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ACC 206 Week 11 Final Exam Strayer

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C h a p t e r 1 4 Through 19
CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND
INCOME REPORTING
CHAPTER STUDY OBJECTIVES
1. Prepare the entries for cash dividends and stock dividends.
2. Identify the items reported in a retained earnings statement.
3. Prepare and analyze a comprehensive stockholders' equity section.
4. Describe the form and content of corporation income statements.
5. Compute earnings per share.
TRUE-FALSE STATEMENTS
1.

Dividends may be declared and paid in

cash or stock.
2.

Cash dividends are not a liability of the corporation until they are
declared by the board of directors.

3.

The amount of a cash dividend liability is recorded on the date of


record because it is on that date that the persons or entities who will
receive the dividend are identified.

4.

A 10% stock dividend will increase the number of shares outstanding


but the book value per share will decrease.

5.

A 3 for 1 common stock split will increase total stockholders' equity


but reduce the par or stated value per share of common stock.

6.

Retained earnings represents the amount of cash available for dividends.

7.

Net income of a corporation should be closed to retained earnings and


net losses should be closed to paid-in capital accounts.

8.

A debit balance in the Retained Earnings account is identified as a deficit.

9.

A correction in income of a prior period involves either a debit or


credit to the Retained Earnings account.

10. Prior period adjustments to income are reported in the current year's income
statement.
11.

Retained earnings that are restricted are unavailable for dividends.

12.

Restricted retained earnings are available for preferred stock dividends


but unavailable for common stock dividends.

13.

A retained earnings statement shows the same information as a


corporation income statement.

14.

A detailed stockholders' equity section in the balance sheet will


list the names of individuals who are eligible to receive dividends on
the date of record.

15.

Common Stock Dividends Distributable is shown within the Paid-in


Capital subdivision of the stockholders' equity section of the balance
sheet.

16.

Return on common stockholders equity is computed by dividing net


income by ending stockholders equity.

17.

Many companies prepare a stockholders equity statement instead


of presenting a detailed stockholders equity section in the balance
sheet.

18.

A major difference among corporations, proprietorships, and


partnerships is that a corporation's income statement reports income
tax expense.

19. A corporation incurs income tax expense only if it pays dividends to


stockholders.
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 5
20.

Income tax expense usually appears as a separate section on a


corporation income statement.

21.

Earnings per share is calculated by dividing net income by the weighted


average number of shares of preferred stock and common stock
outstanding.

22.

Preferred dividends paid are added back to net income in calculating


earnings per share for common stockholders.

23.

Earnings per share indicates the net income earned by each share
of outstanding common stock.

24.

Earnings per share is reported for both preferred and common stock.

25.

Most companies are required to report earnings per share on the face
of the income statement.

Additional True-False Questions


26.

A dividend based on paid-in capital is termed a liquidating dividend.

27.

Common Stock Dividends Distributable is reported as additional


paid-in capital in the stockholders' equity section.

28.

A prior period adjustment is reported as an adjustment of the


beginning balance of Retained Earnings.

29.

Income tax expense and the related liability for income taxes payable are
recorded when taxes are paid.

30.

Earnings per share is reported only for common stock.

MULTIPLE CHOICE QUESTIONS


31.

Each of the following decreases retained


earnings except a a. cash dividend.
b.
liqui
datin
g
divid
end.
c.
stock
divid
end.
d. All of these decrease retained earnings.

32.

Each of the following decreases total


stockholders' equity except a a. cash dividend.
b.
liqui
datin
g
divid
end.
c.
stock
divid
end.
d. All of these decrease total stockholders' equity.

33.

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


corporation to pay a cash dividend?
a. Adequate cash
b. Approval of stockholders
c. Declaration of dividends by the
board of directors d. Retained
earnings

34.

If a corporation declares a dividend based upon paid-in


capital, it is known as a a. scrip dividend.
b.
pro
per
ty
div
ide
nd.
c.
pai
d
div
ide
nd.
d. liquidating dividend.

35.

The date on which a cash dividend becomes a binding legal


obligation is on the a. declaration date.
b
.
d
a
t
e
o
f
r
e
c
o
r
d
.
c
.
p

a
y
m
e
n
t
d
a
t
e
.
d. last day of the fiscal year-end.
36.

The effect of the declaration of a cash dividend by the board of directors is to


Increase
a. Stockholders' equity b. Assets
c.
Liabilities d. Liabilities
Decrease
Assets Liabilities
Stockholders' equity Assets

37.

The cumulative effect of the declaration and payment of a cash


dividend on a company's financial statements is to
a. decrease total liabilities and
stockholders' equity. b. increase
total expenses and total liabilities.
c. increase total assets and
stockholders' equity. d.
decrease total assets and
stockholders' equity.
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 7

38.

Common Stock Dividends Distributable is


classified as a(n) a. asset account.
b. stockholders'
equity account.
c. expense
account.
d. liability account.

39.

The effect of a stock dividend is to


a.
decrease total assets and
stockholders' equity. b. change the
composition of stockholders' equity.
c. decrease total assets and total
liabilities.

d. increase the book value per share of common stock.


40.

If a corporation declares a 10% stock dividend on its common stock, the


account to be debited on the date of declaration is
a. Common Stock
Dividends Distributable. b.
Common Stock.
c. Paid-in Capital
in Excess of Par. d.
Retained Earnings.

41.

Which one of the following events would not require a formal


journal entry on a corporation's books?
a. 2 for 1 stock split
b.
100%
stock
dividend
c. 2%
stock
dividend
d. $1 per share cash dividend

42.

Stock dividends and stock splits have the following effects on retained earnings:

Stock Splits a.
Increase b.
change
Stock Dividends No change
Decrease Decrease No
change
43.

Dividends are
predominantly paid
in a. scrip.
b
.
p
r
o
p
e
r
t
y
.
c
.
c

No change c.

Decrease d.

No

a
s
h
.
d. stock.
44.

If a stockholder receives a dividend consisting of a promissory note, the


stockholder has received a
a.
st
oc
k
di
vi
de
nd
.
b.
ca
sh
di
vi
de
nd
.
c.
conting
ent
dividen
d. d.
scrip
dividen
d.

45.

Of the four dividends types, the two most common


types in practice are a. cash and scrip.
b.
cash
and
proper
ty. c.
cash
and
stock.
d. property and stock.

14 - 8
46.

Regular dividends are declared out of


a. Paid-in Capital in
Excess of Par Value. b.
Treasury Stock.

c. Common Stock.
d. Retained Earnings.
47.

A corporation is committed to a legal


obligation when it declares a. a cash
dividend.
b. either a cash dividend
or a stock dividend. c. a
stock dividend.
d. a stock split.

48.

Which of the following is not a significant date with


respect to dividends? a. The declaration date
b. The
incorpo
ration
date c.
The
record
date
d. The payment date

49.

On the dividend record date,


a. a dividend becomes a
current obligation. b. no
entry is required.
c. an entry may be required if it
is a stock dividend. d. Dividends
Payable is debited.

50.

Which of the following statements regarding the date of a cash dividend


declaration is not accurate?
a. The dividend can be rescinded once it
has been declared. b. The corporation is
committed to a legal, binding obligation.
c. The board of directors formally authorizes
the cash dividend. d. A liability account must
be increased.

51.

Dividends
Payable is
classified as a a.
long-term
liability.
b. contra stockholders' equity account to
Retained Earnings. c. current liability.
d. stockholders' equity account.

52.

Indicate the respective effects of the declaration of a cash dividend


on the following balance sheet sections:

Total Assets a.
Increase b. No change c.
Total Liabilities Decrease Increase Increase
Total Stockholders' Equity No change
Decrease Decrease Increase
53.

Decrease d.
No change

Decrease

Which of the following statements about


dividends is not accurate? a. Many companies
declare and pay cash quarterly dividends.
b. Low dividends may mean high stock returns.
c. The board of directors is obligated to
declare dividends. d. A legal dividend
may not be a feasible one.
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 9

54.

The cumulative effect of the declaration and payment of a cash dividend


on a company's balance sheet is to
a. decrease current liabilities and
stockholders' equity. b. increase total
assets and stockholders' equity.
c. increase current liabilities and
stockholders' equity. d. decrease
stockholders' equity and total assets.

55.

The declaration and distribution of a


stock dividend will a. increase total
stockholders' equity.
b.
increase
total
assets. c.
decrease
total
assets.
d. have no effect on total assets.

56.

ABC, Inc. has 1,000 shares of 4%, $100 par value, cumulative preferred
stock and 50,000 shares of $1 par value common stock outstanding at
December 31, 2008. What is the annual dividend on the preferred stock?
a.
$4
0
per
sh
are
b.
$4,
00
0

in
tot
al
c.
$4
00
in
tot
al
d.
$.4
0
per
sh
are
57.

Agler, Inc. has 10,000 shares of 6%, $100 par value, cumulative
preferred stock and 100,000 shares of $1 par value common stock
outstanding at December 31, 2008. If the board of directors declares a
$50,000 dividend, the
a. preferred shareholders will receive 1/10th of what the common
shareholders will receive.
b. preferred shareholders will receive the entire $50,000.
c. $50,000 will be held as restricted retained earnings and paid out at
some future date. d. preferred shareholders will receive $25,000 and the
common shareholders will receive
$25,000.

58.

Manner, Inc. has 5,000 shares of 6%, $100 par value, noncumulative
preferred stock and 20,000 shares of $1 par value common stock
outstanding at December 31, 2008. There were no dividends declared in
2007. The board of directors declares and pays a $55,000 dividend in
2008. What is the amount of dividends received by the common
stockholders in 2008?
a. $0
b
.
$
3
0
,
0
0
0
c
.
$
5

5
,
0
0
0
d
.
$
2
5
,
0
0
0
59.

Lopez, Inc. has 2,000 shares of 6%, $50 par value, cumulative preferred
stock and 50,000 shares of $1 par value common stock outstanding at
December 31, 2007, and December 31, 2008. The board of directors
declared and paid a $4,000 dividend in 2007. In 2008, $20,000 of
dividends are declared and paid. What are the dividends received by the
preferred and common shareholders in 2008?

Preferred a. $12,000 b.
Common $8,000
$10,000 $12,000
$14,000
14 - 10
60.

$10,000 c.

$8,000 d.

$6,000

Norton, Inc. has 10,000 shares of 6%, $100 par value, noncumulative
preferred stock and 100,000 shares of $1 par value common stock
outstanding at December 31, 2008, and December 31, 2009. The board
of directors declared and paid a $50,000 dividend in 2008. In 2009,
$100,000 of dividends are declared and paid. What are the dividends
received by the preferred and common shareholders in 2009?

Preferred a. $0
b. $60,000 c. $50,000 d. $100,000
Common $100,000
$40,000 $50,000 $0
61.

The board of directors must assign a per share value to a stock


dividend declared that is a. greater than the par or stated value.
b. less than the
par or stated
value. c. equal to
the par or stated
value.
d. at least equal to the par or stated value.

62.

Corporations generally issue stock

dividends in order to a. increase the


market price per share.
b. exceed stockholders'
dividend expectations. c.
increase the marketability of
the stock.
d. decrease the amount of capital in the corporation.
63.

A stockholder who receives a


stock dividend would a. expect
the market price per share to
increase. b. own more shares of
stock.
c. expect retained earnings to increase.
d. expect the par value of the stock to change.

64.

When stock dividends are distributed,


a. Common Stock Dividends
Distributable is decreased. b.
Retained Earnings is decreased.
c. Paid-in Capital in Excess of Par Value is debited if it is a
small stock dividend. d. no entry is necessary if it is a large
stock dividend.

65.

A small stock dividend is defined as


a. less than 30% but greater than 25% of the
corporation's issued stock. b. between 50% and 100%
of the corporation's issued stock.
c. more than 30% of the corporation's issued stock.
d. less than 2025% of the corporation's issued stock.

66.

The per share amount normally assigned by the board of directors


to a large stock dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on
outstanding shares. c. the par or stated value of
the stock.
d. zero.
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 11

67.

The per share amount normally assigned by the board of directors to


a small stock dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on
outstanding shares. c. the par or stated value of
the stock.
d. zero.

68.

Identify the effect the declaration of a stock dividend has on the par value
per share and book value per share.

Par Value per Share a.


Increase
b.
No effect c.
Decrease d. No effect
Book Value per Share Decrease Increase
Decrease Decrease
69.

The declaration of a
stock dividend will a.
increase paid-in
capital.
b. change the total of
stockholders' equity. c.
increase total liabilities.
d. increase total assets.

70. Which of the following show the proper effect of a stock split and a stock
dividend?
Item
a.
Total paid-in capital b.
Total retained earnings
c. Total par value (common) d.
Par value per share
Stock Split Increase
Decrease Decrease Decrease
Stock Dividend Increase Decrease Increase
No change
71.

A stock split
a. may occur in the absence of
retained earnings. b. will increase
total paid-in capital.
c. will increase the total par value of the stock.
d. will have no effect on the par value per share of stock.

72.

Outstanding stock of the Apex Corporation included 20,000 shares of


$5 par common stock and 5,000 shares of 6%, $10 par noncumulative
preferred stock. In 2007, Apex declared and paid dividends of $2,000.
In 2008, Apex declared and paid dividends of $6,000. How much of the
2008 dividend was distributed to preferred shareholders?
a
.
$
4
,
0
0
0
b
.

$
7
,
0
0
0
c
.
$
3
,
0
0
0
d. None of the above
73.

Outstanding stock of the Bell Corporation included 20,000 shares of $5 par


common stock and 10,000 shares of 6%, $10 par noncumulative preferred
stock. In 2007, Bell declared and paid dividends of $4,000. In 2008, Bell
declared and paid dividends of $12,000. How much of the 2008 dividend
was distributed to preferred shareholders?
a
.
$
8
,
0
0
0
b
.
$
1
4
,
0
0
0
c
.
$
6
,
0

0
0
d. None of the above
14 - 12
74.

On January 1, Bluefield Corporation had 800,000 shares of $10 par


value common stock outstanding. On March 31, the company declared
a 10% stock dividend. Market value of the stock was $15/share. As a
result of this event,
a. Bluefields Paid-in Capital in Excess of Par Value account
increased $400,000. b. Bluefields total stockholders equity
was unaffected.
c. Bluefields Retained Earnings account
decreased $1,200,000. d. All of the above.

75.

On January 1, Garrison Corporation had 1,000,000 shares of $10


par value common stock outstanding. On March 31, the company
declared a 10% stock dividend. Market value of the stock was
$15/share. As a result of this event,
a. Garrisons Paid-in Capital in Excess of Par Value account
increased $500,000. b. Garrisons total stockholders equity
was unaffected.
c. Garrisons Retained Earnings account
decreased $1,500,000. d All of the above.

76.

Sun Inc. has 5,000 shares of 6%, $100 par value, cumulative preferred
stock and 50,000 shares of $1 par value common stock outstanding at
December 31, 2008. What is the annual dividend on the preferred
stock?
a
.
$
6
0
p
e
r
s
h
a
r
e
b
.
$
3
0
,
0
0
0

i
n
t
o
t
a
l
c
.
$
3
,
0
0
0
i
n
t
o
t
a
l
d
.
$
0
.
6
0
p
e
r
s
h
a
r
e
77.

Allstate, Inc., has 20,000 shares of 6%, $100 par value,


noncumulative preferred stock and 100,000 shares of $1 par value
common stock outstanding at December 31, 2008. If the board of
directors declares a $200,000 dividend, the
a. preferred stockholders will receive 2/10th of what the
common stockholders will receive.
b. preferred stockholders will receive the entire $200,000.
c. $120,000 will be held as restricted retained earnings and paid out at
some future date. d. preferred stockholders will receive $120,000
and the common stockholders will
receive $80,000.

78.

Archer, Inc., has 10,000 shares of 8%, $100 par value, noncumulative

preferred stock and 40,000 shares of $1 par value common stock


outstanding at December 31, 2008. There were no dividends declared in
2007. The board of directors declares and pays a $120,000 dividend in
2008. What is the amount of dividends received by the common
stockholders in 2008?
a. $0
b
.
$
8
0
,
0
0
0
c
.
$
1
2
0
,
0
0
0
d
.
$
4
0
,
0
0
0
79.

Luther Inc., has 2,000 shares of 8%, $50 par value, cumulative
preferred stock and 100,000 shares of $1 par value common stock
outstanding at December 31, 2008, and December 31, 2007. The board
of directors declared and paid a $6,000 dividend in 2007. In 2008,
$24,000 of dividends are declared and paid. What are the dividends
received by the preferred stockholders in 2008?
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 13

a
.
$
1
4
,
0
0
0
b
.
$
1
2
,
0
0
0
c
.
$
1
0
,
0
0
0
d
.
$
8
,
0
0
0
`80.

Anders, Inc., has 5,000 shares of 6%, $100 par value, cumulative
preferred stock and 20,000 shares of $1 par value common stock
outstanding at December 31, 2009. There were no dividends declared in
2007. The board of directors declares and pays a $50,000 dividend in
2008 and in 2009. What is the amount of dividends received by the
common stockholders in 2009?
a
.

$
1
0
,
0
0
0
b
.
$
3
0
,
0
0
0
c
.
$
5
0
,
0
0
0
d
.
$
0
81.

Cuther Inc., has 1,000 shares of 8%, $50 par value, cumulative
preferred stock and 50,000 shares of $1 par value common stock
outstanding at December 31, 2007, and December 31, 2008. The board
of directors declared and paid a $3,000 dividend in 2007. In 2008,
$12,000 of dividends are declared and paid. What are the dividends
received by the common stockholders in 2008?
a
.
$
7
,
0
0
0

b
.
$
6
,
0
0
0
c
.
$
5
,
0
0
0
d
.
$
4
,
0
0
0
82.

On January 1, Brunner Corporation had 60,000 shares of $10 par value


common stock outstanding. On March 17, the company declared a 10%
stock dividend to stockholders of record on March 20. Market value of
the stock was $13 on March 17. The entry to record the transaction of
March 17 would include a
a. credit to Retained
Earnings for $18,000. b.
credit to Cash for $78,000.
c. credit to Common Stock Dividends
Distributable for $60,000. d. debit to Common
Stock Dividends Distributable for $60,000.

83.

On January 1, Brunner Corporation had 60,000 shares of $10 par value


common stock outstanding. On March 17, the company declared a 10%
stock dividend to stockholders of record on March 20. Market value of
the stock was $13 on March 17. The stock was distributed on March 30.
The entry to record the transaction of March 30 would include a
a. credit to Cash for $60,000.
b.
debit to Common Stock Dividends
Distributable for $60,000. c. credit to Paid-in

Capital in Excess of Par Value for $18,000. d.


debit to Retained Earnings for $18,000.
84.

On January 1, Sandford Corporation had 80,000 shares of $10 par value


common stock outstanding. On June 17, the company declared a 10%
stock dividend to stockholders of record on June 20. Market value of the
stock was $15 on June 17. The entry to record the transaction of June 17
would include a
a. debit to Retained
Earnings for $120,000. b.
credit to Cash for $120,000.
c. credit to Common Stock Dividends
Distributable for $120,000. d. credit to Common
Stock Dividends Distributable for $40,000.
14 - 14
85.

On January 1, Sanford Corporation had 80,000 shares of $10 par


value common stock outstanding. On June 17, the company declared a
10% stock dividend to stockholders of record on June 20. Market
value of the stock was $15 on June 17. The stock was distributed
on June 30. The entry to record the transaction of June 30 would include
a
a. credit to Common Stock for $80,000.
b. debit to Common Stock Dividends
Distributable for $120,000. c. credit to Paidin Capital in Excess of Par Value for $40,000.
d. debit to Retained Earnings for $40,000.

86.

The following selected amounts are available for Sanders Company.


Retained earnings
(beginning)
$1,000
Net
loss
100
Cash
dividends
declared
100 Stock dividends
declared
50
What is its ending retained
earnings balance? a. $850
b
.
$
9
0
0
c
.

$
7
5
0
d
.
$
8
0
0
87.

Turquoise and Topaz Sisters had retained earnings of $10,000 on the


balance sheet but disclosed in the footnotes that $2,000 of retained
earnings was restricted for plant expansion and $1,000 was restricted
for bond repayments. Cash of $2,000 had been set aside for the plant
expansion. How much of retained earnings is available for dividends?
a
.
$
7
,
0
0
0
b
.
$
8
,
0
0
0
c
.
$
1
0
,
0
0
0

d
.
$
5
,
0
0
0
88.

Irwin, Inc. had 300,000 shares of common stock outstanding before a


stock split occurred, and 600,000 shares outstanding after the stock split.
The stock split was
a
.
3
f
o
r
6
.
b
.
6
f
o
r
1
.
c
.
1
f
o
r
6
.
d
.

2
f
o
r
1
.
89.

Restricting retained earnings for the cost of treasury


stock purchased is a a. contractual restriction.
b.
le
g
al
re
st
ri
ct
io
n.
c.
st
o
c
k
re
st
ri
ct
io
n.
d. voluntary restriction.

90.

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. the
retained earnings account.
d. an asset account.
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 15

91.

If the board of directors authorizes a $100,000 restriction of retained


earnings for a future plant expansion, the effect of this action is to
a. decrease total assets and total stockholders' equity.
b. increase stockholders' equity and decrease total liabilities.

c. decrease total retained earnings and increase total liabilities.


d. reduce the amount of retained earnings available for dividend declarations.
92.

A credit balance in retained


earnings represents a.
the
amount of cash retained in the
business. b. a claim on specific
assets of the corporation.
c. a claim on the aggregate assets of the corporation.
d. the amount of stockholders' equity exempted from the stockholders'
claim on total assets.

93.

A net loss
a. occurs if operating expenses exceed cost of goods sold.
b. is not closed to Retained Earnings if it would result in a
debit balance. c. is closed to Retained Earnings even if it
would result in a debit balance.
d. is closed to the paid-in capital account of the stockholders' equity
section of the balance sheet.

94.

Prior period adjustments are reported


a. in the footnotes of the current year's
financial statements. b. on the current year's
balance sheet.
c. on the current year's income statement.
d. on the current year's retained earnings statement.

95.

Retained earnings are


occasionally restricted a. to
set aside cash for dividends.
b. to keep the legal capital associated with paidin capital intact. c. due to contractual loan
restrictions.
d. if preferred dividends are in arrears.

96.

Retained earnings is increased by each of the


following except a. net income.
b. prior period adjustments.
c. some disposals of treasury stock.
d. All of these increase retained earnings.

97.

A prior period adjustment for understatement of


net income will a. be credited to the Retained
Earnings account.
b. be debited to the Retained Earnings account.
c. show as a gain on the current year's
Income Statement. d. show as an asset on
the current year's Balance Sheet.

98.

The retained earnings statement


a. is the owners' equity statement for a corporation.

b. will show an addition to the beginning retained earnings balance for


an understate-ment of net income in a prior year.
c. will not reflect net losses.
d. will, in some cases, fail to reconcile the beginning and ending
retained earnings balances.
14 - 16
99.

In the stockholders' equity section of the balance sheet,


a. Common Stock Dividends Distributable will be classified as part
of additional paid-in capital.
b. Common Stock Dividends Distributable will appear in its own
subsection of the stock-holders' equity.
c. Additional Paid-in Capital appears under the
subsection Paid-in Capital. d. Dividends in arrears will
appear as a restriction of Retained Earnings.

100.

The return on common stockholders' equity is computed by dividing


net income available to common stockholders by
a. ending total stockholders' equity.
b. ending common
stockholders' equity. c.
average total
stockholders' equity.
d. average common stockholders' equity.

101.

The return on common stockholders equity is


computed by dividing a. net income by ending
common stockholders equity.
b. net income by average common stockholders equity.
c. net income less preferred dividends by ending common
stockholders equity. d. net income less preferred dividends by
average common stockholders equity.

Use the following information for questions 102103.


Carter Corporation had net income of $250,000 and paid dividends of
$50,000 to common stockholders and $20,000 to preferred stockholders in
2008. Carter Corporations common stockholders equity at the beginning
and end of 2008 was $870,000 and $1,130,000, respectively. There are
100,000 weighted-average shares of common stock outstanding.
102.

Carter Corporations return on common


stockholders equity was a. 25%.
b
.
2
3
%
.

c
.
2
0
%
.
d
.
1
8
%
.
103.

Carter Corporations earnings per


share for 2008 was a. $2.50.
b
.
$
2
.
3
0
.
c
.
$
2
.
0
0
.
d
.
$
1
.
8
0
.

Use the following information for questions 104105.


The following information pertains to Greenwich Company. Assume that
all balance sheet amounts represent average balance figures.

Stockholders equitycommon Total stockholders equity Sales


Net income
Number of shares of common stock Common stock dividends
Preferred stock dividends
$150,000 200,000 100,000 25,000 10,000 10,000 4,000
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 17
104.

What is the return on common stockholders equity


ratio for Greenwich? a. 16.7%
b
.
1
4
.
0
%
c
.
1
2
.
7
%
d
.
1
0
.
5
%

105.

What is the earnings per share


for Greenwich? a. $2.50
b
.
$
2
.
1
0
c

.
$
1
.
5
0
d
.
$
1
.
1
0
106.

A corporation differs from a proprietorship and a partnership in that


a. assets and liabilities are presented differently on the balance sheet.
b. a corporation is considered a separate legal entity for
taxation purposes. c. the cost principle only applies to
proprietorships and partnerships.
d the owners of the corporation do not have a claim on the net assets of the
business.

107.

Income statements for corporations are the same as the statements for
proprietorships except for the reporting of
a. gross profit.
b. income
from
operations.
c. income
tax
expense.
d. other revenues and gains.

108.

Income statements for corporations are the same as the income


statements for proprietorships except for the reporting of
a.
cost
of
goods
sold.
b.
inco
me
taxes.
c. gross profit.
d. other revenues and other expenses.

109.

Corporation income tax expense is

a. usually accrued in the adjusting entry process.


b. not usually accrued because it is not known what the exact liability
will be until the tax return is filed.
c. not reported in a separate section of a corporate
income statement. d. reported similarly for
corporations and partnerships.
110.

When computing earnings per share,


a. an adjustment related to preferred stock dividends is made in the
numerator and denominator of the earnings per share formula.
b. an adjustment for the preferred dividends is made in the denominator
of the earnings per share formula.
c. the dividends for cumulative preferred stock are deducted from net
income only if the preferred dividends have been declared.
d. the dividends for cumulative preferred stock are deducted from net
income whether or not preferred dividends have been declared.

14 - 18
111.

Each of the following statements is correct except that earnings per


share is reported a. below net income.
b. for both common
and preferred stock. c.
on the face of the
income statement.
d. based on the weighted-average number of common shares outstanding.

112.

West, Inc. has a net income of $400,000 for 2008, and there are
200,000 weighted-average shares of common stock outstanding.
Dividends declared and paid during the year amounted to $80,000 on
the preferred stock and $120,000 on the common stock. The earnings
per share for 2008 is
a
.
$
2
.
0
0
.
b
.
$
.
6
0
.
c

.
$
1
.
6
0
.
d
.
$
1
.
0
0
.
113.

The formula for computing earnings per


share is net income a. divided by the
ending common shares outstanding.
b. divided by the weighted-average number of common shares outstanding.
c. less preferred dividends divided by the ending common shares outstanding.
d. less preferred dividends divided by the weighted-average number of
common shares outstanding.

Additional Multiple Choice Questions


114.

Which of the following statements about a cash


dividend is incorrect? a. The legality of a cash
dividend depends on state corporation laws.
b. The legality of a dividend does not indicate a company's ability
to pay a dividend. c. Dividends are not a liability until declared.
d. Shareholders usually vote to determine the amount of income to be
distributed in the form of a dividend.

115.

The date a cash dividend becomes a binding legal obligation to a


corporation is the a. declaration date.
b
.
e
a
r
n
i
n
g
s

d
a
t
e
.
c
.
p
a
y
m
e
n
t
d
a
t
e
.
d
.
r
e
c
o
r
d
d
a
t
e
.
116.

Abbott Corporation splits its common stock 4 for 1, when the


market value is $40 per share. Prior to the split, Abbott had 50,000
shares of $10 par value common stock issued and outstanding. After the
split, the par value of the stock
a. remains the same.
b. is reduced to $2 per share.
c. is reduced
to $2.50 per
share. d. is
reduced to $10

per share.
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 19
117. Which of the following statements about retained earnings restrictions is
incorrect?
a. Many states require a corporation to restrict retained earnings for the
cost of treasury stock purchased.
b. Long-term debt contracts may impose a restriction on retained
earnings as a condition for the loan.
c. The board of directors of a corporation may voluntarily create
retained earnings restrictions for specific purposes.
d. Retained earnings restrictions are generally disclosed through a
journal entry on the books of a company.
118.

Prior period adjustments


a. may only increase
retained earnings. b.
may only decrease
retained earnings.
c. may either increase or decrease
retained earnings. d. do not affect
retained earnings.

119.

Jennifer Company reports the following amounts for 2008:


Net income Average stockholders' equity Preferred dividends
Par value preferred stock
$125,000 500,000 35,000 100,000
The 2008 rate of return on common
stockholders' equity is a. 18.0%.
b
.
2
2
.
5
%
.
c
.
2
5
.
0
%

.
d
.
3
1
.
3
%
.
120.

The return on common stockholders' equity is


computed by dividing a. net income by ending
common stockholders' equity.
b. net income by average common stockholders' equity.
c. net income minus preferred dividends by ending common
stockholders' equity. d. net income minus preferred dividends by
average common stockholders' equity.

121.

Milner Corporation had 200,000 shares of common stock outstanding


during the year. Milner declared and paid cash dividends of $200,000 on
the common stock and $160,000 on the preferred stock. Net income for
the year was $880,000. What is Milners earnings per share?
a
.
$
2
.
6
0
b
.
$
3
.
4
0
c
.
$
3
.
6
0

d
.
$
4
.
4
0
122.

When a corporation has both preferred and common stock


outstanding, earnings per share is computed by dividing net income
a. by ending common shares outstanding.
b. by weighted average common shares outstanding.
c. less preferred dividends by ending common shares outstanding.
d. less preferred dividends by the weighted average of common shares
outstanding.

14 - 20
123.

In determining earnings per share, dividends for the current year


on noncumulative preferred stock should be
a. disregarded.
b. added back to net income
whether declared or not. c.
deducted from net income only if
declared.
d. deducted from net income whether declared or not.

BRIEF EXERCISES
BE 124
On November 27, the board of directors of India Star Company declared
a $.35 per share dividend. The dividend is payable to shareholders of
record on December 7 on December 24. India Star has 25,500 shares of $1
par common stock outstanding at November 27. Journalize the entries needed
on the declaration and payment dates.
BE 125
On October 10, the board of directors of Pitcher Corporation declared a 5%
stock dividend. On October 10, the company had 10,000 shares of $1 par
common stock issued and outstanding with a market price of $15 per share.
The stock dividend will be distributed on October 31 to shareholders of
record on October 25. Journalize the entries needed for the declaration and
distribution of the stock dividend.
BE 126
Devons Company has 24,000 shares of $1 par common stock issued and

outstanding. The company also has 2,000 shares of $100 par 3% cumulative
preferred stock outstanding. The company did not pay the preferred dividends in
2007 or 2008. What amount of dividends must the company pay the preferred
shareholders in 2009 if they wish to pay the common stockholders a dividend?
BE 127
On November 1, 2008, Mates Corporations stockholders equity section is as
follows:
Common stock, $10 par value
Paid-in capital in excess of par value Retained earnings
Total stockholders equity
$600,000 180,000
200,000 $980,000
On November 1, Mates declares and distributes a 10% stock dividend when the
market value of the stock is $14 per share.
Instructions
Indicate the balances in the stockholders equity accounts after the stock
dividend has been distributed.
BE 128
Match each item/event pair below with the indicated change in the
item. An individual classification may be used more than once, or not at
all. For each dividend, assume that both declaration and payment or
distribution has occurred.
Classifications
A
.
It
e
m
i
n
c
r
e
a
s
e
s
B
.
It
e
m

d
e
c
r
e
a
s
e
s
C. Item is unchanged
D. Direction of change cannot be determined

1.
2.

Item
Book value per share
Total retained earnings
Event Stock Dividend

Stock Split
3. Total stockholders equity
4. Earnings per common share 5. Total retained earnings
6. Total paid-in capital
Prior period adjustment increases last years net income
Restriction of retained Earnings Cash dividend
Stock dividend
BE 129
Identify which of the following items would be reported as additions (A) or
deductions (D) in a Retained Earnings Statement.
1
.
N
e
t
I
n
c
o
m
e
2
.
N
e

t
L
o
s
s
3.
C
a
s
h
D
i
v
i
d
e
n
d
s
4.
S
t
o
c
k
D
i
vi
d
e
n
d
s
5. Prior period adjustments to correct for overstatement of prior
years net income 6. Prior period adjustments to correct for
understatement of prior years net income
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 23
BE 130
The balance in retained earnings on January 1, 2008, for Ettenger Inc, was
$600,000. During the year, the corporation paid cash dividends of $70,000 and
distributed a stock dividend of $8,000. In addition, the company determined that
it had overstated its depreciation expense in prior years by $50,000. Net income
for 2008 was $100,000.
Instructions

Prepare the retained earnings statement for 2008.


BE 131
The following information is available for Wheeler Corporation
Average common stockholders equity Average total stockholders equity
Common dividends declared and paid Preferred dividends declared and paid Net
income
2008
$1,500,000 2,000,000 72,000 30,000 300,000
2007
$1,000,000 1,500,000 50,000 30,000 250,000
Instructions
Compute the return on common stockholders equity ratio for both years. Briefly
comment on your findings.
BE 132
The following information is available for Ryder Corporation for the year
ended December 31, 2008:
Corrected overstatement of 2007 depreciation expense Cost of goods sold
Declared cash dividends Operating expenses
Other expenses and losses Other revenues and gains
Sales
Tax rate
$ 15,000 600,000 50,000 170,000 40,000 50,000 1,000,000 30%
Instructions
Prepare a corporate income statement in good form.

EXERCISES
Ex. 133
The stockholders' equity section of Ellis Corporation at December 31,
2007, included the following:
6% preferred stock, $100 par value, cumulative,
10,000 shares authorized, 8,000 shares issued and outstanding.......
800,000
Common stock, $10 par value, 250,000 shares authorized,
200,000 shares issued and outstanding ............................................
$2,000,000
Dividends were not declared on the preferred stock in 2007 and are in arrears.

On September 15, 2008, the board of directors of Ellis Corporation declared


dividends on the preferred stock for 2007 and 2008, to stockholders of record
on October 1, 2008, payable on October 15, 2008.
On November 1, 2008, the board of directors declared a $.90 per share dividend
on the common stock, payable November 30, 2008, to stockholders of record on
November 15, 2008.
Instructions
Prepare the journal entries that should be made by Ellis Corporation on the
dates indicated below:
September 15, 2008
November 1, 2008 October 1,
2008
November 15, 2008 October 15,
2008
November 30, 2008

Ex. 134
Richman Corporation has 120,000 shares of $5 par value common stock
outstanding. It declared a 15% stock dividend on June 1 when the market
price per share was $12. The shares were issued on June 30.
Instructions
Prepare the necessary entries for the declaration and payment of the stock dividend.
Ex. 135
Irving Corporation's stockholders' equity section at December 31, 2007 appears
below:
Stockholders' equity Paid-in capital
Common stock, $10 par, 60,000 outstanding Paid-in capital in excess
of par
Total paid-in capital Retained earnings
Total stockholders' equity
$600,000
150,000

$750,000
150,000 $900,000

On June 30, 2008, the board of directors of Irving Corporation declared a


15% stock dividend, payable on July 31, 2008, to stockholders of record on
July 15, 2008. The fair market value of Irving Corporation's stock on June 30,
2008, was $15.
On December 1, 2008, the board of directors declared a 2 for 1 stock split
effective December 15, 2008. Irving Corporation's stock was selling for $20 on
December 1, 2008, before the stock split was declared. Par value of the stock
was adjusted. Net income for 2008 was $190,000 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
Irving Corporation at December 31, 2008, 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


$
Corporations: Dividends, Retained Earnings, and Income
Reporting
14 - 27
Ex. 136
Derek Corporation was organized on January 1, 2007. During its first year, the
corporation issued 40,000 shares of $5 par value preferred stock and 400,000
shares of $1 par value common stock. At December 31, the company declared
the following cash dividends:
2007
$10,000
2008
$30,000
2009
$70,000
Instructions
(a) Show the allocation of dividends to each class of stock, assuming the
preferred stock dividend is 6% and not cumulative.
(b) Show the allocation of dividends to each class of stock, assuming the
preferred stock dividend is 8% and cumulative.

(c) Journalize the declaration of the cash dividend at December 31, 2009 using
the assumption of part (b).
Ex. 137
On November 1, 2008, Lambert Corporation's stockholders' equity section is as
follows:
Common stock, $10 par value
Paid-in capital in excess of par value Retained earnings
Total stockholders' equity
$ 600,000 205,000
240,000 $1,045,000
On November 1, Lambert declares and distributes a 10% stock dividend when
the market value of the stock is $13 per share.
Instructions
(a) Compute the book value per share (1) before the stock dividend and
(2) after the stock dividend.
(b)

Indicate the balances in the stockholders' equity accounts after the stock
dividend has been distributed.

Ex. 138
During 2008, Pine Corporation had the following
transactions and events: 1. Issued par value preferred
stock for cash at par value.
2. Issued par value common stock for cash at an amount greater than par value.
3. Completed a 2 for 1 stock split in which the $10 par value common stock
was changed to $5 par value stock.
4. Declared a small stock dividend when the market value was higher
than the par value. 5. Declared a cash dividend.
6. Made a prior period adjustment for
understatement of net income. 7. Issued par value
common stock for cash at par value.
8. Paid the cash dividend.
9. Issued the shares of common stock required by the stock dividend declaration in 4.
above.
Instructions
Indicate the effect(s) of each of the foregoing items on the subdivisions of
stockholders' equity. Present your answers in tabular form with the following
columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.

It e m

Ex. 139

The following information is available for Ellis Corporation:


Common Stock ($5 par) Retained Earnings
$1,500,000 600,000
A 10% stock dividend is declared and paid when the market value was $15 per share.
Instructions
Compute each of the following after
the stock dividend. (a) Total
stockholders' equity.
(b) Number of
shares outstanding.
(c) Book value
per share.
Ex. 140
On January 1, 2008, Bolten Corporation had $2,000,000 of $10 par value
common stock outstanding that was issued at par and retained earnings of
$1,000,000. The company issued 200,000 shares of common stock at $13 per
share on July 1. On December 15, the board of directors declared a 10%
stock dividend to stockholders of record on December 31, 2008, payable
on January 15, 2009. The market value of Bolten Corporation stock was $15
per share on December 15 and $16 per share on December 31. Net income for
2008 was $500,000.
Instructions
(1) Journalize the issuance of stock on July 1 and the declaration of the
stock dividend on December 15.
(2) Prepare the stockholders' equity section of the balance sheet for
Bolten Corporation at December 31, 2008.

Ex. 141
On January 1, 2008, Dolan Corporation had 60,000 shares of $1 par value
common stock issued and outstanding. During the year, the following
transactions occurred:
Mar.

Issued 20,000 shares of common stock for $400,000.

June

Declared a cash dividend of $2.00 per share to stockholders of

record on June 15. June 30 Paid the $2.00 cash dividend.


Dec. 1
share.

Purchased 4,000 shares of common stock for the treasury for $22 per

Dec. 15

Declared a cash dividend on outstanding shares of $2.25 per share


to stockholders of record on December 31.

Instructions
Prepare journal entries to record the above transactions.

