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2. A current liability is always a short-term obligation expected to be paid within one year of
the balance sheet date.
FALSE
3. A current ratio that is high according to an industry average might mean the company may
have excessive inventory levels or slow moving inventory items.
TRUE
4. A current ratio can be manipulated by management through paying off current liabilities
before the end of the accounting period.
TRUE
9-1
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5. A liability, to be reported on the balance sheet, must have a fixed, known amount to be paid
in the future.
FALSE
6. The FICA (social security) tax is a matching tax with a portion paid by both the employer
and the employee.
TRUE
7. The accounts payable turnover ratio is computed by dividing sales by average accounts
payable.
FALSE
9-2
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10. All contingent liabilities should be classified as either current or long-term liabilities on
the balance sheet for the current period.
FALSE
11. A contingent liability that is "probable" and can be "reasonably estimated" must be
accrued and reported as a liability.
TRUE
12. When current liabilities decrease during the year, then we create a positive effect on cash
flow from operating activities.
FALSE
9-3
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13. Excessive or slow moving inventory could be the reason working capital is low.
FALSE
14. A secured debt is where the borrowing company pledges specific assets as collateral for
the loan.
TRUE
15. As corporations have expanded globally, it has become common to borrow money in
foreign currencies as a way to lessen exposure to exchange rate risk.
TRUE
16. For the present value of a single amount, the compounding period may only be once a
year.
FALSE
9-4
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17. An annuity is a series of consecutive payments, each one increasing by a fixed dollar
amount over the payment amount of the prior year.
FALSE
18. In the recognition of revenues and expenses, temporary and permanent differences
between the financial statements and the tax return will result in deferred taxes.
FALSE
19. Tax evasion involves illegal means to avoid paying taxes, but tax planning considers legal
means to postpone paying taxes.
TRUE
20. A reciprocal relationship exists between the "future value of $1" and the "present value of
$1."
TRUE
9-5
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26. A company has a current ratio of 1.9 before paying off a large current liability with cash.
Following this payment, the current ratio will be
A. greater than 1.9.
B. less than 1.9.
C. equal to 1.9.
D. greater than 1.9 or less than 1.9 depending upon the dollar amount involved.
9-7
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27. The following is a partial list of account balances from the books of Probst Enterprise at
the end of 2009:
Based solely upon these balances, the amount of current liabilities appearing on Probst
Enterprise's 2009 year-end balance sheet should be
A. $24,900.
B. $24,100.
C. $23,700.
D. $20,500.
28. In 2009, General Tech reported a current ratio of 2.75 and in 2008 it was 3.10. Which of
the following is a potential cause of a fall in this ratio?
A. An increase in accounts payable.
B. A decrease in inventories.
C. A decrease in short-term borrowings.
D. Both an increase in accounts payable and a decrease in inventories could cause the ratio to
fall.
9-8
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29. If a current ratio has been increasing over the past several years, which of the following
would cause the ratio to rise?
A. An increase in accounts payable.
B. An increase in inventories.
C. An increase in short-term borrowings.
D. A decrease in prepaid rent.
30. In 2009, The Western Air Freight Company reported current assets of $12,094 million,
total assets of $31,327 million, current liabilities of $10,971 million, and total liabilities of
$15,392 million. What was their current ratio for 2009?
A. 1.63
B. 1.10
C. 2.12
D. 1.89
31. Chavez Chocolates had a current ratio of 1.74 in 2008. Which of the following would
cause the ratio to decrease in 2009?
A. A decrease in cash and equivalents and short-term investments.
B. An increase in cash and equivalents and short-term investments.
C. An increase in current assets that exceeded the increase in current liabilities.
D. Current assets as a percentage of total assets increased while current liabilities as a
percentage of total liabilities and stockholders' equity decreased.
9-9
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32. Which of the following would most likely cause an increase in the current ratio?
