301 EXAM 1 Practice Questions PDF

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MGA 301 – Midterm Exam I – Practice Questions University at Buffalo

Class Time __________________

Last Name ___________________________________ First Name ___________________________________ Person Number __________________________

Allowed time: 1 hour and 20 minutes

For Markers’ Use Only Full Points Multiple Choice: 1-20

[email protected] = 70

Problem Solving: 1-3

10+10+10=30

Total

100

0

Your Points

1. Which of the following is an ingredient of relevance? a. Verifiability b. Neutrality c. Timeliness d. Materiality e. Comparability 2.

Which basic assumption may not be followed when a firm in bankruptcy reports financial results? a. Economic entity assumption. b. Going concern assumption. c. Periodicity assumption. d. Monetary unit assumption. e. None of the above

3.

If fair value changes are not recognized in the accounting records, it is most appropriately justified by a. Revenue recognition principle b. Materiality c. Conservatism d. Cost-Benefit relationship e. Historical cost principle

4. What is the sequentially reasonable order when you prepare the following financial statements (1) – (5)? (1) Statement of Retained Earnings (2) Balance Sheet (3) Income Statement (4) Statement of Equity (5) Statement of Cash Flows a. (3), (1), (4), (2), (5). b. (3), (2), (4), (5), (1). c. (2), (3), (5), (1), (4). d. (2), (5), (3), (1), (4). e. (3), (4), (1), (2), (5).

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5.

Michael Nuzback corporation generated $50,000 of revenues and incurred $45,000 in expenses in its first year of business. The managers of the corporation decided that 10% of the income should be distributed to the shareholders at the end of the first year. In its second year of business, the corporation earned $40,000 of revenues and incurred $30,000 in expenses and the managers of the corporation decided that 10% of the income should be distributed to the shareholders at the end of the second year. What is Michael’s retained earnings for the second year of business? a. -$1,000 b. $3,600 c. $11,600 d. $13,500 e. $93,600

6. The following information is available for Victoria Deodene Inc. Retained earnings, beginning $50,000 Liabilities, ending 40,000 Capital stock, ending 40,000 Dividends paid 10,000 Accumulated other comprehensive Income 10,000 Total assets, ending 200,000 Victoria’s ending retained earnings balance is: a. $150,000 b. $145,000 c. $130,000 d. $125,000 e. $110,000

7. Which of the following is a nominal (temporary) account? a. b. c. d. e.

Prepaid expense Dividend revenue Held-to-maturity securities Dividend payment Both b and d

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8.

Cody Elniski Corporation paid cash of $30,000 on June 1, 2012 for one year’s rent in advance and recorded the transaction with a debit to Prepaid Rent. Cody’s December 31, 2012 adjusting entry is a. debit Prepaid Rent and credit Rent Expense, $12,500. b. debit Prepaid Rent and credit Rent Expense, $17,500. c. debit Rent Expense and credit Prepaid Rent, $17,500. d. debit Prepaid Rent and credit Cash, $12,500. e. debit Unlearned Rent revenue and credit Rent Expense, $12,500.

9. For Sharon Dullea Company, the following information is available: Cost of goods sold $ 100,000 Dividend revenue 4,000 Gain on sale of asset 2,000 Interest expense 6,000 Dividend payment 9,000 Selling and administrative expenses 10,000 Extraordinary loss 7,000 Sales 160,000 Assume the total effective tax rate on all items is 30%. In Sharon’s multiple-step income statement, the “operating income” a. should not be reported. b. should be reported at $35,000. c. should be reported at $37,800. d. should be reported at $50,000. e. should be reported at $54,000. 10.

An item that should be classified as an extraordinary item is a. b. c. d. e.

Write-off of goodwill. Gains from transactions involving foreign currencies. Gains from moving a plant to another city. Losses from the expropriation of property by the government. Labor disturbances

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11. Jordan Teller Company, with an applicable income tax rate of 40 percent, reported net income of $280,000. A loss from write-down of inventory was $50,000 while an extraordinary loss from flood damage was $20,000 after deducting the related tax effect. Further, the total loss from discontinued operation was 40,000. Jordan's income from continuing operation was a. $220,000. b. $320,000. c. $340,000. d. $350,000. e. $390,000. 12.

Katie Schiffler Corporation has retained earnings of $675,000 at January 1, 2010. Net income during 2010 was $1,400,000, and cash dividends declared and paid during 2010 totaled $75,000. Assume an error was discovered: depreciation expense $100,000 before tax was overstated in 2007. The applicable income tax rate was 30 percent. Katie’s ending balance of retained earnings for the year ended December 31, 2010 is a. $2,000,000. b. $2,030,000. c. $2,070,000. d. $2,100,000. e. $2,180,000.

