Question 1
Dee’s inventory and accounts payable balances at December 31, Year 2, increased over their December 31, Year 1, balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at Year 2 cost of goods sold?
Increase in inventory Increase in accounts payable
Added to Deducted from
Added to Added to
Deducted from Deducted from
Deducted from Added to
You Answered Incorrectly.
This answer is incorrect. Cash payments to suppliers are converted to CGS as follows:
Cash payments to suppliers
+ Increase in AP
– Increase in inventory
Cost of Goods Sold
An increase in ending inventory represents the cost of items purchased during the period that remain unsold. Thus, the increase should be deducted from cash payments to suppliers. An increase in AP indicates that certain items purchased during the period have not yet been paid for and are not included in cash payments. Since these represent unrecorded purchases, the increase must be added to cash payments to suppliers to arrive at CGS.
Question 2
Magazine subscriptions collected in advance are reported as
A contra account to magazine subscriptions receivable in the asset section of the balance sheet.
Deferred revenue in the liability section of the balance sheet. correct
Deferred revenue in the stockholders’ equity section of the balance sheet.
Magazine subscription revenue in the income statement in the period collected.
You Answered Correctly!
This answer is correct because deposits and prepayments received for goods or services to be provided in the future are deferred revenues. These would be reported as liabilities because an enterprise has an obligation to provide goods or services to those who have paid in advance.
Question 3
The following trial balance of Mint Corp. at December 31, year 1, has been adjusted except for income tax expense.
Dr. Cr.
Cash $ 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings on long-
term contracts 1,600,000
Billings in excess of costs on
long-term contracts $ 700,000
Prepaid taxes 450,000
Property, plant, and equipment,
net 1,480,000
Note payable—noncurrent 1,620,000
Common stock 750,000
Additional paid-in capital 2,000,000
Retained earnings—unappro-
priated 900,000
Dr. Cr.
Retained earnings—restricted for
note payable 160,000
Earnings from long-term contracts 6,680,000
Costs and expenses 5,180,000
$12,810,000 $12,810,000
Other financial data for the year ended December 31, year 1, are
• Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income tax purposes. All receivables on these contracts are considered to be collectible within twelve months.
• During year 1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint's tax rate is 30%.
In Mint's December 31, year 1 balance sheet, what amount should be reported as
Total noncurrent liabilities?
$1,620,000 correct
$1,780,000
$2,320,000
$2,480,000
The only liabilities included in the trial balance are billings in excess of costs on long-term contracts ($700,000) and note payable-noncurrent ($1,620,000). Only the note is noncurrent. Billings in excess of costs on long-term contracts is similar to unearned revenue and is always reported as a current liability.
Question 4
In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?
Balance sheet.
Income statement.
Statement of retained earnings.
Statement of cash flows.
You Answered Correctly!
Although the statement of cash flows provides information about liquidity, solvency, and financial flexibility, a potential investor would primarily use the balance sheet to assess liquidity and financial flexibility. The balance sheet helps users analyze the company's ability to use current assets to pay current liabilities (liquidity) and the company's ability to alter the amounts and timing of future cash flows to adapt to unexpected needs or to take advantage of opportunities (flexibility).
Question 5
TREPD-0047B
The following trial balance of Mint Corp. at December 31, year 1, has been adjusted except for income tax expense.
Dr. Cr.
Cash $ 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings on long-
term contracts 1,600,000
Billings in excess of costs on
long-term contracts $ 700,000
Prepaid taxes 450,000
Property, plant, and equipment,
net 1,480,000
Note payable—noncurrent 1,620,000
Common stock 750,000
Additional paid-in capital 2,000,000
Retained earnings—unappro-
priated 900,000
Dr. Cr.
Retained earnings—restricted for
note payable 160,000
Earnings from long-term contracts 6,680,000
Costs and expenses 5,180,000
$12,810,000 $12,810,000
Other financial data for the year ended December 31, year 1, are
• Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income tax purposes. All receivables on these contracts are considered to be collectible within twelve months.
• During year 1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint's tax rate is 30%.
In Mint's December 31, year 1 balance sheet, what amount should be reported as
Total retained earnings?
$1,950,000
$2,110,000
$2,400,000
$2,560,000
You Answered Correctly!
