Exam 1 CH1

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School

Northwest Mississippi Community College *

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530

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Accounting

Date

Apr 3, 2024

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docx

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#1 1.SiriusXM Radio Incorporated files its annual and quarterly financial statements with the SEC. 2.The president of Applebee’s International, Incorporated, travels on the corporate jet for business purposes only and does not use the jet for personal use. 3.Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications. 4.Lady Jane Cosmetics depreciates the cost of equipment over their useful lives. #2 1) Probable future sacrifices of economic benefits. Liabilities (2) Probable future economic benefits owned by the company. Assets (3) Inflows of assets from ongoing, major activities. Revenues (4) Decrease in equity from peripheral or incidental transactions. Losses #3 1.Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured. 2.McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million. 3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense. #4 1. Winderl Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress. 2. Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC. 3. Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense. 4. Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance. 1. The periodicity assumptionselected answer correct 2. The economic entity assumptionselected answer correct 3. Revenue recognitionselected answer correct 4. Expense recognitionselected answer correct 1. Expense recognition 2. The historical cost (original transaction value) principle 3. The economic entity assumption 1. Disagree The full disclosure principle 2. Agree The periodicity assumption 3. Disagree Expense recognition 4. Agree Revenue recognition

#5 The conceptual framework indicates the desired fundamental and enhancing qualitative characteristics of accounting information. Several constraints impede achieving these desired characteristics. Which component would allow a large company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset? Materiality 2. Donald Kirk, former chairman of the FASB, once noted that “. . . there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests . . .” Which characteristic is implicit in Mr. Kirk’s statement? Neutrality 3. Allied Appliances, Incorporated, changed its revenue recognition policies. Which characteristic is jeopardized by this change? Consistency 4. National Bancorp, a publicly traded company, files quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings? Timeliness 5. In general, relevant information possesses which qualities? Predictive value and/or confirmatory value 6. When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic? Faithful representation 7. Jeff Brown is evaluating two companies for future investment potential. Jeff's task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jeff will be using possess? Comparability 8. A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe? Cost effectiveness #6 Terms and phrases associated with the accounting concepts: Expense recognition Record expenses in the period the related revenue is recognized. 2. Periodicity assumption The life of an enterprise can be divided into artificial time periods. 3. Historical cost principle The original transaction value upon acquisition. 4. Materiality Concerns the relative size of an item and its effect on decisions. 5. Revenue recognition Criteria usually satisfied for products at point of sale. 6. Going concern assumption The entity will continue indefinitely 7. Monetary unit assumption A common denominator is the dollar. 8. Economic entity assumption The enterprise is separate from its owners and other entities. 9. Full-disclosure principle All information that could affect decisions should be reported. Identify the accounting concept that applies to each statement. 1. Jenna Asare is the sole owner of Asare Appliances. Jenna borrowed $100,000 to buy a new home to be used as their personal residence. This liability was not recorded in the records of Asare Appliances. The economic entity assumption 2. Apple Incorporated distributes an annual report to its shareholders. The periodicity assumption 3. Hewlett-Packard Corporation depreciates machinery and equipment over their useful lives. Expense recognition (also the going concern

assumption) 4. Crosby Company lists land on its balance sheet at $120,000, its original purchase price, even though the land has a current fair value of $200,000. The historical cost (original transaction value) principle 5. Honeywell International Incorporated records revenue when products are delivered to customers, even though the cash has not yet been received. Revenue recognition 6. Liquidation values are not normally reported in financial statements even though many companies do go out of business. The going concern assumption 7. IBM Corporation, a multibillion-dollar company, purchased some small tools at a cost of $800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense. Materiality #8 Indicate whether you agree or disagree with the financial reporting practice employed and state the accounting concept applied (if you agree) or violated (if you disagree). 1. Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar. 2. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements. 3. Wei Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery. 4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000. 5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire amount of $100,000 on March 15. However,Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer. 6. Ganesh Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life. 7. Taboye Company provides financial statements to external users every three years. #9 1. The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its recently appraised value of $3.5 million. 2. The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase of an automobile to be used solely for personal use. 3. At the end of its 2020 fiscal year, Dower, Incorporated, received 1. Disagree This is a violation of the historical cost (original transaction value) principle. 2. Disagree This is a violation of the economic entity assumption.

