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1 1. (4 points) A $40,000 fire insurance policy was purchased on October 1. The original journal entry debited Insurance Expense and credited cash. How will the adjusting journal entry made on December 31 affect the accounting equation (A=L+OE)? 2. (4 points) On November 1 the company received $20,000 for rent of office space. The lease will begin on November 1. The original journal entry debited cash and credited Rent Revenue. How will the adjusting entry made on December 31 affect the accounting equation? 3. (4 points) You are reviewing the current months financial statements. You are told that there is an error in the financial statements. Specifically, in recording depreciation expense for the period, the accountant incorrectly debited wage instead of depreciation expense. How does this mistake affect net income? 4. (4 points) How does overstating ending inventory affect net income and owners equity? 5. (4 points) Assume the Houston Company had the following balances at year-end. Assume the company recorded no write-offs or recoveries during 2015. What was the amount of bad debt expense reported in 2015? 6. (4 Points) Why is the Allowance for Doubtful Account credited when an accounts receivable had been previously written off is collected? 7. (4 Points) A zero coupon bond will have annual cash payments of? 8. (4 points) What is the present value of a three year bond with a $100,000 face value, a coupon rate of 8% and an effective rate of 10%? 9. (4 Points) Assume that a three year $100,000 bond with an 8% stated rate and a 6% effective rate was sold for $105,346. What is the interest expense in the first year of the bond? 10. (4 points) Referring to the information in question 9, what is the cash coupon payment in year 2? 2 11. (8 points) Referring to the information in question 9, prepare all of the year 3 journal entries related to this bond. 12. (4 points) Referring to the information in question 9, why were investors willing to pay a premium for this bond? 13. (4 points) Referring to the information in question 9, after all of the year three journal entries relating to this bond have been prepared, what is the ending balance in unamortized bond premium? 14. (4 points) The general ledger account for Accounts Receivable shows a debit balance of $250,000. Allowance for Uncollectible Accounts has a credit balance of $25,000. Write-offs of accounts receivable for the year were $7,500. Net sales for the year were $600,000. In the past, 4 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $45,000 of uncollectible accounts receivable. Calculate Uncollectible Accounts Expense using the accounts receivable aging method. 15. (4 points) Houston Inc makes baseball bats. Occasionally, baseball bats break. Houston will refund the money to a customer whose bat breaks within 90 days of purchase. Based on the Houston’s warranty history, 4% of total bat sales will have to be refunded. Record the warranty expense for this month. Assume that bat sales for this month totaled $450,000. 16. (4 points) Assume warranty liability had a beginning balance of $95,000. The ending balance in warranty liability was $98,000. Warranty expense for the period was $12,500. How much cash was paid to customers to resolve warranty claims? 17. (4 points) When should a contingent liability be recorded in the financial statements? 18. (4 points) Calculate the present value of $X, $Y, and $Z to be received at the end of years 1, 2, and 3. Assume a discount rate of W%. 19. (4 points) Referring to the information in question 19, what is the present value if $X are received today, $Y are received a year from now and $Z are received two years from now?. 3 20. (4 points) Entering into a capital lease would have what effect on assets, liabilities, and oweners equity? 21. (4 points) Recording the first lease payment of a capital lease would have what effect on revenue, expense, assets and liabilities? 22. (4 points) What is treasury stock? 23. (4 points) What is additional paid in capital? 24. (4 points) Assume that Houston Inc issued 1,000 shares of $3 par value stock and was able to sell this stock for $7 a share. One year later, the stock price increased to $13 a share. Prepare the journal entry to record this increase in the market value of the stock price per share over the last fiscal year. 25. (4 points) In recording a capital lease payment, what does the different between the cash payment and the reduction in the lease obligation represent? 26. (4 points) Is a company required to record depreciation expense for an asset recorded as a capital lease or operating lease? CAPITAL LEASE (yes/no) circle correct answer OPERATING LEASE (yes/no) circle correct answer 27. (4 points) What would be the journal entry to record the issuance of dividends? 28. (8 points) Dividends reduce owners equity so are they an expense? Explain your yes or no answer. 29. (4 points) What does the return on equity ratio tell you 30. (4 points) Why is depreciation expense added back to net income in the operating section of the statement of cash flows? 