Ex. 142
Record the following transactions for Harper Corporation on the dates indicated.
1. On March 31, 2008, Harper Corporation discovered that Depreciation
Expense on factory equipment for the year ended December 31, 2007,
had been recorded twice, for a total amount of $50,000 instead of the
correct amount of $25,000.
2. On June 30, 2008, the company's internal auditors discovered that the April
2008 telephone bill for $2,500 had erroneously been charged to the Interest
Expense account.
3. On August 14, 2008, cash dividends on preferred stock of $110,000 declared
on July 1, 2008, were paid.
Ex. 143
The following information is available for Orson Corporation:
Retained Earnings, December 31, 2008
Net Income for the year ended December 31, 2009

$1,500,000 $ 250,000
The company accountant, in preparing financial statements for the year
ending December 31, 2009, has discovered the following information:
The company's previous bookkeeper, who has been fired, had recorded
depreciation expense on a machine in 2007 and 2008 using the doubledeclining-balance method of depreciation. The bookkeeper neglected to use
the straight-line method of depreciation which is the company's policy. The
cumulative effects of the error on prior years was $15,000, ignoring income
taxes. Depreciation was computed by the straight-line method in 2009.
Instructions
(a) Prepare the entry for the prior
period adjustment. (b) Prepare the
retained earnings statement for
2009.
Ex. 144
The following information is available for Sanders Inc.:
Beginning retained earnings Cash dividends declared Net
income for 2008
Stock dividend declared
Understatement of last year's depreciation expense

$600,000 50,000 120,000 10,000 40,000


Instructions
Based on the preceding information, prepare a retained earnings statement for 2008.
Ex. 145
On January 1, 2008, Windom Corporation had Retained Earnings of $378,000.
During the year, Windom had the following selected transactions:
1. Declared stock
dividends of $40,000. 2.
Declared cash dividends
of $90,000.
3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par
value common stock for 100,000 shares of $10 par value common stock.
4. Suffered a net loss of $70,000.
5. Corrected understatement of 2007 net income because of an inventory error of
$68,000.
Instructions
Prepare a retained earnings statement for the year.
Ex. 146
The following accounts appear in the ledger of Norland Inc. after the
books are closed at December 31, 2008.
Common Stock, $1 par value, 500,000 shares authorized, 400,000 shares issued
Common Stock Dividends Distributable
Paid-in Capital in Excess of Par ValueCommon Stock
Preferred Stock, $100 par value, 8%, 10,000 shares authorized; 2,000 shares
issued
Retained Earnings
Treasury Stock (10,000 common shares)
Paid-in Capital in Excess of Par ValuePreferred Stock
$400,000 80,000 650,000
200,000 950,000 85,000 310,000
Instructions
Prepare the stockholders' equity section at December 31, 2008, assuming that
retained earnings is restricted for plant expansion in the amount of $200,000.

Ex. 147
The following information is available for Wenger Corporation:
Beginning stockholders' equity Dividends paid to common stockholders

Dividends paid to preferred stockholders Ending stockholders' equity


Net income
$700,000 50,000 30,000 800,000 165,000
Instructions
Based on the preceding information, calculate return on common stockholders' equity.

Ex. 148
Prepare a 2008 income statement for Carney Corporation based on the following
information:
Cost of goods sold Operating expenses
Other expenses and losses Sales
Tax rate
$420,000 100,000 30,000 700,000
30%

Ex. 149
Feldman Corporation gathered the following information for the fiscal year
ended December 31, 2008:
Sales
$1,600,000 Selling and administrative
expenses
160,000 Cost of
goods
sold
1,040,000 Loss on sale of equipment
40,000
Feldman Corporation is subject to a 30% income tax rate.
Instructions
Prepare a partial income statement, beginning with income from operations.
Ex. 150
At December 31, 2008, Rossi Company has $500,000 of $100 par value,
8%, cumulative preferred stock outstanding and $2,000,000 of $10 par value
common stock issued. Rossi's net income for the year is $500,000.
Instructions
Compute earnings per share of common stock for 2008 under the
following independent situations. (Round to two decimals.)
(a) The dividend to preferred stockholders was declared, and there has been
no change in the number of shares of common stock outstanding during
the year.

(b) The dividend to preferred stockholders was not declared, and 10,000
shares of common treasury stock were held throughout the year. The
preferred stock is cumulative.
Ex. 151
The following information is available for Vincent Corporation:
Dividends paid to common stockholders Dividends paid to preferred
stockholders Net income
Weighted average common shares outstanding
$ 45,000 20,000 145,000 100,000
Instructions
Compute the earnings per share of common stock.

COMPLETION STATEMENTS
152. Three important dates associated with dividends are the: (1)
, (2)
, and (3)
.
153. The entry to record the declaration of a stock dividend increases
, and decreases
.
154. Both a stock split and a stock dividend will
the
number of shares outstanding and have
on total stockholders'
equity.
155. Corporations

sometimes
two
earnings and (2)

segregate
retained earnings into
categories: (1)
retained
retained earnings.

156. The correction of an error in previously issued financial statements is


known as a
.
157. The return on
shows how many dollars of net
income were earned for each dollar invested by owners.
158. The return on common stockholders equity is
computed by dividing minus
dividends by average
common stockholders equity.
159. Income statements for corporations report
separate section before net income.
160. Earnings per share is reported only for

in a
.

161. Earnings per share is calculated by dividing


available for common

stockholders by the
outstanding.

number of common shares

MATCHING
162. Match the items below by entering the appropriate code letter in the space
provided.
A. Deficit
B. Prior period adjustment C. Liquidating dividend
D. Retained earnings restrictions E. Earnings per share
F. Return on common stockholders equity G. Cash dividend
H. Declaration date I.
Stock dividend J.
Stock split
1.

A dividend declared out of paid-in capital.

2.

Retained earnings currently unavailable for dividends.

3.

The correction of an error in previously issued financial statements.

4.

A pro rata distribution of cash to stockholders.

5.

A debit balance in retained earnings.

6.

A pro rata distribution of the corporation's own stock to stockholders.

7.

Shows how many dollars of net income were earned for each dollar
invested by the owners.

8.

The date the board of directors formally declares the dividend and
announces it to stockholders.

9.

The issuance of additional shares of stock to stockholders


accompanied by a reduction in the par or stated value per share.

10.

Widely used by stockholders and potential investors in evaluating the


profitability of a company.

SHORT-ANSWER ESSAY QUESTIONS


S-A E 163
The ultimate effect of incurring an expense is to reduce stockholders' equity.
The declaration of a cash dividend also reduces stockholders' equity. Explain

the difference between an expense and a cash dividend and explain why they
have the same effect on stockholders' equity.
S-A E 164
A large stock dividend and stock split can frequently have the same effect on
the market price of a corporation's stock. Explain how stock dividends and
stock splits affect the market price of a corporation's stock.
S-A E 165
Why must a corporation have sufficient retained earnings before it may declare cash
dividends?
S-A E 166 (Ethics)
Jake Hightower, the president and CEO of Earth Systems, Inc., a waste
management firm, was recently hospitalized, suffering from exhaustion and a
heart ailment. Immediately prior to his hospitalization, Earth Systems had
experienced a sharp decline in its stock price, and trading activity became
almost nonexistent. The primary reason for this was concern expressed in the
media over a new untested waste management system implemented by the
company. Mr. Hightower had been unwilling to submit the procedure to
testing before implementation, but he reluctantly agreed to limited tests after
the system was operational. No problems have been identified by the tests to
date.
The other members of management called a meeting to determine what they
should do. Roger Donovan, the marketing manager, suggested that the
company purchase a large number of shares of treasury stock. In that way,
investors might notice that activity had picked up, and might decide to buy some
more shares. This plan would use up most of the company's available cash, so
that there will be no money available for a cash dividend. Earth Systems
has paid cash dividends every quarter for over ten years.
Required:
1. Is Mr. Donovans suggestion ethical? Explain.
2. Is it ethical to discontinue the cash dividend? Explain.

S-A E 167 (Communication)


As part of a Careers in Accounting program sponsored by accounting
organizations and supported by your company, you will be taking a group
of high-school students through the accounting department in your company.
You will also provide them with various materials to explain the work of an
accountant. One of the materials you will provide is the Stockholders Equity
section of a recent balance sheet.

S-A E 167 (cont.)


Required:
Prepare a sentence or two explaining each major section: Common Stock,
Additional Paid-in Capital, and Retained Earnings. You should try to be brief
but clear.
CHAPTER 15
LONG-TERM LIABILITIES
CHAPTER STUDY OBJECTIVES
1. Explain why bonds are issued.
2. Prepare the entries for the issuance of bonds and interest expense.
3. Describe the entries when bonds are redeemed or converted.
4. Describe the accounting for long-term notes payable.
5. Contrast the accounting for operating and capital leases.
6. Identify the methods for the presentation and analysis of longterm liabilities.
7. Compute the market price of a bond.
8. Apply the effective-interest method of amortizing bond discount and
bond premium.
a9. Apply the straight-line method of amortizing bond discount and bond
premium.

TRUE-FALSE STATEMENTS
1.

Each bondholder may vote for the board of directors in proportion to the
number of bonds held.

2.

Bond interest paid by a corporation is an expense, whereas dividends


paid are not an expense of the corporation.

3. Registered bonds are bonds that are delivered to owners by U.S. registered
mail service.
4.

A debenture bond is an unsecured bond which is issued against the


general credit of the borrower.

5.

Bonds are a form of interest-bearing notes payable.

6.

Neither corporate bond interest nor dividends are deductible for tax purposes.

7.

A 10% stock dividend is the equivalent of a $1,000 par value bond


paying annual interest of 10%.

8.

The holder of a convertible bond can convert an interest payment


received into a cash dividend paid on common stock if the dividend is
greater than the interest payment.

9.

The board of directors may authorize more bonds than are issued.

10.

The contractual interest rate is always equal to the market interest rate
on the date that bonds are issued.

11. If $150,000 face value bonds are issued at 102, the proceeds received will be
$102,000.
12.

Discount on bonds is an additional cost of borrowing and should be


recorded as interest expense over the life of the bonds.

13.

If a corporation issued bonds at an amount less than face value, it


indicates that the corporation has a weak credit rating.
Long-Term
Liabilities
15 - 5

14.

A corporation that issues bonds at a discount will recognize interest


expense at a rate which is greater than the market interest rate.

15.

If bonds are issued at a discount, the issuing corporation will pay a


principal amount less than the face amount of the bonds on the maturity
date.

16.

If bonds are issued at a premium, the carrying value of the bonds will be
greater than the face value of the bonds for all periods prior to the bond
maturity date.

17.

If the market interest rate is greater than the contractual interest rate,
bonds will sell at a discount.

18.

If $800,000, 8% bonds are issued on January 1, and pay interest


semiannually, the amount of interest paid on July 1 will be $32,000.

19.

If bonds sell at a premium, the interest expense recognized each year will
be greater than the contractual interest rate.

20.

The carrying value of bonds is calculated by adding the balance of the


Discount on Bonds Payable account to the balance in the Bonds Payable
account.

21.

The loss on bond redemption is the difference between the cash paid

and the carrying value of the bonds.


22.

If $200,000 par value bonds with a carrying value of $190,400 are


redeemed at 97, a loss on redemption will be recorded.

23.

Gains and losses are not recognized when convertible bonds are
converted into common stock.

24.

Generally, convertible bonds do not pay interest.

25.

Each payment on a mortgage note payable consists of interest on the


original balance of the loan and a reduction of the loan principal.

26.

A long-term note that pledges title to specific property as security for a


loan is known as a mortgage payable.

27.

A capital lease requires the lessee to record the lease as a purchase of an asset.

28. The times interest earned ratio is computed by dividing net income by interest
expense.
a29.

The present value of a bond is a function of two variables: (1) the


payment amounts and (2) the interest (discount) rate.

a30.

The effective-interest method of amortization results in varying


amounts of amortization and interest expense per period but a constant
interest rate.

Additional True-False Questions


31. Bonds that mature at a single specified future date are called term bonds.
15 - 6
32.

The terms of the bond issue are set forth in a formal legal
document called a bond indenture.

33. The carrying value of bonds at maturity should be equal to the face value of
the bonds.
34.

Premium on Bonds Payable is a contra account to Bonds Payable.

35.

When bonds are converted into common stock, the carrying value
of the bonds is transferred to paid-in capital accounts.

36.

Operating leases are leases that the lessee must capitalize on its
balance sheet as an asset.

37.

Under a capital lease, the lease/asset is reported on the balance


sheet under plant assets.

38.

Long-term liabilities are reported in a separate section of the balance

sheet immediately following current liabilities.

MULTIPLE CHOICE QUESTIONS


39.

Each of the following is correct regarding


bonds except they are a. a form of interestbearing notes payable.
b. attractive to many investors.
c. issued by corporations and
governmental agencies. d. sold in
large denominations.

40.

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.

41.

If a corporation issued $2,000,000 in bonds which pay 10% annual


interest, what is the annual net cash cost of this borrowing if the income
tax rate is 30%?
a
.
$
2
,
0
0
0
,
0
0
0
b
.
$
6
0
,
0
0
0
c
.

$
2
0
0
,
0
0
0
d
.
$
1
4
0
,
0
0
0
Long-Term
Liabilities
15 - 7
42.

Secured bonds are bonds that


a. are in the possession of a bank.
b. are registered in the name of the owner.
c. have specific assets of the issuer
pledged as collateral. d. have detachable
interest coupons.

43.

A legal document which summarizes the rights and privileges of


bondholders as well as the obligations and commitments of the issuing
company is called
a. a
bond
indent
ure. b.
a bond
debent
ure.
c.
trading
on the
equity. d.
a term
bond.

44.

Stockholders of a company may be reluctant to finance expansion


through issuing more equity because
a. leveraging with debt is
always a better idea. b. their
earnings per share may
decrease.
c. the price of the stock will
automatically decrease. d. dividends
must be paid on a periodic basis.

45.

Which of the following is not an advantage of issuing bonds instead of


common stock? a. Stockholder control is not affected.
b. Earnings per share on common stock
may be lower. c. Income to common
shareholders may increase.
d. Tax savings result.

46.

Bonds that are secured by real


estate are termed a. mortgage
bonds.
b.
se
ri
al
b
o
n
ds
.
c.
de
be
nt
ur
es
.
d.
be
ar
er
b
o
n
ds
.

47.

Bonds that mature at a single specified future


date are called a. coupon bonds.
b
.

t
e
r
m
b
o
n
d
s
.
c
.
s
e
r
i
a
l
b
o
n
d
s
.
d
.
d
e
b
e
n
t
u
r
e
s
.
48.

Bonds that may be exchanged for common stock at the option of the
bondholders are called
a. options.
b. stock bonds.
c.
conver
tible
bonds.
d.
callabl
e

bonds.
49.

Bonds that are subject to retirement at a stated dollar amount prior to


maturity at the option of the issuer are called
a. callable bonds.
b. early
retirement
bonds. c.
options.
d. debentures.

15 - 8
50.

Investors who receive checks in their names for interest earned on


bonds must hold a. registered bonds.
b
.
c
o
u
p
o
n
b
o
n
d
s
.
c
.
b
e
a
r
e
r
b
o
n
d
s
.
d
.

d
i
r
e
c
t
b
o
n
d
s
.
51.

A bondholder that sends in a coupon to receive interest


payments must have a(n) a. unsecured bond.
b. bearer bond.
c
.
m
o
r
t
g
a
g
e
b
o
n
d
.
d
.
s
e
r
i
a
l
b
o
n
d
.

52.

Bonds that may be directly transferred to another


party by delivery are a. coupon bonds.
b. debentures.

c. registered bonds.
d. transportable bonds.
53.

Bonds that must be cancelled and reissued as new bonds in order to


have ownership interest transferred are
a
.
c
o
u
p
o
n
b
o
n
d
s
.
b
.
b
e
a
r
e
r
b
o
n
d
s
.
c
.
s
e
r
i
a
l
b
o

n
d
s
.
d. registered bonds.
54.

Corporations are granted the power to


issue bonds through a. tax laws.
b. state laws.
c.
federa
l
securit
y
laws.
d.
bond
debent
ures.

55.

The party who has the right to exercise a call


option on bonds is the a. investment banker.
b
.
b
o
n
d
h
o
l
d
e
r
.
c
.
b
e
a
r
e
r
.
d. issuer.

56.

A major disadvantage resulting from the


use of bonds is that a. earnings per share
may be lowered.

b. interest must be paid


on a periodic basis. c.
bondholders have voting
rights.
d. taxes may increase.
57.

Bonds will always fall into all but which one of the
following categories? a. Callable or convertible
b. Term or serial
c.
Registe
red or
bearer
d.
Secured
or
unsecur
ed
Long-Term
Liabilities
15 - 9

58.

Which of the following statements concerning bonds is not a


true statement? a. Bonds are generally sold through an
investment company.
b. The bond indenture is prepared after the bonds are printed.
c. The bond indenture and bond certificate are
separate documents. d. The trustee keeps records of
each bondholder.

59.

A bond
trustee
does
not a.
issue
the
bonds.
b. keep a record of each bondholder.
c. hold conditional title to
pledged property. d.
maintain custody of unsold
bonds.

60.

The contractual interest rate is


always stated as a(n) a. monthly
rate.
b. daily rate.
c.
sem
ian

nua
l
rate
. d.
ann
ual
rate
.
61.

When authorizing bonds to be issued, the board of directors


does not specify the a. total number of bonds authorized to be
sold.
b.
contractual
interest
rate. c.
selling
price.
d. total face value of the bonds.

Use the following exhibit for questions 6263.


Bonds
Yield
Volume 8.4
Net Change +7/8
62.

Close K mart 8 3/8


35

17

100

The contractual interest rate of the


K mart bonds is a. greater than
the market interest rate.
b. less than the
market interest rate.
c. equal to the
market interest rate.
d. not
determinable.

63. On the day of trading


referred to above, a. no K
mart bonds were traded.
b. bonds with market prices of $3,500 were traded.
c. at closing, the selling price of the bond was higher than the
previous day's price. d. the bond sold for $100.25
64.

A $1,000 face value bond with a quoted price


of 98 is selling for a. $1,000.
b
.
$
9
8

0
.
c
.
$
9
0
8
.
d
.
$
9
8
.
65.

A bond with a face value of $100,000 and a quoted price of 102 has
a selling price of a. $120,225.
b
.
$
1
0
2
,
0
2
5
.
c
.
$
1
0
0
,
2
2
5
.
d
.

$
1
0
2
,
2
5
0
.
15 - 10
66.

Premium
on Bonds
Payable
a. has a
debit
balance.
b. is a contra account.
c. is considered to be a reduction in the
cost of borrowing. d. is deducted from
bonds payable on the balance sheet.

67.

If the market interest rate is greater than the contractual interest


rate, bonds will sell a. at a premium.
b
.
a
t
f
a
c
e
v
a
l
u
e
.
c
.
a
t
a

d
i
s
c
o
u
n
t
.
d. only after the stated interest rate is increased.
68.

On January 1, 2008, Grant Corporation issued $3,000,000, 10-year,


8% bonds at 102. Interest is payable semiannually on January 1 and
July 1. The journal entry to record this transaction on January 1, 2008 is
a. Cash .................................................................................... 3,000,000
Bonds Payable............................................................

b.

d.

3,000,000
Cash ....................................................................................
Bonds
Payable............................................................
c. Premium on Bonds Payable ................................................
Cash .................................................................................... Bonds
Payable............................................................
Cash ....................................................................................
Bonds
Payable............................................................ Premium on Bonds
Payable .......................................

3,060,000
60,000 3,000,000
3,060,000
3,060,000
3,060,000
3,000,000 60,000
69.

The total cost of borrowing is


increased only if the a. bonds
were issued at a premium.
b. bonds were
issued at a
discount. c.
bonds were sold at
face value.
d. market interest rate is less than the contractual interest rate on that date.

70.

If the market interest rate is 10%, a $10,000, 12%, 10-year bond,

that pays interest semiannually would sell at an amount


a.
less
than
face
value.
b.
equal
to
face
value.
c. greater than face value.
d. that cannot be determined.
71.

The present value of a $10,000, 5-year bond, will be less


than $10,000 if the a. contractual interest rate is less than
the market interest rate.
b. contractual interest rate is greater than the
market interest rate. c. bond is convertible.
d. contractual interest rate is equal to the market interest rate.

72.

Gomez Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated


January 1, 2008, at 98. The journal entry to record the issuance will
show a
a. debit to Cash of $1,000,000.
b. credit to Discount on Bonds
Payable for $20,000. c. credit to
Bonds Payable for $980,000.
d. debit to Cash for $980,000.
Long-Term
Liabilities
15 - 11

73.

The market interest rate is


often called the a. stated
rate.
b.
e
ff
e
ct
i
v
e
r
at
e.
c.
c
o

u
p
o
n
r
at
e.
d. contractual rate.
74.

If bonds are issued at a discount, it


means that the a. financial
strength of the issuer is suspect.
b. market interest rate is higher than the
contractual interest rate. c. market interest rate is
lower than the contractual interest rate.
d. bondholder will receive effectively less interest than the contractual interest
rate.

75.

Each of the following accounts is reported as long-term


liabilities except a. Bond Interest Payable.
b. Bonds Payable.
c. Discount on
Bonds Payable.
d. Premium on
Bonds Payable.

76.

The statement that "Bond prices vary inversely with changes in the
market interest rate" means that if the
a. market interest rate increases, the contractual interest rate
will decrease. b. contractual interest rate increases, then
bond prices will go down.
c. market interest rate decreases, then bond prices will go up.
d. contractual interest rate increases, the market interest rate will decrease.

77.

The carrying value of bonds will equal


the market price a. at the close of
every trading day.
b. at the end of
the fiscal period.
c. on the date of
issuance.
d. every six months on the date interest is paid.

78.

The sale of bonds


above face value a.
is a rare occurrence.
b. will cause the total cost of borrowing to be less than the
bond interest paid. c. will cause the total cost of borrowing to
be more than the bond interest paid. d. will have no net effect
on Interest Expense by the time the bonds mature.

79.

In the balance sheet, the account, Premium on


Bonds Payable, is a. added to bonds payable.
b. deducted from bonds payable.
c. classified as a stockholders'
equity account. d. classified as
a revenue account.

80.

Two thousand bonds with a face value of $1,000 each, are sold at 103.
The entry to record the issuance is
a. Cash .................................................................................... 2,060,000
Bonds Payable ...........................................................
2,060,000
b.

Cash
....................................................................................
2,000,000
Premium on
Bonds
Payable
................................................
60,000
Bonds Payable ...........................................................
2,060,000

15 - 12
c. Cash ................................................................................... 2,060,000
Premium on Bonds Payable ......................................
Bonds Payable ...........................................................
60,000 2,000,000
d. Cash ................................................................................... 2,060,000
Discount on Bonds Payable .......................................
Bonds Payable ...........................................................
60,000 2,000,000
81.

82.

Bond interest paid is


a. higher when bonds
sell at a discount. b.
lower when bonds sell
at a premium.
c. the same whether bonds sell at a discount or a premium.
d. higher when bonds sell at a discount and lower when bonds sell at a
premium.
Mendez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated
January 1, 2008, at 103. The journal entry to record the issuance will
show a
a. debit to Cash of $2,000,000.
b. credit to Premium on Bonds
Payable for $60,000. c. credit to
Bonds Payable for $2,030,000.

d. credit to Cash for $2,060,000.


Use the following information for questions 8386.
Golden Company received proceeds of $94,250 on 10-year, 8% bonds
issued on January 1, 2007. The bonds had a face value of $100,000, pay
interest semi-annually on June 30 and December 31, and have a call price of
101. Golden uses the straight-line method of amortization.
83.

What is the amount of interest Golden must pay the


bondholders in 2007? a. $7,540
b
.
$
8
,
0
0
0
c
.
$
8
,
5
7
5
d
.
$
7
,
4
2
5

a84.

What is the amount of interest expense Golden will show with relation
to these bonds for the year ended December 31, 2008?
a
.
$
8
,
0
0

0
b
.
$
7
,
5
4
0
c
.
$
8
,
5
7
5
d
.
$
7
,
4
2
5
a85.

What is the carrying value of the bonds on


January 1, 2009? a. $100,000
b
.
$
9
5
,
4
0
0
c
.
$
9

8
,
8
5
0
d
.
$
9
4
,
8
2
5
86.

Golden Company decided to redeem the bonds on January 1, 2009.


What amount of gain or loss would Golden report on its 2009 income
statement?
a
.
$
4
,
6
0
0
g
a
i
n
b
.
$
5
,
6
0
0
g
a
i
n

c
.
$
5
,
6
0
0
l
o
s
s
d
.
$
4
,
6
0
0
l
o
s
s
Long-Term
Liabilities
15 - 13
87.

Bryce Company has $500,000 of bonds outstanding. The unamortized


premium is $7,200. If the company redeemed the bonds at 101, what
would be the gain or loss on the redemption?
a
.
$
2
,
2
0
0
g
a
i

n
b
.
$
2
,
2
0
0
l
o
s
s
c
.
$
5
,
0
0
0
g
a
i
n
d
.
$
5
,
0
0
0
l
o
s
s
88.

The current carrying value of Jensens $600,000 face value bonds is


$597,750. If the bonds are retired at 102, what would be the amount
Jensen would pay its bondholders? a. $597,750

b
.
$
6
0
0
,
0
0
0
c
.
$
6
0
3
,
0
0
0
d
.
$
6
1
2
,
0
0
0
89.

Lahey Corporation retires its $500,000 face value bonds at 105 on


January 1, following the payment of annual interest. The carrying value of
the bonds at the redemption date is $518,725. The entry to record the
redemption will include a
a. credit of $18,725 to Loss on
Bond Redemption. b. debit of
$18,725 to Premium on Bonds
Payable. c. credit of $6,275 to
Gain on Bond Redemption. d.
debit of $25,000 to Premium on
Bonds Payable.

90.

A $900,000 bond was retired at 103 when the carrying value of the bond
was $933,000. The entry to record the retirement would include a

a. gain on bond
redemption of $27,000.
b. loss on bond
redemption of $6,000. c.
loss on bond redemption
of $27,000. d. gain on
bond redemption of
$6,000.
91.

If forty $1,000 convertible bonds with a carrying value of $46,000 are


converted into 6,000 shares of $5 par value common stock, the journal
entry to record the conversion is
a. Bonds Payable ....................................................................
46,000 Common Stock ...........................................................
46,000
b.
Bonds
Payable
....................................................................
40,000
Premium on
Bonds
Payable
................................................
6,000
Common Stock ...........................................................
46,000
c.

Bonds
....................................................................

Payable

40,000
Premium on
Bonds
Payable
................................................
6,000
Common Stock
...........................................................
30,000 Paid-in Capital in Excess of Par .................................
16,000
d. Bonds Payable ....................................................................
46,000
Discount on Bonds Payable .......................................
6,000 Common Stock ...........................................................
30,000 Paid-in Capital in Excess of Par .................................
10,000
92.

A corporation recognizes a gain or loss


a. only when bonds are converted into
common stock. b. only when bonds
are redeemed before maturity.
c. when bonds are redeemed at or before maturity.
d. when bonds are converted into common stock and when they are
redeemed before maturity.
15 - 14

93.

If there is a loss on bonds


redeemed early, it is a.
debited directly to Retained
Earnings.
b. reported as an "Other Expense" on the income statement.
c. reported as an "Extraordinary Item" on the
income statement. d. debited to Interest
Expense, as a cost of financing.

94.

If bonds can be converted into common stock,


a. they will sell at a lower price than comparable bonds without a conversion
feature.
b. they will carry a higher interest rate than comparable bonds
without the conversion feature.
c. they will be converted only if the issuer calls them in for conversion.
d. the bondholder may benefit if the market price of the
common stock increases substantially.

95.

When bonds are converted into common stock,


a. the market price of the stock on the date of conversion is credited
to the Common Stock account.
b. the market price of the bonds on the date of conversion is credited
to the Common Stock account.
c. the market price of the stock and the bonds is ignored when
recording the conversion. d. gains or losses on the conversion are
recognized.

96.

If bonds with a face value of $90,000 are converted into common stock
when the carrying value of the bonds is $81,000, the entry to record the
conversion will include a debit to
a.
Bonds
Payable for
$90,000. b.
Bonds
Payable for
$81,000.
c. Discount on Bonds Payable for $9,000.
d. Bonds Payable equal to the market price of the bonds on the date of
conversion.

97.

A $900,000 bond was retired at 98 when the carrying value of the


bond was $888,000. The entry to record the retirement would include a
a. gain on bond
redemption of
$12,000. b. loss on
bond redemption of
$6,000. c. loss on
bond redemption of
$12,000. d. gain on
bond redemption of
$6,000.

98.

Twenty $1,000 bonds with a carrying value of $25,600 are converted


into 2,000 shares of $5 par value common stock. The common stock
had a market value of $9 per share on the date of conversion. The
entry to record the conversion is
a. Bonds Payable ...................................................................
25,600 Common Stock ..........................................................
10,000 Paid-in Capital in Excess of Par..................................
15,600
b.
Bonds
Payable
...................................................................
20,000
Premium on
Bonds
Payable
...............................................
5,600
Common Stock
..........................................................
18,000
Paid-in
Capital
in
.................................
c.
Bonds
...................................................................

Excess
7,600
Payable

of

Par

20,000
Premium on
Bonds
Payable
...............................................
5,600
Common Stock
..........................................................
10,000
Paid-in
Capital
Par..................................

in

Excess

of

15,600
d. Bonds Payable ...................................................................
25,600 Common Stock ..........................................................
18,000 Paid-in Capital in Excess of Par..................................
7,600
Long-Term
Liabilities
15 - 15
99.

Which one of the following amounts increases each period when


accounting for long-term notes payable?
a.
Cas
h
pay
me
nt
b.
Inte
rest

exp
ens
e
c. Principal balance
d. Reduction of principal
100.

In the balance sheet, mortgage notes payable


are reported as a. a current liability only.
b. a long-term liability only.
c. both a current and a long-term liability.
d. a current liability except for the reduction in principal amount.

101.

A mortgage note payable with a fixed interest rate requires the


borrower to make installment payments over the term of the loan.
Each installment payment includes interest on the unpaid balance of
the loan and a payment on the principal. With each installment
payment, indicate the effect on the portion allocated to interest expense
and the portion allocated to principal.
Portion Allocated to Interest Expense
a.
Increases b. Increases c. Decreases d. Decreases
Portion Allocated to Payment of Principal
Increases Decreases Decreases
Increases

102.

The entry to record an installment payment on a longterm note payable is a. Mortgage Notes Payable
Cash
b.
Inte
rest
Exp
ens
e
Cas
h
c.
Mortga
ge
Notes
Payable
Interest
Expens
e
Cash
d. Bonds
P
ay
ab
le
C
as

h
Use the following information for questions 103104.
Delmar Company purchased a building on January 2 by signing a long-term
$840,000 mortgage with monthly payments of $7,700. The mortgage carries an
interest rate of 10 percent.
103.

The entry to record the first monthly


payment will include a a. debit to the
Cash account for $7,700.
b. credit to the Cash account for $7,000.
c. debit to the Interest Expense
account for $7,000. d. credit to the
Mortgage Payable account for
$7,700.

104.

The amount owed on the mortgage after the first


payment will be a. $840,000.
b
.
$
8
3
9
,
3
0
0
.
c
.
$
8
3
3
,
0
0
0
.
d
.
$
8
3

2
,
3
0
0
.
15 - 16
Use the following information for questions 105106.
Diamond Company borrowed $500,000 from BankTwo on January 1, 2007 in
order to expand its mining capabilities. The five-year note required annual
payments of $130,218 and carried an annual interest rate of 9.5%.
105.

What is the amount of expense Diamond must recognize on its 2008


income statement? a. $47,500
b
.
$
3
9
,
6
4
2
c
.
$
3
5
,
1
2
9
d
.
$
3
1
,
0
3
7

106.

What is the balance in the notes payable account at


December 31, 2008? a. $500,000

b
.
$
3
2
6
,
7
0
6
c
.
$
4
1
7
,
2
8
2
d
.
$
4
0
5
,
0
0
0
107.

The lessee has substantially all of the benefits and risks of


ownership in a(n) a. apartment lease.
b. capital lease.
c. operating lease.
d. operating lease and a capital lease.

108.

A lease where the intent is temporary use of the property by the


lessee with continued ownership of the property by the lessor is called
a. offbalance sheet
financing. b.
an operating
lease.
c. a capital lease.
d. a purchase of property.

109.

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


recording of a lease contract as a capital lease?
a. The lease transfers ownership of the
property to the lessee. b. The lease contains
a bargain purchase option.
c. The lease term is less than 75% of the economic life of the leased property.
d. The present value of the lease payments equals or exceeds 90% of
the fair market value of the leased property.

110.

In a lease contract,
a. the owner of the property is called the lessee.
b. the presence of a bargain purchase option indicates that it
is a capital lease. c. the renter of the property is called the
lessor.
d. there is always a transfer of ownership at the end of the lease term.

111.

Which of the following statements


concerning leases is true? a. Capital
leases are favored by lessees.
b. The appearance of the account, Leased Asset, on the balance
sheet, signifies an operating lease.
c. The portion of a lease liability expected to be paid in the next
year is reported as a current liability.
d. Present value is irrelevant in accounting for leases.
Long-Term
Liabilities
15 - 17

112.

If the present value of lease payments equals or exceeds 90% of the fair
market value of the leased property, the
a. conditions are met for the lease to be considered
a capital lease. b. lease is uneconomical and
should not be entered into.
c. lease may be classified as an operating lease.
d. recording of a lease liability is optionalthat is, the off-balance sheet
approach can be elected.

113.

Each of the following may be shown in a supporting schedule instead of


the balance sheet except the
a. current maturities
of long-term debt. b.
conversion privileges.
c.
in
te
re
st
ra
te

s.
d.
m
at
ur
it
y
d
at
es
.
114.

The times interest earned ratio is


computed by dividing a. net income
by interest expense.
b. income before income taxes by interest expense.
c. income before interest expense by interest expense.
d. income before income taxes and interest expense by interest expense.

115.

The discount on bonds payable or premium on bonds payable is shown


on the balance sheet as an adjustment to bonds payable to arrive at the
carrying value of the bonds. Indicate the appropriate addition or
subtraction to bonds payable:

Premium on Bonds Payable


a.
Add b.
Deduct c. Add d.
Deduct
Discount on Bonds Payable Add
Add
Deduct Deduct
116.

In a recent year Dart Corporation had net income of $140,000,


interest expense of $30,000, and tax expense of $20,000. What was Dart
Corporations times interest earned ratio for the year?
a
.
6
.
3
3
b
.
4
.
6
6
c
.

5
.
3
3
d
.
6
.
0
0
117.

In a recent year Day Corporation had net income of $150,000,


interest expense of $30,000, and a times interest earned ratio of 9.
What was Day Corporations income before taxes for the year?
a
.
$
3
0
0
,
0
0
0
b
.
$
2
7
0
,
0
0
0
c
.
$
2
4
0
,
0
0
0

d. None of the above.


15 - 18
118.

The adjusted trial balance for Lifesaver Corp. at the end of the
current year, 2008, contained the following accounts.

5-year Bonds Payable 8% Bond Interest Payable


Premium on Bonds Payable Notes Payable (3 mo.) Notes
Payable (5 yr.)
Mortgage Payable ($15,000 due currently) Salaries Payable
Taxes Payable (due 3/15 of 2009)
$1,000,000 50,000 100,000 40,000 165,000 200,000
18,000 25,000
The total long-term liabilities reported on the
balance sheet are a. $1,365,000.
b
.
$
1
,
3
5
0
,
0
0
0
.
c
.
$
1
,
4
6
5
,
0
0
0
.
d
.
$
1

,
4
5
0
,
0
0
0
.
119.

The 2008 financial statements of Shadow Co. contain the following


selected data (in millions).
Current Assets
$ 75 Total
Assets
120
Current
Liabilities
40
Total
Liabilities
85
Cash
8
The debt to
total assets
ratio is a.
70.8%.
b
.
5
3
.
3
%
.
c
.
2
9
.
2
%
.
d
.

1
.
4
1
%
.
a120. The present value of a bond is
also known as its a. face
value.
b
.
m
a
r
k
e
t
p
r
i
c
e
.
c
.
f
u
t
u
r
e
v
a
l
u
e
.
d
.
d
e
f
e
r
r
e
d

v
a
l
u
e
.
a121. $3 million, 10%, 10-year bonds are issued at face value. Interest
will be paid semi-annually. When calculating the market price of the
bond, the present value of
a. $300,000 received for 10 periods
must be calculated. b. $3 million
received in 10 periods must be
calculated. c. $3 million received in
20 periods must be calculated. d.
$150,000 received for 10 periods must
be calculated.
a122. Either the straight-line method or the effective-interest method of
amortization will always result in
a. the same amount of interest expense being recognized over the
term of the bonds. b. the same amount of interest expense being
recognized each year.
c. more interest expense being recognized than if premium or
discounts were not amortized.
d. the same carrying value each year during the term of the bonds.
Long-Term
Liabilities
15 - 19
a123. A corporation issued $300,000, 10%, 5-year bonds on January 1,
2008 for $324,333, which reflects an effective-interest rate of 8%.
Interest is paid semiannually on January 1 and July 1. If the corporation
uses the effective-interest method of amortization of bond premium, the
amount of bond interest expense to be recognized on July 1, 2008, is
a
.
$
1
5
,
0
0
0
.
b
.

$
1
2
,
0
0
0
.
c
.
$
1
6
,
2
1
7
.
d
.
$
1
2
,
9
7
3
.
a124. A bond discount must
a. always be amortized using straight-line amortization.
b. always be amortized using the effective-interest method.
c. be amortized using the effective-interest method if it yields annual
amounts that are materially different than the straight-line method.
d. be amortized using the straight-line method if it yields annual
amounts that are materially different than the effectiveinterest method.
a125. When the effective-interest method of bond discount amortization is used,
a. the applicable interest rate used to compute interest expense is the
prevailing market interest rate on the date of each interest payment
date.
b. the carrying value of the bonds will decrease each period.
c. interest expense will not be a constant dollar amount over the life of the
bond.

d. interest paid to bondholders will be a function of the effective-interest


rate on the date the bonds are issued.
a126.

When the effective-interest method of bond premium


amortization is used, the a. amount of premium amortized
will get larger with successive amortization. b. carrying
value of the bonds will increase with successive amortization.
c. interest paid to bondholders will increase after each
interest payment date. d. interest rate used to calculate
interest expense will be the contractual rate.

Use the following information for questions 127129.


Silcon Company issued $800,000 of 6%, 10-year bonds on one of its interest
dates for $690,960 to yield an effective annual rate of 8%. The effectiveinterest method of amortization is to be used.
a127. What amount of discount (to the nearest dollar) should be amortized for
the first interest period?
a
.
$
2
2
,
5
4
2
b
.
$
1
0
,
9
0
4
c
.
$
1
4
,
5
5

4
d
.
$
7
,
2
7
7
a128. The journal entry on the first interest payment date, to record the
payment of interest and amortization of discount will include a
a. debit to Bond Interest
Expense for $48,000. b.
credit to Cash for $55,277.
c. credit to Discount on Bonds
Payable for $7,277. d. debit to
Bond Interest Expense for
$64,000.
15 - 20
a129. How much bond interest expense (to the nearest dollar) should be
reported on the income statement for the end of the first year?
a
.
$
5
5
,
4
2
2
b
.
$
5
5
,
2
7
7
c
.

$
5
5
,
1
3
1
d
.
$
4
8
,
0
0
0
a130. On January 1, Jean Loptein Inc. issued $3,000,000, 9% bonds for
$2,817,000. The market rate of interest for these bonds is 10%. Interest
is payable annually on December 31. Jean Loptein uses the effectiveinterest method of amortizing bond discount. At the end of the first
year, Jean Loptein should report unamortized bond discount of
a
.
$
1
6
4
,
7
0
0
.
b
.
$
1
7
1
,
3
0
0
.
c

.
$
1
5
4
,
8
3
0
.
d
.
$
1
5
3
,
0
0
0
.
a131. On January 1, Cleopatra Corporation issued $2,000,000, 14%, 5-year
bonds with interest payable on December 31. The bonds sold for
$2,144,192. The market rate of interest for these bonds was 12%. On
the first interest date, using the effective-interest method, the debit
entry to Bond Interest Expense is for
a
.
$
2
4
0
,
0
0
0
.
b
.
$
2
5
1
,

1
6
2
.
c
.
$
2
5
7
,
3
0
4
.
d
.
$
2
8
0
,
0
0
0
.
a132. On January 1, Hurley Corporation issues $1,000,000, 5-year, 12%
bonds at 96 with interest payable on July 1 and January 1. The entry
on December 31 to record accrued bond interest and the amortization
of bond discount using the straight-line method will include a
a. debit to Interest
Expense, $60,000. b.
debit to Interest
Expense, $120,000.
c. credit to Discount on
Bonds Payable, $4,000. d.
credit to Discount on Bonds
Payable, $8,000.
133.

On January 1, 2008, $1,000,000, 10-year, 10% bonds, were issued for


$970,000. Interest is paid annually on January 1. If the issuing
corporation uses the straight-line method to amortize discount on bonds
payable, the monthly amortization amount is
a
.

$
9
,
7
0
0
.
b
.
$
3
,
0
0
0
.
c
.
$
8
0
8
.
d
.
$
2
5
0
.
134.

