Sample Questions for Accounting Mid-Term for ECO and BAC

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B 01) To match the estimated loss from uncollectible accounts receivable against the sales they helped produce,
we should require:
A) The use of the direct write-off method for bad debts.
B) The use of the allowance method of accounting for bad debts.
C) That bad debts be disclosed in the financial statements.
D) That bad debts not be written off.
E) That expenses be ignored if their effect on the financial statements is unimportant to users' business
decisions.

D 02) Majesty Productions accepted a $7,200, 120-day, 6% note from Swartz Studio on March 1. On the date
the note matures, Swartz is unable to pay, but Majesty intends to continue collection efforts. What entry should
Majesty record on the maturity date for this dishonored note?
A) Debit Accounts Receivable $7,200; credit Notes Receivable $7,200.
B) Debit Accounts Receivable $7,200; credit Allowance for Doubtful Accounts $7,200.
C) Debit Bad Debt Expense $7,344; credit Notes Receivable $7,344.
D) Debit Accounts Receivable $7,344; credit Interest Revenue $144; credit Notes Receivable $7,200.
E) Debit Accounts Receivable $7,056; debit Interest Revenue $144; credit Notes Receivable $7,200.

B 03) On October 12 of the current year, a company determined that a customer's account receivable was
uncollectible and that the account should be written off. Assuming the allowance method is used to account for
bad debts, what effect will this write-off have on the company's net profit and total assets?
A) Decrease in net profit; no effect on total assets.
B) No effect on net profit; no effect on total assets.
C) Decrease in net profit; decrease in total assets.
D) Increase in net profit; no effect on total assets.
E) No effect on net profit; decrease in total assets.

E 04) Frederick Company borrows $63,000 from First City Bank and pledges its receivables as security. Which
of the following is true regarding this transaction?
A) First City Bank is the factor in this transaction.
B) Frederick Company no longer has the risk of bad debts.
C) No journal entry is required for this event.
D) First City Bank takes ownership of the receivables at the time of the pledge.
E) Frederick Company's financial statements must disclose the pledging of receivables.

B 05) A method of estimating bad debts expense that involves a detailed examination of outstanding accounts
and the length of time past due is the:
A) Direct write-off method.
B) Aging of accounts receivable method.
C) Percentage of sales method.
D) Aging of investments method.
E) Percent of accounts receivable method.

C 06) On December 31 of the current year, the unadjusted trial balance of a company using the percent of
receivables method to estimate bad debt included the following: Accounts Receivable, debit balance of
$95,250; Allowance for Doubtful Accounts, credit balance of $921. What amount should be debited to Bad
Debts Expense, assuming 6% of outstanding accounts receivable at the end of the current year are estimated to
be uncollectible?
A) $5,715.
B) $6,636.
C) $4,794.
D) $5,770.
E) $5,660.

D 07) All of the following statements regarding the allowance method are true except:
A) The allowance method estimates bad debts expense at the end of each accounting period and records it with
an adjusting entry.
B) The Allowance for Doubtful Accounts is a contra asset account.
C) The Allowance for Doubtful Accounts is subtracted from Accounts Receivable to report receivables at
realizable value.
D) The allowance method does not record bad debt expense until a customer’s account receivable is determined
to be uncollectible.
E) The write-off an uncollectible account does not impact the income statement.

E 08) Using the allowance method for bad debts, the end of the period adjusting entry for estimated bad debts
is:
A) Debit Bad Debts Expense and credit Accounts Receivable.
B) Debit Allowance for Doubtful Accounts and credit Accounts Receivable.
C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts.
D) Debit Allowance for Doubtful Accounts and credit Bad Debts Expense.
E) Debit Bad Debts Expense and credit Allowance for Doubtful Accounts.

D 09) Which of the following is not true about the Allowance for Doubtful Accounts?
A) It is a contra asset account.
B) It is used instead of reducing accounts receivable directly.
C) It is debited when uncollectible accounts are written off.
D) It is a liability account.
E) It is credited when bad debts expense is estimated and recorded.

