Horngren’s Accounting  11th Edition by Tracie L. Miller – Matsumura- Test Bank

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Horngren’s Accounting  11th Edition by Tracie L. Miller – Test Bank

 

Sample  Questions

 

Horngren’s Accounting,11e (Miller-Nobles)

Chapter 5  Merchandising Operations

 

Learning Objective 5-1

 

1) A wholesaler is a merchandiser who buys merchandise from a manufacturer and sells the same to a retailer.

Answer:  TRUE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Are Merchandising Operations? (H1)

 

2) A retailer purchases goods from a manufacturer and sells them to customers.

Answer:  TRUE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Are Merchandising Operations? (H1)

 

3) The term “inventory,” for a merchandiser, refers to ________.

  1. A) raw materials that are used for production
  2. B) equipment that are used in production process
  3. C) the cost of goods sold
  4. D) goods held for sale to customers

Answer:  D

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Are Merchandising Operations? (H1)

 

4) An entity that buys goods and sells them to customers at a markup is a ________.

  1. A) merchandiser
  2. B) service provider
  3. C) manufacturer
  4. D) producer

Answer:  A

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  What Are Merchandising Operations? (H1)

 

5) On the income statement, a merchandising company reports the cost of merchandise inventory that has been sold to customers.

Answer:  TRUE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

6) On the income statement, a service company reports the cost of merchandise inventory that has been sold to customers.

Answer:  FALSE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

7) The operating cycle of a merchandiser begins when the company purchases inventory from a vendor and ends when the company then sells the inventory to a customer.

Answer:  FALSE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

8) The operating cycle of a merchandiser begins when the company purchases inventory from a vendor and ends when the company collects cash from customers.

Answer:  TRUE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

9) Gross profit is the extra amount the company receives from the customer for merchandise sold over what the company paid to the vendor.

Answer:  TRUE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

10) Which of the following line items will appear on the income statement of a merchandiser but not of a service company?

  1. A) Salaries Expense
  2. B) Depreciation Expense
  3. C) Cost of Goods Sold
  4. D) Supplies Inventory

Answer:  C

Diff: 1

LO:  5-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  The Operating Cycle of a Merchandising Business

 

11) Gross profit is calculated as the difference between net sales revenue and ________.

  1. A) purchases
  2. B) cost of goods sold
  3. C) cost of merchandise inventory
  4. D) selling and administrative expenses

Answer:  B

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

12) Best Value Company started its operations on January 1, 2017. It engages in buying and selling different types of electronic gadgets. The first step in its operating cycle would be to ________.

  1. A) collect cash from customers
  2. B) sell goods to customers
  3. C) purchase inventory from vendors
  4. D) record the sales in accounts

Answer:  C

Diff: 2

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

13) The main expense of a merchandiser is usually ________.

  1. A) cost of goods sold
  2. B) current assets
  3. C) selling and administrative expenses
  4. D) production overhead

Answer:  A

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

14) ________ are the expenses that occur in an entity’s major line of business.

  1. A) Interest expense
  2. B) Interest revenue
  3. C) Operating expenses
  4. D) Loss on sale of plant asset

Answer:  C

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  The Operating Cycle of a Merchandising Business

 

15) List the three steps, in order of occurrence, of the operating cycle of a merchandising business.

Answer:

  1. The operating cycle begins when the company purchases inventory from an individual or business, called a vendor.
  2. The company then sells the inventory to a customer.
  3. Finally, the company collects cash from the customers.

Diff: 2

LO:  5-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  The Operating Cycle of a Merchandising Business

 

16) G-mart, a small-scale grocer, wants to introduce an inventory system to track its inventory. G-mart does not currently use optical scanning registers and computer systems. The perpetual inventory system is most suitable for its operations.

Answer:  FALSE

Diff: 1

LO:  5-1

AACSB:  Information technology

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

 

17) When a company uses a perpetual inventory system, all merchandise transactions are updated as and when they occur. However, the inventory account may not show the current balance at all times.

Answer:  TRUE

Diff: 2

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

 

 

18) Even in a perpetual inventory system that updates the inventory account as and when transactions occur, the business must count its inventory at least once in a year.

Answer:  TRUE

Diff: 2

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

19) In a periodic inventory system, the Cost of Goods Sold account is continuously updated as and when sales occur.

Answer:  FALSE

Diff: 2

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

 

20) The perpetual inventory system keeps a running record of inventory and cost of goods sold.

Answer:  TRUE

Diff: 1

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

 

21) Merchandise inventory accounting systems can be broadly categorized into two types. They are ________.

  1. A) FIFO and LIFO
  2. B) perpetual and periodic
  3. C) wholesale and retail
  4. D) manufacturer and producer

Answer:  B

Diff: 1

LO:  5-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

 

22) Which of the following is not recorded in a modern perpetual inventory system?

  1. A) units purchased and cost amount
  2. B) units sold and sales and cost amounts
  3. C) customer account numbers and balances owed from the sale of merchandise inventory
  4. D) the quantity of merchandise inventory on hand and its cost

Answer:  C

Diff: 2

LO:  5-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

23) Which of the following statements is not correct?

  1. A) In a perpetual inventory system, the “cash register” at the store is a computer terminal that records sales and updates inventory records.
  2. B) Even in a perpetual inventory system, a business must count inventory at least one a year.
  3. C) Restaurants and small retail stores often use the periodic inventory system.
  4. D) In a periodic inventory system, merchandise inventory and purchasing systems are integrated with the records for Accounts Receivable and Sales Revenue.

Answer:  D

Diff: 2

LO:  5-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Merchandise Inventory Systems:  Perpetual and Periodic Inventory Systems

 

Learning Objective 5-2

 

1) An invoice is a request by the seller for payment from the purchaser.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System? (H1)

 

2) An invoice is also known as a bill.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System? (H1)

 

3) The Merchandise Inventory account is an expense account that is used only for goods purchased that the business owns and intends to resell to customers.

Answer:  FALSE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase of Merchandise Inventory

 

4) The Merchandise Inventory account is an asset account that is used only for goods purchased that the business owns and intends to resell to customers.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase of Merchandise Inventory

5) The Merchandise Inventory account is an expense account that is used for goods purchased that the business owns and intends to resell to customers, as well as for purchase of office supplies and equipment.

Answer:  FALSE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase of Merchandise Inventory

 

6) Which of the following entries would be made to record the purchase of inventory on account, if a company uses the perpetual inventory system?

  1. A) a debit to Purchases and a credit to Accounts Payable
  2. B) a debit to Accounts Payable and a credit to Purchases
  3. C) a debit to Merchandise Inventory and a credit to Accounts Payable
  4. D) a debit to Accounts Payable and a credit to Merchandise Inventory

Answer:  C

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase of Merchandise Inventory

 

7) A company using the perpetual inventory system purchased merchandise on account for $5,000. Give the journal entry to record this transaction.

Answer:

Merchandise Inventory 5,000
       Accounts Payable 5,000

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase of Merchandise Inventory

 

8) A purchase discount is the amount offered to the purchaser for delaying the payment to the seller.

Answer:  FALSE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

 

9) Credit terms of a merchandising company are 1/15, net 40. This means that the buyer can receive a discount of 1% if the invoice is paid within 40 days of the invoice date.

Answer:  FALSE

Diff: 2

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

10) Nurix Company sold goods on credit terms n/20 to Jelly Harper Company. This means no discounts are offered, and the amount of the invoice is due 20 days after the invoice date.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

11) The purchase discount amount is calculated on the amount of the invoice minus the returns and allowances.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

12) Purchase discounts are calculated on the amount of the merchandise purchased including freight costs.

Answer:  FALSE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

13) Under the perpetual inventory system, when a purchaser makes payment within the discount period, the amount of discount will be credited to the Merchandise Inventory account.

Answer:  TRUE

Diff: 2

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

 

14) Credit terms of 2/10, n/30 indicate that a discount of 2% will be given if payment is made within 10 days of the invoice date. Otherwise, the total invoice amount is due within 30 days of the invoice date.

Answer:  TRUE

Diff: 1

LO:  5-2

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

15) What does “2/10” mean, with respect to “credit terms of 2/10, n/30”?

  1. A) A discount of 2 percent will be allowed if the invoice is paid within 10 days of the invoice date.
  2. B) Interest of 2 percent will be charged if the invoice is paid after 10 days from the date on the invoice.
  3. C) A discount of 10 percent will be allowed if the invoice is paid within two days of the invoice date.
  4. D) Interest of 10 percent will be charged if invoice is paid after two days.

Answer:  A

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

16) A company that uses the perpetual inventory system purchases inventory for $61,000 on account, with terms of 3/10, n/30. Which of the following is the journal entry to record the payment made within 10 days?

  1. A) a debit to Accounts Payable for $61,000, a credit to Cash for $59,170, and a debit to Merchandise Inventory for $1,830
  2. B) a debit to Accounts Payable for $61,000, a credit to Merchandise Inventory for $1,830, and a credit to Cash for $59,170
  3. C) a debit to Merchandise Inventory for $1,830, a debit to Accounts Payable for $61,000, and a credit to Cash for $62,830
  4. D) a debit to Accounts Payable for $59,170, a debit to Merchandise Inventory for $1,830, and a credit to Cash for $61,000

Answer:  B

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

17) A company that uses the perpetual inventory system purchased inventory for $910,000 on account with terms of 4/7, n/20. Which of the following correctly records the payment made 15 days after the date of invoice?

 

A)

Cash 910,000
     Accounts Payable 910,000

 

B)

Accounts Payable 910,000
     Merchandise Inventory 910,000

 

C)

Accounts Payable 910,000
     Cash 910,000

 

D)

Accounts Payable 910,000
     Merchandise Inventory 36,400
     Cash 873,600

 

Answer:  C

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

18) A company using the perpetual inventory system purchased inventory worth $21,000 on account with terms of 3/10, n/30. Defective inventory of $1,000 was returned two days later, and the accounts were appropriately adjusted. If the invoice is paid within 10 days, the amount of the purchase discount that would be available to the company is ________.

  1. A) $600
  2. B) $660
  3. C) $630
  4. D) $620

Answer:  A

Diff: 3

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

19) A company using the perpetual inventory system purchased inventory worth $540,000 on account with credit terms of 2/15, n/45. Defective inventory of $40,000 was returned 2 days later, and the accounts were appropriately adjusted. If the company paid the invoice 20 days later, the journal entry to record the payment would be ________.

  1. A) $540,000 debit to Accounts Payable and $540,000 credit to Cash
  2. B) $500,000 debit to Accounts Payable and $500,000 credit to Cash
  3. C) $540,000 debit to Accounts Payable, $530,000 credit to Cash, and $10,000 credit to Merchandise Inventory
  4. D) $530,000 debit to Accounts Payable, $10,000 credit to Merchandise Inventory, and $500,000 credit to Cash

Answer:  B

Diff: 3

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

20) The terms of an invoice are 3/10, n/25. This means that a ________.

  1. A) discount of 10 percent is allowed if the invoice is paid within three days
  2. B) discount of 3 percent is allowed if the invoice is paid within 10 days
  3. C) discount of 25 percent is allowed if the invoice is paid within 10 days
  4. D) discount of 3 percent is allowed if the invoice is paid after 25 days

Answer:  B

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

21) An invoice of $800 for merchandise purchased is showing 2/15, n/30 as terms of credit. If the invoice is paid on or before the fifteenth day, the amount to be paid is ________.

  1. A) $784
  2. B) $800
  3. C) $816
  4. D) $819

Answer:  A

Explanation:  A)

Purchases                        $800

Discount                             (16)

Net amount due             $784

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

22) An invoice, with payment terms of 6/10, n/30, was issued on April 28 for $230.00. If the payment was made on May 12, the amount of payment will be ________. (Round your answer to the nearest cent.)

  1. A) $230.00
  2. B) $207.00
  3. C) $216.20
  4. D) $224.00

Answer:  A

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

23) Under the perpetual inventory system, discounts taken on an invoice by the buyer would be ________.

  1. A) debited to Merchandise Inventory
  2. B) credited to Merchandise Inventory
  3. C) debited to Cost of Goods Sold
  4. D) credited to Cost of Goods Sold

Answer:  B

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Discounts

 

24) A company purchased inventory for $2,200 on account, and recorded the following journal entry:

 

Merchandise Inventory 2,200
       Accounts payable 2,200

 

The vendor’s invoice showed terms of 3/10, n/30. Give the journal entry for the payment of the invoice 17 days after the invoice date.

Answer:

Accounts Payable 2,200
       Cash 2,200

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

25) A company purchased inventory for $100,000 on account and recorded it as follows:

 

Merchandise Inventory 100,000
       Accounts Payable 100,000

 

The vendor’s invoice showed terms of 3/10, net 30. Give the journal entry for the payment of the invoice seven days after the invoice date, assuming that the vendor uses the perpetual inventory system.

Answer:

Accounts Payable 100,000
       Merchandise Inventory 3,000
       Cash 97,000

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Discounts

 

26) Defective, damaged, or otherwise unsuitable merchandise that is returned to the seller is referred to as purchase allowances by the purchaser.

Answer:  FALSE

Diff: 2

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Returns and Allowances

 

27) If purchase allowances are granted, the buyer need not return the goods to the seller.

Answer:  TRUE

Diff: 2

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Returns and Allowances

 

28) Freight in is recorded in the Merchandise Inventory account if the purchaser uses the perpetual inventory system.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Returns and Allowances

 

 

29) Under the perpetual inventory system, purchase returns or allowances are debited to the Merchandise Inventory account by the purchaser.

Answer:  FALSE

Diff: 2

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Returns and Allowances

30) On January 21, 2016, Bessant Company received merchandise from Mullies Company. On that date, it found a few of these goods to be damaged. On January 22, it returned the damaged goods to the seller. Such returns will be treated as ________ by Bessant.

  1. A) purchase returns
  2. B) sales returns
  3. C) purchase allowances
  4. D) sales allowances

Answer:  A

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Returns and Allowances

 

31) Under the perpetual inventory system, when a wholesaler returns the goods purchased on account, the ________ account is credited.

  1. A) Accounts Receivable
  2. B) Merchandise Inventory
  3. C) Cost of Goods Sold
  4. D) Accounts Payable

Answer:  B

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchase Returns and Allowances

 

 

32) A company that uses a perpetual inventory system purchased inventory on account and later returned goods worth $700 to the vendor. Which of the following would be the correct journal entry to record these returns?

 

A)

Purchase Returns 700
        Accounts Payable 700

 

B)

Accounts Payable 700
        Purchase Returns 700

 

C)

Merchandise Inventory 700
        Accounts Payable 700

 

D)

Accounts Payable 700
        Merchandise Inventory 700

 

Answer:  D

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Returns and Allowances

33) Oscar Packers received an allowance from the vendor for an amount of $400. Give the journal entry for this transaction. The company uses a perpetual inventory system.

Answer:

Accounts Payable 400
       Merchandise Inventory 400

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchase Returns and Allowances

 

 

34) If goods are sold on terms FOB shipping point, the ________.

  1. A) seller normally pays the transportation costs
  2. B) buyer normally pays the transportation costs
  3. C) buyer and the seller split the transportation costs
  4. D) shipping company bears the transportation cost

Answer:  B

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

35) A company purchased inventory for $2,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid $100 cash for freight in. Prepare the journal entry to record payment of the invoice within 10 days by the purchaser. (Assume a perpetual inventory system.)

Answer:

Accounts Payable 2,000
       Merchandise Inventory 40
       Cash 1,960

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

36) Complete the following table to show how FOB terms apply to merchandise inventory purchased by a merchandiser.

 

FOB Term When does the title to the goods transfer to the buyer? Who pays the freight?
Shipping Point
Destination

 

Answer:

FOB Term When does the title to the goods transfer to the buyer? Who pays the freight?
Shipping Point When the goods leave the seller’s place of business  (shipping point) Buyer
Destination At the delivery destination point Seller

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

 

37) Under the terms FOB destination, title to the merchandise will pass to the purchaser when the goods are received by the purchaser.

Answer:  TRUE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

38) Freight out is an addition to the Merchandise Inventory account if the seller uses the perpetual inventory system.

Answer:  FALSE

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

39) The term “freight out” refers to ________.

  1. A) transportation costs on purchases
  2. B) cost of inventory purchased
  3. C) costs that are not actually paid in cash
  4. D) transportation costs on sales

Answer:  D

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

40) VB Specialty Foods, a grocery merchandiser, purchased goods and paid transportation to bring them to the company warehouse. The transportation cost is known as ________.

  1. A) freight out
  2. B) selling expense
  3. C) freight in
  4. D) cost of goods sold

Answer:  C

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

 

41) Which of the following is true of freight in?

  1. A) It is an administrative expense.
  2. B) It is a selling expense.
  3. C) It is the transportation cost on purchases.
  4. D) It is the transportation cost on sales.

Answer:  C

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

42) Under which of the following terms will the buyer be required to pay transportation costs?

  1. A) FOB destination
  2. B) FOB shipping point
  3. C) freight out
  4. D) freight in

Answer:  B

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

43) FOB destination refers to a situation where title to goods while in transit belongs to the ________.

  1. A) buyer
  2. B) seller
  3. C) transport agency
  4. D) insurance agency

Answer:  B

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

44) A company purchased inventory for $3,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid $100 cash for freight in. The entry to record payment of invoice within 2 days by the purchaser would include ________. (Assume a perpetual inventory system.)

  1. A) a debit to Accounts Payable for $2,940 and a credit to Cash for $2,940
  2. B) a debit to Accounts Payable for $3,000, a debit to Merchandise Inventory for $100, and a credit to Cash for $2,900
  3. C) a debit to Accounts Payable for $3,000, a credit to Merchandise Inventory for $60, and a credit to Cash for $2,940
  4. D) a debit to Accounts Payable for $2,940, a debit to Merchandise Inventory for $60, and a credit to Cash for $3,000

Answer:  C

Diff: 3

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

45) A company purchased inventory for $74,000 from a vendor on account, FOB shipping point, with terms of 3/10, n/30. The company paid the shipper $1,500 cash for freight in. The company paid the vendor nine days after the sale. If there was no beginning inventory, the cost of inventory would be ________. (Assume a perpetual inventory system.)

  1. A) $73,280
  2. B) $75,500
  3. C) $70,280
  4. D) $72,500

Answer:  A

Explanation:  A) Cost of Purchases   $74,000

Less: Discount ($75,000 × 3%)                 2,220

Net Purchases                                            71,780

Add: Freight-in                                             1,500

Cost of Inventory                                     $73,280

Diff: 3

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

46) A company purchased inventory for $3,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid the shipper $100 cash for freight in. The company then returned damaged goods worth $200. The invoice was then paid eight days after the purchase. Assuming that there was no beginning inventory balance, the cost of inventory would be ________. (Assume a perpetual inventory system.)

  1. A) $2,744
  2. B) $2,844
  3. C) $2,900
  4. D) $2,940

Answer:  B

Explanation:  B)

Cost of Purchase                                                   $3,000

Less: Purchase Returns                                            200

Less: Purchase Discount                                            56

Plus: Freight In                                                            100

Net Cost of Inventory Purchased                     $2,844

Diff: 3

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

47) A company has purchased inventory and received an invoice that requires the buyer to pay the transportation costs for delivering the merchandise. The terms are ________.

  1. A) FOB destination
  2. B) FOB shipping point
  3. C) FOB, 2/10, n/30
  4. D) FOB in transit

Answer:  B

Diff: 1

LO:  5-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs

 

48) A merchandiser, following the perpetual inventory system, has the following transactions during August, 2017:

 

Date              Transaction                                                                                          Amount

Aug. 5          Purchased inventory on account                                                  $300,000

Aug. 9          Paid for transportation of goods purchased                                  25,000

Aug. 10        Returned defective merchandise to the seller                                20,000

Aug. 15        Paid for goods purchased on August 5                                                     ?

