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Multiple Choice Questions in Financial Accounting

Identify the letter of the choice that best completes the statement or answers the question.

1. Monumental Toys sold merchandise to a customer on credit. The invoice amount was $2,000; the invoice date was August 10; credit terms were 1/10, n/30. Which one of the following statements is true?
a. The customer can take a $20 discount if the invoice is paid by August 20.
b. The customer should pay $1,980 if the invoice is paid by September 9.
c. The customer must pay a $20 penalty if payment is made after September 9.
d. The customer must pay $2,020 if payment is made after August 20.

2. Which of the following statements is true?
a. The flow of costs to inventory should match the physical flow of the merchandise.
b. Accounting standards require that merchandise costs be specifically traced to units left in inventory and to units which have been sold.
c. Accountants have developed methods which assume how costs should be assigned to inventory and cost of goods sold.
d. Alternative inventory cost flow assumptions have the same effect on the amount of net income reported.

Exhibit 6-1
Use the data below to answer the questions that follow. Assume that the company uses the periodic inventory system.

Sept. 1 On hand, 300 units @ $1.50 each $ 450.00
6 Purchased 1,000 units @ $1.65 each 1,650.00
18 Purchased 800 units @ $1.75 each 1,400.00
Total cost of goods available for sale $3,500.00 30 On hand, 425 units

3. Refer to Exhibit 6-1. If the Sept. 30th inventory included 250 units from the Sept. 6th purchase and 175 units from the Sept. 18th purchase, the ending inventory for Sept. 30 under the specific identification method would be
a. $701.25.
b. $718.75.
c. $722.50.
d. $743.75.

4. Refer to Exhibit 6-1. If the company uses the FIFO inventory method, the amount assigned to the Sept. 30 inventory would be
a. $637.50.
b. $656.25.
c. $722.50.
d. $743.75.

5. Refer to Exhibit 6-1. If the company uses the weighted average cost inventory method, the amount assigned to the Sept. 30 inventory would be
a. $656.25.
b. $694.17.
c. $708.33.
d. $718.75.

6. Refer to Exhibit 6-1. If the company uses the LIFO inventory method, the ending inventory at Sept. 30 would be
a. $637.50.
b. $656.25.
c. $722.50.
d. $743.75.

Exhibit 6-2
Use the data below to answer the questions that follow. Assume that the company uses the periodic inventory system.

March 1 On hand, 150 units @ $5.50 each $ 825.00
5 Purchased 300 units @ $5.22 each 1,566.00
14 Purchased 125 units @ $4.96 each 620.00
Total cost of goods available for sale $3,011.00 31 On hand, 220 units

7. Refer to Exhibit 6-2. If the company uses the FIFO inventory method, the cost of goods sold for March would be
a. $1,895.10.
b. $1,952.50.
c. $1,820.60.
d. $1,858.97.

8. Refer to Exhibit 6-2. If the company uses the weighted average cost inventory method, the amount assigned to cost of goods sold for March would be
a. $1,895.10.
b. $1,952.50.
c. $1,820.60.
d. $1,858.97.

9. Refer to Exhibit 6-2. If the company uses the LIFO inventory method, the amount assigned to the March 31st inventory would be
a. $1,115.90.
b. $1,190.40.
c. $1,152.03.
d. $1,091.20.

10. Shelton Corp. uses a periodic inventory system. At the beginning of 2004 its inventory balance was
$125,000. During the first 4 months of 2004, net purchases amounted to $475,000 and net sales were $500,000. On May 1, 2004, a fire destroyed the company's warehouse and its entire inventory. The average gross profit ratio in recent years had been 40%. What is the estimated amount of Shelton's inventory loss on May 1, 2004?
a. $50,000
b. $250,000
c. $350,000
d. $300,000

11. If cost of goods sold under FIFO was $80,000 and was $100,000 under LIFO, assuming a tax rate of 40%, what were the tax savings resulting from using LIFO?
a. $32,000
b. $40,000
c. $ 8,000
d. There would be no tax savings.
Exhibit 6-4
Use the data below to answer the questions that follow. Assume that the company uses the perpetual inventory system.

Jan. 1 On hand, 60 units at $50.00 each $3,000
10 Purchased 80 units at $55.25 each 4,420 17 Sold 100 units
25 Purchased 90 units at $51.50 each 4,635 31 On hand, 130 units

12. Refer to Exhibit 6-4. If the moving average method is used, what is the amount assigned to cost of goods sold for the units sold on January 17?
a. $5,200
b. $5,210
c. $5,300
d. $5,420

13. Refer to Exhibit 6-4. If the moving average method is used, what is the amount assigned to the ending inventory on January 31?
a. $6,695
b. $6,755
c. $6,760
d. $6,890

Exhibit 6-5
Use the data below to answer the questions that follow. Assume that the company uses the perpetual inventory system.

