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									                                       Exam 2 Study Questions (Chapter 4 – 7)
                                                   Chapter 4
Answer the self study Questions on pages 190 – 191 in your textbook. Solutions can be found on the bottom of
page 210.

True or False (if false explain why)

1.   Common types of financial statement fraud include creating fictitious revenue from a phantom customer,
     improperly valuing assets, and mismatching revenues and expenses.

2.   The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.

3.   The control environment refers to the overall top-to-bottom attitude of the company with respect to internal
     controls.

4.   Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the
     same client.

5.   The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings
     and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from
     customers.

6.   The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash
     collection is highly likely in the near future.

7.   Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the
     transaction as a cash sale.

8.   A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the
     company's own records.

9.   Checks outstanding are checks the company has written that have not been subtracted from the bank's record
     of the company's balance.

10. Interest earned on a bank account is an example of a cash transaction recorded by the company and then later
    by the bank after notification.

11. A company's cash is reported in two financial statements – income statement and statement of cash flows.

12. Only transactions involving cash affect a company's cash flows.

13. Generally, when a company's net income and free cash flows trend in the same direction over time, earnings
    are believed to have higher quality.

Multiple Choice Questions

14. Which employees are responsible for a company's effective internal controls?
    A. Upper management
    B. Mid-level managers
    C. Lower-level managers
    D. All employees.




Exam 2                                                Page 1                                       Study Questions
15. Which of the following would not be recorded as a cash sale?
    A. Customer who pays with a check.
    B. Customer who pays with a debit card.
    C. Customer who pays with a credit card.
    D. Customer who buys on account.

16. McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3%
    of the sale. When a customer uses a credit card to pay McGregor $100 for merchandise provided, McGregor
    would:
    A. Debit cash for $100
    B. Debit service fee expense $3.00
    C. Credit sales revenue for $97
    D. Credit service fee expense $3.00

17. The following information is about the cash balances for Mooner Sooner Inc. at the end of 20C:
    Bank balance: $8,000
    Checks outstanding: $5,800
    Note collected by the bank: $1,500
    Service fee: $20
    Deposits outstanding: $4,000
    NSF check (bad check) returned for $300
    What is the correct cash balance for Mooner Sooner Inc.?
    A. $10,200
    B. $7,400
    C. $6,200
    D. $6,160

18. After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be
    recorded with:
    A. A credit to notes receivable
    B. A credit to cash
    C. A debit to notes receivable
    D. A credit to accounts receivable

19. A company had the following sales transactions.
    1. Total debit card sales = $200,000
    2. Total credit card sales = $400,000
    3. Total cash sales = $800,000
    4. Total check sales = $100,000
    There is a charge of 2% on all credit card transactions. Calculate total CASH recorded for these sales.
    A. $1,500,000
    B. $1,492,000
    C. $1,470,000
    D. $1,474,000

Fill in the blank/Essay

20. A company's general ledger shows a cash balance of $5,000. Comparing the company's cash records with the
    monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840,
    NSF charges of $110, and interest earned of $15, bank error $89, and bank service charge $20. Calculate the
    correct balance of cash.




Exam 2                                                 Page 2                                       Study Questions
                                                                                       th
21. Miller Company's cash ledger reports the following for the month ending April 30 .

                 Deposits                                      Checks
 Date                            Amount        No.     Date             Amount
                         5-Apr     $3,000       440           3-Apr        $2,100
                       10-Apr        2,560      441           9-Apr         3,200
                       18-Apr        6,400      442       12-Apr            1,950
                       22-Apr        1,280      443       19-Apr            1,100
 Cash receipts 4/23 - 4/30           3,300      444       25-Apr                 650
                                  $16,540       445       27-Apr            2,100
                                                446       30-Apr            1,100
            Balance on April 1     $5,400                                 $12,200
 Receipts                          16,540
               Disbursements       12,200
         Balance on April 30      $9,740
Information from April's bank statement and company records reveals the following additional information:

a) The ending cash balance recorded in the bank statement is $8,552.
b) Cash receipts of $3,300 from 4/23 – 4/30 are outstanding.
c) Checks 444 and 446 are outstanding.
d) The deposit on 4/22 includes a customer's check for $280 that did not clear the bank (NSF check).
e) Check 445 was written for $1,200 for rent in April. The bank properly recorded the check for this amount.
f) An automatic withdrawal for the April bank loan was made on April 29 for $1,250.
g) Miller's checking account earns interest based on the average daily balance. The amount of interest earned for
   April is $12.
h) Earlier this month, one of Miller’s top executives borrowed $1,000 from Miller. On April 29, the executive
   electronically transferred $1,010 ($1,000 borrowed amount plus $10 interest) directly to the company’s bank
   account in payment for the borrowing.
i) The bank charged the following service fees: $25 for NSF check and $5 for the monthly service fee.