31. (4 points) Why is an increase in accounts receivable added back to net income in the operating section of the statement of cash flows? 4 32. (4 points) The financing section of the statement of cash flows describes cash transactions between the firm and whom? Use IBM’s annual report to answer the remaining questions. 33. (4 points) Who is IBMs’ auditor? 34. (4 points) What type of opinion did the auditor’s issue for fiscal year ending 2014? 35. (4 points) According to the audit opinion (a) are the financial statements free of ALL error and (b) who is responsible for the financial statements. 36. (4 points) Calculate IBM’s cash flow yield, cash flow to sales (use total revenue), and cash flow to average assets for 2013 and 2014 and explain what information you obtain from this ratio. Note that total assets for 2012 were $119,213. 37. (4 points) What has caused the change in IBM’s cash flow yield from 2013 to 2014? 38. (4 points) What is IBM’s current ratio in 2014? Based on this ratio does it appear that IBM has a liquidity issue? 39. (4 points) In 2014, IBM recorded a significant loss from discontinued operations. Are discontinued operations a continuing operating activity or a non-operating item and would you expect them to be recurring or non-recurring? 40. (4 points) What is IBM’s standard warranty liability as of 12/31/2014? 41. (4 points) What was IBM’s 2014 advertising and promotion expense and where is it recorded on the Income Statement? 42. (4 points) What type of depreciation method is used by IBM? 5 43. (4 points) IBM’s income tax expense is based on what? 44. (4 points) How much of the 2012 Kenexa purchase price was allocated to goodwill and what is goodwill in this context? 45. (4 points) For 2014, finished goods represent what percentage of total inventory? 46. (4 points) Briefly describe why Iusacell SA de C.V. sued IBM. 47. (4 points) What was IBM’s 2014 effective tax rate? 48. (4 points) What does IBM’s 2014 deferred tax liabilities of $4,773 represent? 49. (4 points) How much are the 2104 U.S. Pension Benefit Obligations underfunded? 50. (4 points) What were the 2014 federal subsidies IBM received for prescription drug related coverage which were used in the nonpension post retirement benefit plan? 1. (4 points) A $20,000 fire insurance policy was purchased on November 1. The original journal entry debited prepaid insurance and credited cash. How will the adjusting journal entry made on December 31 affect the accounting equation (A=L+OE)? 2. (4 points) On November 1 the company received $20,000 for rent of office space. The lease will begin on November 1. The original journal entry debited cash and credited unearned revenue. How will the adjusting entry made on December 31 affect the accounting equation? 3. (4 points) What economic event occurs that transforms a prepaid asset into an expense? 4. (4 points) What economic event occurs that transforms unearned revenue into revenue? 6 5. (4 points) On January 1 Taylor Inc purchased 500 units of inventory at $3 per unit. On January 15, Taylor Inc sold 120 units on account for $4.50 a unit. Prepare the January 15 journal entry. 6. (2 Points) An overstatement in ending inventory results in a higher/lower (circle one) in net income. 7. (2 Points) An understatement in ending inventory results in an higher/lower (circle one) in Cost of Goods Sold. 8. (4 points) Explain the reason for your answer in question 7 above. 9. (4 Points) In periods of rising prices which inventory method LIFO/FIFO (circle one) is best to use for tax purposes. Explain why. 10. (4 points) Use this inventory information for the month of July to answer the following question. July 1 Beginning inventory 10 units @ $120 per unit 5 Purchase 60 units @ $112 per unit 14 Sale 40 units 21 Purchase 30 units @ $116 per unit 31 Sale 28 units Assuming that a periodic inventory system is used, what is cost of goods sold on a FIFO basis? 7 11. (4 points) Using the information from question 10, calculate cost of goods sold on a FIFO basis assuming a perpetual inventory system. 12. (4 points) Use this inventory information for the month of March to answer the following question. March 1 Beginning inventory 30 units @ $56 per unit 7 Purchase 60 units @ $60 per unit 18 Sale 25 units 22 Purchase 10 units @ $66 per unit 29 Sale 40 units Assuming that a periodic inventory system is used, what is cost of goods sold on a LIFO basis? 8 13. (4 points) Use this inventory information for the month of March to answer the following question. March 1 Beginning inventory 30 units @ $56 per unit 7 Purchase 60 units @ $60 per unit 18 Sale 25 units 22 Purchase 10 units @ $66 per unit 29 Sale 40 units Assuming that a perpetual inventory system is used, what is cost of goods sold on a LIFO basis? 14. (4 points) The Sarbanes-Oxley Act of 2002 does not apply to (circle the correct answer) a. public companies with assets over $300 million. b. public companies with assets under $1 million. c. privately owned companies. d. companies established after 2002. 