A corporation issues $100,000, 10%, 5-year bonds on January 1,


2008, for $95,800. Interest is paid annually on January 1. If the
corporation uses the straight-line method of amortization of bond
discount, the amount of bond interest expense to be recognized in
December 31, 2008s adjusting entry is
a
.
$
1
0
,
8

4
0
.
b
.
$
1
0
,
0
0
0
.
c
.
$
9
,
1
6
0
.
d
.
$
8
4
0
.
Long-Term
Liabilities
15 - 21
a135. Roman Company issued $400,000 of 6%, 5-year bonds at 98, with
interest paid annually. Assuming straight-line amortization, what is the
total interest cost of the bonds?
a
.
$
1
2
0
,

0
0
0
b
.
$
1
2
8
,
0
0
0
c
.
$
1
1
2
,
0
0
0
d
.
$
1
1
6
,
0
0
0
a136. Sunwood Company issued $500,000 of 6%, 5-year bonds at 98,
with interest paid annually. Assuming straight-line amortization, what is
the carrying value of the bonds after one year?
a
.
$
4
9
0

,
0
0
0
b
.
$
4
9
1
,
0
0
0
c
.
$
4
9
2
,
0
0
0
d
.
$
4
9
4
,
0
0
0
a137.

Terrance Company issued $200,000 of 8%, 5-year bonds at 106.


Assuming straight-line amortization and annual interest payments, how
much bond interest expense is recorded on the next interest date?
a
.
$
1
6

,
0
0
0
b
.
$
1
8
,
4
0
0
c
.
$
1
3
,
6
0
0
d
.
$
2
,
4
0
0
a138. Garcia Company issued $800,000 of 8%, 5-year bonds at 106, with
interest paid annually. Assuming straight-line amortization, what is the
carrying value of the bonds after one year?
a
.
$
8
4
8
,
0
0

0
b
.
$
8
4
3
,
2
0
0
c
.
$
8
3
8
,
4
0
0
d
.
$
8
5
2
,
8
0
0
a139.

On January 1, 2008, $5,000,000, 5-year, 10% bonds, were issued for


$4,850,000. Interest is paid semiannually on January 1 and July 1. If the
issuing corporation uses the straight-line method to amortize discount on
bonds payable, the monthly amortization amount is
a
.
$
2
9
,
0

4
0
.
b
.
$
3
0
,
0
0
0
.
c
.
$
2
,
4
2
0
.
d
.
$
2
,
5
0
0
.
a140. A corporation issues $300,000, 10%, 5-year bonds on January 1, 2008
for $287,400. Interest is paid semiannually on January 1 and July 1. If the
corporation uses the straight-line method of amortization of bond
discount, the amount of bond interest expense to be recognized on July 1,
2008 is
a
.
$
3
1
,
2

6
0
.
b
.
$
1
5
,
0
0
0
.
c
.
$
1
6
,
2
6
0
.
d
.
$
1
3
,
7
4
0
.
a141. Over the term of the bonds, the balance in the Discount on Bonds
Payable account will a. fluctuate up and down if the market is
volatile.
b
.
d
e
c
r

e
a
s
e
.
c
.
i
n
c
r
e
a
s
e
.
d. be unaffected until the bonds mature.
15 - 22
a142. Bond discount should be
amortized to comply with a.
the historical cost principle.
b. the matching principle.
c. the revenue
recognition
principle. d.
conservatism.
a143. If bonds have been issued at a discount, over the life
of the bonds, the a. carrying value of the bonds
will decrease.
b. carrying value of the bonds will increase.
c. interest expense will increase, if the discount is being amortized
on a straight-line basis.
d. unamortized discount will increase.
Additional Multiple Choice Questions
144.

The market value (present value) of a bond is a function of all of the


following except the a. dollar amounts to be received.
b. length of time until the
amounts are received. c.
market rate of interest.
d. length of time until the bond is sold.

145.

On the date of issue, Chudzick Corporation sells $2 million of 5-year


bonds at 97. The entry to record the sale will include the following

debits and credits:


Bonds Payable a. $1,940,000 Cr. b. $2,000,000 Cr. c. $2,000,000 Cr. d.
$2,000,000 Cr.
Discount on Bonds Payable $0 Dr.
$60,000 Dr. $500,000 Dr. $6,000 Dr.
146.

The market rate of interest for a bond issue which sells for more
than its face value is a. independent of the interest rate stated on
the bond.
b. higher than the interest rate
stated on the bond. c. equal to
the interest rate stated on the
bond.
d. less than the interest rate stated on the bond.

147.

When a company retires bonds before maturity, the gain or loss on


redemption is the difference between the cash paid and the
a. carrying
value of the
bonds. b.
face value of
the bonds.
c. original selling
price of the bonds.
d. maturity value
of the bonds.

148.

Hoffman Corporation retires its bonds at 106 on January 1, following


the payment of semi-annual interest. The face value of the bonds is
$400,000. The carrying value of the bonds at the redemption date is
$419,800. The entry to record the redemption will include a
a. credit of $19,800 to Loss on
Bond Redemption. b. debit of
$24,000 to Premium on Bonds
Payable. c. credit of $4,200 to
Gain on Bond Redemption. d.
debit of $19,800 to Premium on
Bonds Payable.
Long-Term
Liabilities
15 - 23

149.

Each payment on a mortgage note


payable consists of a. interest on the
original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and reduction
of loan principal. d. interest on the unpaid balance of the
loan and reduction of loan principal.

150.

Which of the following is not a condition under which the lessee must
record the lease of an asset?
a. The lease contains a bargain purchase option.
b. The lease transfers ownership of the property to the lessee.
c. The lease term is equal to 60% of the economic life of the lease property.
d. The present value of the lease payments is 90% of the fair market
value of the leased property.

151.

The lessee must record a lease as an


asset if the lease a. transfers
ownership of the property to the lessor.
b. contains a purchase option.
c. term is 75% or more of the useful life of the leased property.
d. payments equal or exceed 90% of the fair market value of the leased
property.

152.

Buffon Electronics Company issues an $800,000, 10%, 20-year


mortgage note on January 1. The terms provide for semiannual
installment payments, exclusive of real estate taxes and insurance, of
$46,621. After the first installment payment, the principal balance is
a
.
$
8
0
0
,
0
0
0
.
b
.
$
7
8
6
,
4
2
7
.
c
.

$
7
9
3
,
3
7
9
.
d
.
$
7
7
9
,
1
2
5
.
153.

The debt to total assets ratio is


computed by dividing a. long-term
liabilities by total assets.
b.
total
debt
by
total assets.
c.
total
assets
by
total debt.
d. total assets by long-term liabilities.

a154. The market price of a bond is the


a. present value of its principal amount at maturity plus the present
value of all future interest payments.
b. principal amount plus the present value of all future
interest payments. c. principal amount plus all future
interest payments.
d. present value of its principal amount only.

BRIEF EXERCISES
BE 155
Shaffer Inc. is considering two alternatives to finance its construction of a
new $5 million plant. (a) Issuance of 500,000 shares of common stock at
the market price of $10 per share.

(b) Issuance of $5 million, 8% bonds at par.


Instructions
Complete the following table.
Income before interest and taxes
Issue Stock $1,400,000
Issue Bonds $1,400,000
Interest expense from bonds
Income before income taxes

Income tax expense (30%)


Net income
Outstanding shares

700,000

Earnings per share


BE 156
On January 1, 2008, Beltway Enterprises issued 11%, 5-year bonds with a
face amount of $900,000 at par. Interest is payable semiannually on June 30
and December 31.
Instructions
Prepare the entries to record the issuance of the bonds and the first
semiannual interest payment.
BE 157
On January 1, 2008, Kentwood Company issued bonds with a face value of
$500,000. The bonds carry a stated interest of 7% payable each January 1 and
July 1.
Instructions
a. Prepare the journal entry for the issuance assuming the bonds are
issued at 97. b.Prepare the journal entry for the issuance assuming
the bonds are issued at 102.
BE 158
On July 1, 2008, Frodo Corporation issued $800,000, 6%, 10-year bonds at face
value. Interest is payable semiannually on January 1 and July 1. Frodo
Corporation has a calendar year end.

Instructions
Prepare all entries related to the bond issue for 2008.
BE 159
On January 1, 2008, Zooland Enterprises sold 12%, 10-year bonds with a
face amount of $1,000,000 for $970,000. Interest is payable semiannually on
July 1 and January 1.
Instructions
Calculate the carrying value of the bond at December 31, 2008 and 2009.
BE 160
Delta Company issued bonds with a face amount of $1,000,000 in 2003. As of
January 1, 2008, the balance in Discount on Bonds Payable is $4,800. At that
time, Delta redeemed the bonds at 102.
Instructions
Assuming that no interest is payable, make the entry to record the redemption.
BE 161
Nicholson Inc. issues an $800,000, 10%, 10-year mortgage note on
December 31, 2008, to obtain financing for a new building. The terms
provide for semiannual installment payments of $64,194.
Instructions
Prepare the entry to record the mortgage loan on December 31, 2008, and the
first installment payment.
BE 162
Franco Corporation reports the following selected financial statement
information at December 31, 2008:
Total
Assets
$89,000
65,000
27,000
1,600
900
300

Total
Liabilities
Net
Income
Interest Income
Interest
Expense
Tax
Expense

Instructions
Calculate the debt to total assets and times interest earned ratios.
BE 163

On January 1, 2008, Fabian Enterprises issued 9%, 10-year bonds with a


face amount of $700,000 at 96. Interest is payable semiannually on June 30 and
December 31. The bonds were issued for an effective interest rate of 10%.
Instructions
Prepare the entries to record the issuance of the bonds and the first semiannual
interest payment assuming that the company uses effective-interest amortization.
BE 164
On January 1, 2008, Halston Enterprises issued 8%, 20-year bonds with a
face amount of $3,000,000 at 101. Interest is payable semiannually on June
30 and December 31.
Instructions
Prepare the entries to record the issuance of the bonds and the first semiannual
interest payment assuming that the company uses straight-line amortization.
EXERCISES
Ex. 165
Banks Company is considering two alternatives to finance its purchase of a
new $4,000,000 office building.
(a) Issue 400,000 shares of common stock
at $10 per share. (b) Issue 8%, 10-year
bonds at par ($4,000,000).
Income before interest and taxes is expected to be $2,000,000. The company
has a 30% tax rate and has 600,000 shares of common stock outstanding prior
to the new financing.
Instructions
Calculate each of the following
for each alternative: (1) Net
income.
(2) Earnings per share.
Long-Term
Liabilities
15 - 29
Ex. 166
The board of directors of Finley Corporation is considering two plans for
financing the purchase of new plant equipment. Plan #1 would require the
issuance of $4,000,000, 6%, 20-year bonds at face value. Plan #2 would require
the issuance of 100,000 shares of $5 par value common stock which is selling
for $40 per share on the open market. Finley Corporation currently has 100,000
shares of common stock outstanding and the income tax rate is expected to be
30%. Assume that income before interest and income taxes is expected to be
$700,000 if the new factory equipment is purchased.

Instructions
Prepare a schedule which shows the expected net income after taxes and the
earnings per share on common stock under each of the plans that the board of
directors is considering.
Ex. 167
United Health is considering two alternatives for the financing of some high
technology medical equipment. These two alternatives are:
1. Issue 50,000 shares of $10 par value common stock
at $50 per share. 2. Issue $2,500,000, 10%, 10-year
bonds at par.
15 - 30
Ex. 167

(cont.)

It is estimated that the company will earn $800,000 before interest and
taxes as a result of acquiring the medical equipment. The company has an
estimated tax rate of 30% and has 100,000 shares of common stock
outstanding prior to the new financing.
Instructions
Determine the effect on net income and earnings per share for these two methods of
financing.
Ex. 168
Three plans for financing a $20,000,000 corporation are under consideration
by its organizers. Under each of the following plans, the securities will be
issued at their par or face amount and the income tax rate is estimated at 30%.
Plan 1
Plan 2
Plan
3
9% Bonds

$10,000,000
6%
Preferred Stock, $100 par

$10,000,000
5,000,000 Common Stock, $10 par
$20,000,000
10,000,000
5,000,000 Total
$20,000,000
$20,000,000
$20,000,000
It is estimated that income before interest and taxes will be $4,000,000.
Instructions
Determine for each plan, the expected net income and the earnings per share on
common stock.
Long-Term
Liabilities
15 - 31

Ex. 169
Taylor Corporation issued $3 million, 10-year, 6% bonds on January 1, 2008.
Instructions
Prepare the entry to record the sale of these bonds, assuming they
were issued at (a) 98.
(b) 103.
Ex. 170
On January 1, 2008, Kohl Corporation issued $700,000, 8%, 10-year bonds
at face value. Interest is payable semiannually on July 1 and January 1. Kohl
Corporation has a calendar year end.
Instructions
Prepare all entries related to the bond issue for 2008.
Ex. 171
On January 1, Porter Corporation issued $800,000, 6%, 5-year bonds at face
value. Interest is payable semiannually on July 1 and January 1.
Instructions
Prepare journal
entries to record
the (a) Issuance
of the bonds.
(b) Payment of interest on July 1, assuming no previous
accrual of interest. (c) Accrual of interest on December
31.
Ex. 172
Wood Company retired $300,000 face value, 9% bonds on June 30, 2008 at
98. The carrying value of the bonds at the redemption date was $305,000.
Instructions
Prepare the journal entry to record the redemption of the bonds.
Ex. 173
Presented below are three independent situations:
(a) Howell Corporation purchased $250,000 of its bonds on June 30,
2008, at 102 and immediately retired them. The carrying value of the
bonds on the retirement date was $229,500. The bonds pay semiannual
interest and the interest payment due on June 30, 2008, has been made and
recorded.
(b)

Justice, Inc. purchased $200,000 of its bonds at 97 on June 30, 2008,

and immediately retired them. The carrying value of the bonds on the
retirement date was $196,500. The bonds pay semiannual interest and the
interest payment due on June 30, 2008, has been made and recorded.
(c)

Starr Company has $80,000, 10%, 12-year convertible bonds


outstanding. These bonds were sold at face value and pay semiannual
interest on June 30 and December 31 of each year. The bonds are
convertible into 40 shares of Starr $5 par value common stock for each
$1,000 par value bond. On December 31, 2008, after the bond interest
has been paid, $30,000 par value of bonds were converted. The market
value of Starr's common stock was $38 per share on December 31, 2008.

Instructions
For each of the independent situations, prepare the journal entry to record
the retirement or conversion of the bonds.
Ex. 174
Riley Company issued a $1,500,000, 10%, 10-year mortgage note
payable to finance the construction of a building at December 31, 2008. The
terms provide for semiannual installment payments of $120,365.
Instructions
Prepare the entry to record:
(a) the mortgage loan on
December 31, 2008. (b) the
first installment payment.
Ex. 175
Downey Corporation issues a $2,000,000, 12%, 20-year mortgage note
payable on December 31, 2008, to obtain needed financing for the construction
of a building addition. The terms provide for semiannual installment payments
of $132,924 on June 30 and December 31.
Instructions
(a) Prepare the journal entries to record the mortgage loan on December 31,
2008, and the first installment payment.
(b) Will the amount of principal reduction in the second installment
payment be more or less than with the first installment payment?

Ex. 176
Presented below are three different aircraft lease transactions that occurred for
Midwest Airways in 2008. All the leases start on January 1, 2008. In no case
does Midwest receive title to the aircraft during or at the end of the lease period;
nor is there a bargain purchase option.
Lessor

Type of property Yearly rental Lease term


Estimated economic life Fair market value of
leased asset Present value of lease
rental payments
Vannoy Insurance
747 Aircraft $7,445,064 15 years 25 years
$69,300,000
$63,000,000
Mark Leasing
727 Aircraft $5,449,423 15 years 25 years
$54,000,000
$46,000,000
Gregg Leasing
L-1011 Aircraft $2,851,861
20 years 25 years
$32,000,000
$28,000,000
Instructions
(a) Which of the above leases are operating leases and which are capital
leases? Explain your answer.
(b) How should the lease transaction with Vannoy Insurance be
recorded in 2008? (c) How should the lease transaction with
Mark Leasing be recorded in 2008?
Ex. 177
Ley Corporation entered into the following transactions:
1. Gant Car Rental leased a car to Ley Corporation for one year. Terms of the
operating lease call for monthly payments of $750.
2. On January 1, 2008, Ley Corporation entered into an agreement to lease 20
machines from Weiss Corporation. The terms of the lease agreement require
an initial payment of $300,000 and then three annual rental payments of
$360,000 beginning on December 31, 2008. The present value of the three
rental payments is $895,265. The lease is a capital lease.
Instructions
Prepare the appropriate journal entries to be made by Ley Corporation in
January related to the lease transactions.
Ex. 178
On January 1, 2008, Rilee Inc. entered into an agreement to lease

equipment from Finley Corporation. The lease agreement requires five


annual rental payments of $70,000 beginning December 31, 2008. The
present value of the rental payments is $265,356. The lease transfers
substantially all the benefits and risks of ownership to Rilee.
Instructions
Prepare the entry to record the lease agreement on the books of Rilee Inc. on January
1, 2008.
Ex. 179
The adjusted trial balance for Payne Corporation at the end of the current
year contained the following accounts:
Bonds payable, 10%............................................................. Bond interest
payable...........................................................
Discount on
bonds
payable ..................................................
Lease
liability ........................................................................ Mortgage notes payable,
9%,
due
2011...............................
Accounts payable .................................................................
$800,000 20,000 40,000 60,000 80,000 120,000
Instructions
(a) Prepare the long-term liabilities section of the balance sheet.
(b) Indicate the proper balance sheet classification for the accounts listed
above that do not belong in the long-term liabilities section.
Ex. 180
On January 1, 2008, Quayle Corporation issued $400,000, 9%, 5-year bonds for
$384,556. The bonds were sold to yield an effective-interest rate of 10%.
Interest is paid semiannually on June 30 and December 31. The company uses
the effective-interest method of amortization.
Instructions
(a) Prepare a bond discount amortization schedule which shows the
amortization of discount for the first two interest payment dates. (Round to
the nearest dollar.)
(b) Prepare the journal entries that Quayle Corporation would make on January
1, June 30, and December 31, 2008, related to the bond issue.
Ex. 181
On June 30, 2008, Wayne, Inc. sold $2,000,000 (face value) of bonds. The
bonds are dated June 30, 2008, pay interest semiannually on December 31 and
June 30, and will mature on June 30, 2011. The following schedule was
prepared by the accountant for 2008.
Semi-Annual Interest Period
1
Interest to

be Paid
$80,000
Interest Expense
$87,750
Amortization
$7,750
Unamortized
Amount
$50,000 42,250
Bond Carrying Value
$1,950,000 1,957,750
Instructions
On the basis of the above information, answer the following questions. (Round
your answer to the nearest dollar or percent.)
1. What is the stated interest rate for this bond issue?
2. What is the market interest rate for this bond issue?
3. What was the selling price of the bonds as a percentage of the face value?
4. Prepare the journal entry to record the sale of the bond issue on June 30, 2008.
5. Prepare the journal entry to record the payment of interest and amortization
on December 31, 2008.
Ex. 182
On January 1, 2008, Lester Corporation issued $2,000,000, 9%, 5-year bonds
dated January 1, 2008, 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.
Instructions
Prepare all the journal entries that Lester Corporation would make related
to this bond issue through January 1, 2009. Be sure to indicate the date on
which the entries would be made.
Ex. 183
Unruh Company issued $900,000, 10%, 20-year bonds on January 1, 2008, at
104. Interest is payable semiannually on July 1 and January 1. Unruh
uses the straight-line method of amortization and has a calendar year end.
Instructions
Prepare all journal entries made in 2008 related to the bond issue.
Ex. 184

Karly Company issued $250,000, 11%, 10-year bonds on December 31,


2008, for $230,000. Interest is payable semiannually on June 30 and
December 31. Karly uses the straight-line method of amortization and has a
calendar year end.
Instructions
Prepare the
appropriate journal
entries on (a)
December 31,
2008.
(b) June 30, 2009.

COMPLETION STATEMENTS
185. Bonds that mature at a single specified future date are called
bonds, whereas bonds that mature in installments are called
bonds.
186. The terms of a bond issue are set forth in a formal legal document
called a bond
.
187. Unsecured bonds that are issued against the general credit of the borrower
are called
bonds.
188. If bonds were issued at a premium, then the contractual interest rate was
than the market interest rate.
189. Discount on Bonds Payable is
(from)(to) bonds
payable on the balance sheet. Premium on Bonds Payable is
(from)(to) bonds payable on the balance sheet.
190. If bonds are issued at face value (par), it indicates that the
interest rate must be equal to the
interest rate.
191. If a $1 million, 10%, 10-year bond issue was sold at 96, the cash
proceeds from the issuance of the bonds amounted to $ .
192. When bonds are converted into common stock and the conversion is
recorded, the
of the bonds is transferred to paid-in capital accounts.
193. A lease may be classified as an
lease.

lease or as a

a194. The market price of a bond is obtained by discounting to its present


value the
paid at
maturity, and all payments to be made over the term of the bond.

a195. When there is a


difference between the straightline and effective-interest methods of amortization, the
method is
required under GAAP.
a196. A method of amortizing bond discount or premium that allocates an
equal amount each period is the method.
a197. The straight-line method of amortization allocates the same amount to
in each interest period.
MATCHING
198. Match the items below by entering the appropriate code letter in the space
provided.
A. Serial bonds
B. Debenture bonds C. Bond indenture
D. Premium on bonds payable E. Discount on bonds payable
F. Effective-interest method of amortization
G. Straight-line method of amortization H. Bonds
I. Debt to total assets ratio J.
Capital lease
K. Operating lease L.
Registered bonds
1. A contractual arrangement which is in effect a purchase of property.
2. A legal document that sets forth the terms of a bond issue.
3. Bonds that mature in installments.
a4. Produces a periodic interest expense equal to a constant percentage
of the carrying value of the bonds.
5. Bonds issued in the name of the owner.
6. A form of interest-bearing notes payable used by corporations.
7. Occurs when the contractual interest rate is greater than the market interest
rate.
8. Unsecured bonds issued against the general credit of the borrower.
9. A contractual arrangement that gives the lessee temporary use of property.
10. A solvency measure that indicates the percentage of assets provided by
creditors.
11. Occurs when the contractual interest rate is less than the market interest
rate.

a12. Produces a periodic interest expense that is the same amount each interest
period.

SHORT-ANSWER ESSAY QUESTIONS


S-A E 199
Bonds are frequently issued at amounts greater or less than face value. Describe
how the market interest rate, relative to the contractual interest rate, affects
the selling price of bonds. Also explain the rationale for requiring an investor
to pay accrued interest when a bond is purchased between interest payment
dates.

S-A E 200
A company desires to replace its current plant equipment with new
equipment that costs $10,000,000. One possibility would be for the company to
issue $10,000,000 of bonds and use the proceeds to purchase the equipment.
Another possibility is to acquire the use of the equipment by signing a
long-term capital lease with a leasing company. Describe and compare the
financial statement effects of these two alternatives.

S-A E 201
When a bond sells at a discount, what is probably true about the market
interest rate versus the stated interest rate? Discuss.
S-A E 202
Bonds may be redeemed (retired) before maturity by the issuing
corporation. Explain why a company would decide to retire bonds before
maturity and the necessary steps to record the redemption.
S-A E 203 (Ethics)
Jeff Weaver, a 26-year-old entrepreneur, started Bells & Whistles (B&W),
Inc., a firm that specializes in top-of-the-line add-ons for computer systems.
The firm has a capital structure of approximately 60% debt. This was
necessitated by the rapid growth of B&W, and Mr. Weaver's lack of personal
funds to sustain the growth. The 60% debt amount is quite high for firms in
this field, and in fact slightly exceeds the debt covenants negotiated with the
bank. B&W recently received notice that the bank considers the company's
debt to be excessive, and that some accelerated repayment schedule will be
adopted. The notice came at a particularly bad time. B&W is in the midst of
a major upgrade of its own computer system. The hardware was to have been

purchased outright, financed by the seller, Mike Bogg, longtime friend of Mr.
Weaver.
Mr. Bogg really needs Mr. Weavers business. Both believe in the long-term
strength of B&W. He therefore suggests to Mr. Weaver that the equipment
be purchased by means of a short-term lease. Mr. Weaver could renew the
lease annually.
Required:
1. Is Mr. Bogg's suggestion ethical? Explain.
2. If Mr. Weaver accepts the suggestion, is he behaving ethically? Explain.
S-A E 204 (Communication)
Betty Jones works for Trend Press, a fairly large book publishing firm. Her best
friend and rival, Rita, works for Walden Books, a smaller publisher. Both
companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a
discount, while Walden's were issued at a premium. Rita sent Betty a fax the
next day. She told Betty that it was obvious who the better publisher was the
market had shown its preference! She reminded Betty again of her recent
increase in salary as further proof of the superiority of Walden Books.
Required:
Draft a short note for Betty to send to Rita. Explain how such a result could occur.

CHAPTER 16
INVESTMENTS
CHAPTER STUDY OBJECTIVES
1. Discuss why corporations invest in debt and stock securities.
2. Explain the accounting for debt investments.
3. Explain the accounting for stock investments.
4. Describe the use of consolidated financial statements.
5. Indicate how debt and stock investments are reported in financial
statements.
6. Distinguish between short-term and long-term investments.
TRUE-FALSE STATEMENTS
1.

Corporations purchase investments in debt or stock securities

generally for one of two reasons.


2.

A reason some companies purchase investments is because they


generate a significant portion of their earnings from investment income.

3.

The accounting for short-term debt investments and for long-term


debt investments is similar.

4.

For short-term debt investments, any bond premium or discount is


amortized to interest revenue over the remaining term of the bonds.

5.

Debt investments are investments in government and corporation bonds.

6.

In accordance with the cost principle, brokerage fees should be added


to the cost of an investment.

7.

In accordance with the cost principle, the cost of debt investments


includes brokerage fees and accrued interest.

8. In accounting for stock investments of less than 20%, the equity method is
used.
9.

Dividends received on stock investments of less than 20% should be


credited to the Stock Investments account.

10.

If an investor owns between 20% and 50% of an investee's common


stock, it is presumed that the investor has significant influence on the
investee.

11.

The Stock Investments account is debited at acquisition under both the


equity method and cost method of accounting for investments in
common stock.

12.

Under the equity method, the investment in common stock is initially


recorded at cost, and the Stock Investments account is adjusted
annually.

13.

Under the equity method, the receipt of dividends from the investee
company results in an increase in the Stock Investments account.

14.

Consolidated financial statements are appropriate when an investor


controls an investee by ownership of more than 50% of the investee's
common stock.

15.

Consolidated financial statements are prepared in place of the financial


statements for the parent and subsidiary companies.

16.

Consolidated financial statements should be prepared only when a


subsidiary company has a controlling interest in the parent company.

17.

The valuation of available-for-sale securities is similar to the


procedures followed for trading securities, except that changes in fair

value are not recognized in current income.


Investme
nts
16 - 5
18.

An unrealized gain or loss on trading securities is reported as a separate


component of stockholders' equity.

19.

For available-for-sale securities, the unrealized gain or loss account is


carried forward to future periods.

20.

A decline in the fair value of a trading security is recorded by debiting


an unrealized loss account and crediting the Market Adjustment account.

21.

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


security should be written up to fair value and a realized gain should be
recognized.

22. The Market Adjustment account can only have a credit balance or a zero
balance.
23.

To be classified as a short-term investment, the investment must be


readily marketable and intended to be converted into cash within the next
year or operating cycle.

24. An investment is readily marketable if it is management's intent to sell the


investment.
25. Stocks traded on the New York Stock Exchange are considered readily
marketable.
Additional True-False Questions
26. One of the reasons a corporation may purchase investments is that it has
excess cash.
27.

When recording bond interest, Interest Receivable is reported as a


fixed asset in the balance sheet.

28.

Under the cost method, the investment is recorded at cost and revenue is
recognized only when cash dividends are received.

29.

Consolidated financial statements present a condensed version of


the financial statements so investors will not experience information
overload.

30.

Available-for-sale securities are securities bought and held primarily for


sale in the near term to generate income on short-term price differences.

31.

"Intent to convert" does not include an investment used as a resource


that will be used whenever the need for cash arises.

MULTIPLE CHOICE QUESTIONS


32.

Corporations invest excess cash for short periods of time in each of


the following except a. equity securities.
b.
highly
liquid
securiti
es. c.
low-risk
securiti
es.
d. government securities.

33.

Corporations invest in other companies for all of the


following reasons except to a. house excess cash until
needed.
b.
gener
ate
earnin
gs. c.
meet
strate
gic
goals.
d. increase trading of the other companies stock.

34.

A typical investment to house excess


cash until needed is a. stocks of
companies in a related industry.
b. debt securities.
c. low-risk,
highly liquid
securities. d.
stock securities.

35.

A company may purchase a noncontrolling interest in another firm


in a related industry a. to house excess cash until needed.
b. to
genera
te
earnin
gs. c.
for

strateg
ic
reason
s.
d. for speculative reasons.
36.

Pension funds and mutual funds regularly invest in debt and


stock securities to a. generate earnings.
b. house excess
cash until needed.
c. meet strategic
goals.
d. control the company in which they invest.

37.

At the time of acquisition of


a debt investment, a. no
journal entry is required.
b. the cost principle applies.
c. the Stock Investments account is debited when
bonds are purchased. d. the Investment account is
credited for its cost plus brokerage fees.

38.

Which of the following is not a true statement regarding short-term


debt investments? a. The securities usually pay interest.
b. Investments are frequently government or corporate bonds.
c. This type of investment must be currently traded in the
securities market. d. Any bond premium or discount is
amortized to interest revenue.

Use the following information for questions 3941.


On January 1, 2008, Turner Company purchased at face value, a $1,000, 7%
bond that pays interest on January 1 and July 1. Turner Company has a
calendar year end.
Investment
s
16 - 7
39.

The entry for the receipt of interest on July 1, 2008, is


a. Cash .....................................................................................
Interest Revenue .........................................................

35

35
b. Cash .....................................................................................
Interest Revenue .........................................................

70

70
c. Interest Receivable...............................................................

35

Interest Revenue .........................................................


35
d. Interest Receivable...............................................................
Interest Revenue .........................................................

70

70
40.

The adjusting entry on


December 31, 2008, is a. not
required.
b. Cash .....................................................................................
Interest Revenue .........................................................

35

35
c. Interest Receivable...............................................................
Interest Revenue .........................................................

35

35
d. Interest Receivable...............................................................
Debt Investments.........................................................

35

35
41.

The entry for the receipt of interest on January 1, 2009 is


a. Cash .....................................................................................
Interest Revenue .........................................................

70

70
b. Cash .....................................................................................
Interest Receivable......................................................

70

70
c. Cash .....................................................................................
Interest Revenue .........................................................

35

35
d. Cash .....................................................................................
Interest Receivable......................................................

35

35
42.

On January 1, Barone Company purchased as a short-term investment


a $1,000, 8% bond for $1,050. The bond pays interest on January 1 and
July 1. The bond is sold on October 1 for $1,200 plus accrued interest.
Interest has not been accrued since the last interest payment date. What is
the entry to record the cash proceeds at the time the bond is sold?
a. Cash .....................................................................................
1,200
Debt Investments ........................................................

1,200
b. Cash .....................................................................................
1,220
Debt
Investments.........................................................
1,050 Gain on Sale of Debt Investments...............................
150 Interest Revenue .........................................................
20
c. Cash .....................................................................................
1,220
Debt
Investments.........................................................
1,200 Interest Revenue .........................................................
20
d. Cash .....................................................................................
1,200
Debt
Investments.........................................................
1,050 Gain on Sale of Debt Investments...............................
150
16 - 8
43.

Which of the following is not a true statement about the accounting


for long-term debt investments?
a. The investment is
initially recorded at cost. b.
The cost includes any
brokerage fees.
c. The accounting for long-term debt investments is similar to the
accounting for short-term debt investments.
d. The cost includes any accrued interest.

44.

The cost of debt investments includes each of


the following except a. brokerage fees.
b. commissions.
c.
ac
cr
u
e
d
in
te
re
st.
d.
th
e
pr
ic
e
p

ai
d.
45.

If a short-term debt investment is sold, the


Investment account is a. credited for the book
value of the bonds at the sale date.
b. credited for the cost of the bonds at the sale date.
c. credited for the fair value of the
bonds at the sale date. d. debited for
the cost of the bonds at the sale date.

46.

Any premium or discount on a long-term debt


investment is amortized a. to interest expense over
the remaining term of the bonds.
b. only if the effective-interest method is used.
c. to interest revenue over the remaining
term of the bonds. d. if the investor owns
20% or more of the bonds.

Use the following information for questions 4749.


Pima Company acquires 50, 10%, 5 year, $1,000 Community bonds on
January 1, 2008 for $51,250. This includes a brokerage commission of
$1,250.
47.

The journal entry to record this investment


includes a debit to a. Debt
Investments for $50,000.
b. Debt
Investments for
$51,250. c.
Cash for
$51,250.
d. Stock Investments for $50,000.

48.

Assume Community pays interest on January 1 and July 1, and the July
1 entry was done correctly. The journal entry at December 31, 2008
would include a credit to
a. Interest
Receivable for
$2,500. b.
Interest
Revenue for
$5,000. c.
Accrued
Expense for
$5,000. d.
Interest
Revenue for
$2,500.

49.

If Pima sells all of its Community bonds for $52,000 and pays
$1,500 in brokerage commissions, what gain or loss is recognized?
a
.
G
a
i
n
o
f
$
2
,
0
0
0
b
.
L
o
s
s
o
f
$
7
5
0
c
.
G
a
i
n
o
f
$
7
5
0

d
.
G
a
i
n
o
f
$
3
,
0
0
0
Investment
s
16 - 9
50.

Steven Co. purchased 30, 6% Johnston Company bonds for $30,000 cash
plus brokerage fees of $300. Interest is payable semiannually on July 1
and January 1. The entry to record the July 1 semiannual interest payment
would include a
a. debit to Interest
Receivable for $900. b.
credit to Interest
Revenue for $900. c.
credit to Interest
Revenue for $909. d.
credit to Debt
Investments for $909.

51.

Steven Co. purchased 30, 6% Johnston Company bonds for $30,000 cash
plus brokerage fees of $300. Interest is payable semiannually on July 1
and January 1. The entry to record the December 31 interest accrual
would include a
a. debit to Interest
Receivable for $900. b.
debit to Interest Revenue
for $900. c. credit to
Interest Revenue for
$909. d. debit to Debt
Investments for $900.

52.

Tolan Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus
brokerage fees of $600. Interest is payable semiannually on July 1 and
January 1. If 15 of the securities are sold on July 1 for $31,000 less $300

brokerage fees, the entry would include a credit to Gain on Sale of Debt
Investments for
a
.
$
1
,
0
0
0
.
b
.
$
7
0
0
.
c
.
$
1
,
3
0
0
.
d
.
$
4
0
0
.
53.

On January 1, Burkett Company purchased as an investment a $1,000,


8% bond for $1,020. The bond pays interest on January 1 and July 1.
What is the entry to record the interest accrual on December 31?
a. Interest Receivable...............................................................
40
Interest Revenue ........................................................
40 b. Debt Investments ................................................................
40
Interest Revenue ........................................................

40 c. Interest Receivable...............................................................
80
Interest Revenue ........................................................
80 d. Debt Investments ................................................................
80
Interest Revenue ........................................................
80
54.

Darnet Corporation sells 100 shares of common stock being held as an


investment. The shares were acquired six months ago at a cost of $30 a
share. Darnet sold the shares for $40 a share. The entry to record the sale is
a.
Cash ................................................................................
.....
3,000 Loss on Sale
.....................................

of

Stock

Investments

1,000
Stock Investments ......................................................
4,000
b. Stock Investments ...............................................................
Cash ...........................................................................

4,000

4,000
c. Cash .....................................................................................
4,000
Gain on Sale of Stock Investments ............................
1,000 Stock Investments ......................................................
3,000
d. Cash .....................................................................................
Stock Investments ......................................................

4,000

4,000
16 - 10
55.

Browne Corporation sells 200 shares of common stock being held as an


investment. The shares were acquired six months ago at a cost of $50 a
share. Browne sold the shares for $40 a share. The entry to record the
sale is
a.
Cash ............................................................................
........
8,000

Loss

on

Sale

of

Stock

Investments

.....................................
2,000
Stock Investments .....................................................
10,000
b. Cash ....................................................................................
10,000
Gain on Sale of Stock Investments ............................
2,000 Stock Investments .....................................................
8,000
c. Cash ....................................................................................
Stock Investments .....................................................

8,000

8,000
d.

Stock
Investments
..............................................................
8,000 Loss on Sale
.....................................

of

Stock

Investments

2,000
Cash ...........................................................................
10,000
Use the following information for questions 5658.
Nagen Company had these transactions pertaining to stock investments:
Feb. 1
June 1
Oct. 1

Purchased 2,000 shares of Cagney Company (10%) for $33,200


cash plus brokerage fees of $800.
Received cash dividends of $2 per share on Cagney stock.
Sold 800 shares of Cagney stock for $16,000 less brokerage fees of $400.

56.

The entry to record the purchase of the Cagney


stock would include a a. debit to Stock
Investments for $33,200.
b. credit to Cash for $33,200.
c. debit to Stock
Investments for $34,000.
d. debit to Investment
Expense for $800.

57.

The entry to record the receipt of the dividends on June


1 would include a a. debit to Stock Investments for
$4,000.
b. credit to Dividend

Revenue for $4,000. c.


debit
to
Dividend
Revenue for $4,000. d.
credit
to
Stock
Investments for $4,000.
58.

The entry to record the sale of the


stock would include a a. debit to
Cash for $16,000.
b. credit to Gain on Sale of Stock
Investments for $800. c. debit to
Stock Investments for $13,600.
d. credit to Gain on Sale of Stock Investments for $2,000.

59.

Mouns Company owns 40% interest in the stock of Darian


Corporation. During the year, Darian pays $20,000 in dividends to
Mouns, and reports $100,000 in net income. Mouns Companys
investment in Darian will increase Mouns net income by
a
.
$
2
0
,
0
0
0
.
b
.
$
4
0
,
0
0
0
.
c
.
$
3
2
,
0
0

0
.
d
.
$
8
,
0
0
0
.
Investment
s
16 - 11
60.

Mouns Company owns 40% interest in the stock of Darian Corporation.


During the year, Darian pays $25,000 in dividends to Mouns, and reports
$100,000 in net income. Mouns Companys investment in Darian will
increase by
a
.
$
2
5
,
0
0
0
.
b
.
$
4
0
,
0
0
0
.
c
.
$
3

2
,
0
0
0
.
d
.
$
1
5
,
0
0
0
.
61.

On January 1, 2008, Jonsey Corporation purchased 30% of the


common stock outstanding of Karsen Corporation for $200,000.
During 2008, Karsen Corporation reported net income of $80,000 and
paid cash dividends of $40,000. The balance of the Stock Investments
Karsen account on the books of Jonsey Corporation at December 31, 2008 is
a
.
$
2
0
0
,
0
0
0
.
b
.
$
2
4
0
,
0
0
0
.
c

.
$
2
8
0
,
0
0
0
.
d
.
$
2
1
2
,
0
0
0
.
62.

Decker Corporation purchased 1,000 shares of Kent common stock at $70


per share plus $3,000 brokerage fees as a short-term investment. The
shares were subsequently sold at $80 per share less $3,400 brokerage fees.
The cost of the securities purchased and gain or loss on the sale were
Cost
Gain or Loss a.
$70,000
$10,000 gain b.
$70,000
$3,600 gain c.
$73,000
$7,000 gain d.
$73,000
$3,600 gain

63.

In accounting for stock investments between 20% and 50%, the


method is used. a. consolidated statements
b.
contro
lling
interes
t c.
cost
d. equity

64.

When a company holds stock of several different corporations, the group


of securities is identified as a(n)
a.
affiliated
investmen
t. b.
consolidat
ed
portfolio.
c.
investmen
t portfolio.
d.
controllin
g interest.

65.

Jacobs Corporation makes a short-term investment in 100 shares of


Starr Company's common stock. The stock is purchased for $50 a share
plus brokerage fees of $300. The entry for the purchase is
a. Debt Investments .................................................................
5,000 Cash ............................................................................
5,000
b. Stock Investments ................................................................
5,300 Cash ............................................................................
5,300
c.
Stock
Investments ................................................................
5,000
Brokerage Fee
Expense.......................................................
300
Cash ............................................................................
5,300

16 - 12
d. Stock Investments ...............................................................
Cash ...........................................................................

5,000

5,000
66.

Dobson Corporation sells 200 shares of common stock being held


as a short-term investment. The shares were acquired six months ago
at a cost of $50 a share. Dobson sold the shares for $40 a share. The
entry to record the sale is
a.
Cash ............................................................................
........