Total retained earnings includes both unappropriated retained earnings and restricted retained earnings. Therefore, before closing entries, total retained earnings is $1,060,000 ($900,000 + $160,000). Before computing year 1 net income, tax expense must be recorded. Earnings ($6,680,000) less costs and expenses ($5,180,000) result in pretax income of $1,500,000. Since the tax rate is 30%, tax expense is $450,000 (30% × $1,500,000). Therefore, an adjustment is necessary to debit income tax expense and credit prepaid taxes for $450,000. After the adjustment, net income is $1,050,000 ($6,680,000 − $5,180,000 − $450,000). After closing entries, total retained earnings is $2,110,000 ($1,060,000 + $1,050,000).
Question 6
Weaver Company sells magazine subscriptions for a 1-year, 2-year, or 3-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of $1,700,000 at December 31, year 1. Information for the year ended December 31, year 2, is as follows:
Cash receipts from subscribers $2,100,000
Magazine subscriptions revenue (credited at 12/31/Y2) 1,500,000
In its December 31, year 2 balance sheet, what amount should Weaver report as the balance for magazine subscriptions collected in advance?
$1,400,000
$1,900,000
$2,100,000
$2,300,000
You Answered Correctly!
This answer is correct. The solutions approach is to set up a T- account for the liability.
As receipts are collected, the liability is credited to record the additional subscriptions owed to customers. In addition, the liability is decreased as revenue from the subscriptions is earned. Based upon the information given, Weaver should report $2,300,000 of subscriptions collected in advance at December 31, year 2.
Question 7
On November 1, year 2, Key Co. paid $3,600 to renew its insurance policy for 3 years and used an income statement account to record this transaction. At December 31, year 2, Key’s unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key’s December 31, year 2 financial statements?
Prepaid insurance Insurance expense
$3,300 $1,200
$3,400 $1,200
$3,400 $1,100
$3,490 $1,010
You Answered Correctly!
This answer is correct. Based on the information given, Key has only one prepaid insurance policy at 12/31/Y2. The 3¬-year policy acquired on 11/1/Y2 has been in force for 2 months, so 34 months remain unexpired. Therefore, 12/31/Y2 prepaid insurance is $3,400 ($3,600 × 34/36). Key must make an adjusting entry to transfer $3,310 ($3,400 – $90) from insurance expense to prepaid insurance. This will leave the account balances at $3,400 for prepaid insurance ($90 + $3,310) and $1,100 for insurance expense ($4,410 – $3,310). (Apparently, Key Co. records policy payments as charges to insurance expense during the year and adjusts the prepaid insurance account at the end of the year.)
Question 8
When preparing a draft of its year 1 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following:
Treasury stock of Mont, Inc. at cost, which ap-
proximates market value on December 31 $24,000
Idle machinery 11,200
Cash surrender value of life insurance on corpo-
rate executives 13,700
Allowance for decline in market value of non-
current equity investments 8,400
At what amount should Mont's net assets be reported in the December 31, year 1 balance sheet?
$851,000
$850,100
$842,600
$834,500
You Answered Correctly!
Idle machinery ($11,200) and cash surrender value of life insurance ($13,700) are both assets. The allowance for decline in market value of noncurrent marketable equity securities ($8,400) is a contra asset that is properly included in the asset section of the balance sheet (as a deduction). The only item listed which should not be included in the asset section of the balance sheet is the treasury stock ($24,000). Although the treasury stock account has a debit balance, it is not an asset; instead, it is reported as a contra equity account. Therefore, the $24,000 must be excluded from the asset section, reducing the net asset amount to $851,000 ($875,000 − $24,000).
Question 9
When preparing a draft of its year 2 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following:
Treasury stock of Mont, Inc. at cost $24,000
Idle machinery 11,200
Cash surrender value of life insurance on corporate executives 13,700
At what amount should Mont’s net assets be reported in the December 31, year 2 balance sheet?
$851,000
$850,100
$842,600
$834,500
You Answered Correctly!
This answer is correct. Idle machinery ($11,200) and cash surrender value of life insurance ($13,700) are both assets. The only item listed which should not be included in the asset section of the balance sheet is the treasury stock ($24,000). Although the treasury stock account has a debit balance, it is not an asset; instead, it is reported as a contra equity account. Therefore, the $24,000 must be excluded from the asset section, reducing the net asset amount to $851,000 ($875,000 − $24,000).
Question 10
Mirr, Inc. was incorporated on January 1, year 1, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, year 2. No additional activities affected owners' equity in year 1. Mirr's liabilities increased to $120,000 by December 31, year 1. On Mirr's December 31, year 1 balance sheet, total assets should be reported at
$885,000
$882,000
$878,000
$875,000
You Answered Correctly!