Jan. 1 On hand, 10 units at $20 each $ 200
4 Sold 8 units for $75 each 600
8 Purchased 25 units at $23 each 575
15 Sold 20 units for $75 each 1,500
22 Purchased 50 units at $26 each 1,300
26 Sold 52 units for $75 each 3,900
28 Purchased 15 units at $29 each 435

14. Refer to Exhibit 6-5. If the FIFO method is used, what is the amount assigned to cost of goods sold for the month of January?
a. $1,930
b. $1,945
c. $1,966
d. $2,080

15. Refer to Exhibit 6-5. If the LIFO method is used, what is the amount assigned to the cost of goods sold on January 15th?
a. $430
b. $454
c. $460
d. $580

16. Refer to Exhibit 6-5. If the LIFO method is used, what amount is assigned to the ending inventory on January
31st?
a. $430
b. $454
c. $544
d. $565

17. Beimesche Corp. invested cash in a 9-month certificate of deposit (CD) on October 1, 2004. If Beimesche has an accounting period which ends on December 31, 2004, when would it most likely recognize interest revenue from the CD?
a. On December 31, 2004, only
b. On July 1, 2005, only
c. On December 31, 2004, and July 1, 2005
d. Daily

Exhibit 7-2
Use the data presented below which Seaside Company identified in preparing a bank reconciliation on August 31, 2004, to answer the questions that follow.

Bank statement balance $24,500
Seaside's book balance (before adjustments) ?
Outstanding checks 2,700
NSF checks 400
Service charges 200
Deposits in transit 800
Interest earned on checking account 100

18. Refer to Exhibit 7-2. What is the adjusted cash balance on August 31, 2004?
a. $22,600
b. $23,100
c. $24,000
d. $26,400

19. Refer to Exhibit 7-2. What is Seaside's book balance (before adjustments)?
a. $22,600
b. $23,100
c. $24,000
d. $26,400

20. Refer to Exhibit 7-2. What is the net amount of the increase or decrease in Seaside's cash balance which must be recorded as a result of the adjustments identified by the bank reconciliation?
a. $1,900 increase
b. $500 increase
c. $500 decrease
d. $2,400 decrease

21. The following information was presented on the balance sheet of The Music Doctor as of December 30, 2004:

Trade accounts receivable (less allowance for doubtful
accounts of $802,000) $11,660,000
Which of the following statements is false?
a. The Music Doctor expects that $802,000 of accounts receivable will not be collected.
b. The balance in the Accounts Receivable account in The Music Doctor's general ledger is $12,462,000.
c. The net realizable value of The Music Doctor's accounts receivable is $11,660,000.
d. The Music Doctor expects to collect only $10,758,000 from its customers.

Exhibit 7-3
Use the data presented below for Woodmoor Corp. for the year ended December 31, 2004 to answer the questions that follow.

Sales (100% on credit) $950,000
Sales Returns and Allowances 21,000
Accounts Receivable (December 31, 2004) 114,000
Allowance for Doubtful Accounts (before adjustment at December 31,
2004; credit balance) 1,0 0 0
Estimated amount of uncollectible accounts based on an aging analysis 9,000

22. Refer to Exhibit 7-3. If Woodmoor estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt expense for 2004?
a. $18,580
b. $18,820
c. $19,000
d. $19,420

23. Refer to Exhibit 7-3. If Woodmoor uses the percentage of net credit sales method to estimate its bad debts, what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?
a. $18,580
b. $19,000
c. $19,580
d. $20,000

24. Refer to Exhibit 7-3. If Woodmoor uses an aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for 2004?
a. $2,280
b. $8,000
c. $9,000
d. $10,000

25. Refer to Exhibit 7-3. If Woodmoor uses an aging of accounts receivable approach to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?
a. $104,000
b. $105,000
c. $106,000
d. $113,000

Exhibit 7-4
Use the data presented below for Palmer Lake, Inc. for 2004 to answer the questions that follow.