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an order from a customer for $45,350. The merchandise will ship early in 2021. Because the sale was made to a long-time customer, the controller recorded the sale in 2020. 4. At the beginning of its 2020 fiscal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi recorded the expenditure as an asset to be expensed equally over the two-year period of the lease. 5. The Reliable Tire Company included a note in its financial statements that described a pending lawsuit against the company. 6. The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements. #10 1. The primary objective of financial reporting is to provide information: o about a firm's financing and investing activities. o about a firm's management team. o useful to capital providers. o concerning the changes in financial position resulting from the income-producing efforts of the entity. 2. Statements of Financial Accounting Concepts issued by the FASB: o identify the conceptual framework within which accounting standards are developed. o represent GAAP. o are subject to approval of the SEC. o have been superseded by SFASs. 3. In general, revenue is recognized when: o the sales price has been collected. o a contract has been signed. o a good or service has been delivered to a customer. o a purchase order has been received. 4. In depreciating the cost of an asset, accountants are most concerned with: o recognizing revenue in the appropriate period. o conservatism. o recognizing expense in the appropriate period. o full disclosure. 5.The primary objective of expense recognition is to: o promote comparability between financial statements of different periods. o provide full disclosure. 3. Disagree This is a violation of appropriate revenue recognition. 4. Agree The company is conforming to appropriate expense recognition. 5. Agree The company is conforming to the full disclosure principle. 6. Disagree This is a violation of the periodicity assumption.

o record expenses in the period that related revenues are recognized. o provide timely information to decision makers. 6.The economic entity assumption states that, in the absence of contrary evidence, all entities will survive indefinitely. o False o True #11 List A List B 1. Predictive value Information is useful in predicting the future. 2. Relevance Pertinent to the decision at hand. 3. Timeliness Information is available prior to the decision. 4. Distribution to owners Decreases in equity resulting from transfers to owners. 5. Confirmatory value Information confirms expectations 6. Understandability Users understand the information in the context of the decision being made. 7. Gain Increases in equity from peripheral or incidental transactions of an entity. 8. Faithful representation Agreement between a measure and the phenomenon it purports to represent. 9. Comprehensive income The change in equity from nonowner transactions. 10. Materiality Concerns the relative size of an item and its effect on decisions 11. Comparability Important for making interfirm comparisons. 12. Neutrality The absence of bias. 13. Recognition The process of admitting information into financial statements. 14. Consistency Applying the same accounting practices over time 15. Cost effectiveness Requires consideration of the costs and value of information. 16. Verifiability Implies consensus among different measurers. #12 1. Pastel Paint Company purchased land two years ago for a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet. The historical cost (original transaction value) principle 2. Atwell Corporation has not prepared financial statements for external users for over three years. The periodicity assumption 3. The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received. Revenue recognition 4. Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith’s personal residence and recorded a $150 expense. The economic entity assumption 5. Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense. Expense recognition; materiality 6. Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached. The full disclosure principle