C 10) Craigmont uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial
balance shows Accounts Receivable of $104,500, allowance for doubtful accounts of $665 (credit) and sales of
$925,000. If uncollectible accounts are estimated to be 4% of accounts receivable, what is the amount of the
bad debts expense adjusting entry?
A) $4,845
B) $4,180
C) $3,515
D) $3,700
E) $3,850

B 11) Using the allowance method for bad debts expense, the Allowance for Doubtful Accounts is decreased:
A) When the estimate of bad debts is expensed.
B) When a specific customer account is written off.
C) When a specific customer account is collected.
D) When a sale to a credit customer is made.
E) When all customer accounts are considered collectible.

A 12) The unadjusted trial balance at year-end for a company that uses the percent of receivables method to
determine its bad debts expense reports the following selected amounts:
Accounts receivable $ 435,000 Debit Allowance for Doubtful Accounts 1,250 Credit
Net Sales 2,100,000 Credit
All sales are made on credit. Based on past experience, the company estimates 3.5% of ending account
receivable to be uncollectible. What adjusting entry should the company make at the end of the current year to
record its estimated bad debts expense?
A) Debit Bad Debts Expense $13,975; credit Allowance for Doubtful Accounts $13,975.
B) Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C) Debit Bad Debts Expense $16,475; credit Allowance for Doubtful Accounts $16,475.
D) Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E) Debit Bad Debts Expense $17,350; credit Allowance for Doubtful Accounts $17,350.

D 13) Depreciation:
A) Measures the decline in market value of an asset.
B) Is applied to land.
C) Measures physical deterioration of an asset.
D) Is the process of allocating the cost of an item of property, plant and equipment to expense.
E) Is an outflow of cash from the use of an item of property, plant and equipment.

E 14) A change in an accounting estimate is:

A) Reflected in past financial statements.
B) Not allowed under current accounting rules.
C) Considered an error in the financial statements.
D) Reflected in future financial statements and also requires modification of past statements.
E) Reflected in current and future years' financial statements, not in prior statements.
A 15) When originally purchased, a vehicle costing $23,000 had an estimated useful life of 8 years and an
estimated residual value of $3,000. After 4 years of straight-line depreciation, the asset's total estimated useful
life was revised from 8 years to 6 years and there was no change in the estimated residual value. The
depreciation expense in year 5 equals:
A) $5,000.
B) $2,875.
C) $5,750.
D) $11,500.
E) $2,500.

B 16) Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset will be
depreciated using the straight-line method over its four-year useful life. Assuming the asset's residual value is
$2,000, Peavey Enterprises should recognize depreciation expense in Year 2 in the amount of:
A) $10,000
B) $5,000
C) $5,500
D) $20,000
E) $9,250

A 17) The straight-line depreciation method and the double-declining-balance depreciation method:
A) Produce the same total depreciation over an asset's useful life.
B) Produce the same depreciation expense each year.
C) Produce the same carrying amount or book value each year.
D) Are acceptable for tax purposes only.
E) Are the only acceptable methods of depreciation for financial reporting.

C 18) A company paid $150,000, plus a 7% commission and $5,000 in closing costs for a property. The
property included land appraised at $87,500, land improvements appraised at $35,000, and a building appraised
at $52,500. What should be the allocation of this property's costs in the company's accounting records?
A) Land $75,000; Land Improvements, $30,000; Building, $45,000.
B) Land $75,000; Land Improvements, $30,800; Building, $46,200.
C) Land $82,750; Land Improvements, $33,100; Building, $49,650.
D) Land $80,250; Land Improvements, $32,100; Building, $48,150.
E) Land $77,500; Land Improvements; $31,000; Building; $46,500.

E 19) An asset can be disposed of by all of the following except:

A) Discarding it.
B) Selling it.
C) Exchanging it for another asset.
D) Donating it to charity.
E) Continuing to use it after it is fully depreciated.
E 20) Minor Company installs a machine in its factory at the beginning of the year at a cost of $135,000. The
machine's useful life is estimated to be 5 years, or 300,000 units of product, with a $15,000 residual value.
During its first year, the machine produces 64,500 units of product. Determine the machines' first year
depreciation under the straight-line method.
A) $27,000.
B) $29,025.
C) $25,800.
D) $23,779.
E) $24,000.