A. A short-term borrowing of $100.
B. A purchase of $100 of inventory for cash.
C. A $100 payment to suppliers thereby reducing accounts payable
D. A $100 receipt of cash from a customer's accounts receivable.
9-10
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38. Gross wages of $20,000 accrued but not paid to employees at the end of 2010 should be
recorded by the employer in a journal entry that includes a
A. debit of $20,000 to Compensation payable.
B. credit of $20,000 to Cash.
C. debit of $20,000 to Compensation expense.
D. debit of $20,000 to Cash.
39. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year
6%, interest-bearing note payable. Assuming no adjusting entries have been made during the
year, the required adjusting entry at the end of the accounting period, December 31, 2010,
would be
A.
B.
C.
D.
9-12
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41. The amount of federal income tax that is withheld from employees' paychecks by the
employer should
A. be recorded on the employer's books as a current liability.
B. be recorded on the employer's books as an asset.
C. be recorded on the employer's books as revenue.
D. not be recorded on the employer's books.
9-13
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43. Landseeker's Restaurants reported cost of goods sold of $322 million and accounts
payable of $83 million for 2008. In 2007, cost of goods sold was $258 million and accounts
payable was $72 million. What was Landseeker's accounts payable turnover ratio in 2008?
A. 4.23
B. 4.15
C. 4.04
D. 3.91
44. In 2008, StarHotels reported an accounts payable turnover ratio of 11.0 and a current ratio
of 1.52. Their statement of cash flows shows good cash flow from operations. Which of the
following interpretations of these ratios is most likely?
A. Since the two ratios are fairly high, it indicates StarHotels has little difficulty paying its
bills in a timely manner.
B. Since both these ratios are low, it might indicate poor liquidity and inability to pay vendors
in a timely manner.
C. StarHotels practices aggressive cash management strategies including investing excess
cash in operations and using vendors to finance operations by making slow payment to them.
D. StarHotels must be carrying a low amount of current liabilities in comparison to its total
liabilities.
9-14
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45. General Tech and AmericanBio are both in the biotechnology industry. In 2009, General
Tech reported a payable turnover of 8.2 and in 2009; AmericanBio reported a ratio of 4.2.
Which of the following is an incorrect reason for the difference in ratios?
A. AmericanBio has a higher average accounts payable in comparison to their cost of goods
sold.
B. AmericanBio is taking longer to pay vendors.
C. AmericanBio has a lower average accounts payable in comparison to their cost of goods
sold.
D. General Tech has a better payment record in terms of timely payment to vendors.
47. Phipps Company borrowed $25,000 cash on October 1, 2009, and signed a six-month, 8%
interest-bearing note payable with interest payable at maturity. Assuming that no adjusting
entries have been made during the year, the amount of accrued interest payable that should be
shown on the 2009 balance sheet for the year ended December 31, 2009 is
A. $250.
B. $300.
C. $500.
D. $750.
9-15
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48. Failure to make a necessary adjusting entry for accrued interest on a note payable would
cause
A. an understatement of liabilities and stockholders' equity.
B. net income to be overstated and assets to be understated.
C. net income to be understated and liabilities to be understated.
D. an overstatement of net income, an understatement of liabilities, and an overstatement of
stockholders' equity.
49. On July 1, 2009, Prism, Inc. borrowed $30,000 from First Bank on a one year, 10% note
payable. Interest is payable on June 30, 2010, the due date of the note. Prism's accounting
year ends December 31, 2009. The journal entry required on the company's books to record
the note payable on July 1, 2009 would include a
A. credit to notes payable for $30,000.
B. credit to notes payable for $33,000.
C. debit to cash for $27,000.
D. debit to interest expense for $3,500.
50. On July 1, 2009, Prism, Inc. borrowed $30,000 from First Bank on a one year, 10% note
payable. Interest is payable on June 30, 2010, the due date of the note. Prism's accounting
year ends December 31, 2009. Assuming no adjusting entries have been made during the year,
the journal entry required on the company's books to record the interest accrued on December
31, 2009, would include a
A. debit to Interest Expense for $1,500.
B. credit to Interest Expense for $1,500.
C. credit to Cash for $1,500.
D. debit to Notes Payable for $1,500.
9-16
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51. On July 1, 2009, Prism, Inc. borrowed $30,000 from First Bank on a one year, 10% note
payable. Interest is payable on June 30, 2010, the due date of the note. Prism's accounting
year ends December 31, 2009. On the company's December 31, 2009 year-end balance sheet,
