CHAPTER 9

1. Claims for which formal instruments of credit are issued as proof of the debt are
a. accounts receivable.
b. interest receivable.
c. notes receivable.
d. other receivables.

2. Interest is usually associated with

a. accounts receivable.
b. notes receivable.
c. doubtful accounts.
d. bad debts.

3. The receivable that is usually evidenced by a formal instrument of credit is a(n)

a. trade receivable.
b. note receivable.
c. accounts receivable.
d. income tax receivable.

4. Which of the following receivables would not be classified as an "other receivable"?

a. Advance to an employee
b. Refundable income tax
c. Notes receivable
d. Interest receivable

5. Notes or accounts receivables that result from sales transactions are often called
a. sales receivables.
b. non-trade receivables.
c. trade receivables.
d. merchandise receivables.

6. The term "receivables" refers to

a. amounts due from individuals or companies.
b. merchandise to be collected from individuals or companies.
c. cash to be paid to creditors.
d. cash to be paid to debtors.

7. A cash discount is usually granted to all of the following except

a. retail customers.
b. retailers.
c. wholesalers.
d. All of these are granted discounts.

8. Which one of the following is not a primary problem associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Disposing of accounts receivable

9. Trade accounts receivable are valued and reported on the balance sheet
a. in the investment section.
b. at gross amounts less sales returns and allowances.
c. at net realizable value.
d. only if they are not past due.
 10. Three accounting issues associated with accounts receivable are
a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting.
c. recognizing, valuing, and disposing.
d. accrual, bad debts, and disposing.

11. Which of the following would require a compound journal entry?

a. To record merchandise returned that was previously purchased on account.
b. To record sales on account.
c. To record purchases of inventory when a discount is offered for prompt payment.
d. To record collection of accounts receivable when a cash discount is taken.

12. Which of the following would be considered as an unlikely occurrence?

a. Manufacturer offers a cash discount to a wholesaler.
b. Wholesaler offers a cash discount to a retailer.
c. Retailer offers a cash discount to a customer.
d. All of these are standard practices.

Use the following information for questions 13-14

A customer charges a treadmill at Hank's Sport Shop. The price is $2,000 and the financing charge is 9%
per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance
charge is added to the customer's account.

13. What is the amount of the finance charge?

a. $60
b. $15
c. $180
d. $6

14. The accounts affected by the journal entry made by Hank's Sport Shop to record the finance
charge are
a. Accounts Receivable
Cash
b. Cash
Finance Receivable
c. Accounts Receivable
Interest Payable
d. Accounts Receivable
Interest Revenue

15. Which of the following practices by a credit card company results in lower interest charges to the
cardholder?
a. The card company states interest as a monthly percentage rather than an annual
percentage.
b. The card company allows a grace period before interest is accrued.
c. The card company allows cardholders to skip payments on their cards.
d. The card company calculates finance charges from the date of purchase to the date the
amount is paid.

16. If a department store fails to make the entry to accrue the finance charges due from
customers,
a. accounts receivable will be overstated.
b. interest revenue will be understated.
c. interest expense will be overstated.
d. interest expense will be understated.
17. Under the allowance method, writing off an uncollectible account
a. affects only balance sheet accounts.
b. affects both balance sheet and income statement accounts.
c. affects only income statement accounts.
d. is not acceptable practice.

18. The net amount expected to be received in cash from receivables is termed the
a. cash realizable value.
b. cash-good value.
c. gross cash value.
d. cash-equivalent value.

19. If a company fails to record estimated bad debts expense,

a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.

20. Janway sells softball equipment. On November 14, they shipped $1,000 worth of softball uniforms
to Chris Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas
High School for $600 worth of custom printed bats to be produced in December. On November 30,
Chris Middle School returned $100 of defective merchandise. Janway has received no payments
from either school as of month end. What amount will be recognized as net accounts receivable
on the Balance Sheet as of November 30?
a. $1,600
b. $1,500
c. $1,000
d. $900

21. Larson Company on July 15 sells merchandise on account to Stuart Co. for $1,000, terms 2/10,
n/30. On July 20 Stuart Co. returns merchandise worth $400 to Larson Company. On July 24
payment is received from Stuart Co. for the balance due. What is the amount of cash received?
a. $600
b. $588
c. $580
d. $1,000

22. The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts
expense in the
a. direct write-off method.
b. percentage of receivables basis.
c. percentage of sales basis.
d. percentage of receivables and percentage of sales basis.

23. When the allowance method is used to account for uncollectible accounts, Bad Debts Expense
is debited when
a. a sale is made.
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles.
d. a customer's account becomes past-due.
24. When an account becomes uncollectible and must be written off,
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debts Expense should be credited.
d. Sales should be debited.

25. The collection of an account that had been previously written off under the allowance method
of accounting for uncollectibles
a. will increase income in the period it is collected.
b. will decrease income in the period it is collected.
c. requires a correcting entry for the period in which the account was written off.
d. does not affect income in the period it is collected.

26. The percentage of sales basis of estimating expected uncollectibles

a. emphasizes the matching of expenses with revenues.
b. emphasizes balance sheet relationships.
c. emphasizes cash realizable value.
d. is not generally accepted as a basis for estimating bad debts.

27. An aging of a company's accounts receivable indicates that $9,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to
record bad debts for the period will require a
a. debit to Bad Debts Expense for $9,000.
b. debit to Allowance for Doubtful Accounts for $7,900.
c. debit to Bad Debts Expense for $7,900.
d. credit to Allowance for Doubtful Accounts for $9,000.

28. A debit balance in the Allowance for Doubtful Accounts

a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad
debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of sales method of estimating bad debts is used.

29. Under the direct write-off method of accounting for uncollectible accounts, Bad Debts
Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible.

30. An alternative name for Bad Debts Expense is

a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.

31. A reasonable amount of uncollectible accounts is evidence

a. that the credit policy is too strict.
b. that the credit policy is too lenient.
c. of a sound credit policy.
d. of poor judgments on the part of the credit manager.
32. Bad Debts Expense is considered
a. an avoidable cost in doing business on a credit basis.
b. an internal control weakness.
c. a necessary risk of doing business on a credit basis.
d. avoidable unless there is a recession.

33. The best managed companies will have

a. no uncollectible accounts.
b. a very strict credit policy.
c. a very lenient credit policy.
d. some accounts that will prove to be uncollectible.

34. Two methods of accounting for uncollectible accounts are the

a. allowance method and the accrual method.
b. allowance method and the net realizable method.
c. direct write-off method and the accrual method.
d. direct write-off method and the allowance method.

35. The allowance method of accounting for uncollectible accounts is required if

a. the company makes any credit sales.
b. bad debts are significant in amount.
c. the company is a retailer.
d. the company charges interest on accounts receivable.

36. Bad Debts Expense is reported on the income statement as

a. part of cost of goods sold.
b. reducing gross profit.
c. an operating expense.
d. a contra-revenue account.

37. When the allowance method of accounting for uncollectible accounts is used, Bad Debts Expense
is recorded
a. in the year after the credit sale is made.
b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.

38. The method of accounting for uncollectible accounts that results in a better matching of
expenses with revenues is the
a. aging accounts receivable method.
b. direct write-off method.
c. percentage of receivables method.
d. percentage of sales method.

39. To record estimated uncollectible accounts using the allowance method, the adjusting entry
would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. debit to Loss on Credit Sales and a credit to Accounts Receivable.
40. Under the allowance method of accounting for uncollectible accounts,
a. the cash realizable value of accounts receivable is greater before an account is written off than
after it is written off.
b. Bad Debts Expense is debited when a specific account is written off as uncollectible.
c. the cash realizable value of accounts receivable in the balance sheet is the same
before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.

41. Allowance for Doubtful Accounts on the balance sheet

a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading "Other Assets."
d. is offset against accounts receivable.

42. When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase.
b. total accounts receivable will decrease.
c. allowance account will increase.
d. total accounts receivable will stay the same.

43. If an account is collected after having been previously written off,

a. the allowance account should be debited.
b. only the control account needs to be credited.
c. both income statement and balance sheet accounts will be affected.
d. there will be both a debit and a credit to accounts receivable.

44. When an account is written off using the allowance method, accounts receivable
a. is unchanged and the allowance account increases.
b. increases and the allowance account increases.
c. decreases and the allowance account decreases.
d. decreases and the allowance account increases.

45. Two bases for estimating uncollectible accounts are:

a. percentage of assets and percentage of sales.
b. percentage of receivables and percentage of total revenue.
c. percentage of current assets and percentage of sales.
d. percentage of receivables and percentage of sales.

46. The percentage of receivables basis for estimating uncollectible accounts emphasizes
a. cash realizable value.
b. the relationship between accounts receivable and bad debts expense.
c. income statement relationships.
d. the relationship between sales and accounts receivable.

47. Long Company uses the percentage of sales method for recording bad debts expense. For the
year, cash sales are $500,000 and credit sales are $2,000,000. Management estimates that 1% is the
sales percentage to use. What adjusting entry will Long Company make to record the bad debts
expense?
 a. Bad Debts Expense ....................................................... 25,000
Allowance for Doubtful Accounts .......................... 25,000
b. Bad Debts Expense ....................................................... 20,000
Allowance for Doubtful Accounts .......................... 20,000
c. Bad Debts Expense ....................................................... 20,000
Accounts Receivable ............................................ 20,000
d. Bad Debts Expense ....................................................... 25,000
Accounts Receivable ............................................ 25,000

48. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record
estimated uncollectible accounts
a. is relevant when using the percentage of receivables basis.
b. is relevant when using the percentage of sales basis.
c. is relevant to both bases of adjusting for uncollectible accounts.
d. will never show a debit balance at this stage in the accounting cycle.

49. The direct write-off method of accounting for bad debts

a. uses an allowance account.
b. uses a contra-asset account.
c. does not require estimates of bad debt losses.
d. is the preferred method under generally accepted accounting principles.

50. Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of write-
off.
b. a specific account receivable is decreased for the actual amount of bad debt at the
time of write-off.
c. balance sheet relationships are emphasized.
d. bad debts expense is always recorded in the period in which the revenue was recorded.

51. An aging of a company's accounts receivable indicates that $4,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to
record bad debts for the period will require a
a. debit to Bad Debts Expense for $4,000.
b. debit to Allowance for Doubtful Accounts for $2,800.
c. debit to Bad Debts Expense for $2,800.
d. credit to Allowance for Doubtful Accounts for $4,000.

52. An aging of a company's accounts receivable indicates that $3,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to
record bad debts for the period will require a
a. debit to Bad Debts Expense for $3,000.
b. debit to Bad Debts Expense for $4,200.
c. debit to Bad Debts Expense for $1,800.
d. credit to Allowance for Doubtful Accounts for $4,000.

53. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $25,000. If the balance of the Allowance for Doubtful Accounts is
$8,000 debit before adjustment, what is the amount of bad debts expense for that period?
 a. $25,000
b. $8,000
c. $33,000
d. $17,000

54. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is
$2,000 credit before adjustment, what is the amount of bad debts expense for that period?
a. $10,000
b. $8,000
c. $12,000
d. $2,000

55. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is
$2,000 debit before adjustment, what is the balance after adjustment?
a. $10,000
b. $12,000
c. $8,000
d. $2,000

56. Using the allowance method, the uncollectible accounts for the year is estimated to be
$28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before
adjustment, what is the amount of bad debts expense for the period?
a. $7,000
b. $21,000
c. $28,000
d. $35,000

57. Using the allowance method, the uncollectible accounts for the year is estimated to be
$28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before
adjustment, what is the amount of bad debts expense for the period?
a. $7,000
b. $21,000
c. $28,000
d. $35,000

58. In reviewing the accounts receivable, the cash realizable value is $16,000 before the write-off
of a $1,500 account. What is the cash realizable value after the write-off?
a. $16,000
b. $1,500
c. $17,500
d. $14,500

59. In 2008, the Fitzu Co. had net credit sales of $750,000. On January 1, 2008, Allowance for
Doubtful Accounts had a credit balance of $16,000. During 2008, $30,000 of uncollectible accounts
receivable were written off. Past experience indicates that the allowance should be 10% of the
balance in receivables (percentage of receivable basis). If the accounts receivable balance at
December 31 was $200,000, what is the required adjustment to the Allowance for Doubtful
Accounts at December 31, 2008?
 a. $20,000
b. $34,000
c. $36,000
d. $30,000

60. A company has net credit sales of $900,000 for the year and it estimates that uncollectible accounts
will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of
$1,000 prior to adjustment, its balance after adjustment will be a credit of a.
$18,000.
b. $19,000.
c. $17,980.
d. $17,000.

61. In 2008, Carpenter Company had net credit sales of 1,125,000. On January 1, 2008, Allowance for
Doubtful Accounts had a credit balance of $27,000. During 2008, $45,000 of uncollectible
accounts receivable were written off. Past experience indicates that the allowance should be 10% of
the balance in receivables (percentage of receivables basis). If the accounts receivable balance at
December 31 was $300,000, what is the required adjustment to the Allowance for Doubtful
Accounts at December 31, 2008?
a. $30,000
b. $112,500
c. $48,000
d. $45,000

Use the following information for questions 8-9.

12/31/07
Accounts receivable $525,000
Allowance (45,000)
Cash realizable value $480,000

During 2008, sales on account were $145,000 and collections on account were $86,000. Also during 2008,
the company wrote off $8,000 in uncollectible accounts. An analysis of outstanding receivable accounts at
year end indicated that bad debts should be estimated at $54,000.

62. The change in the cash realizable value from the balance at 12/31/07 to 12/31/08 was a
a. $50,000 increase.
b. $59,000 increase.
c. $42,000 increase.
d. $51,000 increase.

63. Bad debts expense for 2008 is a.

$17,000.
b. $9,000.
c. $54,000
d. $1,000.

64. During 2008, Carbondale Inc. had sales on account of $132,000, cash sales of $54,000, and
collections on account of $84,000. In addition, they collected $1,450 which had been written off as
uncollectible in 2007. As a result of these transactions, the change in the accounts receivable
balance indicates a
 a. $100,550 increase.
b. $48,000 increase.
c. $46,550 increase.
d. $102,000 increase.

65. Brother Bear Corporation’s unadjusted trial balance includes the following balances (assume
normal balances):
Accounts Receivable $746,000
Allowance for Doubtful Accounts 14,200
Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense
will the company record?
a. $44,760
b. $30,560
c. $29,708
d. $45,612

66. Manning Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold on
July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Manning
Retailers will include a credit to Sales of $75,000 and a debit(s) to
a. Cash $72,000 and Service Charge Expense $3,000.
b. Accounts Receivable $72,000 and Service Charge Expense $3,000.
c. Cash $72,000 and Interest Expense $3,000.
d. Accounts Receivable $75,000.