D 21) Minor Company installs a machine in its factory at the beginning of the year at a cost of $135,000. The
machine's useful life is estimated to be 5 years, or 300,000 units of product, with a $15,000 residual value.
During its first year, the machine produces 64,500 units of product. What journal entry would be needed to
record the machines' first year depreciation under the units-of-production method?
A) Debit Depletion Expense $25,800; credit Accumulated Depletion $25,800.
B) Debit Depletion Expense $29,025; credit Accumulated Depletion $29,025.
C) Debit Depreciation Expense $29,025; credit Accumulated Depreciation $29,025.
D) Debit Depreciation Expense $25,800; credit Accumulated Depreciation $25,800.
E) Debit Amortization Expense $24,000; credit Accumulated Amortization $24,000.

D 22) Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs additional costs of
$600,000 to access the deposit, which is estimated to contain 2,000,000 tons and is expected to take 5 years to
extract. What journal entry would be needed to record the expense for the first year assuming 418,000 tons
were mined?
A) Debit Depletion Expense $1,233,100; credit Accumulated Depletion $1,233,100.
B) Debit Amortization Expense $1,358,500; credit Accumulated Amortization $1,358,500.
C) Debit Depreciation Expense $1,358,500; credit Accumulated Depreciation $1,358,500.
D) Debit Depletion Expense $1,358,500; credit Accumulated Depletion $1,358,500.
E) Debit Depreciation Expense $1,233,100; credit Accumulated Depreciation $1,233,100.

C 23) Riverboat Adventures pays $310,000 plus $15,000 in closing costs to buy out a competitor. The real
estate consists of land appraised at $35,000, a building appraised at $105,000, and paddleboats appraised at
$210,000. Compute the cost that should be allocated to the land.
A) $93,000.
B) $140,000.
C) $32,500.
D) $31,000.
E) $97,500.

D 24) Mohr Company purchases a machine at the beginning of the year at a cost of $24,000. The machine is
depreciated using the straight-line method. The machine's useful life is estimated to be 5 years with a $4,000
residual value. The carrying amount or book value of the machine at the end of year 2 is:
A) $4,000.
B) $8,000.
C) $12,000.
D) $16,000.
E) $20,000.

D 25) Mohr Company purchases a machine at the beginning of the year at a cost of $24,000. The machine is
depreciated using the double-declining-balance method. The machine’s useful life is estimated to be 5 years
with a $4,000 residual value. Depreciation expense in year 2 is:
A) $4,800.
B) $8,000.
C) $9,600.
D) $5,760.
E) $14,400.

D 26) Mohr Company purchases a machine at the beginning of the year at a cost of $24,000. The machine is
depreciated using the double-declining-balance method. The machine's useful life is estimated to be 5 years
with a $4,000 residual value. The machine's carrying amount or book value at the end of year 2 is:
A) $12,000.
B) $7,200.
C) $9,600.
D) $8,640.
E) $14,400.

B 27) All of the following statements regarding liabilities are true except:
A) A liability is a probable future payment of assets or services.
B) Potential future wages to be paid to employees should be recorded as liabilities.
C) For a liability to be reported, it must be a present obligation that results from a past transaction or event, and
requires a future payment of assets or services.
D) Information about liabilities is more useful when the balance sheet identifies them as either current or long
term.
E) Liabilities can involve uncertainty in whom to pay.

D 28) All of the following statements regarding uncertainty in liabilities are true except:
A) Liabilities can involve uncertainty in whom to pay.
B) A company can create a liability with a known amount even when the holder of the note may not be known
until the maturity date.
C) A company can have an obligation of a known amount to a known creditor but not know when it must be
paid.
D) A company only records liabilities when it knows whom to pay, when to pay, and how much to pay.
Without all three, a liability cannot be recorded.
E) A company can be aware of an obligation but not know how much will be required to settle it.

E 29) Contingent liabilities must be recorded if:

A) The future event is remote.
B) The future event is possible but not estimable.
C) The amount owed cannot be reliably estimated.
D) The future event is probable but not estimable.
E) The future event is probable and the amount owed can be reliably estimated.

B 30) Debt guarantees are:

A) Never disclosed in the financial statements.
B) Considered to be contingent liabilities.
C) A bad business practice.
D) Considered to be an unearned revenue.
E) Recorded as liabilities even though it is highly unlikely that the original debtor will default.