the notes payable account should be reported as a
A. $31,500 long-term liability.
B. $31,500 current liability.
C. $30,000 long-term liability.
D. $30,000 current liability.
52. On January 2, 2009, Hill Company borrowed $10,000 from Bank Three. The loan was to
be repaid in equal principal installments of $2,000, payable on December 31 of each year,
beginning on December 31, 2009. Disregarding interest, the amount of the $10,000 loan that
should be considered a current liability on the company's balance sheet for the year ended
December 31, 2009 would be
A. $8,000.
B. $6,000.
C. $4,000.
D. $2,000.
9-17
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54. Purdum Farms borrowed $10 million by signing a five year note on January 1, 2009 and
repayments of the principle are payable annually in $2 million dollar installments. Purdum
Farms makes the first payment December 31, 2009 and then prepares its balance sheet. What
amount will be reported as current and long-term liabilities respectively in connection with
the note at December 31, 2009?
A. $2 million in current liabilities and $8 million in long-term liabilities.
B. $2 million in current liabilities and $6 million in long-term liabilities.
C. Zero in current liabilities and $8 million in long-term liabilities.
D. Zero in current liabilities and $10 million in long-term liabilities.
56. A potential future liability arising from an event that has already happened, usually is
called
A. an accrued liability.
B. a contingent liability.
C. a deferred liability.
D. an estimated liability.
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57. A contingent liability that is "reasonably possible" but "cannot reasonably be estimated"
A. must be recorded and reported as a liability.
B. does not need to be recorded or reported as a liability.
C. must only be disclosed as a note to the financial statements.
D. must be reported as a liability, but not recorded.
58. Young Company is involved in a lawsuit. The liability which could arise as a result of this
lawsuit should be recorded on the books if the probability of Young Company owing money
as a result of the lawsuit is
A. remote and the amount can be reasonably estimated.
B. probable and the amount can be reasonably estimated.
C. reasonably possible and the amount can be reasonably estimated.
D. probable and the amount cannot be reasonably estimated.
59. Houston Company is involved in a lawsuit. Footnote disclosure of the contingent liability
which could arise does not have to be presented if the probability of Houston Company owing
money as a result of the lawsuit is
A. reasonably possible and the amount cannot be reasonably estimated.
B. probable and the amount cannot be reasonably estimated.
C. reasonably possible and the amount can be reasonably estimated.
D. remote and the amount can be reasonably estimated.
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60. Ogden Motors, Inc. is involved in a lawsuit. It is probable that the jury will find in favor
of the plaintiff and Ogden Motors will owe ten million dollars. Even though the lawsuit is not
yet settled, Ogden Motors should record a liability in the balance sheet and
A. a prepaid expense.
B. a loss.
C. deferred revenue.
D. a contra-asset.
61. When inventory increases from last year to the current year and accounts payable
decreases during the period, the following are the effects on cash flow from operating
activities:
A. Cash is decreased for both the increase in inventory and decrease in accounts payable.
B. Cash is decreased for the increase in inventory but increased for the decrease in accounts
payable.
C. Cash is increased for both the increase in inventory and the decrease in accounts payable.
D. Cash is increased for the increase in inventory but decreased for the decrease in accounts
payable.
62. When a company increases accounts payable from one year to the next, the effect on cash
flows from operating activities
A. is a decrease in cash caused by paying down our debt to vendors.
B. is an increase in cash because we have not paid cash for all the inventory and services
purchased on credit during the period.
C. is a decrease to cash because we will have to pay these liabilities in the future.
D. is an increase to cash because we have received cash from vendors.
9-20
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64. On January 1, 2009, Simko Company acquired a truck that had a purchase price of
$20,000. The seller agreed to allow Simko to pay for the truck over a three-year period at 10%
interest with equal payments due at the end of 2009, 2010 and 2011. The amount of each
annual payment the company must make is (round to the nearest dollar)
A. $6,042
B. $8,042
C. $15,026
D. $15,206
9-21
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65. If the market rate of interest is 10%, a rational person would just as soon receive $1,100
three years from now as what amount today (round to the nearest dollar)?
