Ch. 7-10 Textbook Questions

Question 1

Which of the following is not an element of the fraud triangle?

Answer 1

Segregation of duties.

Question 2

Internal control is used in a business to enhance the accuracy and reliability of its accounting records and to:

Answer 2

safeguard its assets.

Question 3

The principles of internal control do not include:

Answer 3

management responsibility.

Question 4

Physical controls do not include:

Answer 4

independent bank reconciliations.

Question 5

Which of the following was not a result of the Sarbanes-Oxley Act?

Answer 5

Companies must file financial statements with the Internal Revenue Service.

Question 6

Which of the following control activities is not relevant when a company uses a computerized (rather than manual) accounting system?

Answer 6

All of these control activities are relevant to a computerized system.

Question 7

Permitting only designated personnel such as cashiers to handle cash receipts is an application of the principle of:

Answer 7

establishment of responsibility.

Question 8

The use of prenumbered checks in disbursing cash is an application of the principle of:

Answer 8

documentation procedures.

Question 9

The control features of a bank account do not include:

Answer 9

having bank auditors verify the correctness of the bank balance per books.

Question 10

In a bank reconciliation, deposits in transit are:

Answer 10

added to the bank balance.

Question 11

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:

Answer 11

bank service charges.

Question 12

Which of the following items in a cash drawer at November 30 is not cash?

Answer 12

An NSF check.

Question 13

Which statement correctly describes the reporting of cash?

Answer 13

Cash is listed first in the current assets section.

Question 14

Which of the following would not be an example of good cash management?

Answer 14

Invest temporary excess cash in stock of a small company.

Question 15

Which of the following is not one of the sections of a cash budget?

Answer 15

Cash from operations section.

Question 16

A check is written to replenish a $100 petty cash fund when the fund contains receipts of $94 and $4 in cash. In recording the check:

Answer 16

debit Cash Over and Short for $2.

Question 17

A receivable that is evidenced by a formal instrument and that normally requires the payment of interest is:

Answer 17

a note receivable.

Question 18

Receivables are frequently classified as:

Answer 18

accounts receivable, notes receivable, and other receivables.

Question 19

Kersee Company on June 15 sells merchandise on account to Eng Co. for $1,000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received?

Answer 19

$686.

Question 20

Accounts and notes receivable are reported in the current assets section of the balance sheet at:

Answer 20

cash (net) realizable value

Question 21

Net credit sales for the month are $800,000. The accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage‐of‐receivables basis. If Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the balance after adjustment?

Answer 21

$12,000.

Question 22

In 2017, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2017, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2017, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage‐of‐receivables basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to Allowance for Doubtful Accounts at December 31, 2017?

Answer 22

$32,000.

Question 23

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal these data:
Accounts receivable
$800,000
Allowance for doubtful accounts per books before adjustment (credit)
50,000
Amounts expected to become uncollectible
65,000
What is the cash realizable value of the accounts receivable at December 31, after adjustment?

Answer 23

$735,000.

Question 24

Which of these statements about Visa credit card sales is incorrect?

Answer 24

The retailer must wait to receive payment from the issuer.

Question 25

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Good Stuff Retailers will include a credit to Sales Revenue of $50,000 and a debit(s) to:

Answer 25

Cash $48,000 and Service Charge Expense $2,000.

Question 26

A company can accelerate its cash receipts by all of the following except:

Answer 26

writing off receivables.

Question 27

Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is:

Answer 27

$55,000.

Question 28

Use the same information as in Question 11, except that Hughes has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. In this situation, the amount of bad debt expense that should be reported for the year is:

Answer 28

$65,000.

Question 29

Which of these statements about promissory notes is incorrect?

Answer 29

A promissory note is not a negotiable instrument.

Question 30

Michael Co. accepts a $1,000, 3‐month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is:

Answer 30

Notes Receivable 1,000

Accounts Receivable 1,000

Question 31

Schleis Co. holds Murphy Inc.’s $10,000, 120‐day, 9% note. The entry made by Schleis Co. when the note is collected, assuming no interest has previously been accrued, is:

Answer 31

Notes Receivable 10,000

    Interest Revenue 10,000

Question 32

If a company is concerned about extending credit to a risky customer, it could do any of the following except:

Answer 32

provide the customer a lengthy payment period to increase the chance of paying.

Question 33

Eddy Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. What was the accounts receivable turnover and average collection period in days?

Answer 33

6.4 and 57 days.

Question 34

Prall Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 7. What is its average collection period (days)?

Answer 34

52

Question 35

Corrieten Company purchased equipment and incurred these costs:
Cash price	
$24,000
Sales taxes	
1,200
Insurance during transit	
200
Installation and testing	
    400
Total costs	
$25,800
What amount should be recorded as the cost of the equipment?

Answer 35

$25,800.

Question 36

Harrington Corporation recently leased a number of trucks from Andre Corporation. In inspecting the books of Harrington Corporation, you notice that the trucks have not been recorded as assets on its balance sheet. From this, you can conclude that Harrington is accounting for this transaction as a/an:

Answer 36

operating lease.

Question 37

Additions to plant assets are:

Answer 37

capital expenditures.

Question 38

Depreciation is a process of:

Answer 38

cost allocation.

Question 39

Cuso Company purchased equipment on January 1, 2016, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2017, if the straight‐line method of depreciation is used?

Answer 39

$156,000.

Question 40

A company would minimize its depreciation expense in the first year of owning an asset if it used:

Answer 40

a high estimated life, a high salvage value, and straight‐line depreciation.