67. ABC Company accepted a national credit card for a $3,000 purchase. The cost of the goods sold is
$2,400. The credit card company charges a 3% fee. What is the impact of this transaction on net
operating income?
a. Increase by $582
b. Increase by $600
c. Increase by $510
d. Increase by $2,910

68. Major advantages of credit cards to the retailer include all of the following except the
a. issuer does the credit investigation of customers.
b. issuer undertakes the collection process.
c. retailer receives more cash from the credit card issuer.
d. All of these are advantages.

69. The sale of receivables by a business

a. indicates that the business is in financial difficulty.
b. is generally the major revenue item on its income statement.
c. is an indication that the business is owned by a factor.
d. can be a quick way to generate cash for operating needs.

70. If a retailer regularly sells its receivables to a factor, the service charge of the factor should
be classified as a(n)
a. selling expense.
b. interest expense.
c. other expense.
d. contra asset.
71. If a company sells its accounts receivables to a factor,
a. the seller pays a commission to the factor.
b. the factor pays a commission to the seller.
c. there is a gain on the sale of the receivables.
d. the seller defers recognition of sales revenue until the account is collected.

72. Retailers generally consider sales from the use of national credit card sales as a
a. credit sale.
b. collection of an accounts receivable.
c. cash sale.
d. collection of a note receivable.

73. Receivables might be sold to

a. lengthen the cash-to-cash operating cycle.
b. take advantage of deep discounts on the cash realizable value of receivables.
c. generate cash quickly.
d. finance companies at an amount greater than cash realizable value.

74. A company regularly sells its receivables to a factor who assesses a 2% service charge on the
amount of receivables purchased. Which of the following statements is true for the seller of the
receivables?
a. The loss section of the income statement will increase each time receivables are sold.
b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold.
c. Selling expenses will increase each time accounts are sold.
d. The other expense section of the income statement will increase each time accounts are sold.

75. Winsor Furniture factors $800,000 of receivables to Fast Factors, Inc. Fast Factors assesses a 2%
service charge on the amount of receivables sold. Winsor Furniture factors its receivables
regularly with Fast Factors. What journal entry does Winsor make when factoring these
receivables?
a. Cash ............................................................................... 784,000
Loss on Sale of Receivables .......................................... 16,000
Accounts Receivable ............................................. 800,000
b. Cash ............................................................................... 784,000
Accounts Receivable ............................................. 784,000
c. Cash ............................................................................... 800,000
Accounts Receivable ............................................. 784,000
Gain on Sale of Receivables ................................. 16,000
d. Cash ............................................................................... 784,000
Service Charge Expense................................................ 16,000
Accounts Receivable ............................................. 800,000

76. When customers make purchases with a national credit card, the retailer
a. is responsible for maintaining customer accounts.
b. is not involved in the collection process.
c. absorbs any losses from uncollectible accounts.
d. receives cash equal to the full price of the merchandise sold from the credit card
company.
77. The retailer considers VISA and MasterCard sales as
a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.

78. The basic issues in accounting for notes receivable include each of the following except
a. analyzing notes receivable.
b. disposing of notes receivable.
c. recognizing notes receivable.
d. valuing notes receivable.

79. A 60-day note receivable dated June 13 has a maturity date of

a. August 13.
b. August 12.
c. August 11.
d. August 10.

80. The maturity value of a $90,000, 10%, 60-day note receivable dated July 3 is a.
$90,000.
b. $99,000.
c. $105,000.
d. $91,500.

81. A 90-day note dated June 14 has a maturity date of

a. September 14.
b. September 12.
c. September 13.
d. September 15.

82. A 30-day note dated May 18 has a maturity date of

a. June 18.
b. June 17.
c. June 19.
d. June 16.

83. A promissory note

a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.

84. Which of the following is not true regarding a promissory note?

a. Promissory notes may not be transferred to another party by endorsement.
b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable.
d. Promissory notes may be bearer notes and not specifically identify the payee by name.
85. The two key parties to a promissory note are the
a. maker and a bank.
b. debtor and the payee.
c. maker and the payee.
d. sender and the receiver.

86. When calculating interest on a promissory note with the maturity date stated in terms of days,
the
a. maker pays more interest if 365 days are used instead of 360.
b. maker pays the same interest regardless if 365 or 360 days are used.
c. payee receives more interest if 360 days are used instead of 365.
d. payee receives less interest if 360 days are used instead of 365.

87. The maturity value of a $4,000, 9%, 60-day note receivable dated February 10th is
a. $4,060.
b. $4,030.
c. $4,000.
c. $4,360.

88. The interest on a $5,000, 10%, 1-year note receivable is a.

$5,000.
b. $500.
c. $5,050.
d. $5,500.

89. The maturity value of a $30,000, 8%, 3-month note receivable is a.

$30,600.
b. $30,240.
c. $32,400.
d. $30,200.

90. The interest on a $4,000, 6%, 60-day note receivable is a.

$240.
b. $40.
c. $80.
d. $120.

91. The interest on a $2,000, 6%, 90-day note receivable is a.

$120.
b. $60
c. $30.
d. $90.

92. Notes receivable are recognized in the accounts at

a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.
93. A note receivable is a negotiable instrument which
a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.

94. A company that receives an interest bearing note receivable will

a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.

95. The face value of a note refers to the amount

a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker.
c. that is identified on the formal instrument of credit.
d. remaining after a service charge has been deducted.

96. Risen Company receives a $5,000, 3-month, 8% promissory note from Dodd Company in
settlement of an open accounts receivable. What entry will Risen Company make upon receiving
the note?
a. Notes Receivable............................................................ 5,100
Accounts Receivable—Dodd Company................. 5,100
b. Notes Receivable............................................................ 5,100
Accounts Receivable—Dodd Company................. 5,000
Interest Revenue ................................................... 100
c. Notes Receivable............................................................ 5,000
Interest Receivable ................................................ 100
Accounts Receivable—Dodd Company................. 5,000
Interest Revenue ................................................... 100
d. Notes Receivable............................................................ 5,000
Accounts Receivable—Dodd Company................. 5,000

97. When a note is accepted to settle an open account, Notes Receivable is debited for the note's
a. net realizable value.
b. maturity value.
c. face value.
d. face value plus interest.

98. Short-term notes receivable are reported at

a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.
 99. Short-term notes receivables
a. have a related allowance account called Allowance for Doubtful Notes Receivable.
b. are reported at their gross realizable value.
c. use the same estimations and computations as accounts receivable to determine cash realizable
value.
d. present the same valuation problems as long-term notes receivables.

100. When a note receivable is dishonored,

a. interest revenue is never recorded.
b. bad debts expense is recorded.
c. the maturity value of the note is written off.
d. Accounts Receivable is debited if eventual collection is expected.

101. Herbert Company lends Newton Company $30,000 on April 1, accepting a four-month, 9%
interest note. Herbert Company prepares financial statements on April 30. What adjusting entry
should be made before the financial statements can be prepared?
a. Note Receivable ............................................................ 30,000
Cash ..................................................................... 30,000
b. Interest Receivable ........................................................ 225
Interest Revenue .................................................. 225
c. Cash .............................................................................. 225
Interest Revenue .................................................. 225
d. Interest Receivable ........................................................ 900
Interest Revenue .................................................. 900

102. When a note receivable is honored, Cash is debited for the note's
a. net realizable value.
b. maturity value.
c. gross realizable value.
d. face value.

103. The average collection period for receivables is computed by dividing 365 days by
a. net credit sales.
b. average accounts receivable.
c. ending accounts receivable.
d. accounts receivable turnover ratio.

104. The average collection period is computed by dividing

a. net credit sales by average gross accounts receivable.
b. net credit sales by ending gross accounts receivable.
c. the accounts receivable turnover ratio by 365 days.
d. 365 days by the accounts receivable turnover ratio.

Use the following information for questions 51-52

The financial statements of Bolton Manufacturing Company report net sales of $500,000 and accounts
receivable of $50,000 and $30,000 at the beginning and end of the year, respectively.
105. What is the receivables turnover ratio for Bolton?
a. 7 times
b. 10 times
c. 16.7 times
d. 12.5 times

106. What is the average collection period for accounts receivable in days? a.
52.1
b. 29.2
c. 21.9
d. 36.5

Use the following information for questions 53-54

The financial statements of Colter Manufacturing Company report net sales of $400,000 and accounts
receivable of $80,000 and $40,000 at the beginning and end of the year, respectively.

107. What is the receivables turnover ratio for Colter?

a. 6.7 times
b. 10 times
c. 5 times
d. 8 times

108. What is the average collection period for accounts receivable in days?
a. 40 times
b. 80 times
c. 54.7 times
d. 50 times

Additional Multiple Choice Questions

109. Which of the following are also called trade receivables?

a. Accounts receivable
b. Other receivables
c. Advances to employees
d. Income taxes refundable

110. On February 1, 2008, Cogwell Company sells merchandise on account to Livingston

Company for $5,000. The entry to record this transaction by Cogwell Company is
a. Sales.................................................................................... 5,000
Accounts Payable......................................................... 5,000
b. Cash .................................................................................... 5,000
Sales ............................................................................ 5,000
c. Accounts Receivable ........................................................... 5,000
Sales ............................................................................ 5,000
d. Notes Receivable................................................................. 5,000
Accounts Receivable.................................................... 5,000
111. Writing off an uncollectible account under the allowance method requires a debit to
a. Accounts Receivable.
b. Allowance for Doubtful Accounts.
c. Bad Debts Expense.
d. Uncollectible Accounts Expense.

112. When the allowance method of recognizing bad debts expense is used, the entry to
recognize that expense
a. increases net income.
b. decreases current assets.
c. has no effect on current assets.
d. has no effect on net income.

113. The direct write-off method

a. is acceptable for financial reporting purposes.
b. debits Allowance for Doubtful Accounts to record write-offs of accounts.
c. shows only actual losses from uncollectible accounts receivable.
d. estimates bad debt losses.

114. Voight Company's account balances at December 31 for Accounts Receivable and Allowance for
Doubtful Accounts were $2,100,000 and $105,000 (Cr.), respectively. An aging of accounts
receivable indicated that $192,000 are expected to become uncollectible. The amount of the
adjusting entry for bad debts at December 31 is
a. $192,000.
b. $87,000.
c. $297,000.
d. $105,000.

115. In recording the sale of accounts receivable, the commission charged by a factor is
recorded as
a. Bad Debts Expense.
b. Commission Expense.
c. Loss on Sale of Receivables.
d. Service Charge Expense.

116. Gudenas Co., makes a credit card sale to a customer for $600. The credit card sale has a grace
period of 30 days and then an interest charge of 18% per year or 1.5% per month is added to the
balance. If the unpaid balance on the above sale is $360 at the end of the grace period, the interest
charge is
a. $9.00.
b. $6.00.
c. $3.60.
d. $5.40.

117. The interest rate specified on any note is for a

a. day.
b. month.
c. week.
d. year.
 118. On February 1, Maris Company received a $9,000, 10%, four-month note receivable. The cash to
be received by Maris Company when the note becomes due is
a. $300.
b. $9,000.
c. $9,300.
d. $9,900.

119. The entry to record the dishonor of a note receivable assuming the payee expects eventual
collection includes a debit to
a. Notes Receivable.
b. Cash.
c. Allowance for Doubtful Accounts.
d. Accounts Receivable.

120. Which of the following statements concerning receivables is incorrect?

a. Notes receivable are often listed last under receivables.
b. The contingent liability from selling notes receivable should be disclosed.
c. Both the gross amount of receivables and the allowance for doubtful accounts should be
reported.
d. Interest revenue and gain on sale of notes receivable are shown under other revenues and
gains.

121. The accounts receivable turnover ratio is computed by dividing

a. total sales by average net accounts receivable.
b. net credit sales by average net accounts receivable.
c. total sales by ending net accounts receivable.
d. net credit sales by ending net accounts receivable.

CHAPTER 11
1. All of the following are reported as current liabilities except
a. accounts payable.
b. bonds payable.
c. notes payable.
d. unearned revenues.

2. The relationship between current liabilities and current assets is

a. useful in determining income.
b. useful in evaluating a company's liquidity.
c. called the matching principle.
d. useful in determining the amount of a company's long-term debt.

3. Most companies pay current liabilities

a. out of current assets.
b. by issuing interest-bearing notes payable.
c. by issuing stock.
d. by creating long-term liabilities.

4. A current liability is a debt that can reasonably be expected to be paid

a. within one year.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.

5. Liabilities are classified on the balance sheet as current or

 a. deferred.
b. unearned.
c. long-term.
d. accrued.

6. From a liquidity standpoint, it is more desirable for a company to have current

a. assets equal current liabilities.
b. liabilities exceed current assets.
c. assets exceed current liabilities.
d. liabilities exceed long-term liabilities.

7. The relationship of current assets to current liabilities is used in evaluating a company's

a. operating cycle.
b. revenue-producing ability.
c. short-term debt paying ability.
d. long-range solvency.

8. Which of the following is usually not an accrued liability?

a. Interest payable
b. Wages payable
c. Taxes payable
d. Notes payable

9. In most companies, current liabilities are paid within

a. one year through the creation of other current liabilities.
b. the operating cycle through the creation of other current liabilities.
c. one year out of current assets.
d. the operating cycle out of current assets.

10. The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's
a. maturity value.
b. market value.
c. face value.
d. cash realizable value.

11. With an interest-bearing note, the amount of assets received upon issuance of the note is generally
a. equal to the note's face value.
b. greater than the note's face value.
c. less than the note's face value.
d. equal to the note's maturity value.

12. A note payable is in the form of

a. a contingency that is reasonably likely to occur.
b. a written promissory note.
c. an oral agreement.
d. a standing agreement.

13. The entry to record the proceeds upon issuing an interest-bearing note is
a. Interest Expense
Cash
Notes Payable
b. Cash
Notes Payable
c. Notes Payable
Cash
d. Cash
 Notes Payable
Interest Payable

Use the following information for questions 14-16

Coffey County Bank agrees to lend Adcock Brick Company $200,000 on January 1. Adcock Brick Company
signs a $200,000, 8%, 9-month note.