15. (4 points) The general ledger account for Accounts Receivable shows a debit balance of $150,000. Allowance for Uncollectible Accounts has a credit balance of $13,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable. Calculate Uncollectible Accounts Expense (bad debts expense) using the accounts receivable aging method. 16. (4 points) Net book value of equipment (called the carrying value in the text book) is calculated as the historical cost less the accumulated depreciation. Assume a truck was purchased at the beginning of the year for $55,000. It has a salvage value of $2,500 and an estimated useful life of 7 years. Calculate the depreciation expense and accumulated depreciation at the end of year 1. 17. (4 points) Using the information in question 16, calculate the depreciation expense and accumulated depreciation at the end of year 2. 9 18. (4 points) Using the information in question 16, calculate the net book value at the end of year 3. 19. (4 points) Using the information in question, calculate the gain or loss if the truck was sold at the end of year 4 for $32,500. Make sure you specify a gain or loss with your answer 20. (4 points) Assume a truck was purchased at the beginning of the year for $95,000. It has a salvage value of $5,500 and an estimated useful life of 7 years. It was sold for $23,300 cash at the end of year 3. Record the journal entry for the sale of the truck. 21. (4 points) The unadjusted balance of the allowance for doubtful accounts is a credit balance in the amount of $28,947. Based on this information, what will be the bad debt expense? 22. (4 points) Your company previously averaged about 20% of its total accounts receivable in the "over 90 days past due" category and now has 35% in this category. All else equal, using the aging of accounts receivable method, the amount of the bad debt adjustment will: A. Decline thus increasing the ending balance of the allowance account B. Increase, thus increasing the ending balance of the allowance account C. decline thus reducing the ending balance of the allowance account D. increase thus reducing the ending balance of the allowance account 23. (4 points) Prepare the journal entry to write-off $4,500 of accounts receivable that have been deemed uncollectible. 10 24 (4 points) Inventory levels increase by 10% at your company during the fourth quarter. Based on this increase, which of the following statements is true? A. This is always good news because inventories are an asset to the company B. This could be good news if the company is ordering more goods because sales appear to be rising C. This could be bad news if the company is ordering more goods because unit costs are falling. D. This is always bad news because higher inventories mean higher costs. 25. (2 points) Circle the correct answer. Writing off accounts receivable that have been deemed uncollectible increases/decreases/has no effect (circle the correct answer) on net accounts receivable. 26. (4 points) Credit sales with the terms 2/10 net 30 means what? 27. (4 points) Your company’s year end is December 31, 2015. On December 31, the sales dept sells $30,000 of inventory FOB shipping point. The inventory leaves the factory on December 31 and will be in transit for three days. Should these sales be recorded in 2015 or 2016 and why? 28. (4 points) Your company’s year end is December 31, 2015. On December 31, the sales dept sells $30,000 of inventory FOB destination point. The inventory leaves the factory on December 31 and will be in transit for three days. Should these sales be recorded in 2015 or 2016 and why? 29. (8 points) As part of their year end audit procedures, auditors will review sales returns for the first few weeks of the following year. What are the auditors looking for? 30. (4 points) Your company sells $469,300 of goods during the year at a cost of goods sold of $398,600. Inventory was $29,783 at the beginning of the year and $34,038 at the end of the year. Bad debt expense for the period is $15,000. Calculate the inventory turnover ratio. 11 31. (4 points) DigDug Corporation had outstanding checks totaling $5,400 on its June bank reconciliation. In July, DigDug issued checks totaling $38,900. The July bank statement shows that $26,300 in checks cleared the bank in July. The amount of outstanding checks on DigDug's July bank reconciliation should be: 32. (4 points) Which of the following bank reconciliation items would not result in an adjusting journal entry in the company's books? Circle the correct answer A. Service Charge B. Outstanding Checks C. A customers’s check returned NSF D. Interest earned on deposits 33. (4 points) On June 15, Oakley Inc. sells merchandise on account to Sunglass Hut (SH) for $1,000, terms 2/10, n/30. On June 20, SH returns to Oakley merchandise that SH had purchased for $300. On June 24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the amount of cash paid by SH to Oakley? 34. (4 points) Flynn Company's monthly bank statement showed the ending balance of cash of $18,500. