Question 1 - Multiple Choice
1. The "accounting equation" can be rephrased as:
a. Net Assets = Operating Assets + Financial Assets
b. Net Assets = Common Stock + Addt'l Paid in Capital + Net Income - Dividends
c. Net Assets = Liabilities + Shareholder's Equity
d. Net Assets = Assets - Liabilities
e. None of the above
2. According to the articulation of financial statements, the balance sheet and the statement of cash flows are linked by:
a. Cash balance
b. Retained earnings
c. Total shareholder equity
d. Net income
e. None of the above
3. Which of the following is an assets?
a. Prepaid rent
b. Taxes payable
c. Unearned revenue
d. Common stock
e. None of the above
4. Which of the following assets on the balance sheet of a company are possibly undervalued?
a. Land
b. Inventories
c. Equipment
d. All of the Above
e. None of the above
5. Which of the following accounts is usually not satisfied by payment of cash?
a. Accounts payable
b. Unearned revenue
c. Taxes payable
d. All of these are satisfied by paying cash
e. None of the above
6. If you wanted to know what accounting rules a company follows related to its revenue recognition, where would you look?
a. the balance sheet
b. the auditor opinion
c. the notes to the financial statements
d. the management certification
e. None of the above
7. The amount of revenue recognized in the income statement by a company that sells goods to customers would be
a. the cash collected from customers during the current period.
b. total sales, both cash and credit sales, for the period.
c. total sales minus beginning amount of accounts receivable.
d. the amount of cash collected plus the beginning amount of accounts receivable.
e. None of the above
8. TRUE/FALSE: In addition to purchased assets like inventories and PPE, companies also report on their balance sheets internally created assets such as the value of a successful marketing campaign and design innovations.
9. TRUE/FALSE: Under the Matching Principle, the cost of inventory should be reported as an expense in the income statement when it is purchased, even if it is purchased on credit and will not be paid until the next reporting period.
10. TRUE/FALSE: If stockholders' equity was $20,000 on January 1, 2010, and decreased to $18,000 on December 31, 2010, this could only be due to a net loss of
$2,000.
Question 2 - Erroneous Journal Entries
Indicate the effect of the error (overstate/understate/no effect and amount) on the various financial statement items.
[Hint: Consider the difference between the entry(s) that the company actually made and the entry(s) that it should have made to record the transaction(s) if the company made an erroneous entry.]
1) At the end of the fiscal year, Pete's Auto Sales improperly accrued Sales Revenue of
$100,000 and Cost of Goods Sold of $75,000 related to the sale of a custom sports car that it had not yet delivered to its customer. In particular, the company made the following journal entry:
Accounts Receivable $100,000
Cost of Goods Sold $75,000
Sales Revenue $100,000
Inventory $75,000
a. Overstate assets by $25,000, no effect on liabilities, overstate shareholder's equity by $25,000 and overstate net income by $25,000.
b. Understate assets by $25,000, no effect on liabilities, understate shareholder's equity by $25,000 and overstate net income by $25,000.
c. Overstate assets by $100,000, no effect on liabilities, overstate shareholder's equity by $100,000 and overstate net income by $100,000.
d. No effect on assets, no effect on liabilities, overstate shareholder's equity by
$25,000 and overstate net income by $25,000.
e. None of the above
2) At the end of the fiscal year, XYZ Corp. failed to accrue income tax expense of $350,000 related to its net income of $1,000,000.
a. Overstate assets by $1,000,000, no effect on liabilities, overstate shareholder's equity by $1,000,000 and overstate net income by $1,000,000.
b. Overstate assets by $350,000, no effect on liabilities, overstate shareholder's equity by $350,000 and overstate net income by $350,000.
c. No effect on assets, understate liabilities by $1,000,000, overstate shareholder's equity by $1,000,000 and overstate net income by $1,000,000.
f. No effect on assets, understate liabilities by $350,000, overstate shareholder's equity by $350,000 and overstate net income by $350,000.
d. None of the above.
3) In making the adjusting entries at year-end, Creative Accounting Inc. failed to record the adjusting entry for wages earned by employees, but not yet paid, amounting to
$5,000 for the last four days of the year.
a. No effect on assets, understate liabilities by $5,000, overstate shareholder's equity by $5,000 and overstate net income by $5,000.
b. Understate assets by 5,000, no effect on liabilities, understate shareholder's equity by $5,000 and understate net income by $5,000.
c. Understate assets by 10,000, no effect on liabilities, understate shareholder's equity by $10,000 and understate net income by $10,000.
d. Overstate assets by 5,000, no effect on liabilities, overstate shareholder's equity by $5,000 and overstate net income by $5,000.
e. None of the above.