14. The entry made by Adcock Brick Company on January 1 to record the proceeds and issuance
of the note is
a. Interest Expense.................................................................. 12,000
Cash....................................................................................................188,000
Notes Payable ............................................................ 200,000
b. Cash....................................................................................................200,000
Notes Payable ............................................................ 200,000
c. Cash....................................................................................................200,000
Interest Expense.................................................................. 12,000
Notes Payable ............................................................ 212,000
d. Cash....................................................................................................200,000
Interest Expense.................................................................. 12,000
Notes Payable ............................................................ 200,000
Interest Payable .......................................................... 12,000

15. What is the adjusting entry required if Adcock Brick Company prepares financial
statements on June 30?
a. Interest Expense.................................................................. 8,000
Interest Payable .......................................................... 8,000
b. Interest Expense.................................................................. 8,000
Cash ........................................................................... 8,000
c. Interest Payable................................................................... 8,000
Cash ........................................................................... 8,000
d. Interest Payable................................................................... 8,000
Interest Expense ......................................................... 8,000
 16. What entry will Adcock Brick Company make to pay off the note and interest at maturity
assuming that interest has been accrued to September 30?
a. Notes Payable ...................................................................... 212,000
Cash ............................................................................ 212,000
b. Notes Payable ...................................................................... 200,000
Interest Payable ................................................................... 12,000
Cash ............................................................................ 212,000
c. Interest Expense .................................................................. 12,000
Notes Payable ...................................................................... 200,000
Cash ............................................................................ 212,000
d. Interest Payable ................................................................... 8,000
Notes Payable ...................................................................... 200,000
Interest Expense .................................................................. 4,000
Cash ............................................................................ 212,000

17. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. increased; the Notes Payable account is increased.
b. increased; the Notes Payable account is decreased.
c. increased; the Interest Payable account is increased.
d. decreased; the Interest Payable account is increased.

18. When an interest-bearing note matures, the balance in the Notes Payable account is
a. less than the total amount repaid by the borrower.
b. the difference between the maturity value of the note and the face value of the note.
c. equal to the total amount repaid by the borrower.
d. greater than the total amount repaid by the borrower.

Use the following information for questions 19-20

On October 1, Jerry's Carpet Service borrows $250,000 from First National Bank on a 3-month,
$250,000, 8% note.

19. What entry must Jerry's Carpet Service make on December 31 before financial
statements are prepared?
a. Interest Payable ................................................................... 5,000
Interest Expense.......................................................... 5,000
b. Interest Expense .................................................................. 20,000
Interest Payable........................................................... 20,000
c. Interest Expense .................................................................. 5,000
Interest Payable........................................................... 5,000
d. Interest Expense .................................................................. 5,000
Notes Payable ............................................................. 5,000

20. The entry by Jerry's Carpet Service to record payment of the note and accrued interest on January 1
is
a. Notes Payable ...................................................................... 255,000
Cash ............................................................................ 255,000
b. Notes Payable ...................................................................... 250,000
Interest Payable ................................................................... 5,000
Cash ............................................................................ 255,000
(cont.)
c. Notes Payable...............................................................................................250,000
Interest Payable................................................................... 20,000
Cash ........................................................................... 270,000
d. Notes Payable...............................................................................................250,000
Interest Expense.................................................................. 5,000
Cash ........................................................................... 255,000

21. Interest expense on an interest-bearing note is

a. always equal to zero.
b. accrued over the life of the note.
c. only recorded at the time the note is issued.
d. only recorded at maturity when the note is paid.

22. The entry to record the payment of an interest-bearing note at maturity after all interest expense
has been recognized is
a. Notes Payable
Interest Payable
Cash
b. Notes Payable
Interest Expense
Cash
c. Notes Payable
Cash
d. Notes Payable
Cash
Interest Payable

23. Sales taxes collected by a retailer are recorded by

a. crediting Sales Taxes Revenue.
b. debiting Sales Taxes Expense.
c. crediting Sales Taxes Payable.
d. debiting Sales Taxes Payable.

24. Unearned Rental Revenue is

a. a contra account to Rental Revenue.
b. a revenue account.
c. reported as a current liability.
d. debited when rent is received in advance.

25. Sales taxes collected by the retailer are recorded as a(n)

a. revenue.
b. liability.
c. expense.
d. asset.

Use the following information for questions 27-28

On September 1, Ken's Painting Service borrows $50,000 from National Bank on a 4-month,
$50,000, 6% note.
26. What entry must Ken's Painting Service make on December 31 before financial
statements are prepared?
a. Interest Payable ................................................................... 1,000
Interest Expense.......................................................... 1,000
b. Interest Expense .................................................................. 3,000
Interest Payable........................................................... 3,000
c. Interest Expense .................................................................. 1,000
Interest Payable........................................................... 1,000
d. Interest Expense .................................................................. 1,000
Notes Payable ............................................................. 1,000

27. The entry by Ken's Painting Service to record payment of the note and accrued interest on January
1 is
a. Notes Payable ...................................................................... 51,000
Cash ............................................................................ 51,000
b. Notes Payable ...................................................................... 50,000
Interest Payable ................................................................... 1,000
Cash ............................................................................ 51,000
c. Notes Payable ...................................................................... 50,000
Interest Payable ................................................................... 3,000
Cash ............................................................................ 53,000
d. Notes Payable ...................................................................... 50,000
Interest Expense .................................................................. 1,000
Cash ............................................................................ 51,000

28. The interest charged on a $100,000 note payable, at the rate of 8%, on a 90-day note would be
a. $8,000.
b. $4,444.
c. $2,000.
d. $667.

29. The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be
a. $6,000.
b. $3,333.
c. $1,500.
d. $1,000.

30. The interest charged on a $50,000 note payable, at the rate of 8%, on a 3-month note would be
a. $4,000.
b. $2,000.
c. $1,000.
d. $667.

31. The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be
a. $3,000.
b. $1,500.
c. $750.
d. $500.
32. A company receives $132, of which $12 is for sales tax. The journal entry to record the sale
would include a
a. debit to Sales Tax Expense for $12.
b. credit to Sales Tax Payable for $12.
c. debit to Sales for $132.
d. debit to Cash for $120.

33. A company receives $174, of which $14 is for sales tax. The journal entry to record the sale
would include a
a debit to Sales Tax Expense for $14.
b. debit to Sales Tax Payable for $14.
c. debit to Sales for $174.
d. debit to Cash for $174.

34. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If
the sales tax rate is 5% and the balance in the Sales account amounted to
$315,000, what is the amount of the sales taxes owed to the taxing agency? a.
$300,000
b. $315,000
c. $15,750
d. $15,000

35. On January 1, 2008, Dunnon Company, a calendar-year company, issued $600,000 of notes
payable, of which $150,000 is due on January 1 for each of the next four years. The proper balance
sheet presentation on December 31, 2008, is
a. Current Liabilities, $600,000.
b. Long-term Debt, $600,000.
c. Current Liabilities, $300,000; Long-term Debt, $300,000.
d. Current Liabilities, $150,000; Long-term Debt, $450,000.

36. On January 1, 2008, Brunson Company, a calendar-year company, issued $400,000 of notes
payable, of which $100,000 is due on January 1 for each of the next four years. The proper balance
sheet presentation on December 31, 2008, is
a. Current Liabilities, $400,000.
b. Long-term Debt , $400,000.
c. Current Liabilities, $100,000; Long-term Debt, $300,000.
d. Current Liabilities, $300,000; Long-term Debt, $100,000.

37. A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record
this information is
a. Cash .................................................................................... 1,620
Sales ........................................................................... 1,620
b. Cash .................................................................................... 1,620
Sales Tax Payable ...................................................... 120
Sales ........................................................................... 1,500
c. Cash .................................................................................... 1,500
Sales Tax Expense.............................................................. 120
Sales ........................................................................... 1,620
d. Cash .................................................................................... 1,620
Sales ........................................................................... 1,500
Sales Taxes Revenue................................................. 120
38. Jo’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the
state government monthly, what entry will Jo's Bookstore make to show the April remittance?
a. Sales Taxes Payable............................................................ 750
Cash ............................................................................ 750
b. Sales Tax Expense ............................................................. 750
Cash ............................................................................ 750
c. Sales Tax Expense .............................................................. 750
Sales Taxes Payable................................................... 750
d. No entry required.

39. Jordon Company does not ring up sales taxes separately on the cash register. Total receipts for
October amounted to $18,900. If the sales tax rate is 5%, what amount must be remitted to the state
for October's sales taxes?
a. $900
b. $945
c. $45
d. It cannot be determined.

40. Enrique's Salon has total receipts for the month of $16,430 including sales taxes. If the sales tax
rate is 6%, what are Enrique's sales for the month?
a. $15,444.20
b. $17,415.80
c. $15,500.00
d. It cannot be determined.

41. The amount of sales tax collected by a retail store when making sales is
a. a miscellaneous revenue for the store.
b. a current liability.
c. not recorded because it is a tax paid by the customer.
d. recorded as an operating expense.

42. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If
the sales tax rate is 5% and the balance in the Sales account amounted to
$189,000, what is the amount of the sales taxes owed to the taxing agency? a.
$180,000
b. $189,000
c. $9,450
d. $9,000

43. Advances from customers are classified as a(n)

a. revenue.
b. expense.
c. current asset.
d. current liability.

44. The current portion of long-term debt should

a. be paid immediately.
b. be reclassified as a current liability.
c. be classified as a long-term liability.
d. not be separated from the long-term portion of debt.
45. Sales taxes collected by a retailer are expenses
a. of the retailer.
b. of the customers.
c. of the government.
d. that are not recognized by the retailer until they are submitted to the government.

46. Sales taxes collected by a retailer are reported as

a. contingent liabilities.
b. revenues.
c. expenses.
d. current liabilities.

47. Linda's Boutique has total receipts for the month of $29,295 including sales taxes. If the sales tax
rate is 5%, what are Linda's sales for the month?
a. $27,831
b. $27,900
c. $29,295
d. It cannot be determined.

48. A cash register tape shows cash sales of $1,500 and sales taxes of $90. The journal entry to record
this information is
a. Cash .................................................................................... 1,500
Sales ........................................................................... 1,500
b. Cash .................................................................................... 1,590
Sales Tax Revenue..................................................... 90
Sales ........................................................................... 1,500
c. Cash .................................................................................... 1,500
Sales Tax Expense.............................................................. 90
Sales ........................................................................... 1,590
d. Cash .................................................................................... 1,590
Sales ........................................................................... 1,500
Sales Taxes Payable .................................................. 90

49. Tim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to
the state government monthly, what entry will Tim's Pharmacy make to show the March
remittance?
a. Sales Tax Expense.............................................................. 600
Cash ........................................................................... 600
b. Sales Taxes Payable ........................................................... 600
Cash ........................................................................... 600
c. Sales Tax Expense.............................................................. 600
Sales Taxes Payable .................................................. 600
d. No entry required.

50. Langer Company does not ring up sales taxes separately on the cash register. Total receipts for
February amounted to $28,600. If the sales tax rate is 4%, what amount must be remitted to the
state for February's sales taxes?
a. $1,144
b. $1,100
c. $1,716
d. It cannot be determined.
51. Any balance in an unearned revenue account is reported as a(n)
a. current liability.
b. long-term debt.
c. revenue.
d. unearned liability.

52. Stanley Company typically sells subscriptions on an annual basis, and publishes six times a year.
The magazine sells 60,000 subscriptions in January at $15 each. What entry is made in January to
record the sale of the subscriptions?
a. Subscriptions Receivable ..................................................... 900,000
Subscription Revenue ................................................. 900,000
b. Cash ..................................................................................... 900,000
Unearned Subscription Revenue................................. 900,000
c. Subscriptions Receivable ..................................................... 150,000
Unearned Subscription Revenue................................. 150,000
d. Prepaid Subscriptions .......................................................... 900,000
Cash ............................................................................ 900,000

53. Milton Company issued a four-year interest-bearing note payable for $300,000 on January 1, 2007.
Each January the company is required to pay $75,000 on the note. How will this note be reported
on the December 31, 2008 balance sheet?
a. Long-term debt, $300,000.
b. Long-term debt, $225,000.
c. Long-term debt, $150,000; Long-term debt due within one year, $75,000.
d. Long-term debt, $225,000; Long-term debt due within one year, $75,000.

54. Janis Knot has a large consulting practice. New clients are required to pay one-half of the
consulting fees up front. The balance is paid at the conclusion of the consultation. How does Knot
account for the cash received at the end of the engagement?
a. Cash
Unearned Consulting Revenue
b. Cash
Earned Consulting Revenue
c. Prepaid Consulting Fees Earned
Consulting Revenue
d. No entry is required when the engagement is concluded.

55. Which one of the following is shown first under current liabilities by many companies as a matter
of custom?
a. Accrued expenses
b. Current maturities of long-term debt
c. Sales taxes payable
d. Notes payable and accounts payable

56. Working capital is

a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets multiplied by current liabilities.
 57. The current ratio is
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets multiplied by current liabilities.

1. A contingent liability need only be disclosed in the financial statement notes when the likelihood
of the contingency is
a. reasonably possible.
b. probable.
c. remote.
d. unlikely.

2. If a contingent liability is reasonably estimable and it is reasonably possible that the contingency
will occur, the contingent liability
a. should be recorded in the accounts.
b. should be disclosed in the notes accompanying the financial statements.
c. should not be recorded or disclosed in the notes until the contingency actually
happens.
d. must be paid for the amount estimated.

3. The accounting for warranty cost is based on the matching principle, which requires that the
estimated cost of honoring warranty contracts should be recognized as an expense
a. when the product is brought in for repairs.
b. in the period in which the product was sold.
c. at the end of the warranty period.
d. only if the repairs are expected to be made within one year.

4. If a liability is dependent on a future event, it is called a

a. potential liability.
b. hypothetical liability.
c. probabilistic liability.
d. contingent liability.

5. Current maturities of long-term debt

a. require an adjusting entry.
b. are optionally reported on the balance sheet.
c. can be properly classified during balance sheet preparation, with no adjusting entry
required.
d. are not considered to be current liabilities.

6. A contingency that is remote

a. should be disclosed in the financial statements.
b. must be accrued as a loss.
c. does not need to be disclosed.
d. is recorded as a contingent liability.

7. The accounting for warranty costs is based on the

a. going concern principle.
b. matching principle.
c. conservatism principle.
d. objectivity principle.
8. Warranty expenses are reported on the income statement as
a. administrative expenses.
b. part of cost of goods sold.
c. contra-revenues.
d. selling expenses.

Use the following information for questions 9-10

Neer Company sells 2,000 units of its product for $500 each. The selling price includes a one- year
warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50
per unit. In the year of sale, warranty contracts are honored on 40 units for a total cost of $2,000.

9. What amount should Neer Company accrue on December 31 for estimated warranty costs?
a. $3,000
b. $2,000
c. $1,000
d. $15,000

10. What amount will be reported on Neer Company's balance sheet as Estimated Warranty Liability
on December 31, 2008?
a. $2,000
b. $3,000
c. $1,000
d. It cannot be determined.