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,500, outstanding checks of $2,000, a NSF check of $700, bank service charges of $30 and the EFT from a customer in payment of the customer's account of $1,500. What is the adjusted cash balance at the end of the month? 35. (4 points) Goodwill (circle the correct answer): A. should be treated like most other intangible assets and amortized over a useful life of not more than 40 years B. is an accounting measurement of how well a company's employees behave towards the company's customers C. should be recorded as a negative value if a company is purchased for less than the net carrying value of its assets. D. is recorded when the purchasers of a business pay more than the fair value of the assets purchased. 12 36. (4 points) The company has net sales revenue of $3.6 million during 2014. The company's records also included the following information (the PP&E is net PP&E): What is the company's fixed asset turnover ratio for 2014? 37. (4 points) Assume that, prior to preparing adjusting entries at the end of the year, Caterpillar Corporation has a fixed asset turnover ratio of 3.4 based on average net fixed assets of $500,000,000. Which of the following year-end adjustments would cause Caterpillar's fixed asset turnover ratio to increase? A. Caterpillar accrues and capitalizes $50,000 for self-constructed assets B. Caterpillar accrues a liability for ordinary repair costs in the amount of $50,000 C. Caterpillar writes down an impaired piece of equipment by $50,000 D. Caterpillar increases the sales returns & allowances by $50,000 38. (4 points) If net sales revenue rises 5% while the average book value of fixed assets falls 5% (circle the correct answer): A. the fixed asset turnover ratio will rise B. the fixed asset turnover ratio will fall C. the fixed asset turnover ratio will stay the same D. the impact on the fixed asset turnover ratio cannot be determined since the beginning values are unknown 39. (4 points) If net sales revenue and the average book value of fixed assets both rise 5% (circle the correct answer): A. the fixed asset turnover ratio will rise B. the fixed asset turnover ratio will fall C. the fixed asset turnover ratio will stay the same D. the impact on the fixed asset turnover ratio cannot be determined since the beginning values are unknown 13 40. (4 points) Company A uses an accelerated depreciation method while Company B uses the straight-line method. All other things being equal, during the first few years of the asset's use, Company A will show which of the following compared to Company B (circle the correct answer) ? A. Higher asset values and higher net income B. Lower asset values and higher net income C. Higher asset values and lower net income D. Lower asset values and lower net income 41. (4 points) Assuming two companies use the same accounting methods, other things being equal, the company with a higher fixed asset turnover ratio (circle the correct answer): A. has a greater amount invested in fixed assets than a company with a lower fixed asset turnover ratio B. has less invested in fixed assets than a company with a lower fixed asset turnover ratio C. generates less sales revenue than a company with a lower fixed asset turnover ratio D. makes better use of its fixed assets to generate revenue than a company with a lower fixed asset turnover ratio. 42. (2 points) When is land depreciated? 43. (4 points) What does the allowance for uncollectible accounts represent? 44. (4 points) Describe the difference between bad debt expense and the write off of accounts receivable. 45. (4 points) Ending inventory at the end of fiscal year 2015 is understated. Ending inventory at the end of fiscal year 2016 is correctly stated. What is the effect of the understatement on 2015 net income? 14 46. (4 points) Ending inventory at the end of fiscal year 2015 is understated. Ending inventory at the end of fiscal year 2016 is correctly stated. What is the effect of the understatement on 2016 net income? 47. (4 points) Ending inventory at the end of fiscal year 2015 is understated. Ending inventory at the end of fiscal year 2016 is correctly stated. What is the effect of the understatement on 2017 net income? 48. (4 points) Ending inventory at the end of fiscal year 2015 is understated. Ending inventory at the end of fiscal year 2016 is correctly stated. What is the effect of the understatement on the ending balance of retained earnings (over/under/correctly stated) for: 2015 2016 49. (4 points) The beginning balance in the allowance for doubtful accounts was a credit balance of $15,000. During the year the company wrote off $4,300 of accounts receivable. One customer that had been written off paid $550 of their balance. Based on the aging schedule the ending balance in the allowance for doubtful accounts is $17,100. What was bad debt expense? 50. (4 points) If the profit margin ratio is 6%, the asset turnover ratio is 1.7, what is the firm’s return on assets? 51. (4 points) What does the profit margin represent?

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