13.

The following information was extracted from the accounts of Soo Han Corporation at December 31, 2006: CR(DR) $1,500,000

Total reported net income for 2006 Total interest expense paid

(800,000)

Cumulative effect of changes in inventory method

(120,000)

Total stock dividends received

300,000

Total extraordinary loss Change of bad debt expense estimates during 2006 Correction of an error, recorded January 1, 2006

(100,000) (200,000) 66,000

What should be Soo’s balance of retained earnings at December 31, 2006?

4

a. b. c. d. e.

$746,000. $646,000. $546,000. $446,000. $1,446,000.

14. Jason Zhu Company reported the following information for 2007: Sales revenue

$500,000

Cost of goods sold 350,000 Operating expenses 55,000 Unrealized holding gain on available-for-sale securities 40,000 Cash dividends paid on the securities 2,000 Gains from the expropriation of property by the government 2,000 For 2007, Jason would report other comprehensive income of a. $11,000. b. $40,000. c. $97,000. d. $115,000. e. $117,000.

15. Which can not be a current (short-term) asset? a. b. c. d. e.

16.

Held-to-maturity securities. Trading securities. Strategic investments. Available-for-sale securities. c and d.

At December 31, 2005, customer advances (unearned revenue) for David Lee Co. were $45,000. During 2006, this company additionally collected $30,000 of customer advances, and advances of $25,000 were earned. David’s dollar amounts to be reported as a current liability at December 31, 2006 is:

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a. $15,000. b. $42,000. c. $17,000. d. $20,000. e. $50,000.

17. Nick Bonaventura Co. reports the following information for 2010: sales revenue $750,000; cost of goods sold $500,000; administrative expenses $80,000; and an unrealized holding loss on available-for-sale securities for 2010 of $50,000. Nick declared a cash dividend of $10,000 in 2010. Nick has January 1, 2010, balances in common stock $250,000; accumulated other comprehensive income $70,000; and retained earnings $80,000. He issued common stock $80,000 and preferred stock $10,000 during 2010. What should be the total equity reported in Nick’s statement of stockholders' equity? a. b. c. d. e.

$590,000. $600,000. $630,000. $700,000. $730,000.

18. In preparing a statement of cash flows, which of the following transactions would not be considered an investing activity? a. Purchases of a franchise b. Sales of properties c. Collections of loans made to other company d. Payment of long-term note payable e. Sale of purchased securities

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19-20. Presented below is part of the comparative balance sheets for Xue Yin Corporation for the last two years at December 31. 2010

2009

180,000

185,000

Investments

51,000

75,000

Long-term notes payable

39,000

35,000

298,000

240,000

Accounts receivable

Equipment

Less: Accumulated depreciation (107,000) (90,000) Current liabilities

134,000

151,000

Additional information: Investments were sold at a loss (not extraordinary) of $10,000; no equipment was sold; cash dividends paid were $50,000; and net income was $160,000. 19. Based on the given information above, what amount should be reported as “net cash flows from operating activities” in Xue’s statement of cash flows for 2010? a. b. c. d. e.

$175,000 $172,000 $170,000 $160,000 $157,000

20. Based on the given information above, what amount should be reported as “cash flows from the sale of investments,” which is part of “net cash flows from investing activities” in Xue’s statement of cash flows for 2010? a. $12,000 b. $13,000 c. $14,000 d. $15,000

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e. $16,000

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Solutions for MCQs (Form A) 1. d 2. b 3. e 4. a 5. d

First year: 50k–45k=5k. So 5k–0.5k=4.5k. Second year: 4.5k + (10k-1k)=13.5k

6. e

TA 200k = Liabs. 40k + Cap Stock 40k + AOCI 10k + RE, Thus, RE = 110k

7. e 8. c

30000*7/12

9. d

160k–100k–10k = 50k

10. d 11. c

$280,000 + $40,000 + $20,000 = $340,000.

12. c

Retained earnings, January 1, as reported............................................................

$ 675,000

Correction for overstatement of expenses in prior period (net of tax)..........................................................................

70,000

Retained earnings, January 1, as adjusted............................................................

745,000

Add:

Net income............................................................................................

1,400,000 2,145,000

Less: Cash dividends...........................................................................................

75,000

13. e $1,500,000– $120,000 + $66,000 = $1,446,000. 14. b 15. c 16. e 45K +30K – 25K 17. b $510,000 (similar to E4-15) + $90,000 (common stock and preferred stocks issued during 2010) = $600,000 18. d

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19. a Cash flows from operating activities Net income..........................................................................................