11. Which of the following items would not be identified if a contingent liability were disclosed in a
financial statement footnote?
a. The nature of the item
b. The expected outcome of the future event
c. A numerical probability of the expected loss
d. The amount of the contingency, if known

12. Disclosure of a contingent liability is usually made

a. parenthetically, in the body of the balance sheet.
b. parenthetically, in the body of the income statement.
c. in a note to the financial statements.
d. in the management discussion section of the financial statement.

13. Current liabilities generally appear

a. after long-term debt on the balance sheet.
b. in decreasing order of magnitude on the balance sheet.
c. in order of maturity on the balance sheet.
d. in increasing order of magnitude on the balance sheet.

14. Which of the following employees would likely receive a salary instead of wages?
a. Store clerk
b. Factory employee
c. Sales manager
d. Manual laborer
15. The total compensation earned by an employee is called
a. take-home pay.
b. net pay.
c. net earnings.
d. gross earnings.

16. Which one of the following payroll taxes does not result in a payroll tax expense for the
employer?
a. FICA tax
b. Federal income tax
c. Federal unemployment tax
d. State unemployment tax

17. Sue Stein's regular rate of pay is $12 per hour with one and one-half times her regular rate for
any hours which exceed 40 hours per week. She worked 48 hours last week.
Therefore, her gross wages were a.
$576.
b. $480.
c. $624.
d. $864.

18. Assuming a FICA tax rate of 8% on the first $90,000 in wages, and a federal income tax rate of
20% on all wages, what would be an employee's net pay for the year if he earned
$100,000 for the year? a.
$92,800
b. $72,000
c. $80,000
d. $72,800

19. Most companies involved in interstate commerce are required to compute overtime at
a. the worker's regular hourly wage.
b. 1.25 times the worker's regular hourly wage.
c. 1.5 times the worker's regular hourly wage.
d. 2.5 times the worker's regular hourly wage.

20. Sue Rice has worked 44 hours this week. She worked in excess of 8 hours each day. Her regular
hourly wage is $15 per hour. What are Sue's gross wages for the week? (The company Sue works
for is in compliance with the Fair Labor Standards Act.)
a. $660
b. $690
c. $990
d. $720

21. FICA taxes do not provide workers with

a. life insurance.
b. supplemental retirement.
c. employment disability.
d. medical benefits.
22. Employee payroll deductions include each of the following except
a. federal unemployment taxes.
b. federal income taxes.
c. FICA taxes.
d. insurance, pension plans, and union dues.

23. The journal entry to record the payroll for a period will include a credit to Wages and
Salaries Payable for the gross
a. amount less all payroll deductions.
b. amount of all paychecks issued.
c. pay less taxes payable.
d. pay less voluntary deductions.

24. The amount of income taxes withheld from employees is dependent on each of the following
except the
a. employee's gross earnings.
b. employee's net pay.
c. length of the pay period.
d. number of allowances claimed by the employee.

Use the following information for questions 25-28

The following totals for the month of April were taken from the payroll register of Main Company.

Salaries $24,000
FICA taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 900
Federal unemployment taxes 64
State unemployment taxes 432

25. The journal entry to record the monthly payroll on April 30 would include a
a. debit to Salaries Expense for $24,000.
b. credit to Salaries Payable for $24,000.
c. debit to Salaries Payable for $24,000.
d. debit to Salaries Expense for $17,000.

26. The entry to record the payment of net payroll would include a
a. debit to Salaries Payable for $16,504.
b. debit to Salaries Payable for $17,000.
c. debit to Salaries Payable for $15,900.
d. credit to Cash for $18,100.

27. The entry to record accrual of Main Company’s payroll taxes would include a
a. debit to Payroll Tax Expense for $496.
b. debit to Payroll Tax Expense for $1,596.
c. credit to FICA Taxes Payable for $2,200.
d. credit to Payroll Tax Expense for $496.
28. The entry to record the accrual of federal unemployment taxes would include a
a. credit to Federal Unemployment Taxes Payable for $64.
b. debit to Federal Unemployment Taxes Expense for $64.
c. credit to Payroll Tax Expense for $64.
d. debit to Federal Unemployment Taxes Payable for $64 Use

the following information for questions 29-32

The following totals for the month of June were taken from the payroll register of Lane Company.
Salaries $20,000
FICA taxes withheld 1,533
Income taxes withheld 4,400
Medical insurance deductions 800
Federal unemployment taxes 160
State unemployment taxes 1,000

29. The journal entry to record the monthly payroll on June 30 would include a
a. debit to Salaries Expense for $20,000.
b. credit to Salaries Payable for $20,000.
c. debit to Salaries Payable for $20,000.
d. debit to Salaries Expense for $13,267

30. The entry to record the payment of net payroll would include a
a. debit to Salaries Payable for $12,107.
b. debit to Salaries Payable for $13,267.
c. debit to Salaries Payable for $12,267.
d. credit to Cash for $12,267.

31. The entry to record accrual of Lane Company’s payroll taxes would include a
a. debit to Payroll Tax Expense for $2,693
b. credit to Payroll Tax Expense for $2,693
c. credit to FICA Taxes Payable for $1,160.
d. credit to Payroll Tax Expense for $1,160.

32. The entry to record the accrual of federal unemployment taxes would include a
a. credit to Federal Unemployment Taxes Payable for $160.
b. credit to Federal Unemployment Taxes Expense for $160.
c. credit to Payroll Tax Expense for $160.
d. debit to Federal Unemployment Taxes Payable for $160.

33. Which one of the following payroll taxes is not withheld from an employee's wages because
it is not levied on the employee?
a. Federal income tax
b. Federal unemployment tax
c. State income tax
d. FICA tax
34. By January 31 following the end of a calendar year, an employer is required to provide each
employee with a(n)
a. state unemployment tax form.
b. federal unemployment tax form 940.
c. wage and tax statement form W-2.
d. employee's withholding allowance certificate form W-4.

35. Which of the following payroll taxes are usually filed and remitted annually?
a. Federal unemployment taxes
b. FICA taxes
c. State unemployment taxes
d. Federal and state unemployment taxes

36. The tax that is paid equally by the employer and employee is the
a. federal income tax.
b. federal unemployment tax.
c. state unemployment tax.
d. FICA tax.

37. The effective federal unemployment tax rate is usually a.

6.2%.
b. 0.8%.
c. 5.4%.
d. 8.0%.

38. The treasurer's department is responsible for

a. approving the payroll.
b. maintaining payroll records.
c. preparing payroll tax returns.
d. signing payroll checks.

39. The payroll is paid by the

a. personnel department.
b. payroll department.
c. cashier.
d. treasurer's department.

.40. Post-retirement benefits consist of payments by employers to retired employees for

a. health care and life insurance only.
b. health care and pensions only.
c. life insurance and pensions only.
d. health care, life insurance, and pensions.
a
41. The paid absence that is most commonly accrued is
a. voting leave.
b. vacation time.
c. maternity leave.
d. disability leave.
a
42. Blake Company has ten employees who each earn $160 per day. If they accumulate vacation time at
the rate of 1.5 vacation days for each month worked, the amount of vacation benefits that should be
accrued at the end of the month is
a. $160.
b. $1,600.
c. $2,400.
d. $240.
a
43. An employer's estimated cost for post-retirement benefits for its employees should be
a. recognized as an expense when paid.
b. recognized as an expense during the employees' work years.
c. recognized as an expense during the employees' retirement years.
d. charged to the goodwill account because providing employees with benefits generates
employee goodwill.

Additional Multiple Choice Questions

44. A current liability is a debt the company reasonably expects to pay from existing current
assets within
a. one year.
b. the operating cycle.
c. one year or the operating cycle, whichever is longer.
d.one year or the operating cycle, whichever is shorter.

45. Which of the following statements concerning current liabilities is incorrect?

a. Current liabilities include unearned revenues.
b. A company that has more current liabilities than current assets is usually the subject of some
concern.
c. Current liabilities include prepaid expenses.
d. A current liability is a debt that can reasonably be expected to be paid out of existing current
assets or result in the creation of other current liabilities.

46. On August 1, 2008, a company borrowed cash and signed a one-year interest-bearing note
on which both the face value and interest are payable on August 1, 2009. How will the note
payable and the related interest be classified in the December 31, 2008, balance sheet?
Note Payable Interest Payable
a. Current liability Noncurrent liability
b.Noncurrent liability Current liability
c. Current liability Current liability
d.Noncurrent liability Not shown

47. Companies report current liabilities on the balance sheet in

a. alphabetical order.
b.order of maturity.
c. random order.
d.order of magnitude.
48. A contingency need not be recorded nor disclosed when
a. it is probable the contingency will happen and the amount can be reasonably
estimated.
b. it is probable the contingency will happen but the amount cannot be reasonably
estimated.
c. it is reasonably possible the contingency will happen and the amount can be
reasonably estimated.
d. the possibility of the contingency happening is remote.

49. A contingent liability is recorded when the likelihood of the contingency is

a. remote.
b. reasonably possible.
c. probable.
d. nil or zero.

50. Mike Kohl, an employee of Spottswood Company, has gross earnings for the month of October of
$6,000. FICA taxes are 8% of gross earnings, federal income taxes amount to
$952 for the month, state income taxes are 2% of gross earnings, and Mike authorizes voluntary
deductions of $15 per month to the United Fund. What is the net pay for Mike Kohl?
a. $4,442
b. $4,433
c. $4,448
d. $4,452

51. A payroll record that accumulates the gross earnings, deductions, and net pay by
employee for each pay period is the
a. withholding tax table.
b. employee earnings record.
c. payroll register.
d. Wage and Tax Statement.

52. The journal entry to record the payroll for Marcus Garvey Company for the week ending January
8, would probably include a
a. credit to Office Salaries.
b. credit to Wages Expense.
c. debit to Federal Income Taxes Payable.
d. credit to FICA Taxes Payable.

53. Employer payroll taxes include all of the following except

a. FICA taxes.
b. federal unemployment taxes.
c. state unemployment taxes.
d. federal income taxes.

54. The record that provides a cumulative summary of each employee’s gross earnings, payroll
deductions, and net pay during the year and is required to be maintained to comply with state and
local federal law is the
a. register.
b. employee earnings record.
c. statement of earnings.
d. wage and tax statement.
55. Post-retirement benefits include all of the following except
a. health care.
b. life insurance.
c. pensions.
d. vacation benefits.

CHAPTER 13
37. Which one of the following is a privately held corporation?
a. Intel
b. General Electric
c. Caterpillar Inc.
d. Cargill Inc.

38. The dominant form of business organization in the United States in terms of dollar sales volume,
earnings, and employees is
a. the sole proprietorship.
b. the partnership.
c. the corporation.
d. not known.

39. Under the corporate form of business organization

a. a stockholder is personally liable for the debts of the corporation.
b. stockholders' acts can bind the corporation even though the stockholders have not been
appointed as agents of the corporation.
c. the corporation's life is stipulated in its charter.
d. stockholders wishing to sell their corporation shares must get the approval of other
stockholders.

40. Stockholders of a corporation directly elect

a. the president of the corporation.
b. the board of directors.
c. the treasurer of the corporation.
d. all of the employees of the corporation.

41. The chief accounting officer in a company is known as the

a. controller.
b. treasurer.
c. vice-president.
d. president.

42. A factor which distinguishes the corporate form of organization from a sole proprietorship or
partnership is that a
a. corporation is organized for the purpose of making a profit.
b. corporation is subject to numerous federal and state government regulations.
c. corporation is an accounting economic entity.
d. corporation’s temporary accounts are closed at the end of the accounting period.
43. Which one of the following would not be considered an advantage of the corporate form of
organization?
a. Limited liability of owners
b. Separate legal existence
c. Continuous life
d. Government regulation

44. The concept of an "artificial being" refers to which form of business organization?
a. Partnership
b. Sole proprietorship
c. Corporation
d. Limited partnership

45. The two ways that a corporation can be classified by purpose are
a. general and limited.
b. profit and nonprofit.
c. state and federal.
d. publicly held and privately held.

46. The two ways that a corporation can be classified by ownership are
a. publicly held and privately held.
b. stock and non-stock.
c. inside and outside.
d. majority and minority.

47. Which of the following would not be true of a privately held corporation?
a. It is sometimes called a closely held corporation.
b. Its shares are regularly traded on the New York Stock Exchange.
c. It does not offer its shares for sale to the general public.
d. It is usually smaller than a publicly held company.

48. Which of the following is not true of a corporation?

a. It may buy, own, and sell property.
b. It may sue and be sued.
c. The acts of its owners bind the corporation.
d. It may enter into binding legal contracts in its own name.

49. Ed Stone has invested $400,000 in a privately held family corporation. The corporation does
not do well and must declare bankruptcy. What amount does Stone stand to lose?
a. Up to his total investment of $400,000.
b. Zero.
c. The $400,000 plus any personal assets the creditors demand.
d. $200,000.

50. Which of the following statements reflects the transferability of ownership rights in a
corporation?
a. If a shareholder decides to transfer ownership, he must transfer all of his shares.
b. A shareholder may dispose of part or all of his shares.
c. A shareholder must obtain permission from the board of directors before selling shares.
d. A shareholder must obtain permission from at least three other stockholders before selling
shares.
51. A corporate board of directors does not generally
a. select officers.
b. formulate operating policies.
c. declare dividends.
d. execute policy.

52. A typical organization chart showing delegation of authority would show

a. stockholders delegating to the board of directors.
b. the board of directors delegating to stockholders.
c. the chief executive officer delegating to the board of directors.
d. the controller delegating to the chief executive officer.

53. The officer who is generally responsible for maintaining the cash position of the corporation is
the
a. controller.
b. treasurer.
c. cashier.
d. internal auditor.

54. The chief accounting officer in a corporation is the

a. treasurer.
b. president.
c. controller.
d. vice-president of finance.

55. The ability of a corporation to obtain capital is

a. enhanced because of limited liability and ease of share transferability.
b. less than a partnership.
c. restricted because of the limited life of the corporation.
d. about the same as a partnership.

56. Which of the following statements concerning taxation is accurate?

a. Partnerships pay state income taxes but not federal income taxes.
b. Corporations pay federal income taxes but not state income taxes.
c. Corporations pay federal and state income taxes.
d. Only the owners must pay taxes on corporate income.

57. Which of the following statements is not considered a disadvantage of the corporate form of
organization?
a. Additional taxes
b. Government regulations
c. Limited liability of stockholders
d. Separation of ownership and management

58. What is ordinarily the first step in the formation of a corporation?

a. Development of by-laws for the corporation
b. Issuance of the corporate charter
c. Application for incorporation to the appropriate Secretary of State
d. Registration with the SEC
59. Which one of the following is not an ownership right of a stockholder in a corporation?
a. To vote in the election of directors
b. To declare dividends on the common stock
c. To share in assets upon liquidation
d. To share in corporate earnings

60. If no-par stock is issued without a stated value, then

a. the par value is automatically $1 per share.
b. the entire proceeds are considered to be legal capital.
c. there is no legal capital.
d. the corporation is automatically in violation of its state charter.