8,000
Loss
on
Sale
Investments......................................

of

Stock

2,000
Stock Investments ......................................................
10,000
b. Cash ....................................................................................
10,000
Gain on Sale of Stock Investments.............................
2,000 Stock Investments ......................................................
8,000
c. Cash ....................................................................................
Stock Investments ......................................................

8,000

8,000
d.

Stock
Investments ...............................................................
8,000
Loss
on
Sale
Investments......................................

of

Stock

2,000
Cash ...........................................................................
10,000
67.

For accounting purposes, the method used to account for longterm investments in common stock is determined by
a. the amount paid for the stock by the investor.
b. the extent of an investor's influence on the operating and
financial affairs of the investee.
c. whether the stock has paid dividends in past years.
d. whether the acquisition of the stock by the investor was "friendly" or
"hostile."

68.

If an investor owns less than 20% of the common stock of another


corporation as a long-term investment,
a. the equity method of accounting for the investment
should be employed. b. no dividends can be expected.
c. it is presumed that the investor has relatively little
influence on the investee. d. it is presumed that the investor
has significant influence on the investee.

69.

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.
70.

If 10% of the common stock of an investee company is


purchased as a long-term investment, the appropriate method of
accounting for the investment is
a.
the
cost
met
hod
. b.
the
equi
ty
met
hod
.
c. the preparation of consolidated financial statements.
d. determined by agreement with whomever owns the remaining 90% of the
stock.
Investment
s
16 - 13

71.

The cost method of accounting for long-term investments in stock


should be employed when the
a. investor owns more than 50% of the investee's stock.
b. investor has significant influence on the investee and the stock held
by the investor are marketable equity securities.
c. market value of the shares held is greater than their
historical cost. d. investor's influence on the investee
is insignificant.

72.

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.

73.

Under the equity method of accounting for long-term investments in


common stock, when a dividend is received from the investee company,
a. the Dividend Revenue

account is credited. b. the


Stock Investments account is
increased.
c. the Stock Investments
account is decreased. d. no entry
is necessary.
74.

On January 1, 2008, Calis Corporation purchased 25% of the common


stock outstanding of Lane Corporation for $700,000. During 2008, Lane
Corporation reported net income of $200,000 and paid cash dividends of
$100,000. The balance of the Stock Investments Lane account on the
books of Calis Corporation at December 31, 2008 is
a
.
$
7
0
0
,
0
0
0
.
b
.
$
7
2
5
,
0
0
0
.
c
.
$
7
5
0
,
0
0
0
.

d
.
$
6
7
5
,
0
0
0
.
75.

Under the equity method, the Stock Investments account is


increased when the a. investee company reports net income.
b. investee company
pays a dividend. c.
investee company
reports a loss. d.
stock investment is
sold at a gain.

76.

The account, Stock


Investments, is a.
a subsidiary ledger
account.
b. a long-term liability account.
c. a general ledger control account.
d. another name for Debt Investments.

77.

Which of the following would not be considered a motive for making a


stock investment in another corporation?
a. Appreciation in the market value of the
stock investment b. Use of the investment
for expanding its own operations c. Use of
the investment to diversify its own
operations
d. An increase in the amount of interest revenue from the stock investment
16 - 14
78.

Revenue is recognized when cash dividends


are received under a. the controlling interest
method.
b.
the
cost
met
hod.
c.
the

equi
ty
met
hod.
d. both the cost and equity methods.
79.

Which of the following is the correct matching concerning an


investor's influence on the operations and financial affairs of an
investee?

% of Investor Ownership a.
Less than 20%
b.
Between 20%-50% c. More than 50%
d.
Between 20%-50%
Presumed Influence Short-term Significant
Long-term Controlling
80.

Which of the following is the correct matching concerning the


appropriate accounting for long-term stock investments?

% of Investor Ownership a.
Less than 20%
b.
Between 20%50% c. More than 50%
d.
Between 20%50%
Accounting Guidelines Cost method
Cost method
Cost or equity method Consolidated financial statements
81. If the cost method is used to account for a long-term investment
in common stock, a. it is presumed that the investor has significant
influence on the investee.
b. the earning of net income by the investee is considered a proper
basis for recognition of income by the investor.
c. net income of the investee is not considered earned by the investor
until dividends are declared by the investee.
d. the Investment account may be, at times, greater than the acquisition cost.
82.

If a company acquires a 40% common stock interest in


another company, a. the equity method is usually
applicable.
b. all influence is
classified as controlling.
c. the cost method is
usually applicable.
d. the ability to exert significant influence over the activities of the
investee does not exist.

83.

If a common stock investment is sold


at a gain, the gain a. is reported as
operating revenue.
b. is reported under a special section, "Discontinued investments,"
on the income statement.
c. is reported in the Other Revenue and Gain section of the
income statement. d. contributes to gross profit on the

income statement.
84.

If the equity method is being used, cash


dividends received a. are credited to
Dividend Revenue.
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 the Stock Investments account.
d. are credited to the Revenue from Investment in Stock account.
Investment
s
16 - 15

85.

If the equity method is being used, the Revenue from Investment in


Stock account is a. just another name for a Dividend Revenue
account.
b. credited when dividends are declared
by the investee. c. credited when net
income is reported by the investee. d.
debited when dividends are declared by
the investee.

86.

Under the equity method, the Stock Investments account is


credited when the a. investee reports net income.
b. investee reports a net loss.
c. investment is originally acquired.
d. investee reports net income and when the investment is originally acquired.

87.

Consolidated financial statements are prepared when a company owns


of the common stock of another company.
a. less than 20%
b.
between
20% and
50% c.
less than
50%
d. more than 50%

88.

Consolidated financial statements present all of the


following except the a. individual assets and liabilities
of the parent company
b. individual assets and liabilities
of the subsidiary. c. total revenues
and expenses of the subsidiary.
d. All of these are presented in consolidated financial statements.

89.

The company whose stock is owned by the parent


company is called the a. controlled company.
b.

subsidiar
y
compan
y. c.
investee
compan
y. d.
sibling
compan
y.
90.

A company that owns more than 50% of the common stock of another
company is known as the
a. charge company.
b.
subsidiar
y
compan
y. c.
parent
compan
y.
d. management company.

91.

If one company owns more than 50% of the common stock of


another company, a. the cost method should be used to account
for the investment.
b. a partnership exists.
c. a parent-subsidiary relationship exists.
d. the company whose stock is owned must be liquidated.

92.

If a parent company has two wholly owned subsidiaries, how many legal
and economic entities are there from the viewpoint of the shareholders of
the parent company?
Legal
Economi
c a. 3
3
b.
1
2 c.
3
1 d.
2

1
16 - 16
93.

When a company owns more than 50% of the common stock of


another company, a. affiliated financial statements are
prepared.
b. consolidated financial
statements are prepared. c.
controlling financial statements
are prepared. d. significant
financial statements are
prepared.

94.

Changes from cost are reported as part


of net income for a. available-forsale securities.
b. held-tomaturity sec
urities. c.
debt
securities.
d. trading securities.

95.

Short-term investments are listed on the balance sheet


immediately below a. cash.
b. inventory.
c.
accou
nts
receiv
able.
d.
prepai
d
expen
ses.

96.

Short-term stock investments should be valued on


the balance sheet at a. the lower of cost or fair
value.
b. the higher
of cost or fair
value. c. cost.
d. fair value.

97.

In recognizing a decline in the fair value of short-term stock


investments, an unrealized loss account is debited because
a. management intends to realize this loss
in the near future. b. the securities have
not been sold.

c. the stock market is volatile.


d. management cannot determine the exact amount of the loss in value.
98.

The Market Adjustment account


a. is set up for each security in the company's portfolio.
b. relates to the entire portfolio of securities
held by the company. c. is closed at the end of
each accounting period.
d. appears on the income statement as Other Expenses and Losses.

99.

The contra-account, Market Adjustment,


is also called a(n) a. offset account.
b.
adjust
ment
accou
nt. c.
valua
tion
accou
nt. d.
oppos
ite
accou
nt.

100.

Reporting
investments at fair
value is a.
applicable to stock
securities only. b.
applicable to debt
securities only.
c. applicable to both debt and stock securities.
d. a conservative approach because only losses are recognized.
Investme
nts
16 - 17

Use the following information for questions 101102.


Grier Corporation's trading portfolio at the end of the year is as follows:
Security
Common Stock A Common Stock B
Cost
$10,000
9,000 $19,000
Market Value $12,000
5,000 $17,000

101.

At the end of the year, Grier Corporation should


a. set up a Market Adjustment account for Stock B.
b. set up a Market Adjustment account for the portfolio.
c. recognize an Unrealized Gain or LossIncome for $4,000.
d. report a loss on the income statement for $4,000 under "Other Expenses
and Losses."

102. Grier subsequently sells Stock B for $12,000. What entry is made to record the
sale?
a. Cash .....................................................................................
12,000
Stock Investments .......................................................
12,000
b. Cash .....................................................................................
12,000
Market
Adjustment.......................................................
3,000 Stock Investments .......................................................
9,000
c. Cash .....................................................................................
12,000
Stock
Investments .......................................................
9,000 Gain on Sale of Stock Investments .............................
3,000
d. Cash .....................................................................................
12,000
Stock
Investments .......................................................
5,000 Gain on Sale of Stock Investments .............................
7,000
103.

Which of the following would not be reported under "Other Revenues


and Gains" on the income statement?
a. Unrealized gain on availablefor-sale securities b. Dividend
revenue
c. Interest revenue
d. Gain on sale of short-term debt investments

104.

The balance in the Unrealized Loss


Equity account will a. appear on the
balance sheet as a contra asset.
b. appear on the income statement under Other
Expenses and Losses. c. appear as a deduction in the
stockholders' equity section.
d. not be shown on the financial statements until the securities are sold.

105.

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
stockholders' 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.
16 - 18
106.

The balance sheet presentation of an unrealized loss on an availablefor-sale security is similar to the statement presentation of
a. treasury stock.
b. discount on bonds payable.
c. allowance for
doubtful
accounts. d.
prepaid expenses.

Use the following information for questions 107108.


At the end of its first year, the trading securities portfolio consisted of the
following common stocks.
Cost
Market Able Corporation
$
46,400
$ 50,000 Baker
Inc.
60,000
53,800 Cole Corporation
80,000
107.

76,000
$186,400

$179,800

The unrealized loss to be recognized under the


fair value method is a. $6,200.
b
.
$
1
0
,
2
0
0
.
c
.

$
6
,
6
0
0
.
d
.
$
4
,
0
0
0
.
108.

In the following year, the Baker common stock is sold for cash proceeds
of $58,000. The gain or loss to be recognized on the sale is a
a
.
g
a
i
n
o
f
$
4
,
2
0
0
.
b
.
l
o
s
s
o
f
$
2
,
0

0
0
.
c
.
g
a
i
n
o
f
$
2
,
2
0
0
.
d
.
l
o
s
s
o
f
$
4
0
0
.
109.

At the end of the first year of operations, the total cost of the trading
securities portfolio is $240,000. Total fair value is $250,000. The
financial statements should show
a. an addition to an asset of $10,000 and a realized gain of $10,000.
b. an addition to an asset of $10,000 and an unrealized gain of
$10,000 in the stockholders equity section.
c. an addition to an asset of $10,000 in the current assets section and an
unrealized gain of $10,000 in Other revenues and gains.
d. an addition to an asset of $10,000 in the current assets section and a
realized gain of $10,000 in Other revenues and gains.

110.

Noell Corp. has common stock of $5,000,000, retained earnings of


$3,000,000, unrealized gains on trading securities of $100,000 and
unrealized losses on available-for-sale securities of $200,000. What is
the total amount of its stockholders equity?
a
.

$
7
,
8
0
0
,
0
0
0
b
.
$
8
,
0
0
0
,
0
0
0
c
.
$
7
,
9
0
0
,
0
0
0
d
.
$
8
,
1
0
0
,
0

0
0
111.

Available-forsale securities are


classified as a. shortterm investments only.
b. long-term investments only.
c. either short-term or
long-term investments. d.
current assets only.
Investme
nts
16 - 19

112.

Which one of the following would not be classified as a shortterm investment? a. Marketable stock securities
b. Equity
method
investments c.
Marketable
debt securities
d. Short-term
paper

113.

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.

114.

Which of the following would not be classified as a shortterm investment? a. Short-term commercial paper
b. Idle cash in a bank
checking account c.
Marketable stock
securities
d. Marketable debt securities

Additional Multiple Choice Questions


115.

Which of the following reasons best explains why a company that


experiences seasonal fluctuations in sales may purchase investments in
debt or stock securities?
a. The company may have excess cash.
b. The company may generate a significant portion of its earnings
from investment income.

c. The company may invest for the strategic reason of establishing a


presence in a related industry.
d. The company may invest for speculative reasons to increase the
value in pension funds.
116. When bonds are sold, the gain or loss on sale is the
difference between the a. sales price and the cost of the
bonds.
b. net proceeds and the cost of the bonds.
c. sales price and the market value
of the bonds. d. net proceeds and
the market value of the bonds.
117. Which of the following is a major difference when accounting
for long-term debt investments versus short-term debt investments?
a. When selling long-term investments, no gain or loss is recognized.
b. At the end of the year, any unrealized gain or loss on long-term debt
investments must be recognized in the stockholders' equity section of
the balance sheet.
c. Interest revenue is not recognized for long-term investments.
d. For short-term investments, bond premium or discount is not
amortized to interest revenue.
118.

Under the equity method, the investor records dividends


received by crediting a. Dividend Revenue.
b. Investment Income.
c. Revenue
from
Investment.
d. Stock
Investments.

16 - 20
119.

A company that acquires less than 20% ownership interest in another


company should account for the stock investment in that company using
a.
the
cost
met
hod
. b.
the
equi
ty
met
hod
.
c. the significant method.
d. consolidated financial statements.

120.

The equity method of accounting for an investment in the common

stock of another company should be used by the investor when the


investment
a. is composed of common stock and it is the investor's intent to vote
the common stock. b. ensures a source of supply of raw materials for
the investor.
c. enables the investor to exercise significant influence
over the investee. d. is obtained by an exchange of
stock for stock.
121.

On January 2, Matthews Corporation acquired 20% of the outstanding


common stock of Dennehy Company for $450,000. For the year
ended December 31, Dennehy reported net income of $90,000 and
paid cash dividends of $30,000 on its common stock. At December
31, the carrying value of Matthews' investment in Dennehy under the
equity method is
a
.
$
4
4
4
,
0
0
0
.
b
.
$
4
5
0
,
0
0
0
.
c
.
$
4
5
6
,
0
0

0
.
d
.
$
4
6
2
,
0
0
0
.
122.

An unrealized loss on available-for-sale securities is


a. reported under Other Expenses and Losses in the
income statement. b. closed-out at the end of the
accounting period.
c. reported as a separate component of
stockholders' equity. d. deducted from the
cost of the investment.

123.

Securities bought and held primarily for sale in the near term to generate
income on short-term price differences are
a. trading securities.
b. availableforsale securities
. c. neversell
securities.
d. held-to-maturity securities.

124.

Short-term investments are


a. (1) readily marketable and (2) intended to be converted into cash
after the current year or operating cycle, whichever is shorter.
b. (1) readily marketable and (2) intended to be converted into cash
within the current year or operating cycle, whichever is longer.
c. (1) readily marketable and (2) intended to be converted into cash
after the current year or operating cycle, whichever is longer.
d. (1) readily marketable and (2) intended to be converted into cash
within the current year or operating cycle, whichever is shorter.
Investme
nts
16 - 21

125.

Short-term investments are securities held by a


company that are a. readily marketable.

b. intended to be converted into cash within the next year.


c. readily marketable and intended to be converted into cash within
the next year or operating cycle, whichever is longer.
d. readily marketable and intended to be held until maturity.

BRIEF EXERCISES
BE 126
On January 14, Blackwell Corporation purchased 20, 11%, $1,000 Gooding
Company bonds for $20,000, plus brokerage fees of $400. On November 30,
the company sold 10 of the Gooding Company bonds for $11,000, less $300
brokerage fees. Prepare journal entries for the purchase and sale of the Gooding
Company bonds.
BE 127
On January 2, Westies Company purchased 30, 10%, $1,000 Arkansas
Company bonds for $31,000 cash, plus brokerage fees of $1,000. Interest is
payable semiannually on July 1 and January 1. On July 1, the company
received a semiannual interest payment on the Arkansas Company bonds.
Journalize the entries to record the purchase of the bonds and the receipt of the
interest payment.
BE 128
On April 25, Braxton Company buys 4,200 shares of Computech common stock
for $82,000, plus brokerage fees of $2,000. On October 31, Braxton sells
600 shares of Computech stock for $15,500, less brokerage fees of $500.
Prepare journal entries for the purchase and sale of the Computech common
stock.
BE 129
On January 1, Hillard Corporation purchased a 40% equity in Lewis
Company for $360,000. At December 31, Lewis declared and paid a $40,000
cash dividend and reported net income of $98,000. Prepare the necessary
journal entries for Hillard Corporation.
BE 130
Stein Company had the following transactions pertaining to its short-term stock
investments.
Jan.

Purchased 600 shares of Rice Company stock for $6,700 cash plus
brokerage fees of $350.

June

Received cash dividends of $0.50 per share on the Rice Company stock.

Sept. 15
Sold 300 shares of the Rice Company stock for $3,600 less brokerage
fees of $200.
Instructio
ns
Journalize
the
transaction
s.
BE 131
On January 1, 2008, Owen Company purchased 5,000 shares of Jen
Company stock for $300,000. Owens investment represents 30 percent of
the total outstanding shares of Jen. During 2008, Jen paid total dividends of
$100,000 and reported net income of $250,000. What revenue does Owen report
related to this investment and what is the amount to be reported as an investment
in Jen stock at December 31?
BE 132
At January 1, 2008, the trading securities portfolio held by the Darin
Corporation consisted of the following investments:
1. 2,000 shares of Stitch common stock purchased
for $42 per share. 2. 1,500 shares of Marvel
common stock purchased for $50 per share.
At December 31, 2008, the fair values per share were Stitch $36 and Marvel $54.
Instructions
(a) Prepare a schedule showing the cost and fair value of the portfolio at December
31, 2008.
(b) Prepare the adjusting entry to report the portfolio at fair value at December 31,
2008.
BE 133
At December 31, 2008, the trading securities for Carter Company are as follows:
Security X

Cost
$17,000
34,000 $51,000
Fair Value $20,000
33,000 $53,000
Prepare the adjusting entry at December 31, 2008, to report the securities at fair value.

BE 134
At January 1, 2008, Gulfport Corporation held one available-for-sale security:
1,500 shares of Netblaster common stock purchased for $40 per share. At
December 31, 2008, the market value per share for Netblaster was $44. Prepare
the adjusting entry to report the portfolio at fair value at December 31, 2008.
Investme
nts
16 - 25
BE 135
Terra Firma Company has the following data at December 31, 2008 for its securities:
Securities Available-for-sale Trading
Cost
$35,000 45,000
Fair Value $38,000
40,000

EXERCISES
Ex. 136
Milner Corporation had the following transactions pertaining to debt investments.
Jan. 1

Purchased 80, 8%, $1,000 Vanoy Company bonds for $80,000, plus
brokerage fees of $800.

July 1

Sold 20 Vanoy Company bonds for $24,000, less $400 brokerage fees.

Instructions
Prepare journal entries for the purchase and sale of the Vanoy Company bonds.

Ex. 137
Glaser Company had the following transactions pertaining to debt securities
held as a short-term investment.
Jan. 1

Purchased 40, 8%, $1,000 Cotter Company bonds for $40,000 cash
plus brokerage fees of $800. Interest is payable semiannually on July
1 and January 1.

July 1

Received semiannual interest on Cotter Company bonds.

Oct. 1

Sold 30 Cotter Company bonds for $32,000 plus accrued interest less
$500 brokerage fees.

Instructions

(a) Journalize the transactions.


(b) Prepare the adjusting entry for the accrual of interest on December 31.
Ex. 138
The following transactions were made by Waite Company. Assume all
investments are short-term and are readily marketable.
June

2 July

1 30

Sept. 15 Dec. 31
31
Purchased 300 shares of Beaty Corporation common stock for $45 per
share. Purchased 200 Meng Corporation bonds for $220,000.
Received a cash dividend of $2 per share from Beaty
Corporation. Sold 90 shares of Beaty Corporation stock for
$50 per share.
Received semiannual interest check for $11,000 from Meng Corporation.
Received a cash dividend of $2 per share from Beaty Corporation.
Instructi
ons
Journaliz
e the
transacti
ons.
Investme
nts
16 - 27
Ex. 139
On April 1, Smith Company buys 3,000 shares of Thomas common stock
for $60,000, plus brokerage fees of $900. On October 1, Smith sells 1,000
shares of Thomas stock for $23,000, less brokerage fees of $500.
Instructions
Prepare journal entries for the purchase and sale of the Thomas common stock.
Ex. 140
Stone Company had the following transactions pertaining to short-term
investments in equity securities.
Jan.

June

1 Sept. 15

Dec.

Purchased 1,000 shares of Renfro Company stock for $9,450 cash plus
brokerage fees of $300.
Received cash dividends of $.50 per share on Renfro Company stock.
Sold 400 shares of Renfro Company stock for $3,800 less brokerage fees of $100.
Received cash dividends of $.50 per share on Renfro Company stock.
Instructions
(a) Journalize the transactions.
(b) Indicate the income statement effects of the transactions.
Ex. 141
Stine Corporation's balance sheet at December 31, 2007, showed
the following: Short-term investments, at fair
value
$46,500
Stine Corporation's trading portfolio of stock investments consisted of the
following at December 31, 2007:
Stock
Dooley Common Stock Adler Preferred Stock Griggs Common Stock
Number of Shares 200
400 300
Cost
$30,000 6,000
9,000 $45,000
Investme
nts
16 - 29
Ex. 141

(cont.)

During 2008, the following transactions took place:


Feb. 5
Sold 50 shares of Dooley common
stock for $8,000. Mar. 30
Purchased 25 shares
of Griggs common stock for $950.
Sept. 9
Purchased 50 shares of Griggs common stock for $2,000.
At year end on December 31, 2008, the market values per share were:
Dooley Common Stock Adler Preferred Stock Griggs Common Stock
Market Value Per Share $158.00
$14.00 $25.00
Instructions
(a) Prepare the journal entries to record the 2008 stock transactions.

(b) On December 31, 2008, prepare any adjusting entry that might be
necessary relative to the trading portfolio.
(c) Show how the stock investments will appear on Stine Corporation's
balance sheet at December 31, 2008.

Ex. 142
On January 5, 2008, Storey Company purchased the following stock
securities as a long-term investment:
300 shares Marks Corporation common
stock for $4,200. 500 shares Wood
Corporation common stock for $10,000.
600 shares Logen Corporation common
stock for $19,800.
Assume that Storey Company cannot exercise significant influence over the
activities of the investee companies and that the cost method is used to
account for the investments.
On June 30, 2008, Storey Company received the following cash dividends:
Marks
Corporation ........................................
Corporation ........................................
Logen Corporation........................................
$2.00 per share $1.00 per share $1.50 per share

Wood

On November 15, 2008, Storey Company sold 200 shares of Logen


Corporation common stock for $7,500.
On December 31, 2008, the fair value of the securities held by Storey Company is as
follows:
Marks Corporation common stock Wood Corporation common stock
Logen Corporation common stock
Per Share $10
16 32
Instructions
Prepare the appropriate journal entries that Storey Company should make on the
following dates:
Ja
n
u
ar
y
5,
2

0
0
8
J
u
n
e
3
0,
2
0
0
8
N
o
v
e
m
b
er
1
5,
2
0
0
8
D
e
c
e
m
b
er
3
1,
2
0
0
8
Ex. 143
Seely Company purchased 42,000 shares of common stock of Otto Corporation
as a long-term investment for $1,000,000. During the year, Otto Corporation
reported net income of $300,000 and paid dividends of $100,000.
Instructions
(a) Assuming that the 42,000 shares represent a 15% interest in
Otto Corporation: 1. Prepare the journal entry to record the
investment in Otto stock.

2. Prepare any entries that Seely Company should make in accounting for
its investment in Otto stock during the year.
3. What is the balance of the Stock Investments account on Seely
Company's books at the end of the year?
(b) Repeat requirement (a) above except assume that the 42,000 shares
represent a 25% interest in Otto Corporation.
Ex. 144
On January 1, Neely Corporation purchased a 30% equity in Poole Company
for $120,000. At December 31, Poole declared and paid a $40,000 cash
dividend and reported net income of $100,000.
Instructions
Prepare the necessary journal entries for Neely Corporation.
Ex. 145
Information pertaining to long-term stock investments in 2008 by Tate Corporation
follows:
Acquired 10% of the 250,000 shares of common stock of Friend Company at
a total cost of $8 per share on January 1, 2008. On July 1, Friend Company
declared and paid a cash dividend of $2 per share. On December 31, Friend's
reported net income was $654,000 for the year.
Investme
nts
16 - 33
Ex. 145

(cont.)

Obtained significant influence over Unruh Company by buying 25% of


Unruh's 100,000 outstanding shares of common stock at a total cost of $22
per share on January 1, 2008. On June 15, Unruh Company declared and paid a
cash dividend of $1.50 per share. On December 31, Unruh's reported net income
was $280,000.
Instructions
Prepare all necessary journal entries for 2008 for Tate Corporation.

Ex. 146
At December 31, 2008, the trading securities for Carter Company are as follows:
Security A
Cost
$25,000

46,000 $71,000
Fair Value $28,000
40,000 $68,000
Instructions
Prepare the adjusting entry at December 31, 2008, to report the securities at fair value.
Ex. 147
Rison Corporation has the following trading portfolio of stock investments
as of December 31, 2008.
Security A
BC
Cost
$19,000 22,000
34,000 $75,000
Fair Value $16,000
26,000
31,000 $73,000
On January 22, 2009, Rison Corporation sold security C for $30,000.
Instructions
(a) Prepare the adjusting entry for Rison Corporation on December 31,
2008, to report the portfolio at fair value.
(b) Indicate the balance sheet and income statement presentation of the
fair value data for Rison Corporation at December 31, 2008.
(c) Prepare the journal entry for the 2009 sale.
Ex. 148
The following information is available for Clooney Corporation's availablefor-sale securities at December 31, 2008.
Security X

Cost
$35,000
22,000 $57,000
Fair Value $33,000
28,000 $61,000
Instructions
Prepare the adjusting entry to record the securities at fair value at December 31, 2008.
Investme
nts
16 - 35
Ex. 149

At January 1, 2008, the available-for-sale securities portfolio held by Howe


Corporation consisted of the following investments:
1. 2,500 shares of Meller common stock purchased
for $42 per share. 2. 1,500 shares of Kane common
stock purchased for $60 per share.
At December 31, 2008, the market values per share were Meller $36 and Kane $66.
Instructions
(a) Prepare a schedule showing the cost and fair value of the portfolio at December
31, 2008.
(b) Prepare the adjusting entry to report the portfolio at fair value at December 31,
2008.
Ex. 150
Weaver Company has the following data at December 31, 2008 for its securities.
Securities Trading
Available-for-sale
Cost
$90,000 75,000
Fair Value $93,000
71,000
Instructions
(a) Prepare the adjusting entries to report the securities at fair value.
(b) Indicate the statement presentation of the related unrealized gain (loss)
accounts for each class of securities.
COMPLETION STATEMENTS
151. Debt investments are investments in government and

bonds.

152. For long-term debt investments, any bond premium or


amortized to
over the remaining term of the bonds.
153. When an investor owns between 20% and 50% of the common stock of
a corporation, it is generally presumed that the investor has influence
over the investee and therefore, the appropriate method of accounting
for this type of investment is the
method.
154. Under the cost method, dividends received from an investee company are
credited to the
account,
whereas under the equity method, dividends received from an investee
company are credited to the
account.

is

155. At the beginning of the year, Grant Corporation acquired 15% of


Downs Company common stock for $400,000. Downs Company
reported net income for the year of $75,000 and paid $25,000 cash
dividends during the year. The balance of the Stock Investments
account on the books of Grant Corporation at the end of the year should
be $
.
156. A company that owns more than 50% of the common stock of another
company is known as the
company and
financial statements are usually prepared.
157.
future.

securities are bought and held primarily for sale in the near

158. Market Adjustment is a valuation


to (from) the cost of the investments.

account which is

159. At the end of an accounting period, if the fair value of the trading
portfolio is less than its cost, then the company should recognize an
which is reported on the
.
160. An unrealized loss on trading securities is reported under Other
on the income statement.
161. An unrealized gain or loss on available-for-sale securities is
reported as a separate component of
.
162. Short-term investments are securities that are
to be converted into cash within the next year.

and

MATCHING
163. Match the items below by entering the appropriate code letter in the space
provided.
A. Available-for-sale securities B. Subsidiary company
C. Equity method
D. Unrealized Gain or LossEquity E. Fair value
F. Consolidated financial statements G. Controlling interest
H. Market Adjustment I. Parent company
J. Long-term investments
1.

Valuation allowance account.

2.

Amount for which a security could be sold.

3.

Ownership of more than 50% of another company's common stock.

4.

Securities that may be sold in the future.

5.

Investments that are not readily marketable and not intended to be


converted into cash within the next year.

6.

Financial statements that present the total assets and liabilities


controlled by the parent and the total revenues and expenses of the
subsidiary companies.

7. The Stock Investments account is adjusted for net income and dividends
received.
8.
entity.
9.

A company that owns more than 50% of the common stock of another
Entity whose stock is owned by the parent company.

10.

An account that is reported in the stockholders' equity section.

SHORT-ANSWER ESSAY QUESTIONS


S-A E 164
The Market Adjustment account is a balance sheet account. Identify the
asset account it is related to. Explain how this account is increased and
describe the procedure followed when its related asset account is disposed of.
S-A E 165
A consolidated balance sheet reports the financial position of two or more
legal entities just as if they were one reporting unit. Explain why all the
individual items appearing on the separate balance sheets of each of the
affiliated companies cannot be added together to arrive at a consolidated
total for each item.
S-A E 166
When a year-end adjustment is made to reduce the trading securities portfolio
to market, what effect, if any, will the adjustment have on the balance sheet and
the income statement?
S-A E 167 (Ethics)
Greyhound Stables, Inc. operates several dog racing tracks throughout the
United States. Since most facilities are outdoor tracks only, most of the cash
receipts for Greyhound are received from April through October. These funds
are usually invested in short-term, very liquid investments, such as stocks and
bonds. Among the stocks purchased last year, was Servitronics, a company

specializing in automatic vending equipment.


Investme
nts
16 - 39
S-A E 167 (cont.)
The company decided not to sell its Servitronics stock at the end of last year, and
has purchased more of the stock this year. The company intends to continue
to purchase stock until it holds enough to make a takeover bid for the
company. The accountants have been instructed to continue to classify the
investment as short-term until the takeover is accomplished, so that less
attention will be directed to it. (Presently, Greyhound has no long-term
investment in stock at all.)
Required:
1. Is it ethical for Greyhound to attempt to take over another company? Explain.
2. Is it ethical for Greyhound to leave its investment in the short-term
investment category? Explain.
S-A E 168 (Communication)
Ann Harman is the daughter of Fred Harman, the founder and president of Big
Sky Enterprises. She has been working in various departments during school
vacations throughout high school. She burst into the accounting department
excitedly one morning. She said that the stock price of several of the firm's
available-for-sale securities are up, and that her father said that the company had
made over $10,000 because of this jump in stock prices. She asks to see how the
increase is recorded. It is a very busy time in the accounting department, and so
her question is deferred.
Required:
Prepare a brief note to answer Ann's question.

CHAPTER 17
THE STATEMENT OF CASH FLOWS
CHAPTER STUDY OBJECTIVES
1. Indicate the usefulness of the statement of cash flows.
2. Distinguish among operating, investing, and financing activities.
3. Prepare a statement of cash flows using the indirect method.
4. Analyze the statement of cash flows.

5. Explain how to use a worksheet to prepare the statement of cash flows


using the indirect method.
6. Prepare a statement of cash flows using the direct method.

TRUE-FALSE STATEMENTS
1.

The statement of cash flows is a required statement that must be


prepared along with an income statement, balance sheet, and retained
earnings statement.

2.

For external reporting, a company must prepare either an income


statement or a statement of cash flows, but not both.

3.

A primary objective of the statement of cash flows is to show the


income or loss on investing and financing transactions.

4. A statement of cash flows indicates the sources and uses of cash during a
period.
5.

In preparing a statement of cash flows, cash equivalents are


subtracted from cash in order to compute the net change in cash during a
period.

6.

Cash equivalents are highly-liquid investments that have maturities


of less than three months.

7.

The use of cash to purchase highly liquid short-term investments (cash


equivalents) would be reported on the statement of cash flows as an
investing activity.

8.

In preparing a statement of cash flows, the issuance of debt should be


reported separately from the retirement of debt.

9.

Noncash investing and financing activities must be reported in the body


of a statement of cash flows.

10.

The statement of cash flows classifies cash receipts and


payments as operating, nonoperating, financial, and
extraordinary activities.

11. The sale of land for cash would be classified as a cash inflow from an
investing activity.
12.

Cash flow from investing activities is considered the most


important category on the statement of cash flows because it is
considered the best measure of expected income.

13.

The receipt of dividends from long-term investments in stock is


classified as a cash inflow from investing activities.

The Statement of Cash


Flows
17 - 5
14.

The payment of interest on bonds payable is classified as a cash outflow


from operating activities.

15.

Any item that appears on the income statement would be considered as


either a cash inflow or cash outflow from operating activities.

16.

The acquisition of a building by issuing bonds would be considered


an investing and financing activity that did not affect cash.

17.

All major financing and investing activities affect cash.

18.

Cash provided by operations is generally equal to operating income.

19.

Using the indirect method, an increase in accounts receivable during a


period is deducted from net income in calculating cash provided by
operations.

20.

Using the indirect method, an increase in accounts payable during a


period is deducted from net income in calculating cash provided by
operations.

21.

A loss on sale of equipment is added to net income in determining


cash provided by operations under the indirect method.

22.

In preparing a statement of cash flows, an increase in the Common


Stock and Treasury Stock accounts during a period would be an investing
activity.

23.

Cash provided by operating activities fails to take into account that a


company must invest in new fixed assets just to maintain its current level
of operations.

24.

Free cash flow equals cash provided by operations less capital


expenditures and cash dividends.

a25.

The use of a worksheet to prepare a statement of cash flows is optional.

a26.

During the year, Income Tax Expense amounted to $30,000 and Income
Taxes Payable increased by $3,000; therefore, the cash paid for income
taxes was $27,000.

a27.

In preparing net cash flow from operating activities using the direct
method, each item in the income statement is adjusted from the accrual
basis to the cash basis.

a28.

Using the direct method, major classes of investing and financing


activities are listed in the operating activities section.

a29.

During a period, cost of goods sold + an increase in inventory + an


increase in accounts payable = cash paid to suppliers.

a30.

Operating expenses + an increase in prepaid expenses a decrease


in accrued expenses payable = cash payments for operating expenses.

17 - 6
Additional True-False Questions
31.

The statement of cash flows classifies cash receipts and cash


payments into two categories: operating activities and nonoperating
activities.

32.

Financing activities include the obtaining of cash from issuing debt


and repaying the amounts borrowed.

33.

The adjusted trial balance is the only item needed to prepare the
Statement of Cash Flows.

34.

Under the indirect method, retained earnings is adjusted for items that
affected reported net income but did not affect cash.

a35.

The reconciling entry for depreciation expense in a worksheet is a


credit to Accumulated Depreciation and a debit to OperatingDepreciation Expense.

a36.

Under the direct method, the formula for computing cash collections
from customers is sales revenues plus the increase in accounts
receivable or minus the decrease in accounts receivable.

MULTIPLE CHOICE QUESTIONS


37.

The statement of cash flows should help investors and creditors


assess each of the following except the
a. entity's ability to
generate future income.
b. entity's ability to pay
dividends.
c. reasons for the difference between net income and net cash
provided by operating activities.
d. cash investing and financing transactions during the period.

38.

The statement of cash flows


a. must be prepared on a daily basis.

b. summarizes the operating, financing, and investing


activities of an entity. c. is another name for the income
statement.
d. is a special section of the income statement.
The Statement of Cash
Flows
17 - 7
39.

Which one of the following items is not generally used in preparing a


statement of cash flows?
a. Adjusted trial balance
b. Comparative
balance sheets c.
Current income
statement d.
Additional
information

40.

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. provide information about the cash receipts and cash payments
during a period. d. facilitate banking relationships.

41.

If a company reports a net loss, it


a. may still have a net
increase in cash. b. will
not be able to pay cash
dividends. c. will not be
able to get a loan.
d. will not be able to make capital expenditures.

42.

In addition to the three basic financial statements, which of the following


is also a required financial statement?
a. the "Cash Budget"
b. the Statement of Cash Flows
c. the Statement of Cash
Inflows and Outflows d. the
"Cash Reconciliation"

43.

The statement of cash flows will not report the


a. amount of checks outstanding at the
end of the period. b. sources of cash in
the current period.
c. uses of cash in the current period.
d. change in the cash balance for the current period.

44.

Cash
equivalents do

not include a.
short-term
corporate notes.
b. treasury
bills.
c. money market funds.
d. 2-year certificates of deposit.
45.

Which of the following characteristics does not apply to


cash equivalents? a. Short-term
b. Highly-liquid
c. Readily convertible into cash
d. Sensitive to interest rate changes

46.

Cash equivalents are generally investments


with maturities of a. $1,000 or more.
b. three
months
or less. c.
at least
six
months.
d. one year or the operating cycle, whichever is less.

17 - 8
47.

The best measure of a company's ability to generate sufficient cash to


continue as a going concern is net cash provided by
a.
financ
ing
activit
ies. b.
invest
ing
activit
ies. c.
operat
ing
activit
ies. d.
proces
sing
activit
ies.

48.

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.
49.

The order of presentation of activities on the


statement of cash flows is a. operating, investing,
and financing.
b.
operating,
financing,
and
investing.
c.
financing, operating,
and investing. d.
financing, investing,
and operating.

50.
Financin
g
activitie
s
involve
a.
lending
money.
b.
acquirin
g
investm
ents. c.
issuing
debt.
d. acquiring long-lived assets.
51.

Investing activities include


a. collecting
cash on loans
made. b.
obtaining cash
from creditors.
c. obtaining
capital from
owners.
d. repaying money previously borrowed.

52.

Generally, the most important category on the statement of cash flows


is cash flows from a. operating activities.
b.
inve
sting
activ
ities.

c.
fina
ncin
g
activ
ities.
d. significant noncash activities.
53.

The category that is generally considered to be the best measure of a


company's ability to continue as a going concern is
a. cash flows from
operating activities.
b. cash flows from
investing activities. c.
cash flows from
financing activities.
d. usually different
from year to year.

54.

Cash receipts from interest and


dividends are classified as a. financing
activities.
b.
inves
ting
activ
ities.
c.
oper
ating
activ
ities.
d. either financing or investing activities.
The Statement of Cash
Flows
17 - 9

55.

Each of the following is an example of a significant


noncash activity except a. conversion of bonds into
common stock.
b. exchanges of plant assets.
c. issuance of debt to
purchase assets. d.
stock dividends.

56.

If a company has both an inflow and outflow of cash related to


property, plant, and equipment, the
a. two cash effects can be netted and presented as one item in the
investing activities section.
b. cash inflow and cash outflow should be reported separately in the

investing activities section.


c. two cash effects can be netted and presented as one item in the
financing activities section.
d. cash inflow and cash outflow should be reported separately in the
financing activities section.
57.

Of the items below, the one that appears first on the statement
of cash flows is a. noncash investing and financing activities.
b. net increase
(decrease) in cash.
c. cash at the end
of the period.
d. cash at the beginning of the period.

58.

Which of the following transactions does not affect cash


during a period? a. Write-off of an uncollectible
account
b. Collection of an
accounts receivable c.
Sale of treasury stock
d. Exercise of the call option on bonds payable

59. Significant noncash transactions


would not include a. conversion of
bonds into common stock.
b.
asset acquisition through bond issuance.
c. treasury
stock
acquisition.
d. exchange
of plant
assets.
60.

In preparing a statement of cash flows, a conversion of bonds into


common stock will be reported in
a. the financing section.
b. the "extraordinary" section.
c. a separate schedule or note to the
financial statements. d. the stockholders'
equity section.

Use the following information for questions 6164.


For each of the following transactions, indicate where, if at all, it would be
classified on the statement of cash flows. Assume the indirect method is used.
61.

Paid income taxes.


a. Operating
activities
section b.
Investing

activities
section c.
Financing
activities
section
d. Does not represent a cash flow
17 - 10
62.

Issued
common
stock for
cash. a.
Operating
activities
section b.
Investing
activities
section c.
Financing
activities
section
d. Does not represent a cash flow

63.

Purchased land for cash.


a.
Operating
activities
section b.
Investing
activities
section c.
Financing
activities
section
d. Does not represent a cash flow

64.

Purchased land and


building with a mortgage.
a. Operating activities
section
b. Investing
activities
section c.
Financing
activities
section
d. Does not represent a cash flow

Use the following information for questions 6566.


Joy Elles Vegetable Market had the following transactions during 2008:

1. Issued $25,000 of par value common stock for cash.


2. Repaid a 6 year note payable in the amount of $11,000.
3. Acquired land by issuing common stock of
par value $50,000. 4. Declared and paid a
cash dividend of $1,000.
5. Sold a long-term investment (cost $3,000)
for cash of $3,000. 6. Acquired an investment
in IBM stock for cash of $6,000.
65.

What is the net cash provided by


financing activities? a. $13,000
b
.
$
2
5
,
0
0
0
c
.
$
1
4
,
0
0
0
d
.
$
9
,
0
0
0

66.

What is the net cash provided by


investing activities? a. $6,000
b
.
$
1
6

,
0
0
0
c
.
(
$
3
,
0
0
0
)
d
.
$
3
,
0
0
0
67.

Miller Company purchased treasury stock with a cost of $15,000 during


2008. During the year, the company paid dividends of $20,000 and
issued bonds payable for proceeds of $816,000. Cash flows from
financing activities for 2008 total
a.
$796,000
net cash
inflow. b.
$811,000
net cash
inflow. c.
$5,000 net
cash
outflow. d.
$781,000
net cash
inflow.
The Statement of Cash
Flows
17 - 11

68.

Cline Company issued common stock for proceeds of $186,000


during 2008. The company paid dividends of $33,000 and issued a long-

term note payable for $45,000 in exchange for equipment during the year.
The company also purchased treasury stock that had a cost of $7,000. The
financing section of the statement of cash flows will report net cash
inflows of
a
.
$
1
4
6
,
0
0
0
.
b
.
$
2
0
2
,
0
0
0
.
c
.
$
1
5
3
,
0
0
0
.
d
.
$
1
7
9
,

0
0
0
.
69.

In Gentry Company, land decreased $120,000 because of a cash sale for


$120,000, the equipment account increased $40,000 as a result of a cash
purchase, and Bonds Payable increased $130,000 from issuance for cash
at face value. The net cash provided by investing activities is
a
.
$
1
2
0
,
0
0
0
.
b
.
$
2
1
0
,
0
0
0
.
c
.
$
8
0
,
0
0
0
.
d
.
$

9
0
,
0
0
0
.
70.

Accounts receivable arising from sales to customers amounted to $80,000


and $70,000 at the beginning and end of the year, respectively. Income
reported on the income statement for the year was $240,000. Exclusive of
the effect of other adjustments, the cash flows from operating activities to
be reported on the statement of cash flows is
a
.
$
2
4
0
,
0
0
0
.
b
.
$
2
5
0
,
0
0
0
.
c
.
$
3
1
0
,
0
0
0
.

d
.
$
2
3
0
,
0
0
0
.
71.

Accounts receivable arising from sales to customers amounted to $35,000


and $40,000 at the beginning and end of the year, respectively. Income
reported on the income statement for the year was $120,000. Exclusive of
the effect of other adjustments, the cash flows from operating activities to
be reported on the statement of cash flows is
a
.
$
1
2
0
,
0
0
0
.
b
.
$
1
2
5
,
0
0
0
.
c
.
$
1
5

5
,
0
0
0
.
d
.
$
1
1
5
,
0
0
0
.
72.

Wilton Company reported net income of $40,000 for the year. During the
year, accounts receivable decreased by $7,000, accounts payable increased
by $3,000 and depreciation expense of $5,000 was recorded. Net cash
provided by operating activities for the year is a. $30,000.
b
.
$
5
5
,
0
0
0
.
c
.
$
3
9
,
0
0
0
.
d
.

$
3
5
,
0
0
0
.
73.

Buster Company reported a net loss of $3,000 for the year ended
December 31, 2008. During the year, accounts receivable increased
$7,000, merchandise inventory decreased $5,000, accounts payable
decreased by $10,000, and depreciation expense of $5,000 was recorded.
During 2007, operating activities
a. used net
cash
of
$10,000. b.
used net cash
of $14,000.
c. provided net
cash of $14,000.
d. provided net
cash of $9,000.
17 - 12
74.

The net income reported on the income statement for the current year
was $205,000. Depreciation recorded on plant assets was $38,000.
Accounts receivable and inventories increased by $2,000 and $8,000,
respectively. Prepaid expenses and accounts payable decreased by
$1,000 and $11,000 respectively. How much cash was provided
by operating activities?
a
.
$
1
8
5
,
0
0
0
b
.
$
2
2
3

,
0
0
0
c
.
$
2
0
5
,
0
0
0
d
.
$
2
3
9
,
0
0
0
75.

The net income reported on the income statement for the current year
was $220,000. Depreciation was $50,000. Account receivable and
inventories decreased by $10,000 and $30,000, respectively. Prepaid
expenses and accounts payable increased, respectively, by $1,000 and
$8,000. How much cash was provided by operating activities?
a
.
$
2
8
1
,
0
0
0
b
.
$
3

1
7
,
0
0
0
c
.
$
3
0
1
,
0
0
0
d
.
$
3
0
9
,
0
0
0
76.

If a gain of $10,000 is incurred in selling (for cash) office equipment


having a book value of $100,000, the total amount reported in the cash
flows from investing activities section of the statement of cash flows is
a
.
$
9
0
,
0
0
0
.
b
.
$

1
1
0
,
0
0
0
.
c
.
$
1
0
0
,
0
0
0
.
d
.
$
1
0
,
0
0
0
.
77.

If a loss of $12,500 is incurred in selling (for cash) office equipment


having a book value of $50,000, the total amount reported in the cash
flows from investing activities section of the statement of cash flows is
a
.
$
3
7
,
5
0
0
.
b
.

$
5
0
,
0
0
0
.
c
.
$
6
2
,
5
0
0
.
d
.
$
1
2
,
5
0
0
.
78.

Harbor Company reported net income of $60,000 for the year ended
December 31, 2008. During the year, inventories decreased by
$12,000, accounts payable decreased by $18,000, depreciation
expense was $20,000 and a gain on disposal of equipment of $9,000
was recorded. Net cash provided by operating activities in 2008 using
the indirect method was
a
.
$
1
1
9
,
0
0

0
.
b
.
$
6
5
,
0
0
0
.
c
.
$
7
7
,
0
0
0
.
d
.
$
5
5
,
0
0
0
.
79.

The third (final) step in preparing the statement


of cash flows is to a. analyze changes in
noncurrent asset and liability accounts.
b. compare the net change in cash with the change in the cash account
reported on the balance sheet.
c. determine net cash provided by
operating activities. d. list the
noncash activities.
The Statement of Cash
Flows

17 - 13
80.

Which one of the following items is not necessary in preparing a


statement of cash flows? a. Determine the change in cash
b. Determine the cash provided by operations
c. Determine cash from financing and
investing activities d. Determine the cash
in all bank accounts

81.

If accounts receivable have increased during the period,


a. revenues on an accrual basis are less than revenues on a cash basis.
b. revenues on an accrual basis are greater than revenues on
a cash basis. c. revenues on an accrual basis are the same as
revenues on a cash basis. d. expenses on an accrual basis are
greater than expenses on a cash basis.

82.

If accounts payable have increased during a period,


a. revenues on an accrual basis are less than revenues on a
cash basis. b. expenses on an accrual basis are less than
expenses on a cash basis.
c. expenses on an accrual basis are greater than expenses on a
cash basis. d. expenses on an accrual basis are the same as
expenses on a cash basis.

83.

Which one of the following affects cash


during a period? a. Recording
depreciation expense
b. Declaration of a cash dividend
c. Write-off of an uncollectible
account receivable d. Payment of
an accounts payable

84.

In calculating cash flows from operating activities using the indirect


method, a gain on the sale of equipment is
a. added to net income.
b. deducted from net income.
c. ignored because it does
not affect cash. d. not
reported on a statement of
cash flows.

85.

Meyer Company reported net income of $50,000 for the year. During the
year, accounts receivable increased by $7,000, accounts payable decreased
by $3,000 and depreciation expense of $5,000 was recorded. Net cash
provided by operating activities for the year is a. $45,000.
b
.
$
6

5
,
0
0
0
.
c
.
$
4
9
,
0
0
0
.
d
.
$
5
0
,
0
0
0
.
86.

Flynn Company reported a net loss of $20,000 for the year ended
December 31, 2008. During the year, accounts receivable decreased
$10,000, merchandise inventory increased $16,000, accounts payable
increased by $20,000, and depreciation expense of $10,000 was recorded.
During 2008, operating activities
a. used net
cash of
$4,000. b.
used net cash
of $16,000.
c. provided net
cash of $4,000. d.
provided net cash
of $16,000.
17 - 14
87.

Starting with net income and adjusting it for items that affected
reported net income but which did not affect cash is called the
a.

d
ir
e
ct
m
et
h
o
d
.
b
.
i
n
d
ir
e
ct
m
et
h
o
d
.
c.
working
capital
method.
d. costbenefit
method.
88.

In calculating net cash provided by operating activities using the


indirect method, an increase in prepaid expenses during a period is
a. deducted
from net
income. b.
added to net
income.
c. ignored because it does not
affect income. d. ignored
because it does not affect
expenses.

89.

Using the indirect method, patent amortization


expense for the period a. is deducted from net
income.
b. causes
cash to
increase. c.
causes cash

to
decrease.
d. is
added to
net
income.
90.

In developing the cash flows from operating activities, most


companies in the U. S. a. use the direct method.
b. use the indirect method.
c. present both the indirect and direct methods in
their financial reports. d. prepare the operating
activities section on the accrual basis.

91.

Each of the following is added to net income in computing net cash


provided by operating activities except
a. amortization expense.
b. an increase in accrued
expenses payable. c. a
gain on sale of equipment.
d. a decrease in inventory.

92.

Which of the following would be subtracted from net income using


the indirect method? a. Depreciation expense
b. An increase in
accounts receivable
c. An increase in
accounts payable d.
A decrease in
prepaid expenses

93.

Which of the following would be added to net income using


the indirect method? a. An increase in accounts receivable
b. An increase in
prepaid expenses
c. Depreciation
expense
d. A decrease in accounts payable

94.

Which of the following would not be an adjustment to net income


using the indirect method?
a. Depreciation Expense
b. An increase in
Prepaid Insurance
c. Amortization
Expense
d. An increase in Land
The Statement of Cash
Flows
17 - 15

95.

In calculating cash flows from operating activities using the indirect


method, a loss on the sale of equipment will appear as a(n)
a. subtraction
from net
income. b.
addition to net
income.
c. addition to cash flow from investing activities.
d. subtraction from cash flow from investing activities.

96.

Which of the following adjustments to convert net income to net


cash provided by operating activities is correct?

a. Accounts Receivable b. Prepaid Expenses


c. Inventory
d. Taxes Payable
Add to Net Income increase increase decrease decrease
Deduct from Net Income decrease decrease increase increase
97.

Which of the following adjustments to convert net income to net


cash provided by operating activities is incorrect?

a. Accounts Receivable b. Prepaid Expenses


c. Inventory
d. Accounts Payable
Add to Net Income decrease increase decrease increase
Deduct from Net Income increase decrease increase decrease
98.

Which of the following adjustments to convert net income to net


cash provided by operating activities is not added to net income?
a. Gain on
Sale of
Equipment b.
Depreciation
Expense
c. Patent
Amortization
Expense d.
Depletion
Expense

99.

Using the indirect method, if equipment is sold at a gain, the


a. sale proceeds received are deducted in the operating
activities section. b. sale proceeds received are added in
the operating activities section.
c. amount of the gain is added in the operating activities section.
d. amount of the gain is deducted in the operating activities section.

100.

A company had net income of $180,000. Depreciation expense is

$26,000. During the year, Accounts Receivable and Inventory increased


$15,000 and $40,000, respectively. Prepaid Expenses and Accounts
Payable decreased $2,000 and $4,000, respectively. There was also a
loss on the sale of equipment of $3,000. How much cash was provided by
operating activities?
a
.
$
1
4
6
,
0
0
0
b
.
$
1
5
2
,
0
0
0
c
.
$
2
2
6
,
0
0
0
d
.
$
2
3
8
,
0
0

0
101.

On the statement of cash flows using the indirect method, patent


amortization expense will a. be added to net income in the operating
section.
b. be deducted from net income in the
operating section. c. appear as an
inflow of cash in the investing section.
d. appear as an outflow of cash in the
investing section.

17 - 16
102.

The indirect and direct methods of preparing the statement of cash


flows are identical except for the
a. significant
noncash activity
section. b.
operating activities
section.
c. investing
activities
section. d.
financing
activities
section.

103.

Land acquired from the issuance of


common stock is reported a. as a financing
activity.
b. as an
investing
activity.
c. as an
operating
activity.
d. in a separate schedule at the bottom of the statement.

104.

If $250,000 of bonds are issued during the year but $150,000 of old
bonds are retired during the year, the statement of cash flows will show
a(n)
a. net increase in
cash of $100,000.
b. net decrease in
cash of $100,000.
c. increase in cash of $250,000 and a decrease in
cash of $150,000. d. net gain on retirement of
bonds of $100,000.

105.

Which of the following changes in retained earnings during a period


will be reported in the financing activities section of the statement of
cash flows?

1. Declaration of a cash dividend paid


during the period. 2. Net income for
the period.
a. 1 b. 2
c
.
N
e
i
t
h
e
r
1
n
o
r
2
.
d
.
B
o
t
h
1
a
n
d
2
.
106.

The statement of cash flows


a. is prepared instead of an income statement under generally
accepted accounting principles.
b. is used to assess an entity's ability to pay dividends and
meet obligations. c. is prepared from comparative income
statements.
d. reflects earnings per share figures on a cash basis and on an
accrual basis in the body of the statement.

107.

In preparing the statement of cash flows, determining the net increase or


decrease in cash requires the use of
a. the adjusted trial balance.
b. the current
period's balance
sheet. c. a
comparative
balance sheet.
d. a comparative income statement.

108.

To determine the net cash provided (used) by operating activities, it is


necessary to analyze a. the current year's income statement.
b. a
comparative
balance sheet.
c. additional
information.
d. all of these.
The Statement of Cash
Flows
17 - 17

109.

Which of the following would not be needed to determine net cash


provided by operating activities?
a. Depreciation expense
b. Change in
accounts
receivable c.
Payment of cash
dividends
d. Change in prepaid expenses

110.

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.

111.

The statement of cash flows will not


provide insight into a. why dividends
were not increased.
b. whether cash flow is greater
than net income. c. the exact
proceeds of a future bond issue.
d. how the retirement of debt was accomplished.

112.

Which of the following transactions would not be classified as a


financing activity? a. Purchase of treasury stock
b. Payment of dividends
c. Issuance of bonds at a discount
d. Purchase of a long-term investment in bonds

113.

A measure that describes the cash remaining from operations after


adjustment for capital expenditures and dividends is
a. adjusted cash
from operations.

b. cash provided
by operations. c.
free cash flow.
d. net cash provided by operating activities.
114.

Free cash flow equals cash provided by


a. operations less capital expenditures and
cash dividends. b. operations less cash
dividends.
c. investing activities less capital expenditures and
cash dividends. d. operations less capital
expenditures.

115.

DVs Pest Control Products has the following information available:


Net Income
Cash Provided by Operations Cash Sales
Capital Expenditures Dividends Paid
What is DVs free cash flow? a. $18,000
$15,000 21,000 65,000 11,000 3,000
b
.
$
1
0
,
0
0
0
c
.
$
7
,
0
0
0
d
.
$
1
,
0
0
0

17 - 18
a116. When listing accounts in the statement of cash flows worksheet,
the accumulated depreciation account is shown
a. with accounts that
have credit balances. b.
with accounts that have
debit balances. c. as a
credit under the
reconciling items. d. as
a debit under the
reconciling items.
a117. In the bottom portion of the statement of
cash flows worksheet, a. inflows of cash
are debits in the reconciling columns.
b. outflows of cash are debits in the reconciling columns.
c. information pertaining to investing and financing
activities only is entered. d. only significant noncash
transactions are entered.
a118. On the statement of cash flows worksheet,
a. significant noncash investing and financing activities are not entered
in the reconciling columns.
b. a decrease in cash will be offset by a debit in the reconciling
items columns at the bottom of the worksheet.
c. an increase in cash will be offset by a debit in the reconciling
items column at the bottom of the worksheet.
d. income statement accounts are listed after balance sheet accounts
in the top half of the worksheet under the indirect method.
a119. Each of the following would be reported under operating activities
except cash receipts a. from sales of goods.
b. from
sales of
investments
. c. of
interest on
loans.
d. of dividends from investments.
a120. Which of the following statements concerning the statement of cash flows is
true?
a. The statement of cash flows is usually more accurate when using the
indirect method. b. If the direct method is used, a supplementary
schedule reconciling the net income to a
net cash from operating activities must still be provided.
c. The statement of cash flows reflects both earnings per share and cash per
share.

d. The statement of cash flows is an optional financial statement for


external reporting purposes.
a121. Carter Company reports the following:
Inventory Accounts Payable
End of Year $25,000
30,000
Beginning of Year $40,000
10,000
If cost of goods sold for the year is $170,000, the amount of cash
paid to suppliers is a. $175,000.
b
.
$
1
6
5
,
0
0
0
.
c
.
$
1
3
5
,
0
0
0
.
d
.
$
2
0
5
,
0
0
0
.

The Statement of Cash


Flows
17 - 19
a122. During the year, Salaries Payable decreased by $6,000. If Salary
Expense amounted to $190,000 for the year, the cash paid to employees
(including deductions from gross pay) is a. $196,000.
b
.
$
1
9
0
,
0
0
0
.
c
.
$
1
8
4
,
0
0
0
.
d
.
$
2
0
2
,
0
0
0
.
a123.

Gary Company reports a $15,000 increase in inventory and a $5,000


increase in accounts payable during the year. Cost of Goods Sold for
the year was $180,000. The cash payments made to suppliers were

a
.
$
1
8
0
,
0
0
0
.
b
.
$
1
9
0
,
0
0
0
.
c
.
$
1
6
0
,
0
0
0
.
d
.
$
1
7
5
,
0
0
0

.
a124. Rader Company had credit sales of $600,000. The beginning accounts
receivable balance was $40,000 and the ending accounts receivable
balance was $140,000. What were the cash collections from customers
during the period?
a
.
$
7
0
0
,
0
0
0
b
.
$
6
0
0
,
0
0
0
c
.
$
5
0
0
,
0
0
0
d
.
$
6
4
0
,

0
0
0
a125. Goren Inc. had cash sales of $300,000 and credit sales of $1,150,000.
The accounts receivable balance increased $15,000 during the year. How
much cash did Goren receive from its customers during the year?
a
.
$
1
,
4
3
5
,
0
0
0
b
.
$
1
,
4
6
5
,
0
0
0
c
.
$
1
,
1
3
5
,
0
0
0
d

.
$
1
,
1
6
5
,
0
0
0
a126. Stine Company had a cost of purchases of $220,000. The comparative
balance sheet analysis revealed a $10,000 decrease in inventory and a
$20,000 increase in accounts payable. What were Stine's cash payments
to suppliers?
a
.
$
2
0
0
,
0
0
0
b
.
$
1
9
0
,
0
0
0
c
.
$
2
3
0
,
0
0

0
d
.
$
2
5
0
,
0
0
0
a127. Wayne Company had an increase in inventory of $40,000. The cost of
goods sold was $80,000. There was a $5,000 decrease in accounts
payable from the prior period. What were Wayne's cash payments to
suppliers?
a
.
$
1
2
5
,
0
0
0
b
.
$
7
5
,
0
0
0
c
.
$
1
1
5
,
0
0

0
d
.
$
8
5
,
0
0
0
a128. Which of the following items does not appear in the statement of cash
flows under the direct method?
a. Cash payments to suppliers
b. Cash collections
from customers c.
Depreciation
Expense
d. Cash from the sale of equipment
17 - 20
a129. Nixon Company has other operating expenses of $90,000. There has
been a decrease in prepaid expenses of $4,000 during the year, and
accrued liabilities are $6,000 larger than in the prior period. What were
Nixon's cash payments for operating expenses?
a
.
$
9
2
,
0
0
0
b
.
$
8
8
,
0
0
0
c

.
$
8
0
,
0
0
0
d
.
$
9
0
,
0
0
0
a130.

Carsen Corporation shows income tax expense of $90,000. There


has been a $5,000 decrease in federal income taxes payable and a
$7,000 increase in state income taxes payable during the year. What
was Carsen's cash payment for income taxes?
a
.
$
9
0
,
0
0
0
b
.
$
8
8
,
0
0
0
c
.

$
8
5
,
0
0
0
d
.
$
9
2
,
0
0
0
a131. Which of the following would not appear in the operating activities
section of a statement of cash flows prepared under the direct method?
a. Cash
receipts from
customers b.
Cash paid for
income taxes
c. Gain on
sale of
equipment
d. Cash
paid to
employees
a132. The cost of goods sold during the year was $165,000. Merchandise
inventory decreased by $6,000 during the year and accounts payable
decreased by $3,000 during the year. Using the direct method of
reporting cash flows from operating activities, cash payments for
merchandise total
a
.
$
1
6
8
,
0
0
0
.

b
.
$
1
6
2
,
0
0
0
.
c
.
$
1
5
6
,
0
0
0
.
d
.
$
1
7
4
,
0
0
0
.
a133. Bent Company reports a $20,000 increase in inventory and a
$5,000 decrease in accounts payable during the year. Cost of Goods
Sold for the year was $150,000. Using the direct method of reporting
cash flows from operating activities, cash payments made to suppliers
were
a
.
$
1
5

0
,
0
0
0
.
b
.
$
1
6
5
,
0
0
0
.
c
.
$
1
7
5
,
0
0
0
.
d
.
$
1
3
5
,
0
0
0
.
a134. During 2008, Unruh Company had $160,000 in cash sales and
$1,400,000 in credit sales. The accounts receivable balances were
$180,000 and $212,000 at December 31, 2007 and 2008, respectively.
Using the direct method of reporting cash flows from operating
activities, what was the total cash collected from all customers during

2008?
a
.
$
1
,
3
6
8
,
0
0
0
b
.
$
1
,
5
9
2
,
0
0
0
c
.
$
1
,
5
6
0
,
0
0
0
d
.
$
1
,
5
2

8
,
0
0
0
The Statement of Cash
Flows
17 - 21
a135. Logan Company has other operating expenses of $260,000. There has
been an increase in prepaid expenses of $16,000 during the year, and
accrued liabilities are $24,000 lower than in the prior period. Using the
direct method of reporting cash flows from operating activities, what
were Logan's cash payments for operating expenses?
a
.
$
2
4
8
,
0
0
0
b
.
$
2
5
2
,
0
0
0
c
.
$
2
2
0
,
0
0
0

d
.
$
3
0
0
,
0
0
0
Additional Multiple Choice Questions
136.

Which of the following steps is not required in preparing the


statement of cash flows? a. Determine the change in cash.
b. Determine the net cash provided by
operating activities. c. Determine cash
from investing and financing activities. d.
Determine the change in current assets.

137.

Financing activities involve


a. lending money to other entities and
collecting on those loans. b. cash receipts from
sales of goods and services.
c. acquiring and disposing of productive
long-lived assets. d. long-term liability
and owners' equity items.

138.

The information to prepare the statement of cash flows usually comes


from each of the following except
a. the comparative
balance sheet. b.
the retained
earnings statement.
c. additional
information.
d. the current income statement.

139.

The statement of cash flows is prepared from all of the


following except a. the adjusted trial balance.
b. comparative
balance sheets.
c. selected
transaction
data.
d. the current income statement.

140.

The information in a statement of cash flows will not help investors to


assess the entity's ability to

a. generate future cash flows.


b. obtain favorable
borrowing terms at a bank. c.
pay dividends.
d. pay its obligations when they become due.
141.

In converting net income to net cash provided by operating activities,


under the indirect method:
a. decreases in accounts receivable and increases in prepaid
expenses are added. b. decreases in inventory and increases in
accrued liabilities are added.
c. decreases in accounts payable and decreases in inventory are deducted.
d. increases in accounts receivable and increases in accrued liabilities are
deducted.

17 - 22
142.

In the Freyfogle Company, land decreased $60,000 because of a cash


sale for $60,000, the equipment account increased $20,000 as a result
of a cash purchase, and Bonds Payable increased $70,000 from an
issuance for cash at face value. The net cash provided by investing
activities is
a
.
$
6
0
,
0
0
0
.
b
.
$
1
1
0
,
0
0
0
.
c
.
$
4

0
,
0
0
0
.
d
.
$
5
0
,
0
0
0
.
a143.

Cribbets Company uses the direct method in determining net cash


provided by operating activities, During the year, operating
expenses were $260,000, prepaid expenses increased $20,000, and
accrued expenses payable increased $30,000. Cash payments for
operating expenses were
a
.
$
2
1
0
,
0
0
0
.
b
.
$
3
1
0
,
0
0
0
.
c

.
$
2
7
0
,
0
0
0
.
d
.
$
2
5
0
,
0
0
0
.
a144. Bainbridge Company uses the direct method in determining net
cash provided by operating activities. The income statement shows
income tax expense $60,000. Income taxes payable were $25,000 at
the beginning of the year and $18,000 at the end of the year. Cash
payments for income taxes are
a
.
$
5
3
,
0
0
0
.
b
.
$
6
0
,
0
0

0
.
c
.
$
6
7
,
0
0
0
.
d
.
$
7
8
,
0
0
0
.
a145. When a worksheet is used, all but one of the following statements is
correct. The incorrect statement is
a. Reconciling items on the worksheet are not journalized or posted.
b. The bottom portion of the worksheet shows the statement of cash flows
effects.
c. The balance sheet accounts portion of the worksheet is divided into
two parts: assets, and liabilities and stockholders' equity.
d. Each line pertaining to a balance sheet account should foot across.

BRIEF EXERCISES
BE 146
Selected transactions for the Eldon Company are listed below.
1. Collected accounts receivable.
2. Declared and paid dividends
on common stock. 3. Sold longterm investments for cash.
4. Issued stock for equipment.
5. Repaid five
year note

payable. 6.
Paid employee
wages.
7. Converted bonds payable
to common stock. 8.
Acquired long-term
investment with cash.
9. Sold buildings and
equipment for cash. 10.
Sold merchandise to
customers.
Instructions
Classify each transaction as either (a) an operating activity, (b) an
investing activity, (c) a financing activity, or (d) a noncash investing and
financing activity.

BE 147
Bertucci Company had net income of $204,000 in 2008. Depreciation
expense for the year is $45,000. During the year, Accounts Receivable
increased $9,000 and Prepaid Expenses decreased $1,000. The company
also sold equipment at a loss of $2,000.
Instructions
Calculate net cash flows from operating activities using the indirect method.
BE 148
During 2008, Baxter Company sold a building with a book value of $145,000
for proceeds of $132,000. The company also sold long-term investments for
proceeds of $45,000. The company purchased land and a new building for
$320,000 by signing a long-term note payable. No other transactions impacted
long-term asset accounts during 2008.
Instructions
Compute net cash flows from investing activities.
BE 149
Mover Company issued common stock for proceeds of $14,000 during 2008.
The company paid dividends of $2,000. The company also issued a long-term
note payable for $30,000 in exchange for equipment during the year. The
company sold treasury stock that had a cost of $2,000 for $4,000.
Instructions
Compute net cash flows from financing activities.

BE 150
At January 1, 2008, Bergman Enterprises reported a balance in the
Equipment account of $45,000. During the year the company purchased
equipment with a cost of $60,000 and sold equipment with a book value of
$30,000. The company reported a loss on the sale of equipment of $2,000.
Assume the indirect method is used.
Instructions
Determine what amount will be reported in (a) the operating activities
section and (b) the investing activities section with regard to the purchase and
sale of equipment.

BE 151
Assume the indirect method is used to compute cash flows from operations. For
each item listed below, indicate the effect on net income in arriving at cash flows
from operations by choosing one of the following code letters.
C
ode Cash Flows From Operating Activities
Add
to
Net
Income
A

Deduct

from

Net

D
1. Increase in
accounts receivable
2. Increase in
inventory
3. Decrease in
prepaid expenses
4. Decrease in
accounts payable
5. Increase in
accrued liabilities
6. Increase in
income taxes payable
7. Depreciation
expense
8. Loss on sale of investment
9. Gain on
disposal of
equipment 10.
Amortization
expense
BE 152

Income

Dutton Company prepared the tabulation below at December 31, 2008.


Net Income ..............................................................................................................
$275,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $25,000......................................................................
Decrease in accounts receivable, $55,000.....................................................
Increase in inventory, $12,000 .......................................................................
Decrease in accounts payable, $6,600 ..........................................................
Increase in income taxes payable, $1,500 .....................................................
Loss on sale of land, $5,000...........................................................................
Net cash provided (used) by operating activities............................................
Instructions
Show how each item should be reported in the statement of cash flows. Use
parentheses for deductions.
BE 153
Daimler Enterprises reported cash flow from operations of $342,000. The
company made capital expenditures of $112,000 and paid dividends of $34,000.
Instr
uctio
ns
Comp
ute fre
e cash
flow.
BE 154
Schick Company reported cost of goods sold of $192,000 on its 2008 income
statement. The companys beginning inventory was $35,000. The ending
inventory was valued at $40,000. The Accounts Payable balance at January 1
was $25,000. The December 31 balance in Accounts Payable was $22,000.
Instructions
Compute cash payments to suppliers.
BE 155

Hiller Company had total operating expenses of $135,000 in 2008, which


included Depreciation Expense of $25,000. Also during 2008, prepaid
expenses decreased by $9,000 and accrued expenses increased by $5,500.
Instructions
Calculate the amount of cash payments for operating expenses in 2008 using the direct
method.

EXERCISES
Ex. 156
Classify each of the following as a(n):
A.
Op
era
tin
g
Act
ivit
y
B.
Inv
esti
ng
Act
ivit
y
C.
Fin
anc
ing
Act
ivit
y
1
Issu
anc
e of
bon
ds.
2.
Sale
of

equi
pme
nt.
3. Amortization expense.
4. Purchase of treasury stock.
5. Receipt of
dividends on
investment. 6.
Purchase of land.
Ex. 157
Selected transactions of Eller Company are listed below.
1. Common stock is sold for cash
above par value. 2. Bonds
payable are issued for cash at a
discount.
3. Interest receivable on a short-term note
receivable is collected. 4. Land is sold for cash
at book value.
5. Accounts payable are paid in cash.
6. Equipment is purchased by signing a 3-year,
10% note payable. 7. Cash dividends on
common stock are declared and paid.
8. 100 shares of XYZ common stock are
purchased for cash. 9. Merchandise is sold
to customers for cash.
10. Bonds payable are converted into common stock.
Instructions
Classify each transaction as either (a) an operating activity, (b) an
investing activity, (c) a financing activity, or (d) a noncash investing and
financing activity.
Ex. 158
(a) Identify several alternatives for presenting significant noncash
activities in financial statements.
(b) Give three examples of significant noncash transactions.
Ex. 159
The following information is available for Snider Company:
Receipts from customers Dividends from stock investments Proceeds from sale

of equipment Proceeds from issuance of stock Payments for goods


Payments for operating expenses Interest paid
Taxes paid Dividends paid
$180,000 3,000 18,000 90,000 100,000 70,000
5,000 4,000 20,000
Instructions
Based on the preceding information, compute the net cash provided by operating
activities.
Ex. 160
Pierce Company reported net income of $200,000 for the current year.
Depreciation recorded on buildings and equipment amounted to $80,000 for
the year. Balances of the current asset and current liability accounts at the
beginning and end of the year are as follows:
Cash Accounts receivable Inventories
Prepaid expenses Accounts payable Income taxes payable
End of Year $20,000
24,000 50,000 7,500 12,000 1,600
Beginning of Year $15,000
32,000 65,000 5,000 18,000 1,200
Instructions
Prepare the cash flows from the operating activities section of the statement
of cash flows using the indirect method.
Ex. 161
Neal Company reported net income of $120,000. For 2008, depreciation was
$30,000, and the company reported a gain on sale of investments of
$10,000. Accounts receivable increased $25,000 and accounts payable
decreased $15,000.
Instructions
Compute net cash provided by operating activities using the indirect method.

Ex. 162
Assuming a statement of cash flows is prepared, indicate the reporting of the
transactions and events listed below by major categories on the statement. Use
the following code letters to indicate the appropriate category under which the
item would appear on the statement of cash flows.
ode Cash Flows From Operating
Activities
Add to Net Income
A Deduct from Net Income

D Cash Flows From Investing


Activities
IA
Cash Flows From Financing Activities

FA
Cat
ego
ry

1.

Common stock is issued for cash at an amount

above par value. 2.

Merchandise inventory

increased during the period.


3.

Depreciation expense

recorded for the period. 4.


Building was purchased for
cash.
5.

Bonds payable were acquired and retired at

their carrying value. 6.

Accounts payable

decreased during the period.


7.

Prepaid expenses decreased

during the period. 8.

Treasury

stock was acquired for cash.


9.

Land is sold for cash at an amount

equal to book value. 10.

Patent

amortization expense recorded for a period.


Ex. 163
A comparative balance sheet for Lyon Company appears below:
LYON
COMPA
NY
Comparat
ive Balan
ce Sheet
Assets Cash
Accounts receivable Inventory
Prepaid expenses Long-term investments Equipment
Accumulated depreciationequipment Total assets
Dec. 31, 2008
$ 23,000 18,000 27,000 6,000
-0-60,000
(18,000) $116,000

Dec. 31, 2007


$10,000 14,000 18,000 9,000 18,000 32,000
(14,000) $87,000
Liabilities and Stockholders' Equity
Accounts payable Bonds payable Common stock
Retained earnings
Total liabilities and stockholders' equity
$ 17,000 37,000 40,000
22,000 $116,000
$ 7,000 47,000 23,000
10,000 $87,000
Additional information:
1. Net income for the year ending December 31,
2008 was $24,000. 2. Cash dividends of $12,000
were declared and paid during the year.
3. Long-term investments that had a cost of $18,000 were
sold for $16,000. 4. Sales for 2008 were $120,000.
Instructions
Prepare a statement of cash flows for the year ended December 31, 2008,
using the indirect method.
Ex. 164
A comparative balance sheet for Jenner Corporation is presented below:

Cash Accounts receivable (net) Prepaid insurance


Land Equipment
Accumulated depreciation Total Assets
JENNER CORPORATION Comparative Balance Sheet
Assets
2008

2007

$ 36,000
$ 31,000 80,000
60,000 25,000
17,000 18,000
40,000 70,000
60,000
(20,000)
(13,000) $209,000
$195,000
Liabilities and Stockholders' Equity Accounts payable
$ 11,000 Bonds
payable
27,000 Common stock
140,000 Retained earnings
31,000
Total liabilities and stockholders' equity
$209,000

$ 6,000 19,000 115,000


55,000 $195,000
Ex
164
(con
t.)
Add
ition
al
info
rmat
ion:
1. Net loss for 2008 is $15,000.
2. Cash dividends of $9,000 were declared and paid in 2008.
3. Land was sold for cash at a loss of $7,000. This was the only land transaction
during the year.
4. Equipment with a cost of $15,000 and accumulated depreciation of
$10,000 was sold for $5,000 cash.
5. $12,000 of bonds were retired during the year at carrying (book) value.
6. Equipment was acquired for common stock. The fair market value of the
stock at the time of the exchange was $25,000.
Instructions
Prepare a statement of cash flows for the year ended 2008, using the indirect method.
Ex. 165
The following information is available for Fryer Corporation for the year
ended December 31, 2008:
Collection of principal on long-term loan to a supplier Acquisition of
equipment for cash
Proceeds from the sale of long-term investment at book value Issuance of
common stock for cash
Depreciation expense
Redemption of bonds payable at carrying (book) value Payment of cash
dividends
Net income
Purchase of land by issuing bonds payable
$15,000 10,000 27,000 20,000 35,000 24,000 14,000 30,000 40,000

In addition, the following information is available from the comparative balance


sheet for Fryer at the end of 2007 and 2008:
Cash Accounts receivable (net) Prepaid insurance
Total current assets
Accounts payable Salaries payable Total current liabilities
2008
$ 87,000 20,000
17,000 $124,000
$ 25,000
4,000 $ 29,000
2007
$14,000 15,000
13,000 $42,000
$19,000
7,000 $26,000
Instructions
Prepare Fryer's statement of cash flows for the year ended December 31, 2008
using the indirect method.
17 - 36
Ex. 166
Trent Company prepared the tabulation below at December 31, 2008.
Net
Income ..............................................................................................................
$300,000 Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense,
$35,000......................................................................
Increase in accounts receivable,
$60,000 ...................................................... Decrease in
inventory,
$13,000......................................................................
Amortization of patent,
$4,000........................................................................
Increase in accounts payable,
$5,600 ............................................................ Decrease in
interest receivable,
$4,000 ......................................................... Increase in
prepaid expenses,
$6,000............................................................ Decrease in
income taxes payable,
$1,500.................................................... Gain on sale of

land,
$5,000........................................................................... Net
cash provided (used) by operating
activities............................................
Instructions
Show how each item should be reported in the statement of cash flows. Use
parentheses for deductions.
Ex. 167
The following information is available for Visser Corporation:
Capital expenditures Cash dividends
Cash provided by operations Net income
Sales
$115,000 65,000 200,000 130,000
500,000
Instructions
Compute Visser Corporation's free cash flow.
Ex. 168
Leiter Company has begun a worksheet for preparing a statement of cash
flows. The following additional information is provided:
1. Cash dividends of $15,000 were paid during the year.
2. Land which originally cost $60,000 was
sold for $55,000. 3. Common stock was
issued at par value for cash.
Instructions
Complete the worksheet for Leiter Company.
aEx. 168

(cont.)
L
E
I
T
E
R
C
O
M
P
A
N
Y
W
o
r
k

s
h
e
et
Statement of Cash Flows
For the Year Ended December 31, 2008
Balance Sheet Accounts Debits
Cash Accounts receivable Inventory
Land Equipment
Total
Credits Accounts payable Bonds payable
Accumulated depreciation equipment
Common stock Retained earnings
Total
Statement of Cash Flows Effects Operating activities
Net income
Balance 12/31/07
30,000 40,000 90,000 60,000 131,000 351,000
15,000 25,000
81,000 170,000
60,000 351,000
Reconciling Items Debits Credits

21,000
Balance 12/31/08
55,000 58,000 110,000
-0-145,000 368,000

12,000 10,000
95,000 180,000
71,000 368,000
Ex. 169
Dolan Company's income statement showed revenues of $250,000 and
operating expenses of $160,000. Accounts receivable decreased by $60,000
and accounts payable increased by $40,000 during the year.
Instructions
Compute (a) cash receipts from customers and (b) cash payments for operating
expenses using the direct method.
Ex. 170
Banner Company had total operating expenses of $140,000 in 2008, which
included Depreciation Expense of $20,000. Also, during 2008, prepaid
expenses increased by $5,000 and accrued expenses decreased by $6,700.
Instructions
Calculate the amount of cash payments for operating expenses in 2008 using the direct
method.
Ex. 171
The general ledger of Lopez Company provides the following information:
Accounts Receivable Inventory Accounts Payable
End of Year $ 55,000
350,000 40,000
Beginning of Year $ 94,000
210,000 65,000
The company's net sales for the year was $2,100,000 and cost of goods
sold amounted to $1,500,000.
Inst
ructi
ons
Com
pute
the
follo
wing
:
(a) Cash
receipts from
customers. (b)
Cash
payments to
suppliers.

Ex. 172
The income statement of Redman Inc. for the year ended December 31,
2008, reported the following condensed information:
Service revenue Operating expenses Income from operations Income tax expense
Net income
$600,000
360,000 240,000
60,000 $180,000
Redman's balance sheet contained the following comparative data at December 31:
Accounts receivable Accounts payable Income taxes payable
2008
$50,000 35,000 6,000
2007
$40,000 50,000 3,000
Redman has no depreciable assets. Accounts payable pertains to operating expenses.
Instructions
Prepare the operating activities section of the statement of cash flows using the direct
method.
Ex. 173
The income statement of Haslett Company is shown below:
HAS
LET
T
COM
PAN
Y
Inco
me St
ateme
nt
For the Year Ended December 31, 2008
Sales
Cost of goods sold Gross profit Operating expenses
Selling expenses Administrative expense Depreciation expense
Amortization expense
Net income

$500,000 700,000 90,000


30,000
$8,000,000
5,400,000 2,600,000

1,320,000 $1,280,000
Ex. 173

(cont.)