 

Credit terms of invoice are 2/15, n/45. Give journal entries for the above transactions.

Answer:

Date              Accounts and Explanation                          Debit                      Credit

Aug. 5          Merchandise Inventory                            300,000

Accounts Payable                                                               300,000

Aug. 9          Merchandise Inventory                               25,000

Cash                                                                                          25,000

Aug. 10        Accounts Payable                                         20,000

Merchandise Inventory                                                       20,000

Aug. 15        Accounts Payable                                       280,000

Cash                                                                                        274,400

Merchandise Inventory                                                         5,600

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

 

49) Reid Art Supply Company uses a perpetual inventory system. The company had the following transactions during August 2017:

 

Aug. 5:      Purchased $2,900 of merchandise on account. Freight and credit terms were FOB shipping point, 3/15, n/60.

Aug. 9:      Paid transportation costs of $440 for the Aug. 5 purchase.

Aug. 10:    Returned $600 of defective merchandise that had been purchased on Aug. 5.

Aug. 15:    Paid for the merchandise purchased on Aug. 5.

 

Give journal entries for August 10 and 15.

Answer:  Journal entry on Aug. 10

Accounts Payable 600
       Merchandise Inventory 600

 

Journal entry on Aug. 15

Accounts Payable 2,300
       Merchandise Inventory 69
       Cash 2,231

Diff: 2

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

50) Portian Merchandisers has purchased merchandise on account and paid $450 for freight in. Give the journal entry for freight paid. (Assume a perpetual inventory system.)

Answer:

Merchandise Inventory 450
       Cash 450

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs

 

 

51) WAXS-D, merchandisers of musical instruments, has provided the following details:

 

Mar. 5 Inventory purchased on account $725,000
Mar. 8 Freight in 35,000
Mar. 13 Purchase returns 55,000
Mar. 14 Allowances by vendor 12,000
Mar. 20 Payment made to vendor for purchases on March 5 ?

 

Credit terms are: 4/20, n/45, FOB shipping point. Calculate the net cost of inventory purchased assuming that there are no other inventory-related transactions during the month.

  1. A) $713,000
  2. B) $665,280
  3. C) $658,000
  4. D) $666,680

Answer:  D

Explanation:  D)

Net Cost of Inventory Purchased

Purchases                                                                                   $725,000

Less: Purchase Returns and Allowances                              67,000

Less: Purchase Discounts                                                          26,320

Plus: Freight In                                                                              35,000

Net Cost of Inventory Purchased                                        $666,680

Diff: 1

LO:  5-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Cost of Inventory Purchased

 

Learning Objective 5-3

 

1) An amount that a merchandiser earns by selling its inventory is known as sales revenue or sales.

Answer:  TRUE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sale of Merchandise Inventory

2) Under the perpetual inventory system, two journal entries are used to record the sales of merchandise. One entry records the Sales Revenue and another entry records the Cost of Goods Sold.

Answer:  TRUE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sale of Merchandise Inventory

 

 

3) A company sold merchandise with a cost of $238 for $440 on account. The seller uses the perpetual inventory system. The entry to record the cost of merchandise sold would include ________.

  1. A) a debit to Sales Revenue and a credit to Cash for $440
  2. B) a debit to Cash and a credit to Sales Revenue for $440
  3. C) a debit to Cost of Goods Sold and a credit to Merchandise Inventory for $238
  4. D) a debit to Merchandise Inventory for $238 and a credit to Cost of Goods Sold for $238

Answer:  C

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

4) Owens Jewelers uses the perpetual inventory system. On April 2, Owens sold merchandise with a cost of $5,500 for $7,000 to a customer on account with terms of 1/15, n/30. Which of the following journal entries correctly records the sales revenue?

 

A)

Sales Revenue 7,000
        Accounts Receivable 7,000

 

B)

Sales Revenue 7,000
        Cost of Goods Sold 7,000

 

C)

Accounts Receivable 5,500
        Sales Revenue 5,500

 

D)

Accounts Receivable 7,000
        Sales Revenue 7,000

 

Answer:  D

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

5) Landon Jewelers uses the perpetual inventory system. On April 2, Landon sold merchandise with a cost of $3,500 for $8,000 to a customer on account with terms of 1/15, n/30. The journal entry to record the cost of goods sold would be:

 

A)

Cost of Goods Sold 3,500
        Accounts Receivable 3,500

 

B)

Sales Revenue 3,500
        Cost of Goods Sold 3,500

 

C)

Cost of Goods Sold 3,500
        Merchandise Inventory 3,500

 

D)

Merchandise Inventory 3,500
        Cost of Goods Sold 3,500

 

Answer:  C

Explanation:  A)

Cost of Goods Sold 3,500
        Accounts Receivable 3,500

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

 

6) Under the perpetual inventory system, the journal entry to record cost of goods sold:

 

A)

Cost of Goods Sold XX
       Sales XX

 

B)

Merchandise Inventory XX
       Sales XX

 

C)

Cost of Goods Sold XX
       Merchandise Inventory XX

 

D)

Sales XX
       Merchandise Inventory XX

 

Answer:  C

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

7) On November 1, 2016, Everett Janitorial Supply sold merchandise with a cost of $3,200 for $5,000, FOB destination, and payment terms of 2/10, n/30. The company uses a perpetual inventory system. Give journal entries to record the sales revenue.

Answer:

Accounts Receivable 5,000
       Sales Revenue 5,000

 

Cost of Goods Sold 3,200
       Merchandise Inventory 3,200

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

 

8) Journalize the following transactions for a merchandiser that uses the perpetual inventory system.

On January 8, inventory was sold for $6,000 on account.  Credit terms were 3/15, n/30 (cost $4,500). On January 17, cash was received in full settlement of the January 8 sale.

Answer:

Jan. 8 Accounts Receivable 6,000
     Sales 6,000
Cost of Goods Sold 4,500
      Merchandise Inventory 4,500
Jan. 17 Cash 5,820
Sales Discounts ($6,000 × .03) 180
      Accounts Receivable 6,000

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

9) Journalize the following transaction for a merchandiser that uses the perpetual inventory system.

Sold goods for cash, $1,200 (cost $750).

Answer:

Cash 1,200
     Sales 1,200
Cost of Goods Sold 750
      Merchandise Inventory 750

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

10) Office Supplies Express uses a perpetual inventory system.  Journalize the following sales transactions for this company.  Explanations are not required.

 

July 3 Sold $15,400 of merchandise on account, credit terms are 2/10, n/30.  Cost of goods is $9,300.
July 7 Received a $750 sales return from the customer.  Cost of the goods is $435.
July 12 Office Supplies receives payment for the customer for the amount due from the July 3 sale.

 

Answer:

Date Accounts and Explanation Debit Credit
Jul. 3 Accounts Receivable 15,400
Sales Revenue 15,400
 
Cost of Goods Sold         9,300
Merchandise Inventory 9,300
 
Jul. 7 Sales Returns and Allowances           750
Accounts Receivable 750
 
Merchandise Inventory            435
Cost of Goods Sold 435
 
Jul. 12 Cash ($14,650 – $293)      14,357
Sales Discounts ($14,650 × 0.02)           293
Accounts Receivable ($15,400 − $750) 14,650

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

11) Rally Auto Supplies uses a perpetual inventory system.  Journalize the following sales transactions for this company.  Explanations are not required.

 

June 10 Sold $14,800 of merchandise on account, credit terms are 3/15, n/30.  Cost of goods is $6,200.
June 14 Received a $900 sales return from the customer.  Cost of the goods is $400.
June 23 Rally Auto Supplies receives payment for the customer for the amount due from the June 10 sale.

 

Answer:

Date Accounts and Explanation Debit Credit
Jun. 10 Accounts Receivable 14,800
Sales Revenue 14,800
 
Cost of Goods Sold         6,200
Merchandise Inventory 6,200
 
Jun. 14 Sales Returns and Allowances           900
Accounts Receivable        900
 
Merchandise Inventory            400
Cost of Goods Sold 400
 
Jun. 23 Cash ($13,900 − $417)      13,483
Sales Discounts ($13,900 × 0.03)           417
Accounts Receivable ($15,400 − $750) 13,900

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

12) A reduction in the amount of cash received from a customer for early payment is known as a sales discount.

Answer:  TRUE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Discounts

 

13) A company sold merchandise for $24,000 on account with terms of 5/15, n/30. The company uses a perpetual inventory system. After two days, it received defective merchandise worth $4,000. The journal entry to record the cash receipt for the sale if the payment is received within 10 days of the invoice date would include ________.

  1. A) a debit to Cash for $20,000, a credit to Merchandise Inventory for $1,000, and a credit to Sales Revenue for $19,000
  2. B) a debit to Cash for $19,000, a debit to Sales Discount for $1,000, and a credit to Accounts Receivable for $20,000
  3. C) a debit to Cash for $20,000, a debit to Merchandise Inventory for $4,000, and a credit to Accounts Receivable for $24,000
  4. D) a debit to Sales Revenue for $24,000, a credit to Accounts Receivable for $20,000, and a credit to Sales Discounts for $4,000

Answer:  B

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Discounts

 

14) A company sold merchandise for $4,000 on account with terms of 4/15, n/30. The company uses a perpetual inventory system. Defective merchandise of $200 was returned two days later. If the payment was received after 30 days, the journal entry to record the cash receipt will include ________.

  1. A) a debit to Cash for $3,840 and a credit to Accounts Receivable for $3,840
  2. B) a debit to Cash for $3,800 and a credit to Accounts Receivable for $3,800
  3. C) a credit to Sales Revenue for $3,800 and a debit to Cash for $3,800
  4. D) a credit to Cost of Goods Sold for $4,000 and a debit to Sales Revenue for $4,000

Answer:  B

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Discounts

 

15) The Sales Discounts account is a contra account to the ________ account.

  1. A) Purchases
  2. B) Sales Revenue
  3. C) Merchandise Inventory
  4. D) Sales Returns and Allowances

Answer:  B

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Discounts

 

16) When a customer returns goods to the seller, the seller debits the Purchase Returns account.

Answer:  FALSE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Returns and Allowances

 

17) When a merchandiser records sales returns, Accounts Receivable is credited. (Assume the seller uses the perpetual inventory system.)

Answer:  TRUE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Returns and Allowances

 

18) A sales allowance is recorded with a credit to Accounts Payable.

Answer:  FALSE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Returns and Allowances

 

19) When a seller grants a sales allowance, the customer does not return any goods to the seller.

Answer:  TRUE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Returns and Allowances

 

20) Under the perpetual inventory system, what is the difference between a sales return and a sales allowance?

  1. A) A sales return reduces the amount receivable from the customer, but a sales allowance does not.
  2. B) A sales return involves an adjustment to Merchandise Inventory, but a sales allowance does not.
  3. C) A sales return requires a debit to Sales Returns and Allowances, but a sales allowance does not.
  4. D) A sales return is not deducted from sales revenue to calculate net sales, but a sales allowance is deducted from sales revenue.

Answer:  B

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Returns and Allowances

 

21) The normal balances of Sales, Sales Discounts, and Sales Returns and Allowances are ________.

  1. A) debit, credit, and credit, respectively
  2. B) debit, debit, and credit, respectively
  3. C) credit, debit, and debit, respectively
  4. D) credit, credit, and debit, respectively

Answer:  C

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Returns and Allowances

 

22) Under a perpetual inventory system, merchandise returned by a customer to the seller is recorded as a ________ in the books of seller.

  1. A) sales return
  2. B) sales allowance
  3. C) sales discount
  4. D) purchase return

Answer:  A

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Returns and Allowances

 

 

23) A merchandiser sold merchandise inventory on account. The journal entry to record sales allowances in the books of the merchandiser, using the perpetual inventory system would be:

 

A)

Sales Returns and Allowances XX
       Accounts Receivable XX

 

B)

Merchandise Inventory XX
       Sales Revenue XX

 

C)

Cost of Goods Sold XX
       Sales Returns and Allowances XX

 

D)

Sales Returns and Allowances XX
       Cash XX

 

Answer:  A

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Returns and Allowances

 

24) Under the perpetual inventory system, the journal entries to record sales returns (the original sale was on account) would be:

 

A)

Accounts Payable XX
       Merchandise Inventory XX
Merchandise Inventory XX
       Cost of Goods Sold XX

 

B)

Cost of Goods Sold XX
       Merchandise Inventory XX
Merchandise Inventory XX
       Accounts Payable XX

 

C)

Accounts Receivable XX
       Sales XX
Sales XX
       Cost of Goods Sold XX

 

D)

Sales Returns and Allowances XX
       Accounts Receivable XX
Merchandise Inventory XX
       Cost of Goods Sold XX

 

Answer:  D

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Returns and Allowances

 

25) Fashion Jewelers uses the perpetual inventory system. On April 2, Fashion sold goods with a cost of $5,500 for $14,000 with terms of 4/15, n/30. On April 4, the customer reported damaged goods and Fashion granted a $2,000 sales allowance. On April 10, Fashion received the payment for the sale. Give the journal entry that will be recorded on April 10 by Fashion.

 

A)

Cash 11,520
Sales Discount 480
     Accounts Receivable 12,000

 

B)

Cash 12,000
     Accounts Receivable 12,000

 

C)

Accounts Receivable 12,000
     Sales 12,000

 

D)

Cash 12,000
     Sales Discount 480
     Accounts Receivable 11,520

 

Answer:  A

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Returns and Allowances

 

26) Journalize the following transaction for a merchandiser that uses the perpetual inventory system.

Received returned goods from a customer, $1,000 (cost, $740).

Answer:

Sales Returns and Allowances 1,000
    Accounts Receivable 1,000
Merchandise Inventory       740
      Cost of Goods Sold  740

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Returns and Allowances

 

27) A company ships goods to a customer and pays transportation costs.  To the seller, the transportation costs are ________.

  1. A) freight out
  2. B) freight in
  3. C) sales commission
  4. D) brokerage

Answer:  A

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs – Freight Out

 

28) Under the perpetual inventory system, the journal entry to record the freight paid by the seller on goods sold is:

 

A)

Cash XX
       Sales Discount XX
       Accounts Receivable XX

 

B)

Delivery Expenses XX
       Cash XX

 

C)

Cash XX
        Accounts Receivable XX

 

D)

Merchandise Inventory XX
        Cash XX

 

Answer:  B

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs – Freight Out

 

 

29) Delivery expense is a(n) ________.

  1. A) administrative expense
  2. B) part of Cost of Goods Sold
  3. C) operating expense
  4. D) overhead expense

Answer:  C

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Transportation Costs – Freight Out

30) Mason Lawn Equipment uses a perpetual inventory system.  Journalize the following sales transactions for this company.  Explanations are not required.

 

May 18  Sold $26,000 of merchandise on account, credit terms are 1/10, n/30, FOB destination.  Cost of goods is $15,600.
May 22 Mason negotiated a $600 allowance on the goods sold on May 18.
May 24 Mason paid freight of $450.
May 26 Mason receives payment for the customer for the amount due from the

May 18 sale.

 

Answer:

Date Accounts and Explanation Debit Credit
May 18 Accounts Receivable           26,000
Sales Revenue 26,000
Cost of Goods Sold           15,600
Merchandise Inventory 15,600
May 22 Sales Returns and Allowances                600
Accounts Receivable 600
May 24 Delivery Expense                450
        Cash 450
May 26 Cash ($25,400 – $254)

Sales Discounts ($25,400 × 0.01)

          25,146

254

Accounts Receivable ($26,000 – $600) 25,400

Diff: 3

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Transportation Costs – Freight Out

 

31) Net sales revenue is equal to sales revenue less cost of goods sold.

Answer:  FALSE

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Net Sales Revenue and Gross Profit

 

32) Which of the following is true of net sales revenue?

  1. A) It is calculated by subtracting cost of goods sold from sales.
  2. B) It is calculated by adding sales discounts to sales.
  3. C) It is calculated by adding sales discounts and sales returns and allowances to sales.
  4. D) It is calculated by deducting sales discounts and sales returns and allowances from sales.

Answer:  D

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Net Sales Revenue and Gross Profit

33) From the following details, calculate net sales revenue.

 

Sales Revenue $400,000
Cost of Goods Sold 300,000
Operating Expenses 75,000
Sales Discounts 20,000
Sales Returns and Allowances 8,000
Interest Revenue 6,000

 

  1. A) $351,000
  2. B) $359,000
  3. C) $372,000
  4. D) $392,000

Answer:  C

Explanation:  C)

Net Sales Revenue:

Sales Revenue                                                          $400,000

Less: Sales Discounts                                                 20,000

Less: Sales Returns and Allowances                       8,000

Net Sales Revenue                                                  $372,000

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Net Sales Revenue and Gross Profit

 

34) Up-to-date Merchandisers has the following transactions for the month of July.

 

Sales Revenue $420,000
Cost of Goods Sold 300,000
Operating Expenses 85,000
Sales Discounts 20,000
Sales Returns and Allowances 18,000
Interest Revenue 5,000

 

Calculate Gross Profit.

  1. A) $44,000
  2. B) $82,000
  3. C) $100,000
  4. D) $120,000

Answer:  B

Explanation:  B)

Net Sales Revenue*                                     $382,000

Less: Cost of Goods Sold                              300,000

Gross Profit                                                      $82,000

 

*Calculation of Net Sales Revenue

Sales Revenue                                               $420,000

Less: Sales Discounts                                      20,000

Less: Sales Returns and Allowances          18,000

Net Sales Revenue                                       $382,000

Diff: 1

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Net Sales Revenue and Gross Profit

 

 

35) On November 1, 2017, Rodgers Enterprises sold merchandise with a cost of $7,000 for $25,000, FOB destination, with payment terms of 2/10, n/40. The company paid transportation costs of $100. Customer returns on this sale were $5,000 (with a cost of $2,500). The merchandise was returned on November 6. The company received the payment for the balance amount on November 10, 2017. Calculate the net sales revenue.

  1. A) $19,600
  2. B) $20,000
  3. C) $4,500
  4. D) $20,100

Answer:  A

Explanation:  A)

Net Sales Revenue:

Sales Revenue                                                            $25,000

Less: Sales Returns and Allowances                       5,000

Less: Sales Discounts                                                       400

Net Sales Revenue                                                     $19,600

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Net Sales Revenue and Gross Profit

36) On November 1, 2017, Lotz Company sold merchandise for $16,000, FOB destination, with payment terms of 2/10, n/40. Customer returns on this sale amounted to $4,000. The company received payment for the balance on November 10, 2017. The cost of goods sold was $3,600. Calculate the amount of gross profit from these transactions.

  1. A) $12,400
  2. B) $8,160
  3. C) $8,400
  4. D) $11,760

Answer:  B

Explanation:  B)

Net Sales Revenue*                                            $11,760

Less: Cost of Goods Sold                                       3,600

Gross Profit                                                             $8,160

 

* Calculation of Net Sales Revenue:

Sales Revenue                                                      $16,000

Less: Sales Returns and Allowances                4,000

Less: Sales Discounts ($12,000 × 2%)                   240

Net Sales Revenue                                              $11,760

Diff: 3

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Net Sales Revenue and Gross Profit

 

 

37) Weston Jewelers uses the perpetual inventory system. On April 2, Weston sold merchandise with a cost of $5,000 for $10,000 to a customer on account with terms of 2/15, n/30. On April 4, the customer reported damaged goods, and Michelin granted a $2,000 sales allowance. On April 10, Weston received payment from the customer. Calculate the amount of net sales revenue.

