Test 1

Determine the effect of each error on the net income and retained earnings for the 20X0 and 20X1 financial statements. For each error, you are to tell whether there is an overstatement, understatement, or no effect on net income and retained earnings Inventory was understated at the end of 20X0.

Net Income for... Retained Earnings for... 20X0 20X1 20X0 20X1 U O U N

Determine the effect of each error on the net income and retained earnings for the 20X0 and 20X1 financial statements. For each error, you are to tell whether there is an overstatement, understatement, or no effect on net income and retained earnings The purchase of a new truck with a five-year life was recorded in 20X0 as delivery expense.

Net Income for... Retained Earnings for... 20X0 20X1 20X0 20X1 U O U U

The primary objective of reversing entries is to a) correct errors. b) simplify the bookkeeping associated with accruals from the prior period. c) transfer the balance of the expense accounts to the Retained Earnings account and set the accounts equal to zero. d) place the expenses for the current period in the proper accounts.

simplify the bookkeeping associated with accruals from the prior period.

Chloe Company was formed on January 20X0 and used an accelerated method of depreciation for its machinery until January 1, 20X2. At that time, Chloe adopted the straight-line method of depreciation for the machinery previously acquired as well as for any new machinery acquired in 20X2. Information concerning depreciation amounts under each method is as follows: Year Dep. under Acc. Method Dep. under Straight-Line Method 20X0 $300,000 $200,000 20X1 $430,000 $275,000 20X2 $500,000 $300,000 Assume that the change was made for both book and tax purposes, and that the income tax rate was 40% in each of these years. What should be reported as the "Cumulative Effect of Change in Accounting Principle" in Chloe's income statement for 20X2? $0. $153,000. $255,000. $273,000.

$0.

At December 31, 20X1 Ratt Corporation had 40,000 shares of common stock and 10,000 shares of preferred stock issued and outstanding. Ratt's net income for the year ended December 31, 20X1 was $240,000. During 20X1 Ratt declared and paid $16,000 cash dividends on the preferred stock and $100,000 on the common stock. There were no common stock or preferred stock transactions during the year. The earnings per common share for the year ended December 31, 20X1 should be

$5.60. 240,000 - 16,000 = 224,000 224,000 / 40,000 = 5.6

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" The company expects that bad debts will amount to about 1.5% of the year's sales of $275,000

Bad Debt expense 4,125 -----------------Allowance 4,125 275,000 * .015 = 4,125 No

The following facts pertain to the Luskin Corporation for 20X1: Retained Earnings balance, 1/1/20X1 $320,000 Cash dividends declared and paid in 20X1 $45,000 Correction of income for 20X0; income was overstated in 20X0 and the error was discovered and corrected in 20X1 $19,000 Retained Earnings balance (after closing), 12/31/20X1 $416,000 Net Income for 20X1 ? Based on the above facts, net income for 20X1 for the Luskin Corporation amounted to $70,000. $122,000. $141,000. $160,000.

Beg R/E Adjusted: 320,000 - 19,000=201,000 EB R/E = BBAdj + NI - Div 416,000 = 301,000 + X - 45,000 $160,000.

Which of the following should be reflected net of applicable income taxes, in the statement of stockholders' equity as an adjustment of the opening balance in retained earnings? a) Loss on discontinued operations. b) Declaration of preferred stock dividend to cover dividends in arrears. c) Correction of an error in the financial statements of a prior year. d) Loss from flood damage.

Correction of an error in the financial statements of a prior year.

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" Fleming uses a periodic inventory system and records the inventory and cost of goods sold as an adjusting entry. The following information relates to the 20X1 inventory transactions: Beginning inventory $12,000 Purchases $100,800 Purchases discounts $3,500 Ending inventory $17,250 Prepare the adjusting entry necessary to record the inventory and the cost of goods sold

COGS 92,050 Inventory (EB) 17,250 Purchase Disc 3,500 ------------Inventory (Beg. Bal.) 100,800 ------------Purchases 12,000 (12,000 + 100,800 - 3,500) - 17,250 = 92,050 AV. ---------------------------EB No

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" Depreciation for the three office buildings is $36,000 for 20X1

Depreciation Expense 36,000 --------Accumulated Expense 36,000 No

Determine the effect of each error on the net income and retained earnings for the 20X0 and 20X1 financial statements. For each error, you are to tell whether there is an overstatement, understatement, or no effect on net income and retained earnings A January 1, 20X0, purchase of a 2 year fire insurance policy was charged to insurance expense and no adjustments were made at the end of either 20X0 or 20X1.