61. If a stockholder cannot attend a stockholder's meeting, he may delegate his voting rights by
means of
a. an absentee ballot.
b. a proxy.
c. a certified letter.
d. a telegram.

62. If a corporation has only one class of stock, it is referred to as

a. Classless Stock.
b. Preferred Stock.
c. Solitary Stock.
d. Common Stock.

63. The term residual claim refers to a shareholder's right to

a. receive dividends.
b. share in assets upon liquidation.
c. acquire additional shares when offered.
d. exercise a proxy vote.

64. Which of the following factors does not affect the initial market price of a stock?
a. The company's anticipated future earnings
b. The par value of the stock
c. The current state of the economy
d. The expected dividend rate per share

65. If an investment firm underwrites a stock issue, the

a. risk of being unable to sell the shares stays with the issuing corporation.
b. corporation obtains cash immediately from the investment firm.
c. investment firm has guaranteed profits on the sale of the stock.
d. issuance of stock is likely to be directly to creditors.

66. The par value of a stock

a. is legally significant.
b. reflects the most recent market price.
c. is selected by the SEC.
d. is indicative of the worth of the stock.
67. A corporation has the following account balances: Common stock, $1 par value, $30,000;
Paid-in Capital in Excess of Par Value, $1,350,000. Based on this information, the
a. legal capital is $1,380,000.
b. number of shares issued are 30,000.
c. number of shares outstanding are 1,380,000.
d. average price per share issued is $4.60.

68. The authorized stock of a corporation

a. only reflects the initial capital needs of the company.
b. is indicated in its by-laws.
c. is indicated in its charter.
d. must be recorded in a formal accounting entry.

69. Owners' equity for a corporation is identified as each of the following except
a. corporate capital.
b. paid-in capital.
c. shareholders' equity.
d. stockholders' equity.

70. Retained earnings

a. is unique to the corporate form of business.
b. is an optional account in the partnership form of business.
c. reflects cash paid in by shareholders to date.
d. is closed at the end of the year.

71. Dividends are declared out of

a. Capital Stock.
b. Paid-in Capital in Excess of Par Value.
c. Retained Earnings.
d. Treasury Stock.

72. Retained earnings is

a. always equal to the amount of cash that the corporation has generated from operations.
b. a part of the paid-in capital of the corporation.
c. a part of the stockholders' claim on the total assets of the corporation.
d. closed at the end of each accounting period.

73. When stock is issued for legal services, the transaction is recorded by debiting Organization
Expense for the
a. stated value of the stock.
b. par value of the stock.
c. market value of the stock.
d. book value of the stock.

74. If Vickers Company issues 2,000 shares of $5 par value common stock for $140,000,
a. Common Stock will be credited for $140,000.
b. Paid-In Capital in Excess of Par Value will be credited for $10,000.
c. Paid-In Capital in Excess of Par Value will be credited for $130,000.
d. Cash will be debited for $130,000.
75. If common stock is issued for an amount greater than par value, the excess should be credited
to
a. Cash.
b. Retained Earnings.
c. Paid-in Capital in Excess of Par Value.
d. Legal Capital.

76. If stock is issued for a noncash asset, the asset should be recorded on the books of the
corporation at
a. fair market value.
b. cost.
c. zero.
d. a nominal amount.

77. If stock is issued for less than par value, the account
a. Paid-In Capital in Excess of Par Value is credited.
b. Paid-In Capital in Excess of Par Value is debited if a debit balance exists in the
account.
c. Paid-In Capital in Excess of Par Value is debited if a credit balance exists in the
account.
d. Retained Earnings is credited.

78. The sale of common stock below par

a. is a common occurrence in most states.
b. is not permitted in most states.
c. is a practice that most shareholders encourage.
d. requires that a liability be recorded for the difference between the sales price and the par
value of the shares.

79. Paid-In Capital in Excess of Stated Value

a. is credited when no-par stock does not have a stated value.
b. is reported as part of paid-in capital on the balance sheet.
c. represents the amount of legal capital.
d. normally has a debit balance.

80. A separate paid-in capital account is used to record each of the following except the
issuance of
a. no-par stock.
b. par value stock.
c. stated value stock.
d. treasury stock above cost.

81. Becker Company is a publicly held corporation whose $1 par value stock is actively traded at $20
per share. The company issued 2,000 shares of stock to acquire land recently advertised at $50,000.
When recording this transaction, Becker Company will
a. debit Land for $50,000.
b. credit Common Stock for $40,000.
c. debit Land for $40,000.
d. credit Paid-In Capital in Excess of Par Value for $48,000.
 82. Simon Company issued 6,000 shares of its $5 par value common stock in payment of its attorney's
bill of $45,000. The bill was for services performed in helping the company incorporate. Simon
should record this transaction by debiting
a. Legal Expense for $30,000.
b. Legal Expense for $45,000.
c. Organization Expense for $30,000.
d. Organization Expense for $45,000.

83. In the financial statements, organization costs appears

a. immediately below Retained Earnings in the stockholders' equity section.
b. in the income statement.
c. as part of paid-in capital in the stockholders' equity section.
d. as an intangible asset.

84. Which of the following represents the largest number of common shares?
a. Treasury shares
b. Issued shares
c. Outstanding shares
d. Authorized shares

85. New Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When the
transaction is recorded, credits are made to
a. Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $4,000.
b. Common Stock $14,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $4,000.
d. Common Stock $10,000 and Retained Earnings $4,000.

86. If Kiner Company issues 1,000 shares of $5 par value common stock for $70,000, the account
a. Common Stock will be credited for $5,000.
b. Paid-in Capital in Excess of Par Value will be credited for $5,000.
c. Paid-in Capital in Excess of Par Value will be credited for $70,000.
d. Cash will be debited for $65,000.

87. Jansen Packaging Corporation began business in 2008 by issuing 40,000 shares of $5 par
common stock for $8 per share and 10,000 shares of 6%, $10 par preferred stock for par. At year
end, the common stock had a market value of $10. On its December 31, 2008 balance sheet, Jansen
Packaging would report
a. Common Stock of $400,000.
b. Common Stock of $200,000.
c. Common Stock of $320,000.
d. Paid-In Capital of $300,000.

88. Kim, Inc. issued 5,000 shares of stock at a stated value of $10/share. The total issue of stock
sold for $15/share. The journal entry to record this transaction would include a
a. debit to Cash for $50,000.
b. credit to Common Stock for $50,000.
c. credit to Paid-in Capital in Excess of Par Value for $25,000.
d. credit to Common Stock for $75,000.
89. Foley Manufacturing Corporation purchased 3,000 shares of its own previously issued
$10 par common stock for $69,000. As a result of this event,
a. Foley’s Common Stock account decreased $30,000.
b. Foley’s total stockholders’ equity decreased $69,000.
c. Foley’s Paid-in Capital in Excess of Par Value account decreased $39,000.
d. All of the above.

90. A corporation purchases 20,000 shares of its own $20 par common stock for $35 per share,
recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $700,000
b. Decrease by $400,000
c. Decrease by $700,000
d. Increase by $400,000

91. A corporation purchases 10,000 shares of its own $10 par common stock for $25 per share,
recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $100,000
b. Decrease by $250,000
c. Increase by $250,000
d. Decrease by $100,000

92. Beckham Company has 1,000 shares of 4%, $100 par cumulative preferred stock outstanding at
December 31, 2008. No dividends have been paid on this stock for 2007 or 2008. Dividends in
arrears at December 31, 2008 total
a. $0.
b. $400.
c. $4,000.
d. $8,000.

93. Ephram Company has 2,000 shares of 5%, $100 par non-cumulative preferred stock outstanding at
December 31, 2008. No dividends have been paid on this stock for 2007 or 2008. Dividends in
arrears at December 31, 2008 total
a. $0.
b. $1,000.
c. $10,000.
d. $20,000.

94. Rebel Inc. issued 2,000 shares of no-par common stock with a stated value of $3 per share. The
market price of the stock on the date of issuance was $12 per share. The entry to record this
transaction includes a
a. debit to Cash for $6,000.
b. credit to Common Stock for $24,000.
c. credit to Common Stock for $6,000.
d. debit to Paid-in Capital in Excess of Par Value for $24,000.

95. Rancho Corporation sold 100 shares of treasury stock for $40 per share. The cost for the shares
was $30. The entry to record the sale will include a
a. credit to Gain on Sale of Treasury Stock for $3,000.
b. credit to Paid-in Capital from Treasury Stock for $1,000.
c. debit to Paid-in Capital in Excess of Par Value for $1,000.
d. credit to Treasury Stock for $4,000.
 96. Each of the following is correct regarding treasury stock except that it has been
a. issued.
b. fully paid for.
c. reacquired.
d. retired.

97. Treasury stock is

a. stock issued by the U.S. Treasury Department.
b. stock purchased by a corporation and held as an investment in its treasury.
c. corporate stock issued by the treasurer of a company.
d. a corporation's own stock which has been reacquired but not canceled.

98. The acquisition of treasury stock by a corporation

a. increases its total assets and total stockholders' equity.
b. decreases its total assets and total stockholders' equity.
c. has no effect on total assets and total stockholders' equity.
d. requires that a gain or loss be recognized on the income statement.

99. Treasury stock should be reported in the financial statements of a corporation as a(n)
a. investment.
b. liability.
c. deduction from total paid-in capital.
d. deduction from total paid-in capital and retained earnings.

100. A company would not acquire treasury stock

a. in order to reissue shares to officers.
b. as an asset investment.
c. in order to increase trading of the company's stock.
d. to have additional shares available to use in acquisitions of other companies.

101. Accounting for treasury stock is done by the

a. FIFO method.
b. LIFO method.
c. cost method.
d. lower of cost or market method.

102. Treasury stock is generally accounted for by the

a. cost method.
b. market value method.
c. par value method.
d. stated value method.

103. Treasury Stock is a(n)

a. contra asset account.
b. retained earnings account.
c. asset account.
d. contra stockholders’ equity account.
104. Four thousand shares of treasury stock of Meyer, Inc., previously acquired at $12 per share,
are sold at $18 per share. The entry to record this transaction will include a
a. credit to Treasury Stock for $72,000.
b. debit to Paid-In Capital from Treasury Stock for $24,000.
c. debit to Treasury Stock for $48,000.
d. credit to Paid-In Capital from Treasury Stock for $24,000.

105. Reeves Company originally issued 2,000 shares of $10 par value common stock for
$60,000 ($30 per share). Reeves subsequently purchases 200 shares of treasury stock for $27
per share and resells the 200 shares of treasury stock for $29 per share. In the entry to record the
sale of the treasury stock, there will be a
a. credit to Common Stock for $5,400.
b. credit to Treasury Stock for $2,000.
c. debit to Paid-In Capital in Excess of Par Value of $6,000.
d. credit to Paid-In Capital from Treasury Stock for $400.

106. When preferred stock is cumulative, preferred dividends not declared in a period are
a. considered a liability.
b. called dividends in arrears.
c. distributions of earnings.
d. never paid.

107. Which of the following is not a right or preference associated with preferred stock?
a. The right to vote
b. First claim to dividends
c. Preference to corporate assets in case of liquidation
d. To receive dividends in arrears before common stockholders receive dividends Use the

following information for questions 108 and 109.

Cole Corporation issues 15,000 shares of $50 par value preferred stock for cash at $60 per share.
108. The entry to record the transaction will consist of a debit to Cash for $900,000 and a credit or
credits to
a. Preferred Stock for $900,000.
b. Preferred Stock for $750,000 and Paid-in Capital in Excess of Par Value—Preferred Stock
for $150,000.
c. Preferred Stock for $750,000 and Paid-in Capital from Preferred Stock for $150,000.
d. Paid-in Capital from Preferred Stock for $900,000.

109. In the stockholders' equity section, the effects of the transaction above will be reported
a. entirely within the capital stock section.
b. entirely within the additional paid-in capital section.
c. under both the capital stock and additional paid-in capital sections.
d. entirely under the retained earnings section.

110. Dividends in arrears on cumulative preferred stock

a. never have to be paid.
b. must be paid before common stockholders can receive a dividend.
c. should be recorded as a current liability until they are paid.
d. enable the preferred stockholders to share equally in corporate earnings with the
common stockholders.
111. Dividends in arrears on cumulative preferred stock
a. are considered to be a non-current liability.
b. are considered to be a current liability.
c. only occur when preferred dividends have been declared.
d. should be disclosed in the notes to the financial statements.

112. If preferred stock is cumulative, the

a. preferred dividends not declared in a given year are called dividends in arrears.
b. preferred shareholders and the common shareholders receive equal dividends.
c. preferred shareholders and the common shareholders receive the same total dollar amount
of dividends.
d. common shareholders will share in the preferred dividends.

113. The Nice Corporation issues 10,000 shares of $100 par value preferred stock for cash at
$110 per share. The entry to record the transaction will consist of a debit to Cash for
$1,100,000 and a credit or credits to
a. Preferred Stock for $1,100,000.
b. Paid-in Capital from Preferred Stock for $1,100,000.
c. Preferred Stock for $1,000,000 and Retained Earnings for $100,000.
d. Preferred Stock for $1,000,000 and Paid-in Capital in Excess of Par Value—Preferred Stock
for $100,000.

Use the following information for questions 114–116.

Triad Corporation’s December 31, 2008 balance sheet showed the following: 8%
preferred stock, $20 par value, cumulative, 10,000 shares authorized;
5,000 shares issued $ 100,000
Common stock, $10 par value, 1,000,000 shares authorized; 650,000
shares issued, 640,000 shares outstanding 6,500,000
Paid-in capital in excess of par value—preferred stock 20,000
Paid-in capital in excess of par value—common stock 9,000,000
Retained earnings 2,500,000
Treasury stock (10,000 shares) 210,000

114. Triad declared and paid a $25,000 cash dividend on December 15, 2008. If the company’s
dividends in arrears prior to that date were $6,000, Triad’s common stockholders received a.
$19,000.
b. $9,000.
c. $11,000.
d. no dividend.

115. Triad’s total paid-in capital was a.

$15,620,000.
b. $15,830,000.
c. $15,410,000.
d. $9,020,000.

116. Triad’s total stockholders’ equity was a.

$18,380,000.
b. $15,620,000.
c. $18,170,000.
d. $17,910,000.
117. Burgess Corporation began business by issuing 100,000 shares of $5 par value common stock for
$24 per share. During its first year, the corporation sustained a net loss of
$20,000. The year-end balance sheet would show
a. Common stock of $500,000.
b. Common stock of $2,400,000.
c. Total paid-in capital of $2,380,000.
d. Total paid-in capital of $1,900,000.