(CH2) #1The Marchetti Soup Company entered into the following transactions during the month of June: (1) purchased inventory on account for $225,000 (assume Marchetti uses a perpetual inventory system); (2) paid $56,000 in salaries to employees for work performed during the month; (3) sold inventory on account to customers for $280,000 that had a cost of $152,000; (4) collected $260,000 in cash from credit customers; and (5) paid on account to suppliers of inventory $205,000. Analyze each transaction and show the effect of each on the accounting equation for a corporation. #2The Marchetti Soup Company entered into the following transactions during the month of June: (1) purchased inventory on account for $155,000 (assume Marchetti uses a perpetual inventory system); (2) Paid $42,000 in salaries to employees for work performed during the month. (3a) Record the sale of inventory on account to customers $210,000. 3(b) Record cost of inventory sold for $124,000 (4) Collected $190,000 in cash from credit customers. (5) Paid on account to supplier of inventory $135,000. #3 (1) purchased inventory on account for $185,000(assume Marchetti uses a perpetual inventory system); (2) paid $48,000 in salaries to employees for work performed during the month; (3) sold inventory on account to customers for $240,000 that had a cost of $136,000; (4) collected $220,000 in cash from credit customers; and (5) paid on account to suppliers of inventory $165,000. Post the above transactions to the below T-accounts. Assume that the opening balances in each of the accounts is zero except for cash, accounts receivable, and accounts payable that had opening balances of $69,000, $51,000, and $30,000, respectively. Note: Enter the transaction number in the column next to the amount. #4 (1) On October 1, $31,000 was paid for a one-year fire insurance policy. Assets = Liabilities + Paid- in capital + Retained Earnings $225,000 = $225,000 + 0 + 0 (56,000) = + 0 + (56,000) 128,000 = + 0 + 128,000 0 = + 0 + 0 (205,000) = (205,000) + 0 + 0 Inventory $155,000 Accounts Payable $155,000 Accounts receivable $210,000 Sales Revenue $210,000 Cost of Goods Sold $124,000 Inventory $124,000 Salaries Expense $42,000 Cash $42,000 Cash Accounts Receivable $190,000 Accounts Payable $135,000 Cash $135,000 Cash $190,000 Accounts Receivable $190,000 Prepaid Insurance $31,000 Cash $31,000

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(2)On June 30 the company loaned its chief financial officer $29,000; principal and interest at 7% are due in one year. (3)Equipment costing $79,000 was purchased at the beginning of the year for cash. #5 A company has a fiscal year-end of December 31: (1) On October 1, $22,000 was paid for a one-year fire insurance policy. Prepare the adjst. entry on Dec.31. (2)On June 30 the company loaned its chief financial officer $20,000; principal and interest at 6% are due in one year. Prepare the necessary adjusting entry on December 31. (3) Equipment costing $70,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $14,000 per year. Prepare the necessary adjusting entry on December 31. #6 A company has a fiscal year-end of December 31: (1) on October 1, $24,000 was paid for a one-year fire insurance policy; (2) on June 30 the company loaned its chief financial officer $22,000; principal and interest at 8% on the note are due in one year; and (3) equipment costing $72,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $14,400 per year. If the adjusting entries were not recorded, would net income be higher or lower and by how much? #7 (1) On December 10, 2024, Jingle received a $5,000 payment from a customer and credited deferred service revenue. The services to the customer were completed by December 31, 2024. (2) On December 1, 2024, the company paid a local radio station $4,000 for 40 radio ads that were to be aired, 20 per month, throughout December and January. Prepaid advertising was debited at the time the advertising was paid. Salaries Expense $26,000 Salaries Payable $26,000 (3) Employee salaries for the month of December totaling $26,000 will be paid on January 7, 2025. (4)On August 31, 2024, Jingle borrowed $60,000 from a local bank. A note was signed with principal and 7% interest to be paid on August 31, 2025. #8 1. On December 10, 2024, Jingle received a $4,600 payment from a customer and credited deferred service revenue. The services to the customer were completed by December 31, 2024. Notes Receivable $29,000 Cash $29,000 Equipment $79,000 Cash $79,000 Insurance Expense $5,500 Prepaid insurance $5,500 Interest receivable $600 Interest Revenue $600 Adjusting Entry Net income (1) Higher $6,000 (2) Lower (880) (3) Higher 14,400 Total Higher $19,520 Depreciation Expense $14,000 Accumulated Depreciation $14,000 Interest expense $1,400 Interest payable $1,400 Deferred Service Revenue $5,000 Service Revenue $5,000 Advertising Expense $2,000 Prepaid Advertising $2,000