  1. A) $9,840
  2. B) $10,000
  3. C) $8,000
  4. D) $7,840

Answer:  D

Explanation:  D)

Net Sales Revenue:

Sales Revenue                                                     $10,000

Less: Sales Returns and Allowances                2,000

Less: Sales Discounts                                               160

Net Sales Revenue                                                $7,840

Diff: 2

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Net Sales Revenue and Gross Profit

38) Quality Jewelers uses the perpetual inventory system. On April 2, Quality sold merchandise for $50,000 to a customer on account with terms of 3/15, n/30. The allowances and returns on this sale amounted to $3,000 and $9,000, respectively. The cost of goods sold was $20,000. On April 20, Quality received payment from the customer. Calculate the amount of gross profit.

  1. A) $38,000
  2. B) $20,000
  3. C) $18,000
  4. D) $16,500

Answer:  C

Explanation:  C)

Net Sales Revenue*                                                    $38,000

Less: Cost of Goods Sold                                            20,000

Gross Profit                                                                  $18,000

 

* Calculation of Net Sales Revenue:

Sales Revenue                                                              $50,000

Less: Sales Returns and Allowances                      12,000

Sales Discounts                                                                       0

Net Sales Revenue                                                      $38,000

Diff: 3

LO:  5-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Net Sales Revenue and Gross Profit

 

 

39) Gross profit is calculated as ________.

  1. A) sales revenue less sales discounts and allowances
  2. B) sales revenue less operating expenses
  3. C) net sales revenue less sales discounts
  4. D) net sales revenue less cost of goods sold

Answer:  D

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Net Sales Revenue and Gross Profit

 

40) Gross profit represents the mark-up on ________.

  1. A) sales revenue
  2. B) merchandise inventory
  3. C) operating expenses
  4. D) transportation cost

Answer:  B

Diff: 1

LO:  5-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Net Sales Revenue and Gross Profit

41) Briefly discuss what gross profit represents and how it affects the net earnings of a merchandiser.

Answer:  Gross profit is the difference between net sales revenue and cost of goods sold. It represents the markup on the merchandise inventory and is a measure of a merchandiser’s success. A sufficiently high gross profit is vital to a merchandiser. The gross profit must cover the company’s operating expenses for the company to survive.

Diff: 3

LO:  5-3

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Critical thinking

H2 :  Net Sales Revenue and Gross Profit

 

 

Learning Objective 5-4

 

1) The loss of inventory that occurs because of theft, damage, and errors is referred to as inventory shrinkage.

Answer:  TRUE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Adjusting Merchandise Inventory Based on a Physical Count

 

2) When a company uses the perpetual inventory system, there is no need to conduct a physical count of inventory.

Answer:  FALSE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Adjusting Merchandise Inventory Based on a Physical Count

 

3) The Merchandise Inventory account balance is $50,000. An physical count of inventory reveals that actual inventory balance is $42,000. Which of the following would be included in the adjusting entry? (Assume a perpetual inventory system.)

  1. A) a $42,000 credit to Merchandise Inventory
  2. B) a $50,000 debit to Cost of Goods Sold
  3. C) a $8,000 credit to Cost of Goods Sold
  4. D) a $8,000 credit to Merchandise Inventory

Answer:  D

Diff: 1

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Adjusting Merchandise Inventory Based on a Physical Count

 

4) The Merchandise Inventory account of a company shows a balance of $50,000 but a physical count of inventory shows $43,000 Which of the following entries is required to record the shrinkage? (Assume a perpetual inventory system.)

 

A)

Cost of Goods Sold 7,000
        Shrinkage Expense 7,000

 

B)

Merchandise Inventory 7,000
        Cost of Goods Sold 7,000

 

C)

Cost of Goods Sold 7,000
        Merchandise Inventory 7,000

 

D)

Cash 7,000
        Merchandise Inventory 7,000

 

Answer:  C

Diff: 1

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Adjusting Merchandise Inventory Based on a Physical Count

 

5) The general ledger shows a balance of $66,900 in the Merchandise Inventory account at the end of the period. The physical inventory count shows inventory of $63,600. The adjusting entry includes a ________.

  1. A) debit to Cost of Goods Sold and a credit to Merchandise Inventory for $3,300
  2. B) debit to Cost of Goods Sold and a credit to Cash for $3,300
  3. C) debit to Merchandise Inventory and a credit to Cost of Goods Sold for $3,300
  4. D) debit to Merchandise Inventory and a credit to Cash for $3,300

Answer:  A

Diff: 1

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Adjusting Merchandise Inventory Based on a Physical Count

 

 

6) The trial balance for a merchandiser is as follows. A physical count of inventory at the end of the accounting year reveals $28,000 of inventory on hand. (Assume a perpetual inventory system.)

 

Debit Credit
Cash $12,600
Accounts Receivable 2,400
Prepaid Rent 800
Merchandise Inventory 30,000
Accounts Payable $4,200
Salaries Payable 1,000
Notes Payable 800
Owner, Capital 13,800
Owner, Withdrawals 1,000
Sales Revenue 96,000
Sales Returns and Allowances 1,600
Sales Discounts 400
Cost of Goods Sold 23,000
Salaries Expense 21,000
Rent Expense 14,000
Selling Expense 8,500
Supplies Expense 500 ________
Total $115,800 $115,800

 

Give journal entry to record the inventory shrinkage, and the entries to close the Sales Revenue account, the expense accounts and contra revenue accounts with a debit balance, and the the Income Summary account and the Owner, Withdrawals account.

 

Answer:

Cost of Goods Sold 2,000
       Merchandise Inventory 2,000

 

Sales Revenue 96,000
       Income Summary 96,000

 

Income Summary 69,000
       Sales Returns and Allowances 1,600
       Sales Discounts 400
       Cost of Goods Sold 23,000
       Salaries Expense 21,000
       Rent Expense 14,000
       Administrative Expense 8,500
       Supplies Expense 500

 

Income Summary* 27,000
       Owner, Capital 27,000

 

Owner, Capital 1,000
       Owner, Withdrawals 1,000

 

Explanation:

*Calculation of net income:

 

Sales Revenue                                                           $96,000

Less:

Sales Returns and Allowances                        1,600

Sales Discounts                                                        400

Cost of Goods Sold                                            23,000

Salaries Expense                                                21,000

Rent Expense                                                      14,000

Administrative Expense                                    8,500

Supplies Expense                                                    500

Net Income                                                        $27,000

Diff: 1

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Adjusting Merchandise Inventory Based on a Physical Count

 

 

7) The entry to close Sales Discounts will include a debit to Income Summary.

Answer:  TRUE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Closing the Accounts of a Merchandiser

 

8) If a physical count of inventory indicates that the Merchandise Inventory account is overstated, an adjusting entry is required to record the difference.

Answer:  TRUE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Closing the Accounts of a Merchandiser

 

9) The entry to close Cost of Goods Sold includes a debit to Income Summary.

Answer:  TRUE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Closing the Accounts of a Merchandiser

 

10) The revenue, expenses, Sales Returns and Allowances, and Sales Discounts will be closed via the ________ account.

  1. A) Income Summary
  2. B) Owner, Capital
  3. C) Dividend
  4. D) Stockholders’ Equity

Answer:  A

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Closing the Accounts of a Merchandiser

11) The Income Summary account has a credit balance of $29,000 after the revenue and expense accounts have been closed. Which of the following is to be credited to close the Income Summary account?

  1. A) Dividends
  2. B) Sales Revenue
  3. C) Cost of Goods Sold
  4. D) Owner, Capital

Answer:  D

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Closing the Accounts of a Merchandiser

 

12) An adjusted trial balance is given below.

 

Debit Credit
Cash $16,000
Accounts Receivable 3,000
Prepaid Rent 900
Merchandise Inventory 25,000
Accounts Payable $4,100
Salaries Payable 2,000
Notes Payable 700
Owner, Capital 11,800
Owner, Withdrawals 1,500
Sales Revenue 92,200
Sales Returns and

Allowances

1,000
Sales Discounts 600
Cost of Goods Sold 21,000
Salaries Expense 18,000
Rent Expense 15,000
Selling Expense 8,100
Supplies Expense 700               
Total $110,800 $110,800

 

What will be the final balance in the company’s Owner,Capital account after recording the closing entries?

  1. A) $38,100
  2. B) $39,600
  3. C) $26,300
  4. D) $2,300

 

Answer:  A

Explanation:  A)

Calculation of Owner, Capital balance:

Beginning balance, Owner, Capital                                 $11,800

Plus: Net Income*                                                                     27,800

Owner, Withdrawals                                                              (1,500)

Closing balance, Owner, Capital                                      $38,100

 

Calculation of Net Income*

Sales Revenue                                                                         $92,200

Less:

Sales Returns and Allowances                                               1,000

Sales Discounts                                                                              600

Cost of Goods Sold                                                                   21,000

Salaries Expense                                                                       18,000

Rent Expense                                                                             15,000

Selling Expense                                                                           8,100

Supplies Expense                                                                           700

Net Income                                                                               $27,800

Diff: 2

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

13) The sales revenue of a merchandiser amounted to $22,000, sales returns and allowances amounted to $2,500, and sales discounts amounted to $800. The merchandiser uses a perpetual inventory system. The first entry in the closing process would include ________.

  1. A) a credit to Income Summary for $22,000
  2. B) a credit to Income Summary for $19,500
  3. C) a debit to Income Summary for $2,500
  4. D) a debit to Income Summary for $21,200

Answer:  A

Explanation:  A)

Sales Revenue 22,000
     Income Summary 22,000

Diff: 1

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

14) A merchandiser had sales returns and allowances of $300, sales discounts of $700, cost of goods sold of $14,000, and all other expenses of $4,400. The merchandiser uses a perpetual inventory system. The second entry in the closing process would include ________.

  1. A) a debit to Income Summary for $19,400
  2. B) a credit to Income Summary for $18,400
  3. C) a debit to Income Summary for $4,400
  4. D) a debit to Income Summary for $18,400

Answer:  A

Explanation:  A) Second entry in closing process relates to closing of expense accounts and other temporary accounts with a debit balance.

 

Income Summary 19,400
     Sales Returns and Allowances 300
     Sales Discounts 700
     Cost of Goods Sold 14,000
     Other expenses 4,400

Diff: 2

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

15) A merchandiser uses a perpetual inventory system. The third step in the process of closing the accounts of a merchandiser is to ________.

  1. A) make the revenue accounts equal to zero via the Income Summary account
  2. B) make the Income Summary account equal to zero via the Owner, Withdrawals account
  3. C) make the expense accounts equal to zero via the Income Summary account
  4. D) make the Income Summary account equal to zero via the Owner, Capital account

Answer:  D

Diff: 2

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Closing the Accounts of a Merchandiser

 

 

16) A merchandiser uses a perpetual inventory system. The beginning Owner, Capital balance of the merchandiser was $95,000. During the year, Sales Revenue amounted to $80,000, Sales Returns and Allowances were $1,300, Sales Discounts were $2,700, Cost of Goods Sold was $40,000, and all other expenses totaled $13,000. The company paid $24,000 in withdrawals to the owner. The last step in the closing process would include ________.

  1. A) a debit to Income Summary for $57,000
  2. B) a credit to Income Summary for $80,000
  3. C) a debit to the Owner, Capital account for $20,000
  4. D) a debit to the Owner, Capital account for $24,000

Answer:  D

Diff: 1

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

17) A merchandiser uses a perpetual inventory system. The beginning Owner, Capital balance of the merchandiser was $130,000. During the year, Sales Revenue amounted to $80,000, Sales Returns and Allowances were $2,000, Sales Discounts were $4,000, Cost of Goods Sold was $40,000, and all other expenses totaled $12,000. The company paid $27,000 in withdrawals to the owner. The closing balance of Owner, Capital would be ________.

  1. A) $129,000
  2. B) $125,000
  3. C) $118,000
  4. D) $130,000

Answer:  B

Explanation:  B)

The closing journal entries would be:

 

Sales Revenue                                                                       80,000

Income Summary                                                                                       80,000

 

Income Summary                                                                58,000

Sale Returns and Allowances                                                                   2,000

Sales Discounts                                                                                             4,000

Cost of Goods Sold                                                                                     40,000

Other Expenses                                                                                           12,000

 

Income Summary                                                                22,000

Owner, Capital                                                                                            22,000

 

Owner, Capital                                                                     27,000

Owner, Withdrawals                                                                                27,000

 

Closing balance of Owner, Capital:

Beginning balance                                                          $130,000

Net income                                                                            22,000

Owner, Withdrawals                                                       (27,000)

Closing balance of Owner, Capital                           $125,000

Diff: 2

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

18) An adjusted trial balance for a merchandiser is given below.

 

Debit Credit
Cash $12,600
Accounts Receivable 2,400
Prepaid Rent 800
Merchandise Inventory 30,000
Accounts Payable $4,200
Salaries Payable 1,000
Notes Payable 800
Owner, Capital 13,800
Owner, Withdrawals 1,000
Sales Revenue 96,000
Sales Returns and Allowances 1,600
Sales Discounts 400
Cost of Goods Sold 23,000
Salaries Expense 21,000
Rent Expense 14,000
Selling Expense 8,500
Supplies Expense 500 ________
Total $115,800 $115,800

 

Give the journal entry to close the Sales Revenue account.

Answer:

Sales Revenue 96,000
       Income Summary 96,000

Diff: 2

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

 

19) An adjusted trial balance for a merchandiser is given below.

 

Debit Credit
Cash $12,600
Accounts Receivable 2,400
Prepaid Rent 800
Merchandise Inventory 30,000
Accounts Payable $4,200
Salaries Payable 1,000
Notes Payable 800
Owner, Capital 13,800
Owner, Withdrawals 1,000
Sales Revenue 96,000
Sales Returns and Allowances 1,600
Sales Discounts 400
Cost of Goods Sold 23,000
Salaries Expense 21,000
Rent Expense 14,000
Selling Expense 8,500
Supplies Expense 500 ________
Total $115,800 $115,800

 

Give journal entry to close the expense accounts and contra revenue accounts with a debit balance.

Answer:

Income Summary 69,000
       Sales Returns and Allowances 1,600
       Sales Discounts 400
       Cost of Goods Sold 23,000
       Salaries Expense 21,000
       Rent Expense 14,000
       Administrative Expense 8,500
       Supplies Expense 500

Diff: 2

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

 

20) An adjusted trial balance a merchandiser is given below.

 

Debit Credit
Cash $12,600
Accounts Receivable 2,400
Prepaid Rent 800
Merchandise Inventory 30,000
Accounts Payable $4,200
Salaries Payable 1,000
Notes Payable 800
Owner, Capital 13,800
Owner, Withdrawals 1,000
Sales Revenue 96,000
Sales Returns and Allowances 1,600
Sales Discounts 400
Cost of Goods Sold 23,000
Salaries Expense 21,000
Rent Expense 14,000
Selling Expense 8,500
Supplies Expense 500 ________
Total $115,800 $115,800

 

Provide journal entries to close the Income Summary account and the Owner, Withdrawals account.

 

 

Answer:

Income Summary* 27,000
       Owner, Capital 27,000

 

Owner, Capital 1,000
       Owner, Withdrawals 1,000

 

Explanation:

*Calculation of net income:

 

Sales Revenue                                                           $96,000

Less:

Sales Returns and Allowances                        1,600

Sales Discounts                                                        400

Cost of Goods Sold                                            23,000

Salaries Expense                                                21,000

Rent Expense                                                      14,000

Administrative Expense                                    8,500

Supplies Expense                                                    500

Net Income                                                        $27,000

Diff: 3

LO:  5-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Closing the Accounts of a Merchandiser

 

21) When preparing the worksheet for a merchandising business using the perpetual inventory system, the Merchandise Inventory account must be adjusted based on a physical count due to inventory shrinkage.

Answer:  TRUE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Worksheet for a Merchandising Business – Perpetual Inventory

 

22) Worksheet procedures for a merchandising business using the perpetual inventory system are different from the worksheet procedures for a service business.

Answer:  FALSE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Worksheet for a Merchandising Business – Perpetual Inventory

 

23) When preparing the worksheet for a merchandising business using the perpetual inventory system, the main new account is the Merchandise Inventory account.

Answer:  TRUE

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Worksheet for a Merchandising Business – Perpetual Inventory

 

24) When preparing the worksheet for a merchandising business using the perpetual inventory system, which of the following statements is incorrect?

  1. A) The merchandiser’s worksheet carries the account Cost of Goods Sold.
  2. B) The main new account is the Merchandise Inventory account.
  3. C) The worksheet procedures are not similar to the worksheet procedures for a service company.
  4. D) The Merchandise Inventory account must be adjusted based on a physical count due to inventory shrinkage.

Answer:  C

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Worksheet for a Merchandising Business – Perpetual Inventory

 

25) When preparing the worksheet for a merchandising business using the perpetual inventory system, which of the following is not a new merchandising account that is shown on the worksheet?

  1. A) Accumulated Depreciation — Building
  2. B) Sales Returns and Allowances
  3. C) Cost of Goods Sold
  4. D) Merchandise Inventory

Answer:  A

Diff: 1

LO:  5-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Worksheet for a Merchandising Business – Perpetual Inventory

 

 

Learning Objective 5-5

 

1) Cost of Goods Sold appears on a multi-step income statement but not on a single-step income statement.

Answer:  FALSE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

2) The net income calculated using either the single-step or multi-step income statement formats is always the same.

Answer:  TRUE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

3) Operating income is gross profit minus operating expenses.

Answer:  TRUE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

4) A single-step income statement shows subtotals for gross profit and operating income.

Answer:  FALSE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

5) In a multi-step income statement, interest revenue and interest expense are included in operating income.

Answer:  FALSE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

 

6) On a multi-step income statement, merchandisers report operating expenses in two categories—selling expenses and administrative expenses.

Answer:  TRUE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

7) The following information relates to Nebula Company.

 

Sales Revenue $230,000
Cost of Goods Sold 150,000
Interest Revenue 10,000
Operating Expenses 42,500
Sales Discounts 20,000
Sales Returns and Allowances 6,000

 

Calculate the operating income.

  1. A) $11,500
  2. B) $67,500
  3. C) $230,000
  4. D) $21,500

Answer:  A

Explanation:  A)

Sales Revenue                                              $230,000

Sales Discounts                                             (20,000)

Sales Returns and Allowances                   (6,000)

Net Sales                                                       $204,000

Cost of Goods Sold                                    (150,000)

Gross Profit                                                     $54,000

Operating Expenses                                    (42,500)

Operating Income                                         $11,500

Diff: 1

LO:  5-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Income Statement

 

8) The following information relates to Newman Company.

 

Sales Revenue $240,000
Cost of Goods Sold 170,000
Interest Revenue 10,000
Operating Expenses 40,000
Sales Discounts 18,000
Sales Returns and Allowances 6,000

 

Calculate the net income of Newman Company.

  1. A) $6,000
  2. B) $16,000
  3. C) $58,000
  4. D) $240,000

Answer:  B

Explanation:  B)

Sales Revenue                                                $240,000

Sales Discounts                                               (18,000)

Sales Returns and Allowances                     (6,000)

Net Sales                                                          $216,000

Cost of Goods Sold                                       (170,000)

Gross Profit                                                       $46,000

Operating Expenses                                       (40,000)

Operating Income                                             $6,000

Interest Revenue                                                10,000

Net Income                                                        $16,000

Diff: 1

LO:  5-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Income Statement

 

9) Which of the following is subtracted from net sales revenue to arrive at gross profit on a multi-step income statement?

  1. A) cost of goods available for sale
  2. B) cost of goods sold
  3. C) sales discounts and sales returns and allowances
  4. D) operating expenses

Answer:  B

Diff: 1

LO:  5-5

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

10) On a multi-step income statement, the operating expenses are subtracted from ________ to arrive at operating income.