Mirr began operations on 1/1/Y1 with the following balance sheet elements:
Assets = Liabilities + Owners' equity
$860,000 = $110,000 + $750,000
During year 1, liabilities increased to $120,000, and owners' equity increased to $765,000 [$750,000 beginning balance + $18,000 net income ($82,000 revenues − $64,000 expenses) − $3,000 dividends declared]. Therefore, 12/31/Y1 assets must be $885,000.
Assets = Liabilities + Owners' equity
Assets = $120,000 + $765,000
Assets = $885,000
Question 11
The following trial balance of Trey Co. at December 31, 20X5 has been adjusted except for income tax expense.
Dr. Cr.
Cash $550,000
Accounts Receivable, net 1,650,000
Prepaid taxes 300,000
Accounts payable $ 120,000
Common stock 500,000
Additional paid-in capital 680,000
Retained earnings 630,000
Foreign currency translation adjustment 430,000
Revenues 3,600,000
Expenses 2,600,000
$5,530,000 $5,530,000
Additional information:
• During 20X5, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between the financial statement and the income tax income, and Trey's tax rate is 30%.
• Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payments in equal, semiannual installments of $125,000 every April 1 and October 1.
In Trey's December 31, 20X5 Balance Sheet, what amount should be reported as total current assets?
$1,950,000 correct
$2,200,000
$2,250,000
$2,500,000
Current assets are assets that are collectible within one year. The sum of the stated current assets is $2,500,000 ($550,000 + $1,650,000 + $300,000). However, once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense. In addition, $250,000 of the special account receivable is not due for over one year and is, therefore, noncurrent. Therefore, current assets should be $1,950,000 ($2,500,000–$300,000–$250,000). This response correctly adjusted for the accounts receivable but failed to adjust for the tax situation.
Question 12
Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due under the agreement on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the year ended December 31, year 2, is as follows:
Date Amount
January 1, year 2 Prepaid royalties $ 65,000
October 31, year 2 Royalty payment (charged to royalty expense) 120,000
In its December 31, year 2 balance sheet, Ott should report prepaid royalties of
$55,000.
$65,000.
$85,000.
$100,000.
You Answered Incorrectly.
This response is incorrect. It is the royalty expense for year 2, and the question asked for the balance in the prepaid royalty at December 31, year 2. All of the prepaid royalty as of January 1, year 2 would be expensed. The prepayment on October 31 is for the next 12 months. Ten months is prepaid for year 3; therefore, the balance in the prepaid royalty account should be $100,000 ($120,000 ÷ 12 × 10 months).
Question 13
The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January 1, year 1. Assuming that the original payment was recorded as a prepaid asset, how would total assets and stockholders’ equity be affected during year 3?
Total assets would decrease and stockholders’ equity would increase.
Both total assets and stockholders’ equity would decrease.
Both total assets and stockholders’ equity would increase.
Neither total assets nor stockholders’ equity would change.
You Answered Correctly!
This answer is correct because when the premium on the 3-year insurance policy was paid in total on January 1, year 1, a prepaid asset was recorded. At the end of each of the next 3 years, one-third of the premium must be amortized to expense using the following journal entry:
Insurance expense xxx
Prepaid insurance (asset) xxx
The effect of this amortization is to increase expenses (a decrease in stockholders’ equity) and decrease prepaid assets.
Question 14
Which of the following is a deferred cost that should be amortized over the periods estimated to be benefited?
Prepayment of 3-year insurance premiums on machinery.
Security deposit representing 2-months’ rent on leased office space.
Advance from customer to be returned when sale completed.
Property tax for this year payable next year.
You Answered Incorrectly.
This answer is incorrect because a deposit to cover potential damages will not necessarily provide benefits in the future; it would be more properly labeled a receivable.
Question 15
CACL-0002
On the December 31, year 1 balance sheet of the Stat Company, the current assets were comprised of the following items:
Cash $ 70,000
Accounts receivable 120,000
Inventories 60,000
An examination of the accounts revealed that the accounts receivable were composed of the following items:
Trade accounts $ 93,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (11/Y1) 3,000
Selling price of unsold goods sent by Stat on consignment at 130% of cost (and not included in Stat’s ending inventory) 26,000
$120,000
What is the correct amount of current assets as of 12/31/Y1?
$221,000
$224,000
$244,000
$250,000
You Answered Correctly!