4) On April 1, 2009, Utley Inc. purchased land for $400,000 by issuing a note payable. The terms of the note require that it be repaid in full in one year (i.e., on March 31, 2010) along with (simple) interest at an annual rate of 10%. Utley Inc. recorded the following entry to accrue interest related to the note on December 31, 2009.
Interest Expense $40,000 Interest Payable $40,000
a. No effect on assets, overstate liabilities by $10,000, understate shareholder's equity by $10,000 and understate net income by $10,000.
b. Understate assets by 10,000, no effect on liabilities, understate shareholder's equity by $10,000 and understate net income by $10,000.
c. No effect on assets, understate liabilities by $360,000, overstate shareholder's equity by $360,000 and overstate net income by $360,000.
d. Overstate assets by 360,000, no effect on liabilities, overstate shareholder's equity by $360,000 and overstate net income by $360,000.
e. None of the above.Question 3 - Revenue recognition for a long-term contract (10 points)
On September 29, 2009 Granite Construction Inc. (NYSE:GVA) received a $640 million contract from New York's Metropolitan Transportation Authority (MTA). The contract, from MTA, is to build the Queens Bored Tunnels and Structures for Long Island Rail Road's East Side Access project in New York. The companies will excavate and concrete line four bored tunnels beneath an active rail storage yard. Work on the project will begin January 1, 2011 and is estimated to take 48 months to complete. The estimated total project cost is $480 million.
The company uses the percentage of completion accounting method for construction contracts wherein revenue and earnings on construction contracts, including construction joint ventures, are recognized using the percentage of completion method in the ratio of costs incurred to estimated final costs. The company has a December 31 fiscal year end. Ignore the effect of taxes while answering these questions.
1) Suppose, Granite Construction recognizes $40 million in revenue in fiscal year ending December 31, 2011. How much profit did the company report for fiscal year ending December 31, 2011?
a. $ 10 million
b. $40 million
c. $20 million
d. Enough information is not available to compute profit.
e. None of the above
2) Further suppose that in the fiscal year ending December 31, 2012, the company recognizes $100 million in profits. How much revenue did the company report for fiscal year ending December 31, 2012
a. $ 400 million
b. $300 million
c. $600 million
d. Enough information is not available to compute revenue.
e. None of the above
3) Further suppose, at the end of 2012, before recording revenues for the year, Granite Construction realizes that the total estimated costs have to revise upwards to $550 million. How much revenue should they recognize in 2012?
a. $ 400 million
b. $384 million
c. $600 million
d. Enough information is not available to compute revenue.
e. None of the above
4) If Granite Construction believes that the estimated project costs cannot be determined accurately, then how much revenue should the company recognize in the fiscal year ending December 31, 2011?
a. $40 million
b. $ 0 million
c. $640 million
d. Enough information is not available to compute revenue.
e. None of the above
5) If Granite Construction believes that the estimated project costs cannot be determined accurately, then how much revenue should the company recognize in the fiscal year ending December 31, 2013? Assume that the project gets completed by December 31, 2013
a. $40 million
b. $ 0 million
c. $640 million
d. Enough information is not available to compute revenue.
e. None of the above
Question 4 - Comprehensive Accounting Problem
Part A: Self Smart Corp. was founded on January 1, 2009. It had the following transactions during the fiscal year ending December, 2009. Select the appropriate journal entry that Self Smart would make at the time of each transaction.
1) January 1: Investors purchased 1,000 shares of $1 par value common stock for $200,000.
a. Debit cash 200,000, credit common stock 1,000, credit additional paid in capital 199,000.
b. Credit cash 200,000, debit common stock 1,000, debit additional paid in capital 199,000.
c. Debit cash 200,000, credit additional paid in capital 200,000.
d. This transaction does not trigger any journal entries.
e. None of the above
2) January 1: Prepaid 24 months of rent on a warehouse for $48,000.
a. Debit Rent expense 48,000, credit cash 48,000.
b. Debit cash 48,000, credit rent payable 48,000
c. Debit prepaid rent 48,000, credit cash 48,000
d. This transaction does not trigger any journal entries.
e. None of the above
3) January 1: Purchased 10,000 units of inventory at a cost of $5 per unit on account.
a. Debit Cost of goods sold 50,000, credit accounts payable 50,000.
b. Debit inventory 50,000, credit accounts payable 50,000.
c. Debit plant, property and equipment (PP&E) 50,000, credit accounts payable 50,000.
d. This transaction does not trigger any journal entries.
e. None of the above
4) January 1: Purchased a forklift for $60,000 which will be used in the warehouse. The estimated useful life of the forklift is 5 years and Self Smart will depreciate the forklift using the straight line method with salvage value of $0.