  1. A) net sales
  2. B) cost of goods sold
  3. C) net profit
  4. D) gross profit

Answer:  D

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

11) Which of the following is added to operating income to arrive at net income?

  1. A) sales revenue
  2. B) cost of goods sold
  3. C) interest revenue
  4. D) operating expenses

Answer:  C

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

12) Which of the following is the correct order of subtotals that appear on a multi-step income statement?

  1. A) Operating income, Gross profit, Net income
  2. B) Gross profit, Net sales revenue, Net income
  3. C) Net income, Operating income, Net income
  4. D) Gross profit, Operating income, Net income

Answer:  D

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

13) Which of the following is shown on a multi-step income statement but not on a single-step income statement?

  1. A) gross profit
  2. B) net sales revenue
  3. C) cost of goods sold
  4. D) net income

Answer:  A

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

14) Refer to the following trial balance.

 

Debit Credit
Cash $19,000
Accounts Receivable 44,000
Merchandise Inventory 64,000
Supplies 16,000
Land 320,000
Accounts Payable $5,000
Notes Payable 22,000
Owner, Capital 341,000
Owner, Withdrawals 3,000
Sales Revenue 460,000
Sales Returns and Allowances 9,000
Sales Discounts 9,000
Cost of Goods Sold 200,000
Salaries Expense 17,000
Utilities Expense 65,000
Rent Expense 56,000
Interest Expense 6,000 ________
Totals $828,000 $828,000

 

How much is the net sales revenue?

  1. A) $461,000
  2. B) $122,000
  3. C) $442,000
  4. D) $116,000

Answer:  C

Explanation:  C)

Sales Revenues                                                   $460,000

Sales Returns and Allowances                          (9,000)

Sales Discounts                                                      (9,000)

Net Sales Revenue                                             $442,000

Diff: 2

LO:  5-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Income Statement

 

15) Refer to the following trial balance.

 

Debit Credit
Cash $4,000
Accounts Receivable 14,000
Inventory 15,000
Supplies 4,000
Land 120,000
Accounts Payable $6,000
Notes Payable 21,000
Owner, Capital 107,000
Owner, Withdrawals 2,000
Sales Revenue 160,000
Sales Returns and Allowances 2,000
Sales Discounts 6,000
Cost of Goods Sold 83,000
Salaries Expense 5,000
Utilities Expense 21,000
Rent Expense 16,000
Interest Expense 2,000 ________
Totals $294,000 $294,000

 

How much is the gross profit?

  1. A) $152,000
  2. B) $160,000
  3. C) $294,000
  4. D) $69,000

Answer:  D

Explanation:  D) Gross profit = Net sales* – Cost of goods sold = $152,000* – $83,000 = $10,000

* Net sales = Sales revenue – Sales returns and allowances – Sales discounts = $160,000 – $2,000 – $6,000 = $152,000

Diff: 2

LO:  5-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Income Statement

 

 

16) In a multi-step income statement, which of the following items is excluded from the calculation of operating income?

  1. A) sales revenue
  2. B) interest expense
  3. C) selling expense
  4. D) administrative expense

Answer:  B

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

17) Expenses that fall outside the regular operations of a business are ________.

  1. A) not shown in the income statement of a merchandiser
  2. B) treated as current assets and are shown as merchandise inventory
  3. C) included under the other revenues and expenses section of the income statement
  4. D) not considered for the calculation of net income

Answer:  C

Diff: 2

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Statement

 

 

18) An adjusted trial balance of Woods Company as of December 31, 2017 is given below. Prepare a multi-step income statement for the year for the company.

 

Debit Credit
Cash $15,000
Accounts Receivable 42,000
Merchandise Inventory 60,000
Supplies 15,000
Land 300,000
Accounts Payable $3,000
Notes Payable 25,000
H. Woods, Capital 326,000
H. Woods, Withdrawals 3,000
Sales Revenue 480,000
Sales Returns and Allowances 6,000
Sales Discounts 9,000
Cost of Goods Sold 240,000
Salaries Expense 15,000
Utilities Expense 69,000
Rent Expense 54,000
Interest Expense 6,000 _______
Totals $834,000 $834,000

 

Answer:

Sales Revenue                                                                $480,000

Less: Sales Returns and Allowances                          (6,000)

Less: Sales Discounts                                                       (9,000)

Net Sales Revenue                                                                                       $465,000

Cost of Goods Sold                                                                                      (240,000)

Gross Profit                                                                                                      225,000

Operating Expenses:

Salaries Expense                                                     (15,000)

Utilities Expense                                                     (69,000)

Rent Expense                                                           (54,000)

Total Operating Expenses                                                                         (138,000)

Operating Income                                                                                             87,000

Other Revenues and (Expenses):

Interest Expense                                                                                        (6,000)

Net Income                                                                                                       $81,000

Diff: 3

LO:  5-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Income Statement

 

 

19) An adjusted trial balance of Woods Company as of December 31, 2017 is given below. Prepare a single-step income statement for the year for the company.

 

Debit Credit
Cash $15,000
Accounts Receivable 42,000
Merchandise Inventory 60,000
Supplies 15,000
Land 300,000
Accounts Payable $3,000
Notes Payable 25,000
H. Woods, Capital 326,000
H. Woods, Withdrawals 3,000
Sales Revenue 480,000
Sales Returns and Allowances 6,000
Sales Discounts 9,000
Cost of Goods Sold 240,000
Salaries Expense 15,000
Utilities Expense 69,000
Rent Expense 54,000
Interest Expense 6,000 _______
Totals $834,000 $834,000

 

Answer:                     Woods Company

Income Statement

Year Ended December 31, 2017

 

Revenues:

Net Sales Revenue                                                           $465,000

Expenses:

Cost of Goods Sold                          $240,000

Salaries Expense                                   15,000

Utilities Expense                                   69,000

Rent Expense                                         54,000

Interest Expense                                      6,000

Total Expenses                                                                 $384,000

Net Income                                                                          $81,000

Diff: 2

LO:  5-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Income Statement

 

20) A merchandiser’s statement of owner’s equity looks exactly like that of a service business.

Answer:  TRUE

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Statement of Retained Earnings and the Balance Sheet

 

21) Merchandise Inventory and Cost of Goods Sold appear ________.

  1. A) on the balance sheet and statement of owner’s equity, respectively
  2. B) on the statement of owner’s equity and income statement, respectively
  3. C) on the balance sheet and income statement, respectively
  4. D) on the income statement and statement of cash flows, respectively

Answer:  C

Diff: 1

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Statement of Retained Earnings and the Balance Sheet

 

22) On a balance sheet for a merchandiser, Merchandise Inventory is listed as a(n) ________.

  1. A) current asset
  2. B) current liability
  3. C) expense
  4. D) revenue

Answer:  A

Diff: 2

LO:  5-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Statement of Retained Earnings and the Balance Sheet

 

Learning Objective 5-6

 

1) The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.

Answer:  TRUE

Diff: 1

LO:  5-6

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

2) A small increase in the gross profit percentage may indicate an important rise in income.

Answer:  TRUE

Diff: 1

LO:  5-6

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

3) Which of the following is the correct formula for calculating gross profit percentage?

  1. A) Net profit / Net sales revenue
  2. B) Gross profit / Net sales revenue
  3. C) Net sales revenue / Net profit
  4. D) Net sales revenue / Gross profit

Answer:  B

Diff: 1

LO:  5-6

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

4) The gross profit percentage is one of the most carefully watched measures of ________.

  1. A) profitability
  2. B) liquidity
  3. C) solvency
  4. D) marketability

Answer:  A

Diff: 1

LO:  5-6

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

5) Which of the following is true of the gross profit percentage?

  1. A) Gross profit percentage is the same for companies in all industries.
  2. B) Gross profit percentage is used to measure the solvency of a company.
  3. C) The gross profit percentage is one of the most carefully watched measures of profitability.
  4. D) A service company must show its gross profit percentage in its Income Statement.

Answer:  C

Diff: 2

LO:  5-6

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

6) A company made net sales revenue of $540,000, and cost of goods sold totaled $324,000. Calculate its gross profit percentage.

  1. A) 40%
  2. B) 60%
  3. C) 130%
  4. D) 315%

Answer:  A

Explanation:  A) Gross profit = Sales revenue – Cost of goods sold = $540,000 – $324,000 = $216,000

Gross profit percentage = Gross profit / Sales revenue = $216,000 / $540,000 = 40%

Diff: 2

LO:  5-6

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

7) Gilbert Company generated sales revenues of $1,800,000 in 2017. Its cost of goods sold amounted to  Calculate Gilbert’s gross profit percentage.

  1. A) 55%
  2. B) 45%
  3. C) 222%
  4. D) 182%

Answer:  B

Explanation:  B) Gross profit = Sales revenue – Cost of goods sold = $1,800,000 – $990,000 = $810,000

Gross profit percentage = Gross profit / Sales revenue = $810,000 / $1,800,000 = 55%

Diff: 2

LO:  5-6

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

8) What does the gross profit percentage measure?  How is it computed?

Answer:  The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.  Gross profit percentage equals gross profit divided by net sales revenue.

Diff: 2

LO:  5-6

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

9) The gross profit percentage for Smith Clothing Retailer was 37.7% for the year ended December 31, 2016 and 42.5% for the year ended December 31, 2017.  The industry average gross profit percentage, for both years, is 45.7%.  Briefly discuss these findings.

Answer:  The gross profit percentage for Smith has improved from 37.5 percent for 2016 to 42.5 percent for 2017. This shows that the gross profit earned from merchandise inventory has increased and is providing more to cover the remaining operating expenses and provide for net income.  This increase is a good step in reaching the industry average. Smith should work to continue this increase and to keep operating expenses under control. These two actions will improve net income.

Diff: 3

LO:  5-6

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Critical thinking

H2 :  How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

 

 

Learning Objective 5-7

 

1) Under the periodic inventory system, purchases, purchase discounts, and purchase returns and allowances are recorded in the Merchandise Inventory account as and when they occur.

Answer:  FALSE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchases of Merchandise Inventory

2) If a merchandiser uses the periodic inventory system, it is necessary to conduct a physical count of inventory to determine the quantity of inventory on hand.

Answer:  TRUE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Purchases of Merchandise Inventory

 

3) A merchandiser purchased inventory on account for $18,000. Under the periodic inventory system, the journal entry to record the purchase would include ________.

  1. A) a debit to Purchases for $18,000 and a credit to Accounts Payable for $18,000
  2. B) a debit to Accounts Payable for $18,000 and a credit to Purchases for $18,000
  3. C) a debit to Merchandise Inventory for $18,000 and a credit to Accounts Payable for $18,000
  4. D) a debit to Accounts Payable for $18,000 and a credit to Merchandise Inventory for $18,000

Answer:  A

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

4) A merchandiser returned inventory worth $1,400 that was purchased on account. Under the periodic inventory system, the journal entry to record the return would include ________.

  1. A) a debit to Purchase Returns and Allowances for $1,400 and a credit to Accounts Payable for $1,400
  2. B) a debit to Accounts Payable for $1,400 and a $1,400 credit to Purchase Returns and Allowances
  3. C) a debit to Purchases for $1,400 and a credit to Accounts Payable for $1,400
  4. D) a debit to Accounts Payable for $1,400 and a credit to Purchases for $1,400

Answer:  B

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

5) Which of the following is the correct journal entry for freight paid on goods purchased by a merchandiser using the periodic inventory system?

 

A)

Purchases XX
       Accounts Payable XX

 

B)

Merchandise Inventory XX
       Accounts Payable XX

 

C)

Freight In XX
       Cash XX

 

D)

Accounts Payable XX
       Cash XX

 

Answer:  C

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

 

6) Which of the following is the correct journal entry for a return of goods that were purchased on account under the periodic inventory system?

 

A)

Purchase Returns and Allowances XX
       Accounts Payable XX

 

B)

Accounts Payable XX
      Merchandise Inventory XX

 

C)

Accounts Payable XX
       Purchase Returns and

Allowances

XX

 

D)

Merchandise Inventory XX
       Accounts Payable XX

 

Answer:  C

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

7) Avery Company uses the periodic inventory system. On February 1, the corporation purchased inventory on account for $10,000. The terms of invoice were 5/10, n/30. The amount due was paid on February 9. Which of the following journal entries correctly records the payment in the books of Avery Company?

 

A)

Accounts Payable 10,000
     Purchase Discounts 500
     Cash 9,500

 

B)

Accounts Payable 10,000
     Cash 10,000

 

C)

Accounts Payable 10,000
     Purchases 10,000

 

D)

Accounts Payable 10,000
     Merchandise Inventory 500
     Cash 9,500

 

Answer:  A

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

8) Glasgow Company uses the periodic inventory system. On February 1, the corporation purchased inventory on account for $16,000. The terms were 3/10, n/30. On February 2, it returned damaged goods worth $500 to the supplier and was granted an allowance. Give the journal entry for the payment if the invoice is paid after the discount period. (Round your answers to the nearest dollar.)

 

A)

Accounts Payable 15,520
     Cash 15,054
     Purchase Discounts 466

 

B)

Cash 16,000
     Accounts Payable 16,000

 

C)

Accounts Payable 15,520
     Cash 15,520

 

D)

Cash 15,054
Purchase Discounts 466
     Accounts Payable 15,520

 

Answer:  C

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

9) Using the periodic inventory system, state which accounts are used and whether the account is debited or credited.  All transactions involve the purchase of inventory.

 

Transaction Accounts Used / Is the account debited or credited?
Purchase of inventory on account  
Prior to payment, returned inventory to the seller  
Payment of freight bill  

 

 

Answer:

Transaction Accounts Used / Is the account debited or credited?
Purchase of inventory on account Purchases – debited

Accounts Payable – credited

Prior to payment, returned inventory to the seller Accounts Payable – debited

Purchase Returns and Allowances – credited

Cash payment of freight bill Freight In – debited

Cash – credited

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

10) Journalize the following purchase transactions for Schaeffer Office Supplies using the periodic inventory system.  Explanations are not required.

 

May 12 Schaeffer buys $167,500 worth of merchandise inventory on account with credit terms of 2/10, n/30.
May 16 Schaeffer returns $18,600 of the merchandise to the vendor due to damage during shipment.
May 21 Schaeffer pays the amount due.

 

Answer:

Date Accounts and Explanation Debit Credit
May 12 Purchases 167,500
       Accounts Payable 167,500
 
May 16 Accounts Payable    18,600
       Purchases Returns and Allowance   18,600
 
May 21 Accounts Payable ($167,500 – $18,600)  148,900
       Cash ($148,900 − $2,978) 145,922
       Purchase Discount ($148,900 × 0.02)    2,978

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

11) Journalize the following purchase transactions for ABC Swimming Pool Supply Company using the periodic inventory system.  Explanations are not required.

 

May 2 Purchased $5,280 of merchandise inventory on account under terms 3/10, n/30 and FOB shipping point.
May 6 Returned $675 of defective merchandise purchased on May 2.
May 8 Paid freight bill of $120 on May 2 purchase.
May 12 Paid amount owed on credit purchase on May 2.

 

Answer:

Date Accounts and Explanation Debit Credit
May 2 Purchases 5,280
        Accounts Payable 5,280
 
May 6 Accounts Payable      675
        Purchases Returns and Allowance    675
May 8 Freight-In     120
        Cash    120
May 12 Accounts Payable ($5,280 – $675)   4,605
        Cash ($4,605 – $138.15) 4,466.85
        Purchase Discount ($4,605 × .03)    138.15

Diff: 3

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Purchases of Merchandise Inventory

 

12) In a periodic inventory system, there is no need to record an entry to Merchandise Inventory and Cost of Goods Sold.

Answer:  TRUE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sale of Merchandise Inventory

 

13) In a periodic inventory system, a sale of inventory involves two entries, one to record Sales Revenue and one to record Cost of Goods Sold.

Answer:  FALSE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sale of Merchandise Inventory

 

14) When recording the sale of merchandise inventory, using a periodic inventory system, ________.

  1. A) a running record of merchandise inventory is maintained during the accounting period
  2. B) the Sales Revenue account is credited only as an adjusting entry because sales information is not needed during the accounting period
  3. C) sales discounts and sales returns and allowances are not recorded
  4. D) there is no need to record an entry to the Merchandise Inventory and the Cost of Goods Sold accounts

Answer:  D

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

15) Anderson Furniture sold 15 desks, with a cost of $7,500, for $13,250 on account.  Anderson uses the periodic inventory system. Which of the following is the correct way to record this transaction?

 

A)

Sales Revenue 13,250
      Accounts Receivable 13,250

 

B)

Accounts Receivable 13,250
      Sales Revenue 13,250
Cost of Goods Sold 7,500
        Merchandise Inventory 7,500

 

C)

Accounts Receivable 13,250
      Sales Revenue 13,250

 

D)

Accounts Receivable 13,250
      Sales Revenue 13,250
Purchases 7,500
        Merchandise Inventory 7,500

 

Answer:  C

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

16) Journalize the following sales transactions for Smith Printing Equipment using the periodic inventory system.  Explanations are not required.

 

March 2 Smith sold $45,800 of printing equipment on account, credit terms 2/10, n/EOM.
March 5 Smith received a $2,500 sales return on damaged goods from the customer.
March 11 Smith received payment from the customer on the amount due.

 

Answer:

Date Accounts and Explanation Debit Credit
March 2 Accounts Receivable 45,800
        Sales Revenue 45,800
 
March 5 Sales Returns and Allowances            2,500
        Accounts Receivable 2,500
 
March 11 Cash ($43,300 − $866)          42,434
        Sales Discounts ($43,300 × 0.02)               866
        Accounts Receivable ($45,800 − $2,500) 43,300

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

17) Journalize the following sales transactions for Outdoor Equipment using the periodic inventory system.  Explanations are not required.

 

July 1 Sold $4,200 of equipment on account, credit terms are 3/10, n/30, FOB destination.
July 5 Paid  $90 on freight out.
July 8 Negotiated a $240 allowance on the goods sold on July 1.
July 11 Received payment from the customer for the full amount due on the July 1 sale.

 

Answer:

Date Accounts and Explanation Debit Credit
July 1 Accounts Receivable 4,200
       Sales Revenue 4,200
July 5 Delivery Expense            90
       Cash 90
July 8 Sales Returns and Allowances        240
       Accounts Receivable 240
July 11 Cash ($3,960 – $118.80) 3,841.20
       Sales Discounts ($3,960 × 0.03)   118.80
       Accounts Receivable ($4,200 – $240) 3,960

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sale of Merchandise Inventory

 

18) When using the periodic inventory system, there is no need to record an adjusting entry for inventory shrinkage.

Answer:  TRUE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Adjusting and Closing Entries

 

19) When using the periodic inventory system, the process of recording the ending Merchandise Inventory is completed by making an adjusting entry.

Answer:  FALSE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Adjusting and Closing Entries

 

20) The key difference in the closing process under the periodic inventory system is how merchandise inventory is handled.

Answer:  TRUE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Adjusting and Closing Entries

 

21) Regarding the four-step closing process under the periodic inventory system, ________.

  1. A) purchase Returns and Allowances and Purchase Discount accounts are closed with a credit via the Income Summary account
  2. B) Sales Revenue is closed with a credit via the Income Summary account
  3. C) the beginning Merchandise Inventory, Purchases, and Freight In are closed with a debit via the Income Summary account
  4. D) the ending merchandise inventory balance must be recorded as a debit via the Income Summary account

Answer:  D

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Adjusting and Closing Entries

 

22) When a periodic inventory system is used, ________.

  1. A) an adjusting entry is needed to record the ending Merchandise Inventory account balance
  2. B) the process for closing the Income Summary and Owner’s Withdrawals accounts differs from the process used in the perpetual inventory system
  3. C) beginning Inventory, Purchases, and Freight In accounts are closed via the Income Summary Account
  4. D) there is no need to take a physical count of inventory

Answer:  C

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Adjusting and Closing Entries

 

23) When preparing financial statements under the periodic inventory system, a calculation of cost of goods sold must be made.

