COMPREHENSIVE EXAMINATION A

COMPREHENSIVE EXAMINATION A PART 1 (Chapters 1-6) Problem A-I — Multiple Choice. Choose the best answer for each of the following questions and enter the identifying letter in the space provided. ...

COMPREHENSIVE EXAMINATION A PART 1 (Chapters 1-6) Problem A-I — Multiple Choice. Choose the best answer for each of the following questions and enter the identifying letter in the space provided. ____ 1. How does failure to record accrued revenue distort the financial reports? a. It understates revenue, net income, and current assets. b. It understates net income, stockholders’ equity, and current liabilities. c. It overstates revenue, stockholders’ equity, and current liabilities. d. It understates current assets and overstates stockholders’ equity. ____ 2. A contingent liability which is normally accrued is a. notes receivable discounted. b. accommodation endorsements on customer notes. c. additional compensation that may be payable on a dispute now being arbitrated. d. estimated claims under a service warranty on new products sold. ____ 3. Which of the following items is a current liability? a. Bonds due in three months (for which there is an adequate sinking fund classified as a long-term investment). b. Bonds due in three years. c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue. ____ 4. On June 15, 2012 Stine Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2012 would be a. assets and stockholders’ equity were overstated but liabilities were not affected. b. stockholders’ equity was the only item affected by the omission. c. assets and liabilities were understated but stockholders’ equity was not affected. d. assets and stockholders’ equity were understated but liabilities were not affected. ____ 5. Reversing entries are most commonly used in relation to year-end adjusting entries that a. allocate the expired portion of a depreciable asset to expense. b. amortize intangible assets. c. provide for bad debt expense. d. accrue interest revenue on notes receivable. ____ 6. Of the following adjusting entries, which one would cause an increase in assets at the end of the period? a. The entry to record the earned portion of rent received in advance. b. The entry to accrue unrecorded interest expense. c. The entry to accrue unrecorded interest revenue. d. The entry to record expiration of prepaid insurance. ____ 7. Why is it necessary to make adjusting entries? a. The accountant has made errors in recording external transactions. b. Certain facts about the affairs of the business are not included in the ledger as built up from external transactions. c. The accountant wants to show the largest possible net income for the period. d. The accountant wants to show the net cash flow for the year. ____ 8. Notes to financial statements should not be used to a. describe the nature and effect of a change in accounting principles. b. identify substantial differences between book and tax income. c. correct an improper financial statement presentation. d. indicate basis for asset valuation. ____ 9. Consistency is best demonstrated when a. expenses are reported as charges against the period in which incurred. b. the effect of changes in accounting methods is properly disclosed. c. extraordinary gains and losses are not reported on the income statement. d. accounting procedures are adopted which give a consistent rate of net income. ____ 10. The current assets section of a balance sheet should never include a. a receivable from a customer not collectible for over one year. b. the premium paid on short-term bond investment. c. goodwill arising from the purchase of a going business. d. customers' accounts with credit balances. Problem A-II — Adjusting and Reversing Entries. The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31, 2012: Cash $ 29,090 Equity Investments (trading) 60,000 Accounts Receivable 69,000 Allowance for Doubtful Accounts $ 500 Inventory 54,720 Prepaid Rent 36,000 Plant Assets 160,000 Accumulated Depreciation-Plan Assets 14,740 Accounts Payable 11,370 Bonds Payable 90,000 Common Stock 170,000 Retained Earnings 97,180 Sales Revenue 214,800 Cost of Goods Sold 154,400 Freight-Out 11,000 Salaries and Wages Expense 32,000 Interest Expense 2,040 Rent Revenue 21,600 Miscellaneous Expense 890 Insurance Expense 11,050 $620,190 $620,190 Additional Data: Problem A-II — (cont.) 1. The balance in the Insurance Expense account contains the premium costs of three policies: Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2011; Policy 2, original cost of $7,200, 3-yr. term, taken out on Oct. 1, 2012; Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2012. 2. On September 30, 2012, Alt received $21,600 rent from its lessee for an eighteen month lease beginning on that date. 3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2011, the balance of the Plant and Equipment account was $240,000. 4. On December 28, 2012, the bookkeeper incorrectly credited Sales for a receipt on account in the amount of $10,000. 5. At December 31, 2012, salaries and wages accrued but unpaid were $4,200. 6. Alt estimates that 1% of sales will become uncollectible. 7. On August 1, 2012, Alt purchased, as a short-term investment, 60 $1,000, 7% bonds of Allen Corp. at par. The bonds mature on August 1, 2013. Interest payment dates are July 31 and January 31. 8. On April 30, 2012, Alt rented a warehouse for $3,000 per month, paying $36,000 in advance. Instructions (a) Record the necessary correcting and adjusting entries. (b) Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period. Problem A-III — Key Conceptual Terms. Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the space(s) provided. A letter may be used more than once or not at all. a. Historical cost f. Economic entity k. Revenue recognition b. Relevance g. Materiality l. Full disclosure c. Monetary unit h. Conservatism m. Cost constraint d. Going concern i. Periodicity n. Industry practices e. Consistency j. Expense recognition o. Faithful representation _____ 1. Chose the solution that will be least likely to overstate assets or income. _____ 2. Describing the depreciation methods used in the financial statements. _____ 3. Applying the same accounting treatment to similar accounting events. _____ 4. The quality which helps users make predictions about present, past, and future events. _____ 5. Recording a transaction when goods or services are exchanged for cash or claims to cash. _____ 6. Preparing consolidated statements. _____ 7. Information must make a difference or a company need not disclose it. _____ 8. Provides the figure at which to record a liability. _____ 9. The preparation of timely reports on continuing operations. _____ 10. Accrual accounting (do not use "going concern"). _____ 11. Reporting those items which are significant enough to affect decisions. Select two (11 and 12). _____ 12. See item 11 above. _____ 13. Ignoring the phenomenon of price-level changes (do not use "historical cost"). _____ 14. Not reporting assets at liquidation prices (do not use "historical cost"). _____ 15. Characterized by completeness, neutrality, and being free from error. _____ 16. Establishment of an allowance for doubtful accounts. _____ 17. Additivity of financial statement figures relating to different time periods. _____ 18. Carrying inventories at sales price less distribution costs. _____ 19. Use of estimating procedures for amortization policies. Select two (do not use "periodicity") (19 and 20). _____ 20. See item 19 above. Problem A-IV — Balance Sheet Form. List the corrections needed to present in good form the balance sheet below. Errors include misclassifications, lack of adequate disclosure, and poor terminology. Do not concern yourself with the arithmetic. If an item can be classified in more than one category, select the category most favored by the authors of your textbook. Tanner Corporation Balance Sheet For the year ended December 31, 2012 Assets Current Assets: Cash $ 18,000 Equity investments-trading (fair value, $32,000) 27,000 Accounts receivable 75,000 Inventory 60,000 Supplies inventory 3,000 Investment in subsidiary company 60,000 $243,000 Investments: Treasury stock 78,000 Tangible Fixed Assets: Buildings and land 213,000 Less: Reserve for depreciation 60,000 153,000 Deferred Charges: Discount on bonds payable 3,000 Other Assets: Cash surrender value of life insurance 54,000 $531,000 Liabilities and Capital Current Liabilities: Accounts payable $ 45,000 Reserve for income taxes 42,000 Customer's accounts with credit balances 3 $ 87,003 Long-Term Liabilities: Bonds payable 120,000 Total Liabilities 207,003 Capital Stock: Capital stock 225,000 Earned surplus 74,997 Cash dividends declared 24,000 323,997 $531,000 Problem A-V — Balance Sheet and Income Statement Classifications. Specify, to the left of each account, the letter of the financial statement classification the account would appear in. Use only the classifications shown. Balance Sheet Income and Retained Earnings Statement a. Current Assets j. Sales Revenue b. Investments k. Cost of Goods Sold c. Property, Plant, and Equipment l. Operating Expenses d. Intangible Assets m. Other Revenues and Gains e. Other Assets n. Other Expenses and Losses f. Current Liabilities o. Extraordinary Item g. Long-term Debt p. Retained Earnings Section h. Capital Stock q. Not on the Statements i. Retained Earnings Account balances taken from the ledger of Morin Company on December 31, 2012 follow: _____ 1. Common Stock, $10 par _____ 16. Inventory _____ 2. Loss on Disposal of Equipment _____ 17. Salaries and Wages Expense _____ 3. Buildings _____ 18. Merchandise on order with supplier _____ 4. Office Expense _____ 19. Interest Revenue _____ 5. Allowance for Doubtful Accounts _____ 20. Selling Expenses _____ 6. Notes Payable (Short Term) _____ 21. Interest Expense _____ 7. Accum. Depreciation—Buildings _____ 22. Income Taxes Payable _____ 8. Mortgage Payable due 2014 _____ 23. Insurance Expense _____ 9. Depletion Expense _____ 24. Advertising Expense _____ 10. Freight-Out _____ 25. Equity Investments _____ 11. Sales Revenue _____ 26. Accounts Receivable _____ 12. Dividends _____ 27. Land _____ 13. Retained Earnings Dec. 31, _____ 28. Accounts Payable 2011 _____ 29. Error made in computing 2010 _____ 14. Cash depreciation expense _____ 15. Sales Discounts _____ 30. Gain on Redemption of Debt Problem A-VI — Future Value and Present Value. In computing your answers to the cases below, you can round your answer to the nearest dollar. Present value tables are provided on the next page. Use the following information in answering Cases 1 and 2 below: On January 1, 2006, Gray Company sold $800,000 of 10% bonds, due January 1, 2016. Interest on these bonds is paid on July 1 and January 1 each year. According to the terms of the bond contract, Gray must establish a sinking fund for the retirement of the bond principal starting no later than January 1, 2014. Since Gray was in a tight cash position during the years 2006 through 2011, the first contribution into the fund was made on January 1, 2012. Case 1: Assume that, starting with the January 1, 2012 contribution, Gray desires to make a total of four equal annual contributions into this fund. Compute the amount of each of these contributions assuming the interest rate is 8% compounded annually. Case 2: Assume, instead, that starting with the January 1, 2014 contribution, Gray desires to make a total of five equal semiannual contributions into this fund. Compute the amount of each of these contributions assuming the annual interest rate is 12%, compounded semiannually. Case 3: On January 2, 2012, Nelson Company loaned $90,000 to Holt Company. The terms of this loan agreement stipulate that Holt is to make 5 equal annual payments to Nelson at 10% interest compounded annually. Assume the payments are to begin on December 31, 2012. Compute the amount of each of these payments. &nbs