Use the following information for questions 118–119.

Starr Corporation’s December 31, 2008 Balance Sheet showed the following: 8%
preferred stock, $20 par value, cumulative, 20,000 shares
authorized; 10,000 shares issued $ 200,000
Common stock, $10 par value, 2,000,000 shares authorized;
1,300,000 shares issued, 1,280,000 shares outstanding 13,000,000
Paid-in capital in excess of par value – preferred stock 40,000
Paid-in capital in excess of par value – common stock 18,000,000
Retained earnings 5,100,000
Treasury stock (10,000 shares) 420,000

118. Starr’s total paid-in capital was a.

$31,240,000.
b. $31,660,000.
c. $30,820,000.
d. $18,040,000.

119. Starr’s total stockholders’ equity was a.

$36,760,000.
b. $31,240,000.
c. $36,340,000.
d. $35,920,000.

120. Adcock Corporation began business by issuing 150,000 shares of $5 par value common stock
for $24 per share. During its first year, the corporation sustained a net loss of
$30,000. The year-end balance sheet would show
a. Common stock of $750,000.
b. Common stock of $3,600,000.
c. Total paid-in capital of $3,570,000.
d. Total paid-in capital of $2,850,000.

121. The trial balance of Hackman Inc. includes the following balances: Common Stock,
$39,000; Paid-in Capital in Excess of Par, $96,000; Treasury Stock, $9,000; Preferred Stock,
$30,000. Capital stock totals
a. $69,000.
b. $126,000.
c. $165,000.
d. $174,000.
122. Each of the following is reported for common stock except the
a. par value.
b. shares issued.
c. shares outstanding.
d. liquidation value.

123. Paid-in capital from treasury stock would appear on a balance sheet under the category
a. capital stock.
b. treasury stock.
c. additional paid-in capital.
d. contra to owners' equity.

124. Two classifications appearing in the paid-in capital section of the balance sheet are
a. preferred stock and common stock.
b. paid-in capital and retained earnings.
c. capital stock and additional paid-in capital.
d. capital stock and treasury stock.

125. Information that is not generally reported for each class of stock on the balance sheet is
a. the market value.
b. the par value.
c. shares authorized.
d. shares issued.

126. In published annual reports

a. subclassifications within the stockholders’ equity section are routinely reported in detail.
b. capital surplus is used in place of retained earnings.
c. the individual sources of additional paid-in capital are often combined.
d. retained earnings is often not shown separately.

127. Additional paid-in capital includes all of the following except

a. paid-in capital from treasury stock.
b. paid-in capital in excess of par.
c. paid-in capital in excess of stated value.
d. paid-in capital in excess of book value.

128. Book value per share is computed by dividing total

a. paid-in capital by the number of common shares outstanding.
b. paid-in capital by the number of common shares issued.
c. stockholders' equity by the number of common shares outstanding.
d. stockholders' equity by the number of common shares issued.

129. Book value per share is usually

a. equal to the market value per share.
b. less than the market value per share.
c. greater than the market value per share.
d. equal to the par value per share.
130. Book value per share is
a. the equity a common stockholder has in the net assets of the corporation from owning one
share of stock.
b. the equity a common stockholder has in the total assets of the corporation from owning
one share of stock.
c. always equal to the market value of the stock.
d. computed only for preferred stockholders.

131. The book value per share

a. is usually a close approximation of the market price per share.
b. is the same as the par value per share.
c. may be useful in determining the trend of a stockholder's per share equity in a corporation.
d. always falls within the annual range of a company's market value per share.

132. Barr, Inc. reports $3,000,000 of common stock, and $4,500,000 of additional paid-in capital on its
balance sheet. The number of common shares issued and outstanding is 500,000 shares. The book
value per share is
a. $15.
b. $9.
c. $6.
d. not determinable.

Additional Multiple Choice Questions

133. Which of the following is an incorrect statement about a corporation?

a. A corporation is an entity separate and distinct from its owners.
b. Creditors ordinarily have recourse only to corporate assets in satisfaction of their claims.
c. A corporation may be formed in writing, orally, or implied.
d. A corporation is subject to numerous state and federal regulations.

134. Capital stock to which the charter has assigned a value per share is called
a. par value stock.
b. no-par value stock.
c. stated value stock.
d. assigned value stock.

135. Legal capital per share cannot be equal to the

a. par value per share of par value stock.
b. total proceeds from the sale of par value stock above par value.
c. stated value per share of no-par value stock.
d. total proceeds from the sale of no-par value stock.

136. When common stock is issued for services or non-cash assets, cost should be
a. only the fair market value of the consideration given up.
b. only the fair market value of the consideration received.
c. the book value of the common stock issued.
d. either the fair market value of the consideration given up or the consideration received,
whichever is more clearly evident.
137. When the selling price of treasury stock is greater than its cost, the company credits the
difference to
a. Gain on Sale of Treasury Stock.
b. Paid-in Capital from Treasury Stock.
c. Paid-in Capital in Excess of Par Value.
d. Treasury Stock.

138. Roberson Corporation was organized on January 1, 2008, with authorized capital of 750,000
shares of $10 par value common stock. During 2008, Roberson issued 30,000 shares at $12 per
share, purchased 3,000 shares of treasury stock at $13 per share, and sold 3,000 shares of treasury
stock at $14 per share. What is the amount of additional paid-in capital at December 31, 2008?
a. $0
b. $3,000
c. $60,000
d. $63,000

139. The purchase of treasury stock

a. decreases common stock authorized.
b. decreases common stock issued.
c. decreases common stock outstanding.
d. has no effect on common stock outstanding.

140. Preferred stockholders have a priority over common stockholders as to

a. dividends only.
b. assets in the event of liquidation only.
c. voting rights.
d. both dividends and assets in the event of liquidation.

141. On January 2, 2005, Riley Corporation issued 20,000 shares of 6% cumulative preferred stock at
$100 par value. On December 31, 2008, Riley Corporation declared and paid its first dividend.
What dividends are the preferred stockholders entitled to receive in the current year before any
distribution is made to common stockholders?
a. $0
b. $120,000
c. $360,000
d. $480,000

142. Additional paid-in capital includes all of the following except the amounts paid in
a. over par value.
b. over stated value.
c. from treasury stock.
d. for the par value of common stock.

143. In the stockholders' equity section of the balance sheet, the classification of capital stock consists
of
a. additional paid-in capital and common stock.
b. common stock and treasury stock.
c. common stock, preferred stock, and treasury stock.
d. common stock and preferred stock.
144. At December 31, the stockholders’ equity section shows:
Common stock, $5 par value; 1,320,000 shares issued
and 1,200,000 shares outstanding .................................................. $6,600,000
Additional paid-in capital ....................................................................... 1,400,000
Retained earnings ................................................................................. 500,000
Treasury stock, (120,000 shares).......................................................... (700,000)
Total stockholders’ equity...................................................................... $7,800,000
The book value per share of common stock is a.
$5.91.
b. $6.50.
c. $7.08.
d. $6.44.
CHAPTER 14

31. Each of the following decreases retained earnings except a

a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. All of these decrease retained earnings.

32. Each of the following decreases total stockholders' equity except a

a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. All of these decrease total stockholders' equity.

33. Which one of the following is not necessary in order for a corporation to pay a cash
dividend?
a. Adequate cash
b. Approval of stockholders
c. Declaration of dividends by the board of directors
d. Retained earnings

34. If a corporation declares a dividend based upon paid-in capital, it is known as a

a. scrip dividend.
b. property dividend.
c. paid dividend.
d. liquidating dividend.

35. The date on which a cash dividend becomes a binding legal obligation is on the
a. declaration date.
b. date of record.
c. payment date.
d. last day of the fiscal year-end.

36. The effect of the declaration of a cash dividend by the board of directors is to
Increase Decrease
a. Stockholders' equity Assets
b. Assets Liabilities
c. Liabilities Stockholders' equity
d. Liabilities Assets

37. The cumulative effect of the declaration and payment of a cash dividend on a company's financial
statements is to
a. decrease total liabilities and stockholders' equity.
b. increase total expenses and total liabilities.
c. increase total assets and stockholders' equity.
d. decrease total assets and stockholders' equity.
38. Common Stock Dividends Distributable is classified as a(n)
a. asset account.
b. stockholders' equity account.
c. expense account.
d. liability account.

39. The effect of a stock dividend is to

a. decrease total assets and stockholders' equity.
b. change the composition of stockholders' equity.
c. decrease total assets and total liabilities.
d. increase the book value per share of common stock.

40. If a corporation declares a 10% stock dividend on its common stock, the account to be debited
on the date of declaration is
a. Common Stock Dividends Distributable.
b. Common Stock.
c. Paid-in Capital in Excess of Par.
d. Retained Earnings.

41. Which one of the following events would not require a formal journal entry on a corporation's
books?
a. 2 for 1 stock split
b. 100% stock dividend
c. 2% stock dividend
d. $1 per share cash dividend

42. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change

43. Dividends are predominantly paid in

a. scrip.
b. property.
c. cash.
d. stock.

44. If a stockholder receives a dividend consisting of a promissory note, the stockholder has received
a
a. stock dividend.
b. cash dividend.
c. contingent dividend.
d. scrip dividend.

45. Of the four dividends types, the two most common types in practice are
a. cash and scrip.
b. cash and property.
c. cash and stock.
d. property and stock.
46. Regular dividends are declared out of
a. Paid-in Capital in Excess of Par Value.
b. Treasury Stock.
c. Common Stock.
d. Retained Earnings.

47. A corporation is committed to a legal obligation when it declares

a. a cash dividend.
b. either a cash dividend or a stock dividend.
c. a stock dividend.
d. a stock split.

48. Which of the following is not a significant date with respect to dividends?
a. The declaration date
b. The incorporation date
c. The record date
d. The payment date

49. On the dividend record date,

a. a dividend becomes a current obligation.
b. no entry is required.
c. an entry may be required if it is a stock dividend.
d. Dividends Payable is debited.

50. Which of the following statements regarding the date of a cash dividend declaration is not
accurate?
a. The dividend can be rescinded once it has been declared.
b. The corporation is committed to a legal, binding obligation.
c. The board of directors formally authorizes the cash dividend.
d. A liability account must be increased.

51. Dividends Payable is classified as a

a. long-term liability.
b. contra stockholders' equity account to Retained Earnings.
c. current liability.
d. stockholders' equity account.

52. Indicate the respective effects of the declaration of a cash dividend on the following
balance sheet sections:
Total Assets Total Liabilities Total Stockholders' Equity
a. Increase Decrease No change
b. No change Increase Decrease
c. Decrease Increase Decrease
d. Decrease No change Increase

53. Which of the following statements about dividends is not accurate?

a. Many companies declare and pay cash quarterly dividends.
b. Low dividends may mean high stock returns.
c. The board of directors is obligated to declare dividends.
d. A legal dividend may not be a feasible one.
54. The cumulative effect of the declaration and payment of a cash dividend on a company's balance
sheet is to
a. decrease current liabilities and stockholders' equity.
b. increase total assets and stockholders' equity.
c. increase current liabilities and stockholders' equity.
d. decrease stockholders' equity and total assets.

55. The declaration and distribution of a stock dividend will

a. increase total stockholders' equity.
b. increase total assets.
c. decrease total assets.
d. have no effect on total assets.

56. ABC, Inc. has 1,000 shares of 4%, $100 par value, cumulative preferred stock and 50,000 shares of
$1 par value common stock outstanding at December 31, 2008. What is the annual dividend on the
preferred stock?
a. $40 per share
b. $4,000 in total
c. $400 in total
d. $.40 per share

57. Agler, Inc. has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 100,000 shares
of $1 par value common stock outstanding at December 31, 2008. If the board of directors declares
a $50,000 dividend, the
a. preferred shareholders will receive 1/10th of what the common shareholders will receive.
b. preferred shareholders will receive the entire $50,000.
c. $50,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred shareholders will receive $25,000 and the common shareholders will receive
$25,000.

58. Manner, Inc. has 5,000 shares of 6%, $100 par value, noncumulative preferred stock and 20,000
shares of $1 par value common stock outstanding at December 31, 2008. There were no dividends
declared in 2007. The board of directors declares and pays a $55,000 dividend in 2008. What is the
amount of dividends received by the common stockholders in 2008?
a. $0
b. $30,000
c. $55,000
d. $25,000

59. Lopez, Inc. has 2,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of
$1 par value common stock outstanding at December 31, 2007, and December 31, 2008. The
board of directors declared and paid a $4,000 dividend in 2007. In 2008,
$20,000 of dividends are declared and paid. What are the dividends received by the preferred and
common shareholders in 2008?
Preferred Common
a. $12,000 $8,000
b. $10,000 $10,000
c. $8,000 $12,000
d. $6,000 $14,000
60. Norton, Inc. has 10,000 shares of 6%, $100 par value, noncumulative preferred stock and 100,000
shares of $1 par value common stock outstanding at December 31, 2008, and December 31, 2009.
The board of directors declared and paid a $50,000 dividend in 2008. In 2009, $100,000 of
dividends are declared and paid. What are the dividends received by the preferred and common
shareholders in 2009?
Preferred Common
a. $0 $100,000
b. $60,000 $40,000
c. $50,000 $50,000
d. $100,000 $0

61. The board of directors must assign a per share value to a stock dividend declared that is
a. greater than the par or stated value.
b. less than the par or stated value.
c. equal to the par or stated value.
d. at least equal to the par or stated value.

62. Corporations generally issue stock dividends in order to

a. increase the market price per share.
b. exceed stockholders' dividend expectations.
c. increase the marketability of the stock.
d. decrease the amount of capital in the corporation.

63. A stockholder who receives a stock dividend would

a. expect the market price per share to increase.
b. own more shares of stock.
c. expect retained earnings to increase.
d. expect the par value of the stock to change.

64. When stock dividends are distributed,

a. Common Stock Dividends Distributable is decreased.
b. Retained Earnings is decreased.
c. Paid-in Capital in Excess of Par Value is debited if it is a small stock dividend.
d. no entry is necessary if it is a large stock dividend.

65. A small stock dividend is defined as

a. less than 30% but greater than 25% of the corporation's issued stock.
b. between 50% and 100% of the corporation's issued stock.
c. more than 30% of the corporation's issued stock.
d. less than 20–25% of the corporation's issued stock.

66. The per share amount normally assigned by the board of directors to a large stock dividend
is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
67. The per share amount normally assigned by the board of directors to a small stock
dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.