Answer:  TRUE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Preparing Financial Statements

 

24) Cost of goods available for sale represents beginning merchandise inventory plus net purchases less freight in.

Answer:  FALSE

Diff: 1

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Preparing Financial Statements

 

25) Which of the following line items would appear on the income statement of a company that uses the periodic inventory system, but not on that of a company that uses the perpetual inventory system?

  1. A) Net Sales Revenue
  2. B) Cost of Goods Sold
  3. C) Cost of Goods Available for Sale
  4. D) Operating expenses

Answer:  C

Diff: 2

LO:  5-7

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Preparing Financial Statements

 

26) Calculate the cost of goods sold for a merchandiser using the periodic inventory system from the following details.

 

Purchases $540,000
Beginning Merchandise Inventory 180,000
Purchase Returns and Allowances 60,000
Purchase Discounts 16,000
Freight In 17,000
Ending Merchandise Inventory 160,000

 

  1. A) $540,000
  2. B) $501,000
  3. C) $518,000
  4. D) $821,000

Answer:  B

Explanation:  B)

Calculation of Cost of Goods Sold:

Beginning Merchandise Inventory                                                            $180,000

Purchases                                                                          $540,000

Less: Purchase Returns and Allowances                     60,000

Less: Purchase Discounts                                                  16,000

Net Purchases                                                                  $464,000

Plus: Freight In                                                                      17,000

Net Cost of Purchases                                                                                      481,000

Cost of Goods Available for Sale                                                                $661,000

Less: Ending Inventory                                                                                    160,000

Cost of Goods Sold                                                                                          $501,000

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

 

27) The following details are provided by Blue Bell Merchandisers. The company uses the periodic inventory system.

 

Net Sales $202,000
Purchases 91,000
Purchase Returns and Allowances 1,900
Purchase Discounts 1,400
Freight In 1,600
Beginning Merchandise Inventory 63,000
Ending Merchandise Inventory 37,000

 

Calculate the amount of net purchases.

  1. A) $150,700
  2. B) $86,100
  3. C) $87,700
  4. D) $111,000

Answer:  C

Explanation:  C)

Calculation of Net Purchases:

Purchases                                                                                  $91,000

Less: Purchase Returns and Allowances                             1,900

Less: Purchase Discounts                                                          1,400

Net Purchases                                                                           $87,700

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

 

28) From the following details of a merchandiser, calculate the Cost of Goods Sold. (Assume the merchandiser uses the periodic inventory system.)

 

Net Sales $210,000
Purchases 93,000
Purchase Returns and Allowances 1,800
Purchase Discounts 1,300
Freight In 1,750
Beginning Merchandise Inventory 61,000
Ending Merchandise Inventory 37,000

 

  1. A) $115,650
  2. B) $65,900
  3. C) $113,900
  4. D) $54,650

Answer:  A

Explanation:  A)

Calculation of Cost of Goods Sold:

Beginning Merchandise Inventory                                                               $61,000

Purchases                                                                            $93,000

Less: Purchase Returns and Allowances                       1,800

Less: Purchase Discounts                                                   1,300

Net Purchases                                                                    $89,900

Plus: Freight In                                                                       1,750

Net Cost of Purchases                                                                                         91,650

Cost of Goods Available for Sale                                                                $152,650

Less: Ending Inventory                                                                                      37,000

Cost of Goods Sold                                                                                          $115,650

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

 

29) Classic Car Parts uses a periodic inventory system. From the following details, calculate net purchases.

 

Beginning merchandise inventory $2,000
Ending merchandise inventory 2,200
Purchases 21,000
Purchase Discounts 800
Purchase Returns and Allowances 1,300
Freight In 4,000

 

  1. A) $23,100
  2. B) $18,900
  3. C) $20,900
  4. D) $20,200

Answer:  B

Explanation:  B)

Calculation of net purchases:

Purchases                                                                       $21,000

Less: Purchase Returns and Allowances                  1,300

Less: Purchase Discounts                                                  800

Net Purchases                                                               $18,900

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

 

30) Swanson Company uses a periodic inventory system. From the following details, calculate the cost of goods sold.

 

Beginning merchandise inventory $3,000
Ending merchandise inventory 2,300
Purchases 22,000
Purchase Discounts 700
Purchase Returns and Allowances 1,200
Freight In 4,300

 

  1. A) $23,900
  2. B) $20,100
  3. C) $25,100
  4. D) $27,400

Answer:  C

Explanation:  C)

Calculation of Cost of Goods Sold:

Beginning Merchandise Inventory                                                             $3,000

Purchases                                                                         $22,000

Less: Purchase Returns and Allowances                    1,200

Less: Purchase Discounts                                                    700

Net Purchases                                                                 $20,100

Plus: Freight In:                                                                   4,300

Net Cost of Purchases                                                                                     24,400

Cost of Goods Available for Sale                                                               $27,400

Less: Ending Merchandise Inventory                                                          2,300

Cost of Goods Sold                                                                                        $25,100

Diff: 1

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

 

31) Describe the calculation of cost of goods sold when using the periodic inventory system.

Answer:  The Cost of Goods Sold account is calculated by adding Beginning Merchandise Inventory plus Net Cost of Purchases less Ending Inventory. Net Cost of Purchases is calculated by taking Purchases less Purchase Returns and Allowances less Purchase Discounts plus Freight In.

Diff: 2

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

 

 

32) Brookside Equipment Company uses the periodic inventory system.  Brookside reported the following selected amounts at June 30, 2017:

 

Merchandise Inventory, July 1, 2016 $22,000
Merchandise Inventory, June 30, 2017     19,000
Purchases     96,000
Purchase  Discounts      5,000
Purchase Returns and Allowances      8,500
Freight In     3,200
Sales Revenue   234,000
Sales Discounts     7,400
Sales Returns and Allowances     14,200
Common Stock     45,000
Retained Earnings     24.50

 

Requirement A:  Compute net sales revenue.

Requirement B:    Compute cost of goods sold.

Requirement C:   Compute gross profit.

Answer:

Requirement A

Sales Revenue $234,000
Less: Sales Discounts        7,400
          Sales Returns & Allowances      14,200
Net Sales Revenue $212,400

 

Requirement B

Beginning Merchandise Inventory $22,000
Purchases  $96,000
Less: Purchase Returns and Allowances   8,500
         Purchase Discounts 5,000
Net Purchases 82,500
Plus: Freight In 3,200
Net Cost of Purchases 85,700
Cost of Goods Available for Sale 107,700
Less: Ending Inventory  19,000
Cost of Goods Sold  $88,700

 

Requirement C

Net Sales Revenue $212,400
Less: Cost of Goods Sold  88,700
Gross Profit $123,700

Diff: 3

LO:  5-7

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Preparing Financial Statements

Horngren’s Accounting,11e (Miller-Nobles)

Chapter 11  Current Liabilities and Payroll

 

Learning Objective 11-1

 

1) Current liabilities must be paid either in cash or with goods and services within one year or within the entity’s operating cycle, if the cycle is longer than a year.

Answer:  TRUE

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Current Liabilities of Known Amounts Accounted For? (H1)

 

2) Which of the following is a characteristic of a current liability?

  1. A) It creates a present obligation for future payment of cash or services.
  2. B) It cannot be settled with services.
  3. C) It is an avoidable obligation.
  4. D) It occurs because of a future transaction or event.

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Current Liabilities of Known Amounts Accounted For? (H1)

 

3) Corrections Services sells service plans for commercial computer maintenance. The price for each plan is $1,350 per year, paid in advance. On October 1, 2016, a service plan was sold to a new customer for cash, and the plan covers the period October 1, 2016 to September 30, 2017. Adjusting entries are made on December 31 of each year.  Prepare the journal entry for September 30, 2017.

Answer:

Unearned Revenue ($1,350 × 9/12) 1,012.50
      Service Revenue 1,012.50

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Are Current Liabilities of Known Amounts Accounted For? (H1)

 

4) Amounts owed for products or services purchased on account are accounts receivable.

Answer:  FALSE

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accounts Payable

 

5) Amounts owed for products or services purchased on account are called ________.

  1. A) accounts payable
  2. B) unearned revenue
  3. C) accrued expense
  4. D) warranty payable

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Accounts Payable

 

6) Sales revenue for a sporting goods store amounted to $539,000 for the current period. All sales are on account and are subject to a sales tax of 11%. Which of the following would be included in the journal entry to record the sales transaction?

  1. A) a debit to Sales Revenue for $539,000
  2. B) a credit to Accounts Receivable for $539,000
  3. C) a debit to Sales Tax Payable for $59,290
  4. D) a debit to Accounts Receivable for $598,290

Answer:  D

Explanation:  D)

Accounts Receivable 598,290
     Sales Revenue 539,000
     Sales Tax Payable ($539,000 × 11%) 59,290

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Tax Payable

 

7) Which of the following would be included in the journal entry to record the payment of sales tax payable?

  1. A) a debit to Sales Tax Payable
  2. B) a credit to Sales Tax Expense
  3. C) a debit to Sales Tax Expense
  4. D) a credit to Sales Tax Payable

Answer:  A

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Tax Payable

 

8) Which of the following accounts is credited by the seller when tax is collected on retail sales?

  1. A) Accounts Payable
  2. B) Payroll Tax
  3. C) Sales Tax Payable
  4. D) Unearned Revenue

Answer:  C

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Sales Tax Payable

 

9) Pluto Corp. sold goods, with a selling price of $9,021, for cash. The state sales tax rate is 10%. What amount is credited to the Sales Revenue account?

  1. A) $9,021
  2. B) $9,923
  3. C) $902
  4. D) $8,119

Answer:  A

Explanation:  A)

Cash 9,923
     Sales Revenue 9,021
     Sales Tax Payable ($9,021 × 10%) 902

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Tax Payable

 

10) Gem Corp. had cash sales of $10,000. The state sales tax rate is 9.8%. What amount is debited to the Cash account?

  1. A) $10,000
  2. B) $10,980
  3. C) $980
  4. D) $1,000

Answer:  B

Explanation:  B)

Cash 10,980
     Sales Revenue 10,000
     Sales Tax Payable (9.8% × $10,000) 980

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Tax Payable

 

11) Barter, Inc. sold goods for $894,500 on account. The company operates in a state that imposes a 6% sales tax. What is the amount of the sales tax payable to the state?

  1. A) $53,670
  2. B) $26,835
  3. C) $13,418
  4. D) $107,340

Answer:  A

Explanation:  A)

Accounts Receivable 948,170
     Sales Revenue 894,500
     Sales Tax Payable ($894,500 × 6%) 53,670

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Tax Payable

 

12) Applied Foods Corp. had cash sales of $598,000 during the month of August. Sales taxes of 6.5% were collected on the sales. Prepare the journal entry to record the sales revenue and sales tax for the month.

Answer:

Cash 636,870
      Sales Revenue 598,000
      Sales Tax Payable ($598,000 × 6.5%) 38,870

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Sales Tax Payable

 

13) In regards to corporate income tax, which of the following statements is incorrect?

  1. A) Federal income taxes are calculated on a corporate tax return.
  2. B) Income Tax Expense is recorded when the federal income tax is paid.
  3. C) When the corporation files its federal corporate tax return and makes payment, the account Income Tax Payable is credited.
  4. D) The amount income taxes that the corporation owes but has not yet paid is classified as a current liability.

Answer:  B

Explanation:  B) Income Tax Expense is recorded when the federal income tax is incurred.

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Tax Payable

 

14) The amount of income taxes ________.

  1. A) required by the federal government for a corporation is calculated on a Form 1120
  2. B) paid by the corporation, when it files the Form 1120, is recorded as a debit to the Income Tax Expense account and a credit to the Cash account
  3. C) the corporation owes, but has not yet paid, is recorded as a debit to the Income Tax Payable account
  4. D) the corporation owes, but has not yet paid, is reported as a long-term liability on the balance sheet

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Income Tax Payable

 

15) Unearned revenues are current liabilities until they are earned.

Answer:  TRUE

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Unearned Revenues

 

16) Cash received in advance of providing goods or performing services is recorded as ________.

  1. A) Unearned Revenue
  2. B) Accrued Revenue
  3. C) Service Revenue
  4. D) Uncollected Revenue

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Unearned Revenues

 

17) Which of the following liabilities is created when a company receives cash for services to be provided in the future?

  1. A) Unearned Revenue
  2. B) Accrued Liability
  3. C) Accounts Payable
  4. D) Estimated Warranty Payable

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Unearned Revenues

 

18) Unearned revenue, for services to be performed in six months, appears on the balance sheet as ________.

  1. A) long-term investments
  2. B) current liabilities
  3. C) current assets
  4. D) long-term assets

Answer:  B

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Unearned Revenues

 

19) On August 31, 2016, Peter Services received $3,500 in advance of performing the service. Which journal entry is needed to record the receipt of cash?

  1. A) Debit Unearned Revenue $3,500, and credit Cash $3,500.
  2. B) Debit Cash $3,500, and credit Service Revenue $3,500.
  3. C) Debit Unearned Revenue $3,500, and credit Service Revenue $3,500.
  4. D) Debit Cash $3,500, and credit Unearned Revenue $3,500.

Answer:  D

Diff: 1

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Unearned Revenues

 

20) On April 1, 2017, Planet Services received $14,200 in advance of performing the services from a customer for three months of service — April, May and June. What would be the journal entry to adjust the accounts at the end of May? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) Debit Service Revenue $4,733, and credit Unearned Revenue $4,733.
  2. B) Debit Unearned Revenue $9,467, and credit Service Revenue $9,467.
  3. C) Debit Unearned Revenue $14,200, and credit Service Revenue $14,200.
  4. D) Debit Service Revenue $9,467, and credit Accounts Receivable $9,467.

Answer:  B

Explanation:  B)

Unearned Revenue ($14,200 × 2/3) 9,467
     Service Revenue 9,467

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Unearned Revenues

 

21) NewAge, Inc. made total cash sales in February of $666,000, which are subject to 7.5% sales tax. Prepare the summary entry to record the transaction.

Answer:

Cash 715,950
      Sales Tax Payable ($666,000 × 7.5%) 49,950
      Sales Revenue 666,000

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Unearned Revenues

 

22) Jupiter Services sells service plans for commercial computer maintenance. The price for each service plan is $1,650 per year, paid in advance. On October 1, 2017, a service plan was sold to a new customer for cash. Prepare the journal entry to record this transaction.

Answer:

Cash 1,650
      Unearned Revenue 1,650

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Unearned Revenues

 

23) Database Services sells service plans for commercial computer maintenance. The price for each plan is $1,350 per year, paid in advance. On October 1, 2017, a service plan was sold to a new customer for cash, and the plan covers the period October 1, 2017 to September 30, 2018. Prepare the December 31, 2017 adjusting entry.

Answer:

Unearned Revenue ($1,350 × 3/12) 337.50
      Service Revenue 337.50

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Unearned Revenues

 

24) Short-term notes payable represent a written promise by the business to pay a debt, without the addition of interest, within one year or less.

Answer:  FALSE

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Short-Term Notes Payable

 

25) When a business records accrued interest expense on a note payable ________.

  1. A) Interest Expense is credited
  2. B) Note Payable is credited
  3. C) Cash is debited
  4. D) Interest Payable is credited

Answer:  D

Diff: 2

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Short-Term Notes Payable

 

26) Which of the following correctly describes the accounting treatment for interest payable?

  1. A) It is shown on the balance sheet as a current liability.
  2. B) It is shown on the income statement as an operating expense.
  3. C) It is shown on the balance sheet as a current asset.
  4. D) It is shown on the balance sheet as a long-term liability.

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Short-Term Notes Payable

 

27) A $37,000, three-month, 11% note payable was issued on December 1, 2017. What is the amount of accrued interest on December 31, 2017? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) $339
  2. B) $493
  3. C) $247
  4. D) $565

Answer:  A

Explanation:  A)

Interest Expense 339
     Interest Payable ($37,000 × 11% × 1/12) 339

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

28) A $45,000, two-month, 7% note payable was issued on December 1, 2016. What is the amount of interest expense recorded in the year 2017? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) $3,150
  2. B) $263
  3. C) $525
  4. D) $45,525

Answer:  B

Explanation:  B)

Notes Payable 45,000
Interest Expense ($45,000 × 0.07% × 1/12) 263
Interest Payable ($45,000 × 0.07% × 1/12) 263
     Cash 45,525

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

29) A $46,000, four-month, 7% note payable was issued on October 1, 2017. Which of the following would be included in the journal entry required on the note’s maturity date by the borrower? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) a credit to Note payable for $47,073
  2. B) a credit to Cash for $46,000
  3. C) a debit to Interest expense for $268
  4. D) a debit to Interest payable for $268

Answer:  C

Explanation:  C)

Notes Payable 46,000
Interest Expense ($46,000 × 7% × 1/12) 268
Interest Payable ($46,000 × 7% × 3/12) 805
     Cash 47,073

Diff: 3

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

30) Maywood, Inc. signs a $17,000, 8.5%, six-month note dated November 1, 2017. The interest expense recorded for this note in 2017 will be ________. (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) $1,445
  2. B) $241
  3. C) $723
  4. D) $482

Answer:  B

Explanation:  B)

Interest Expense ($17,000 × 8.5% × 2/12) 241
     Interest Payable 241

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

31) Firewood, Inc. signed a three-year note payable for $45,000 at 13% annual interest. What is the interest expense for 2017 if the note was signed on August 1, 2017? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) $2,925
  2. B) $2,438
  3. C) $17,550
  4. D) $5,850

Answer:  B

Explanation:  B)

Interest Expense ($45,000 × 13% × 5/12) 2,438
     Interest Payable 2,438

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

32) Which of the following accounts will be credited by the borrower when a promissory note is issued?

  1. A) Note Payable
  2. B) Note Receivable
  3. C) Interest Payable
  4. D) Cash

Answer:  A

Diff: 1

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

33) The journal entry for accrued interest on a note payable includes ________.

  1. A) a debit to Interest Expense and credit to Cash
  2. B) a debit to Interest Expense and credit to Interest Payable
  3. C) a debit to Interest Payable and credit to Cash
  4. D) a credit to Interest Expense and debit to Notes Payable

Answer:  B

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Short-Term Notes Payable

 

34) At the maturity of a note payable, a borrower will pay ________.

  1. A) the principal plus interest
  2. B) the principal amount only
  3. C) the interest amount only
  4. D) the principal minus interest

Answer:  A

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Short-Term Notes Payable

 

35) Rosewood, Inc. recently signed a $356,000, six-month note on August 22, 2017. The interest rate is 12.5%. How much interest will be due at maturity?

  1. A) $18,542
  2. B) $44,500
  3. C) $22,250
  4. D) $14,833

Answer:  C

Explanation:  C) $356,000 × 12.5% × 6/12 = $22,250

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

36) On July 1, 2017, Ferrero, Inc. purchased merchandise inventory for $350,000 by signing a note payable. The note is for 6 months and bears interest at a rate of 8%. Prepare the journal entry for this transaction, using a perpetual inventory system.

Answer:

Merchandise Inventory 350,000
      Notes Payable 350,000

Diff: 1

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

37) On June 30, 2017, Nightvale, Inc. purchased merchandise inventory for $500,000 by signing a six-month, 8% note payable.  Prepare the journal entry for the payment of the note on December 30, 2016.

Answer:

Notes payable 500,000
Interest expense [($500,000 × 8%) × 6/12] 20,000
      Cash 520,000

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

38) On September 1, 2017, Neighborhood, Inc. borrowed $125,000 by signing a nine-month, 7.2% note payable.  Prepare the journal entry to accrue interest expense on December 31, 2016.