$160,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense....................................................................

$17,000

Loss on sale of investments...........................................................

10,000

Decrease in accounts receivable....................................................

5,000

Decrease in current liabilities........................................................

(17,000)

Net cash provided by operating activities........................................... 20. c 24K – 10K

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15,000 175,000

Part 2: Problem Solving (30 points) Show the process how you got the answer!

1. Adjusting Entries. (10 points)

A. When the accounts of Jason Lam Inc. are examined, the following was found on December 31, 2011: On September 1, Rental Revenue was credited for $12,000, representing revenue from a rental for a 12-month period beginning on that date. Prepare Jason’s adjusting journal entry at December 31, 2011. (5 points) B. When the accounts of Katie Chiu Inc. are examined, the following was found on December 31, 2011: Purchase of advertising materials for $2,000 during the year was recorded in the advertising expense account. On December 31, 2011, advertising materials of $600 are on hand. Prepare Katie’s adjusting journal entry at December 31, 2011. (5 points)

Solutions A. Rent Revenue (12,000*8/12)

8,000

Unearned Rent Revenue

8,000

OR Rent Revenue

12,000

Unearned Rent Revenue

12,000

Unearned Rent Revenue (12,000*4/12)

4,000

Rent Revenue

4,000

B. Advertising Materials

600

Advertising Expense

600

OR

Advertising Materials

2,000

Advertising Expense

2,000

Advertising Expense

1,400

Advertising Materials

1,400

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2. Income Statement. (10 points) A. For Chris Tong Company, the following information is available: Cost of goods sold Unrealized holding gain on available for sale investment Dividend revenue Gain on sale of land Interest expense Dividend payment Administrative expenses Extraordinary loss 7,000 Loss from write down of inventory Sales

$ 90,000 4,000 4,000 2,000 6,000 9,000 10,000 2,000 150,000

Assume the total effective tax rate on all items is 30%. In Chris’s single-step income statement, what is the reported amount of income from continuing operation? (5 points)

Solutions 150,000–90,000–10,000 +4,000 –6,000 +2000 –2,000 = 48,000. So, 48,000*70%=33,600 B. Andrew Palladino Corporation had after tax income from continuing operations of $60,000,000 in 2007. During 2007, the disposal of its Sports division is approved and the division was disposed at a pretax gain of $300,000. Prior to disposal, the division operated at a pretax loss of $400,000 in 2007. Assume a tax rate of 30%. Megan had 10,000,000 shares of common stock outstanding during 2007. Andrew declared and paid preferred dividends of $930,000. What amount is Andrew’s earnings per share in 2007? (5 points) Solutions Income from continuing operations Discontinued operations:

$60,000,000

(1) Loss from operations, net of $120,000 tax (2) Gain on disposal, net of $90,000 tax

(280,000) 210,000

Total loss on discontinued operations (70,000) Net income $59,930,000 EPS = 59,0000,000 /10,000,000 = 5.9 12

3. Preparation of the Statement of Cash Flows. (10 points) Farid Kustiro Company reported the following items in 2007. Net income

$35,000

Amortization expense Purchase of treasury stocks Increase in account receivable

6,000 10,000 3,400

Redemption of bonds

16,000

Decrease in account payable

20,400

Sale of other companies’ stocks

10,000

Sale of available for sale investment Purchase of bonds Gain on sale of investment Total cash dividends paid

18,000 17,000 6,000 8,400

Instructions A. When Farid prepares a Statement of Cash Flows for 2007, what amount should be reported as Net cash flows from operating activities? (6 points) B. When Farid prepares a Statement of Cash Flows for 2007, what amount should be reported as Net cash flows from financing activities? (4 points)

Solutions Cash flows from operating activities Net income....................................................................................... Amortization expense................................................................. 6,000 Increase in account receivable........................................ (3,400) Decrease in account payable………………… (20,400) Gain on sale of investment.........................................................(6,000) Net cash provided by operating activities (A).................................. Cash flows from investing activities Sale of other companies’ stocks....................................................... 10,000 Sale of AFS investment.................................................................... 18,000

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$35,000

11,200

Purchase of bonds.............................................................................(17,000) Net cash used by investing activities................................................

11,000

Cash flows from financing activities Purchase of treasury stocks..............................................................(10,000) Redemption of bonds........................................................................(16,000) Payment of cash dividends............................................................... (8,400) Net cash used by financing activities (B).........................................

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(34,400)...