68. Identify the effect the declaration of a stock dividend has on the par value per share and book
value per share.
Par Value per Share Book Value per Share
a. Increase Decrease
b. No effect Increase
c. Decrease Decrease
d. No effect Decrease

69. The declaration of a stock dividend will

a. increase paid-in capital.
b. change the total of stockholders' equity.
c. increase total liabilities.
d. increase total assets.

70. Which of the following show the proper effect of a stock split and a stock dividend?
Item Stock Split Stock Dividend
a. Total paid-in capital Increase Increase
b. Total retained earnings Decrease Decrease
c. Total par value (common) Decrease Increase
d. Par value per share Decrease No change

71. A stock split

a. may occur in the absence of retained earnings.
b. will increase total paid-in capital.
c. will increase the total par value of the stock.
d. will have no effect on the par value per share of stock.

72. Outstanding stock of the Apex Corporation included 20,000 shares of $5 par common stock and
5,000 shares of 6%, $10 par noncumulative preferred stock. In 2007, Apex declared and paid
dividends of $2,000. In 2008, Apex declared and paid dividends of
$6,000. How much of the 2008 dividend was distributed to preferred shareholders? a.
$4,000
b. $7,000
c. $3,000
d. None of the above

73. Outstanding stock of the Bell Corporation included 20,000 shares of $5 par common stock and
10,000 shares of 6%, $10 par noncumulative preferred stock. In 2007, Bell declared and paid
dividends of $4,000. In 2008, Bell declared and paid dividends of $12,000. How much of the 2008
dividend was distributed to preferred shareholders?
a. $8,000
b. $14,000
c. $6,000
d. None of the above
74. On January 1, Bluefield Corporation had 800,000 shares of $10 par value common stock
outstanding. On March 31, the company declared a 10% stock dividend. Market value of the stock
was $15/share. As a result of this event,
a. Bluefield’s Paid-in Capital in Excess of Par Value account increased $400,000.
b. Bluefield’s total stockholders’ equity was unaffected.
c. Bluefield’s Retained Earnings account decreased $1,200,000.
d. All of the above.

75. On January 1, Garrison Corporation had 1,000,000 shares of $10 par value common stock
outstanding. On March 31, the company declared a 10% stock dividend. Market value of the stock
was $15/share. As a result of this event,
a. Garrison’s Paid-in Capital in Excess of Par Value account increased $500,000.
b. Garrison’s total stockholders’ equity was unaffected.
c. Garrison’s Retained Earnings account decreased $1,500,000. d
All of the above.

76. Sun Inc. has 5,000 shares of 6%, $100 par value, cumulative preferred stock and 50,000 shares of
$1 par value common stock outstanding at December 31, 2008. What is the annual dividend on the
preferred stock?
a. $60 per share
b. $30,000 in total
c. $3,000 in total
d. $0.60 per share

77. Allstate, Inc., has 20,000 shares of 6%, $100 par value, noncumulative preferred stock and
100,000 shares of $1 par value common stock outstanding at December 31, 2008. If the board of
directors declares a $200,000 dividend, the
a. preferred stockholders will receive 2/10th of what the common stockholders will receive.
b. preferred stockholders will receive the entire $200,000.
c. $120,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred stockholders will receive $120,000 and the common stockholders will receive
$80,000.

78. Archer, Inc., has 10,000 shares of 8%, $100 par value, noncumulative preferred stock and 40,000
shares of $1 par value common stock outstanding at December 31, 2008. There were no dividends
declared in 2007. The board of directors declares and pays a $120,000 dividend in 2008. What is
the amount of dividends received by the common stockholders in 2008?
a. $0
b. $80,000
c. $120,000
d. $40,000

79. Luther Inc., has 2,000 shares of 8%, $50 par value, cumulative preferred stock and 100,000 shares
of $1 par value common stock outstanding at December 31, 2008, and December 31, 2007. The
board of directors declared and paid a $6,000 dividend in 2007. In 2008, $24,000 of dividends are
declared and paid. What are the dividends received by the preferred stockholders in 2008?
 a. $14,000
b. $12,000
c. $10,000
d. $8,000

`80. Anders, Inc., has 5,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of
$1 par value common stock outstanding at December 31, 2009. There were no dividends declared
in 2007. The board of directors declares and pays a $50,000 dividend in 2008 and in 2009. What is
the amount of dividends received by the common stockholders in 2009?
a. $10,000
b. $30,000
c. $50,000
d. $0

81. Cuther Inc., has 1,000 shares of 8%, $50 par value, cumulative preferred stock and 50,000
shares of $1 par value common stock outstanding at December 31, 2007, and December 31, 2008.
The board of directors declared and paid a $3,000 dividend in 2007. In 2008, $12,000 of dividends
are declared and paid. What are the dividends received by the common stockholders in 2008?
a. $7,000
b. $6,000
c. $5,000
d. $4,000

82. On January 1, Brunner Corporation had 60,000 shares of $10 par value common stock outstanding.
On March 17, the company declared a 10% stock dividend to stockholders of record on March 20.
Market value of the stock was $13 on March 17. The entry to record the transaction of March 17
would include a
a. credit to Retained Earnings for $18,000.
b. credit to Cash for $78,000.
c. credit to Common Stock Dividends Distributable for $60,000.
d. debit to Common Stock Dividends Distributable for $60,000.

83. On January 1, Brunner Corporation had 60,000 shares of $10 par value common stock outstanding.
On March 17, the company declared a 10% stock dividend to stockholders of record on March 20.
Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry
to record the transaction of March 30 would include a
a. credit to Cash for $60,000.
b. debit to Common Stock Dividends Distributable for $60,000.
c. credit to Paid-in Capital in Excess of Par Value for $18,000.
d. debit to Retained Earnings for $18,000.

84. On January 1, Sandford Corporation had 80,000 shares of $10 par value common stock
outstanding. On June 17, the company declared a 10% stock dividend to stockholders of record on
June 20. Market value of the stock was $15 on June 17. The entry to record the transaction of June
17 would include a
a. debit to Retained Earnings for $120,000.
b. credit to Cash for $120,000.
c. credit to Common Stock Dividends Distributable for $120,000.
d. credit to Common Stock Dividends Distributable for $40,000.
85. On January 1, Sanford Corporation had 80,000 shares of $10 par value common stock outstanding.
On June 17, the company declared a 10% stock dividend to stockholders of record on June 20.
Market value of the stock was $15 on June 17. The stock was distributed on June 30. The entry to
record the transaction of June 30 would include a
a. credit to Common Stock for $80,000.
b. debit to Common Stock Dividends Distributable for $120,000.
c. credit to Paid-in Capital in Excess of Par Value for $40,000.
d. debit to Retained Earnings for $40,000.

86. The following selected amounts are available for Sanders Company.
Retained earnings (beginning) $1,000
Net loss 100
Cash dividends declared 100
Stock dividends declared 50
What is its ending retained earnings balance?
a. $850
b. $900
c. $750
d. $800

87. Turquoise and Topaz Sisters had retained earnings of $10,000 on the balance sheet but disclosed
in the footnotes that $2,000 of retained earnings was restricted for plant expansion and $1,000
was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion.
How much of retained earnings is available for dividends? a. $7,000
b. $8,000
c. $10,000
d. $5,000

88. Irwin, Inc. had 300,000 shares of common stock outstanding before a stock split occurred, and
600,000 shares outstanding after the stock split. The stock split was
a. 3 for 6.
b. 6 for 1.
c. 1 for 6.
d. 2 for 1.

89. Restricting retained earnings for the cost of treasury stock purchased is a
a. contractual restriction.
b. legal restriction.
c. stock restriction.
d. voluntary restriction.

90. A prior period adjustment that corrects income of a prior period requires that an entry be made to
a. an income statement account.
b. a current year revenue or expense account.
c. the retained earnings account.
d. an asset account.
 91. If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant
expansion, the effect of this action is to
a. decrease total assets and total stockholders' equity.
b. increase stockholders' equity and decrease total liabilities.
c. decrease total retained earnings and increase total liabilities.
d. reduce the amount of retained earnings available for dividend declarations.

92. A credit balance in retained earnings represents

a. the amount of cash retained in the business.
b. a claim on specific assets of the corporation.
c. a claim on the aggregate assets of the corporation.
d. the amount of stockholders' equity exempted from the stockholders' claim on total assets.

93. A net loss

a. occurs if operating expenses exceed cost of goods sold.
b. is not closed to Retained Earnings if it would result in a debit balance.
c. is closed to Retained Earnings even if it would result in a debit balance.
d. is closed to the paid-in capital account of the stockholders' equity section of the
balance sheet.

94. Prior period adjustments are reported

a. in the footnotes of the current year's financial statements.
b. on the current year's balance sheet.
c. on the current year's income statement.
d. on the current year's retained earnings statement.

95. Retained earnings are occasionally restricted

a. to set aside cash for dividends.
b. to keep the legal capital associated with paid-in capital intact.
c. due to contractual loan restrictions.
d. if preferred dividends are in arrears.

96. Retained earnings is increased by each of the following except

a. net income.
b. prior period adjustments.
c. some disposals of treasury stock.
d. All of these increase retained earnings.

97. A prior period adjustment for understatement of net income will

a. be credited to the Retained Earnings account.
b. be debited to the Retained Earnings account.
c. show as a gain on the current year's Income Statement.
d. show as an asset on the current year's Balance Sheet.

98. The retained earnings statement

a. is the owners' equity statement for a corporation.
b. will show an addition to the beginning retained earnings balance for an understate- ment of
net income in a prior year.
c. will not reflect net losses.
d. will, in some cases, fail to reconcile the beginning and ending retained earnings
balances.
 99. In the stockholders' equity section of the balance sheet,
a. Common Stock Dividends Distributable will be classified as part of additional paid-in
capital.
b. Common Stock Dividends Distributable will appear in its own subsection of the stock-
holders' equity.
c. Additional Paid-in Capital appears under the subsection Paid-in Capital.
d. Dividends in arrears will appear as a restriction of Retained Earnings.

100. The return on common stockholders' equity is computed by dividing net income available to
common stockholders by
a. ending total stockholders' equity.
b. ending common stockholders' equity.
c. average total stockholders' equity.
d. average common stockholders' equity.

101. The return on common stockholders’ equity is computed by dividing

a. net income by ending common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income less preferred dividends by average common stockholders’ equity.

Use the following information for questions 102–103.

Carter Corporation had net income of $250,000 and paid dividends of $50,000 to common stockholders and
$20,000 to preferred stockholders in 2008. Carter Corporation’s common stockholders’ equity at the
beginning and end of 2008 was $870,000 and $1,130,000, respectively. There are 100,000 weighted-
average shares of common stock outstanding.

102. Carter Corporation’s return on common stockholders’ equity was a.

25%.
b. 23%.
c. 20%.
d. 18%.

103. Carter Corporation’s earnings per share for 2008 was a.

$2.50.
b. $2.30.
c. $2.00.
d. $1.80.

Use the following information for questions 104–105.

The following information pertains to Greenwich Company. Assume that all balance sheet amounts
represent average balance figures.
Stockholders’ equity—common $150,000
Total stockholders’ equity 200,000
Sales 100,000
Net income 25,000
Number of shares of common stock 10,000
Common stock dividends 10,000
Preferred stock dividends 4,000
104. What is the return on common stockholders’ equity ratio for Greenwich? a.
16.7%
b. 14.0%
c. 12.7%
d. 10.5%

105. What is the earnings per share for Greenwich? a.

$2.50
b. $2.10
c. $1.50
d. $1.10

106. A corporation differs from a proprietorship and a partnership in that

a. assets and liabilities are presented differently on the balance sheet.
b. a corporation is considered a separate legal entity for taxation purposes.
c. the cost principle only applies to proprietorships and partnerships.
d the owners of the corporation do not have a claim on the net assets of the business.

107. Income statements for corporations are the same as the statements for proprietorships
except for the reporting of
a. gross profit.
b. income from operations.
c. income tax expense.
d. other revenues and gains.

108. Income statements for corporations are the same as the income statements for proprietorships
except for the reporting of
a. cost of goods sold.
b. income taxes.
c. gross profit.
d. other revenues and other expenses.

109. Corporation income tax expense is

a. usually accrued in the adjusting entry process.
b. not usually accrued because it is not known what the exact liability will be until the tax return
is filed.
c. not reported in a separate section of a corporate income statement.
d. reported similarly for corporations and partnerships.

110. When computing earnings per share,

a. an adjustment related to preferred stock dividends is made in the numerator and
denominator of the earnings per share formula.
b. an adjustment for the preferred dividends is made in the denominator of the earnings per
share formula.
c. the dividends for cumulative preferred stock are deducted from net income only if the
preferred dividends have been declared.
d. the dividends for cumulative preferred stock are deducted from net income whether or not
preferred dividends have been declared.
 111. Each of the following statements is correct except that earnings per share is reported
a. below net income.
b. for both common and preferred stock.
c. on the face of the income statement.
d. based on the weighted-average number of common shares outstanding.

112. West, Inc. has a net income of $400,000 for 2008, and there are 200,000 weighted- average shares
of common stock outstanding. Dividends declared and paid during the year amounted to $80,000
on the preferred stock and $120,000 on the common stock.
The earnings per share for 2008 is a.
$2.00.
b. $.60.
c. $1.60.
d. $1.00.

113. The formula for computing earnings per share is net income
a. divided by the ending common shares outstanding.
b. divided by the weighted-average number of common shares outstanding.
c. less preferred dividends divided by the ending common shares outstanding.
d. less preferred dividends divided by the weighted-average number of common shares
outstanding.

Additional Multiple Choice Questions

114. Which of the following statements about a cash dividend is incorrect?

a. The legality of a cash dividend depends on state corporation laws.
b. The legality of a dividend does not indicate a company's ability to pay a dividend.
c. Dividends are not a liability until declared.
d. Shareholders usually vote to determine the amount of income to be distributed in the form of
a dividend.

115. The date a cash dividend becomes a binding legal obligation to a corporation is the
a. declaration date.
b. earnings date.
c. payment date.
d. record date.

116. Abbott Corporation splits its common stock 4 for 1, when the market value is $40 per share. Prior
to the split, Abbott had 50,000 shares of $10 par value common stock issued and outstanding. After
the split, the par value of the stock
a. remains the same.
b. is reduced to $2 per share.
c. is reduced to $2.50 per share.
d. is reduced to $10 per share.
117. Which of the following statements about retained earnings restrictions is incorrect?
a. Many states require a corporation to restrict retained earnings for the cost of treasury stock
purchased.
b. Long-term debt contracts may impose a restriction on retained earnings as a condition for the
loan.
c. The board of directors of a corporation may voluntarily create retained earnings restrictions for
specific purposes.
d. Retained earnings restrictions are generally disclosed through a journal entry on the books
of a company.