Accounts Receivable (January 1, 2004) $236,000
Credit sales during 2004 720,000
Collections from credit customers during 2004 590,000
Customer accounts written off as uncollectible during 2004 8,000
Allowance for Doubtful Accounts (credit balance; after write-off of
uncollectible accounts) 700
Estimated uncollectible accounts based on an aging analysis 9,600

26. Refer to Exhibit 7-4. What is the balance of Accounts Receivable at December 31, 2004?
a. $236,000
b. $348,400
c. $358,000
d. $366,000

27. On July 1, 2004, Mikulas Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually on June 30. If the accounting year for Mikulas ends at December 31, 2004, what will be recorded with respect to the bonds on that date?
a. The carrying value of the bonds will be $108,000.
b. The cash received in interest will be $8,000.
c. Interest income in the amount of $4,000 will be accrued.
d. No entry is necessary at December 31, 2004, because the bonds were purchased at face value.

28. Lenkenann, Inc. purchased 1,000 shares of Dody & Co. for $17 per share and classified the investment as trading securities. At the end of the year, the fair value of Dody stock was $15 per share. How would Lenkenann record this change?
a. The investment in Dody stock would be increased by $2,000.
b. The investment in Dody stock would be decreased by $2,000.
c. An unrealized gain would be recorded on the income statement.
d. An unrealized loss would be recorded on the balance sheet.

29. Upon review of the balance sheet, you observed that there was an unrealized gain. You could assume that
a. trading securities were sold at a gain.
b. available-for-sale securities were sold at a gain.
c. trading securities increased in market value.
d. available-for-sale securities increased in market value.

Exhibit 8-1
Use the information concerning Clark Communications, Inc. to answer the questions that follow.

Clark Communications, Inc. purchased equipment at a cost of $68,000. The equipment has an estimated residual value of $4,000 and an estimated life of 8 years, or 12,500 hours of operation. The equipment was purchased on January 1, 2004. During the first year of operation, it was used for 1,800 hours. At the end of 7 years, Clark Communications expects to replace this old equipment with a newer model at an estimated cost of $85,000.

30. Refer to Exhibit 8-1. Based on the information presented above, what method of depreciation will produce the maximum depreciation expense in the first year of life?
a. Straight-line
b. Double-declining-balance
c. Units-of-production
d. All methods produce the same expense in the first year of life.

31. Refer to Exhibit 8-1. What amount will Clark Communications report as depreciation expense over the 8-year life of the equipment?
a. $ 8,000
b. $64,000
c. $68,000
d. $60,000

32. Refer to Exhibit 8-1. If Clark Communications uses the straight-line method, what is the book value of the equipment at December 31, 2004?
a. $68,000
b. $64,000
c. $60,000
d. $8,000

33. Refer to Exhibit 8-1. If Clark Communications uses the units-of-production method, what is the depreciation rate per hour for the equipment?
a. $5.12
b. $5.44
c. $35.55
d. $37.88

34. Refer to Exhibit 8-1. If Clark Communications uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2004?
a. $18,000
b. $17,000
c. $16,000
d. $15,000

35. Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance sheet?
a. Land
b. Buildings
c. Accumulated Depreciation, Buildings
d. Depreciation Expense, Buildings

42. On January 2, 2004, Xeriscape Company sold a machine for $1,000 that it had used for several years. The machine cost $6,500, and had accumulated depreciation of $5,200 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine?
a. Gain of $1,000
b. Loss of $300
c. Loss of $1,000
d. Gain of $300

43. Goodwill can be recorded as an asset when a(n)
a. business has above normal profitability compared to other businesses in its industry.
b. business can determine that it has created customer goodwill and name recognition.
c. offer is received to purchase the business at a price in excess of the value of the net
assets.
d. business is purchased and payment is made in excess of the value of the net assets acquired.
Exhibit 8-3
Use the information presented below for Royal Cleaners, Inc. for 2004 and 2003 to answer the questions that follow. Royal Cleaners uses the straight-line depreciation method.

2004 2003
Property, Plant, and Equipment $ 250,000 $190,000
Accumulated Depreciation 100,000 85,000
Depreciation Expense 62,500 47,500
Net Sales 1,000,000 900,000
Total Assets 625,000 475,000

44. Refer to Exhibit 8-3. Using the data of 2004, determine the average life of Royal Cleaners' property, plant, and equipment rounded to one decimal place.
a. 1.6 years
b. 2.2 years
c. 2.5 years
d. 4.0 years

45. Refer to Exhibit 8-3. Using the data for 2003, determine the average age of Royal Cleaners' property, plant, and equipment rounded to one decimal place.
a. 1.6 years
b. 1.8 years
c. 2.2 years
d. 2.5 years

46. Paul Gibbs bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values: land $320,000: building $370,000 and equipment $60,000. What cost should be allocated to the building?
a. $370,000
b. $695,000
c. $342,867
d. $399,281

Problem

Exhibit 5-9
The following set of questions is based on the financial statements for Winnebago Industries for 2001 and 2000. Selected data from those financial statements are presented below (all data are in thousands of dollars).