Answer:

Interest Expense 3,000
      Interest Payable [($125,000 × 7.2%) × 4/12] 3,000

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

39) On October 1, 2017, Carlos, Inc. borrowed $225,000 by signing a nine-month, 8% note payable. Interest was accrued on December 31, 2017. Prepare the journal entry July, 1, 2017, the date the note was paid.

Answer:

Notes Payable 225,000
Interest Expense [($225,000 × 8%) × 6/12] 9,000
Interest Payable [(225,000 × 8%) × (3/12)] 4,500
      Cash 238,500

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Short-Term Notes Payable

 

40) If a long-term debt is paid in installments, the business will report the current portion of the note payable as a current liability.

Answer:  TRUE

Diff: 1

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Current Portion of Long-Term Notes Payable

 

41) The current portion of long-term notes payable is ________.

  1. A) the amount of principal that will be paid within five years
  2. B) typically included with the long-term liabilities on the balance sheet
  3. C) recorded as an adjusting entry
  4. D) reclassified as current for reporting purposes on the balance sheet

Answer:  D

Diff: 2

LO:  11-1

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Current Portion of Long-Term Notes Payable

 

42) On December 31, 2016, Jerry’s, Inc. borrowed $500,000 by signing a five-year, 8% note payable.  The note is payable in five yearly installments of $100,000 plus interest, due at the end of every year beginning on December 31, 2017. What amount represents the current portion of Long-term Notes Payable at December 31, 2016?

Answer:  The current portion of notes payable is the principal amount that will be paid within one year.

Therefore, Principal Amount = $500,000

Current portion of Long-term Notes Payable = $500,000 / 5 years = $100,000

Diff: 1

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Current Portion of Long-Term Notes Payable

 

43) On December 31, 2016, Circle, Inc. borrowed $500,000 by signing a five-year, 8% note payable. The note is payable in five yearly installments of $100,000 plus interest, due at the end of every year beginning on December 31, 2017. Which portion is classified as the long-term portion of Notes Payable at December 31, 2016?

Answer:  The current portion of notes payable is the principal amount that will be paid within one year. The remaining portion of the note will be classified as long term.

Therefore, Principal Amount = $500,000

Current portion of Long-term Notes Payable = $500,000 / 5 years = $100,000

Therefore, Long-term portion = $500,000 – $100,000 = $400,000

Diff: 2

LO:  11-1

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Current Portion of Long-Term Notes Payable

 

 

Learning Objective 11-2

 

1) Benefits are extra compensation—items that are not paid directly to an employee.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do Companies Account for and Record Payroll? (H1)

2) Rocco earns $19.00 per hour for straight time (40 hours), and the company pays him time-and-a-half for overtime. He worked 49 hours at his job during the first week of March 2017. What was Rocco’s gross pay for the week? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) $931.00
  2. B) $935.50
  3. C) $1,016.50
  4. D) $1,396.50

Answer:  C

Explanation:  C)

Straight Time Pay (40 × $19.00)                     $760.00

Overtime Pay (9 × $19.00 × 1.5)                        256.50

Gross Pay                                                          $1,016.50

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do Companies Account for and Record Payroll? (H1)

 

3) ________ is a pay amount stated at an hourly rate.

  1. A) Salary
  2. B) Wage
  3. C) Commission
  4. D) Bonus

Answer:  B

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do Companies Account for and Record Payroll? (H1)

 

 

4) ________ is pay stated as a percentage of a sale amount.

  1. A) Salary
  2. B) Wage
  3. C) Commission
  4. D) Bonus

Answer:  C

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do Companies Account for and Record Payroll? (H1)

5) Which of the following is pay over and above base salary, usually paid for exceptional performance?

  1. A) FICA
  2. B) benefits
  3. C) wages
  4. D) bonuses

Answer:  D

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do Companies Account for and Record Payroll? (H1)

 

6) Extra compensation items that are not paid directly to an employee are called ________.

  1. A) bonuses
  2. B) benefits
  3. C) wages
  4. D) commissions

Answer:  B

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do Companies Account for and Record Payroll? (H1)

 

 

7) Complete the table to show how each type of employee pay is generally stated.

 

Employee pay Generally stated as
Salary
Wages
Commission
Bonus
Benefits

 

Answer:

Employee pay Generally stated as
Salary An annual, monthly, or weekly rate
Wages An hourly rate
Commission A percentage of a sale amount
Bonus Pay over and above base salary, usually for exceptional performance
Benefits Extra compensation for items such as health, life, or disability insurance or for retirement

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do Companies Account for and Record Payroll? (H1)

8) Gross pay is the total amount of salary, wages, commissions, and bonuses earned by an employee during a pay period, after taxes or any other deductions.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Gross Pay and Net (Take-Home) Pay

 

9) Gross pay is the total amount of compensation earned by an employee after the deductions are made.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Gross Pay and Net (Take-Home) Pay

 

10) Net pay is the total amount of compensation that an employee takes home after the deductions are made.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Gross Pay and Net (Take-Home) Pay

 

11) Regarding gross and net pay, which of the following statements is correct?

  1. A) Gross pay minus all deductions such as income tax withheld equals net pay.
  2. B) Net pay represents the total salaries and wages expense to the employer.
  3. C) For most businesses, gross pay equals net pay.
  4. D) Employers are required to deposit net pay into the employee’s bank account.

Answer:  A

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Gross Pay and Net (Take-Home) Pay

 

12) Regarding net pay, which of the following statements is incorrect?

  1. A) The net pay amount is not important for accounting purposes.
  2. B) The amount of compensation that the employee actually takes home is net pay.
  3. C) The employer either writes a paycheck to each employee for his or her net pay or directly deposits the employee’s net pay into the employee’s bank account.
  4. D) Net pay equals gross pay minus all deductions.

Answer:  A

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Gross Pay and Net (Take-Home) Pay

13) The old age, survivors, and disability insurance component of FICA tax is imposed on the entire amount of an individual employee’s earnings.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employee Payroll Withholding Deductions

 

14) The employee federal and state income tax and Social Security tax are optional payroll deductions.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employee Payroll Withholding Deductions

 

 

15) Income taxes are withheld from the employee’s paycheck.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employee Payroll Withholding Deductions

 

16) Alex, an employee of Super Sunday, Inc., has gross salary for March of $5,400. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. The total amount of employee FICA tax is $826.20. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

Answer:  FALSE

Explanation:  Employee FICA tax = Gross Salary × FICA rate

Employee FICA tax = $5,400 × 7.65% = $413.10

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

17) Aaron earns $18.50 per hour with time-and-a-half for hours in excess of 40 per week. He worked 45 hours at his job during the first week of March 2017. Aaron pays income taxes at 15% and 7.65% for OASDI and Medicare. All of his income is taxable under FICA. Determine Aaron’s net pay for the week. (Do not round any intermediate calculations, and round your final answer to the nearest cent.)

  1. A) $746.94
  2. B) $679.71
  3. C) $579.84
  4. D) $616.51

Answer:  B

Explanation:  B)

Gross Pay                                                                                             $878.75

Straight Time Pay (40 × $18.50)                             740.00

Overtime pay (5 × $18.50 × 1.5)                             138.75

 

Less                  Federal Income tax (15% × $878.75                      131.81

OASDI and Medicare (7.65% × $878.75)               67.22

 

199.04

Net Pay                                                                                                  $679.71

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

 

 

18) Which of the following is required to be deducted from employees’ paychecks?

  1. A) federal income tax
  2. B) SUTA
  3. C) FUTA
  4. D) charitable contributions

Answer:  A

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employee Payroll Withholding Deductions

 

19) Which of the following taxes has a ceiling on the amount of annual earnings subject to tax?

  1. A) FICA—OASDI taxes
  2. B) sales tax
  3. C) federal income tax
  4. D) FICA—Medicare taxes

Answer:  A

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employee Payroll Withholding Deductions

20) Federal income taxes are ________.

  1. A) deducted to arrive at an employee’s gross pay
  2. B) added to arrive at an employee’s net pay
  3. C) deducted to arrive at an employee’s net pay
  4. D) not borne by the employee

Answer:  C

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employee Payroll Withholding Deductions

 

 

21) Berkley’s gross pay for the month is $7,400. His deduction for federal income tax is based on a rate of 18%. He has no voluntary deductions. His yearly pay is under the limit for OASDI. What is Berkley’s net pay? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%. Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

  1. A) $5,502
  2. B) $7,400
  3. C) $6,834
  4. D) $6,068

Answer:  A

Explanation:  A)

Gross Pay                                                          $7,400.00

Less: OASDI                                                           458.80

Less: Medicare                                                       107.30

Less: Federal Income Tax                               1,332.00

Net Pay                                                                    $5,502

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

22) Isabelle’s gross pay for the week is $960.00. Her deduction for federal income tax is based on a rate of 20%. She has voluntary deductions of $235.00. Her yearly pay is under the limit for OASDI. What is her net pay? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%. Do not round any intermediate calculations, and round your final answer to the nearest cent.)

  1. A) $533.00
  2. B) $768.00
  3. C) $694.56
  4. D) $459.56

Answer:  D

Explanation:  D)

Gross Pay                                                              $960.00

Less: Voluntary Deductions                              235.00

Less: Federal Income Tax                                   192.00

Less: OASDI                                                              59.52

Less: Medicare                                                         13.92

Net Pay                                                                   $459.56

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

 

 

23) Tom’s gross pay for the month is $3,400. Tom’s deduction for federal income tax is based on a rate of 22%. Tom has no voluntary deductions. Tom’s yearly pay is under the limit for OASDI. What is the amount of FICA tax withheld from Tom’s pay? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of

1.45%. Do not round any intermediate calculations, and round your final answer to the nearest cent.)

  1. A) $1,008.10
  2. B) $260.10
  3. C) $748.00
  4. D) $487.90

Answer:  B

Explanation:  B) FICA withheld = FICA—OASDI Tax of 6.2% + FICA—Medicare Tax

FICA withheld = ($3,400 × 0.062) + ($3,400 × 0.0145) = $260.10

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

24) Angela’s gross pay for the week is $970.00. Her deduction for federal income tax is based on a rate of 24%. She has voluntary deductions of $175.00. Her yearly pay is under the limit for OASDI. What is the amount of FICA—Medicare Tax deducted from her pay? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%. Do not round any intermediate calculations, and round your final answer to the nearest cent.)

  1. A) $232.80
  2. B) $14.07
  3. C) $60.14
  4. D) $307.01

Answer:  B

Explanation:  B)

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

 

 

25) Timothy’s gross pay for this month is $8,950. His gross year-to-date pay, prior to this month, totaled $110,500. What is the amount of FICA tax withheld from Timothy’s pay for this month? (Assume an OASDI rate of 6.2%, applicable on the first $117,000 earnings, and a Medicare rate of 1.45%, applicable on all earnings. Do not round any intermediate calculations, and round your final answer to the nearest cent.)

  1. A) $403.00
  2. B) $129.78
  3. C) $532.78
  4. D) $554.90

Answer:  C

Explanation:  C)                                                                                    FICA

OASDI          Medicare

Earnings subject to tax                                                       $117,000            No Max

Less: Earnings prior to current month                            110,500                   –      

Current pay subject to tax                                                        6,500                  8,950

Tax rate                                                                                        × 6.2%             × 1.45%

Tax to be withheld from pay-check                                    403.00               129.78

Total FICA withheld ($403.00 + $129.78)                       $532.78

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

 

26) Sean’s gross pay for this month is $9,250. His gross year-to-date pay, prior to this month, totaled $110,500. Sean’s rate for federal income tax is 20%. His voluntary deductions total $1,000. What is Sean’s net pay? (Assume an OASDI rate of 6.2%, applicable on the first $117,000 earnings, and a Medicare rate of 1.45%, applicable on all earnings. Round any intermediate calculations to two decimal places, and your final answer to the nearest cent.)

  1. A) $6,862.87
  2. B) $6,400.00
  3. C) $7,400.00
  4. D) $5,862.87

Answer:  D

Explanation:  D)                                                                                    FICA

OASDI           Medicare

Earnings subject to tax                                                       $117,000             No Max

Less: Earnings prior to current month                            110,500                    –       

Current pay subject to tax                                                        6,500                  9,250

Tax rate                                                                                       × 6.2%              × 1.45%

Tax to be withheld from pay-check                                          403                134.13

Total FICA withheld ($403 + $134.13)                             $537.13

 

Gross Pay                                                                            $9,250

Less: Federal income tax ($9,250 × 20%)                1,850.00

Less: Voluntary deductions                                             1,000

Less: FICA withheld                                                      $537.13

Net pay                                                                          $5,862.87

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

 

27) Eric’s gross pay for the week is $2,050. His deduction for federal income tax is based on a rate of 23%. He has no voluntary deductions. His yearly pay is under the limit for OASDI. What is the amount of FICA tax that will be withheld from Eric’s pay? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%. Round any intermediate calculations to two decimal places, and your final answer to the nearest cent.)

  1. A) $471.50
  2. B) $156.83
  3. C) $628.33
  4. D) $130.15

Answer:  B

Explanation:  B)

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employee Payroll Withholding Deductions

28) A payroll register is a schedule that summarizes the earnings, withholdings, and net pay for each employee. Round any intermediate calculations and your final answer to the nearest cent.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Payroll Register

 

29) Medicare is a required column in a payroll register.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Payroll Register

 

30) The current period earnings column of the payroll register only includes regular and overtime earnings.

Answer:  FALSE

Explanation:  This column includes regular and overtime earnings, commissions, and bonuses.

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Payroll Register

 

31) A ________ is a schedule that summarizes the earnings, withholdings, and net pay for each employee.

  1. A) payroll register
  2. B) bin card
  3. C) cash ledger
  4. D) bank reconciliation statement

Answer:  A

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Payroll Register

 

32) Which of the following columns is typically included in a payroll register?

  1. A) Direct Labor Hours Worked
  2. B) Warranties Payable
  3. C) Current Period Earnings
  4. D) Sales Tax

Answer:  C

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Payroll Register

33) Bergan Corp. has gross pay for March of $50,000. The journal entry to record salaries expense would include a debit to Salaries and Wages Payable for $50,000.

Answer:  FALSE

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

34) Steve is an employee of Panache, Inc. Panache pays a portion of his health insurance premium and also contributes to a retirement plan in his name. The company’s share of the health insurance premium is $660, and the company’s contribution to the retirement plan is $820. The journal entry to record the employee benefits to be paid by the company should include a debit to Employee Health Insurance Payable for $1,480.

Answer:  FALSE

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

35) Katie Pereira and Ferro Schwartz are employees of Free Star, Inc. In February 2017, Katie’s gross pay was $8,500, and Ferro’s gross pay was $10,900. All earnings are subject to FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%. Which of the following would be included in the entry to record the salaries expense for February?

  1. A) a debit to Salaries Payable to employees for $1,202.80
  2. B) a debit to FICA—Medicare Taxes Payable for $1,202.80
  3. C) a credit to FICA—OASDI Taxes Payable for $1,202.80
  4. D) a credit to Salaries Expense for $1,202.80

Answer:  C

Explanation:  C)

Katie’s Salary                                                                                             $8,500.00

Ferro’s Salary                                                                                            $10,900.00

Total Salary                                                                                               $19,400.00

 

Credit to FICA-OASDI Taxes Payable ($19,400 × 6.2%)                $1,202.80

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

36) For the month of September, Countrywide Sales, Inc. recorded gross pay of $66,000. The net pay for the month amounted to $62,500. The salaries are paid on October 5. Which of the following is the journal entry for the payment of salaries?

 

A)

Salaries and Wages Payable 62,500
     Cash 62,500

 

B)

Salaries and Wages Payable 66,000
     Cash 66,000

 

C)

Salaries and Wages Expense 62,500
     Cash 62,500

 

D)

Cash 66,000
     Salaries and Wages Expense 66,000

 

Answer:  A

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

37) Statewide Sales, Inc. has gross pay for March of $45,000. Which of the following is included in the journal entry to record salaries expense?

  1. A) credit Salaries and Wages Expense
  2. B) debit Cash
  3. C) debit Salaries and Wages Payable
  4. D) debit Salaries and Wages Expense

Answer:  D

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

38) Kevin, an employee of Sunbeam, Inc., has gross salary for May of $8,000. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. He is also subject to federal income tax at a rate of 20%. Which of the following is a part of the journal entry to record the disbursement of his net pay? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

  1. A) debit to Cash for $5,788.00
  2. B) credit to Cash for $5,788.00
  3. C) debit to Employee Income Tax Payable of $5,788.00
  4. D) debit to FICA Tax Payable of $5,788.00

Answer:  B

Explanation:  B)

Gross Pay                                                                $8,000

Less: Federal Income Tax                               1,600.00

Less: OASDI ($8,000 × 6.2%)                             496.00

Less: Medicare ($8,000 × 1.45%)                      116.00

Net Pay                                                              $5,788.00

 

Credit to Cash                                                  $5,788.00

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

39) Larry, an employee of Ramsay’s, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. He is also subject to federal income tax at a rate of 18%. Larry has a deduction of $320 for health insurance and $80 for United Way. Which of the following is included in the entry to record the liability of payroll withholding deductions?

  1. A) debit to Salaries Payable
  2. B) credit to United Way Payable
  3. C) debit to FICA Taxes Payable
  4. D) debit to Cash

Answer:  B

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

40) Harrison, an employee of Saft Associates, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. He is also subject to federal income tax at a rate of 18%. Harrison has a deduction of $320 for health insurance and $80 for United Way. Which of the following is included in the entry to record the disbursement of his net pay?

  1. A) credit to Salaries and Wages Payable
  2. B) debit to United Way Payable
  3. C) debit to FICA Taxes Payable
  4. D) credit to Cash

Answer:  D

Diff: 3

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

41) Cambridge Sales, Inc. has gross salaries and wages for March of $45,000. Provide the journal entry to record salaries and wages expense and payroll withholdings. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.) Salaries and wages to date are under the OASDI limit. Assume no federal or state income taxes are due.

Answer:

Salaries and Wages Expense                                                       45,000.00

FICA—OASDI tax payable ($45,000 × 6.20%)                                                  2,790.00

FICA—Medicare Tax Payable ($45,000 × 1.45%)                                                652.50

Salaries and Wages Payable                                                                               41,557.50

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

42) Leroy, an employee of Double Time, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. He is also subject to federal income tax at a rate of 18%. Provide the journal entry to record salaries expense and payroll withholdings. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

Answer:

Salaries Expense                                                                                        4,000

Employee Income Taxes Payable ($4,000 × 18%)                                                 720

FICA—OASDI Taxes Payable ($4,000 × 6.20%)                                                     248

FICA—Medicare Taxes Payable ($4,000 × 1.45%)                                                   58

Salaries Payable                                                                                                           2,974

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

43) Karl, an employee of Smith Electric, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. He is also subject to federal income tax at a rate of 18%. Karl has a deduction of $320 for health insurance and $80 for United Way. Provide the journal entry to record salaries expense and payroll withholdings. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

Answer:

Salaries Expense                                                                                        4,000

Employee Income Taxes Payable ($4,000 × 18%)                                                 720

FICA—OASDI Taxes Payable ($4,000 × 6.20%)                                                     248

FICA—Medicare Taxes Payable ($4,000 × 1.45%)                                                   58

Employee Health Insurance Payable                                                                       320

United Way Payable                                                                                                        80

Salaries Payable ($4,000 – $720 – $248 – 58 – $320 – $80)                                  2,574

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

44) William Baker works for Jones Restaurant Supply all year and earns a monthly salary of $8,000.  There is no overtime pay and Jones withholds income taxes at 12% of gross pay. Jones deducts $200 monthly fo the co-payment of the health insurance premium.  Employees are paid on the fifth day of each month.  As of October, 31, William had $80,000 of cumulative earnings.  Journalize the accrual of salaries expense on October 31.  Omit explanations.