A. $ 783.
B. $ 826.
C. $1,000.
D. $1,100.
9-22
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67. On January 1, 2009, Hopkins Company purchased a machine that had a sticker (list) price
of $22,000. The seller agreed to allow Hopkins Company to pay for the machine over a threeyear period at 10% interest on the unpaid balance and with equal payments of $8,444 due at
the end of 2009, 2010, and 2008. The amount that should be debited to the asset account,
Machinery, on the day the contract was initiated is (rounded to the nearest dollar)
A. $27,865.
B. $25,332.
C. $22,000.
D. $20,999.
9-23
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68. On January 1, 2009, Clem Company purchased a machine. The seller agreed that a total of
$9,000 would be paid over a three-year period$3,000 per year at the end of 2009, 2010, and
2011. At the time the machine was purchased, the market rate of interest was 10%. The
amount that should be debited to the asset account, Machinery, on the date of purchase is
(round to the nearest dollar)
A. $9,000.
B. $9,948.
C. $7,461.
D. $9,016.
69. You have been asked to compute the cash equivalent price of a machine assuming the cost
(including principal and interest) is to be paid in two equal payments after the acquisition
date. The interest concept that best describes this application is
A. present value of a single amount.
B. present value of an annuity.
C. future value of a single amount.
D. future value of an annuity.
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70. Straight Industries purchased a large piece of equipment from Curvy Company on January
2, 2009. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the
equipment on December 31, 2011. The market rate of interest for similar notes was 8%. The
present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 2009,
Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit
to notes payable for $317,520. On December 31, 2009, Straight recorded an adjusting entry to
account for interest that had accrued on the note. Assuming no adjusting entries have been
made during the year, the approximate amount of interest expense that would have accrued at
December 31, 2009, would be
A. $25,400.
B. $32,000.
C. $76,200.
D. $96,000.
71. Straight Industries purchased a large piece of equipment from Curvy Company on January
2, 2009. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the
equipment on December 31, 2011. The market rate of interest for similar notes was 8%. The
present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 2009,
Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes
payable for $317,520. On Straight Industries' balance sheet for the year ended December 31,
2009, the book value of the liability for notes payable related to this purchase would equal
A. $317,520.
B. an amount less than $317,520.
C. an amount more than $317,520.
D. an amount more or less than $317,520 depending upon Straight's income for the year.
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72. Straight Industries purchased a large piece of equipment from Curvy Company on January
2, 2009. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the
equipment on December 31, 2011. The market rate of interest for similar notes was 8%. The
present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 2009,
Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes
payable for $317,520. Accrued interest was recorded annually. On December 31, 2011, the
due date of the note, Straight paid the amount due and recorded the transaction with a
A. debit to notes payable $400,000.
B. debit to notes payable $317,520.
C. credit to notes payable for $400,000.
D. credit to notes payable for $317,520.
73. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them
under a note agreement with Kenworthy on January 1, 2009. The note agreement will require
$10 million in annual payments starting on December 31, 2009 and continuing for a total of
five years (final payment December 31, 2013). Kenworthy will charge Alden Trucking
Company the market interest rate of 10% compounded annually. (Round answers to the
nearest tenth of a million.)
How much will Alden Trucking Company record as a debit to their equipment account and as
a credit to their notes payable account on January 1, 2009?
A. $50.0 million
B. $10.0 million
C. $37.9 million
D. $61.1 million
9-26
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74. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them
under a note agreement with Kenworthy on January 1, 2009. The note agreement will require
$10 million in annual payments starting on December 31, 2009 and continuing for a total of
five years (final payment December 31, 2013). Kenworthy will charge Alden Trucking
Company the market interest rate of 10% compounded annually. Round answers to the
nearest tenth of a million.
How much of the first $10 million payment on December 31, 2009 is interest?
A. $5.0 million
B. $3.8 million
C. $1.0 million
D. $2.8 million
9-27
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75. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them
under a note agreement with Kenworthy on January 1, 2009. The note agreement will require
$10 million in annual payments starting on December 31, 2009 and continuing for a total of
five years (final payment December 31, 2013). Kenworthy will charge Alden Trucking
Company the market interest rate of 10% compounded annually. Round answers to the
nearest tenth of a million.
