Name: __________________________ Date: _____________
1. Ariel, Inc., issued $30 million face amount of 9% bonds when market interest rates were
9.30% for bonds of similar risk and other characteristics.
(a.) How much interest will be paid annually on these bonds?
(b.) Will the bonds be issued at a premium or discount? Explain your answer.
(c.) Will the annual interest expense on these bonds be more than, equal to, or less than,
the amount of interest paid each year? Explain your answer.
2. The Defiance College sells season tickets for four home football games at a price of
$15. For the 2007 season, 5,000 season tickets were sold.
(a.) Write the journal entry or use the horizontal model to show the effect of the sale of
the season tickets.
(b.) Write the journal entry or use the horizontal model to show the effect of hosting a
home football game.
(c.) Where on the balance sheet would the account balance representing funds received
for games not yet played be classified? Assume that The Defiance College follows the
same accounting and financial reporting procedures that are used in business.
3. Lone Star Sales & Service acquired a new machine that cost $42,000 in early 2006. The
machine is expected to have a five-year useful life and is estimated to have a salvage
value of $7,000 at the end of its life. (Round your final answers to the nearest dollar).
(a.) Using the straight-line depreciation method, calculate the depreciation expense to be
recognized in the second year of the machine's life and calculate the accumulated
depreciation after the third year of the machine's life.
(b.) Using the double declining balance depreciation method, calculate the depreciation
expense for the third year of the machine's life and the net book value of the machine at
this point in time.
(c.) Using the sum-of-the-years digits depreciation method, calculate the amount of
accumulated depreciation after the third year of the machine's life.
4. Goodwill results from the purchase of one firm by another for a price that is greater than
the fair market value of the net assets acquired. On January 1, 2007, Blue Grass Co.
purchased Red Grass Co for $1,200,000 when the net assets were valued at $1,000,000.
Goodwill will be tested annually for impairment. Assume that after the first year there
was an impairment of $15,000.
(a.) Compute the value of goodwill to be recorded on the books of Blue Grass
Company upon the purchase of the business.
(b.) What is impairment and how is the first year's impairment recorded in the books?
5. The following are data available for Richards Co. for the month of May:
Sales 1,120 units
Beginning inventory 200 units @ $1.25
Purchases, in chronological order 500 units @ $1.30
400 units @ $1.40
700 units @ $1.50
Calculate cost of goods sold and ending inventory under the following cost flow
(1.) Weighted average
6. Prepare a bank reconciliation for Grace, Inc., as of January 31 from the following
(a.) The January 31 cash balance in the general ledger is $2,544.
(b.) The January 31 balance shown on the bank statement is $2,272.
(c.) Checks issued but not returned with the bank statement were No. 435 for $226 and
No. 448 for $91.
(d.) A deposit made on January 31 for $640 was included in the general ledger balance
but not in the bank statement balance.
(e.) Interest credited to the account during January but not recorded on the company's
books amounted to $36.
(f.) A bank charge of $12 for printing new checks was made to the account during
January. Although the company was expecting a charge, the amount was not known
until the bank statement arrived.
(g.) In the process of reviewing canceled checks, it was determined that a check issued
to a supplier in payment of an account payable of $125 was recorded as a $152 cash
(1.) Prepare the bank reconciliation for Grace, Inc., as of January 31.
(2.) Prepare the appropriate adjusting entry(ies) or show the reconciling items in a
horizontal model, for Grace, Inc. related to the bank reconciliation.
7. Using the column headings provided below, show the effect, if any, of the transaction
entry or adjusting entry on the appropriate balance sheet category or on the income
statement by entering the account name, amount, and indicating whether it is an addition
(+) or subtraction (-). Column headings reflect the expanded balance sheet equation;
items that affect net income should not be shown as affecting owners' equity.
(1.) During the month, the board of directors declared a cash dividend of $1,200,
payable next month.
(2.) Employees were paid $1,900 in wages for their work during the first three weeks of
(3.) Employee wages of $600 for the last week of the month have not been recorded.
(4.) Merchandise that cost $900 was sold for $1,350. Of this amount, $1,000 was
received in cash and the balance is expected to be received within 30 days.
(5.) A contract was signed with a local radio station for a $100 advertisement; the ad
was aired during this month but will not be paid for until next month.
