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COMPREHENSIVE EXAMINATION A

PART 1

(Chapters 1-6)

Problem A-I — Multiple Choice.

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

____ 1. How does failure to record accrued revenue distort the financial reports? a. It understates revenue, net income, and current assets. b. It understates net income, stockholders’ equity, and current liabilities. c. It overstates revenue, stockholders’ equity, and current liabilities. d. It understates current assets and overstates stockholders’ equity.

____ 2. A contingent liability which is normally accrued is a. notes receivable discounted. b. accommodation endorsements on customer notes. c. additional compensation that may be payable on a dispute now being

arbitrated.

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

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

a. Bonds due in three months (for which there is an adequate sinking fund

classified as a long-term investment). b. Bonds due in three years.

c. Bonds (for which there is an adequate appropriation of retained earnings)

due in eleven months.

d. Bonds to be refunded when due in eight months, there being no doubt

about the marketability of the refunding issue.

____ 4. On June 15, 2014 Stine Corporation accepted delivery of merchandise which

it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2014 would be

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

affected.

b. stockholders’ equity was the only item affected by the omission. c. assets and liabilities were understated but stockholders’ equity was not

affected.

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

affected.

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

entries that

a. allocate the expired portion of a depreciable asset to expense. b. amortize intangible assets. c. provide for bad debt expense. d. accrue interest revenue on notes receivable.

A-2 Comprehensive Exam A

____ 6. Of the following adjusting entries, which one would cause an increase in

assets at the end of the period?

a. The entry to record the earned portion of rent received in advance. b. The entry to accrue unrecorded interest expense. c. The entry to accrue unrecorded interest revenue. d. The entry to record expiration of prepaid insurance.

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

____ 8.

____ 9.

____ 10.

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

b. Certain facts about the affairs of the business are not included in the

ledger as built up from external transactions.

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

period.

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

Notes to financial statements should not be used to a. describe the nature and effect of a change in accounting principles. b. identify substantial differences between book and tax income. c. correct an improper financial statement presentation. d. indicate basis for asset valuation.

Consistency is best demonstrated when a. expenses are reported as charges against the period in which incurred. b. the effect of changes in accounting methods is properly disclosed. c. extraordinary gains and losses are not reported on the income statement. d. accounting procedures are adopted which give a consistent rate of net

income.

The current assets section of a balance sheet should never include a. a receivable from a customer not collectible for over one year. b. the premium paid on short-term bond investment.

c. goodwill arising from the purchase of a going business. d. customers' accounts with credit balances.

Problem A-II — Adjusting and Reversing Entries.

Comprehensive Exam A A-3

The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31, 2014: Cash Equity Investments (trading) Accounts Receivable Allowance for Doubtful Accounts Inventory Prepaid Rent Plant Assets Accumulated Depreciation-Plant Assets Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Revenue Cost of Goods Sold Freight-Out Salaries and Wages Expense Interest Expense Rent Revenue Miscellaneous Expense Insurance Expense

Additional Data:

Problem A-II — (cont.)

$ 27,290 60,000 69,000

54,720 36,000 160,000

154,400 11,000 32,000 2,040

890 12,850 $620,190 21,600 $620,190 14,740 11,370 90,000 170,000 97,180 214,800 $ 500

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

policies:

Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2013; Policy 2, original cost of $9,000, 3-yr. term, taken out on Oct. 1, 2014; Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2014.

2. On September 30, 2014, Alt received $21,600 rent from its lessee for an eighteen

month lease beginning on that date.

3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during

a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2013, the balance of the Plant and Equipment account was $220,000.

4. On December 28, 2014, the bookkeeper incorrectly credited Sales Revenue for a

receipt on account in the amount of $20,000.

5. At December 31, 2014, salaries and wages accrued but unpaid were $4,200.

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

7. On August 1, 2014, Alt purchased, as a short-term investment, 60 $1,000, 6% bonds

of Allen Corp. at par. The bonds mature on August 1, 2015. Interest payment dates are July 31 and January 31.