Prepare a bank reconciliation for April 30.




Exam 2                                                Page 3                                    Study Questions
22. A company provides services on account during the current year totaling $400,000. By the end of the year,
    $350,000 of this amount was received. In addition, $75,000 was received on account from customers for
    services provided in the prior year. Determine the amount of operating cash flows the company will report as
    received from customers in the current year.




23. Consider the following transactions. For each, indicate the type of cash flow involved based on the
    classification in the statement of cash flows. If a transaction does not involve cash, write “NO CASH”

    Transaction                                                   Type of Cash Flow
    1. Pay employees' salaries.
    2. Repay borrowing to the bank.
    3. Purchase equipment with note payable.
    4. Provide services to customers on account.
    5. Pay dividends to stockholders.
    6. Collect cash from customers for services provided.
    7. Purchase supplies on account.
    8. Pay for supplies purchased in 7. above.



24. A company’s beginning cash balance was $14,800 and they had the following transactions during the year:
    1. Pay for rent for the next two years, $8,000.
    2. Purchase office supplies on account, $2,400.
    3. Purchase equipment, paying $12,000 cash and issuing a note payable for $4,000.
    4. Borrow from the bank, $6,000.
    5. Pay employee salaries, $7,200.
    6. Pay $2,000 on account related to transaction 2. above.
    7. Pay dividends to stockholders, $2,800.
    8. Sell land for $10,000 that was purchased in a prior year for $7,500.
    9. Collect cash from customers for services provided, $25,700.

     Calculate cash flows from operating activities, investing activities, and financing activities.




25. What is the link between the balance sheet and the statement of cash flows?




Exam 2                                                   Page 4                                        Study Questions
                                                    Chapter 5
Answer the self study Questions on pages 242-243 in your textbook. Solutions can be found on the bottom of
page 259.

True or False (if false explain why)

1.   At the time of a credit sale, a company would record an increase in assets and an increase in revenues.

2.   When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.

3.   A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be
     paid by a credit customer if payment is made within a specified period of time.

4.   A sale on account for $1,000 offered with terms 2/10 means that the customers will get a $2 discount if
     payment is made within 10 days.

5.   A sales allowance is recorded as a debit to accounts receivable and credit to sales allowance.

6.   If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales
     allowances of $2,000, the income statement will report net revenues of $91,000.

7.   The adjusting entry to account for future bad debts has the effect of (1) reducing assets and (2) increasing
     liabilities.

8.   The allowance for uncollectible accounts is a contra asset account representing the amount of accounts
     receivable that we do not expect to collect.

9.   Bad debt expense is the amount needed to adjust the allowance for uncollectible accounts to its desired
     ending balance (using the percent of A/R method).

10. When a company writes off an account receivable as an actual bad debt, it reduces total assets.

11. The receivables turnover ratio shows the number of times during a year that the average accounts receivable
    balance is collected (or "turns over").

12. A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by
    company managers.

13. Interest on a note receivable is calculated as the face value (principal) of the note times the annual interest
    rate stated on the note times the fraction of the year the note is outstanding.

Multiple Choice Questions

14. On January 15, 20B, the accounts receivable balance was $8,500 and the balance in the allowance for doubtful
    accounts was $1,300. On January 15, 20B, a $800 uncollectible account was written-off. The net realizable
    value of accounts receivable immediately after the write-off is:
       a. $6,400
       b. $7,700
       c. $7,200
       d. $8,000




Exam 2                                                  Page 5                                        Study Questions
15. When using the allowance method for accounting for bad debts, accounts receivable is reported on the
    balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is
    determined to be uncollectible and is written off, the recording of this event will:
       a. decrease the net realizable value of the accounts receivable
       b. have an effect that is not determinable from the information given.
       c. increase the net realizable value of the accounts receivable.
       d. have no effect on the net realizable value of the accounts receivable.

