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Multiple choice

1. Bad Debts Expense should be recorded
a. whenever an account is written off as uncollectible.
b. each time a credit sale is made.
c. whenever an account written off is recovered.
d. at the end of each accounting period.

2. The principles of internal control do not include:
a. establishment of responsibility.
b. documentation procedures.
c. management responsibility.
d. independent internal verification.

3. The basis of computing uncollectible accounts that provides a reasonable matching of expenses with revenues is the
a. percentage of receivables basis.
b. percentage of doubtful accounts basis.
c. lower of cost or market basis.
d. direct write-off method.

4. The receivables turnover ratio is calculated by dividing
a. net credit sales by average receivables.
b. net credit sales by ending receivables.
c. total sales by average receivables.
d. total sales by ending receivables.

5. The amortization of premium on bonds payable
a. will increase bond interest expense.
b. should take place over a period not to exceed 40 years.
c. will decrease bond interest expense.
d. will increase bond interest revenue.

6. Retained earnings is affected by each of the following except a
a. cash dividend.
b. large stock dividend.
c. small stock dividend.
d. stock split.

7. The X Company has the following stock outstanding:
6% Preferred stock, $100 par value, cumulative $400,000
Common stock, $50 par value $600,000

Preferred stock dividends are in arrears for 2005 and 2004. If the company declares and pays $75,000 in dividends in 2006, the amount received by the preferred stockholders would be
a. $24,000.
b. $48,000.
c. $72,000.
d. $75,000

8. The Ewing Company purchases 1,000 shares of its common stock for $20,000. The $20,000 amount should be debited to
a. an asset account.
b. Treasury Stock.
c. Common Stock.
d. Retained Earnings.

9. The Land account would include all of the following costs except
a. drainage costs.
b. the cost of building a fence.
c. commissions paid to real estate agents.
d. the cost of tearing down a building.

10. The inventory turnover ratio is computed by dividing the average inventories into
a. net sales.
b. total assets.
c. cost of goods sold.
d. stockholders' equity.

11. The best way to study the relationship of the components of financial statements is to prepare
a. common size statements.
b. a trend analysis.
c. profitabiltiy analysis.
d. ratio analysis.

12. In performing a vertical analysis, the base for prepaid expenses is
a. total current assets.
b. total assets.
c. total liabilities.
d. prepaid expenses in a previous year.

13. Which one of the following transactions does not affect cash?
a. Acquisition and retirement of bonds payable
b. Write-off of an uncollectible accounts receivable
c. Acquisition of treasury stock
d. Payment of cash dividend

14. The Paine Company had credit sales of $600,000. The beginning accounts receivable balance was $60,000 and the ending accounts receivable balance was $80,000. Cash collections from customers were
a. $680,000.
b. $620,000.
c. $600,000.
d. $580,000.

15. Panzer 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 $5,840,000. The receivable turnover ratio was
a. 7.1 times.
b. 7.3 times.
c. 7.5 times.
d. 7 times.

16. Hepford Company reported the following on its income statement:
Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000
An analysis of the income statement revealed that interest expense was $80,000. Hepford Company's times interest earned was
a. 8 times.
b. 5.25 times.
c. 6.25 times.
d. 5 times.

17. If year one equals $800, year two equals $840, and year three equals $896, the percentage to be assigned for year three in a trend analysis, assuming that year 1 is the base year, is
a. 112%.
b. 89%.
c. 105%.
d. 100%.

18. The purchase of office equipment for $15,000 cash
a. is a cash outflow from financing activities.
b. is a cash outflow from operating activities.
c. is a cash outflow from investing activities.
d. does not affect cash flows.

19. Which of the following would be considered an "Other Comprehensive Income" item?
a. net income.
b. gain on disposal of discontinued operations.
c. extraordinary loss related to flood.
d. unrealized loss on available-for-sale securities.

20. Which of the following income statement figures would probably be the best indicatory of a company's future performance?
a. Total revenues
b. Income from operation
c. Net income
d. Comprehensive income

Part - II - Statement of Cash Flows

The comparative balance sheet for Hadford Company appears below:

Comparative Balance Sheet
Dec. 31, 2007 Dec. 31, 2006
Cash $38,000 $12,000
Accounts receivable 8,000 8,000
Inventory 14,000 7,000
Prepaid expenses 2,000 3,000
Equipment 24,000 20,000
Accumulated depreciation-equipment (7,000) (2,000)
Total assets $79,000 $48,000

Liabilities and Stockholders' Equity

Accounts payable $ 3,000 $ 4,000
Long-term note payable 9,000 14,000
Common stock 35,000 18,000
Retained earnings 32,000 12,000
Total liabilities and stockholders' equity $79,000 $48,000

The income statement for the year is as follows:

Income Statement
For the Year Ended December 31, 2007
Sales (all on credit) $250,000
Expenses and losses
Cost of goods sold $170,000
Operating expenses, exclusive of depreciation 37,000
Depreciation expense 5,000
Interest expense 2,000
Loss on sale of land 1,000
Income taxes 7,000
Total expenses and loss 222,000
Net income $ 28,000

Cash dividends of $8,000 were paid during the year. Land costing $17,000 was acquired by the issuance of common stock. The property was subsequently sold for $16,000 cash.

Prepare a statement of cash flows for the year ended December 31, 2007, using the indirect method.

Part - III - Calculation of Ratios

The financial information below was taken from the annual financial statements of Garney Company.
2007 2006
Current assets $192,000 $212,000
Current liabilities 80,000 90,000
Total liabilities 190,000 160,000
Total assets 525,000 475,000
Sales 420,000 370,000
Cost of goods sold 240,000 220,000
Inventory 105,000 125,000
Receivables (net) 80,000 60,000
Net income 55,000 48,000
Net cash provided by operating activities 65,000 25,000

Calculate the following ratios for Garney Company for 2007.
1. Current ratio.
2. Average collection period.
3. Current cash debt coverage ratio.
4. Debt to total assets ratio.
5. Cash debt coverage ratio.
6. Return on assets.
7. Profit margin ratio.
8. Asset turnover ratio.
9. Inventory turnover ratio.

Part - IV - Journal Entries

The Sextet Company uses the allowance method to account for uncollectible accounts. Prepare the appropriate journal entries to record the following transactions during 2007. You may omit journal entry explanations.

May 20 The account of Jose Castro for $950 was deemed to be uncollectible and is written off as a bad debt.

Aug. 14 Received a check for $700 from Jose Castro whose account had previously been written off as uncollectible.

Dec. 31 Use the following information for year-end adjusting entry:
The balances of Accounts Receivable and Allowance for Doubtful Accounts at year end are $175,000 and $900, respectively. Both have debit balances. It is estimated that bad debts will be 3% of accounts receivable.

Part - V - Bonds Payable (15 points)

1. On April 1, the Bently Company borrows $50,000 from New State Bank by signing a 6-month, 7%, interest-bearing note.

(a) Prepare the entry on April 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.

Solution Summary

The solution explains some multiple choice questions in accounting