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Online professor's response to: Accounting questions

21. Employees at B Corporation are paid $5,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2?
a. $5,000
b. $3,000
c. None, matching requires the weekly salary to be accrued on December 31.
d. $2,000

22. If a company has a current 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 Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease

Fill-in-the-Blank Questions:

27. If the inventory turnover ratio is 5 times, and the average inventory was $600,000, the cost of goods sold during the year was $______________ and the average days to sell the inventory was ______________ days.

29. The claims of owners on the assets of a corporation are known as _____________ _______________.

Short Answer/Essay Questions:

33. The following data are taken from the financial statements of Dellmont Company. The data are in alphabetical order.
Accounts payable $ 28,000 Net sales 500,000
Accounts receivable 65,000 Other current liabilities 20,000
Avg. common shares O/S 20,000 Salaries payable 7,000
Cash 56,000 Stockholders' equity 169,000
Gross profit 190,000 Total assets 325,000
Net income $ 50,000
Instructions
Compute the following:
(a) Current ratio.
(b) Working capital.
(c) Earnings per share.
(d) Debt to total assets ratio.

34. Sam Hill has worked for Dr. Lee Chang for several years. Sam demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Sam's primary duties at the medical office is to open the mail and list the checks received. He also
takes cash from patients at the cashier window as patients leave. At times it is so hectic that Sam doesn't bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office Sam offers to help Mary post the payments to the patients' accounts receivable. She
is always happy to receive his help, because he is a very conscientious worker.
Instructions
Identify any principles of internal control that may be violated in this medical office situation.

35. Ramon Diaz was reviewing his business activities at the end of the year (2007) and decided to prepare a Retained Earnings Statement. At the beginning of the year his assets were $550,000, liabilities were $140,000, and common stock was $120,000. The net income for the year was $350,000. Dividends of $220,000 were paid during the year.
Instructions
Prepare a Retained Earnings Statement in good form.

36. The comparative balance sheet of Stuart Company appears below:
STUART COMPANY
Comparative Balance Sheet
December 31,
____________________________________________________________________
Assets 2007 2006
Current assets ............................................................................. $ 340 $280
Plant assets ................................................................................. 675 520
Total assets ............................................................................ $1,015 $800
Liabilities and stockholders' equity
Current liabilities .......................................................................... $ 180 $120
Long-term debt ............................................................................ 250 160
Common stock ............................................................................ 325 320
Retained earnings ....................................................................... 260 200
Total liabilities and stockholders' equity ................................. $1,015 $800
Instructions
(a) Using horizontal analysis, show the percentage change for each balance sheet item using 2006 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.

37. Benson and Jencks is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in the year, even though testing was not complete. It was a pen designed
with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success.
The success of the product has Fern Donald, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results.
Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable.
Instructions
1. Describe the alternatives that you as an accountant would have in this
situation.
2. Indicate which alternative is best.

Solution Preview

21. Employees at B Corporation are paid $5,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2?
a. $5,000
b. $3,000
c. None, matching requires the weekly salary to be accrued on December
31.
d. $2,000

The salary on a per day basis is $5,000/5=$1,000. Since Dec 31 is a Wednesday, 3 days of salary would be accrued till Dec 31. The entry would be
Salary Expense Dr 3,000
Salaries Payable Cr 3,000
On Jan 2 when the total amount of $5,000 is paid, only $2,000 would be the further salary expense. The entry would be
Salary Expense Dr 2,000
Salary Payable Dr 3,000
Cash Cr 3,000
On Jan 2, a salary expense of $2,000 would be recorded

22. If a company has a current 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 Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease

The current ratio is 1.2:1. When cash is borrowed by short term debt, then current assets (cash) will increase and current liabilities (short term borrowing) will increase. If the initial ratio is >1 (1.2:1) and both the numerator and denominator increase by the same value, the final ratio would be lower than the initial ratio. The current ratio will Decrease.
Collection of receivable does not change the total current assets, receivable is converted to cash and so there will be no effect on the current ratio.
The answer is c.

Fill-in-the-Blank Questions:

27. If the inventory turnover ratio is 5 times, and the average inventory was $600,000, the cost of goods sold during the year was $______________ and the average days to sell the inventory was ______________ days.

Inventory Turnover = Cost of Goods Sold/Average Inventory
Cost of Goods Sold = Inventory Turnover X Average Inventory = 5X600,000=$3,000,000
Average days to sell inventory = 365/Inventory turnover = 365/5 = 73 days

29. The claims of owners on the assets of a corporation are known as _____________ _______________.

The claims are known as Owners Equity

Short Answer/Essay Questions:

33. The following data are taken from the financial statements of Dellmont
Company. The data are in alphabetical order.
Accounts payable $ 28,000 Net sales 500,000
Accounts receivable 65,000 Other current liabilities 20,000
Avg. common shares O/S 20,000 Salaries payable 7,000
Cash 56,000 Stockholders' equity 169,000
Gross profit 190,000 Total assets 325,000
Net income $ 50,000
Instructions ...

Solution Summary

The solution explains various accounting questions

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