Question 41

When there is a change in estimated depreciation:

Answer 41

current and future years’ depreciation should be revised.

Question 42

Able Towing Company purchased a tow truck for $60,000 on January 1, 2017. It was originally depreciated on a straight‐line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2019, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2019) and the salvage value to $2,000. What was the depreciation expense for 2019?

Answer 42

$12,100.

Question 43

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2017. The machine was purchased for $80,000 on January 1, 2013, and was depreciated on a straight‐line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or loss recorded at the time of the sale?

Answer 43

$18,000 loss.

Question 44

Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It spent $20,000 in legal fees for a patent granted on January 2, 2017. On July 31, 2017, Pierce paid $15,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2017?

Answer 44

$35,000.

Question 45

Indicate which one of these statements is true.

Answer 45

Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements.

Question 46

If a company reports goodwill as an intangible asset on its books, what is the one thing you know with certainty?

Answer 46

The company purchased another company.

Question 47

Which of the following statements is false?

Answer 47

Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.

Question 48

Which of the following measures provides an indication of how efficient a company is in employing its assets?

Answer 48

Asset turnover.

Question 49

Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets of $200,000, and ending total assets of $300,000. What was the company’s asset turnover?

Answer 49

0.72

Question 50

Kant Enterprises purchased a truck for $11,000 on January 1, 2016. The truck will have an estimated salvage value of $1,000 at the end of 5 years. If you use the units‐of‐activity method, the balance in accumulated depreciation at December 31, 2017, can be computed by the following formula:

Answer 50

(10,000/total estimated activity) x units of activity for 2016 and 2017

Question 51

Jefferson Company purchased a piece of equipment on January 1, 2017. The equipment cost $60,000 and has an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2018 under the double‐declining‐balance method?

Answer 51

$11,250.

Question 52

The time period for classifying a liability as current is one year or the operating cycle, whichever is:

Answer 52

longer.

Question 53

To be classified as a current liability, a debt must be expected to be paid within:

Answer 53

(a) or (b), whichever is longer.

Question 54

Ottman Company borrows $88,500 on September 1, 2017, from Farley State Bank by signing an $88,500, 12%, 1‐year note. What is the accrued interest at December 31, 2017?

Answer 54

$3,540.

Question 55

JD Company borrowed $70,000 on December 1 on a 6‐month, 12% note. At December 31:

Answer 55

both the note payable and the interest payable are current liabilities.

Question 56

Alexis Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, what is the amount to be credited to Sales Revenue?

Answer 56

$4,300.

Question 57

When recording payroll:

Answer 57

payroll deductions are recorded as liabilities.

Question 58

No Fault Insurance Company collected a premium of $18,000 for a 1‐year insurance policy on April 1. What amount should No Fault report as a current liability for Unearned Insurance Premiums at December 31?

Answer 58

$4,500.

Question 59

Employer payroll taxes do not include:

Answer 59

federal income taxes.

Question 60

What term is used for bonds that have specific assets pledged as collateral?

Answer 60

Secured bonds.

Question 61

The market interest rate:

Answer 61

is the rate investors demand for loaning funds.

Question 62

Laurel Inc. issues 10‐year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:

Answer 62

the contractual interest rate exceeds the market interest rate.

Question 63

On January 1, 2017, Kelly Corp. issues $200,000, 5‐year, 7% bonds at face value. The entry to record the issuance of the bonds would include a:

Answer 63

credit to Bonds Payable for $200,000.

Question 64

Prescher Corporation issued bonds that pay interest every July 1 and January 1. The entry to accrue bond interest at December 31 includes a:

Answer 64

credit to Interest Payable.

Question 65

Goethe Corporation redeems its $100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a:

Answer 65

debit of $3,745 to Premium on Bonds Payable.

Question 66

In a recent year, Derek Corporation had net income of $150,000, interest expense of $30,000, and income tax expense of $20,000. What was Derek Corporation’s times interest earned for the year?

Answer 66

6.67.

Question 67

Which of the following is not a measure of liquidity?

Answer 67

Debt to assets ratio.

Question 68

On January 1, Xiang Corporation issues $500,000, 5‐year, 12% bonds at 96 with interest payable on January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight‐line method will include a:

Answer 68

credit to Discount on Bonds Payable $4,000.

Question 69

For the bonds issued in Question 17, what is the carrying value of the bonds at the end of the third interest period?

Answer 69

$492,000.

Question 70

On January 1, Holly Ester Inc. issued $1,000,000, 10‐year, 9% bonds for $938,554. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Holly Ester uses the effective‐interest method of amortizing bond discount. At the end of the first year, Holly Ester should report unamortized bond discount of:

Answer 70

$57,591.

Question 71

On January 1, Nicholas Corporation issued $1,000,000, 14%, 5‐year bonds with interest payable on December 31. The bonds sold for $1,072,096. The market rate of interest for these bonds was 12%. On the first interest date, using the effective‐interest method, the debit entry to Interest Expense is for:

Answer 71

$128,652.

Question 72

Sampson Corp. purchased a piece of equipment by issuing a $20,000, 6% installment note payable. Quarterly payments on the note are $1,165. What will be the reduction in the principal portion of the note payable that results from the first payment?

Answer 72

$865.

Question 73

Andrews Inc. issues a $497,000, 10% 3‐year mortgage note on January 1. The note will be paid in three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc. in the second year?

Answer 73

$34,670.

Question 74

Howard Corporation issued a 20‐year mortgage note payable on January 1, 2017. At December 31, 2017, the unpaid principal balance will be reported as:

Answer 74

part current and part long‐term liability.