16. On January 31, 20B, Low Company wrote off an uncollectible account of $2,000. The allowance method is
    used. The write-off would cause bad debt expense to:
       a. Decrease $2,000
       b. Increase $2000
       c. Be unchanged

17. Prior to the write off of a $30 customer account, Kraft Company had the following account balances:

           Accounts receivable                                  $9,800
           Allowance for doubtful accounts                         500

      The net realizable value of the receivables before and after the write-off was:
               Before                After
        A)     $9,300                $9,300
        B)     $9,300                $9,270
        C)     $9,800                $9,770
        D)     $9,800                $9,800

18. When using the allowance method for bad debts, bad debt expense should be recorded
       a. as an adjusting entry at the end of the accounting period.
       b. when a particular account is written off.
       c. whenever the allowance for doubtful accounts has a debit balance.
       d. whenever the allowance for doubtful accounts has a zero balance.

19. Which of the following account(s) is not a contra revenue, circle all that apply:
       a. Sales
       b. Sales discounts
       c. Sales returns
       d. Sales allowances
       e. Trade discounts
       f. Allowance for uncollectible accounts
       g. Accounts receivable

20. FM provided services to a customer on account for $1,000. FM invoiced the customer and offered credit
    terms of 2/10, n30. The customer paid FM within 9 days of the invoice date. Identify the true statements
    (circle all that apply)
         a. Accounts receivable is credited for $1,000 when the customer pays.
         b. The customer paid $1,000 in cash
         c. The customer paid $980 in cash
         d. Accounts receivable is credited for $980 when the customer pays.
         e. Sales discounts are debited $20
         f. Sales discounts are credited $20
         g. Sales are debited $20
         h. Allowance for doubtful accounts are credited $20
         i. Sales returns and allowances are debited $20




Exam 2                                                 Page 6                                     Study Questions
21. On February 1, 20B, Middelton Corp. issues cash and accepts a $1,000 note receivable that offers 12% interest
    and is due in six months. How much interest revenue will Middleton Corp report during 20B?
        a. $120
        b. $240
        c. $100
        d. $60

22. On August 1, 20B, Middelton Corp. issues cash and accepts a $1,000 note receivable that offers 12% interest
    and is due in six months. How much interest revenue will Middleton Corp report during 20B?
        a. $10
        b. $50
        c. $60
        d. $120

Use the following information to answer questions 23 - 26

At the end of the year Rosco Works has $98,000 of accounts receivable. The allowance for doubtful accounts had a
$900 balance at year-end prior to adjustment. Rosco Works had $400,000 of net credit sales for the year. For the
percent of accounts receivable method Rosco estimates 5% of Accounts Receivables to be uncollectible.

23. The amount of bad debt expense that should appear in Rosco's income statement for the year would be:
        a. $5,000.
        b. $5,400.
        c. $4,600.
        d. $4,000.
        e. None of the above is correct.

24. What amount should Rosco Works report as their ending balance for allowance for uncollectible accounts?
       $__________

25. What should Rosco Works report on the balance sheet for net accounts receivable for the year-end?

         $______________

26. If the adjustment for bad debt was not recorded, what would happen to stockholders’ equity?


Short Answer


27. What happens to Net Accounts Receivables when a company writes off an account that is deemed
    uncollectible?


28. What happens to Bad Debt Expense when a company writes off an account that is deemed uncollectible?


29. What happens to Allowance for doubtful accounts when a company writes off an account that is deemed
    uncollectible?


30. What happens to Accounts Receivable when a company writes off an account that is deemed uncollectible?




Exam 2                                               Page 7                                       Study Questions
31. Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of a
    summer special, Casey offers customers a trade discount of 20%. On, July 9, Linda Holmes uses the services of
    Casey and pays cash equal to the discounted price. Record the revenue earned by Casey on July 9




32. A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts =
    $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net sales.




33. A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales
    discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000;
    sales allowances = $25,000. Compute net sales.




34. On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The
    customer pays for those services on September 15. For the company, record the service on account on
    September 8 and the collection of cash on September 15.




35. On September 8, a company provides services on account to a customer for $1,000, terms 2/10, n/30. The
    customer pays for those services on September 30. For the company, record the collection of cash on
    September 30.




Exam 2                                               Page 8                                      Study Questions
                                                     Chapter 6
Answer the self study Questions on pages 297 - 298 in your textbook. Solutions can be found on the bottom of
page 317.

True or False (if false explain why)

1.   Inventory is typically reported as a current asset because companies expect to convert it to cash in the near
     term.

2.   If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending inventory
     of $20,000, cost of goods sold equals $70,000.