.
a. Debit forklift 60,000, credit cash 60,000
b. Debit depreciation expense 60,000, credit cash 60,000
c. Debit depreciation expense 12,000, credit forklift 12,000
d. This transaction does not trigger any journal entries.
e. None of the above.
5) April 15: Spent $5,000 to run television ads on the same day.
a. Debit advertising expense 5,000, credit cash 5,000
b. Debit cash 5,000, credit advertising revenue 5,000
c. Debit advertising expense 5,000, Credit prepaid advertising expense 5,000.
d. This transaction does not trigger any journal entries.
e. None of the above.
6) June 30: Sold 2,000 units of inventory for $40,000. The customer paid for half of the inventory with and purchased the remainder on credit in the form of a note that is due in one year with an annual interest rate of 10%.
a. Debit cash 20,000, debit notes receivable 20,000, credit sales revenue 40,000.
b. Debit cost of goods sold 10,000, credit inventory 10,000
c. Journal entries mentioned above in both choice (a.) and choice (b.) should be made.
d. This transaction does not trigger any journal entries.
e. None of the above.
7) August 10: Purchased Office Supplies for $16,000.
a. Debit office supplies expense 12,000, credit cash 12,000
b. Debit office supplies (asset) 16,000, credit cash 16,000
c. Debit office supplies (asset) 4,000, credit cash 4,000
d. This transaction does not trigger any journal entries.
e. None of the above.
8) October 1: Rented out part of the warehouse to XYZ Corp. under a one year lease. XYZ Corp. paid Self Smart Corp. $12,000 for the first six months rent.
a. Debit cash 12,000, credit rent revenue 12,000
b. Debit cash 12,000, credit deferred rent revenue 12,000
c. Debit rent expense 12,000, credit cash 12,000
d. This transaction does not trigger any journal entries.
e. None of the above.
9) December 1: Hired a warehouse manager whose $5,000 monthly salary is payable the second day after the end of the month.
a. Debit salary expense 5,000, credit salary payable 5,000
b. Debit prepaid salary expense 5,000, credit cash 5,000
c. Debit salary expense 5,000, credit cash 5,000
d. This transaction does not trigger any journal entries.
e. None of the above.
10) December 28: Chief executive officer of Self Smart Corp. bought a house worth $1,000,000 using his personal funds.
a. Debit property 1,000,000, credit cash 1,000,000
b. Debit property 1,000,000, credit accounts payable 1,000,000
c. Debit inventory 1,000,000, credit cash 1,000,000
d. This transaction does not trigger any journal entries.
e. None of the above.
Part B: Record the six adjusting entries related to transactions in Part A.
1) Beginning balance of office supplies for the period was $0, after purchasing office supplies on Aug 10, and after taking inventory of the remaining office supplies on December 31, 2009, there was $4,000 worth of supplies on hand. Deferred Expense for Office Supplies.
a. Debit supplies expense 16,000, credit office supplies 16,000
b. Debit supplies expense 12,000, credit office supplies 12,000
c. Debit supplies expense 4,000, credit office supplies 4,000
d. No journal entries need to be recorded
e. None of the above
2) Depreciation Expense for the Forklift.
a. Debit depreciation expense 12,000, credit accumulated depreciation 12,000.
b. Debit depreciation expense 12,000, credit Forklift (Asset) 12,000.
c. Debit depreciation expense 60,000, credit accumulated depreciation 60,000.
d. No journal entries need to be recorded
e. None of the above
3) Deferred Expense for Prepaid Rent.
a. Debit rent expense 24,000, credit prepaid rent 24,000
b. Debit rent expense 48,000, credit prepaid rent 48,000
c. Debit cash 24,000, credit prepaid rent 24,000
d. No journal entries need to be recorded
e. None of the above
4) Accrued interest revenue on the note related to the June 30th sale of inventory.
a. Debit interest receivable 2,000, credit interest revenue 2,000
b. Debit interest expense 1,000, credit cash 1,000
c. Debit interest receivable 1,000, credit interest revenue 1,000
d. No journal entries need to be recorded
e. None of the above
5) Recognized revenue related to the warehouse sublease to XYZ Corp.
a. Debit deferred rent revenue 6,000, credit rent revenue 6,000
b. Debit deferred rent revenue 12,000, credit rent revenue 12,000
c. Debit cash 6,000, credit rent revenue 6,000
d. No journal entries need to be recorded
e. None of the above
6) Accrued expense for warehouse manager's salary.
a. Debit salary expense 5,000, credit prepaid salary 5,000
b. Debit salary expense 5,000, credit cash 5,000
c. Debit salary expense 5,000, credit salary payable 5,000
d. No journal entries need to be recorded
e. None of the above