1. On December 31, 2006, the stockholders’ equity section of Clark, Inc., was as follows:
Common stock, par value $10; authorized 30,000 shares;
issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 174,000
Total stockholders’ equity $380,000
On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance of Clark’s retained earnings as of March 31, 2007, should be
2. Bleeker Company issued 10,000 shares of its $5 par value common stock having a market value of $25 per share and 15,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated to the common stock?
3. Adler Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2008, the first year of the corporation’s existence:
Sold 5,000 shares of common stock for $18 per share.
Issued 5,000 shares of common stock in exchange for a patent valued at $100,000.
At the end of the Adler’s first year, total paid-in capital amounted to
1. a. $125,800.
2. b. $218,182
3. d. $190,000
Part A (30 points)
Record the following transactions in the basic accounting equation:
a. Brian invests $10,000 cash to begin an accounting service.
b. The company buys office furniture for cash, $600.
c. The company buys additional office furniture on account, $300.
d. The company makes a payment on the office furniture, $200.
Brian’s Accounting Service
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash + Office Furniture = Accounts Payable + Brian’s Capital
Part B (40 points) The following is a list of accounts and their balances for Benson Company for the month ended June 30, 20xx. Prepare a trial balance in good form.
Cash $1,370 Accounts Payable 770 Office Equipment 900 Benson, Capital 1,500 Benson, Withdrawals 500 Accounts Receivable 1,600 Service Fees 2,730 Salaries Expense 630
Part C (30 points) The following transactions occurred during June for Campus Cycle Shop. Record the transactions below in the T accounts. Place the letter of the transaction next to the entry. Foot and calculate the ending balances of the T accounts where appropriate. a. Tyler invested $6,500 in the bike service from his personal savings account. b. Bought office equipment for cash, $900. c. Performed bike service for a customer on account, $1,000. d. Company cell phone bill received, but not paid, $80. e. Collected $500 from customer in transaction c. f. Tyler withdrew $300 for personal use.
Assets = Liabilities + Owner’s Equity
Cash + Office Furniture Accounts payable Brian’s Capital
a. $10,000 = $10,000
b. $ (600) $ 600 =
c. $ 300 = $ 300
d. $ (200) = $(200)
Benson Company Trial Balance June 30, 20xx Particulars Debit Credit Cash $ 1,370 Accounts Payable $ 770 Office equipment $ 900
Benson, Capital $ 1,500 Benson, Withdrawals 500 Accounts receivable 1600 Service Fees $ 2,730 Salaries expense $ 630 $ 5,000 $ 5,000
CASH 111 a capital $ 6,500 b office equipment $ 900 e Accounts receivable $ 500 f Tyler’s withdrawal $ 300 c/d $ 5,800 $ 7,000 $ 7,000
TYLER’S CAPITAL311 a cash $ 6,500 OFFICE EQUIPMENT112 b cash $ 900
BIKE FEES411 c Accounts Receivable $ 1,000 ACCOUNTS RECEIVABLE112 c service revenue $ 1,000 e cash $ 500 c/d $ 500 $ 1,000 $ 1,000
TELEPHONE EXPENSE512 d Phone Payable $ 80
ACCOUNTS PAYABLE 211 d Phone Expense $ 80 TYLER’S WITHDRAWALS 312 f cash $ 300
1. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these
2. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
d. All of these are true.
3. On September 1, 2006, Looper Co. issued a note payable to National Bank in the amount of $1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of $400,000. On this date, the bank’s prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At December 31, 2007, Looper should record accrued interest payable of
1. d. None of these
2. b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
3. c. $32,000.
1. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:
Employee advances $12,000 $ 18,000
Accrued salaries payable 65,000 ?
Salaries expense during the year 650,000
Salaries paid during the year (gross) 625,000
At December 31, 2007, what amount should Barr report for accrued salaries payable?
2. Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $480,000 at December 31, 2006 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:
During 2007 During 2008 During 2009
$100,000 $160,000 $70,000
What amount should be reported as unearned service contract revenues in Dexter’s December 31, 2006 balance sheet?
3. Lett Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be
b. the maximum of the range.
c. the mean of the range.
d. the minimum of the range.
1. a. $90,000.
2. b. $330,000.
3. d. the minimum of the range.
1. In March 2007, an explosion occurred at Howe Co.’s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Howe. However, Howe’s management and legal counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Howe’s $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Howe’s December 31, 2006 financial statements, for which the auditor’s fieldwork was completed in April 2007, how should this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2006 because the event occurred in 2007.
2. On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2008. The lease is appropriately accounted for by Mendez as a capital lease. Mendez’s incremental borrowing rate is 11%. Mendez knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.In its December 31, 2008 balance sheet, Mendez should report a lease liability of
3. In a lease that is recorded as a sales-type lease by the lessor, interest revenue
a. should be recognized in full as revenue at the lease’s inception.
b. should be recognized over the period of the lease using the straight-line method.
c. should be recognized over the period of the lease using the effective interest method.
d. does not arise.
1. c. As a note disclosing a possible liability of $400,000.
2. a. $606,528.
3. c. should be recognized over the period of the lease using the effective interest method.