3.   Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold.

4.   Using the average cost method, the average cost of inventory is calculated as the average unit cost of
     inventory purchased during the year.

5.   During periods of rising costs, LIFO generally results in a higher ending inventory balance.

6.   One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax
     savings.

7.   The LIFO conformity rule requires that when a company uses LIFO for tax reporting it may not also use it for
     financial reporting.

8.   Freight-in and Freight-out are both included in the cost of inventory.

9.   A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating
     income, income before income taxes, and net income.

10. Net sales minus cost of goods sold are referred to as operating income.

11. Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory.

12. The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost as a
    percentage of sales.

13. Overstating ending inventory in the current year causes net income in the current year to be overstated.

14. Understating ending inventory in the current year causes cost of goods sold in the current year to be
    understated.

Multiple Choice

15. Cost of goods sold is given by:
     a) Beginning inventory - net purchases + ending inventory.
     b) Beginning inventory + accounts payable - net purchases.
     c) Net purchases + ending inventory - beginning inventory.
     d) Net Purchases + beginning inventory - ending inventory




Exam 2                                                  Page 9                                         Study Questions
16. Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker purchases inventory
    for $150,000 and ends the year with $20,000 of inventory. Baker will report cost of goods sold equal to:
             a) $150,000
             b) $158,000
             c) $142,000

17. Inventory records for Dunbar Incorporated revealed the following:
    Date        Transaction              # of units     Cost per unit
    April 1     Beginning inventory      500            $2.40
    April 20    Purchase                 400            $2.50
    Dunbar sold 700 units of inventory during the month. Ending inventory assuming LIFO would be:
       a) $500
       b) $490
       c) $470
       d) $480

18. Same data as number 17. Determine Cost of Goods sold using LIFO.
       a) $1,730
       b) $1,700
       c) $1,720
       d) $1,710

19. Inventory records for Marvin Company revealed the following:
    Date        Transaction              # of units     Cost per unit
    March 1     Beginning inventory      1,000          $7.20
    March 10    Purchase                 600            7.25
    March 16    Purchase                 800            7.30
    March 23    Purchase                 600            7.35
    Marvin sold 2,300 units of inventory during the month. The ending inventory assuming FIFO would be:
       a) $5,140
       b) $5,080
       c) $5,060
       d) $5,050

20. Same data as number 19. Determine Cost of Goods sold using FIFO
       a) $16,750
       b) $16,660
       c) $16,740
       d) $16,630

21. Same data as number 19. What is the average cost per unit (weighted average cost per unit) rounded?
       a) $7.28
       b) $7.24
       c) $7.27
       d) $7.31

22. Which of the following is true regarding LIFO and FIFO?
       a) In a period of decreasing costs, LIFO results in lower total assets than FIFO.
       b) In a period of decreasing costs, LIFO results in lower net income than FIFO.
       c) In a period of rising costs, LIFO results in lower net income than FIFO.
       d) The amount reported for COGS is based on market value of inventory if LIFO is used.




Exam 2                                                Page 10                                   Study Questions
23. Which inventory method is better described as having a balance sheet focus and why is it considered as such?
       a) FIFO; better approximates the value of ending inventory.
       b) LIFO; better approximates the value of ending inventory.
       c) LIFO; better approximates inventory cost necessary to generate revenue.
       d) FIFO; better approximates inventory cost necessary to generate revenue.

24. The distinction between operating and non-operating income relates to:
        a) Continuity of income.
        b) Principal activities of the reporting entity.
        c) Consistency of income stream.
        d) Reliability of measurements

25. Nu Company reported the following data for its first year of operations.
    Net sales                         $2,800
    Cost of goods sold                1,680
    Operating expenses                880
    Ending inventories                820
    What is Nu’s gross profit ratio?
       a) 80%
       b) 49%
       c) 40%
       d) 5%

26. If a company understates its count of ending inventory in Year 1, which of the following is true?
          a) Costs of good sold is understated at the end of Year 1.
          b) Profit is correct in Year 2.
          c) The balance of retained earnings is overstated at the end of Year 1.
          d) The balance of retained earnings is correct at the end of Year 2.

Fill in the blank

27. Below are some of the titles found in a multiple-step income statement:
    a. Sales
    b. Net income
    c. Operating income
    d. Income before income taxes
    e. Gross profit
    Place these items in the order they would appear from first to last.