Additional information:
1. Accounts receivable increased
$500,000 during the year. 2. Inventory
increased $250,000 during the year.
3. Prepaid expenses increased $200,000 during the year.
4. Accounts payable to merchandise suppliers increased
$150,000 during the year. 5. Accrued expenses payable increased
$180,000 during the year.
Instructions
Prepare the operating activities section of the statement of cash flows for
the year ended December 31, 2008, for Haslett Company, using the direct
method.
Ex. 174
The financial statements of Larkin Company appear below:

Cash Accounts receivable Merchandise inventory


Property, plant, and equipment Accumulated depreciation
Total
LARKIN COMPANY Comparative Balance Sheet December 31
Assets

2008
$ 43,000
50,000
(20,000)

2007
$ 23,000 26,000
34,000 25,000
78,000
(24,000) $124,000$126,000

Accounts payable Income taxes payable Bonds payable Common stock

15,000

Retained earnings
Total
Liabilities and Stockholders' Equity
$ 17,000 13,000 7,000 41,000
46,000 $124,000
$ 23,000 8,000 33,000 24,000
38,000 $126,000
LA
RK
IN
CO
MP
AN
Y
Inc
om
e
Sta
tem
ent
For the Year Ended December 31, 2008
Sales
Cost of goods sold Gross profit Selling expenses
Administrative expenses Income from operations Interest expense Income before
income taxes Income tax expense
Net income

$20,000
16,000
$360,000
280,000 80,000
36,000 44,000
4,000 40,000
12,000 $ 28,000
The following additional data were provided:
1. Dividends declared and paid were $20,000.
2. During the year, equipment was sold for $12,000 cash. This
equipment cost $28,000 originally and had a book value of $12,000 at the
time of sale.
3. All depreciation expense is in the selling
expense category. 4. All sales and purchases
are on account.
5. Accounts payable pertain to merchandise suppliers.
6. All operating expenses except for depreciation were paid in cash.

Instructions
Prepare a statement of cash flows for Larkin Company using the direct method.
Ex. 175
Condensed financial data of Stiner Company appear below:

Cash Accounts receivable Inventories


Prepaid expenses Investments
Plant assets Accumulated depreciation
Total
STINER COMPANY Comparative Balance Sheet December 31
Assets

2008
$ 71,000
19,000
(65,000)

2007
$ 35,000 85,000
25,000 90,000
(60,000) $635,000

53,000 120,000
75,000 315,000
$510,000

132,000
250,000

Accounts payable Accrued expenses payable Bonds payable Common stock


Retained earnings
Total
Liabilities and Stockholders' Equity
$ 93,000 29,000 130,000 245,000
138,000 $635,000
$ 75,000 24,000 160,000 170,000
81,000 $510,000
STI
NE
RC
O
MP
AN
Y
Inc
om
e
Sta
tem

ent
For the Year Ended December 31, 2008
Sales Less:
Cost of goods sold
Operating expenses (excluding depreciation) Depreciation expense
Income taxes Interest expense
Loss on sale of plant assets Net income
$280,000 60,000 17,000 15,000 18,000
3,000
$470,000

393,000 $ 77,000
Additional information:
1. New plant assets costing $90,000 were purchased for cash in 2008.
2. Old plant assets costing $25,000 were sold for $10,000 cash when book
value was $13,000. 3. Bonds with a face value of $30,000 were converted into
$30,000 of common stock.
4. A cash dividend of $20,000 was declared and paid
during the year. 5. Accounts payable pertain to
merchandise purchases.
Instructions
Prepare a statement of cash flows for the year using the direct method.
Ex. 176
The income statement for Javier Company showed cost of goods
$95,000 and operating expenses of $50,000. The comparative
sheets for the year show that inventory decreased $3,000,
expenses increased $7,000, accounts payable increased $4,000, and
expenses payable decreased $5,000.

sold of
balance
prepaid
accrued

Instructions
Compute (a) cash payments to suppliers and (b) cash payments for operating
expenses using the direct method.
COMPLETION STATEMENTS
177. A statement of cash flows summarizes the operating,
, and activities of an entity.
178. The cash effects of selling goods and services appears in the
activities section of a statement of cash flows.

179. The operating activities section of the statement of cash flows may be
prepared using the
method or the
method.
180. Net income from operations is generally not the same as cash provided
from operations because revenues and expenses are recognized in
the income statement on the
basis.
181. Using the indirect approach, noncash charges in the income
statement are
to net income and noncash credits are
to compute cash provided by operations.
182. If accounts receivable increase during a period, revenues on an accrual
basis are
than revenues on a cash basis.
183. The sale of equipment at less than its book value is a(n)
of cash that is reported in the
activities section.
184. Free
equals cash provided by operations less capital
expenditures and cash dividends.
a185. Under the direct method, noncash charges, such as depreciation, are
in the statement of cash flows.
a186. Under the direct method, the two largest classes of items in the
operating activities section for a merchandising company are cash
and cash
.
a187. Cost of goods sold for the year amounted to $150,000, and during
the year, accounts payable
by
$8,000 and inventory
by $7,000 resulting in cash paid to suppliers
of $135,000.
a188. In computing cash payments for operating expenses, a decrease in prepaid
expenses is
and an increase in accrued expenses payable is
to (from) operating expenses, exclusive of depreciation.
a189. In computing cash payments for income taxes, a decrease in income taxes
payable is
to (from) income tax expense.
MATCHING

Set 1 Indirect Method


190. For each of the following items, indicate by using the appropriate code
letter, how the item should be reported in the statement of cash flows,
using the indirect method.
A. Added to net income
B. Deducted from net income
C. Cash outflow
investing activity
D. Cash inflow
investing activity E.
Cash outflow
financing activity F.
Cash inflow
financing activity
G. Significant noncash investing and financing activity
1. Decrease in accounts payable during a period
2. Declaration and payment of a cash dividend.
3. Loss on sale of land.
4. Decrease in accounts receivable during a period.
5. Redemption of bonds for cash.
6. Proceeds from sale of equipment at book value.
7. Issuance of common stock for cash.
8. Purchase of a building for cash.
9. Acquisition of land in exchange for common stock.
10. Increase in merchandise inventory during a period.

Set 2 Direct Method


a191. For each of the following items, indicate by using the appropriate code
letter, how the item should be reported in the statement of cash flows,
using the direct method.
A. Added in determining cash receipts from customers
B. Deducted in determining cash
receipts from customers C.
Added in
determining cash payments to suppliers

D. Deducted in determining cash


payments to suppliers E.
Cash
outflowinvesting activity
F. Cash inflow
investing activity
G. Cash outflow
financing
activity H. Cash
inflow
financing activity
I. Significant noncash investing
and financing activity J.
Is not
shown
1. Decrease in accounts payable during a period.
2. Declaration and payment of a cash dividend.
3. Decrease in accounts receivable during a period.
4. Depreciation expense.
5. Conversion of bonds payable into common stock.
6. Decrease in merchandise inventory during a period.
7. Sale of equipment for cash at book value.
8. Issuance of preferred stock for cash.
9. Purchase of land for cash.
10. Loss on sale of a plant asset.

SHORT-ANSWER ESSAY QUESTIONS


S-A E 192
The statement of cash flows is the only required financial statement that is not
prepared from an adjusted trial balance. What are the sources of information
for preparing a statement of cash flows? Explain how the accrual basis of
accounting affects the statement of cash flows.
S-A E 193
Cash flows from operating activities can be calculated using the indirect or
direct method. Briefly describe how the two methods differ yet arrive at the
same information about the net cash flows from operating activities.

S-A E 194
How is it possible for a company to suffer a net loss for a given year, yet
produce a positive net cash flow from operating activities?
S-A E 195 (Ethics)
Flint Hills Company's most recent financial statements showed dismal
performance. There was a net loss of $10,000 and the statement of cash
flows showed a net cash decrease in all categories. The company
president called all the managers together and asked them to do all they
could to make sure the next quarter's performance was better.
Mel Law, manager of the manufacturing division, sold off old manufacturing
equipment. He also reclassified several workers to part time (30 hours per
week) and hired additional temporary workers to take up the slack. This
saved the company money, since part-time workers do not have the same
insurance and other benefits as full-time workers.
John Reed, financial manager, immediately suspended payments on all
accounts except those on which interest would accrue. He also instituted
aggressive collection procedures.
Required:
1. Were Mel Law's actions ethical? Explain.
2. Were John Reed's actions ethical? Explain.
3. Were the company president's actions ethical? Explain.
S-A E 196 (Communication)
You are the accountant for a small manufacturing firm. Your company is
privately held, so there is no current requirement to issue financial statements
using GAAP. You were hired four years ago, and at that time you instituted a
cash budgeting system. Presently, you present a schedule of predicted cash
sources and cash needs at the end of each week for the following week.
The Statement of Cash
Flows
17 - 53
S-A E 196 (cont.)
Ken Harmon, the company's president, has asked whether a statement of cash
flows would also be useful.
Required:
Prepare a short memorandum to the president indicating whether you believe
such an addition to the financial statements to be useful. Include in your memo
the benefits that might be expected from a statement of cash flows and
whether those are different from the benefits of a cash sources and cash needs
listing.

CHAPTER 18
FINANCIAL STATEMENT ANALYSIS
CHAPTER STUDY OBJECTIVES
1. Discuss the need for comparative analysis.
2. Identify the tools of financial statement analysis.
3. Explain and apply horizontal (trend) analysis.
4. Describe and apply vertical analysis.
5. Identify and compute ratios used in analyzing a firm's liquidity,
profitability, and solvency.
6.

Understand the concept of


irregular items are presented.

earning

power,

and

indicate

how

7. Understand the concept of quality of earnings.


TRUE-FALSE STATEMENTS
1.

Intracompany comparisons of the same financial statement items


can often detect changes in financial relationships and significant
trends.

2.

Calculating financial ratios is a financial reporting requirement under


generally accepted accounting principles.

3.

Measures of a company's liquidity are concerned with the frequency


and amounts of dividend payments.

4.

Analysis of financial statements is enhanced with the use of comparative data.

5.

Comparisons of company data with industry averages can provide


some insight into the company's relative position in the industry.

6.

Vertical and horizontal analyses are concerned with the format used to
prepare financial statements.

7.

Horizontal, vertical, and circular analyses are the most common


tools of financial statement analysis.

8.

Horizontal analysis is a technique for evaluating a financial statement


item in the current year with other items in the current year.

9.

Another name for trend analysis is horizontal analysis.

10.

If a company has sales of $110 in 2008 and $154 in 2009, the

percentage increase in sales from 2008 to 2009 is 140%.


11.

In horizontal analysis, if an item has a negative amount in the base


year, and a positive amount in the following year, no percentage change
for that item can be computed.

12.

Common size analysis expresses each item within a financial


statement in terms of a percent of a base amount.

13. Vertical analysis is a more sophisticated analytical tool than horizontal


analysis.
14. Vertical analysis is useful in making comparisons of companies of different
sizes.
15.

Meaningful analysis of financial statements will include either


horizontal or vertical analysis, but not both.

16.

Using vertical analysis of the income statement, a company's net


income as a percentage of net sales is 10%; therefore, the cost of
goods sold as a percentage of sales must be 90%.

17.

In the vertical analysis of the income statement, each item is


generally stated as a percentage of net income.

18.

A ratio can be expressed as a percentage, a rate, or a proportion.

19.

A solvency ratio measures the income or operating success of an


enterprise for a given period of time.

20.

The current ratio is a measure of all the ratios calculated for the current year.

21.

Inventory turnover measures the number of times on the average the


inventory was sold during the period.

22.

Profitability ratios are frequently used as a basis for evaluating


management's operating effectiveness.

23.

The rate of return on total assets will be greater than the rate of
return on common stockholders' equity if the company has been
successful in trading on the equity at a gain.

24.

From a creditor's point of view, the higher the total debt to total assets
ratio, the lower the risk that the company may be unable to pay its
obligations.

25.

A current ratio of 1.2 to 1 indicates that a company's current assets


exceed its current liabilities.

26.

Using borrowed money to increase the rate of return on common


stockholders' equity is called "trading on the equity."

27.

When the disposal of a significant segment occurs, the income


statement should report both income from continuing operations and
income (loss) from discontinued operations.

28.

An event or transaction should be classified as an extraordinary item if


it is unusual in nature or if it occurs infrequently.

29.

Variations among companies in the application of generally


accepted accounting principles may reduce quality of earnings.

30.

Pro forma income usually excludes items that the company thinks
are unusual or nonrecurring.

Additional True-False Questions


31.

The three basic tools of analysis are horizontal analysis, vertical


analysis, and ratio analysis.

32. A percentage change can be computed only if the base amount is zero or
positive.
33. In vertical analysis, the base amount in an income statement is usually net
sales.
34.

Profitability ratios measure the ability of the enterprise to survive over


a long period of time.

35.

The days in inventory is computed by multiplying inventory turnover by 365.

36.

Extraordinary items are reported net of applicable taxes in a separate


section of the income statement.

MULTIPLE CHOICE QUESTIONS


37.

Which one of the following is primarily interested in the


liquidity of a company? a. Federal government
b. Stockholders
c.
Long
-term
credi
tors
d.
Short
-term
credi
tors

38.

Which one of the following is not a characteristic generally evaluated in


analyzing financial statements?
a. Liquidity
b
.
P
r
o
f
i
t
a
b
i
l
i
t
y
c
.
M
a
r
k
e
t
a
b
i
l
i
t
y
d
.
S
o
l
v
e
n
c
y

39.

In analyzing the financial statements of a company, a single item

on the financial statements


a. should be reported in bold-face type.
b. is more meaningful if compared to other
financial information. c. is significant only if
it is large.
d. should be accompanied by a footnote.
40.

Short-term creditors are usually most


interested in evaluating a. solvency.
b. liquidity.
c
.
m
a
r
k
e
t
a
b
i
l
i
t
y
.
d
.
p
r
o
f
i
t
a
b
i
l
i
t
y
.

41.

Long-term creditors are usually most


interested in evaluating a. liquidity and
solvency.
b. solvency

and
marketabilit
y. c.
liquidity
and
profitability.
d. profitability and solvency.
42.

Stockholders are most


interested in evaluating a.
liquidity and solvency.
b.
profitabilit
y and
solvency.
c.
liquidity
and
profitabilit
y.
d. marketability and solvency.
Financial Statement
Analysis
18 - 7

43.

A stockholder is interested in the


ability of a firm to a. pay
consistent dividends.
b. appreciate
in share price.
c. survive
over a long
period. d. all
of these.

44.

Comparisons of financial data made within a


company are called a.
intracompany comparisons.
b. interior comparisons.
c.
intercompany c
omparisons. d.
intramural
comparisons.

45.

A technique for evaluating financial statements that expresses the


relationship among selected items of financial statement data is
a.
common
size

analysis. b.
horizontal
analysis.
c. ratio analysis.
d. vertical analysis.
46.

Which one of the following is not a tool in financial


statement analysis? a. Horizontal analysis
b.
Circ
ular
anal
ysis
c.
Verti
cal
anal
ysis
d.
Rati
o
anal
ysis

47.

In analyzing financial statements,


horizontal analysis is a a. requirement.
b. tool.
c
.
p
r
i
n
c
i
p
l
e
.
d
.
t
h
e
o
r
y

.
48.

Horizontal
analysis is also
called a. linear
analysis.
b.
verti
cal
anal
ysis.
c.
tren
d
anal
ysis.
d. common size analysis.

49. Vertical analysis


is also known as a.
perpendicular analysis.
b.
common
size
analysis. c.
trend
analysis.
d. straight-line analysis.
50.

In ratio analysis, the ratios are never


expressed as a a. rate.
b.
neg
ativ
e
fig
ure
. c.
per
cen
tag
e.
d. simple proportion.

18 - 8
51.

The formula for horizontal analysis of changes since the base period is
the current year amount
a. divided by the base year amount.
b. minus the base year amount divided by the
base year amount. c. minus the base year
amount divided by the current year amount. d.

plus the base year amount divided by the base


year amount.
52.

Horizontal analysis evaluates a series of financial statement data


over a period of time a. that has been arranged from the highest
number to the lowest number.
b. that has been arranged from the lowest number to the
highest number. c. to determine which items are in
error.
d. to determine the amount and/or percentage increase or decrease
that has taken place.

53.

Horizontal analysis evaluates


financial statement data a. within
a period of time.
b.
over a
period
of
time.
c. on
a
certain
date.
d. as it may appear in the future.

54.

Assume the following sales data for a company:


2010
$1,000,000
2009
900,000
2008
750,000
2007
600,000
If 2007 is the base year, what is the percentage increase in sales
from 2007 to 2009? a. 100%
b
.
1
5
0
%
c
.
5

0
%
d
.
6
6
.
7
%
55.

Comparative balance sheets are


usually prepared for a. one year.
b
.
t
w
o
y
e
a
r
s
.
c
.
t
h
r
e
e
y
e
a
r
s
.
d
.
f
o
u

r
y
e
a
r
s
.
56.

Horizontal analysis is
appropriately performed a.
only on the income
statement.
b. only on the balance sheet.
c. only on the statement of
retained earnings. d. on all
three of these statements.

57.

A horizontal analysis performed on a statement of retained earnings


would not show a percentage change in
a
.
d
i
v
i
d
e
n
d
s
p
a
i
d
.
b
.
n
e
t
i
n
c
o
m
e
.
c. expenses.
d. beginning retained earnings.

Financial Statement
Analysis
18 - 9
58.

Under which of the following cases may a percentage


change be computed? a. The trend of the balances is
decreasing but all balances are positive.
b. There is no balance in the base year.
c. There is a positive balance in the base year and a negative balance in
the subsequent year.
d. There is a negative balance in the base year and a positive balance in
the subsequent year.

59.

Assume the following sales data for a company:


2009
$945,0
00
2008
780,00
0 2007
650,00
0
If 2007 is the base year, what is the percentage increase in sales from
2007 to 2008? a. 25%
b
.
2
0
%
c
.
1
2
5
%
d
.
1
4
3
%

60.

Assume the following cost of goods sold data for a company:

2009
$1,500,
000
2008
1,200,0
00
2007
900,00
0
If 2007 is the base year, what is the percentage increase in cost of goods
sold from 2007 to 2009?
a
.
1
6
7
%
b
.
6
7
%
c
.
6
0
%
d
.
4
0
%
Use the following information for questions 6162:
Moon Beam, Inc. has the following income statement (in millions):
M
OO
N
BE
A

M,
IN
C.
Inc
om
eS
tate
me
nt
For the Year Ended December 31, 2008
Net
$180
120
60

Sales
Cost

of
Goods
Sold
Gross
Profit
Operating Expenses
33

Net

Income

$ 27
61.

Using vertical analysis, what percentage is assigned to Cost


of Goods Sold? a.
67%
b
.
3
3
%
c
.
1
0
0
%
d. None of the above

18 - 10
62.

Using vertical analysis, what percentage is


assigned to Net Income? a. 100%
b
.
8
5
%
c
.

1
5
%
d. None of the above
63.

Vertical
analysis is
also called
a.
common
size
analysis.
b.
hori
zont
al
anal
ysis.
c.
ratio
anal
ysis.
d. trend analysis.

64.

Vertical analysis is a technique which expresses each item within a


financial statement a. in dollars and cents.
b. in terms of a percentage of the item in
the previous year. c. in terms of a
percent of a base amount.
d. starting with the highest value down to the lowest value.

65.

In common size analysis,


a. a base
amount is
required. b.
a
base
amount is
optional.
c. the same base is used across all financial statements analyzed.
d. the results of the horizontal analysis are necessary inputs for performing
the analysis.

66.

In performing a vertical analysis, the base for


prepaid expenses is a. total current assets.
b. total assets.
c. total liabilities and
stockholders' equity. d.
prepaid expenses.

67.

In performing a vertical analysis, the base for sales revenues on the

income statement is a. net sales.


b. sales.
c. net income.
d. cost of goods available for sale.
68.

In performing a vertical analysis, the base for sales returns


and allowances is a. sales.
b
.
s
a
l
e
s
d
is
c
o
u
n
ts
.
c.
n
e
t
s
a
l
e
s.
d. total revenues.

69.

In performing a vertical analysis, the base for


cost of goods sold is a. total selling expenses.
b. net sales.
c
.
t
o
t
a
l
r
e
v
e
n
u
e
s

.
d
.
t
o
t
a
l
e
x
p
e
n
s
e
s
.
Financial Statement
Analysis
18 - 11
70.

Each of the following is a


liquidity ratio except the a. acidtest ratio.
b. current ratio.
c. debt to
total assets
ratio. d.
inventory
turnover.

71.

A ratio calculated in the analysis of financial statements


a. expresses a mathematical relationship between
two numbers. b. shows the percentage increase
from one year to another.
c. restates all items on a financial statement in terms of dollars of the
same purchasing power.
d. is meaningful only if the numerator is greater than the denominator.

72.

A liquidity ratio measures the


a. income or operating success of an enterprise over a
period of time. b. ability of the enterprise to survive
over a long period of time.
c. short-term ability of the enterprise to pay its maturing
obligations and to meet unexpected needs for cash.
d. number of times interest is earned.

73.

The current ratio is


a. calculated by dividing current liabilities by current assets.
b. used to evaluate a company's liquidity and short-term

debt paying ability. c. used to evaluate a company's


solvency and long-term debt paying ability. d. calculated by
subtracting current liabilities from current assets.
74.

The acid-test (quick) ratio


a. is used to quickly determine a company's solvency and long-term
debt paying ability. b. relates cash, short-term investments, and net
receivables to current liabilities.
c. is calculated by taking one item from the income statement and one
item from the balance sheet.
d. is the same as the current ratio except it is rounded to the nearest whole
percent.

75.

Walker Clothing Store had a balance in the Accounts Receivable account


of $780,000 at the beginning of the year and a balance of $820,000 at
the end of the year. Net credit sales during the year amounted to
$8,000,000. The average collection period of the receivables in terms of
days was
a
.
3
0
d
a
y
s
.
b
.
3
6
5
d
a
y
s
.
c
.
1
0
d
a

y
s
.
d
.
3
7
d
a
y
s
.
76.

Parr Hardware Store had net credit sales of $5,200,000 and cost of
goods sold of $4,000,000 for the year. The Accounts Receivable balances
at the beginning and end of the year were $600,000 and $700,000,
respectively. The receivables turnover was
a
.
7
.
4
t
i
m
e
s
.
b
.
8
.
7
t
i
m
e
s
.
c
.

6
.
2
t
i
m
e
s
.
d
.
8
t
i
m
e
s
.
18 - 12
Use the following information for questions 7778.
Waters Department Store had net credit sales of $12,000,000 and cost of
goods sold of $9,000,000 for the year. The average inventory for the year
amounted to $2,000,000.
77.

Inventory
turnover for
the year is a.
6 times.
b
.
1
0
.
5
t
i
m
e
s
.

c
.
4
.
5
t
i
m
e
s
.
d
.
3
t
i
m
e
s
.
78.

The average number of days in inventory


during the year was a. 122 days.
b
.
8
1
d
a
y
s
.
c
.
6
1
d
a
y
s

.
d
.
3
5
d
a
y
s
.
79.

Each of the following is included in computing the


acid-test ratio except a. cash.
b
.
i
n
v
e
n
t
o
r
y
.
c
.
r
e
c
e
i
v
a
b
l
e
s
.
d. short-term investments.

80.

Which one of the following would not be


considered a liquidity ratio? a. Current ratio
b.

Inv
ent
ory
tur
nov
er
c.
Aci
dtest
rati
o
d. Return on assets
81.

Asset turnover measures


a. how often a company replaces its assets.
b. how efficiently a company uses its assets to
generate sales. c. the portion of the assets that
have been financed by creditors. d. the overall
rate of return on assets.

82.

Profit margin is
calculated by
dividing a. sales
by cost of goods
sold.
b. gross profit by net sales.
c. net income by
stockholders' equity.
d. net income by
net sales.

Use the following information for questions 8384.


Raney Corporation had net income of $200,000 and paid dividends to common
stockholders of $50,000 in 2008. The weighted average number of shares
outstanding in 2008 was 50,000 shares. Raney Corporation's common stock
is selling for $40 per share on the New York Stock Exchange.
83.

Raney Corporation's
price-earnings ratio is a.
2.5 times.
b
.
1
0
t
i
m

e
s
.
c
.
1
3
.
3
t
i
m
e
s
.
d
.
4
t
i
m
e
s
.
Financial Statement
Analysis
18 - 13
84

Raney Corporation's payout


ratio for 2008 is a. $4 per
share.
b
3
3
.
3
%
.
c
.

2
5
%
.
d
.
1
0
%
.
85

Holt Company reported the following on its income statement:


Income before income taxes Income tax expense
Net income

$420,000
120,000 $300,000
An analysis of the income statement revealed that interest expense was
$50,000. Holt Company's times interest earned was
a
.
9
t
i
m
e
s
.
b
.
8
t
i
m
e
s
.
c
.
7

t
i
m
e
s
.
d
.
6
t
i
m
e
s
.
86.

The debt to total assets


ratio measures a. the
company's profitability.
b. whether interest can be paid on debt in
the current year. c. the proportion of
interest paid relative to dividends paid. d.
the percentage of the total assets provided by
creditors.

87.

Trading on the equity


(leverage) refers to the a.
amount of working capital.
b. amount of capital provided by owners.
c. use of borrowed money to increase the
return to owners. d. number of times
interest is earned.

88.

The current assets of Kile Company are $150,000. The current liabilities
are $120,000. The current ratio expressed as a proportion is
a
.
1
2
5
%
.
b
.
1

.
2
5
:
1
c
.
.
8
0
:
1
d. $150,000 $120,000.
89.

The current ratio may also be


referred to as the a. short run
ratio.
b. acid-test ratio.
c.
working
capital
ratio. d.
contemp
orary
ratio.

90.

A weakness of the
current ratio is a.
the difficulty of
the calculation.
b. that it doesn't take into account the composition of the
current assets. c. that it is rarely used by sophisticated
analysts.
d. that it can be expressed as a percentage, as a rate, or as a proportion.
18 - 14
91.

A supplier to a company would be most


interested in the companys a. asset turnover.
b
.
p
r
o
f

i
t
m
a
r
g
i
n
.
c
.
c
u
r
r
e
n
t
r
a
t
i
o
.
d. earnings per share.
92.

Which one of the following ratios would not likely be used by a


short-term creditor in evaluating whether to sell on credit to a
company?
a
.
C
u
r
r
e
n
t
r
a
t
i
o
b
.
A

c
i
d
t
e
s
t
r
a
t
i
o
c
.
A
s
s
e
t
t
u
r
n
o
v
e
r
d. Receivables turnover
93.

Ratios are used as tools in


financial analysis a.
instead of horizontal and
vertical analyses.
b. because they may provide information that is not apparent from
inspection of the individual components of the ratio.
c. because even single ratios by themselves are
quite meaningful. d. because they are prescribed
by GAAP.

94.

The ratios that are used to determine a company's short-term debt


paying ability are a. asset turnover, times interest earned, current
ratio, and receivables turnover.
b. times interest earned, inventory turnover, current ratio, and
receivables turnover. c. times interest earned, acid-test ratio,
current ratio, and inventory turnover.
d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.

95.

A measure of the percentage of each dollar of sales that


results in net income is a. profit margin.

b. return on assets.
c. return on common
stockholders' equity. d.
earnings per share.
Use the following information for questions 9697.
Risen Company had $250,000 of current assets and $90,000 of current
liabilities before borrowing $50,000 from the bank with a 3-month note
payable.
96.

What effect did the borrowing transaction have on the amount of


Risen Company's working capital?
a. No effect
b.
$50
,00
0
incr
eas
e c.
$90
,00
0
incr
eas
e d.
$50
,00
0
dec
reas
e

97.

What effect did the borrowing transaction have on Risen


Company's current ratio? a. The ratio remained unchanged.
b. The change in the current ratio
cannot be determined. c. The ratio
decreased.
d. The ratio increased.
Financial Statement
Analysis
18 - 15

98.

If equal amounts are added to the numerator and the denominator of the
current ratio, the ratio will always
a
.

i
n
c
r
e
a
s
e
.
b
.
d
e
c
r
e
a
s
e
.
c.
st
a
y
t
h
e
s
a
m
e.
d.
e
q
u
al
z
e
r
o.
99.

The acid-test ratio


a. is a quick calculation of an approximation of
the current ratio. b. does not include all current
liabilities in the calculation.
c. does not include inventory as part of the numerator.
d. does include prepaid expenses as part of the numerator.

100.

If a company has an acid-test ratio of 1.2:1, what respective effects will


the borrowing of cash by short-term debt and collection of accounts
receivable have on the ratio?
Short-term Borrowing a. Increase
b.
Increase c. Decrease d. Decrease
Collection of Receivable No effect Increase
No effect Decrease
101.

A company has a receivables turnover of 10 times. The average


netceivables during the period are $500,000. What is the amount of net
credit sales for the period?
a. $50,000
b
.
$
5
,
0
0
0
,
0
0
0
c
.
$
6
0
0
,
0
0
0
d. Cannot be determined from the information given

102.

If the average collection period is 35 days, what is the


receivables turnover? a. 9.49 times
b
.
1
0
.
4
3

t
i
m
e
s
c
.
5
.
2
2
t
i
m
e
s
d. None of these
103.

A general rule to use in assessing the average


collection period is that a. it should not exceed 30
days.
b. it can be any length as long as the customer continues to
buy merchandise. c. it should not greatly exceed the discount
period.
d. it should not greatly exceed the credit term period.

104.

Inventory turnover is calculated by dividing


a. cost of goods sold by the ending inventory.
b. cost of goods sold by the
beginning inventory. c. cost of
goods sold by the average
inventory. d. average inventory
by cost of goods sold.

105.

A company has an average inventory on hand of $100,000 and the days in


inventory is 73 days. What is the cost of goods sold?
a
.
$
5
0
0
,
0
0
0

b
.
$
7
,
3
0
0
,
0
0
0
c
.
$
1
,
0
0
0
,
0
0
0
d
.
$
3
,
6
5
0
,
0
0
0
18 - 16
106.

A successful grocery store


would probably have a. a
low inventory turnover.
b. a high
inventory
turnover. c.
zero profit
margin.

d. low volume.
107.

An aircraft company
would most likely have
a. a high inventory
turnover.
b.
lo
w
pr
ofi
t
m
ar
gi
n.
c.
hi
gh
vo
lu
m
e.
d. a low inventory turnover.

108.

Net sales are $4,500,000, beginning total assets are $2,100,000, and the
asset turnover is 3.0 times. What is the ending total asset balance?
a
.
$
1
,
5
0
0
,
0
0
0
b
.
$
9
0
0
,
0
0

0
c
.
$
2
,
1
0
0
,
0
0
0
d
.
$
1
,
2
0
0
,
0
0
0
109.

Earnings per
share is
calculated a.
only for
common
stock.
b. only for preferred stock.
c. for common
and preferred
stock. d. only for
treasury stock.

110.

Which of the following is not


a profitability ratio? a.
Payout ratio
b. Profit margin
c. Times interest earned
d. Return on common stockholders' equity

111.

Times interest
earned is also called

the a. money
multiplier.
b.
interest
coverage
ratio. c.
coupon
coverage
ratio. d.
premium
ratio.
112.

The ratio that uses weighted average common shares outstanding in the
denominator is the
a. price-earnings ratio.
b. return on common
stockholders' equity. c.
earnings per share.
d. payout ratio.

113.

Net income does not appear in the


numerator of the a. profit
margin.
b. return on assets.
c. return on common
stockholders' equity. d.
payout ratio.
Financial Statement
Analysis
18 - 17

114.

Fall Clothing Store had a balance in the Accounts Receivable account of


$820,000 at the beginning of the year and a balance of $880,000 at the
end of the year. Net credit sales during the year amounted to $6,120,000.
The receivables turnover ratio was
a
.
7
.
2
t
i
m
e
s
.
b

.
7
t
i
m
e
s
.
c
.
6
.
9
t
i
m
e
s
.
d
.
6
.
8
t
i
m
e
s
.
115.

Fall Clothing Store had a balance in the Accounts Receivable account of


$810,000 at the beginning of the year and a balance of $850,000 at the
end of the year. Net credit sales during the year amounted to $5,814,980.
The average collection period of the receivables in terms of days was
a
.
5
0
d
a

y
s
.
b
.
5
2
.
1
d
a
y
s
.
c
.
3
6
5
d
a
y
s
.
d
.
5
2
.
9
d
a
y
s
.
Use the following information for questions 116117.
Luthor Corporation had net income of $160,000 and paid dividends to common
stockholders of $40,000 in 2008. The weighted average number of shares
outstanding in 2008 was 50,000 shares. Luthor Corporation's common stock is

selling for $50 per share on the New York Stock Exchange.
116.

Luthor Corporation's
price-earnings ratio is a.
3.2 times.
b
.
1
5
.
6
t
i
m
e
s
.
c
.
1
0
t
i
m
e
s
.
d
.
5
t
i
m
e
s
.

117.

Luthor Corporation's
payout ratio for 2008 is a.
$5 per share.
b
.

2
5
%
.
c
.
2
0
%
.
d
.
1
2
.
5
%
.
118.

Raye Company reported the following on its income statement:


Income before income taxes Income tax expense
Net income

$500,000
150,000 $350,000
An analysis of the income statement revealed that interest expense was
$80,000. Raye Company's times interest earned was
a. 8 times.
b
.
7
.
2
5
t
i
m
e
s
.
c
.
6

.
2
5
t
i
m
e
s
.
d
.
4
.
4
t
i
m
e
s
.
18 - 18
Use the following information for questions 119-125.
The following information pertains to Soho Company. Assume that all
balance sheet amounts represent both average and ending balance figures.
Assume that all sales were on credit.
Assets
Cash and short-term investments Accounts receivable
(net) Inventory
Property, plant and equipment Total Assets
Liabilities and Stockholders Equity Current liabilities
Long-term liabilities Stockholders equity
common
Total Liabilities and Stockholders Equity
$ 40,000 25,000 20,000
210,000 $295,000
$ 60,000 85,000
150,000 $295,000
Sales

Cost of goods sold Gross margin Operating expenses


Net income
Income Statement
$ 85,000
45,000 40,000
20,000 $ 20,000
Number of
6,000
$20
.90
119.

shares
Market

of

price
of
Dividends per

What is the current ratio


for this company? a.
1.42
b
.
.
8
0
c
.
1
.
1
6
d
.
.
6
0

120.

What is the receivables turnover


for this company? a. 2.8 times
b
.
2
t
i
m
e
s

common
common

stock
stock
share

c
.
3
.
4
t
i
m
e
s
d
.
3
t
i
m
e
s
121.

What is the inventory turnover


for this company? a. 2 times
b
.
2
.
2
5
t
i
m
e
s
c
.
1
t
i
m
e
d. .44 times

122.

What is the return on assets


for this company? a. 6.8%
b
.
1
0
.
5
%
c
.
1
1
.
7
%
d
.
2
6
.
7
%
Financial Statement
Analysis
18 - 19

123.

What is the profit margin


for this company? a.
42.86%
b
.
1
8
.
7
5
%
c
.
2

3
.
5
%
d
.
1
5
.
0
%
124.

What is the return on common stockholders equity


for this company? a. 13.3%
b. 5%
c
.
2
3
.
3
%
d
.
5
3
.
3
%

125.

What is the price-earnings ratio


for this company? a. 6 times
b
.
2
.
5
t
i
m
e
s
c

.
8
t
i
m
e
s
d
.
4
t
i
m
e
s
Use the following information for questions 126129.
The following information pertains to Cashe Company. Assume that all
balance sheet amounts represent both average and ending balance figures.
Assume that all sales were on credit.
Assets Cash and short-term investments
Accounts receivable (net)
Inventory
Property, plant and equipment Total Assets
$ 40,000 30,000 25,000
215,000 $310,000
Liabilities and Stockholders Equity Current liabilities
Long-term liabilities Stockholders equity
common
Total Liabilities and Stockholders Equity
$ 60,000 95,000
155,000 $310,000
Sales
Cost of goods sold Gross margin Operating expenses
Net income
Income Statement
$ 90,000
45,000 45,000
20,000 $ 25,000
Number of

shares

of

common

stock

6,000
$20
1.00
126.

Market

price
of
Dividends per

What is the return on assets


for this company? a. 6.8%
b
.
1
0
.
5
%
c
.
8
.
1
%
d
.
1
6
.
1
%

18 - 20
127.

What is the profit margin


for this company? a.
50.0%
b
.
5
5
.
6
%
c
.
2
3

common

stock
share

.
5
%
d
.
2
7
.
8
%
128.

What is the return on common stockholders equity


for this company? a. 7.3%
b
.
1
6
.
1
%
c
.
2
3
.
5
%
d
.
5
3
.
3
%

129.

What is the price-earnings ratio


for this company? a. 6 times
b
.
4
.
2

t
i
m
e
s
c
.
8
t
i
m
e
s
d
.
4
.
8
t
i
m
e
s
Use the following information for questions 130131.
The following information is available for Charles Company:
Accounts receivable Inventory
Net credit sales Cost of goods sold Net income
2008
$ 360,000 280,000 3,000,000 1,200,000 300,000
2007
$ 400,000 320,000 1,400,000 1,060,000
170,000
130.

The receivables
turnover ratio for 2008
is a. 8.3 times.
b
.
3

.
9
t
i
m
e
s
.
c
.
7
.
9
t
i
m
e
s
.
d
.
1
0
.
0
t
i
m
e
s
.
131.

The inventory
turnover ratio for
2008 is a. 4.3
times.
b
.
4
.
0

t
i
m
e
s
.
c
.
2
.
0
t
i
m
e
s
.
d
.
2
.
4
t
i
m
e
s
.
Use the following information for questions 132134.
The following amounts were taken from the financial statements of Palmer Company:
Total assets Net sales Gross profit
Net income
Weighted average number of common shares outstanding Market price of
common stock
2008
$800,000 720,000 352,000 144,000 120,000 $36
2007
$1,000,000 650,000 320,000 117,000 120,000 $40
Financial Statement
Analysis
18 - 21

132.

The return on assets


ratio for 2008 is a.
18%.
b
.
1
6
%
.
c
.
3
6
%
.
d
.
3
2
%
.

133.

The profit
margin ratio for
2008 is a. 10%.
b
.
1
5
%
.
c
.
2
0
%
.
d
.
3

0
%
.
134.

The price-earnings
ratio for 2008 is a.
30 times.
b
.
2
0
t
i
m
e
s
.
c
.
1
0
t
i
m
e
s
.
d
.
5
t
i
m
e
s
.

Use the following information for questions 135136.


Panza Corporation had net income of $250,000 and paid dividends to common
stockholders of $50,000 in 2008. The weighted average number of shares
outstanding in 2008 was 50,000 shares. Panza Corporation's common stock is
selling for $40 per share on the New York Stock Exchange.

135.

Panza Corporation's
price-earnings ratio is a.
2 times.
b
.
8
t
i
m
e
s
.
c
.
1
0
t
i
m
e
s
.
d
.
5
t
i
m
e
s
.

136.

Panza Corporation's payout


ratio for 2008 is a. $5 per
share.
b
.
2
5
%
.

c
.
2
0
%
.
d
.
1
2
.
5
%
.
137.

Esters Bunny Barn has experienced a $40,000 loss due to tornado


damage to its inventory. Tornados have never before occurred in
this area. Assuming that the companys tax rate is 30%, what
amount will be reported for this loss on the income statement?
a
.
$
4
0
,
0
0
0
b
.
$
2
8
,
0
0
0
c
.
$
1
2

,
0
0
0
d
.
$
3
6
,
0
0
0
138.

Wenger Company reported income before taxes of $600,000 and an


extraordinary loss of $150,000. Assume that the companys tax rate is
30%. What amounts will be reported on the income statement for
income before irregular items and extraordinary items, respectively?
a.
$420,000
and
$150,000 b.
$420,000
and
$105,000 c.
$495,000
and
$150,000 d.
$495,000
and
$105,000

18 - 22
139.

Kandy Kane Corporation has income before taxes of $400,000 and an


extraordinary gain of $100,000. If the income tax rate is 25% on all
items, the income statement should show income before irregular items
and extraordinary items, respectively, of
a.
$325,000
and
$100,000.
b.
$325,000
and
$75,000.
c.
$300,000
and
$100,000.

d.
$300,000
and
$75,000.
140.