2. On December 1, 2024, the company paid a local radio station $3,200 for 40 radio ads that were to be aired, 20 per month, throughout December and January. Prepaid advertising was debited at the time the advertising was paid. 3. Employee salaries for the month of December totaling $22,000 will be paid on January 7, 2025. 4. On August 31, 2024, Jingle borrowed $40,000 from a local bank. A note was signed with principal and 9% interest to be paid on August 31, 2025. #9Prepare the necessary adjusting entries for Digital Controls at the end of its December 31, 2024, fiscal year-end for each of the above situations. (1)On March 31, 2024, the company lent $30,000 to another company. A note was signed with principal and interest at 5% payable on March 31, 2025. (2)On September 30, 2024, the company paid its landlord $12,400 representing rent for the period September 30, 2024, to September 30, 2025. Digital Controls debited prepaid rent at the time the rent was paid. (3) Supplies on hand at the end of 2023 (previous year) totaled $3,500. Additional supplies costing $7,300 were purchased during 2024 and debited to the supplies account. At the end of 2024, supplies costing $4,900 remain on hand. (4) Vacation pay of $17,500 for the year that had been earned by employees was not paid or recorded. The company records vacation pay as salaries expense. #10 The following account balances were taken from the 2024 adjusted trial balance of the Bowler Corporation: sales revenue, $425,000; cost of goods sold, $218,000; salaries expense, $55,000; rent expense, $30,000; depreciation expense, $40,000; and miscellaneous expense, $22,000. Prepare an income statement for 2024. BOWLER CORPORATION Income Statement For the Year Ended December 31, 2024 Sales revenue $425,000 Cost of goods sold 218,000 Gross profit 207,000 Operating expenses: Salaries expense 55,000 Rent expense 30,000 Depreciation expense 40,000 Miscellaneous expense 22,000 Interest receivable $1,125 Interest revenue $1,125 Rent Expense $3,100 Prepaid Rent $3,100 Supplies Expense $5,900 Supplies $5,900 Salaries Expense $17,500 Salaries Payable $17,500

Total operating expenses 147,000 Net income or loss $60,000 #11The following account balances were taken from the 2024 post-closing trial balance of the Bowler Corporation: cash, $8,000; accounts receivable, $13,000; inventory, $22,000; equipment, $160,000; accumulated depreciation, $52,000; accounts payable, $62,000; salaries payable, $18,000; retained earnings, $15,000; and common stock, $56,000.Prepare a balance sheet for December 31, 2024. BOWLER CORPORATION Balance Sheet At December 31, 2024 Assets Current assets: Cash $8,000 Accounts receivable 13,000 Inventory 22,000 Total current assets 43,000 Property and equipment: Equipment 160,000 Accumulated depreciation (52,000) Total assets $151,000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable 62,000 Salaries payable 18,000 Total current liabilities 80,000 Shareholders’ equity: Retained earnings $15,000 Common stock 56,000 Total shareholders’ equity 71,000 Total liabilities and shareholders’ equity $151,000 #12 The year-end adjusted trial balance of the Tool and Die Corporation included the following account balances: retained earnings, $230,000; dividends, $16,000; sales revenue, $810,000; cost of goods sold, $510,000; salaries expense, $190,000; rent expense, $42,000; and interest expense, $17,000. (1) Record the entry to close the revenue accounts using the retained earnings account. (2) Record the entry to close the expense accounts using the retained earnings account. (3) Record the entry to close the dividends account. Sales Revenue $810,000 Retained Earnings $810,000 Retained Earnings $16,000 Dividends $16,000