Use the following to answer questions 28 – 34
Beasley, Inc., reports the following amounts in its December 31, 20D income statement
Net sales                  $300,000            Income tax expense    $38,000
Interest expense           12,000              Cost of goods sold    125,000
Salaries expense           35,000              Advertising expense   24,000
Utilities expense          41,000              Sales returns         20,000
Determine the following amounts based on the multiple-step income statement:

28. Gross sales (Sales):

29. Total operating expenses




Exam 2                                                 Page 11                                     Study Questions
30. Gross profit

31. Operating income (income from operations)

32. Income before income taxes (IBT or Pretax income)

33. Net income

34. Gross profit ratio

35. Fill in the missing amounts:

                                   Case 1       Case 2       Case 3
 Beginning inventory               $1,985                    $3,000
 Ending inventory                  3,785         3,150       6,510
 Purchases                         99,150       89,480
 Cost of goods sold                             88,750       91,450
 Goods available for sale

36. Find the missing amounts

                                      Case 1        Case 2        Case 3
 Sales                               $70,000
 Contra revenue                                     2,150         4,960
 Net Sales                           68,920         87,850
 COGS                                               55,420       92,540
 Gross profit                        36,200                      42,500
 Operating expense                   27,500         26,800
 Operating income                                                16,500
 Gross Profit ratio

37. Find the missing amounts
                                      Case 1        Case 2        Case 3
 Gross profit                        36,200                      42,500
 Operating expense                   27,500         26,800
 Operating income                                   14,500
 Other revenue (expense)                           (2,500)           (500)
 Income before income tax             9,500
 Income tax expense                                 3,000         4,800
 Net income                           6,650                      11,200




Exam 2                                             Page 12                   Study Questions
                                                      Chapter 7
Answer the self study Questions on pages 349 -350 in your textbook. Solutions can be found on the bottom of
page 367.

True or False (if false explain why)

1.    Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost less
      accumulated depreciation.


2.    On the acquisition date, operational assets are measured and recorded in conformity with the cost principle;
      and subsequent to acquisition, their cost is depreciated in conformity with the matching principle.


3.    When a company buys equipment for its own use, all costs of acquisition and preparation to get the asset
      ready for use are included in the asset's acquisition cost including interest if they buy the equipment on credit.


4.    Repair costs are classified as capital expenditures when they increase the useful life or efficiency of an asset.


5.    We use the term capitalize to describe recording an expenditure as an expense.


6.    Cash received from the sale of salvaged materials increases the total cost of land.


7.    The cost of a major addition to an operational asset should be recorded as an asset and depreciated over its
      useful life.


8.    Ordinary repairs and maintenance of operational assets should be capitalized and depreciated over the
      remaining useful life of the related asset.

9.    Depreciation accounting is a method of cost allocation rather than asset valuation.

10. Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life.

11. The accumulated depreciation account allows us to reduce the carrying value of assets through depreciation,
    while maintaining the original cost of each asset in the accounting records.

12. We record a gain if we sell an asset for less than book value.

13. Profit margin is net income divided by net sales.

Multiple Choice
14.     Operational assets do not include the following kind of assets
         A) land held for resale.
         B) plant and equipment in use.
         C) patents in use.
         D) mineral deposits being mined.
         E) None of the above is correct.



Exam 2                                                   Page 13                                        Study Questions
15.   Wilson, Inc., a manufacturing company, is preparing their annual financial statements. Which of the
      following accounts would not be grouped under operational assets?
        A) Buildings.
        B) Land on which the building is located.
        C) Equipment.
        D) Vehicles.
        E) Finished goods inventory.

16.   Which of the following about the characteristics of all long-lived, operational assets is true?
       A) They have physical substance.
       B) They are being used in the company's operations.
       C) They are classified as non-current assets on the balance sheet.
       D) Only B and C are true.
       E) All of the above are true.

17.   On July 1, Kiljoy Company purchased a new stamping machine for $5,000. Kiljoy paid cash for the machine.
      Other costs associated with the machine were: transportation costs, $200; sales tax paid $400; and
      installation cost, $300. The cost recorded for the machine was
        A) $5,200.
        B) $5,600.
        C) $5,900.
        D) $5,000.
        E) None of the above is correct.

18.   The amount of sales tax paid on the purchase of new machinery should be debited to
        A) the machinery account.
        B) a separate deferred charge account.
        C) a sales tax expense account.
        D) accumulated depreciation for machinery.