Answer:

Salaries and Wages Expense                                                                     8,000

FICA – OASDI Payable ($8,000 × 6.2%)                                                                      496

FICA – Medicare Taxes Payable ($8,000 × 1.45%)                                                    116

Employee Income Taxes Payable ($8,000 × 12%)                                                    960

Employee Health Insurance Payable                                                                          200

Salaries and Wages Payable                                                                                      6,228

Diff: 3

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Journalizing Employee Payroll

 

45) Federal unemployment compensation tax (FUTA) is not withheld from employees’ gross earnings.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

46) State unemployment compensation tax (SUTA) is not withheld from employees’ gross earnings.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

47) State unemployment compensation tax (SUTA) is paid by the employer and is not deducted from an employee’s gross earnings.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

48) Federal unemployment compensation tax is paid by the employer and is not deducted from an employee’s gross earnings.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

49) FICA tax is paid by the employee only and is deducted from gross earnings.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

50) The Social Security system is funded by contributions from both the employer and employee.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

51) Employer FICA is paid by the employer and recorded as a payroll tax expense.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

52) FICA tax is a tax that is paid both by the employer and the employee.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

53) Employer FICA tax is paid by the employer and is added to the employee’s earnings.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

54) FICA tax is paid by the employee only.

Answer:  FALSE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

55) David, an employee of Cecil, Inc., has gross salary for March of $5,600. The entire amount is under the OASDI limit of $117,000, and thus subject to FICA. He is also subject to federal income tax at a rate of 30%. His year-to-date pay has already exceeded the $7,000 cap for FUTA and SUTA. The journal entry to record the employer’s payroll tax expense includes a credit to FICA—OASDI Taxes Payable for $347.20. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

Answer:  TRUE

Explanation:  FICA—OASDI Taxes Payable = $5,600 × 6.2% = $347.20

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

56) Joe, an employee of Time Travel, Inc., has gross salary for March of $5,200. The entire amount is under the OASDI limit of $117,000, and thus subject to FICA. He is also subject to federal income tax at a rate of 21%. His year-to-date pay has already exceeded the $7,000 cap for FUTA and SUTA. The journal entry to record employer’s payroll tax expense includes a credit to FICA—Medicare Taxes Payable for $150.80. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

Answer:  FALSE

Explanation:  FICA—Medicare Tax Payable = $5,200 × 1.45% = $75.40

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

57) The journal entry to record the employer’s payroll tax expense will include a debit to Employee Income Taxes Payable.

Answer:  FALSE

Diff: 2

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

58) Mayfield, Inc. withholds $720 from Stephen’s paycheck for federal income tax. This amount is part of the company’s payroll tax expense.

Answer:  FALSE

Diff: 2

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

59) Which of the following is paid by the employer only?

  1. A) OASDI tax
  2. B) medicare tax
  3. C) employee income tax
  4. D) federal unemployment tax

Answer:  D

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

60) It is mandatory for both the employer and employee to pay ________.

  1. A) FICA
  2. B) SUTA
  3. C) employee income tax
  4. D) federal unemployment tax

Answer:  A

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

 

 

61) Which of the following deductions is paid by both the employer and employee?

  1. A) federal income taxes
  2. B) federal unemployment taxes
  3. C) FICA taxes
  4. D) SUTA taxes

Answer:  C

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

62) Spencer’s gross pay for the week is $1,400. Spencer’s yearly pay is under the limit for OASDI. Assume that the rate for state and federal unemployment compensation taxes is 6% and that Spencer’s year-to-date pay has not yet exceeded the $7,000 cap. What is the amount of state and federal unemployment tax that his employer must record as payroll tax expense and pay to the federal and state governments?

  1. A) $197.61
  2. B) $188.30
  3. C) $104.30
  4. D) $84.00

Answer:  D

Explanation:  D)

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

63) Tanner’s gross pay for the week is $1,400. His yearly pay is under the limit for OASDI. Assume that the rate for state and federal unemployment compensation taxes is 6% and that Tanner’s year-to-date pay has previously exceeded the $7,000 cap. What is the amount of state and federal unemployment tax that his employer must record as payroll tax expense and pay to the federal and state governments?

  1. A) $0
  2. B) $20.3
  3. C) $104.3
  4. D) $84

Answer:  A

Explanation:  A) Because Tanner’s year-to-date pay has already exceeded $7,000,

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

64) Jason’s gross pay for the week is $1,300. His yearly pay is under the limit for OASDI. Assume that the rate for state and federal unemployment compensation taxes is 6% and that Jason’s year-to-date pay has not yet exceeded the $7,000 cap. His yearly pay is under the limit for OASDI. What is the total amount of payroll taxes that his employer must record as payroll tax expenses? (Do not round your intermediate calculations. Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

  1. A) $73.45
  2. B) $80.60
  3. C) $177.45
  4. D) $159.93

Answer:  C

Explanation:  C)

Gross Pay                                                          $1,300.00

OASDI ($1,300 × 6.2%)                                          80.60

Medicare ($1,300 × 1.45%)                                   18.85

FUTA ($1,300 × 6%)                                                     78

Payroll Tax Expense                                         $177.45

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

65) Gene’s gross pay for the week is $1,300. His yearly pay is under the limit for OASDI. Assume that the rate for state and federal unemployment compensation taxes is 6% and that Gene’s year-to-date pay has previously exceeded the $7,000 cap. His yearly pay is under the limit for OASDI. What is the total amount of payroll taxes that Gene’s employer must record as payroll tax expenses? (Do not round your intermediate calculations. Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

  1. A) $80.60
  2. B) $54.60
  3. C) $18.85
  4. D) $99.45

Answer:  D

Explanation:  D)

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

 

66) Which of the following is included in the entry to record the employer’s payroll taxes?

  1. A) a debit to State Unemployment Tax Payable
  2. B) a credit to Payroll Tax Expense
  3. C) a credit to FICA—OASDI Tax Payable
  4. D) a credit to Salaries Payable

Answer:  C

Diff: 2

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Employer Payroll Taxes

67) Dan Jones and Pat Smith are two employees of Lone Star, Inc. In January 2017, Dan’s gross pay was $10,500, and Pat’s gross pay was $10,900. All earnings are subject to FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%. Which of the following would be included in the entry to record the payroll tax expense to be paid out by Lone Star, Inc. for January?

  1. A) a debit to Salaries Payable to employees for $310.30
  2. B) a debit to FICA—OASDI Taxes Payable for $310.30
  3. C) a credit to FICA—Medicare Taxes Payable for $310.30
  4. D) a credit to Salaries Expense for $310.30

Answer:  C

Explanation:  C)

Dan’s Salary                                                                                             $10,500.00

Pat’s Salary                                                                                                  10,900.00

Total Salary                                                                                              $21,400.00

 

Credit to FICA-Medicare Taxes Payable ($21,400 × 1.45%)            $310.30

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

 

68) Jack, an employee of Desert Sky, Inc., has gross salary for May of $6,000. The entire amount is under the OASDI limit of $117,000 and thus subject to FICA. He is also subject to federal income tax at a rate of 20%. Which of the following is a part of the journal entry for accrual of the employer payroll taxes? (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.) Jack’s income to date exceeds the FUTA and SUTA tax income limits.

  1. A) credit to Salaries Payable for $6,000
  2. B) debit to Cash for $4,461.00
  3. C) debit to Employee Income Taxes payable of $1,200.00
  4. D) credit to FICA—Medicare Taxes Payable of $87.00

Answer:  D

Explanation:  D)

OASDI ($6,000 × 6.2%)                                                                      $372.00

Medicare ($6,000 × 1.45%)                                                                    87.00

Payroll Tax Expense                                                                               $459

 

Credit to FICA—Medicare Taxes payable = $87.00

 

Payroll Tax Expense                                         459

FICA—Medicare Taxes Payable                            87.00

FICA—OASDI Taxes Payable                              372.00

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

69) Grant, an employee of Fitzgerald, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000, and thus subject to FICA. His year-to-date pay has already exceeded the $7,000 cap for FUTA and SUTA. Which of the following is a part of the journal entry to record the employer’s payroll taxes?

  1. A) credit to Payroll Tax Expense
  2. B) debit to FICA Taxes Payable
  3. C) credit to FICA—Medicare Taxes Payable
  4. D) debit to Cash

Answer:  C

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

 

70) Lawrence, an employee of Light, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000, and thus subject to FICA. His year-to-date pay has already exceeded the $7,000 cap for FUTA and SUTA. Which of the following is a part of the journal entry to record the employer’s payroll taxes?

  1. A) debit to Payroll Tax Expense
  2. B) debit to FICA Taxes Payable
  3. C) credit to Payroll Tax Expense
  4. D) debit to Cash

Answer:  A

Diff: 1

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

71) Doug, an employee of Cayman Travels, Inc., has gross salary for March of $4,000. The entire amount is under the OASDI limit of $117,000, and thus subject to FICA. His year-to-date pay has already exceeded the $7,000 cap for FUTA and SUTA. Provide the journal entry to record the employer’s payroll taxes. (Assume a FICA—OASDI Tax of 6.2% and FICA—Medicare Tax of 1.45%.)

Answer:

Payroll Tax Expense                                                                                         306

FICA—OASDI Taxes Payable ($4,000 × 6.20% = $248)                                         248

FICA—Medicare Taxes Payable ($4,000 × 1.45% = $58)                                         58

Diff: 2

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

72) Main Street Restaurant incurred salaries expense of $60,000 for 2016. The payroll expense includes employer FICA tax, in addition to state unemployment tax and federal unemployment tax.  Of the total salaries, $17,000 is subject to unemployment tax. Also, the company provides the following benefits for employees: health insurance (cost to the company, $2,500), life insurance (cost to the company, $700), and retirement benefits (cost to the company, 10% of salaries expense). Journalize Main Street’s expenses for employee benefits and for payroll taxes. Explanations are not required.

Answer:

                                Accounts and Explanation                                                 Debit              Credit

Payroll Tax Expense                                                                                              5,644

FICA—OASDI Taxes Payable (6.2% × $60,000)                                                                3,720

FICA—Medicare Taxes Payable (1.45% × $60,000)                                                            870

Federal Unemployment Taxes Payable (0.6% × $17,000)                                                 102

State Unemployment Taxes Payable (5.6% × $17,000)                                                      952

 

Employee Benefits Expense                                                                                 9,200

Employee Health Insurance Payable                                                                                  2,500

Employee Life Insurance Payable                                                                                            700

Employee Retirement Benefits Payable                                                                              6,000

Diff: 3

LO:  11-2

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Employer Payroll Taxes

 

73) Establishing controls for efficiency of the payroll process is one of the two key controls for payroll.

Answer:  TRUE

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

74) Which of the following is an important aspect of control over payroll?

  1. A) controls to limit salaries and wages so that they are no higher than competitors
  2. B) controls for efficiency in payroll procedures
  3. C) controls to screen potential employees for criminal records
  4. D) controls to monitor employee behavior, such as use of security cameras

Answer:  B

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

75) Which of the following is a reason why many companies require a photo ID when employees pick up their paychecks?

  1. A) to make sure an employee’s work hours have been accurately reported
  2. B) to avoid writing a paycheck to a fictitious person
  3. C) to improve efficiency of the payroll disbursement process
  4. D) to make sure all employees are legal adults

Answer:  B

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

76) Which of the following is true of good internal controls over payroll?

  1. A) Accounting for payroll should be separate from hiring and firing of employees.
  2. B) Disbursement of paychecks should not be separate from the function of maintaining payroll records.
  3. C) Hiring and firing employees should not be separated from accounting and from disbursing paychecks.
  4. D) Cash receipts from customers should be separated from the accounting for accounts receivable.

Answer:  A

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

77) Which of the following is a major control risk related to payroll?

  1. A) theft of inventory by staff
  2. B) a dishonest employee cashing a paycheck that was written to a fictitious person
  3. C) expenses being recorded as assets in order to manipulate earnings
  4. D) contracts being awarded to relatives of employees

Answer:  B

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

78) Which of the following is a control procedure to prevent a dishonest employee from cashing a paycheck that was written to a fictitious person?

  1. A) having employees clock in and out of work
  2. B) keeping computerized records of payroll data
  3. C) serial numbering of paychecks
  4. D) requiring photo IDs for employees picking up their paychecks

Answer:  D

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

79) Which of the following is an important internal control over payroll?

  1. A) separating the duties of the disbursement of paychecks from the recording of payroll transactions in the ledger
  2. B) separating the duties of safeguarding property from record-keeping of property
  3. C) separating the duties of approving invoices from signing disbursement checks
  4. D) separating the duties of cash disbursement from bank reconciliations

Answer:  A

Diff: 1

LO:  11-2

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Internal Controls Over Payroll

 

Learning Objective 11-3

 

1) Usually a company does not know the amount of the year-end bonus at year-end.

Answer:  TRUE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Bonus Plans

 

2) Since a company usually does not know the amount of the year-end bonus at year-end, the company estimates the amount of the bonus based on a percentage.

Answer:  TRUE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Bonus Plans

 

3) Jefferson Enterprises estimates that it will pay a 9% bonus on annual net income.  If Jefferson reports net income of $510,000 before the calculation of the bonus, the amount of the bonus is $45,900.

Answer:  FALSE

Explanation:

Bonus    = (Bonus % × Net income before bonus)/ (1 + Bonus %)

= (0.09 × $510,000) / (1 + 0.09)

=  ($42,110 rounded)

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Bonus Plans

 

4) The employees of Royal Clothes achieved all of the sales goals for 2017. Royal decides to reward the employees with a bonus of 18% on annual net income, after deducting the bonus. The net income before the calculation of the bonus is $304,000. What is the amount of the bonus? (Round your final answer to the nearest dollar.)

  1. A) $54,720
  2. B) $46,373
  3. C) $53,647
  4. D) $9,850

Answer:  B

Explanation:  B)

Bonus    = (Bonus % × Net income before bonus) / (1 + Bonus %)

= (18% × $304,000) / (1 + 18%)

= $46,373

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Bonus Plans

 

5) Paramount, Inc. decided to reward its employees with a bonus of 7% on annual net income, after deducting the bonus. The company reported net income of $513,600 before the calculation of the bonus. Prepare the journal entry to accrue employee bonus expense.

Answer:

Employee Bonus Expense 33,600
       Employee Bonus Payable 33,600

 

Explanation:

Bonus = (Bonus % × Net income before bonus) / (1 + Bonus %)

Bonus = (7% × $513,600) / (1 + 7%) = $33,600

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Bonus Plans

 

6) Vacation, health, and pension benefits must be estimated and recorded as a liability.

Answer:  TRUE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Vacation, Health, and Pension Benefits

 

7) Which of the following accounts is debited when employees take paid vacation?

  1. A) Vacation Benefits Expense
  2. B) Vacation Benefits Payable
  3. C) Salaries Expense
  4. D) No entry is needed.

Answer:  B

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Vacation, Health, and Pension Benefits

 

8) Which of the following statements regarding vacation benefits is correct?

  1. A) No entry is needed until the employee takes paid vacation.
  2. B) The account, Vacation Expense is debited when the employee takes paid vacation.
  3. C) Health and pension benefits are recorded in the same manner as vacation benefits.
  4. D) When an employee takes paid vacation, the account, Vacation Benefits Payable is credited.

Answer:  C

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Vacation, Health, and Pension Benefits

 

 

9) Tryst, Inc. has a policy of accruing $2,400 for every employee as a vacation benefit. Sarah, an employee, took a vacation. Which of the following is the correct journal entry for the vacation benefit paid?

 

A)

Vacation Benefits Payable 2,000
     Vacation Benefits Expense 2,000

 

B)

Vacation Benefits Expense 2,400
     Cash 2,400

 

C)

Vacation Benefits Payable 2,400
     Cash 2,400

 

D)

Vacation Benefits Expense 2,000
     Vacation Benefits Payable 2,000

 

Answer:  C

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Vacation, Health, and Pension Benefits

10) Warranties pose an accounting challenge because a company does not know which or how many products will have to be repaired.

Answer:  TRUE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

11) The entry to accrue the warranty payable includes a credit to Warranty Expense.

Answer:  FALSE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

 

12) Estimated Warranty Payable is included in the liability section of the balance sheet.

Answer:  TRUE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

13) The matching principle requires businesses to record Warranty Expense when the warranty costs are incurred.

Answer:  FALSE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

14) Warranty Expense is shown on the income statement at the estimated amount.

Answer:  TRUE

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

15) The matching principle requires businesses to report Warranty Expense ________.

  1. A) in the same period that the company records the revenue related to that warranty
  2. B) in the period prior to which the company records the revenue related to that warranty
  3. C) in the period after the related revenue is recorded
  4. D) in the long-term assets section of the balance sheet

Answer:  A

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

16) Synergy Appliances sells dishwashers with a four-year warranty. In 2017, sales revenue for dishwashers is $97,000. The company estimates warranty expense at 4.5% of revenues. What is the total estimated warranty payable of Synergy Appliances in 2017? (Round your final answer to the nearest dollar.)

  1. A) $4,365
  2. B) $1,091
  3. C) $1,598
  4. D) $3,424

Answer:  A

Explanation:  A)

Sales Revenue                                                                                $97,000

Warranty Expense                                                                              4.5%

Estimated Warranty Payable ($97,000 × 4.5%)                      $4,365

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

17) Dana Appliances sells dishwashers with a four-year warranty. In 2017, sales revenue for dishwashers is $90,000. The company estimates warranty expense at 4.5% of revenues. What is the 2017 warranty expense? (Round your final answer to the nearest dollar.)

  1. A) $4,050
  2. B) $1,013
  3. C) $0
  4. D) $3,176

Answer:  A

Explanation:  A)

Sales Revenue                                                            $90,000.00

Warranty Expense                                                               4.5%

Warranty expense ($90,000 × 4.5%)                           $4,050

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

18) The expense for warranty costs is recorded in the period ________.

  1. A) when the product is sold
  2. B) when the product is repaired or replaced
  3. C) when cash is paid to repair or replace the product
  4. D) when cash is collected from the sale of the product

Answer:  A

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

19) Which of the following accounting principles requires that warranty expense must be estimated and recognized in the same period when the related sales revenue is recognized?

  1. A) the matching principle
  2. B) the disclosure principle
  3. C) the revenue principle
  4. D) the consistency principle

Answer:  A

Diff: 1

LO:  11-3

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Warranties

 

20) Buffalo, Inc. reported sales revenue for 2017 of $911,000. The products were sold with a nine-month warranty. Members of Buffalo’s management estimate that the cost of the warranty will be equal to 9% of sales revenue. Which of the following will be included in the entry to record the actual amounts paid out as a result of warranty claims?

  1. A) a debit to Estimated Warranty Payable for the actual amount of payments
  2. B) a credit to Estimated Warranty Payable for $81,990
  3. C) a debit to Estimated Warranty Payable for $81,990
  4. D) a debit to Warranty Expense for the actual amount of payments

Answer:  A

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

21) Which of the following is included in the entry to record accrual of warranty expense?

  1. A) a debit to Warranty Expense
  2. B) a credit to Merchandise Inventory
  3. C) a credit to Warranty Expense
  4. D) a debit to Estimated Warranty Payable

Answer:  A

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

22) Which of the following is included in the entry to record estimated warranty payable?

  1. A) a credit to Estimated Warranty Payable
  2. B) a credit to Merchandise Inventory
  3. C) a credit to Warranty Expense
  4. D) a debit to Estimated Warranty Payable

Answer:  A

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

23) Jumbo Sales Corporation offers warranties on all their electronic goods. Warranty expense is estimated at 3% of sales revenue. In 2017, the company had $610,000 of sales. In the same year, it paid out $9,000 of warranty payments. Which of the following is the entry needed to record the estimated warranty expense?

