Accounting 201 Name _____________________________
Test 2 (Chapters 4,5,6,7)
1. Freda's Florist reported the following before-tax income statement items for the year ended
December 31, 2009:
All income statement items are subject to a 40% income tax rate. In its 2009 income statement,
Freda's separately stated income tax expense and total income tax expense would be:
A. $128,000 and $128,000, respectively.
B. $128,000 and $100,000, respectively.
C. $100,000 and $128,000, respectively.
D. $100,000 and $100,000, respectively.
2. On November 1, 2009, Jamison Inc. adopted a plan to discontinue its barge division, which
qualifies as a separate component of the business according to SFAS No. 144. The disposal of the
division was expected to be concluded by April 30, 2010. On December 31, 2009, the company's
year-end, the following information relative to the discontinued division was accumulated:
In its income statement for the year ended December 31, 2009, Jamison would report a before-
tax loss on discontinued operations of:
A. $ 65 million.
B. $ 50 million.
C. $130 million.
D. $145 million.
On October 28, 2009, Mercedes Company committed to a plan to sell a division that qualified as
a component of the entity according to SFAS No. 144, and was properly classified as held for
sale on December 31, 2009, the end of the company's fiscal year. The division's loss from
operations for 2009 was $2,000,000.
3. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and
$3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on
discontinued operations in its 2009 income statement?
A. $2,000,000 loss.
B. $2,500,000 loss.
D. $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued
On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80
million. The sale was completed on December 31, 2009.
The following additional facts pertain to the transaction:
The Footwear Division's operations and cash flows can be clearly distinguished operationally
and for financial reporting purposes from the rest of Foxtrot Co.
The book value of Footwear's assets totaled $48 million on the date of the sale.
Footwear's operating income was a pre-tax loss of $10 million in 2009.
Foxtrot's income tax rate is 40%.
4. In the 2009 income statement for Foxtrot Co., it would report:
A. Income (loss) on its total operations for the year without separation.
B. Income (loss) on its continuing operation only.
C. Income (loss) from its continuing and discontinued operations separately.
D. Income and gains separately from losses.
5. An extraordinary event for financial reporting purposes is both:
A. Unusual and material.
B. Infrequent and significant.
C. Material and infrequent.
D. Unusual and infrequent.
6. Howard Co.'s 2009 income from continuing operations before income taxes was $280,000.
Howard Co. reported a before-tax extraordinary gain of $50,000. All tax items are subject to a
40% tax rate. In its income statement for 2009, Howard Co. would show the following line-item
amounts for net income and income tax expense:
A. $198,000 and $112,000.
B. $230,000 and $92,000.
C. $330,000 and $132,000.
D. $198,000 and $79,000.
7. A voluntary change in accounting principle is accounted for by:
A. A cumulative effect on income in the year of the change.
B. A retrospective reporting of all comparative financial statements shown.
C. A prior period adjustment.
D. A separate line component of income.
8. Harley Davis Inc. started its unicycle manufacturing business in 2007 and acquired $600,000
of equipment at the beginning of 2007. It decided to use the double-declining balance (DDB)
depreciation on its equipment with no residual value and a 10-year useful life. In 2009 it changed
to the straight-line depreciation method. Depreciation computed for 2007-8 is presented below:
In 2009, Harley Davis would report depreciation of:
9. Change statements include a:
A. Retained earnings statement, a balance sheet, and a cash flow statement.
B. Balance sheet, a cash flow statement, and an income statement.
C. Cash flow statement, an income statement, and a retained earnings statement.
D. Retained earnings statement, a balance sheet, and an income statement.
10. Tropical Tours reported revenue of $300,000 for its year ended December 31, 2009.
Accounts receivable at December 31, 2008 and 2009, were $32,000 and $35,000, respectively.
Using the direct method for reporting cash flows from operating activities, Tropical Tours would
report cash collected from customers of:
11. Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2009.
January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000
respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively.
Assuming that all relevant information has been presented, Bird Brain's cash flows from
operating activities would be:
Rowdy's Restaurants Cash Flow (in millions)
Cash Received from:
Interest on investments 200
Sale of Land 2,100
Sale of Capital Stock 600
Issuance of debt securities 2,000
Cash Paid for:
Interest on debt $ 300
Income Tax 300
Debt principal reduction 1,500
Purchase of equipment 4,000
Purchase on inventory 1,000
Dividends on capital stock 280
Operating expenses 1,500
12. Rowdy's would report net cash inflows (outflows) from operating activities in the amount of:
13. Rowdy's would report net cash inflows (outflows) from investing activities in the amount of:
B. $ 100.
14. Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:
A. $ 1,100.
C. $ 820.
D. $ 900.
15. Merchandise sold FOB shipping point indicates that:
A. The seller pays the freight.
B. The buyer holds title after the merchandise leaves the seller's location.
C. The common carrier holds title until the merchandise is delivered.
D. The sale is not consummated until the merchandise reaches the point to which it is being
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3
of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each
year for the next two years. Because Lake has little information about collectibility of these
receivables, they use the installment method for revenue recognition. In 2008 Lake began
operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake
collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales.
In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake
collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales.
In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a
fair value of $75,000 at the time they were repossessed.
