Chapter 4 Practice

Question 1

adjusted deferred revenue

Answer 1

remove from liabilities if done service
add to revenue if done service

Question 2

depreciation

Answer 2

added to expense
reduce from asset (anti-asset)

Question 3

Supplies used =

Answer 3

Beginning amount on hand + purchase - sell - ending amount on hand

Question 4

Wages earned by employees during November, unpaid and unrecorded at November 30, amounted to x

Answer 4

X add to expense and X add to liabilities

Question 5

identify the expense or revenue account that should be adjusted

Unpaid wages for the last three days of December amounting to $X were not recorded.

Answer 5

X wage expense

Question 6

identify the expense or revenue account that should be adjusted

The unpaid $X telephone bill for December has not been recorded.

Answer 6

X - utilities expense

Question 7

identify the expense or revenue account that should be adjusted

Interest on a $X, one-year, 10 percent note payable dated October 1 of the current year, was not recorded. The full amount of interest is payable on the maturity date of the note.

Answer 7

X x (10%:12xperiod) - interest expense

Question 8

identify the expense or revenue account that should be adjusted

Maintenance expense includes $X, which is the cost of maintenance supplies still on hand at December 31. These supplies will be used in the next year.

Answer 8

-X maintainence expense

Question 9

identify the expense or revenue account that should adjusted at Dec 31.

The deferred rental revenue account at December 31 includes $5,800 to be earned in January of the next year.

Answer 9

Not required

Question 10

identify the expense or revenue account that should be adjusted

Depreciation on rental cars, amounting to $X for the current year, was not recorded.

Answer 10

X depreciation expense

Question 11

Statement of Earnings Order

Answer 11

1. Revenue
2. Expense
3. 2.1 Total expense
4. Earnings before income tax
5. Income tax expense
6. Net earnings
7. Earnings per share

Question 12

Net profit margin =

Answer 12

Net earnings : Net Sales (or revenue)*100

Question 13

Net profit margin = 23.4% indicates that

Answer 13

for every $1 of rental revenues, Barton earns $0.23 (23.4%) in net earnings
Higher -> more profitable + better able to manage its business

Question 14

ROE: Return on Equity =

Answer 14

Net earnings/Average shareholders’ Equity*100

Question 15

To accrue income tax expense incurred but not yet paid=

Answer 15

Earnings before any of the adjustments or income taxes +/- effects of adjustments * Income tax rate

Question 16

Quality of earnings

Answer 16

Cash flow from operations/net earnings (or net income)

Question 17

Why does Air Canada recognize passenger and cargo revenues when transportation is provided, rather than when cash is received?

Answer 17

Air Canada prepares its financial statements in accordance with IFRS. In particular, it is recognizing revenue during the time period it has been earned, that is when it provides the transportation service.

Question 18

cash collected from customers, assume all on credits, fiscal year 2020

Answer 18

Trade receivable beg. (2019) + Sales - Collections = Trade receivable 2020
=> Collections = Trade 2019 + Sales - Trade receivable 2020

Question 19

Dividend paid =

Answer 19

Beginning dividends payable + dividend declared - ending dividends payable

Question 20

the accrual of interest expense effect

Answer 20

• liabilities: increase interest payable, reduce income tax payable (if subject to income tax rate)
• reduced net earnings -> retained earnings -> shareholders’ equity

Question 21

decrease in R&D investment’s effect on ROE

Answer 21

• Current ROE: lower expense -> increase net earnings -> increase ROE
• Future ROE: less research -> fewer products are brought to market in future periods -> net earnings and ROE likely to decrease

Question 22

advertising for next year’s effect on ROE

Answer 22

• advertising for next year = prepaid asset not an expense => current ROE would not be affected
• Assume movie earns greater net earnings in future periods -> increase future ROE

Question 23

Issuance of additional shares’s + purchase other high-tech companies’s effect on ROE

Answer 23

• increase shareholders’ equity -> decrease current ROE
• assume those companies are profitable -> increase net earnings -> increase future ROE