 above.
8. Paid $295 cash for January utilities.
Based on this information, the balance in the cash account at the end of January would be:
A. $44,050.
B. $12,005.
C. $19,300.
D. $15,650.
E. $14,955.
B. $12,005.
Ending Cash Balance = $13,700 (#1) − $2,300 (#2) + $5,900 (#3) − $1,700 (#6) − $3,300 (#7) − $295 (#8) = $12,005
Learning Objective: 02-A1 Analyze and record transactions and their impact on financial statements.
What is the proper adjusting entry at December 31, the end of the accounting period, if the balance in the prepaid insurance account is $7,750 before adjustment, and the unexpired amount per analysis of policies is $3,250?
A. Debit Insurance Expense, $3,250; credit Prepaid Insurance, $3,250.
B. Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.
C. Debit Prepaid Insurance, $4,500; credit Insurance Expense, $4,500.
D. Debit Insurance Expense, $7,750; credit Prepaid Insurance, $7,750.
E. Debit Cash, $7,750; Credit Prepaid Insurance, $7,750.
B. Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.
$7,750 − $3,250 = $4,500
Learning Objective: 03-P1 Prepare adjusting entries for deferral of expenses.
On March 12, Fret Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Fret uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20 and takes the appropriate discount. The amount that Fret receives from Babson on March 20 is:
A. $7,800.
B. $7,644.
C. $7,044.
D. $7,056.
E. $7,200.
D. $7,056
Accounts Receivable = $7,800 − $600 = $7,200
Sales Discounts = $7,200 × 0.02 = $144
Cash = $7,200 − $144 = $7,056
Learning Objective: 04-P2 Analyze and record transactions for merchandise sales using a perpetual system.
A company has net sales of $825,000 and cost of goods sold of $547,000. Its net income is $98,500. The company's gross profit and operating expenses, respectively, are:
A. $209,000 and $191,470.
B. $278,000 and $179,500.
C. $278,000 and $98,500.
D. $179,500 and $98,500.
E. $645,500 and $179,500.
B. $278,000 and $179,500.
Gross Profit = Net Sales − Cost of Goods Sold; $825,000 − $547,000 = $278,000
Operating Expenses = Gross Margin − Net Income; $278,000 − $98,500 = $179,500
Learning Objective: 04-P4 Define and prepare multiple-step and single-step income statements.