118. Prior period adjustments

a. may only increase retained earnings.
b. may only decrease retained earnings.
c. may either increase or decrease retained earnings.
d. do not affect retained earnings.

119. Jennifer Company reports the following amounts for 2008:

Net income $125,000
Average stockholders' equity 500,000
Preferred dividends 35,000
Par value preferred stock 100,000
The 2008 rate of return on common stockholders' equity is a.
18.0%.
b. 22.5%.
c. 25.0%.
d. 31.3%.

120. The return on common stockholders' equity is computed by dividing

a. net income by ending common stockholders' equity.
b. net income by average common stockholders' equity.
c. net income minus preferred dividends by ending common stockholders' equity.
d. net income minus preferred dividends by average common stockholders' equity.

121. Milner Corporation had 200,000 shares of common stock outstanding during the year. Milner
declared and paid cash dividends of $200,000 on the common stock and $160,000 on the preferred
stock. Net income for the year was $880,000. What is Milner’s earnings per share?
a. $2.60
b. $3.40
c. $3.60
d. $4.40

122. When a corporation has both preferred and common stock outstanding, earnings per share is
computed by dividing net income
a. by ending common shares outstanding.
b. by weighted average common shares outstanding.
c. less preferred dividends by ending common shares outstanding.
d. less preferred dividends by the weighted average of common shares outstanding.
 123. In determining earnings per share, dividends for the current year on noncumulative preferred stock
should be
a. disregarded.
b. added back to net income whether declared or not.
c. deducted from net income only if declared.
d. deducted from net income whether declared or not.

ĐỀ TEST THỬ
Câu 1. Financial statement:

a.       Can be substituted by worksheet.

b.      Comprise of financial position, cashflow statement, and income statement.

c.       Is not necessary when balance sheet and income statement are shown on the worksheet.

d.      Are products of accounting cycle.

Câu 2. If stock is issued for a non-cash asset, the asset should be recorded on the books of the
corporation at:

a.       Zero

b.      Fair value (ý là giá gốc, không phải là mệnh giá mà cũng không phải giá phát hành, giá thị
trường)

c.       Cost

d.      A nominal amount

Câu 3. Before closing, expense accounts and revenues have total balance of $700,000, and
$820,000. Opening balance of Capital is $350,000, $80,000 fixed assets purchased during the
period, the balance of capital at the end of accounting period is:

a.       550,000

b.      470,000 = 820,000 – 700,000 + 350,000 ; 80,000 không được tính.

c.       100,000

d.      350,000

Câu 4. Lahasa Bookstore had 300 units (at cost $11 per unit), on hand at June 1. Purchases and
sales during the month of June as follows:

-          Jun.4 : Sale 150 Units @ $16/unit

-          Jun.12. Purchase 250 units @$12/unit

-          Jun.18: Sale 300 units @ $17/unit

-          Jun.29: Purchase 50 units @$13/unit

Fahasa maintains periodic inventory system. The Gross profit for the month ended June 30,
under the LIFO method is:

a.       2700

b.      2350

c.     2200

d.      5150

Amount of available good for sale  = 30x0 + 250 + 50 = 600

Amount of goods sale = 150 + 300 = 450, consists of 50 units $13, 250 units $12, 150 units $11
-> Cost of good sales = 5300

Sale revenue = 150 x 16 + 300 x 17 = 7500

Gross profit = 7500 – 5300 = 2200

Câu 5. The depreciation expense will:

a.       Decrease assets and increases liabilities

b.      Decrease assets and liabilities

c.       Increase liabilities and net income

d.     Decrease assets and owner’s equity – chi phí tăng thì giảm vốn chủ, và khi phát sinh chi
phí thì TK acc. dep cũng sẽ phát sinh tăng -> giảm tài sản.

Vốn chủ = Góp vốn – Rút vốn + Doanh thu – Chi phí

Câu 6. Toys “R” UK had cost of goods sold of $9,421 million, ending inventory of $2,089
million, and average inventory of $1,965 million. Its inventory turnover equal:

a.       0.21

b.       4.51 = 9,421 / 1,965

c.       4.79

d.      76.1

Câu 7. Detailed records of goods held for resale are maintained under a:

a.       Double entry accounting system

b.      Single entry accounting system

c.       Perpetual inventory sys,

d.      Periodic inventory sys.

Câu 8. Lassen’s market recorded the following events involving a recent purchase of
merchandise:
-          Received goods for $40,000, terms 3/10, n/30.

-          Returned $800 of the shipment for credit.

-          Paid $200 freight on the shipment.

-          Paid the invoice within the discount period.

As a result of these events, the company’s inventory:

a.      Increased by $38,224 = 200 + (40,000 – 800) x 97%

b.      Increased by $38,612

c.       Increased by $39,400

d.      Increased by $38,024

Câu 9. When a note receivable are honored. Cash is debited for the note’s:

a.       Face value

b.      Gross realizable value

c.       Net realizable value

d.     Maturity value. (Giá bao gồm cả gốc lẫn lãi)

Câu 10. NQ’s Electric Repair Shop started the year with total assets of $350,000 and total
liabilities of $250,000. During the year, the business recorded $450,000 in electronic repair
revenues, $350,000 in expenses, and NQ withdrew $40,000. NQ’s owner’s capital balance
changed by what amount from the beginning of the year to the end of the year?

a.       $150,000

b.      $100,000

c.      $60,000 change = 450 – 350 - 40

d.      $160,000

Câu 11. The date when ownership of outstanding shares is determined for dividend purposes is
called:

a.      The record date

b.      The payment date

c.       The declaration date

d.      The payment and record date.

Câu 12. The closing entries maybe prepared from all of the following except:

a. Balance sheet - căn bản là cái bảng này chỉ đúng lại 1 thời điểm nên không dùng để
khóa sổ các bút toán liên quan đến cả kỳ được
b. Adj. balance in the ledger
 c. Income and owner’s equity statements
d. Income statement and balance sheet columns of the worksheet.

 Câu 13. Which is the most common type of reporting period:

a. Semi - annually and annually

b. Monthly, quarterly and annually (không chắc vì đề hỏi số ít chứ không phải số nhiều)
c. Daily, monthly and quarterly
d. Annually

Câu 14. A truck was purchases with cost $220,000 and its acc. dep $164,000 has been recorded.
It was disposed of for $90,000 cash. As a result of the sale:
a. Net income will decreases $24,000
b. Net income will increases $24,000
c. Net income will decreases $34,000
d. Net income will increases $34,000
Giá trị còn lại (NBV) = 220 - 164 = 56
Giá thanh lý = 90 -> Net income tăng 34

Câu 15. Saint Company reported the following income statement in4 for Year 1 and Year 2.
Year 1 Year 2
Sale $410,000 $550,000

Beginning Inventory $132,000 $144,000

Cost of good purchases $273,000 $302,000
Cost of goods available
for sale $405,000 $446,000
Ending inventory $144,000 $152,000
Cost of goods sold $261,000 $294,000

Gross profit $149,000 $256,000

The beginning inventory balance for Year 1 is correct. The ending inventory for Year 2 is also
correct. However, the ending inventory figure for Year 1 was overstated by $20,000. Given this
information, the correct gross profit figures for Year 1 and Year 2 would be:
a. $169,000 for Y1 and $236,000 for Y2
b. $129,000 for Y1 and $256,000 for Y2
c. $281,000 for Y1 and $274,000 for Y2
d. $129,000 for Y1 and $276,000 for Y2
Hàng tồn kho cuối kỳ năm nhất bị phóng đại $20,000 -> Hàng tồn kho cuối kỳ đúng là 124,000,
giá vốn hàng bán đúng là 281,000 -> gross profit đúng là 129,000.
Beginning inventory đúng đầu Y2 là 124,000 (giảm 20k so với bảng trên) , mà tồn cuối kỳ không
đổi, dẫn đến giá vốn hàng bán đúng giảm 20k -> gross profit năm 2 đúng tăng 20k.
Đây là một câu tiêu biểu cho việc đánh giá thấp/cao hàng tồn kho.

Câu 16. The steps in preparing a trial balance include all of the following except:
a. Record transactions in the invoice
b. Listing the account titles and their balances 
c. proving the equality of the two columns
d. totaling the debit and credit columns.
Câu 17. After gross profit is calculated, operating expenses are deducted to determine 
a. net margin
b. profit from operation
c. net income
d. gross margin 
Câu 18. Difference between assets and liabilities is owed to
A. Benefactors.
B. Owner's equity.
C. Debtors.
D. Underwriters

Câu 19. Which one of the following is not a part of an account?

A. Debit side
B. Cash flow
c. Credit side
D. Account Title

Câu 20. The owner's equity account

A. is decreased with debits and decreased with credits.
B. appears on the income statement along with the expenses of the business.
c. must show transactions every accounting period.
D. is not a proper subdivision of owner's equity.

Câu 21. Louis Consulting started the year with total assets of $39,000 and total liabilities of $17,000.
During the year, the business recorded $48,000 in consulting revenues and $36,000 in expenses. Louis
made an additional investment of S8,000 and withdrew cash of S10,000 during the year. The owner's
equity at the end of the year was
A. $60,000.
B. $32,000. = 39 - 17 + 48 - 36 + 8-10
c. $54,000.
D. $57,000..

Câu 22. The direct write-off method of accounting for bad debts
A. uses a contra-asset account.
B. is the preferred method under generally accepted accounting principles.
c. uses an allowance account.
D. does not require estimates of bad debt losses.

Câu 23. Long-term liabilities are listed

A. Under liabilities category on the balance sheet

B. As expenditures against revenue on the income statement

c. Under liabilities category on the income statement

D. As expenditures on the balance sheet

Câu 24. Credits

A. increase both assets and liabilities.

B. increase assets and decrease liabilities.

c. decrease both assets and liabilities.

D. decrease assets and increase owner's equity.

Câu 25. Chocolate, Inc. paid $180,000 to buy back 20,000 sharės of its $1 par value common
stock. This stock was sold later at a selling price of $7 per share.

The entry to record the sale includes a

A. debit to Retained Earnings for $40,000.

B. debit to Paid-in Capital from Treasury Stock for $180,000.

C. credit to Paid-in Capital from Treasury Stock for $20,000.

D.credit to Retained Earnings for $40,000

Câu 26. The Income Summary account is used:

A. To determine the appropriate withdrawal amount

B. To close the revenue and expense accounts.

c. To adjust and update asset and liability accounts

D. To replace the income statement under certain circumstances

Câu 27. Biggreen company acquired a land for $200,000 on account on 01/5/2018. As of
31/12/2018, the land has appreciated in value to $180,000. On31/12/2019 the land has an
appraised value of $220,000. By what amount, under historical cost, should the Land account be
reported in Balance sheet in31/12/2019?

A. $220,000

B. Depending on accountant's choice

c. $180,000

D. $200,000

Câu 28.  Sources of decreases to owner's equity are

A. Purchases of merchandise.

B. Withdrawals by the owner.

c. Disposal of an equipment.

D. Revenues

Câu 29. On July 15t 2019, Raymond Company borrows $180,000 from National Bank on a 5
month,$180,000, 9% note. The entry by Ray Company to record payment of the note and accrued
interest on November 1st 2019 is

A. Note payable       186,000

           Cash                                186,000

B. Note payable       180,000

           Interest Payable              6,750

           Cash                                186,750

C. Note payable      180,000

           Interest expense              6.000

           Cash                               186,000

D. Note payable         174,000

              Interest Payable             6,000

             Cash                               180,000

Câu 30. The two key parties to a note payable are the

A. maker and a bank.

B. debtor and the payee.

C. maker and the payee.

D. sender and the receiver.

Câu 31. Accounts are closed at year end will be called:

A. Temporary accounts (tài khoản tạm thời)

B. Contra accounts

C. Nominal accounts

D. Permanent accounts (tài khoản tích lũy)

Câu 32. Items that are purchased, stored, and waiting for sale are

A. Consigned goods (hàng ký gửi)

B. Merchandise inventory

c. Finishes goods (thành phẩm)

D. Goods in transit (hàng đang đi đường)

Câu 33. Increases in owner's equity are recorded

A. On the debit side, meanwhile the normal balance are on the credit side of the account

B. Together with normal balance on the credit side of the account

c. On the credit side meanwhile, the normal balance are on the debit side of the account

D. Together with normal balance on the debit side of the account

Câu 34. On Feb 1, Mary received a  $45,000 in cash for consulting services to be provided over
the next 3 months. The full amount should be recorded in Unearned revenue account, this
account belongs to:

A. Revenue account

B. Liabilities account
с. Еxpense account

D. Assets account

Câu 35. A company uses the perpetual inventory system and recorded the following entry:

Dr. Account Payable:       2,500

             Cr. Inventory:                    50

             Cr. Cash:                           2,450

This entry reflects a:

A. Payment of the account payable and recognítion of a cash return

B. Return

c. Sale

D. Purchase

Câu 36. The following totals for the month of September were taken from the payroll register of
Molly Company:

Salaries and wages payable     $43,500

FICA taxes withheld                  $2,800

Income tax withheld                  $4,450

The journal entry to record the monthly payroll on 30 September would include a

A. Credit to Salaries and Wages payable for $50,750

B. Debit to Salaries and Wages payable S43,500

c. Credit to Salaries and Wages expense for S43,500

D. Debit to Salaries and Wages expenses for S50,750

Câu 37. Triumph Company paid S9,600 for the owing debt to supplier. The transaction was
recorded as a debit to Cash of S6,900 and a credit to Accounts Receivable, $6,900. The
correcting entry is:

A. Accounts Receivable     6,900

                 Cash                                   6,900

B. Accounts Payable          6,900

               Cash                                    6,900

C. Accounts Receivable     9,600

               Accounts Payable               9,600

D. Dr. Accounts Receivable     6,900

     Dr. Accounts Payable         9,600

                 Cr. Cash                            16,500

Câu 38. Total amount of cash and other assets paid in to the corporation by stockholders in
exchange for capital stock is called:

A. Dividend

B. Paid-in Capital

c. Retained Earnings

D. Treasury Stock

Câu 39. An analysis and aging of the accounts receivable of Wood Company at December 31
revealed the following data:

Accounts Receivable:  $900,000

Allowance for Doubtful Accounts per books before adjustment (Cr.): $50,000

Amounts expected to become uncollectible: $80,000

The cash realizable value of the accounts receivable at December 31, after adjustment, is:

A. $900,000

B. $820,000

c. $790,000

D. $850,000

Câu 40. Which one of the following items is not considered a part of the cost of buildings?

A. A new parking lot

B, Attorney's fee

C. Cash cost

D. Broker's commission