Exam 2 Prep

Question 1

Xu Corp. started its business at the beginning of 2016. Xu
selected the FIFO method for its inventory. In order to
maximize its profits for 2016 under this method, prices
must be?

a. Fluctuating up and down at the same amount
consistently over the year
b. Stable
c. Decreasing
d. Increasing

Answer 1

d. Increasing

Question 2

The cost of goods sold is?

a. Equal to the amount of inventory on hand at the end of
the accounting period
b. Reported on the balance sheet in the inventory account
c. Purchases less beginning inventory plus ending
inventory
d. Goods available for sale less ending inventory

Answer 2

d. Goods available for sale less ending inventory

Question 3

Which of the following accounts is classified as a contra
revenue account?

a. Cost of Purchases
b. Purchase Returns and Allowances
c. Sales Returns and Allowances
d. Unearned Sales Revenue

Answer 3

c. Sales Returns and Allowances

Question 4

Multiple-step income statements show

a. Gross profit but not income from operations.
b. Both income from operations and gross profit.
c. Income from operations but not gross profit.
d. Neither gross profit nor income from operations.

Answer 4

b. Both income from operations and gross profit.

Question 5

Using the following information, what is the amount of cost
of goods sold?

Purchases - $32,000
Merchandise inventory September 1 - 5,700
Sales returns and allowances - 910
Purchases returns and allowances - 1,200
Purchases discounts - $960
Merchandise inventory September 30 - 6,370
Sales - 63,000
Freight In - 1,040

a. $26,900
b. $20,530
c. $28,130
d. $30,210

Answer 5

d. $30,210

Net Purchases = Purchases − Purchase Discounts − Purchase Returns and Allowances
= $32,000 − $960 − $1,200
= $29,840

Cost of Goods available for sale = Merchandise Inventory on September 1 + Net Purchases + Freight In
= $5,700 + $29,840 + $1,040
= $36,580

Cost of Goods Sold = Cost of Goods available for sale − Merchandise Inventory on September 30
= $36,580 − $6,370
= $30,210

Question 6

Which internal control procedure is followed when the
work of one department acts as a check on the work of
another?

a. Proper authorizations
b. Safeguarding assets and records
c. Independent verifications
d. Segregation of duties

Answer 6

c. Independent verifications

Question 7

Which internal control procedure is followed when a
physical count of inventory is performed in a perpetual
inventory system?

a. Segregation of duties
b. Safeguarding assets and records
c. Independent verifications
d. Segregation of duties

Answer 7

c. Independent verifications

Question 8

Which internal control procedure is followed when storage
areas are secured with limited access?

a. Segregation of duties
b. Safeguarding assets and records
c. Independent verifications
d. Segregation of duties

Answer 8

b. Safeguarding assets and records

Question 9

Which one of the following would not appear on a bank
statement for a checking account?

a. Service charges
b. Interest earned
c. Outstanding checks
d. Deposits

Answer 9

c. Outstanding checks

Question 10

The party to a promissory note that agrees to repay
money on the maturity date of the note is called the

a. Lender
b. Maker of the note
c. Payee of the note
d. Recipient of the note

Answer 10

b. Maker of the note

Question 11

The data below is for Music Corporation for 2016.

Accounts receivable–January 1, 2016 - $236,000
Credit sales during 2016 - 820,000
Collections from credit customers during 2016 - 590,000
Customer accounts written off as uncollectible during 2016 - 8,000
Allowance for doubtful accounts–January 1, 2016 - 8,700
Estimated uncollectible accounts based on an aging analysis - 9,600

What is the balance of Accounts Receivable at December 31, 2016?

a. $336,000
b. $448,400
c. $458,000
d. $466,000

Answer 11

c. $458,000

Balance of A.R. Dec 31 = A.R. Jan 1 + Credit sales - Collections from credit customers - Customer accounts written off as uncollectible

$236,000 + 820,000 - 590,000 - 8,000 = $458,000

Question 12

Utah Co. sold merchandise to Big Sky Corp. on December 1
2016, for $9,000, and accepted a promissory note for payment
in the same amount. The note has a term of 90 days and a
stated interest rate of 8%. Utah’s accounting period ends on
December 31. What amount should Utah recognize as interest
revenue on the maturity date of the note?

a. $0
b. $60
c. $120
d. $180

Answer 12

c. $120

$9,000 * 8% * (90-30) = $43,200/360 = $120

Question 13

Which one of the following is an accurate description of
Allowance for Doubtful Accounts?

a. Contra account
b. Liability account
c. Revenue account
d. Expense account

Answer 13

a. Contra account

Question 14

On January 15, 2016, the accounts receivable balance was
$7,000 and the balance in the allowance for doubtful accounts
was $700. On January 16, 2016, a $200 uncollectible account
was written-off. The net realizable value of accounts receivable
on January 16 immediately after the write-off is:

a. $6,300
b. $6,800
c. $6,500
d. $7,900

Answer 14

a. $6,300

Net realizable value of accounts receivable on January 16 = A.R. Balance - Allowance for doubtful accounts

$7,000 - $700 = $6,300

Question 15

Router Inc. lends $70,000 on a 120-day, 9% promissory
note. The total interest that Router will receive at maturity
is

a. $6,300
b. $2,100
c. $525
d. $1,890

Answer 15

b. $2,100

($70,000 * 9% * 120) / 360 = $2,100

Question 16

Which of the following would not be included in inventory
Costs?

a. Freight costs incurred by the buyer in shipping inventory to
its place of business.
b. The cost of insurance taken out during the time that
inventory is in transit.
c. The cost of storing inventory before it is ready to be sold.
d. Shelving to hold the inventory.

Answer 16

d. Shelving to hold the inventory.