Net Income for... Retained Earnings for... 20X0 20X1 20X0 20X1 U O U N

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" The company purchased the following two insurance policies during 20X1 and debited a real account for the cost. There were no other insurance policies in effect during 20X1. Policy Term Date Purchased Premium Paid A 3 years August 1 $4,500 B 1 year June 1 $960

Insurance Expense 1,185 --------------Prepaid insurance 1,185 (4,500 * (5/36)) + (960 * (7/12)) = 1,185 No

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" Fleming acquired bonds as an investment on March 1, 20X0. The bonds were purchased at their face amount of $150,000. The stated interest rate is 12% and the interest payment dates are March 1 and October 1

Interest Receivable 4,500 -----------Interest Revenue 4,500 150,000 * .12 = 18,000 18,000 * (2/12) = 3,000 3,000 * 1/2 = 1,500 3,000 + 1,500= 4,500 Yes

Determine the effect of each error on the net income and retained earnings for the 20X0 and 20X1 financial statements. For each error, you are to tell whether there is an overstatement, understatement, or no effect on net income and retained earnings Inventory was overstated at the end of 20X1.

Net Income for... Retained Earnings for... 20X0 20X1 20X0 20X1 N O N O

Determine the effect of each error on the net income and retained earnings for the 20X0 and 20X1 financial statements. For each error, you are to tell whether there is an overstatement, understatement, or no effect on net income and retained earnings No depreciation expense was recorded at the end of 20X0.

Net Income for... Retained Earnings for... 20X0 20X1 20X0 20X1 O N O O

Determine the effect of each error on the net income and retained earnings for the 20X0 and 20X1 financial statements. For each error, you are to tell whether there is an overstatement, understatement, or no effect on net income and retained earnings A purchase of merchandise on credit in late 20X0 was not recorded until early 20X1. The merchandise was correctly included in the December 31,20X0 physical inventory.

Net Income for... Retained Earnings for... 20X0 20X1 20X0 20X1 O U O N

Which of the following items would be reported separately on the income statement net of its income tax effect? a) Gain on the sale of a temporary investment. b) Gain from early extinguishment of long-term bonds. c) Loss resulting from a strike by employees. d) Loss due to shoplifting. e) None of the above

None of the above

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" The Office Supplies account has a debit balance before adjustment of $6,300 at December 31, 20X1. The office supplies purchased during 20X1 amounted to $18,800, and the supplies were recorded in the Office Supplies Expense account. At December 31, 20X1, it was determined by a physical count that the office supplies on hand were $9,400

Office Supplies 3,100 --------Supplies Expense 3,100 18,800 - 6,300 - 9,400 = 3,100 Yes

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" Fleming owns three office buildings. The tenants' rent is always collected in advance for a 12-month period and is recorded in a nominal account at that time. The bookkeeper prepared the following schedule relating to rent received: Tenant Date Received Amount Received X March 1, 20X1 $15,600 Y June 1, 20X1 $18,600 Z August 1, 20X1 $13,200

Rent Revenue 18,050 --------Unearned Rent Revenue 18,050 (15,600*(2/12)) + (18,600*(5/12)) + (13,200*(7/12)) = 18,050 Yes

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" At the end of the year, unpaid and unrecorded salaries amounted to $3,500

Salaries Expense 3,500 --------Salaries Payable 3,500 Yes

For each situation, prepare the adjusting entry that is necessary as of December 31, 20X1 Indicate which of the above adjusting entries would be reversed in January 20X2, by writing either "Yes" or "No" The company began printing and distributing a new magazine during November 20X1. A total of $150,000 of one-year subscriptions was sold during November. All subscribers received both the November and December issues of the magazine. The company used a nominal account to record the original cash transactions

Subscription Revenue 125,000 ----------------Unearned subscription revenue 125,000 150,000 * (10/12) = 125,000 Yes

An adjusting entry cannot include a debit to a) an expense and a credit to an asset. b) an asset and a credit to a revenue. c) a liability and a credit to a revenue. d) an asset and a credit to a liability.

an asset and a credit to a liability.