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#13New Consulting Company maintains its records on a cash basis. During the year, the following cash flows were recorded: cash received for services rendered to clients, $510,000; and cash paid for salaries, utilities, and advertising, $285,000, $44,000, and $21,000, respectively. You also determine that customers owed the company $65,000 and $69,000 at the beginning and end of the year, respectively, and that the company owed the utility company $12,000 and $6,500 at the beginning and end of the year, respectively. Complete the table to determine accrual net income for the year. Rev= cash rec. for services +ending rec. bal. – begin rec. bal. Util expns= utilities-opening util. owed+closing util. owed #14The following transactions occurred during March 2024 for the Right Corporation. The company operates a wholesale warehouse. 1. Issued 32,000 shares of no-par common stock in exchange for $320,000 in cash. 2. Purchased equipment at a cost of $42,000. Cash of $11,000 was paid and a note payable to the seller was signed for the balance owed. 3. Purchased inventory on account at a cost of $82,000. The company uses the perpetual inventory system. 4. Credit sales for the month totaled $130,000. The cost of the goods sold was $72,000. 5. Paid $5,200 in rent on the warehouse building for the month of March. 6. Paid $6,200 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2024. 7. Paid $72,000 on account for the inventory purchased in transaction 3. 8. Collected $57,000 from customers on account. 9. Recorded depreciation expense of $1,200 for the month on the equipment. Revenue $514,000 Expenses: Salaries expense 285,000 Utilities expense 38,500 Advertising expense 21,000 Net Income (Loss) $ 169,500

Trial Balance Account Title Debits Credits Cash $282,600 Accounts receivable 73,000 Inventory 10,000 Prepaid insurance 6,200 Equipment 42,000 Accumulated depreciation $1,200 Accounts payable 10,000 Notes payable 31,000 Common stock 320,000 Sales revenue 130,000

Cost of goods sold 72,000 Rent expense 5,200 Depreciation expense 1,200 Totals $492,200 $492,200 #15 1. A three-year fire insurance policy was purchased on July 1, 2024, for $9,360. The company debited prepaid insurance for the entire amount at the time of payment. 2. Depreciation on equipment totaled $10,250 for the year. 3. Employee salaries of $12,500 for the month of December will be paid in early January 2025. 4. On November 1, 2024, the company borrowed $110,000 from a bank. The note requires principal and interest at 12% to be paid on April 30, 2025. 5. On December 1, 2024, the company received $3,600 in cash from another company that is renting office space in Fierro’s building. The payment, representing rent for December, January, and February was credited to deferred rent revenue at the time cash was received. #16 1. On October 1, 2024, Microchip lent $83,000 to another company. A note was signed with principal and 8% interest to be paid on September 30, 2025. 2. On November 1, 2024, the company paid its landlord $7,200 representing rent for the months of November through January. Prepaid rent was debited at the time of payment. 3. On August 1, 2024, collected $13,200 in advance rent from another company that is renting a portion of Microchip’s factory. The $13,200 represents one year’s rent and the entire amount was credited to deferred rent revenue at the time cash was received. 4. Depreciation on office equipment is $4,900 for the year. 5. Vacation pay for the year that had been earned by employees but not paid to them or recorded is $8,400. The company records vacation pay as salaries expense. 6. Microchip began the year with $2,400 in its asset account, supplies. During the year, $6,900 in supplies were purchased and debited to supplies. At year-end, supplies costing $3,450 remain on hand.

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#17 The Eldorado Corporation’s controller prepares adjusting entries only at the end of the reporting year. The following adjusting entries were prepared on December 31, 2024: Debit Credit Interest expense 88,200 Interest payable 88,200 Rent expense 37,125 Prepaid rent 37,125 Interest receivable 2,012 Interest revenue 2,012 1. The company borrowed $840,000 on March 31, 2024. Principal and interest are due on March 31, 2025. This note is the company’s only interest-bearing debt. 2. Rent for the year on the company’s office space is $49,500. The rent is paid in advance. 3. On October 31, 2024, Eldorado lent money to a customer. The customer signed a note with principal and interest at 10% due in one year. Required: (1)What is the interest rate on the company's note payable? (2)The 2024 rent payment was made at the beginning of which month?(3)How much did Eldorado lend its customer on October 31? Interest rate = 88200 interest is for 9 months, interest for full year will be = $88200*12/9 = $117600 So Interest rate = $117600*100/$840000 = 14% Interest prepaid adjusting entry is for 9 Months as = 12 x 37125/49500 = 9 months so we can say interest is paid 9 months before 31st December that is 1st April 2021 Principal = $2012 x (12/2) x 1/10% = $120720 . Interest rate 14 % 2. Month of rent payment April 3. Principal $120,720