Net Sales--2001 $681,834
Cost of Sales--2001 587,330
Selling, General &
Administrative Expenses--2001 39,030
Other Income--2001 3,754
Income Taxes--2001 15,474
Inventories--August 26, 2000 85, 707
Inventories--August 25, 2001 79,815
Retained Earnings--August 26, 2000 195, 556

47. Refer to Exhibit 5-9. Determine the dollar amount of cost of goods purchased for Winnebago Industries for 2001. Also, illustrate how the cost of sales figure for 2001 was determined.

Exhibit 5-10
Several transactions for sales and purchase activities for a company like Target are described below. Use these transactions to answer the questions that follow.

(a) Target purchases shoes from ProSpirit on credit.
(b) Target returns defective shoes to ProSpirit before payment is made to ProSpirit for the shoes purchased in transaction (a).
(c) Target pays for the shoes purchased from ProSpirit.
(d) Target sells shoes to its customers for cash and on credit.
(e) Credit customers return shoes to Target for a refund.
(f) Credit customers pay their account balances to Target.

48. Refer to Exhibit 5-10. For each transaction described above, describe the economic effects of the transaction on Target. Assume that Target uses a periodic inventory system.

49. Tan Lines purchased equipment at the beginning of 2003 for $140,000. The company decided to depreciate the equipment over a 10-year period using the double-declining-balance method. The company estimated the equipment's salvage value at $12,000. Show how the costs should be presented on Tan Lines' financial statements at December 31, 2004. Label the statements properly.

50. The following information appeared in the financial statements of The Quarry, Inc. at December 31, 2004:
(In thousands) December 31, 2004 December 31, 2003
Land $ 36.8 $ 48.9
Buildings 665.2 605.8
Machinery and equipment 848.5 854. 3
$1,550.5 $1,509.0
Less accumulated depreciation (330.5) (295.1)
Net plant and equipment $1,220.0 $1,213.9
Note 4: Plant Assets

The company depreciates plant assets over useful lives of 5 to 12 years using the straight-line and accelerated methods. During 2004, plant assets costing $25,000 were sold at a gain of $2,000. Depreciation for the period amounted to $18,000.

Answer the following questions:

A. How much depreciation expense was recorded during 2004?

B. Were any new plant assets purchased during the year? How do you know?

C. Are you able to determine whether any land was sold during 2004? Why or why not?

Please see attached for full question.

Attachments

Solution Preview

Identify the letter of the choice that best completes the statement or answers the question.

1. Monumental Toys sold merchandise to a customer on credit. The invoice amount was $2,000; the invoice date was August 10; credit terms were 1/10, n/30. Which one of the following statements is true?
a. The customer can take a $20 discount if the invoice is paid by August 20.
b. The customer should pay $1,980 if the invoice is paid by September 9.
c. The customer must pay a $20 penalty if payment is made after September 9.
d. The customer must pay $2,020 if payment is made after August 20.

Answer: a) The customer can take a $20 discount if the invoice is paid by August 20.

1% of $ 2000 = $20
Rebate can be availed if the payment is made by the 10th day i.e. by August 20.
After that the customer has to pay $2000 by the 30th day.

2. Which of the following statements is true?
a. The flow of costs to inventory should match the physical flow of the merchandise.
b. Accounting standards require that merchandise costs be specifically traced to units left in inventory and to units which have been sold.
c. Accountants have developed methods which assume how costs should be assigned to inventory and cost of goods sold.
d. Alternative inventory cost flow assumptions have the same effect on the amount of net income reported.

Answer: c) Accountants have developed methods which assume how costs should be assigned to inventory and cost of goods sold.

Exhibit 6-1
Use the data below to answer the questions that follow. Assume that the company uses the periodic inventory system.