(6.) Store equipment was purchased at a cash price of $300. The original list price of the
equipment was $400, but a discount was received.
(7.) Received $180 of interest income for the current month.
(8.) Accrued $310 of interest expense at the end of the month.
Situation Assets Liabilities Equity Net Income
1 ________ ________ ________ ________
2 ________ ________ ________ ________
3 ________ ________ ________ ________
4 ________ ________ ________ ________
5 ________ ________ ________ ________
6 ________ ________ ________ ________
7 ________ ________ ________ ________
8 ________ ________ ________ ________
8. At the beginning of the current fiscal year, the balance sheet of Arches Co. showed
liabilities of $380,000. During the year liabilities increased by $10,000, assets increased
by $55,000, and paid-in capital increased $20,000 to $165,000. Dividends declared and
paid during the year were $60,000. At the end of the year, owners' equity totaled
$402,000. Calculate net income or loss for the year.
9. Presented below are the comparative balance sheets of Big Apple, Inc., at December 31,
2007, and 2006. Sales for the year ended December 31, 2007, totaled $890,000.
BIG APPLE, INC.
December 31, 2007 and 2006
Cash $ 45,000 $ 49,000
Accounts receivable 134,000 106,000
Merchandise inventory 201,000 197,000
Total current assets $380,000 $352,000
Land 66,000 60,000
Building and Equipment 364,000 325,000
Less: Accumulate depreciation (186,000 ) (157,000 )
Total assets $624,000 $580,000
Short-term debt $ 49,000 $ 43,000
Accounts payable 92,000 84,000
Other accrued liabilities 64,000 67,000
Total current liabilities $205,000 $194,000
Long-term debt 87,000 107,000
Total liabilities $292,000 $301,000
Common stock, no par, 100,000 shares
authorized, 35,000 and 28,000 shares
issued respectively $102,000 $ 78,000
Beginning balance 201,000 168,000
Net income for the year 74,000 67,000
Dividends for the year (45,000 ) (34,000 )
Ending balance $230,000 $201,000
Total owners’ equity $332,000 $279,000
Total liabilities and owners’ equity $624,000 $580,000
(a.) Calculate ROI for 2007.
(b.) Calculate ROE for 2007.
(c.) Calculate working capital at December 31, 2007.
(d.) Calculate the current ratio at December 31, 2007.
(e.) Calculate the acid-test ratio at December 31, 2007.
10. Presented below is a statement of cash flows for Peach, Inc., for the year ended
December 31, 2007. Also shown is a partially completed comparative balance sheet as
of December 31, 2007 and 2006.
Statement of Cash Flows
For the year ended December 31, 2007
Cash flows from operating activities:
Net Income $9,000
Add (deduct) items not affecting cash:
Depreciation expense 45,000
Decrease in accounts receivable 23,000
Increase in inventory (7,000 )
Increase in short-term debt 5,000
Increase in notes payable 12,000
Decrease in accounts payable (6,000 )
Net cash provided by operating activities $81,000
Cash flows from investing activities:
Purchase of equipment $(50,000 )
Purchase of buildings (48,000 )
Net cash used by investing activities $(98,000 )
Cash flows from financing activities:
Cash used for retirement of long-term debt $(25,000 )
Proceeds from issuance of common stock 10,000
Payment of cash dividends on common stock (3,000 )
Net cash used by financing activities (18,000 )
Net decrease in cash for the year $(35,000 )
December 31, 2007 and 2006
Cash $ $ 88,000
Accounts receivable 73,000
Inventory 56,000 _______
Total current assets $ $
Building and Equipment 260,000
Less: Accumulate depreciation (123,000 )
Total land, buildings, and equipment _______ _______
Total assets $______ $_______
Short-term debt $32,000 $_______
Notes payable 36,000
Accounts payable _______ 29,000
Total current liabilities $ $
Long-term debt 85,000
Common stock $ 40,000
Retained earnings $_______ $_______
Total owners’ equity $_______ $_______
Total liabilities and owners’ equity $__________ $_______
(a.) Complete the December 31, 2007 and 2006 balance sheets.
(b.) Prepare a Statement of Changes in Retained Earnings for the year ended December