19.   On August 1, Energy Company purchased a coal digging machine for $30,000 cash and also gave 100 shares
      of AT common stock held by Energy Company as an investment. The AT common stock cost Energy
      Company $5,000 and on August 1 had a market value of $4,200. Installation cost was $700 and shipping cost
      was $200. What amount should be the total amount debited to the machinery account?
        A) $35,100.
        B) $36,200.
        C) $35,500.
        D) $35,400.

20.      Which of the following would NOT be included in the acquisition cost of a building?
         A) The purchase price of a building including title transfer fees.
         B) The cost of putting new windows and doors in the building before it opens for operations.
         C) The cost of paving the parking lot and outdoor lighting in the lot.
         D) The cost of paying an architect to design the remodeling modifications of the building before the
             store opens.

21.   In 20B, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant
      debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect
      on the financial statements of Gamma?
         A) The repair was accounted for correctly.
         B) The error increased assets and net income in 20B.
         C) In the years following 20B, net income will be too high.
         D) The error decreased net income in 20B.
         E) Net income was correctly stated for 20B.



Exam 2                                                Page 14                                           Study Questions
22.   Bethany Company plans to depreciate a new building using declining-balance depreciation with 200 percent
      acceleration rate. The building cost $400,000. The estimated residual value of the building is $50,000 and it
      has an expected useful life of 25 years. Assuming the first year's depreciation expense was recorded
      properly, what would be the amount of depreciation expense for the second year?
        A) $15,360.
        B) $16,000.
        C) $29,440.
        D) $32,000.
        E) None of the above is correct.

23.   The records of Pam Company showed the following about a machine on January 1, 20H:

         Purchased 1/1/20E for $35,000
         Accumulated depreciation at January 1, 20H, $26,400

      On July 1, 20H, the machine was sold for $7,000. Depreciation for the first six months of 20H was $1,467.
      The gain or loss on disposal would be
        A) $1,600 gain.
        B) $ 133 gain.
        C) $1,600 loss.
        D) $ 133 loss.
        E) None of the above is correct.

24.   Which of the following is false?
       A) Replacement of a truck's tires would be treated as a revenue expenditure.
       B) The cost of replacing carpet in a building would be a revenue expenditure.
       C) Cost of replacing a roof on a newly purchased building before using it as a store would be a capital
            expenditure.
       D) None of the above is false.

25. What operational asset is not depreciated? ___________________

Use the following information to answer questions 26 – 31

Duval Company acquired a machine on January 1, 20A, that cost $2,700 and had an estimated residual value of
$200. Complete the following schedule using the three methods of depreciation: A.) straight-line, B.) Activity
based, C.) declining-balance at 135% acceleration rate.

                                                                                 Accumulated           BOOK VALUE
      Method         Estimated                        Depreciation Expense       Depreciation
                     Useful Life                            for 20B               12/31/20B
  A      SL         5 years                           26. _____________       27. ____________
  B      Activity   10,000 units (total)
         base        1,000 units (20A’s actual)       28. _____________       29. ____________
                     1,200 units (20B’s actual)

  C      DB         5 years                           30. _____________       31. ____________




Exam 2                                               Page 15                                      Study Questions
32.          The following financial information is from Cook Company.
               Accounts receivable                    $55,000
               Buildings                              90,000
               Inventory                              10,500
               Accounts payable                       7,500
               Furniture                              8,000
               Unearned revenue                       58,500
               Short-term investments                 20,000
               Notes receivable due in 8 months       45,500
               Interest payable                       2,000
               Copyrights                             75,000

             The above accounts reflect normal activity.

      a.     What is the amount of long-term assets?                   $____________

      b.     What is the amount of current assets?                     $_____________

      c.     What is the amount of current liabilities?                $_____________

      d.     What’s the current ratio?                                 _______


33. JOE’s report the following income statement results:

           Sales                                  $700,000
           Operating exp                           195,600
           Net income                               54,400
           Sales returns & allowances               20,000
           Gross profit                            278,800
           Loss on sale of equipment               (3,000)

      a.     Calculate Net sales:                                      $____________

      b.     Calculate Cost of Goods Sold                              $____________

      c.     Calculate operating income                                $____________

      d.     Calculate Income before Income tax (IBT)                  $_____________

      e.     Calculate the gross profit margin:                        ___ ___%

      f.     Calculate the net profit margin:                          ___.___%




Exam 2                                                       Page 16                    Study Questions

								
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