Hardy Inc. has an investment in available-for-sale securities of


$50,000. This investment experienced an unrealized loss of $3,000
during the current year. Assuming a 35% tax rate, the effect of this loss
on comprehensive income will be
a. no effect.
b.
$50,
000
incr
ease
. c.
$17,
500
decr
ease
. d.
$3,0
00
decr
ease
.

141.

The disposal of a significant segment of a


business is called a. a change in
accounting principle.
b. an
extraor
dinary
item. c.
an
other
expens
e.
d. discontinued operations.

142.

ABC Company reports income before income taxes of $1,800,000


and had an extra-ordinary loss of $600,000. If the tax rate is 30%,
a. the income before the extraordinary item is $1,440,000.
b. the extraordinary loss would be reported on the income
statement at $600,000. c. the income before the extraordinary
item is $1,260,000.
d. the extraordinary loss will be reported at $180,000.

143.

Evers, Inc. disposes of an unprofitable segment of its business. The


operation of the segment suffered a $240,000 loss in the year of
disposal. The loss on disposal of the segment was $120,000. If the

tax rate is 30%, and income before income taxes was $1,500,000,
a. the income tax expense on the income before discontinued
operations is $342,000. b. the income from continuing operations is
$1,050,000.
c. net income is $1,140,000.
d. the losses from discontinued operations are reported net of income taxes at
$180,000.
144.

Each of the following is an


extraordinary item except the a.
effects of major casualties, if rare in
the area.
b. effects of a newly enacted law or regulation.
c. expropriation of property by a
foreign government. d. losses
attributable to labor strikes.

145.

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.
Financial Statement
Analysis
18 - 23

146.

Which one of the following would be classified as an


extraordinary item? a. Expropriation of property by a
foreign government
b. Losses attributed
to a labor strike c.
Write-down of
inventories
d. Gains or losses from sales of equipment

147.

A loss on the write down of obsolete inventory


should be reported as a. "other expenses and
losses."
b. part of
discontinued
operations. c. an
operating expense.
d. an extraordinary item.

148.

If an item meets one (but not both) of the criteria for an


extraordinary item, it a. only needs to be disclosed in the
footnotes of the financial statements.
b. may be treated as sales revenue (if it is a gain) and as an operating

expense (if it is a loss).


c. is reported as an "other revenue or gain" or "other expense and loss," net of
tax.
d. is reported at its gross amount as an "other revenue or gain" or
"other expense or loss."
149.

The order of presentation of nontypical items that may appear on the


income statement is a. Extraordinary items, Discontinued operations,
Other revenues and expenses.
b. Discontinued operations, Extraordinary items, Other
revenues and expenses. c. Other revenues and expenses,
Discontinued operations, Extraordinary items. d. Other
revenues
and
expenses,
Extraordinary items,
Discontinued operations.

150.

Each of the following is a factor affecting quality


of earnings except a. alternative accounting
methods.
b.
imprope
r
recognit
ion. c.
pro
forma
income.
d. extraordinary items.

Additional Multiple Choice Questions


151.

Comparisons can be made on each of the


following bases except a. industry averages.
b.
interco
mpany
basis.
c.
intraco
mpany
basis.
d. Each of these is a basis for comparison.

152.

Comparisons of data within a company are an example of the


following comparative basis:
a.
Indu
stry
aver
ages
b.

Inter
com
pany
c
.
I
n
t
r
a
c
o
m
p
a
n
y
d
.
I
n
t
e
r
r
e
g
i
o
n
a
l
18 - 24
153.

Silva Corporation reported net sales of $240,000, $420,000, and


$540,000 in the years 2007, 2008, and 2009 respectively. If 2007 is the
base year, what is the trend percentage for 2009?
a
.
1
2
9
%
b
.
1

3
5
%
c
.
1
6
4
%
d
.
2
2
5
%
154.

In vertical analysis, the base amount for each income


statement item is a. gross profit.
b
.
n
e
t
i
n
c
o
m
e
.
c
.
n
e
t
s
a
l
e
s
.

d
.
s
a
l
e
s
.
155.

When performing vertical analysis, the base amount for


administrative expense is generally
a. administrative expense
in a previous year. b. net
sales.
c
.
g
r
o
s
s
p
r
o
f
i
t
.
d
.
f
i
x
e
d
a
s
s
e
t
s
.

156.

Ratios that measure the short-term ability of the company to pay its

maturing obligations are


a. liquidity ratios.
b.
pr
ofi
tab
ilit
y
rat
ios
. c.
sol
ve
nc
y
rat
ios
.
d.
tre
nd
rat
ios
.
157.

What type of ratios best measure the short-term ability of the


enterprise to pay its maturing obligations and to meet unexpected
needs for cash?
a
.
L
e
v
e
r
a
g
e
b
.
S
o
l
v
e
n
c
y

c
.
P
r
o
f
i
t
a
b
i
l
i
t
y
d
.
L
i
q
u
i
d
i
t
y
158.

The acid-test ratio is


also known as the a.
current ratio.
b
.
q
u
i
c
k
r
a
t
i
o
.

c
.
f
a
s
t
r
a
t
i
o
.
d. times interest earned ratio.
159.

The debt
to total
assets
ratio a. is
a solvency
ratio.
b. is computed by dividing total assets by total debt.
c. measures the total assets provided
by stockholders. d. is a profitability
ratio.

160.

An extraordinary item is one that


a. occurs infrequently and is
uncontrollable in nature. b. occurs
infrequently and is unusual in
nature.
c. is material and is unusual in nature.
d. is material and is uncontrollable in nature.
Financial Statement
Analysis
18 - 25

161.

Galileo, Inc. decided on January 1 to discontinue its telescope


manufacturing division. On July 1, the divisions assets with a book
value of $630,000 are sold for $450,000. Operating income from
January 1 to June 30 for the division amounted to $75,000. Ignoring
income taxes, what total amount should be reported on Galileos
income statement for the current year under the caption, Discontinued
Operations?
a. $75,000
b
.
$
1

0
5
,
0
0
0
l
o
s
s
c
.
$
1
8
0
,
0
0
0
l
o
s
s
d
.
$
2
5
5
,
0
0
0
162.

When there has been a change in accounting principle,


a. the old principle should be used in reporting the results of
operations for the current year.
b. the cumulative effect of the change should be reported in the current
years retained earnings statement.
c. the change should be reported retroactively.
d. the new principle should be used un reporting the results of
operations of the current year, but there is no change to prior years.

BRIEF EXERCISES

BE 163
The following items were taken from the financial statements of Horace, Inc.,
over a three-year period:
Item
Net Sales
Cost of Goods Sold Gross Profit
2009
$355,000
214,000 $141,000
2008
$336,000
206,000 $130,000
2007
$300,000
186,000 $114,000
Instructions
Compute the following for each of the
above time periods. a. The amount and
percentage change from 2007 to 2008. b.
The amount and percentage change from
2008 to 2009.
BE 164
If Parthenon Company had net income of $672,300 in 2009 and it experienced
a 20% increase in net income over 2008, what was its 2008 net income?
BE 165
Horizontal analysis (trend analysis) percentages for Vishnu Companys sales,
cost of goods sold, and expenses are listed here.
Horizontal Analysis
2009
Sales
98.2% Cost of goods sold
102.5
Expenses
108.6
2008
2007
104.8%
100.0% 98.0
100.0 96.4
100.0
Financial Statement
Analysis
18 - 27
BE 165

(cont.)

Instructions
Explain whether Vishnus net income increased, decreased, or remained
unchanged over the 3-year period.

BE 166
Using the following operating data for Manchac Corporation, illustrate horizontal
analysis.
Net sales
Cost of goods sold Operating expenses Net income
2008
2007
$350,000
$320,000 200,000
180,000 120,000
100,000 30,000
40,000
BE 167
Using the data presented for Manchac Company in BE 166, prepare a
schedule showing a vertical analysis for 2008.
BE 168
Using these data from the comparative balance sheet of Luca Company,
perform vertical analysis.
Accounts receivable Inventory
Total assets
December 31, 2009 $ 500,000
780,000 3,220,000
December 31, 2008 $ 400,000
600,000 2,800,000
BE 169
For each of the ratios listed below, indicate by the appropriate code letter,
whether it is a liquidity ratio (L), a profitability ratio (P), or a solvency ratio (S).
1. Times
interest
earned ratio
2. Asset
turnover
3. Receivables turnover
4. Debt
to total
assets
ratio 5.

Current
ratio
6. Payout ratio
BE 170
Selected financial statement data for Meyer Company are presented below.
Cash
Short-term investments Accounts receivable Inventories
Total current liabilities
12/31/08 $ 10,000 15,000 60,000 75,000 110,000
Instructions
Compute the following ratios at
December 31, 2008: (a) Current.
(b) Acid-test.
BE 171
Breaktown Company had net income of $152,000 and net
$625,000 in 2008. The companys total assets for 2007/2008
$3,900,000. Its common stockholders equity for the period
$2,340,000. Calculate (a) profit margin, (b) return on assets, and (c)
common stockholders equity.

sales of
averaged
averaged
return on

BE 172
Berman Company reported the following financial information:
Accounts receivable Net credit sales
12/31/08 $ 320,000
2,100,000
12/31/07 $ 360,000
2,420,000
Compute (a) the receivables turnover and (b) the average collection period for 2008.
BE 173
Prepare a partial income statement, beginning with income before income
taxes using the following information for Slidell Corporation for the fiscal year
ended December 31, 2008:
Sales Extraordinary loss
Selling and administrative expenses Cost of goods sold
Loss on sale of land
$800,000 100,000 180,000 500,000 25,000

Slidell Corporation is subject to a 30% income tax rate.


EXERCISES
Ex. 174
Selected financial information for Bradley Corporation is presented below.
Current assets Long-term liabilities Retained earnings
December 31, 2009 $ 60,000
100,000 115,000
December 31, 2008 $ 50,000
80,000 100,000
Instructions
Prepare a schedule showing a horizontal analysis for 2009 using 2008 as the base
year.
Ex. 175
Comparative information taken from the Wells Company financial statements is
shown below:
(a) Notes receivable (b) Accounts receivable (c)
Retained earnings
(d) Income taxes payable (e)
Sales
(f) Operating expenses
2009
2008
$ 20,000
$ -0-182,000
140,000
30,000
(40,000) 44,000
20,000 960,000
750,000 170,000
200,000
Instructions
Using horizontal analysis, show the percentage change from 2008 to 2009 with
2008 as the base year.
Ex. 176
Eaton Corporation had net income of $6,000,000 in 2007. Using 2007 as the
base year, net income decreased by 70% in 2008 and increased by 140% in
2009.
Instructions
Compute the net income reported by Eaton Corporation for 2008 and 2009.
Ex. 177
The following items were taken from the financial statements of Ritz, Inc., over a
four-year period:
It e m
Net Sales

Cost of Goods Sold Gross Profit


2010
$800,000
560,000 $240,000
2009
$700,000
500,000 $200,000
2008
$550,000
420,000 $130,000
2007
$500,000
400,000 $100,000
Instructions
Using horizontal analysis and 2007 as the base year, compute the trend
percentages for net sales, cost of goods sold, and gross profit. Explain
whether the trends are favorable or unfavorable for each item.
Ex. 178
The comparative balance sheet of Greer Company appears below:
GREER
COMPA
NY
Comparat
ive
Balance
Sheet
December
31,

Assets
2009
2008
Current assets ......................................................................................
$
330
$280 Plant assets ..........................................................................................
670
520 Total assets ..........................................................................................
$1,000
$800
Liabilities and stockholders' equity
Current liabilities ...................................................................................
$
160
$120 Long-term debt

.....................................................................................
240
160 Common stock .....................................................................................
340
320 Retained earnings
................................................................................
260
200
Total liabilities and stockholders' equity .........................................
$1,000
$800
Financial Statement
Analysis
18 - 33
Ex. 178

(cont.)

Instructions
(a) Using horizontal analysis, show the percentage change for each balance
sheet item using 2008 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.
Ex. 179
Using the following selected items from the comparative balance sheet of
Anders Company, illustrate horizontal and vertical analysis.
Accounts Receivable Inventory
Total Assets
December 31, 2009 $ 900,000
975,000 4,000,000
December 31, 2008 $ 600,000
750,000 2,500,000
Ex. 180
Operating data for Manning Corporation are presented below.
Net sales
Cost of goods sold Operating expenses Net income
2008
$500,000 340,000
120,000 40,000
Instructions
Prepare a schedule showing a vertical analysis for 2008.
Ex. 181
The following information was taken from the financial statements of Lee Company:
Gross profit on sales ............................................................ Income before income
taxes
................................................
Net

income ........................................................................... Net income as a percentage


of net sales .............................
2009
$750,000 280,000 200,000 8%
2008
$800,000 230,000 180,000 9%
Instructions
(a) Compute the net sales for each year.
(b) Compute the cost of goods sold in dollars and as a percentage of net sales
for each year. (c)
Compute operating expenses in dollars and as a
percentage of net sales for each year.
(Income taxes are not operating expenses).
Ex. 182
Selected financial statement data for Morton Company are presented below.
Cash
Short-term investments Receivables (net) Inventories
Total current liabilities
December 31, 2009 $ 20,000
25,000 100,000 85,000 100,000
December 31, 2008 $30,000
18,000 80,000 65,000 90,000
During 2009, net sales were $810,000, and cost of goods sold was $615,000.
Instructions
Compute the following ratios at
December 31, 2009: (a) Current.
(b) Acid-test.
(c)
Receivabl
es
turnover.
(d)
Inventory
turnover.

Ex. 183
Selected information from the comparative financial statements of Fryman
Company for the year ended December 31, appears below:
2009
2008
Accounts receivable (net)
$ 180,000
$200,000
Inventory
140,000
160,000
Total
assets

1,200,000
140,000
340,000
1,520,000
750,000
40,000
60,000
160,000

800,000 Current liabilities


110,000 Long-term debt
300,000 Net credit sales
700,000 Cost of goods sold
530,000 Interest expense
25,000 Income tax expense
29,000 Net income
85,000

Instructions
Answer the following questions relating to the year ended December 31,
2009. Show computa-tions.
1. Inventory turnover for 2009 is

2. Times interest earned in 2009 is

3. The debt to total assets ratio for 2009 is

4. Receivables turnover for 2009 is


5. Return on assets for 2009 is

.
.

$750,000

Ex. 184
The financial statements of Dobson Company appear below:
DOBSON
COMPAN
Y
Comparativ
e Balance
Sheet
December
31,

Assets Cash................................................................................................. Short-term


investments.................................................................... Accounts receivable (net)
................................................................
Inventory .......................................................................................... Property, plant and
equipment (net) ................................................
Total assets ...............................................................................
Liabilities and stockholders' equity
Accounts payable............................................................................. Short-term notes
payable................................................................. Bonds
payable ................................................................................. Common
stock ................................................................................. Retained

earnings............................................................................ Total liabilities and


stockholders' equity .....................................
2009
$ 35,000 15,000 50,000 50,000
250,000 $400,000
$ 10,000 40,000 88,000 160,000
102,000 $400,000
2008
$ 40,000 60,000 30,000 70,000
300,000 $500,000
$ 30,000 90,000 160,000 145,000
75,000 $500,000
DOB
SON
CO
MPA
NY
Inco
me
State
ment
For the Year Ended December 31, 2009
Net sales .......................................................................................... Cost of goods
sold ...........................................................................
Gross
profit
...................................................................................... Expenses
Interest expense......................................................................... Selling
expenses ........................................................................ Administrative
expenses ............................................................ Total
expenses..................................................................... Income before income
taxes............................................................ Income tax
expense......................................................................... Net
income.......................................................................................

$12,000 40,000
59,000
$360,000
198,000 162,000

111,000 51,000

15,000 $ 36,000
Additional information:
a. Cash dividends of $9,000 were declared and paid in 2009.
b. Weighted-average number of shares of common stock outstanding during
2009 was 30,000 shares.
c. Market value of common stock on December 31, 2009, was $21 per share.
= 3
$50,000
$12,000
18 - 38
Ex. 184 (cont.)
Instructions
Using the financial statements and additional information, compute the
following ratios for Coulter Company for 2009. Show all computations.
Computati
ons
1.

Current ratio

2.

Return on common stockholders' equity

3.

Price-earnings ratio

4.

Acid-test ratio

5.

Receivables turnover

6.

Times interest earned

7.

Profit margin

8.

Days in inventory

9.

Payout ratio

10.

Return on assets

.
.

.
.

.
.
.
.

Ex. 185
The following ratios have been computed for Pratt Company for 2009.
Profit margin
Times interest earned Receivables turnover Acid-test ratio Current ratio
Debt to total assets ratio
20% 15 times
5 times 1.60 : 1
3 : 1 26%
Pratt Companys 2009 financial statements with missing information follow:
PRATT
COMPAN

Y
Comparativ
e Balance
Sheet
December
31,

Assets Cash........................................................................................... Short-term


Investments.............................................................. Accounts receivable (net)
..........................................................
Inventory .................................................................................... Property, plant, and
equipment (net) .........................................
Total assets ........................................................................
Liabilities and stockholders' equity
Accounts payable....................................................................... Short-term notes
payable........................................................... Bonds
payable ........................................................................... Common
stock ........................................................................... Retained
earnings...................................................................... Total liabilities and stockholders'
equity..............................
2009
$ 25,000 15,000
?
(6) ?
(8)
200,000
$
?
(9)
$

?
(7) 35,000
?
(10) 200,000
59,000
$
?
(11)
2008
$ 35,000 15,000 60,000 50,000
150,000 $310,000
$ 25,000 30,000 20,000 200,000
35,000 $310,000
18 - 40
Ex. 185

(cont.)
P
R
A
T
T
C
O

M
P
A
N
Y
I
n
c
o
m
e
S
t
a
t
e
m
e
n
t
For the Year Ended December 31, 2009

Net sales .................................................................................... Cost of goods


sold......................................................................
Gross
profit................................................................................. Expenses:
Depreciation expense........................................................... Interest
expense................................................................... Selling
expenses .................................................................. Administrative expenses
...................................................... Total
expenses ............................................................... Income before income
taxes ...................................................... Income tax
expense ............................................................. Net
income .................................................................................
$250,000
125,000 125,000
$ ?
10,000
15,000

(5) 5,000
?
?

(4) ?
(3) $ ?

(2)
(1)

Instructions
Use the above ratios and information from the Pratt Company financial
statements to fill in the missing information on the financial statements.
Follow the sequence indicated. Show computations that support your
answers.

Ex. 186
Selected data for Nancy's Store appear below.
Net sales
Cost of goods sold Inventory at end of year
Accounts receivable at end of year

2009
$650,000
65,000

2008
$520,000 455,000
85,000 80,000

345,000
50,000

Instructions
Compute the
following for
2009: (a)
Gross
profit rate.
(b)
Inventor
y
turnover.
(c)
Receivab
les
turnover.
Ex. 187
Selected financial statement data for Holmes Company are presented below.
Net sales
Cost of goods sold Interest expense Net income
Total assets (ending)
Total common stockholders' equity (ending)
$1,200,000 700,000 10,000 180,000 850,000
650,000
Total assets at the beginning of the year were $750,000; total common
stockholders' equity was $550,000 at the beginning of the period.
Instructions
Compute each
of the
following: (a)
Asset turnover
(b) Profit margin
(c) Return on assets
(d) Return on common stockholders' equity

Ex. 188
Winter Corporation has issued common stock only. The company has been
successful and has a gross profit rate of 20%. The information shown below
was taken from the company's financial statements.
Beginning inventory Purchases
Ending inventory
Average accounts receivable
Average common stockholders' equity Sales (all on credit)
Net income
$ 482,000 5,636,000
? 700,000
3,500,000 7,000,000 525,000
Instructions
Compute the following:
(a) Receivables turnover and the average
collection period. (b) Inventory turnover
and the days in inventory.
(c) Return on common stockholders' equity.
Ex. 189
Boyle Corporation had the following comparative current assets and current
liabilities:
Current assets Cash
Short-term investments Accounts receivable Inventory
Prepaid expenses Total current assets
Current liabilities Accounts payable Salaries payable Income tax payable
Total current liabilities
Dec. 31, 2009
$ 20,000 40,000 55,000 110,000
35,000 $260,000
$140,000 40,000
20,000 $200,000
Dec. 31, 2008
$ 30,000 10,000 95,000 90,000
20,000 $245,000
$110,000 30,000
15,000 $155,000
During 2009, credit sales and cost of goods sold were $600,000 and $350,000,
respectively.

Instructions
Compute the following liquidity
measures for 2009: 1. Current
ratio.
2.
W
ork
ing
ca
pit
al.
3.
Ac
idtes
t
rati
o.
4.
Receiva
bles
turnover.
5.
Inventor
y
turnover.
Ex. 190
Selected data from Oates Company are presented below:
Total assets Average assets Net income Net sales
Average common stockholders' equity
$1,600,000 1,750,000 175,000 1,225,000 1,000,000
Instructions
Calculate the profitability ratios that can be computed from the above information.
Ex. 191
The following data are taken from the financial statements of Doyle Company:
Monthly average accounts receivable Net sales on account
Terms for all sales are 2/10, n/30
2009
$ 520,000 5,460,000
2008
$ 500,000 4,500,000
Instructions

(a) Compute the receivables turnover and the average collection period for both
years.
(b) What conclusion can an analyst draw about the management of the accounts
receivable?

Financial Statement
Analysis
18 - 47
Ex. 192
State the effect of the following transactions on the current ratio. Use increase,
decrease, or no effect for your answer.
(a) Collection of an
accounts receivable. (b)
Declaration of cash
dividends.
(c) Additional stock is sold for cash.
(d) Short-term investments are
purchased for cash. (e)
Equipment is purchased for
cash.
(f) Inventory purchases are
made for cash. (g)
Accounts payable are
paid.

Ex. 193
The balance sheet for Farley Corporation at the end of the current year indicates the
following:
Bonds payable, 7% .............................................................. 6% Preferred stock, $100
par...............................................
Common
stock,
$10
par .......................................................
$4,000,000 1,000,000 3,000,000
Income before income taxes was $1,120,000 and income taxes expense for
the current year amounted to $336,000. Cash dividends paid on common stock
were $300,000, and the common stock was selling for $45 per share at the
end of the year. There were no ownership changes during the year.
Instructions
Determine each of the following:
(a) times that bond
interest was earned. (b)
earnings per share

for common stock. (c)


price-earnings ratio.
Ex. 194
The income statement for Stoval Company for the year ended December
31, 2008 appears below.
Sales
Cost of goods sold Gross profit Expenses
Net income
$610,000
380,000 230,000
170,000* $ 60,000
*Includes $30,000 of interest expense and $18,000 of income tax expense.

Ex.
194
(cont.
)
Addit
ional
infor
matio
n:
1. Common stock outstanding on January 1, 2008 was 40,000 shares. On July
1, 2008, 10,000 more shares were issued.
2. The market price of Stoval's stock was $15 at the end of 2008.
3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred
stockholders.
Instructions
Compute the
following ratios for
2008: (a) earnings
per share.
(b) price-earnings.
(c) times interest earned.
$60,000 $6,000
Ex. 195

54,000

Gumble Corporation had income from continuing operations of $300,000 for


the year ended December 31, 2008. It also had the following items (before
income taxes):
1. Extraordinary flood loss of $150,000.
2. Loss of $60,000 on discontinuance of a division.
All items are subject to income taxes at a 30% tax rate.
Instructions
Prepare a partial income statement, beginning with income from continuing
operations.
Ex. 196
Lawrenz Corporation gathered the following information for the fiscal year
ended December 31, 2008:
Sales
$1,400,000 Extraordinary fire loss
140,000 Selling and administrative
expenses
160,000 Cost of
goods
sold
900,000 Loss on sale of equipment
40,000
Lawrenz Corporation is subject to a 30% income tax rate.
Instructions
Prepare a partial income statement, beginning with income before income taxes.
Ex. 197
Dennehy Corporation had the information listed below available in preparing an
income statement for the year ended December 31, 2008. All amounts are
before income taxes. Assume a 30% income tax rate for all items.
Sales
Expropriation of property by a foreign government (loss) Income from operation
of discontinued cement division Loss from disposal of cement division
Operating expenses
Gain on sale of equipment Cost of goods sold
$ 600,000 $(120,000) $ 100,000 $ (80,000) $ 125,000 $ 85,000 $
360,000
Financial Statement
Analysis
18 - 51
Ex. 197

(cont.)

Instructions
Prepare a multiple-step income statement in good form which takes into
account intraperiod income tax allocation. Ignore EPS computations.

Ex. 198
Indicate whether the following items would be reported as an ordinary or an
extraordinary item in Logan Corporation's income statement.
(a) Loss
attributable to labor
strike. (b) Gain on
sale of fixed assets.
(c)

Loss from fire. Logan is a

chemical company. (d) Loss


from sale of short-term
investments.
(e) Expropriation of property by a foreign government.
(f)

Loss from tornado damage. Logan Corporation is located in the

Midwest's tornado alley. (g) Loss from government condemnation of


property through newly enacted law.
Ex. 199
Potter Company has income from continuing operations of $480,000 for
the year ended December 31, 2008. It also has the following items (before
considering income taxes):
(1) An extraordinary fire loss of $180,000.
(2) A gain of $110,000 on the discontinuance of a major segment.
(3) A correction of an error in last year's financial statement that
resulted in a $100,000 overstatement of 2007 net income.
Assume all items are subject to income taxes at a 30% tax rate.
Instructions
(a) Prepare an income statement, beginning with income from
continuing operations. (b)
Indicate the statement presentation of
any item not included in (a) above.
COMPLETION STATEMENTS
200. In analyzing and interpreting financial statement information, three major
characteristics are generally evaluated: (1) , (2)
, and (3)
.
201.

analysis, also called trend analysis, is a technique

for evaluating a percentage increase or decrease for a financial statement


item over a period of time.
202. Expressing each item within a financial statement as a percentage of a
base amount is called analysis.
203. The ratios used in evaluating a company's liquidity and short-term debt
paying ability that complement each other are the ratio and the
ratio.
204. The receivables turnover is calculated by dividing
by average
.
205. If inventory turnover is 5 times, and the average inventory was
$400,000, the cost of goods sold during the year was $
and
the days in inventory was
days.
206. Hansen Corporation had net income for the year of $300,000 and a profit
margin of 25%. If total average assets were $400,000, the asset turnover
ratio was
times.
207. The
ratio measures the percentage of earnings
distributed in the form of cash dividends.
208. The lower the
to
equity "buffer" there is available to the creditors.
209. Times interest earned is calculated by dividing
and
by interest expense.
210. Discontinued operations refers to the disposal of a
business.

ratio, the more


before
of a

211. The two criteria necessary for an item to be classified as an extraordinary


item are that the transaction or event must be (1)
and (2)
.
212. A change in inventory methods during the year would be classified as a
change in
.
MATCHING
SET A

213. For each of the ratios listed below, indicate by the appropriate code
letter, whether it is a liquidity ratio, a profitability ratio, or a solvency
ratio.
Code:
L =
P =

Liquidity ratio

Profita
bility
ratio S
=
Solven
cy
ratio
1. Price-earnings ratio
2. Asset turnover
3. Receivables turnover
4. Earnings per share
5. Payout ratio
6. Current ratio
7. Acid-test ratio
8. Debt to total assets ratio
9. Times interest earned
10. Inventory turnover

SET B
214. Match the ratios with the appropriate ratio computation by entering the
appropriate letter in the space provided.
A. Current ratio B. Acid-test ratio C. Profit margin D. Asset turnover
E. Price-earnings ratio
F. Times interest earned G. Inventory turnover
H. Average collection period I. Days in inventory
J. Payout ratio

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Cost
goods

of
sold

Average
inventory

Net
incom
e Net
sales

Cash
dividen
ds Net
income

Net
sales
Average
assets

Current
assets
Current
liabilities

365 days
Receivables
turnover

Market price per share of


stock Earnings per share

365 days
Inventory
turnover

Income before income taxes and interest


expense Interest expense
Cash + short-term investments + receivables (net)
Current liabilities

SHORT-ANSWER ESSAY QUESTIONS


S-A E 215
Horizontal and vertical analyses are analytical tools frequently used to
analyze financial statements. What type of information or insights can be
obtained by using these two techniques? Explain how the output of horizontal
analysis and vertical analysis can be compared to industry averages and/or
competitive companies.
S-A E 216
Manuel Mentirosa, the CEO of Mystical Products, is a successful entrepreneur
but a poor student of accounting. He asks you to explain to him, in a

memo, the bases of comparison for ratio analysis.


S-A E 217 (Ethics)
A trusted employee of Wilderness Tours was caught in the act of
embezzling funds. He confessed to earlier embezzlements, but retracted the
confession on the advice of his attorney. Over the course of the most recent
quarter, it has been determined that $20,000 was embezzled.
Wilderness Tours has suffered adverse publicity in the recent past because of
serious injury to five tourists that occurred during a two week "Winter Wilds
Adventure" tour. The company has therefore decided to avoid publicity and has
agreed to drop all charges against the embezzling employee. In return, the
employee has agreed to a notation of "TerminatedNot to be Rehired" to be
appended to his personnel file.
Required:
1. Who are the stakeholders in the decision not to prosecute?
2. Was it ethical for the company to decide not to prosecute? Explain.
S-A E 218 (Communication)
Kwik Express specializes in the overnight transportation of medical
equipment and laboratory specimens. The company has selected the following
information from its most recent annual report to be the subject of an
immediate press release.
The financial statements are being released.
Net income this year was $2.2 million. Last year's net income had
been $2.0 million. The current ratio has changed to 2:1 from last
year's 1.5:1
The debt/total assets ratio has changed to 4:5 from last year's 3:5
The company expanded its truck fleet substantially by purchasing ten new
delivery vans. The company already had twelve delivery vans.
The company is now the largest medical courier in the mid-Atlantic region.
Required:
Prepare a brief press release incorporating the information above. Include all
information. Think
carefully which information (if any) is good news for thetcompany, and which (if
any) is bad news.

CHAPTER 19
MANAGERIAL ACCOUNTING

CHAPTER STUDY OBJECTIVES


1. Explain the distinguishing features of managerial accounting.
2. Identify the three broad functions of management.
3. Define the three classes of manufacturing costs.
4. Distinguish between product and period costs.
5. Explain the difference between a merchandising and a
manufacturing income statement.
6. Indicate how cost of goods manufactured is determined.
7. Explain the difference between a merchandising and a manufacturing
balance sheet.
TRUE-FALSE STATEMENTS
1.

Reports prepared in financial accounting are general-purpose reports,


whereas reports prepared in managerial accounting are usually specialpurpose reports.

2.

Managerial accounting information generally pertains to an entity as a


whole and is highly aggregated.

3.

Managerial accounting applies to all forms of business organizations.

4. Determining the unit cost of manufacturing a product is an output of financial


accounting.
5.

Managerial accounting internal reports are prepared more frequently


than are classified financial statements.

6.

The management function of organizing and directing is mainly


concerned with setting goals and objectives for the entity.

7.

The Sarbanes-Oxley Act replaces generally accepted accounting


principles in a manufacturing company.

8.

Controlling is the process of determining whether planned goals are being met.

9. Decision-making is an integral part of the planning, directing, and controlling


functions.
10.

Both direct labor cost and indirect labor cost are product costs.

11.

Manufacturing costs that cannot be classified as direct materials or


direct labor are classified as manufacturing overhead.

12.

Raw materials are equal to direct materials minus indirect materials.

13.

Raw materials that can be conveniently and directly associated with a


finished product are called materials overhead.

14.

The total cost of a finished product does not generally contain equal
amounts of materials, labor, and overhead costs.

15.

Direct materials costs and indirect materials costs are manufacturing overhead.

16.

Period costs include selling and administrative expenses.

17.

Indirect materials and indirect labor are both inventoriable costs.

18.

Direct materials and direct labor are the only product costs.

19.

Total period costs are deducted from total cost of work in process to
calculate cost of goods manufactured.

20.

Period costs are not inventoriable costs.

21.

Ending finished goods inventory appears on both the balance sheet


and the income statement of a manufacturing company.

22.

The beginning work in process inventory appears on both the balance


sheet and the cost of goods manufactured schedule of a manufacturing
company.

23.

In calculating gross profit for a manufacturing company, the cost of goods


manufactured is deducted from net sales.

24. Finished goods inventory does not appear on a cost of goods manufactured
schedule.
25.

If the ending work in process inventory is greater than the beginning


work in process inventory, then the cost of goods manufactured will be
less than total manufacturing costs for the period.

26.

Finished goods inventory for a manufacturing company is equivalent


to merchandise inventory for a merchandising company.

27.

Raw materials inventory is not an asset until it is used to make a product.

28.

Raw materials inventory shows the cost of completed goods


available for sale to customers.

29. The supply chain is all the activities associated with providing a product or
service.
30.

Many companies have significantly lowered inventory levels and costs


using just-in-time inventory methods.

Additional True-False Questions

31. Managerial accounting is primarily concerned with managers and external


users.
32.

Planning involves coordinating the diverse activities and human


resources of a company to produce a smooth running operation.

33.

When the physical association of raw materials with the finished


product is too small to trace in terms of cost, they are usually classified
as indirect materials.

34.

Product costs are also called inventoriable costs.

35.

Direct materials become a cost of the finished goods manufactured


when they are acquired, not when they are used.

36.

The sum of the direct materials costs, direct labor costs, and beginning
work in process is the total manufacturing costs for the year.

37.

In a manufacturing company balance sheet, manufacturing inventories are


reported in the current assets section in the order of their expected use in
production.

MULTIPLE CHOICE QUESTIONS


38.

Managerial accounting applies to each of the following types of


businesses except a. service firms.
b.
merc
handi
sing f
irms.
c.
manu
factur
ing fir
ms.
d. Managerial accounting applies to all types of firms.

39.

Managerial accounting information is


generally prepared for a. stockholders.
b
.
c
r
e
d
i

t
o
r
s
.
c
.
m
a
n
a
g
e
r
s
.
d. regulatory agencies.
40.

Managerial accounting information


a. pertains to the entity as a whole and is
highly aggregated. b. pertains to subunits
of the entity and may be very detailed. c. is
prepared only once a year.
d. is constrained by the requirements of generally accepted accounting
principles.

41.

The major reporting standard for presenting managerial


accounting information is a. relevance.
b. generally accepted
accounting principles. c.
the cost principle.
d. the current tax law.

42.

Managerial
accounting is also
called a.
management
accounting.
b. controlling.
c.
analyti
cal
accoun
ting. d.
inside
reporti
ng.

43.

Which of the following is

not an internal user? a.


Creditor
b.
Depart
ment
manag
er c.
Contro
ller
d. Treasurer
Managerial Accounti
ng
19 - 7
44.

Managerial accounting does


not encompass a.
calculating product cost.
b. calculating
earnings per share.
c. determining
cost behavior.
d. profit planning.

45.

Managerial accounting
is applicable to a.
service entities.
b.
manufactu
ring
entities. c.
not-forprofit
entities. d.
all of
these.

46.

Management
accountants would
not a. assist in
budget planning.
b. prepare reports primarily
for external users. c.
determine cost behavior.
d. be concerned with the impact of cost and volume on profits.

47.

Internal reports must be


communicated a.
daily.
b
.

m
o
n
t
h
l
y
.
c
.
a
n
n
u
a
l
l
y
.
d. as needed.
48.

Financial statements for external users can


be described as a. user-specific.
b.
gener
alpurp
ose.
c.
speci
alpurp
ose.
d. managerial reports.

49.

Managerial accounting reports can


be described as a. general-purpose.
b.
macr
orepo
rts.
c.
spec
ialpurp
ose.
d. classified financial statements.

50.

The reporting standard for external


financial reports is a. industryspecific.
b. company-specific.
c. generally accepted
accounting principles. d.
department-specific.

51.

Which of the following statements about internal reports is not true?


a. The content of internal reports may extend beyond the doubleentry accounting system.
b. Internal reports may show all amounts at
market values. c. Internal reports may
discuss prospective events.
d. Most internal reports are summarized rather than detailed.

19 - 8
52.

In an analogous sense, external user is to internal user as generally


accepted accounting principles are to
a. timely.
b. special-purpose.
c.
relevan
ce to
decisio
n. d.
SEC.

53.

Internal
reports are
generally
a.
aggregated
.
b
.
d
e
t
a
i
l
e
d
.
c
.

r
e
g
u
l
a
t
e
d
.
d
.
u
n
r
e
l
i
a
b
l
e
.
54.

A distinguishing feature of
managerial accounting is a.
external users.
b.
generalpurpose re
ports. c.
very
detailed
reports.
d. quarterly and annual reports.

55.

What activities and responsibilities are not associated with


management's functions? a. Planning
b
.
A
c
c
o
u
n
t
a

b
i
l
i
t
y
c
.
C
o
n
t
r
o
l
l
i
n
g
d. Directing
56.

Planning is a function that involves


a. hiring the right people for a particular job.
b. coordinating the accounting
information system. c. setting
goals and objectives for an entity.
d. analyzing financial statements.

57.

The managerial function of controlling


a. is performed only by the controller of a company.
b. is only applicable when the company sustains a loss.
c. is concerned mainly with operating a
manufacturing segment. d. includes
performance evaluation by management.

58.

Which of the following is not a


management function? a.
Constraining
b
.
P
l
a
n
n
i
n
g

c
.
C
o
n
t
r
o
l
l
i
n
g
d
.
D
i
r
e
c
t
i
n
g
59.

A manager that is establishing objectives is performing which


management function? a. Controlling
b
.
D
i
r
e
c
t
i
n
g
c
.
P
l
a
n

n
i
n
g
d. Constraining
Managerial Accounti
ng
19 - 9
60.

The management function that requires managers to look ahead and


establish objectives is
a
.
c
o
n
t
r
o
l
l
i
n
g
.
b
.
d
i
r
e
c
t
i
n
g
.
c
.
p
l
a
n
n
i

n
g
.
d. constraining.
61.

In determining whether planned goals are being met, a manager is


performing the function of
a
.
p
l
a
n
n
i
n
g
.
b
.
f
o
l
l
o
w
u
p
.
c
.
d
i
r
e
c
t
i
n
g
.
d
.

c
o
n
t
r
o
l
l
i
n
g
.
62.

Which of the following is not a separate


management function? a. Planning
b. Directing
c.
Deci
sion
mak
ing
d.
Cont
rolli
ng

63.

Directing includes
a. providing a framework for management to have criteria to terminate
employees when needed.
b. running a department under quality control standards universally accepted.
c. coordinating a company's diverse activities and human resources
to produce a smooth-running operation.
d. developing a complex performance ranking system to give certain
high performers good raises.

64.

Both direct materials and


indirect materials are a. raw
materials.
b.
manufacturin
g overhead.
c.
merchandise
inventory.
d. sold directly to customers by a manufacturing company.

65.

The work of factory employees that can be physically and directly


associated with converting raw materials into finished goods is
a.
manufacturin

g overhead.
b. indirect
materials.
c.
i
n
d
ir
e
ct
la
b
o
r.
d.
d
ir
e
ct
la
b
o
r.
66.

Which one of the following would not be classified as


manufacturing overhead? a. Indirect labor
b. Direct materials
c. Insurance on
factory building
d. Indirect
materials

67.

Manufacturing costs include


a. direct materials and direct labor only.
b. direct materials and manufacturing
overhead only. c. direct labor and
manufacturing overhead only.
d. direct materials, direct labor, and manufacturing overhead.
19 - 10
68.

Which one of the following is


not a direct material? a. A tire
used for a lawn mower
b. Plastic used in the covered case for a home PC
c. Steel used in the manufacturing
of steel-radial tires d. Lubricant for
a ball-bearing joint for a large crane

69.

Which one of the following is not a cost element in


manufacturing a product? a. Manufacturing overhead
b

.
D
ir
e
c
t
m
a
t
e
ri
a
l
s
c
.
O
f
fi
c
e
s
a
l
a
ri
e
s
d
.
D
ir
e
c
t
l
a
b
o
r
70.

A manufacturing process requires small amounts of glue. The glue used


in the production process is classified as a(n)
a. period cost.
b.
in
di
re
ct
m

at
er
ia
l.
c.
di
re
ct
m
at
er
ia
l.
d. miscellaneous expense.
71.

The wages of a timekeeper in the factory


would be classified as a. a period cost.
b
.
d
i
r
e
c
t
l
a
b
o
r
.
c
.
i
n
d
i
r
e
c
t
l
a
b
o
r

.
d. compliance costs.
72.

Which one of the following is not considered


as material costs? a. Partially completed
motor engines for a motorcycle plant
b. Bolts used in manufacturing the
compressor of an engine c. Rivets for the
wings of a new commercial jet aircraft
d. Lumber used to build tables

73.