16. Total cash collections on installment sales during 2009 would be:
17. In 2008, Lake would recognize realized gross profit of:
B. $ 0.
18. In its December 31, 2009, balance sheet, Lake would report:
A. Deferred gross profit of $700,000.
B. Deferred gross profit of $1,050,000.
C. Installment receivables (net) of $750,000.
D. Installment receivables (net) of $900,000.
19. In 2011, Lake would record a loss on repossession of:
Excerpts from Dowling Company's December 31, 2009 and 2008, financial statements and key
ratios are presented below (all numbers are in millions):
Accounts Receivable (net) $20,000 $16,000
Merchandise Inventory $28,000 $35,000
Net Sales $100,000 115,000
Cost of Goods Sold $ 60,000 55,000
Total Assets $125,000 105,000
Total shareholder’s equity $140,000 125,000
Net Income 20,000 17,000
20. Dowling's 2009 profit margin is:
21. Dowling's 2009 average collection period is:
A. 50 days.
B. 66 days.
C. 57 days.
D. 51 days.
22. Dowling's return on equity for 2009 is:
23. Dowling's average total assets for 2009 is:
24. Dowling's inventory turnover for 2009 is:
Present and future value tables of $1 at 3% are presented below:
25. George has deposited $100,000 today in a four-year, 12% CD that compounds quarterly.
What is the maturity value of the CD?
26. Susan wants to invest money in a 6% CD account that compounds semiannually. Carol
would like the account to have a balance of $50,000 six years from now. How much must Carol
deposit to accomplish her goal?
27. At the end of the next four years, a new machine is expected to generate net cash flows of
$15,000, $10,000, $12,000, and $8,000, respectively. What are the cash flows worth today if a
3% interest rate properly reflects the time value of money in this situation?
28. At the end of each quarter, Shane deposits $400 into an account that pays 12% interest
compounded quarterly. How much will Patti have in the account in four years?
29. Carol deposits $2,000 in an IRA account on April 15, 2009. Assume the account will earn
3% annually. If she repeats this for the next ten years, how much will she have on deposit on
April 14, 2020?
30. Shelley wants to cash in her winning lottery ticket. She can either receive ten, $100,000
semiannual payments starting today, or she can receive a lump-sum payment now based on a 6%
annual interest rate. What is the equivalent lump-sum payment?
31. Rosie’s Florist is considering making an investment on 1/1/09 that will pay four annual
payments of $10,000. The first payment is not expected until December 31, 2011. She is eager to
earn 3%. What is the present value of the investment on January 1, 2009?
32. Debbie has $298,620 accumulated in a 401K plan. The fund is earning a low, but safe, 3% a
year. The withdrawals will take place at the end of each year starting a year from now. How soon
will the fund be exhausted if Debbie withdraws $30,000 each year?
A. 12 years.
B. 10 years.
C. 8.5 years.
D. 8.8 years.
33. Jimmy has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% a
year. The withdrawals will take place annually starting today. How soon will the fund be
exhausted if Jimmy withdraws $30,000 each year?
A. 15 years.
B. 16 years.
C. 14 years.
D. 12.3 years.
34. Jose just won the lottery and is trying to decide between the semi-annual cash flow payment
option of $250,000 per year for 8 years beginning today and the lump sum option. Jose can earn
6 percent investing his money. At what lump-sum payment amount would he be indifferent
between the two alternatives?
On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with
credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts.
35. What is the correct entry for Flores on November 10?
36. What is the correct entry for Flores on November 17, assuming the correct payment was
received on that date?
37. What is the correct entry for Flores on December 5, assuming the correct payment was
received on that date?
Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the
current year, with terms 1/15, n/60. Harvey uses the net method of accounting for cash discounts.
38. What entry would Harvey's make on April 12?
39. What entry would Harvey's make on April 23, assuming the customer made the correct
payment on that date?
40. What entry would Harvey's make on June 10, assuming the customer made the correct
payment on that date?
41. Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending
balance of accounts receivable. During 2009, Chez Fred's credit sales and collections were
$125,000 and $131,000, respectively. What was the balance of accounts receivables on January
1, 2009, if $180 in accounts receivable were written off during 2009 and if the allowance account
had a balance of $750 on 12/31/09?
D. None of these is correct.
In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for
uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts
receivable they had attempted to collect and failed. Credit sales for the year were $2,200,000,
and cash collections from credit customers totaled $1,950,000.
42. What Bad debt expense would Dinty report in its first-year income statement?
A. $ 50,000
B. $ 82,000
D. Can't be determined from the given information
43. What accounts receivable balance would Dinty report in its first year-end balance sheet?
D. None of these is correct.
44. In Dinty's adjusting entry for bad debts at year-end, which of these would be included?
A. Debit to bad debt expense for $114,000
B. Credit to allowance for uncollectible accounts for $82,000
C. Debit to accounts receivable for $32,000
D. All of these are correct.
For 2009, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company
reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100,
respectively, at December 31, 2008. During 2009, Rahal's credit sales and collections were
$404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off.
45. Rahal's accounts receivable at December 31, 2009, are:
46. Rahal's adjusted allowance for uncollectible accounts at December 31, 2009, is:
47. Rahal's 2009 bad debt expense is:
D. None of these is correct.
48. At December 31, 2008, Gill Co reported accounts receivable of $216,000 and an allowance
for uncollectible accounts of $8,400. During 2009, accounts receivable increased by $22,000
after a $7,800 write-off of bad debts. An analysis of Gill Co.'s December 31, 2009, accounts
receivable suggests that the allowance for uncollectible accounts should be 3% of accounts
receivable. Bad debt expense for 2009 would be:
D. None of these is correct.
49. Alliance Software began 2009 with accounts receivable of $115,000. All sales are made on
credit. Sales and cash collections from customers for the year were $780,000 and $700,000,
respectively. Cost of goods sold for the year was $450,000. What was Alliance's receivables
turnover ratio for 2009?
50. Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the
end of July, the balance in the general ledger checking account was $2,750 and the bank balance
on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited
were $400. The bank statement revealed that a check written for $120 was incorrectly recorded
by Brockton as a $220 disbursement. The bank statement listed service charges and NSF check
charges totaling $150. The corrected cash balance is: