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COMPREHENSIVE EXAMINATION A

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COMPREHENSIVE EXAMINATION A

COMPREHENSIVE EXAMINATION A

PART 1

(Chapters 1-6)

 

 

Problem A-I — Multiple Choice.

Choose the best answer for each of the following questions and enter the identifying letter in the space provided.

 

____    1.    How does failure to record accrued revenue distort the financial reports?

                  a.   It understates revenue, net income, and current assets.

                  b.   It understates net income, stockholders’ equity, and current liabilities.

                  c.   It overstates revenue, stockholders’ equity, and current liabilities.

                  d.   It understates current assets and overstates stockholders’ equity.

 

____    2.    A contingent liability which is normally accrued is

                  a.   notes receivable discounted.

                  b.   accommodation endorsements on customer notes.

                  c.   additional compensation that may be payable on a dispute now being         arbitrated.

                  d.   estimated claims under a service warranty on new products sold.

 

____    3.    Which of the following items is a current liability?

a.   Bonds due in three months (for which there is an adequate sinking fund classified as a long-term investment).

b.   Bonds due in three years.

c.   Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

d.   Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

 

____    4.    On June 15, 2012 Stine Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2012 would be

                  a.   assets and stockholders’ equity were overstated but liabilities were not        affected.

                  b.   stockholders’ equity was the only item affected by the omission.

                  c.   assets and liabilities were understated but stockholders’ equity was not       affected.

                  d.   assets and stockholders’ equity were understated but liabilities were not      affected.

 

____    5.    Reversing entries are most commonly used in relation to year-end adjusting entries that

                  a.   allocate the expired portion of a depreciable asset to expense.

                  b.   amortize intangible assets.

                  c.   provide for bad debt expense.

                  d.   accrue interest revenue on notes receivable.

____    6.    Of the following adjusting entries, which one would cause an increase in assets at the end of the period?

                  a.   The entry to record the earned portion of rent received in advance.

                  b.   The entry to accrue unrecorded interest expense.

                  c.   The entry to accrue unrecorded interest revenue.

                  d.   The entry to record expiration of prepaid insurance.

 

____    7.    Why is it necessary to make adjusting entries?

a.   The accountant has made errors in recording external transactions.

b.   Certain facts about the affairs of the business are not included in the ledger as built up from external transactions.

c.   The accountant wants to show the largest possible net income for the period.

d.   The accountant wants to show the net cash flow for the year.

 

____    8.    Notes to financial statements should not be used to

                  a.   describe the nature and effect of a change in accounting principles.

                  b.   identify substantial differences between book and tax income.

                  c.   correct an improper financial statement presentation.

                  d.   indicate basis for asset valuation.

 

____    9.    Consistency is best demonstrated when

                  a.   expenses are reported as charges against the period in which incurred.

                  b.   the effect of changes in accounting methods is properly disclosed.

                  c.   extraordinary gains and losses are not reported on the income statement.

                  d.   accounting procedures are adopted which give a consistent rate of net       income.

 

____ 10.    The current assets section of a balance sheet should never include

                  a.   a receivable from a customer not collectible for over one year.

                  b.   the premium paid on short-term bond investment.

                  c.   goodwill arising from the purchase of a going business.

                  d.   customers' accounts with credit balances.

 

 

 

 

Problem A-II — Adjusting and Reversing Entries.

The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31, 2012:

         Cash                                                                                 $ 29,090

         Equity Investments (trading)                                               60,000

         Accounts Receivable                                                          69,000

         Allowance for Doubtful Accounts                                                                      $    500

         Inventory                                                                              54,720

         Prepaid Rent                                                                        36,000

         Plant Assets                                                                       160,000

         Accumulated Depreciation-Plan Assets                                                             14,740

         Accounts Payable                                                                                               11,370

         Bonds Payable                                                                                                    90,000

         Common Stock                                                                                                170,000

         Retained Earnings                                                                                              97,180

         Sales Revenue                                                                                                 214,800

         Cost of Goods Sold                                                           154,400

         Freight-Out                                                                          11,000

         Salaries and Wages Expense                                             32,000

         Interest Expense                                                                    2,040

         Rent Revenue                                                                                                     21,600

         Miscellaneous Expense                                                            890

         Insurance Expense                                                               11,050                             

                                                                                                   $620,190               $620,190

 

Additional Data:

 

Problem A-II — (cont.)

1.   The balance in the Insurance Expense account contains the premium costs of three policies:

      Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2011;

      Policy 2, original cost of $7,200, 3-yr. term, taken out on Oct. 1, 2012;

      Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2012.

 

2.   On September 30, 2012, Alt received $21,600 rent from its lessee for an eighteen month lease beginning on that date.

 

3.   The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2011, the balance of the Plant and Equipment account was $240,000.

 

4.   On December 28, 2012, the bookkeeper incorrectly credited Sales for a receipt on account in the amount of $10,000.

 

5.   At December 31, 2012, salaries and wages accrued but unpaid were $4,200.

 

6.   Alt estimates that 1% of sales will become uncollectible.

 

7.   On August 1, 2012, Alt purchased, as a short-term investment, 60 $1,000, 7% bonds of Allen Corp. at par. The bonds mature on August 1, 2013. Interest payment dates are July 31 and January 31.

 

8.   On April 30, 2012, Alt rented a warehouse for $3,000 per month, paying $36,000 in advance.

 

 

Instructions

(a)   Record the necessary correcting and adjusting entries.

(b)   Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period.

 

 

Problem A-III — Key Conceptual Terms.

Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the space(s) provided. A letter may be used more than once or not at all.

a.   Historical cost                   f.    Economic entity                k.   Revenue recognition

b.   Relevance                         g.   Materiality                         l.    Full disclosure

c.   Monetary unit                    h.   Conservatism                    m.  Cost constraint

d.   Going concern                  i.    Periodicity                         n.   Industry practices

e.   Consistency                      j.    Expense recognition         o.   Faithful                                                                                                      representation

_____    1.  Chose the solution that will be least likely to overstate assets or income.

_____    2.  Describing the depreciation methods used in the financial statements.

_____    3.  Applying the same accounting treatment to similar accounting events.

_____    4.  The quality which helps users make predictions about present, past, and future events.

_____    5.  Recording a transaction when goods or services are exchanged for cash or claims to cash.

_____    6.  Preparing consolidated statements.

_____    7.  Information must make a difference or a company need not disclose it.

_____    8.  Provides the figure at which to record a liability.

_____    9.  The preparation of timely reports on continuing operations.

_____ 10.  Accrual accounting (do not use "going concern").

_____ 11.  Reporting those items which are significant enough to affect decisions. Select two (11 and 12).

_____ 12.  See item 11 above.

_____ 13.  Ignoring the phenomenon of price-level changes (do not use "historical cost").

_____ 14.  Not reporting assets at liquidation prices (do not use "historical cost").

_____ 15.  Characterized by completeness, neutrality, and being free from error.

_____ 16.  Establishment of an allowance for doubtful accounts.

_____ 17.  Additivity of financial statement figures relating to different time periods.

_____ 18.  Carrying inventories at sales price less distribution costs.

_____ 19.  Use of estimating procedures for amortization policies. Select two (do not use "periodicity") (19 and 20).

_____ 20.  See item 19 above.

 

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COMPREHENSIVE EXAMINATION A 1. How does failure to record accrued revenue distort the financial reports? a. It understates revenue, net income, and current assets. b. It understates net income, stockholders’ equity, and current liabilities. c. It overstates revenue, stockholders’ equity, and current liabilities. d. It understates current assets and overstates stockholders’ equity. 2. A contingent liability which is...
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