Sept. 1 On hand, 300 units @ $1.50 each $ 450.00
6 Purchased 1,000 units @ $1.65 each 1,650.00
18 Purchased 800 units @ $1.75 each 1,400.00
Total cost of goods available for sale $3,500.00
30 On hand, 425 units
3. Refer to Exhibit 6-1. If the Sept. 30th inventory included 250 units from the Sept. 6th purchase and 175 units from the Sept. 18th purchase, the ending inventory for Sept. 30under the specific identification method would be
a. $701.25.
b. $718.75.
c. $722.50.
d. $743.75.
Answer: b) $718.75
250x 1.65 + 175 x 1.75 = 718.75

4. Refer to Exhibit 6-1. If the company uses the FIFO inventory method, the amount assigned to the Sept. 30 inventory would be
a. $637.50.
b. $656.25.
c. $722.50.
d. $743.75.
FIFO (first-in, first-out) is the assumption that the first units purchased are the first units sold. Thus inventory is assumed to consist of the most recently purchased units.
425 x 1.75 =743.75
5. Refer to Exhibit 6-1. If the company uses the weighted average cost inventory method, the amount assigned
to the Sept. 30 inventory would be
a. $656.25.
b. $694.17.
c. $708.33.
d. $718.75.

Answer: c) $708.33
Weighted average cost = 3500/ (300+1000+800) =$5/3 per unit
425 x 5/3=708.33

6. Refer to Exhibit 6-1. If the company uses the LIFO inventory method, the ending inventory at Sept. 30 would be
a. $637.50.
b. $656.25.
c. $722.50.
d. $743.75.

Answer: b $656.25.
LIFO (last-in, first-out) is the assumption that the most recently acquired goods are sold first.
300x1.5 + 125 x 1.65 = 656.25
Exhibit 6-2
Use the data below to answer the questions that follow. Assume that the company uses the periodic inventory system.

March 1 On hand, 150 units @ $5.50 each $ 825.00
5 Purchased 300 units @ $5.22 each 1,566.00
14 Purchased 125 units @ $4.96 each 620.00
Total cost of goods available for sale $3,011.00 31 On hand, 220 units
7. Refer to Exhibit 6-2. If the company uses the FIFO inventory method, the cost of goods sold for March would be
a. $1,895.10.
b. $1,952.50.
c. $1,820.60.
d. $1,858.97.
Answer: a ) $1,895.10
Units sold= 150+300+125-220=355
COGS= 150 x5.50 + 205 x 5.22 = 1895.10

8. Refer to Exhibit 6-2. If the company uses the weighted average cost inventory method, the amount assigned to cost of goods sold for March would be
a. $1,895.10.
b. $1,952.50.
c. $1,820.60.
d. $1,858.97.

Answer: d. $1,858.97.

Average cost= 3011/ (150+300+125) = 3011/575
COGS= 355 x 3011/575= 1858.97

9. Refer to Exhibit 6-2. If the company uses the LIFO inventory method, the amount assigned to the March 31st inventory would be
a. $1,115.90.
b. $1,190.40.
c. $1,152.03.
d. $1,091.20.

Answer: a) $1,115.90.

125 x 4.96+ 95 x 5.22 = 1115.90

10. Shelton Corp. uses a periodic inventory system. At the beginning of 2004 its inventory balance was
$125,000. During the first 4 months of 2004, net purchases amounted to $475,000 and net sales were $500,000. On May 1, 2004, a fire destroyed the company's warehouse and its entire inventory. The average gross profit ratio in recent years had been 40%. What is the estimated amount of Shelton's inventory loss on May 1, 2004?
a. $50,000
b. $250,000
c. $350,000
d. $300,000

Answer: d ) $300,000

Cost of goods sold= 60% x Net sales= 60% x 500,000= 300,000
Beginning inventory + Purchases - Cost of goods sold= Ending inventory
125,000 + 475,000 - 300,000 = 300,000

11. If cost of goods sold under FIFO was $80,000 and was $100,000 under LIFO, assuming a tax rate of 40%, what were the tax savings resulting from using LIFO?
a. $32,000
b. $40,000
c. $ 8,000
d. There would be no tax savings.

Answer: c) $ 8,000

Difference in cost = 100,000-80,000= 20,000
Tax Saving = tax rate x additional cost = 40% x 20,000 = 8,000

Exhibit 6-4
Use the data below to answer the questions that follow. Assume that the company uses the perpetual inventory system.

Jan. 1 On hand, 60 units at $50.00 each $3,000
10 Purchased 80 units at $55.25 each 4,420 17 Sold 100 units
25 Purchased 90 units at $51.50 each 4,635 31 On hand, 130 units
12. Refer to Exhibit 6-4. If the moving average method is used, what is the amount assigned to cost of goods sold for the units sold on January 17?
a. $5,200
b. $5,210
c. $5,300
d. $5,420
e. Answer: c) $5,300
Moving average cost = (60x50+ ...

Solution Summary

Multiple Choice Questions and short answer questions in Financial Accounting have been answered.

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