This answer is correct. The additional detail of accounts receivable indicates that goods out on consignment are included in accounts receivable at their selling price. Consignment goods should be included in inventory at their cost. Since the selling price of the consigned goods is 130% of cost, the cost of the $26,000 of goods at retail is $20,000 ($26,000/130%). Accounts receivable should be reduced to $94,000 ($120,000 − $26,000), and inventory should be increased to $80,000 ($60,000 + $20,000). Therefore, total current assets are $244,000 ($70,000 + $94,000 + $80,000).
Question 16
How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance?
Revenue for the entire proceeds.
Revenue to the extent of related costs expended.
Unearned revenue to the extent of related costs expended.
Unearned revenue for the entire proceeds.
Question 17
TREPA-0045
A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift certificates lapse 1 year after they are issued. How would the deferred revenue account be affected by each of the following transactions?
Redemption of certificates Lapse of certificates
No effect Decrease
Decrease Decrease
Decrease No effect
No effect No effect
Answer
Decrease Decrease
Cash xx
Deferred revenue xx
Upon redemption of the certificates, the obligation becomes satisfied and the revenue is earned. Similarly, as the certificates expire, the store is no longer under any obligation to honor the certificates and the deferred revenue should be taken into income. In both instances, the deferred revenue account must be reduced (debited) to reflect the earning of revenue. This is done through the following entry:
Deferred revenue xx
Revenue xx
Question 18
CACL-0001
Rogo Corp.’s trial balance reflected the following account balances at December 31, year 1:
Accounts receivable (net) $16,000
Short-term investments 5,000
Accumulated depreciation on equipment and furniture 15,000
Cash 11,000
Inventory of merchandise 30,000
Equipment and furniture 25,000
Patent 4,000
Prepaid expenses 1,000
Land held for future business site 18,000
In Rogo Corp.’s December 31, year 1 balance sheet, the current assets total is
$81,000
$73,000
$67,000
$63,000
Answer
63000
Question 19
If a company issues both a balance sheet and an income statement with comparative figures from last year, a statement of cash flows
Is no longer necessary, but may be issued at the company’s option.
Should not be issued.
Should be issued for each period for which an income statement is presented.
Should be issued for the current year only.
Answer
Should be issued for each period for which an income statement is presented.
Question 20
The following trial balance of Mint Corp. at December 31, year 1, has been adjusted except for income tax expense.
Dr. Cr.
Cash $ 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings on long-
term contracts 1,600,000
Billings in excess of costs on
long-term contracts $ 700,000
Prepaid taxes 450,000
Property, plant, and equipment,
net 1,480,000
Note payable—noncurrent 1,620,000
Common stock 750,000
Additional paid-in capital 2,000,000
Retained earnings—unappro-
priated 900,000
Dr. Cr.
Retained earnings—restricted for
note payable 160,000
Earnings from long-term contracts 6,680,000
Costs and expenses 5,180,000
$12,810,000 $12,810,000
Other financial data for the year ended December 31, year 1, are
• Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income tax purposes. All receivables on these contracts are considered to be collectible within twelve months.
• During year 1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint's tax rate is 30%.
In Mint's December 31, year 1 balance sheet, what amount should be reported as
Total current assets?
$5,000,000
$5,450,000
$5,700,000
$6,150,000
Answer
5700,000
You Answered correctly.
Current assets listed in the trial balance are cash ($600,000), accounts receivable ($3,500,000), cost in excess of billings on long-term contracts ($1,600,000) and prepaid taxes ($450,000). However, income tax expense has not yet been recorded. Earnings ($6,680,000) less costs and expenses ($5,180,000) result in pretax income of $1,500,000. Since the tax rate is 30%, tax expense is $450,000 (30% × $1,500,000). Therefore, an adjustment is necessary to debit income tax expense and credit prepaid taxes for $450,000. Total current assets, after this adjustment, are $5,700,000.
Cash $ 600,000
Accounts receivable 3,500,000
Cost in excess of billings 1,600,000
$5,700,000
Question 21
Gar, Inc.’s trial balance reflected the following liability account balances at December 31, year 1:
Accounts payable $19,000
Bonds payable, due year 2 34,000
Deferred income tax liability 4,000
Discount on bonds payable 2,000
Dividends payable on 2/15/Y2 5,000
Income tax payable 9,000
Notes payable, due 1/19/Y3 6,000
The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes.
In Gar’s December 31, year 1 balance sheet, the current liabilities total was
$71,000
$69,000
$67,000
$65,000
Answer
65000
