Questions and Answers of Financial And Managerial Accounting The Basis For Business Decisions

Morgan Corporation has decided to write off its account receivable from Brill Company because the latter has entered bankruptcy. What general ledger ac¬counts should be debited and credited,
Mill Company, which has accounts receivable of $309,600 and an allowance for doubtful accounts of $3,600, decides to write off as worthless a past-due account receivables for $1,500 from J. D. North.
Describe a procedure by which management could be informed each month of the status of collections and the overall quality of the accounts receivable on hand. LO9
What are the advantages to a retailer of making credit sales only to customers who use nationally recognized credit cards? LO9
Alta Mine Co., a restaurant that had always made cash sales only, adopted a new policy of honoring several nationally known credit cards. Sales did not increase, but many of Alta Mine Co.’s regular
Determine the maturity date of the following notes: LO9 a A three-month note dated March 10 b A 30-day note dated August 15 c A 90-day note dated July 2
X Company acquires a 9%, 60-day note receivable from a customer, Robert Wa¬ters, in settlement of an existing account receivable of $4,000. Give the journal entry to record acquisition of the note
Distinguish between LO9 a Current and long-term liabilities b Estimated and contingent liabilities
Does a contingent liability appear on a balance sheet? If so, in what part of the balance sheet? LO9
Jonas Company issues a 90-day, 12% note payable to replace an account payable to Smith Supply Company in the amount of $8,000. Draft the journal entries (in general journal form) to record the
Howard Benson applied to the City Bank for a loan of $20,000 for a period of three months. The loan was granted at an annual interest rate of 12%. Write a sentence illustrating the wording of the
With reference to Question 16 above, give the journal entry required on the books of Howard Benson for issuance of each of the two types of notes. LO9
Rager Products sold merchandise to Baron Company in exchange for a one-year note receivable. The note was made out in the face amount of $13,189, including a 9% interest charge. Compute the amount of
Sylmar Industries buys a substantial amount of equipment having an estimated service life of five years by issuing a two-year note payable. The note includes no mention of an interest charge. Explain
Maxline Stores sells merchandise with a sales price of $1,260 on an installment plan requiring 12 monthly payments of $120 each. How much revenue will this sale ultimately generate for Maxline
With reference to Question 20 above, make the journal entries required in the accounting records of Maxline Stores to record a Sale of the merchandise on the installment plan. b Collection of the
Which of the seven items listed below are used in computing the cost of goods available for sale? LO4 a Ending inventory e Transportation-in b Sales f Purchase returns and allowances c Beginning
Through an error in counting of merchandise at December 31, Year 4, the Trophy Company overstated the amount of goods on hand by $8,000. Assuming that the error was not discovered, what was the
Is the establishment of an appropriate valuation for the merchandise inventory at the end of the year more important in producing a dependable income state¬ment, or in producing a dependable balance
Explain the meaning of the term physical inventory. LO4
Near the end of December, Hadley Company received a large order from a major customer. The work of packing the goods for shipment was begun at once but could not be completed before the close of
During a prolonged period of rising prices, will the fifo or lifo method of inventory valuation result in higher reported profits? LO4
Throughout several years of strongly rising prices, Company A used the lifo method of inventory valuation and Company B used the fifo method. In which company would the balance sheet figure for
You are making a detailed analysis of the financial statements and accounting records of two companies in the same industry, Adams Company and Bar Com¬pany. Price levels have been rising steadily
Why do some accountants consider the net income reported by businesses during a period of rising prices to be overstated? LO4
Assume that a business uses the first-in, first-out method of accounting for inven¬tories during a prolonged period of inflation and that the business pays dividends equal to the amount of reported
The Financial Accounting Standards Board requires large corporations to dis¬close the cost of replacing their inventories and to disclose what their cost of goods sold would be if computed by using
Explain the meaning of the term market as used in the expression lower of cos or market.” LO4
One of the items in the inventory of Gray line Stores is marked for sale at $125.The purchase invoice shows the item cost $95, but a newly issued price list from the manufacturer shows the present
Explain the usefulness of the gross profit method of estimating inventories. LO4
A store using the retail inventory method takes its physical inventory by applying current retail prices as marked on the merchandise to the quantities counted.Does this procedure indicate that the
Estimate the ending inventory by the gross profit method, given the following data: beginning inventory $40,000, net purchases $100,000, net sales $106,667, average gross profit rate 25% of net