 

A)

Estimated Warranty Payable 9,000
     Cash 9,000

 

B)

Warranty Expense 9,000
     Estimated Warranty Payable 9,000

 

C)

Warranty Expense 18,300
     Estimated Warranty Payable 18,300

 

D)

Warranty Expense 18,300
     Sales Revenue 18,300

 

Answer:  C

Explanation:  C) Calculation: Warranty expense = $610,000 × 3% = $18,300

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

24) Lawrence Sales Corporation offers warranties on all their electronic goods. Warranty expense is estimated at 4% of sales revenue. In 2017, the company had $608,000 in sales. In the same year, Lawrence Sales replaced defective goods with a cost of $18,500. Which of the following is the entry needed to record the replacement of the defective goods?

 

A)

Estimated Warranty Payable 18,500
     Merchandise Inventory 18,500

 

B)

Warranty Expense 18,500
     Estimated Warranty Payable 18,500

 

C)

Warranty Expense 24,320
     Estimated Warranty Payable 24,320

 

D)

Warranty Expense 24,320
     Merchandise Inventory 24,320

 

Answer:  A

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

25) Saran Digital, Inc. starts the year with $3,500 in its Estimated Warranty Payable account. During the year, there were $226,000 in sales and $5,000 in warranty repair payments. Saran Digital estimates warranty expense at 4% of sales. The Warranty Expense for the year is ________.

  1. A) $9,040
  2. B) $5,000
  3. C) $3,500
  4. D) $7,540

Answer:  A

Explanation:  A)

Warranty Expense 9,040
     Estimated Warranty Payable ($226,000 × 4%) 9,040

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

26) White Hat Digital, Inc. starts the year with a credit balance of $3,000 in its Estimated Warranty Payable account. During the year, there were $222,000 in sales and $4,900 in warranty repair payments. White Hat Digital estimates warranty expense at 2% of sales. At the end of the year, what is the balance in the Estimated Warranty Payable account?

  1. A) $4,440 debit
  2. B) $4,900 credit
  3. C) $3,000 debit
  4. D) $2,540 credit

Answer:  D

Explanation:  D)

Opening Balance of Estimated Warranty Payable                     $3,000

Add: Warranty Expense                                                                       4,440

Less: Warranty Repairs                                                                         4,900

Closing Balance of Estimated Warranty Payable                       $2,540

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

27) Cycle Haven, Inc. offers warranties on all their bikes. They estimate warranty expense at 4.5% of sales. At the beginning of 2017, the Estimated Warranty Payable account had a credit balance of $2,200. During the year, Cycle Haven had $305,000 in sales and had to pay out $6,000 in warranty payments. How much Warranty Expense will be reported on the 2017 income statement?

  1. A) $9,925
  2. B) $8,200
  3. C) $11,525
  4. D) $13,725

Answer:  D

Explanation:  D)

Sales revenue                                                                     $305,000

Rate of estimated warranty expense                                  4.5%

Warranty Expense to be reported                                  $13,725

Diff: 1

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

28) Bespoke, Inc. offers warranties on all their bikes. They estimate warranty expense at 4.5% of sales. At the beginning of 2017, the Estimated Warranty Payable account had a credit balance of $1,200. During the year, Bespoke had $305,000 in sales and had to pay out $5,700 in warranty payments. At the end of the year, what is the closing balance in the Estimated Warranty Payable accounts?

  1. A) $9,225
  2. B) $6,900
  3. C) $12,525
  4. D) $13,725

Answer:  A

Explanation:  A)

Opening Balance of Estimated Warranty Payable                  $1,200

Add: Warranty Expense (4.5% × $305,000)                               13,725

Less: Warranty Repairs                                                                     5,700

Closing Balance of Estimated Warranty Payable                    $9,225

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

29) Ragas, Inc. sold goods with a selling price of $62,000 in the 2017 and estimated 4% warranty expense for the year. Customers complained of defects, and goods with a cost of $3,500 had to be replaced. Which of the following is the correct journal entry for honoring the warranties with goods?

 

A)

Estimated Warranty Payable 3,500
     Cash 3,500

 

B)

Estimated Warranty Payable 3,500
     Merchandise Inventory 3,500

 

C)

Warranty Expense 3,500
     Merchandise Inventory 3,500

 

D)

Estimated Warranty Payable 3,500
     Warranty Expense 3,500

 

Answer:  B

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

30) Northwest, Inc. records indicate that January sales on account were $109,000. The company’s management estimates warranty expense to be 3.6% of sales. Prepare the journal entry to record warranty expense.

Answer:

Warranty Expense 3,924
       Estimated Warranty Payable 3,924

 

Explanation:

Warranty Expense = $109,000 × 3.6% = $3,924

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

31) Felix Sales, Inc. offers warranties on all its electronic goods. Warranty expense is estimated at 3.5% of sales revenue. In 2017, Felix had sales of $333,000. In the same year, Felix replaced defective goods with merchandise inventory costing $8,750. Prepare the journal entry to record the warranty expense.

Answer:

Warranty Expense 11,655
       Estimated Warranty Payable 11,655

 

Explanation:

Warranty Expense = 333,000 × 3.5% = $11,655

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

32) Iggy Sales, Inc. offers warranties on all its electronic goods. Warranty expense is estimated at 3.5% of sales revenue. In 2017, Iggy had sales of $333,000. In the same year, Iggy replaced defective goods with merchandise inventory costing $8,750. Prepare the journal entry to record the replacement of defective goods.

Answer:

Estimated Warranty Payable 8,750
       Merchandise Inventory 8,750

 

Explanation:

Merchandise Inventory Repaired = $8,750

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

33) McBride Industries completed the following transactions during 2016:

 

Oct. 1 Made sales of $10,000.  McBride estimates that warranty expense is 5% of sales.  (Record only the warranty expense.)
Oct. 24 Paid $250 to satisfy warranty claims.
Dec. 31 Estimated vacation benefits expense to be $2,350.
Dec. 31 McBride expected to pay its employees a 4% bonus on net income after deducting the bonus.  Net income for the year is $25,000.

 

Journalize the transactions (explanations are not required).  Round to the nearest dollar.

Answer:

Date Accounts and Explanation Debit Credit
2016
Oct. 1 Warranty Expense (5% × $10,000) 500
     Estimated Warranty Payable 500
Oct. 24 Estimated Warranty Payable 250
     Cash 250
Dec. 31 Vacation Benefits Expense 2,350
     Vacation Benefits Payable 2,350
Dec. 31 Employee Bonus Expense (4% × 25,000) / 1.04 962
     Employee Bonus Payable 962

Diff: 3

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

 

34) The following transactions of Windsor Enterprises occurred in 2016 and 2017:

 

Jul. 31, 2016 Purchased a delivery truck at a cost of $14,000, signing a six-month, 8% note payment for that amount.
Aug. 31, 2016 Recorded the month’s sales of $105,000 ($40,000 for cash and the balance on credit).  Sales amounts are subject to a 6% state sales tax.  Ignore cost of goods sold.
Sept. 20, 2016 Paid the August sales tax to the state.
Dec. 31, 2016 Accrued warranty expense, which is estimated to be 3% of sales of $748,500.
Dec. 31, 2016 Accrued interest on the outstanding note payable.
Feb. 1, 2017 Paid off the note from July 31, 2016

 

Journalize the transactions in Windsor’s general journal.  Explanations are not required.  Round to the nearest dollar.

Answer:

Date Accounts and Explanations Debit Credit
2016
Jul. 31 Delivery Truck 14,000
     Short-term Notes Payable 14,000
Aug. 31 Cash ($40,000 × 1.06) 42,400
Accounts Receivable ($105,000 – 40,000)(1.06) 68,900
     Sales 105,000
     Sales Tax Payable ($105,000 × .06) 6,300
Feb. 5 Sales Tax Payable 6,300
     Cash 6,300
Dec. 31 Warranty Expense (3% × $748,500) 22,455
     Estimated Warranty Payable 22,455
Dec. 31 Interest Expense (14,000 × 8% × 5/12) 467
     Interest Payable 467
2017
Jan. 31 Short-term Notes Payable 14,000
Interest Expense 467
Interest Expense ($14,000 × 8% × 1/12) 93
     Cash 14,560

Diff: 3

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

 

35) You have started working for a company that manufactures lawn mowers.  These mowers carry a warranty that will replace defective parts for one year.  The corporate president feels that an expense should be recorded when the defective parts are replaced.  Explain the proper accounting treatment to the corporate president.

Answer:  The matching principle requires businesses to record warranty expense in the same period the company records the revenue from the sales of the lawn mowers. This means that the expense is incurred when the sale is made, not when the company makes the warranty repairs. Because the exact amount of the warranty expense is not known at the time of the sale, the company must estimate the amount of expense. At the end of the accounting period, an adjusting entry is made to debit Warranty Expense and credit Estimated Warranty Payable.  Estimated Warranty Payable is a liability account that appears on the balance sheet. When defective parts are replaced, the company will debit Estimated Warranty Payable and credit Merchandise Inventory.

Diff: 2

LO:  11-3

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Warranties

Learning Objective 11-4

 

1) When a company co-signs a note payable for another entity, a current liability must be recorded.

Answer:  FALSE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Contingent Liabilities Accounted For? (H1)

 

2) Which of the following is true of a contingent liability?

  1. A) It is a potential liability that depends on a future event.
  2. B) It is an actual liability that is difficult to estimate.
  3. C) It is an actual liability that depends on a past event.
  4. D) It is a liability resulting from a lawsuit settled in court.

Answer:  A

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Contingent Liabilities Accounted For? (H1)

 

3) What is a contingent liability?  Provide two examples of contingencies.

Answer:  A contingent liability is a potential, rather than an actual, liability because it depends on a future event. For a contingent liability to be paid, some event (the contingency) must happen in the future. Two examples of contingencies are lawsuits and co-signing a note for another entity.

Diff: 2

LO:  11-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Are Contingent Liabilities Accounted For? (H1)

 

4) If the likelihood of a future event is remote, how should the company report the contingency?

Answer:  No disclosure is needed.

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Contingent Liabilities Accounted For? (H1)

 

5) If the likelihood of a future event is reasonably possible, how should the company report the contingency?

Answer:  Describe the situation in a note to the financial statements.

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Contingent Liabilities Accounted For? (H1)

6) If the likelihood of a future event is probable and the amounts of the expense cannot be estimated, how should the company report the contingency?

Answer:  Describe the situation in a note to the financial statements.

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Contingent Liabilities Accounted For? (H1)

 

7) If the likelihood of a future event is probable and the amounts of the expense can be estimated, how should the company report the contingency?

Answer:  Record as expense and a liability based on estimated amounts.

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Are Contingent Liabilities Accounted For? (H1)

 

8) If a contingency is remote, the company does not need to record a liability and does not need to disclose it in the notes to the financial statements.

Answer:  TRUE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Remote Contingent Liability

 

 

9) A contingency was evaluated at year-end and considered to have a remote possibility of becoming an actual liability. If this is not reported on the balance sheet or in the notes to the financial statements, it could be considered a violation of generally accepted accounting principles.

Answer:  FALSE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Remote Contingent Liability

 

10) A restaurant is being sued because a customer claims to have found a bug in her chili. The company’s lawyers believe there is only a remote possibility that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company’s management?

  1. A) The situation should be described in a note to the financial statements.
  2. B) The possible liability should not be shown in the financial statements.
  3. C) The liability should be estimated and accrued as an expense.
  4. D) An expense must be matched to the period in which the incident occurred.

Answer:  B

Diff: 2

LO:  11-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Remote Contingent Liability

11) A contingency was evaluated at year-end and considered to have a remote possibility of becoming an actual liability. If this was not reported on the balance sheet or in the notes to the financial statements, what effect would this have on the financial reporting of the company?

  1. A) There would be no effect.
  2. B) The liabilities on the balance sheet would be understated.
  3. C) The information about the transaction would be inadequately disclosed in the notes.
  4. D) The net income of the company would be understated.

Answer:  A

Diff: 1

LO:  11-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Remote Contingent Liability

 

12) A contingency was evaluated at year-end and considered to have a reasonable possibility of becoming an actual liability. If this was not reported on the balance sheet or in the notes to the financial statements, it could be considered a violation of generally accepted accounting principles.

Answer:  TRUE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Reasonably Possible Contingent Liability

 

 

13) A corporation has been sued for product failures allegedly resulting in injuries to the individuals bringing the lawsuit. The company’s lawyers believe it is more than remote, but less than probable, that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company’s management?

  1. A) The liability should be estimated and recorded as an expense.
  2. B) The situation should be described in a note to the financial statements.
  3. C) The possible liability should be ignored.
  4. D) Management should consider resigning.

Answer:  B

Diff: 2

LO:  11-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Reasonably Possible Contingent Liability

14) A contingency was evaluated at year-end and considered to have a reasonable possibility of becoming an actual liability. If this was not reported in the notes to the financial statements, what is the effect on the financial reporting of the company?

  1. A) There would be no effect.
  2. B) The liabilities on the balance sheet would be understated.
  3. C) The information about the transaction would be inadequately disclosed in the notes.
  4. D) The net income of the company would be understated.

Answer:  C

Diff: 1

LO:  11-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Reasonably Possible Contingent Liability

 

15) If a contingency that is probable can be reasonably estimated, a liability is recorded and an expense is accrued.

Answer:  TRUE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Probable Contingent Liability

 

16) Only contingencies that are probable and can be estimated are recorded as a liability and an accrued expense.

Answer:  TRUE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Probable Contingent Liability

 

 

17) A contingency was evaluated at year-end. Management felt it was probable that this would become an actual liability and the amount could be reasonably estimated. If this is reported on the balance sheet, it could be considered a violation of generally accepted accounting principles.

Answer:  FALSE

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Probable Contingent Liability

18) Which of the following is the proper treatment for a contingency that is probable but the exact amount of which is not known? The amount can be estimated.

  1. A) The liability should be doubled following conservatism.
  2. B) The liability should be estimated and recorded.
  3. C) The liability should be ignored.
  4. D) The liability should be reported in the notes to the financial statements.

Answer:  B

Diff: 2

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Probable Contingent Liability

 

19) Which of the following is an example of an estimable probable contingency?

  1. A) FICA Taxes Payable
  2. B) Income Taxes Payable
  3. C) Warranty Payable
  4. D) Accounts Payable

Answer:  C

Diff: 1

LO:  11-4

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  Probable Contingent Liability

 

20) A contingency was evaluated at year-end.  Management felt it was probable that this would become an actual liability and the amount could be reasonably estimated. If this was not reported on the balance sheet or in the notes to the financial statements, what is the effect on the financial reporting of the company?

  1. A) There would be no effect.
  2. B) The liabilities on the balance sheet would be understated.
  3. C) The information about the transaction would be inadequately disclosed in the notes.
  4. D) The net income of the company would be understated.

Answer:  B

Diff: 1

LO:  11-4

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  Probable Contingent Liability

 

Learning Objective 11-5

 

1) Investors use the times-interest-earned ratio to evaluate a company’s ability to pay interest expense.

Answer:  TRUE

Diff: 1

LO:  11-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

2) The times-interest-earned ratio is also called the short interest ratio.

Answer:  FALSE

Diff: 1

LO:  11-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

3) A high interest-coverage ratio indicates a company’s difficulty in paying interest expense.

Answer:  FALSE

Diff: 1

LO:  11-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

4) The times-interest-earned ratio is calculated as ________.

  1. A) earnings before interest and tax divided by interest expense
  2. B) profit before tax divided by interest expense
  3. C) net income divided by interest expense
  4. D) income tax expense plus interest expense divided by interest expense

Answer:  A

Diff: 1

LO:  11-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

 

5) The information related to interest expense of Stereo Music, Inc. is given below:

 

Net income $255,000
Income tax expense 112,000
Interest expense 72,000

 

Based on the above data, which of the following is the times-interest-earned ratio?

  1. A) 3.92 times
  2. B) 3.54 times
  3. C) 6.1 times
  4. D) 4.54 times

Answer:  C

Explanation:  C) Times-interest-earned ratio = EBIT / Interest Expense

EBIT = Net Income + Income Tax Expense + Interest Expense

EBIT = $255,000 + $112,000 + $72,000

EBIT = $439,000

Interest Coverage Ratio = $439,000 / $72,000 = 6.1 times.

Diff: 2

LO:  11-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

6) The times-interest-earned ratios of Benin, Inc. are 20.56 and 7.35 for 2016 and 2017, respectively. Which of the following can be the possible reason for such a change?

  1. A) Benin, Inc. incurred less debt specifically in its revolving line of credit.
  2. B) Benin, Inc. incurred more debt specifically in its revolving line of credit.
  3. C) Benin, Inc. paid less interest in its revolving line of credit.
  4. D) Benin, Inc.’s debt-paying ability increased.

Answer:  B

Diff: 2

LO:  11-5

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Critical thinking

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

 

7) The times-interest-earned ratios of four companies are given below:

 

Forge Corp. 8.9
Fellow, Inc. 9.2
Stacy Corp. 6.7
Bennett, Inc. 13.5

 

Which of the above companies has the highest debt-paying ability?

  1. A) Forge Corp.
  2. B) Fellow, Inc.
  3. C) Stacy Corp.
  4. D) Bennett, Inc.

Answer:  D

Diff: 1

LO:  11-5

AACSB:  Analytical thinking

AICPA Functional:  Measurement

PE Question Type:  Critical thinking

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

8) Which of the following statements about the times-interest-earned ratio is true?

  1. A) A lower ratio indicates a higher debt paying ability.
  2. B) Debt reduction leads to an increase in interest expense.
  3. C) The times-interest-earned ratio is also called the interest-coverage ratio.
  4. D) The times-interest-earned ratio is calculated by dividing gross income by interest expense.

Answer:  C

Diff: 2

LO:  11-5

AICPA Functional:  Measurement

PE Question Type:  Concept

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

9) The information related to Outloud Music, Inc. is given below:

 

Year ended December                 Year ended December

                                                                                 31, 2016                                           31, 2017

Net Income                                                            $81,510                                          $210,570

Income Tax Expense                                            55,910                                            103,505

Interest Expense                                                       6,595                                               59,505

 

Calculate the times-interest-earned ratio for each year and also state the percentage change in the ratio.

Answer:                                                                                              December           December

                                                                                                                  31, 2016              31, 2017

Net Income                                                                                           $ 81,510            $ 210,570

Income Tax Expense                                                                             55,910               103,505

Interest Expense                                                                                        6,595                  59,505

EBIT                                                                                                      $ 144,015            $ 373,580

Times-interest-earned ratio (EBIT / Interest Expense)                   21.84                      6.28

Percentage Change [(21.84 – 6.28) / 21.84 × 100]                        -71.24%

Diff: 2

LO:  11-5

AACSB:  Application of knowledge

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)

 

10) Sandstorm, Inc. signed a 200-day, 5%, $5,000 note on April 1, 2017, and this was the only note payable for the company. Calculate the times-interest-earned ratio of Sandstorm, Inc. if its earnings before interest and taxes for the year ending December 31, 2017, is $4,300. (Use a 360-day year.)

Answer:  EBIT                                                                                 $ 4,300.00

Interest Expense                                 $5,000 × 5% × 200 / 360 = $138.89

Times-interest-earned                             $4,300 / $138.89 = 30.96 times

Diff: 2

LO:  11-5

AICPA Functional:  Measurement

PE Question Type:  Application

H2 :  How Do We Use the Times-Interest-Earned Ratio to Evaluate Business Performance? (H1)