Question 17

Which one of the following statements regarding changing
inventory methods is true?

a. A change in inventory methods can be justified if the change
is made to better match profits with revenue.
b. Changing inventory methods affects consistency.
c. One place that the reader of an annual report would be able
to identify that a company changed inventory methods is the
statement of stockholders’ equity.
d. Tax advantages are valid justification for changing inventory
methods.

Answer 17

b. Changing inventory methods affects consistency.

Question 18

Blanket Airlines acquires a new aircraft. It has an
estimated life of 15 years and should be used for 15,000
hours of flight. What is the most appropriate method of
depreciation to properly match revenues and expenses?

a. Units-of-production
b. Straight-line
c. Revenue expenditure method
d. Double-declining-balance

Answer 18

a. Units-of-production

Question 19

Grove City Corp.
On January 1, 2016, Grove City Corp. purchased a ship for
$2,000,000. It has a ten-year useful life and a residual value of
$50,000. The company uses the double-declining-balance
method.

What was the depreciation expense for Grove City Corp. for the
year ended December 31, 2016?

a. $0
b. $195,000
c. $390,000
d. $400,000

Answer 19

c. $390,000

$2,000,000 - $50,000 = $1,950,000/10 years = $195,000 * 2 = $390,000

Question 20

Grove City Corp.
On January 1, 2016, Grove City Corp. purchased a ship for
$2,000,000. It has a ten-year useful life and a residual value of
$50,000. The company uses the double-declining-balance
method.

What was the book value of the ship for Grove City Corp. at the
end of the useful life?

a. $0
b. $50,000
c. $214,400
d. Need more information to determine this answer.

Answer 20

b. $50,000

Question 21

Mclaren Corp incurred the following costs to acquire and
prepare land during 2016 for a new parking lot: purchase
price for land, $800,000; cost to clear the land, $30,000;
cost of paving, $40,000; and lighting for the parking lot,
$20,000. How much should Halifax record in the Land
Improvements account?

a. $30,000
b. $40,000
c. $60,000
d. $90,000

Answer 21

c. $60,000

Question 22

On the balance sheet, the cumulative amount of plant and
equipment already expensed is reported in an account
called

a. Accumulated Amortization
b. Accumulated Depreciation
c. Amortization Expense
d. Depreciation Expense

Answer 22

b. Accumulated Depreciation

Question 23

Grove City Corp.
On January 1, 2016, Grove City Corp. purchased a ship for
$2,000,000. It has a ten-year useful life and a residual value of
$50,000. The company uses the straight-line method.

What was the depreciation expense for Grove City Corp. for the
year ended December 31, 2016?

a. $0
b. $195,000
c. $390,000
d. $400,000

Answer 23

b. $195,000

Question 24

Royal Company purchased a dump truck at the beginning of 2014 at a cost of $60,000. The truck had an estimated life of 6 years and an estimated residual value of $24,000. On January 1, 2016, the company made major repairs of $20,000 to the truck that extended the life 1 year. Thus, starting with 2016, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. When calculating depreciation for 2016, Royal should

a. add the $20,000 to the book value at December 31, 2015 and then
allocate the revised basis over the remaining adjusted useful life of 5 years.
b. report the effect of the change in life as an expense on the income
statement in 2015.
c. ignore the change in life on the original cost of $60,000 and depreciate
the additional $20,000 cost separately over its useful life.
d. expense the $20,000 and depreciate the original cost of $60,000 over its
revised estimated total live of 7 years.

Answer 24

a. add the $20,000 to the book value at December 31, 2015 and then
allocate the revised basis over the remaining adjusted useful life of 5 years.

Question 25

Current accounting standards indicate that the costs of
intangible assets with an indefinite life, such as goodwill,
should

a. not be amortized
b. be reported on the statement of retained earnings in the
year in which acquired
c. be amortized over a reasonable period of time not to
exceed 40 years
d. increase an expense account entirely in the year in
which acquired

Answer 25

a. not be amortized

Question 26

Depreciation is

a. an effort to achieve proper matching of the cost of
operating assets.
b. an accumulation of funds to replace the related plant
asset.
c. the difference between the original cost and salvage
value of an asset.
d. the cash allocated each period to maintain a plant
asset.

Answer 26

a. an effort to achieve proper matching of the cost of

Question 27

Blenham, Inc. sells merchandise on credit. If a customer
pays its balance due after the discount period has passed,
what is the effect of the payment on Blenham’s accounting
equation?

a. Assets and stockholders’ equity decrease.
b. Assets and stockholders’ equity increase.
c. Assets decrease and liabilities increase.
d. No net effect.

Answer 27

d. No net effect.

Question 28

Roki Inc. uses the periodic inventory system.

June:
1 On hand, 50 units @ $15.00 each - $750.00
5 Purchased 115 units @ $15.10 each - 1,736.50
14 Purchased 75 units @ $15.20 each - 1,140.00
Total cost of goods available for sale - $3,626.50
30 On hand, 90 units

If Roki uses the weighted average cost inventory method, the amount
assigned to the June 30th inventory would be

a. $1,359.90
b. $1,486.50
c. $1,549.00
d. $1,591.50

Answer 28

a. $1,359.90

$3,626.50 / ( 115 + 50 + 75 ) = 15.11
90 * 15.11 = $1,359.90

Question 29

At the year end inventory count, if goods in transit are
shipped FOB shipping point, they should be included in
the inventory count of

a. The seller
b. The buyer
c. Both the seller and the buyer
d. Neither the seller no the buyer

Answer 29

b. The buyer

Question 30

Which one of the following is considered one of the six
most important categories of internal control procedures?

a. Computerized accounting systems
b. The board of directors
c. Proper authorizations
d. Verification by government agencies

Answer 30

c. Proper authorizations