Summarize the difference between the periodic system and the perpetual system of accounting for inventory. Which system would usually cost more to maintain .Which system would be most practicable for
Identify each of the four statements shown below as true or false. In the account¬ing records of a company using a perpetual inventory system: LO4 a The Inventory account will ordinarily remain
Which of the following items should be included in the balance sheet category of plant and equipment? LO9 a A machine in good physical condition which has been used in operations in the past, but is
The following expenditures were incurred in connection with a large new ma¬chine acquired by a metals manufacturing company. Identify those which should be included in the cost of the asset, (a)
Which of the following statements best describes the nature of depreciation? LO9 a Regular reduction of asset value to correspond to changes in market value as the asset ages b A process of
Which of the following characteristics would prevent an item from being included in the classification of plant and equipment? (a) Intangible, (b) limited life,(c) unlimited life, (d) held for sale
What is the distinction between capital expenditures and revenue expenditures? LO9
What connection exists between the choice of a depreciation method for expen¬sive new machinery and the amount of income taxes payable in the near future? LO9
What is an extraordinary repair and how is it recorded in the accounts? LO9
Company A’s balance sheet shows accumulated depreciation on machinery and equipment of $100,000 and Company B shows accumulated depreciation of$50,000. Both companies are considering the
Criticize the following quotation: . LO9“We shall have no difficulty in paying for new plant assets needed during the coming year because our estimated outlays for new equipment amount to
A factory machine acquired at a cost of $93,600 was to be depreciated by the sum-of-the-years’-digits method over an estimated life of eight years. Residual salvage value was estimated to be
After four years of using a machine acquired at a cost of $15,000, Krai Construc¬tion Company determined that the original estimated life of 10 years had been too short and that a total useful life
a Give some reasons why a large corporation with stock listed on the New York Stock Exchange might change its depreciation policy for financial reporting purposes from an accelerated-depreciation
An asset costing $10,000 with an estimated useful life of four years and residual value of $1,000 is depreciated by the double-declining-balance method. What will be the amount of depreciation
During a period of continued severe inflation, does the computation of deprecia¬tion on the basis of the historical cost of plant and equipment lead to an over¬statement or understatement of annual
Does Statement No. 33, “Financial Reporting and Changing Prices,” issued by the Financial Accounting Standards Board, require large corporations to base depre¬ciation expense on replacement
Century Company traded in its old computer on a new model. The trade-in allowance for the old computer is greater than its book value. Should Century Company recognize a gain on the exchange in
Fargo Corporation traded in an old machine on a similar new one, but received a trade-in allowance less than the book value of the old machine. The Internal Revenue Service did not permit the company
Describe briefly three situations in which debit entries may properly be made in accumulated depreciation accounts. LO2
Student A asserts that when a depreciable plant asset is to be sold a first step is to record depreciation for the fractional period to the date of sale. Student B argues that an entry for
Topeka Corporation maintains a general ledger controlling account for office equipment. This controlling account is supported by a subsidiary ledger in the form of a card file with a card for each
What is the term used to describe the pro rata allocation of the cost of a mine or other natural resource to the units removed during the year? LO2
Lead Hill Corporation recognizes $1 of depletion for each ton of ore mined. Dur¬ing the current year the company mined 600,000 tons but sold only 500,000 tons, as it was attempting to build up
Under what circumstances does good accounting call for a mining company to depreciate a plant asset over a period shorter than the normal useful life? LO2
Define intangible assets. Would an account receivable arising from a sale of merchandise under terms of 2/10, n/30 qualify as an intangible asset under your definition? LO2
The James Electric Shop obtained its store building under a 10-year lease at $400 a month. The lease agreement required payment of rent for the tenth year at the time of signing the lease. All other
Under what circumstances should goodwill be recorded in the accounts? LO2
In reviewing the financial statements of Digital Products Co. with a view to investing in the company’s stock, you notice that net tangible assets total $1 million, that goodwill is listed as
Space Research Company paid $500,000 cash to acquire the entire business of Saturn Company, a strong competitor. In negotiating this lump-sum price for the business, a valuation of $60,000 was
Current accounting standards require that the cost of various types of intangible assets be amortized by regular charges against earnings. Over what period of time should amortization extend? (Your
Several years ago March Metals purchased for $120,000 a well-known trademark for padlocks and other security products. After using the trademark for three years, March Metals discontinued it