Which of the following is not a


manufacturing cost category? a. Cost of
goods sold
b
.
D
ir
e
c
t
m
a
t
e
ri
a
l
s
c
.
D
ir
e
c
t
l
a
b
o
r
d. Manufacturing overhead

74.

As current technology changes manufacturing processes, it


is likely that direct a. labor will increase.
b. labor will decrease.
c.
materials
will
increase.
d.

materials
will
decrease.
75.

For the work of factory employees to be considered as direct labor,


the work must be conveniently and
a. materially associated with raw
materials conversion. b. periodically
associated with raw materials
conversion. c. physically associated
with raw materials conversion. d.
promptly associated with raw materials
conversion.
Managerial Accounti
ng
19 - 11

76.

Which of the following is not


classified as direct labor? a. Bottlers
of beer in a brewery
b. Copy machine operators
at a copy shop c. Wages of
supervisors
d. Bakers in a bakery

77.

Cotter pins and lubricants used irregularly in a production process


are classified as a. miscellaneous expense.
b.
direct
mater
ials.
c.
indire
ct
mater
ials.
d. nonmaterial materials.

78.

Which of the following is not another name for the term


manufacturing overhead? a. Factory overhead
b.
Per
vasi
ve
cost
s c.
Bur
den
d. Indirect manufacturing costs

79.

Because of automation, which component of product


cost is declining? a. Direct labor
b. Direct materials
c.
Manufacturi
ng overhead
d.
Advertising

80.

The product cost that is most difficult to associate


with a product is a. direct materials.
b. direct labor.
c.
manufacturin
g overhead.
d.
advertising.

81.

Manufacturing costs that cannot be classified as either direct materials or


direct labor are known as
a. period costs.
b. nonmanufacturing costs.
c. selling and
administrative expenses.
d. manufacturing
overhead.

82.

Which one of the following is an example of a period cost?


a. A change in benefits for the union workers who work in the New
York plant of a Fortune 1000 manufacturer
b. Workers' compensation insurance on factory workers' wages
allocated to the factory c. A box cost associated with computers
d. A manager's salary for work that is done in the corporate head office

83.

Which one of the following costs would not


be inventoriable? a. Period costs
b. Factory
insurance
costs c.
Indirect
materials
d. Indirect labor costs
19 - 12
84.

Direct materials and direct labor of a company total $6,000,000.


If manufacturing overhead is $3,000,000, what is direct labor cost?
a
.
$
3

,
0
0
0
,
0
0
0
b
.
$
6
,
0
0
0
,
0
0
0
c
.
$
0
d. Cannot be determined from the information provided
85.

Which of the
following are period
costs? a. Raw
materials
b. Direct materials and direct labor
c. Direct labor and
manufacturing overhead d.
Selling expenses

86.

Sales
commissions are
classified as a.
overhead costs
b
.
p
e
r
i
o

d
c
o
s
t
s
.
c
.
p
r
o
d
u
c
t
c
o
s
t
s
.
d
.
i
n
d
i
r
e
c
t
l
a
b
o
r
.
87.

Product costs consist of


a. direct materials and direct labor only.
b. direct materials, direct labor, and
manufacturing overhead. c. selling and
administrative expenses.

d. period costs.
88.

Which one of the following


represents a period cost? a. The
VP of Sales' salary and benefits
b. Overhead allocated to the
manufacturing operations c. Labor
costs associated with quality control
d. Fringe benefits associated with factory workers

89.

Product
costs are
also called
a. direct
costs.
b. overhead costs.
c.
inve
ntor
iabl
e
cost
s. d.
capi
taliz
able
cost
s.

90.

For inventoriable costs to become expenses under the


matching principle, a. the product must be finished
and in stock.
b. the product must be expensed based on its
percentage-of-completion. c. the product to which
they attach must be sold.
d. all accounts payable must be settled.

91.

As inventoriable costs
expire, they become a.
selling expenses.
b. gross profit.
c.
cost
of
goo
ds
sold
. d.
sale
s
reve

nue.
Managerial Accounti
ng
19 - 13
92.

A manufacturing company calculates cost of goods sold as follows:


a. Beginning FG inventory + cost of goods purchased ending FG inventory.
b. Ending FG inventory cost of goods manufactured +
beginning FG inventory. c. Beginning FG inventory cost of
goods manufactured ending FG inventory. d. Beginning FG
inventory + cost of goods manufactured ending FG inventory.

93.

A manufacturing company reports cost of goods


manufactured as a(n) a. current asset on the balance
sheet.
b. administrative expense on the income statement.
c. component in the calculation of cost of goods sold on the
income statement. d. component of the raw materials inventory
on the balance sheet.

94.

The subtotal, "Cost of goods


manufactured" appears on a. a
merchandising company's income
statement.
b. a manufacturing company's income statement.
c. both a manufacturing and a merchandising company's
income statement. d. neither a merchandising nor a
manufacturing company's income statement.

95.

Cost of goods manufactured in a manufacturing company


is analogous to a. Ending inventory in a merchandising
company.
b. Beginning inventory in a merchandising company.
c. Cost of goods available for sale in a
merchandising company. d. Cost of goods
purchased in a merchandising company.

96.

Cost of goods sold


a. only appears on merchandising companies'
income statements. b. only appears on
manufacturing companies' income statements.
c. appears on both manufacturing and merchandising companies'
income statements. d. is calculated exactly the same for merchandising
and manufacturing companies.

97.

Hollern Combines, Inc. has $10,000 of ending finished goods inventory


as of December 31, 2008. If beginning finished goods inventory was
$5,000 and cost of goods sold was $20,000, how much would Hollern
report for cost of goods manufactured?
a

.
$
2
2
,
5
0
0
b
.
$
5
,
0
0
0
c
.
$
2
5
,
0
0
0
d
.
$
1
5
,
0
0
0
98.

Cost of goods manufactured is calculated as follows:


a. Beginning WIP + direct materials used + direct labor +
manufacturing overhead + ending WIP.
b. Direct materials used + direct labor + manufacturing overhead
beginning WIP + ending WIP.
c. Beginning WIP + direct materials used + direct labor +
manufacturing overhead ending WIP.
d. Direct materials used + direct labor + manufacturing overhead
ending WIP beginning WIP.

19 - 14
99.

If the amount of "Cost of goods manufactured" during a period


exceeds the amount of "Total manufacturing costs" for the period, then
a. ending work in process inventory is greater than or equal to
the amount of the beginning work in process inventory.
b. ending work in process is greater than the amount of the beginning
work in process inventory.
c. ending work in process is equal to the cost of goods manufactured.
d. ending work in process is less than the amount of the beginning
work in process inventory.

100. On the costs of goods manufactured schedule, depreciation on factory


equipment
a. is not listed because it is included with Depreciation Expense
on the income statement.
b. appears in the manufacturing
overhead section. c. is not listed
because it is not a product cost.
d. is not an inventoriable cost.
101.

On the costs of goods manufactured schedule, the item raw materials


inventory (ending) appears as a(n)
a. addition to raw materials purchases.
b. addition to raw materials available for use.
c. subtraction from raw
materials available for use. d.
subtraction from raw materials
purchases.

Use the following information for questions 102104.


Carly Manufacturing Company's accounting records reflect the following inventories:
Raw materials inventory Work in process inventory Finished goods inventory
Dec. 31, 2008 $310,000
300,000 190,000
Dec. 31, 2007 $260,000
160,000 150,000
During 2008, $500,000 of raw materials were purchased, direct labor
costs amounted to $600,000, and manufacturing overhead incurred was
$480,000.
102.

The total raw materials available for use during 2008 for Carly
Manufacturing Company is a. $810,000.
b
.
$
2
6

0
,
0
0
0
.
c
.
$
4
5
0
,
0
0
0
.
d
.
$
7
6
0
,
0
0
0
.
103.

Carly Manufacturing Company's total manufacturing costs incurred in


2008 amounted to a. $1,530,000.
b
.
$
1
,
4
9
0
,
0
0
0
.
c

.
$
1
,
3
9
0
,
0
0
0
.
d
.
$
1
,
5
8
0
,
0
0
0
.
104.

If Carly Manufacturing Company's cost of goods manufactured for


2008 amounted to $1,390,000, its cost of goods sold for the year is
a
.
$
1
,
5
0
0
,
0
0
0
.
b
.
$
1

,
2
5
0
,
0
0
0
.
c
.
$
1
,
3
5
0
,
0
0
0
.
d
.
$
1
,
4
3
0
,
0
0
0
.
Managerial Account
ing
19 - 15
105.

What is work in process inventory generally described as?


a. Costs applicable to units that have been started in production but
are only partially completed
b. Costs associated with the end stage of manufacturing that are
almost always complete and ready for customers
c. Costs strictly associated with direct labor
d. Beginning stage production costs associated with labor costs dealing

with bringing in raw materials from the shipping docks


106.

Utley Manufacturing Company reported the following year-end


information: beginning work in process inventory, $180,000; cost of
goods manufactured, $516,000; beginning finished goods inventory,
$252,000; ending work in process inventory, $220,000; and ending
finished goods inventory, $264,000. Utley Manufacturing Company's cost
of goods sold for the year is
a
.
$
5
0
4
,
0
0
0
.
b
.
$
5
2
8
,
0
0
0
.
c
.
$
4
7
6
,
0
0
0
.
d
.
$

2
5
2
,
0
0
0
.
107.

Neeley Manufacturing Company reported the following year-end information:


Beginning work in process inventory Beginning raw materials inventory
Ending work in process inventory Ending raw materials inventory
Raw materials purchased Direct labor Manufacturing overhead
$1,080,000 300,000 900,000 480,000 960,000 900,000
600,000
Neeley Manufacturing Company's cost of goods
manufactured for the year is a. $2,280,000.
b
.
$
2
,
4
6
0
,
0
0
0
.
c
.
$
2
,
1
0
0
,
0
0
0
.
d
.

$
2
,
6
4
0
,
0
0
0
.
Use the following information for questions 108110.
Hopkins Manufacturing Inc.'s accounting records reflect the following inventories:
Raw materials inventory Work in process inventory Finished goods inventory
Dec. 31, 2007 $ 80,000
104,000 100,000
Dec. 31, 2008 $ 64,000
116,000 92,000
During 2008, Hopkins purchased $760,000 of raw materials, incurred
direct labor costs of $100,000, and incurred manufacturing overhead totaling
$128,000.
108.

How much is raw materials transferred to production during


2008 for Hopkins Manufacturing?
a
.
$
9
9
2
,
0
0
0
b
.
$
7
7
6
,
0
0
0

c
.
$
7
6
0
,
0
0
0
d
.
$
7
4
4
,
0
0
0
19 - 16
109.

How much is total manufacturing costs incurred during


2008 for Hopkins? a. $992,000
b
.
$
1
,
0
0
4
,
0
0
0
c
.
$
9
8
8
,
0

0
0
d
.
$
1
,
0
0
0
,
0
0
0
110.

Assume Hopkins Manufacturings cost of goods manufactured for


2008 amounted to $960,000. How much would it report as cost of
goods sold for the year?
a
.
$
9
6
8
,
0
0
0
b
.
$
1
,
0
0
0
,
0
0
0
c
.
$
1

,
0
6
0
,
0
0
0
d
.
$
9
5
2
,
0
0
0
111. McNally Manufacturing Company reported the following year-end
information:
Beginning work in process inventory Beginning raw materials inventory
Ending work in process inventory Ending raw materials inventory
Raw materials purchased Direct labor Manufacturing overhead
$ 46,000 24,000 50,000 20,000 680,000 240,000
100,000
How much is McNally Manufacturings cost of goods
manufactured for the year? a. $684,000
b
.
$
1
,
0
2
4
,
0
0
0
c
.
$
1
,

0
2
0
,
0
0
0
d
.
$
1
,
0
2
8
,
0
0
0
Use the following information for questions 112113.
Modine Manufacturing Inc.'s accounting records reflect the following inventories:
Raw materials inventory Work in process inventory Finished goods
inventory
Dec. 31, 2007 $120,000
156,000 150,000
Dec. 31, 2008 $ 96,000
174,000 138,000
During 2008, Modine purchased $1,140,000 of raw materials, incurred
direct labor costs of $150,000, and incurred manufacturing overhead totaling
$192,000.
112.

How much is total manufacturing costs incurred


during 2008 for Modine? a. $1,488,000
b
.
$
1
,
5
0
6
,
0
0

0
c
.
$
1
,
4
8
2
,
0
0
0
d
.
$
1
,
5
0
0
,
0
0
0
113.

How much would Modine Manufacturing report as cost of goods


manufactured for 2008? a. $1,464,000
b
.
$
1
,
5
2
4
,
0
0
0
c
.
$
1

,
5
1
8
,
0
0
0
d
.
$
1
,
4
8
8
,
0
0
0
Managerial Account
ing
19 - 17
114.

Sauder Manufacturing Company reported the following year-end information:

Beginning work in process inventory Beginning raw materials inventory


Ending work in process inventory Ending raw materials inventory
Raw materials purchased Direct labor Manufacturing overhead
$ 35,000 18,000 38,000 15,000 510,000 180,000 75,000
How much is Sauder Manufacturings total cost of work in
process for the year? a. $513,000
b
.
$
7
6
8
,
0
0
0
c
.
$

7
6
5
,
0
0
0
d
.
$
8
0
3
,
0
0
0
115.

Hardigan Manufacturing Company reported the following year-end


information: beginning work in process inventory, $80,000; cost of
goods manufactured, $980,000; beginning finished goods inventory,
$50,000; ending work in process inventory, $70,000; and ending finished
goods inventory, $40,000. How much is Hardigans cost of goods sold
for the year?
a
.
$
9
8
0
,
0
0
0
b
.
$
9
9
0
,
0
0
0
c

.
$
9
7
0
,
0
0
0
d
.
$
1
,
0
0
0
,
0
0
0
Use the following information for questions 116119.
Raw materials inventory, January 1 Raw materials inventory, December
31 Work in process, January 1
Work in process, December 31 Finished goods, January 1
Finished goods, December 31 Raw materials purchases Direct
labor
Factory utilities Indirect labor Factory depreciation
Selling and administrative expenses
$
20,000 40,000 18,000 12,000 40,000 32,000
1,000,000 460,000 150,000 50,000 400,000 420,000
116. Direct
materials used
is a.
$1,060,000.
b.
$1,020,000.
c.
$1,000,000.
d. $980,000.
117.

Assume your answer to question 116 above is $1,000,000. Total


manufacturing costs equal
a

.
$
2
,
0
6
0
,
0
0
0
.
b
.
$
2
,
0
5
4
,
0
0
0
.
c
.
$
1
,
8
6
0
,
0
0
0
.
d
.
$
2
,
4

8
0
,
0
0
0
.
19 - 18
118.

Assume your answer to question 117 above is $2,000,000. Cost of


goods manufactured equals
a
.
$
1
,
9
9
2
,
0
0
0
.
b
.
$
1
,
9
9
4
,
0
0
0
.
c
.
$
2
,
0
0
6
,

0
0
0
.
d
.
$
2
,
0
0
8
,
0
0
0
.
119.

Assume your answer to question 118 above is $2,040,000. The


cost of goods sold is a. $2,046,000.
b
.
$
2
,
0
0
8
,
0
0
0
.
c
.
$
2
,
0
3
2
,
0
0
0
.

d
.
$
2
,
0
4
8
,
0
0
0
.
Use the following information for questions 120123:
Raw materials inventory, January 1 Raw materials inventory, December
31 Work in process, January 1
Work in process, December 31 Finished goods, January 1
Finished goods, December 31 Raw materials purchases Direct
labor
Factory utilities Indirect labor Factory depreciation
Selling and administrative expenses
$
30,000 60,000 27,000 18,000 60,000 48,000
1,500,000 690,000 225,000 75,000 600,000 630,000
120.
Direct
materials
used is a.
$1,590,000.
b.
$1,530,000.
c.
$1,500,000.
d.
$1,470,000.
121.

Assume your answer to question 120 above is $1,500,000. Total


manufacturing costs equal
a
.
$
3
,
0
9

0
,
0
0
0
.
b
.
$
3
,
0
8
1
,
0
0
0
.
c
.
$
2
,
7
9
0
,
0
0
0
.
d
.
$
3
,
7
2
0
,
0
0
0

.
122. Assume your answer to question 121 above is $3,000,000. Cost of
goods manufactured equals
a
.
$
2
,
9
8
8
,
0
0
0
.
b
.
$
2
,
9
9
1
,
0
0
0
.
c
.
$
3
,
0
0
9
,
0
0
0
.
d

.
$
3
,
0
1
2
,
0
0
0
.
123.

Assume your answer to question 122 above is $3,060,000. The


cost of goods sold is a. $3,069,000.
b
.
$
3
,
0
1
2
,
0
0
0
.
c
.
$
3
,
0
4
8
,
0
0
0
.
d
.
$

3
,
0
7
2
,
0
0
0
.
Managerial Account
ing
19 - 19
124.

Samson Company reported total manufacturing costs of $130,000,


manufacturing overhead totaling $26,000, and direct materials totaling
$32,000.
How much is direct labor cost?
a. Cannot be determined from the
information provided. b. $188,000
c
.
$
5
8
,
0
0
0
d
.
$
7
2
,
0
0
0

125.

Given the following data for Mehring Company, compute (A) total
manufacturing costs and (B) costs of goods manufactured:

Direct materials used Direct labor Manufacturing overhead


Operating expenses
$180,000 75,000 225,000 263,000
Beginning work in process Ending work in process Beginning finished goods Ending

finished goods
$30,000 15,000 38,000 23,000
a.

(A)
$465,000 b. $480,000 c.

$480,000 d.

$495,000

(B)
$495,000 $465,000 $495,000
$510,000
126.

Penner Company reported total manufacturing costs of $195,000,


manufacturing overhead totaling $39,000, and direct materials totaling
$48,000.
How much is direct labor cost?
a. Cannot be determined from the
information provided. b. $282,000
c
.
$
8
7
,
0
0
0
d
.
$
1
0
8
,
0
0
0

127.

Given the following data for Glennon Company, compute (A) total
manufacturing costs and (B) costs of goods manufactured:
Direct materials used Direct labor Manufacturing overhead
Operating expenses

(A)
a.
$620,000 b. $640,000 c.
$240,000 100,000 300,000 350,000

$640,000 d.

$660,000

(B)
$660,000 $620,000 $660,000 $680,000
Beginning work in process Ending work in process Beginning finished goods Ending
finished goods

$40,000 20,000 50,000 30,000


128.

What term describes all activities associated with providing a


product or service? a. The manufacturing chain
b.
The
prod
uct
chain
c.
The
suppl
y
chain
d.
The
value
chain

19 - 20
129.

Which one of the following does not appear on the balance sheet of
a manufacturing company?
a. Finished
goods
inventory
b. Work in
process
inventory
c. Cost of
goods
manufactured
d. Raw
materials
inventory

130.

The equivalent of finished goods inventory for a


merchandising firm is referred to as a. purchases.
b. cost of
goods
purchased.
c.
merchandi
se
inventory.
d. raw
materials
inventory.

131.

How have many companies significantly lowered


inventory levels and costs? a. They use activity-based

costing.
b. They utilize an enterprise resource
planning system. c. They have a
just-in-time method.
d. They focus on a total quality management system.
Additional Multiple Choice Questions
132.

Financial and managerial accounting are


similar in that both a. have the same
primary users.
b. produce general-purpose reports.
c. have reports that are prepared
quarterly and annually. d. deal with
the economic events of an enterprise.

133.

The function that pertains to keeping the activities of the


enterprise on track is a. planning.
b
.
d
i
r
e
c
t
i
n
g
.
c
.
c
o
n
t
r
o
l
l
i
n
g
.
d. accounting.

134.

Property taxes on a manufacturing plant are an element of a

Product Cost a. Yes


b.
Yes c.
No d.
Period Cost No
Yes
Yes
No
135.

No

For a manufacturing company, which of the following is an example of


a period cost rather than a product cost?
a. Depreciation on
factory equipment
b. Wages of
salespersons
c. Wages of machine operators
d. Insurance on factory equipment
Managerial Account
ing
19 - 21

136.

For a manufacturing firm, cost of goods available for sale is


computed by adding the beginning finished goods inventory to
a. cost of goods purchased.
b. cost of
goods
manufactured.
c. net
purchases.
d. total manufacturing costs.

137.

If the cost of goods manufactured is less than the cost of goods


sold, which of the following is correct?
a. Finished Goods Inventory
has increased. b. Work in
Process Inventory has
increased. c. Finished
Goods Inventory has
decreased. d. Work in
Process Inventory has
decreased.

138.

The principal difference between a merchandising and a manufacturing


income statement is the
a.
cost of
goods
sold
section.
b.
extraordinary
item section.
c. operating
expense
section.
d.

revenue
section.
139.

If the total manufacturing costs are greater than the cost of goods
manufactured, which of the following is correct?
a. Work in Process
Inventory has increased. b.
Finished Goods Inventory
has increased. c. Work in
Process Inventory has
decreased. d. Finished
Goods Inventory has
decreased.

140.

The sum of the direct materials costs, direct labor costs, and
manufacturing overhead incurred is the
a. cost of goods
manufactured. b.
total
manufacturing
overhead. c.
total
manufacturing
costs.
d. total cost of work in process.

141.

The inventory accounts that show the cost of completed goods on


hand and the costs applicable to production that is only partially
completed are, respectively
a. Work in Process Inventory and Raw
Materials Inventory. b. Finished Goods
Inventory and Raw Materials Inventory. c.
Finished Goods Inventory and Work in
Process Inventory. d. Raw Materials
Inventory and Work in Process Inventory.

BRIEF EXERCISES
BE 142
Presented below are Truck Companys monthly manufacturing cost data
related to its personal computer products.
(a) Taxes on factory building (b) Raw materials
(c) Depreciation on manufacturing equip. (d) Wages for assembly line workers
$820,000 66,000 210,000 340,000
Instructions
Enter each cost item in the following table, placing an X under the appropriate

headings.
Direct Materials (a)
(b) (c) (d)
Product Costs
Direct Labor
Factory Overhead
BE 143
Determine whether each of the following costs should be classified as direct
materials (DM), direct labor (DL), or manufacturing overhead (MO).
a.

Depreciation on factory equipment

b.

Table legs used in

manufacturing tables c.
Wages paid to
assembly line workers
d.

Factory rent

BE 144
Indicate whether each of the following costs of a pencil manufacturer would be
classified as direct materials (DM), direct labor (DL), or manufacturing overhead
(MO).
a.

Depreciation of pencil

painting machinery b. Lead


inserted into pencils
c.

Factory utilities

d.

Wages of

assembly line worker e.


Salary of
supervisor
f.
Factory machinery
maintenance g.
Wood
h.
BE 145

Eraser compound

Presented below are Cricket Companys monthly manufacturing cost data


related to its personal computer products.
a. Hard drives and memory sticks
$30,000 b. Wages to assemble equipment
$65,000 c.
building

Insurance on manufacturing

$41,000 d. Wages for factory supervisors


$64,000
Instructions
Enter each cost item in the following table, placing an X under the appropriate
headings.
Prod
Co
Direct
Materials

Direct Labor

Factory
Overhead

a.
b.
c.
d.

BE 146
Identify whether each of the following is classified as a product cost or a period cost.
1. Direct labor
2. Direct materials
3. Factory utilities
4. Repairs to office equipment
5. Property taxes on factory building

6. Sales salaries
BE 147
Criba Manufacturing Company has the following data: direct labor
$630,000, direct materials used $421,000, total manufacturing overhead
$206,000, and beginning work in process $42,000.
Instructions
Compute (a) total manufacturing costs and (b) total cost of work in process.
BE 148
Presented below are incomplete 2009 manufacturing cost data for Swartnez
Corporation.
Direct Materials Used
(a)

$ 17,000

(b)
$148,000
Direct Labor
$42,000
?
Factory Overhead
?
$112,000
Total Manufacturing Costs
$ 73,000
$420,000
Instructions
Determine the missing amounts.
BE 149
Presented below are incomplete 2008 manufacturing cost data for Supreme
Corporation.
Direct
Materials
Used

Direct Labor

Factory Overh
ead

Total
Manufacturin
g Costs

(a)

$38,00
0

$72,000

$164,
000

(b)

$95,00
0

$70,000

$305,
000

(c)

$80,000

$120,000

$260,
000

Instructions
Determine the missing amounts.

BE 150
Raynor Manufacturing Company has the following data:
Direct labor
Direct materials used
Total manufacturing overhead Ending work in process Beginning work in
process
$46,000 84,000 60,000 30,000
40,000
Instructions
Compute (a) total manufacturing costs and (b) cost of goods manufactured.
BE 151
In alphabetical order below are current asset items for Sudler Company as of
December 31, 2008. Prepare the current assets section of the companys
balance sheet as of the same date.
Accounts receivable Cash
Finished goods Prepaid expenses Raw materials Work in process
$41,000 56,000 21,000 3,000 12,000
32,000
EXERCISES
Ex. 152
Financial accounting information and managerial accounting information
have a number of distinguishing characteristics. For each of the
characteristics listed below, indicate which characteristics are more closely
related to financial accounting by placing the letter "F" in the space to the left
of the item and indicate those characteristics which are more closely associated
with managerial accounting by placing the letter "M" to the left of the item.

1.

General-

purpose reports
2.
Reports are
used internally
3.

Prepared in accordance with generally accepted

accounting principles 4.

Special purpose reports

5.

Limited to historical cost data

6.

Reporting standard is relevance to the

decision to be made 7.Financial statements


8.

Reports generally pertain to the

business as a whole 9. Reports generally


pertain to subunits
10.

Reports issued quarterly or annually

Ex. 153
Determine whether each of the following is classified as:
D
M:
Dir
ect
ma
teri
als
DL
:
Dir
ect
lab
or
MO: Manufacturing overhead
1. Assembly line workers' wages.
2. Factory supervisors' salaries.
3. Steel used in manufacturing product.
4. Insurance on factory building.
5. Rivets and screws used in production.
6. Tires used in manufacturing vehicles.

Ex. 154
Presented below is a list of costs and expenses incurred in the factory by NuWay Corporation, a manufacturer of recreational vehicles.
1.

Property taxes

on the factory land


2.

Nails and glue

used in production
3.

Cabinet

maker's wages
4.
Factory superv
isors salaries
5.

Metal

used

in

manufacturing
6.

Depreciation

on factory machines
7.

Factory utilities

8.

Carpeting for the

recreational vehicles 9.
Property taxes on
the factory building
10.

Insurance on factory equipment


Managerial Account
ing
19 - 29

Ex. 154

(cont.)

Instructions
Classify the above items into the following categories:
DM

Direc
t
Mater
ials
DL


Direc
t
Labor
MO Manufacturing Overhead
Ex. 155
For each item, identify all applicable cost labels. Use the following code in your
answer:
1

P
r
o
d
u
c
t
C
o
s
t
2

P
e
r
i
o
d
C
o
s
t
a.

Advertising

b.
Direct
materials
used c.
Sales

salaries
d.

Indirect factory labor

e.

Repairs to

office
equipment f.
Factory manag
er's salary g.
Direct
labor used
h.

Indirect materials

Ex. 156
For each item listed below, indicate in the space to the left whether the item
would be considered a product cost or a period cost for a manufacturing
company. Use the following code:
P
r
=
P
r
o
d
u
ct
c
o
st
P
e
=
P
er
io
d
c
o
st
1. Factory supervisory salaries
2. Sales commissions

3. Income tax expense


4. Indirect materials used
5. Indirect labor
6. Office salaries expense
7. Property taxes on factory building
8. Sales manager's salary
9. Factory wages expense
10. Direct materials used

Ex. 157
Yates Manufacturing Company incurs the following manufacturing costs and
expenses during the month of May.
1. Assembly line wages
2. Raw materials used
directly in product 3.
Depreciation on office
equipment
4. Property taxes
on factory building
5. Rent on factory
building
6. Sales commissions
7. Depreciation on
factory equipment 8.
Factory utilities
9. Wages for factory
maintenance workers 10.
Advertising
11. Indirect materials
used in production 12.
Factory manager's salary
Instructions
Complete the following matrix by placing an X mark under the appropriate headings.
Cost Item 1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
12.
Direct
Direct Materials Labor
Manufacturing
Period
Overhead
Costs

Ex. 158
Presented below are incomplete 2008 manufacturing cost data for Tardy Corporation.

Used

Total
Work in Work in
Cost of Direct Materials Direct
Manufacturing
Manufacturing
Process
Process
Goods
Labor
Overhead
Costs
(1/1)
(12/31)
Manufactured

(a) $38,000
$72,000
?
(b) $149,000
$53,000
$331,000 (c)
$463,000
? $515,000

$48,000
$90,000
$53,000

$120,000

$292,000
?
$116,000
$121,000

Instructions
Determine the missing amounts.

Ex. 159
Among the items that Gentry Print Shop accounts for are the following:
1. Direct labor
2. Office supplies used
3. Depreciation on
printing machines
4. Finished goods
inventory, 12/31 5.
Raw materials
inventory, 1/1
6. Cost of
goods
manufactured
7. Work in
process, 1/1
8. Office
supplies
inventory, 12/31
9. Indirect labor

$96,000
$98,000
$290,000

10. Heat and electricity for the print shop


Gentry Print Shop prepares the following schedule and financial statements
on a yearly basis: (a)
Cost of goods manufactured schedule.
(b)
Inco
me
state
ment.
(c)
Balan
ce
sheet.
Instructions
For each item, indicate by using the appropriate letter(s) the schedule and/or
financial statements in which the item will appear.
Ex. 160
Isaac Company manufactures boats. During September, 2008, the company
purchased 100 cellular phones at a cost of $100 each. Isaac withdrew 70 phones
from the warehouse during the month. Twenty of these phones were installed in
salespersons cars and the remaining 50 phones were put in boats
manufactured during the month.
Of the boats put into production during September, 2008, 80% were completed
and transferred to the company's storage lot. Fifty percent of the boats
completed during the month were sold by September 30.
Instructions
Determine the cost of cellular phones that would appear in each of the
following accounts at September 30, 2008:
Raw
materials
inventory
Work in
process
inventory
Finished
goods
inventory
Cost of
goods
sold
Selling
expenses
Ex. 161

Manning Manufacturing Company has the following data at June 30, 2008:
Raw materials inventory, June 1 Work in process inventory, June 1
Finished goods inventory, June 1 Total manufacturing costs
Sales
Work in process inventory, June 30 Finished goods inventory, June 30 Raw
materials inventory, June 30
$ 13,800 18,100 43,500 510,000 590,000
30,400 50,200 18,000
Instructions
(a) Prepare an income statement through gross profit for
the month of June. (b) Indicate the balance sheet
presentation of the June 30 inventories.

Ex. 162
From the account balances listed below, prepare a schedule of cost of goods
manufactured for Timmons Manufacturing Company for the month ended
December 31, 2008.
Finished Goods Inventory, December 31 Factory Supervisory Salaries
Income Tax Expense
Raw Materials Inventory, December 1 Work In Process Inventory, December 31
Sales Salaries Expense Factory Depreciation Expense Finished Goods Inventory,
December 1 Raw Materials Purchases
Work In Process Inventory, December 1 Factory Utilities Expense
Direct Labor
Raw Materials Inventory, December 31 Sales Returns and Allowances
Indirect Labor
Account Balances $42,000
12,000 18,000 12,000 25,000 14,000 8,000 35,000
95,000 30,000 4,000 70,000 19,000 5,000 21,000

Ex. 163
Rabid Manufacturing Company has the following data:
Direct labor
Direct materials used
Total manufacturing overhead Beginning work in process
$160,000 191,000 208,000 21,000
Instructions
Compute (a) total manufacturing costs and (b) total cost of work in process.
Ex. 164
The following costs and inventory data were taken from the accounts of

Reser Company for 2008:


Inventories:
Raw materials Work in process Finished goods
January 1, 2008
$ 8,000 15,000 16,000
December 31, 2008
$ 7,000 13,000 10,000
Costs incurred:
Raw materials purchases Direct labor
Factory rent Factory utilities Indirect materials Indirect labor Selling
expenses
Administrative expenses
$93,000 42,000 8,000 7,000 4,000 6,000 5,000 12,000
Instructions
a. Prepare a schedule showing the amount of direct materials used in
production during the year.
b. Compute the amount of manufacturing overhead incurred during the year.
c. Prepare a schedule of Cost of Goods Manufactured for Reser Company
for the year ended December 31, 2008 in good form.
d. Prepare the Cost of Goods Sold section of the Income Statement for Reser
Company for the year ended December 31, 2008 in good form.
Ex. 165
Manufacturing costs for Carson Company for selected months are as follows:
Beginning work in process Direct materials used Direct labor
Manufacturing overhead Total manufacturing costs
Total cost of work in process Ending work in process Cost of goods manufactured
Beginning finished goods
Cost of goods available for sale Ending finished goods
Cost of goods sold
April
July
October
$
80,000
(f)
$ 98,000
280,000
$190,000
155,000 195,000
170,000
(j)
(a)
150,000
90,000 720,000
510,000
470,000
(b)
650,000
(k) 75,000
(g)
(l)
(c)
505,000
385,000 (d)
68,000
(m)
960,000
(h)
450,000 (e)
75,000
(n)

790,000

(i)

355,000

Instructions
Indicate the missing amounts. (Show computations.)

Ex. 166
Fill in the missing information on the cost of goods manufactured
schedule of Maddox Manufacturing Company:
MADDOX
MANUFACTURING
COMPANY Cost of
Goods Manufactured
Schedule For the Year
Ended December 31, 2008
Work in process (1/1) Direct materials
Raw materials inventory (1/1) Raw materials purchases
Raw materials available for use Raw materials inventory (12/31)
Direct materials used Direct labor Manufacturing overhead
Indirect labor Factory depreciation Factory utilities
Total overhead Total manufacturing costs
Total cost of work in process Less: Work in process (12/31) Cost of goods
manufactured
$

?
271,000 ?
37,000

24,000 38,000 39,000

$280,000 ?

?
$320,000

??
292,000 $520,000

Ex. 167
Data for the cost of direct materials for the month ended March 31, 2008, are as
follows:
Materials inventory, March 1, 2008 Materials inventory, March 31, 2008
$76,000 85,000
During March, the company purchased $220,000 of raw materials on
account from Pine Company and $72,000 of raw materials for cash from
Frye Company. In addition, $50,000 was paid on the Pine account balance.
Instructions
Compute the cost of direct materials used during March.

Ex. 168
Presented below are incomplete 2008 manufacturing cost data for Tardy Corporation.
Direct Materials
Factory
Total Manufacturing Used
Direct Labor
Overhead
Costs
$36,000

(a) (b) (c)

?
$53,000
$101,000

Instructions

$72,000
$54,000
?
$53,000
$90,000
$272,000
?
$290,000

Determine the missing amounts.

Ex. 169
Indicate whether each of the following would appear on the:
ACost of goods
manufactured schedule B
Income statement
CBalance sheet
Note: If it would appear in more than just one, indicate which ones.
1. Cost of goods sold
2. Finished goods inventory, 12/31
3. Direct materials used
4. Raw materials inventory, 1/1
5. Insurance on factory equipment
6. Work in process, 12/31
7. Indirect labor
8. Property taxes on office building

Ex. 170
Listed below are current asset items for Klugman Company at December 31, 2008.
Finished goods inventory Cash
Prepaid expenses Accounts receivable
$35,000 20,000 2,000 4,000
Short-term investments Raw materials inventory Work in process inventory Supplies
$28,000 12,000 18,000 500
Instructions
Prepare the current assets section of the balance sheet. (Include a complete heading.)

COMPLETION STATEMENTS
171. Financial accounting information is prepared mainly for
users, while

managerial accounting information is prepared primarily for


users.
172. The types of reports prepared in managerial accounting are often
purpose reports prepared for a specific decision.
173. Managerial accounting reports generally pertain to
business and

of a

may be very detailed.


174. Three broad managerial functions are: (1)
, and
(3)
175. The
objectives for the

, (2)

.
function is concerned with setting goals and

entity.
176. Exercising good judgment in performing the managerial functions and
choosing among alternative courses of action is called .
177. The three cost elements in manufacturing a product are (1)
,
(2)

, and (3)

178. The work of factory employees that can be physically and directly
associated with
converting raw materials into products is classified as

179. Indirect materials and indirect labor are classified as

189. Each of the manufacturing cost components is a

cost.

181. A major difference between the income statements of a merchandising


company and a manufacturing company is that the cost of goods
sold section of a merchandising company shows cost of goods
,
manufacturing company shows cost of goods
182.
get total

whereas

is added to direct labor and manufacturing overhead to

manufacturing costs for the current period.


183. The ending work in process inventory is subtracted from the total cost of
work in process to calculate

184. A manufacturing company computes cost of goods sold by adding


cost of goods manufactured to the

and subtracting the

.
185. A manufacturing company

usually has

three inventory

accounts which are (1)


, and (3)

, (2)
.

MATCHING
186. Match the items in the two columns below by entering the appropriate
code letter in the space provided.
A. Managerial accounting B. Financial accounting C. Planning
D. Directing E. Controlling
F. Work in process inventory G. Direct materials
H. Manufacturing overhead I.
Period costs
J. Value chain
1.

The cost of products that are partially complete.

2.

The function of keeping activities in accordance with plans.

3.
the entity.

Primarily concerned with internal users and reports pertain to subunits of

4.

Materials that can be physically and directly associated with


manufacturing a product.

5.

The function of setting goals and objectives.

6.

Indirect costs of manufacturing a product.

7. Primarily concerned with external users and reports pertain to the entity
as a whole.
8.

Costs that are noninventoriable.

9.

All activities associated with providing a product or service.

10.

The function of coordinating diverse activities to produce


a smooth-running operation.

SHORT-ANSWER ESSAY QUESTIONS


S-A E 187
Financial

and

managerial

accounting

are

both

concerned

with

the

economic events of an enterprise. Similarities between financial and


managerial accounting do exist, but they do have different focus. Briefly
distinguish between financial and managerial accounting as they relate to (1) the
primary users, (2) the type and frequency of reports, (3) the purpose of reports,
and (4) the content of reports.
S-A E 188
A manufacturing company makes the products that it sells. Briefly identify
and define the cost elements that are incurred in making a product. After
product cost elements are identified, how is the cost of goods manufactured for a
period determined?
S-A E 189
Assume you have just taken a position as controller for a new company that
manufactures and sells wrought iron wall hangings. Although the founder of
the company, who is the president and CEO, is a great artisan, she has very
limited knowledge of accounting.
Instructions
To help your new boss better understand accounting for a manufacturing
organization, prepare a response to her in which you: (1) identify, (2) describe,
and (3) provide examples of the three manufacturing costs and the three
inventory accounts used in accounting for a manufacturing company.
S-A E 190 (Ethics)
Million Dollar Mills is a textile manufacturing firm located in the southern
United States. The company carefully prepares all financial statements in
accordance with GAAP, and gives a copy of all financial statements to each
department. In addition, the company keeps records on quality control, safety,
and environmental pollution by the company. It then prepares "scorecards"
for each department indicating their performance. Recently, the financial
impact of the second set of information was added, and the information has
been used in the evaluation of employees for merit pay and promotions.
At the most recent employee meeting, Tyler Hanes, marketing
manager, expressed his discomfort with the system. He said there was no
guarantee that the second set of information was fair, since there were no
generally accepted principles for this kind of information. He also said that it
was kind of like keeping two sets of booksone following all legal
requirements, and the other one actually used by the company.
S-A E 190 (cont.)
Required:
1. Is it ethical to evaluate managers in the way described? Explain briefly.
2. Name at least two safeguards the company could build into its system to
ensure the ethical treatment of employees.

S-A E 191 (Communication)


Volumetrica, a producer of audio equipment for large computer systems, is
reviewing its policies as part of a biannual self-examination of the company. As
part of this process, all managers have been asked to carefully examine costs
and determine as closely as possible which costs are direct and which are
indirect.
Marie Ramsey and Dan Wilson, managers of different manufacturing
departments in the same building, have been working together. They found
the following four costs that could be economically traced to the products,
but have historically been a part of overhead:
Cost of setting up the machinery for a different production run.
Cost of minor assembly components such as
knobs and switches. Cost of packaging, which is
quite different for each model.
Cost of inspecting and testing each model.
None of the costs is significant by itself, but together these four costs make up
between 10 and 15% of the total cost of the product. Marie favors "leaving well
enough alone," as she puts it, and leaving these costs in overhead. She is afraid
that her volunteering to trace these costs will result in her having to trace many
more costs in the future. Dan, on the other hand, prefers to have the product cost
as accurate as possible. He points out that these costs are already known, and the
process would require little extra work.
Required:
You have been called on in your function as accounting manager to resolve the
dispute. Write a memo to Marie and Dan, supporting one or the other position.
Be sure to adequately defend your position, but be brief.