Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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During 1983, Olsen Company discovered that the ending inventories reported on
its financial statements were understated as follows:
Year
Understatement
1980
$50,000
1981
$60,000
1982
$0
Olsen ascertains year-end quantities on a periodic inventory system. These quantities
are converted to dollar amounts using the FIFO cost flow method. Assuming no other accounting
errors, Olsen's retained earnings at December 31, 1982, will be
a. | Correct. | b. | $ 60,000 understated. | c. | $ 60,000
overstated. | d. | $110,000 understated. |
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2.
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On December 31, 1984, Hurd Company signed an operating lease for a warehouse for
ten years at $24,000 per year. Upon execution of the lease, Hurd paid $48,000 covering rent for
the first two years. How much should be shown in Hurd's income statement for the year
ended December 31, 1984, as rent expense?
a. | $0 | b. | $ 2,000 | c. | $24,000 | d. | $48,000 |
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3.
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During the year ended December 31, 1984, Pine Co. paid $46,000 for interest, but
Pine's 1984 income statement properly reported interest expense of $50,000. There was no
prepaid interest either at the beginning or at the end of 1984. Accrued interest at December
31, 1984, amounted to $5,000. How much was the accrued interest at December 31,
1983?
a. | $0 | b. | $1,000 | c. | $4,000 | d. | $5,000 |
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4.
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James Lee, M.D., keeps his accounting records on a cash basis. During
20X6, Dr. Lee collected $100,000 in fees from his patients. At December 31, 20X5, Dr. Lee had
accounts receivable of $20,000. At December 31, 20X6, Dr. Lee had accounts receivable of
$30,000, and unearned fees of $1,000. On an accrual basis, how much was Dr. Lee's patient
service revenue for 20X6?
a. | $111,000 | b. | $109,000 | c. | $
90,000 | d. | $ 89,000 |
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5.
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Dix Company operates a retail store and must determine the proper December 31,
20X5, year-end accrual for the following expenses: | *
| The store lease calls for fixed rent of $1,200 per month, payable at
the beginning of the month, and additional rent equal to 6% of net sales over $250,000 per calendar
year, payable on January 31, of the following year. Net sales for 20X5 are
$450,000.
| | * | An
electric bill of $850 covering the period 12/16/20X5 through 1/15/20X6 was received January 22,
20X6.
| | * | A $400
telephone bill was received January 7, 20X6, covering:
Service in advance for January
20X6 $150
Local and toll
calls for December 20X5
250
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In its December 31, 20X5, balance sheet, Dix should report accrued
laibilities of a. | $15,075 | b. | $13,100 | c. | $12,825 | d. | $12,675 |
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6.
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Kemp Co. must determine the December 31, 1990,
year-end accruals for advertising and rent expenses. A $500 advertising bill was received
January 7, 1991, comprising costs of $375 for advertisements in December 1990 issues, and $125 for
advertisements in January 1991 issues of the newspaper.
A store lease, effective December 16,
1989, calls for fixed rent of $1,200 per month, payable one month from the effective date and monthly
thereafter. In addition, rent equal to 5% of net sales over $300,000 per calendar year is
payable on January 31 of the following year. Net sales for 1990 were $550,000.
In its
December 31, 1990, balance sheet, Kemp should report accrued liabilities of
a. | $12,875 | b. | $13,000 | c. | $13,100 | d. | $13,475 |
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7.
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Greg Corp. reported revenue of $1,250,000 in its accrual basis income statement
for the year ended June 30, 1999. Additional information ws as follows: | Accounts receivable June 30, 1998 | $400,000 | | Accounts receivable June 30, 1999 | 530,000 | | Uncollectible accounts written off during the fiscal year | 15,000 | | |
Under the cash basis, Greg should report revenue of a. | $ 835,000 | b. | $ 850,000 | c. | $1,105,000 | d. | $1,135,000 |
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8.
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During 20X7, Paul Company discovered that the ending inventories reported on its
financial statements were incorrect by the following
amounts:
20X5 $60,000
understated
20X6 75,000
overstated
Paul uses the periodic inventory system to ascertain year-end quantities that are
converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these
errors and ignoring income taxes, Paul's retained earnings at January 1, 20X7, would
be
a. | Correct. | b. | $ 15,000 overstated. | c. | $ 75,000
overstated. | d. | $135,000 overstated. |
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9.
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The Shannon Corporation began operations on
January 1, 1988. Financial statements for the years ended December 31, 1988, and 1989, contained the
following errors:
| | | December
31 | | | | 1988 | | 1989
| | Ending inventory | | $16,000
overstated | | $15,000 understated | | Depreciation expense | | $ 6,000 overstated | | --- | | Insurance expense | | $10,000
understated | | $10,000 overstated | | Prepaid insurance | | $10,000 overstated | |
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In
addition, on December 31, 1988, fully depreciated machinery was sold for $10,800 cash, but the sale
was not recorded until 1989. There were no other errors during 1988 or 1989 and no corrections have
been made for any of the errors.
Ignoring income taxes, what is the total effect of the
errors on 1989 net income?
a. | Net income overstated by $30,200 | b. | Net income understated by
$30,200 | c. | Net income understated by $5,800 | d. | Net income overstated by
$1,800 |
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10.
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The balance in Ashwood Company's accounts payable account at December 31,
1982, was $900,000 before any necessary year-end adjustment relating to the following: | * | Goods were in transit from a
vendor to Ashwood on December 31, 1982. The invoice cost was $50,000, and the goods were shipped
F.O.B. destination on December 29, 1982. The goods were received on January 4,
1983. | | * | Goods shipped
F.O.B. shipping point on December 20, 1982, from a vendor to Ashwood were lost in transit. The
invoice cost was $25,000. On January 5, 1983, Ashwood filed a $25,000 claim against the common
carrier. | | * | Goods
shipped F.O.B. shipping point on December 21, 1982, from a vendor to Ashwood were received on January
6, 1983. The invoice cost was $15,000. | | |
What amount
should Ashwood report as accounts payable on its December 31, 1982, balance sheet?
a. | $925,000 | b. | $940,000 | c. | $950,000 | d. | $975,000 |
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