Name the federal taxes that most employers are required to withhold from em¬ployees. What account or accounts would be credited with the amounts with¬held? LO5
Distinguish between an employee and an independent contractor. Why is this distinction important with respect to payroll accounting? LO5
Explain which of the following taxes relating to an employee’s wages are borne by the employee and which by the employer: LO5 a FICA taxes b Federal unemployment compensation taxes c State
List four kinds of information which constitute input to the payroll accounting system and four kinds of information included in the output of the payroll sys¬ tem. LO5
That type of payroll fraud known as “padding” a payroll is a more difficult maneuver under today’s payroll accounting practices than it was a generation or more ago. What present-day factors
Is the Salary Expense account equal to “take-home” pay or to gross earnings? Why? LO5
When and for what purpose is an Employee’s Withholding Allowance Certificate obtained? LO5
What purposes are served by maintaining a detailed earnings record for each employee? LO5
Are the payroll taxes levied against employers considered a legal liability and a deductible expense in the period the wages are earned by the employees or in the period the wages are paid? LO5
Explain two methods which have been used repeatedly by the federal govern¬ment in increasing the amount of FICA taxes over the years. LO5
John Adams earns $7 an hour and works a varying number of hours in each pay period. What documents or materials would an employer need to use in deter¬mining the amount of income tax to withhold
William Smith is employed at a monthly salary of $2,200. He is married and claims two withholding allowances on his W-4 form. Use the withholding table on page 498 to determine the amount of federal
What is the basic objective of financial statements? LO4
To qualify as “generally accepted,” accounting principles must receive substan¬tial authoritative support. Name three proups or organizations in the United States which have been most
Explain what is meant by the expression “trade-off between reliability and rele¬vance ” in connection with the preparation of financial statements. LO4
Barker Company has at the end of the current period an inventory of merchan¬dise which cost $500,000. It would cost $600,000 to replace this inventory, and it is estimated that the goods will
Why is it necessary for accountants to assume the existence of a clearly defined accounting entity? LO4
If the going-concern assumption were dropped, there would be no point in having current asset and current liability classifications in the balance sheet. Explain. LO4
“The matching of costs and revenue is the natural extension of the time period principle.” Evaluate this statement. LO4
Define objectivity, consistency, materiality, and conservatism. LO4
Is the assumption that the dollar is a stable unit of measure realistic? What alternative procedures would you suggest? LO4
a Why is it important that any change in accounting methods from one period to the next be disclosed?b Does the concept of consistency mean that all companies in a given industry follow similar
Briefly define the principle of disclosure. List five examples of information that should be disclosed in financial statements or in notes accompanying the state¬ments. LO4
Publicly owned corporations are required to include in their annual reports a description of the accounting principles followed in the preparation of their fi¬nancial statements. What advantages do
List four stages of the productive process which might become the accountant’s basis for recognizing changes in the value of a firm’s output. Which stage is most commonly used as a basis for
A CPA firm’s standard audit opinion consists of two major paragraphs. Describe the essential content of each paragraph. LO4
Define monetary assets and indicate whether a gain or loss results from the hold¬ing of such assets during a period of rising prices. LO4
Why is it advantageous to be in debt during an inflationary period? LO4
Evaluate the following statement: “During a period of rising prices, the conven¬tional income statement overstates net income because the amount of deprecia¬tion recorded is less than the value
List the three supplementary disclosures required of large corporations by FASB Statement No. 33 which were discussed in this chapter. LO4
How does constant dollar accounting differ from current cost accounting? For which one would the Consumer Price Index be used? LO4
Alpha Company sells pocket calculators which have been decreasing in cost while the general price level has been rising. Explain why Alpha Company’s cost of goods sold on a constant dollar basis
The latest financial statements of Boston Manufacturing Co. indicate that in¬come measured in terms of constant dollars is much lower than income measured in historical dollars. What is the most
What conclusion would you draw about a company that consistently shows large net losses when its income is measured on a current cost basis? LO4
Explain the difference between being admitted to a partnership by buying an sihnitpe.r est from an existing partner and by making an investment in the partnership. LO5
Is it possible that a partnership agreement containing interest and salary allow¬ances as a step toward distributing income could cause a partnership net loss to be distributed so that one

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