What is the remaining obligation on January 1, 2010 after the first payment has been made?
A. $31.7 million
B. $37.9 million
C. $40.0 million
D. $27.9 million
9-28
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77. Gammell, Inc. reported net income of $40,000 for 2009. The income tax return excluded a
revenue item of $3,000 (reported on the income statement) because under the tax laws the
$3,000 would not be reported for tax purposes until 2010. Assuming a 35% income tax rate,
this situation would cause a 2009 deferred tax amount of
A. $3,000 (debit).
B. $3,000 (credit).
C. $1,050 (debit).
D. $1,050 (credit).
78. Situations which require that deferred income tax be reported involve a difference that is
called a
A. permanent difference.
B. reversing tax inverse difference.
C. temporary difference.
D. contingent liability.
79. If income tax expense reported on the income statement is $45,000 for 2009, and the tax
return for 2009 (the first year) shows an income tax liability of $42,000 the deferred income
tax amount on the balance sheet at the end of 2009 will be
A. debit of $3,000.
B. credit of $3,000.
C. credit of $42,000.
D. credit of $45,000.
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80. An amount is to be deposited in a savings account at the end of each year in order to
provide funds for a trip to Europe at the end of the fourth year. You have been asked to
determine the amount of the annual deposit. The interest concept that best describes this
application is
A. present value of a single amount.
B. present value of an annuity.
C. future value of a single amount.
D. future value of an annuity.
Essay Questions
81. Halbur Company reported total assets of $150,000; current assets of $60,000; total
stockholders' equity of $60,000; and noncurrent liabilities of $65,000.
Required: (show computations).
1. Compute Working Capital.
2. Compute the Current Ratio.
1. $150,000 = $65,000 + ? + $60,000
Current liabilities = $25,000
Working Capital = $60,000 $25,000 = $35,000
2. Current Ratio = $60,000/$25,000 = 2.4 to 1
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82. Moore Company has the following partial list of account balances at year end:
Required:
A. Compute the current ratio.
B. Determine the amount of working capital.
C. Assume that cash is used to pay the balance due on accounts payable.
1. Compute the new current ratio.
2. Compute the new amount of working capital.
D. Compute the accounts payable turnover ratio (use year-end amounts,)
A. Current assets = Cash + Accounts receivable = $3,000 + $1,600 = $4,600.
Current liabilities = Accounts payable + Notes payable + Salaries payable = $1,500 + $1,000
+ $900 = $3,400.
Current ratio = Current assets/Current liabilities = $4,600/$3,400 = 1.35
B. Working capital = $4,600
$3,400 = $1,200.
C. Current assets = $1,500 + $1,600 = $3,100.
Current liabilities = $1,000 + $900 = $1,900.
1. Current ratio = 1.63
2. Working capital = $3,100 $1,900 = $1,200
D. Cost of Goods Sold/Accounts payable = $3,200/$1,500 = 2.1 times.
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83.
A. Calculate the following:
1. Tommy's Toys 2009 current ratio
2. Tommy's Toys 2008 current ratio
3. Tommy's Toys 2009 working capital
4. Tommy's Toys 2008 working capital
5. Debbie's Dolls 2009 current ratio
6. Debbie's Dolls 2008 current ratio
7. Debbie's Dolls 2009 working capital
8. Debbie's Dolls 2008 working capital
B. Interpret what changes have taken place for Tommy's Toys and Debbie's Dolls in their
current ratio.
A1. 1.28
A2. 1.08
A3. $1,878 million
A4. $ 515 million
A5. 1.10
A6. 1.06
A7. $1,123 million
A8. $ 510 million
B. Debbie's Dolls current ratio has stayed the same between 2008 and 2009. Tommy's Toys
current ratio improved a little between 2008 and 2009 caused by an increase in current assets
which exceeds the increase in current liabilities. It appears as if both competitors practice
aggressive cash management strategies to assure current assets are minimized and they use
their vendors to help finance their current assets.
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84. At the end of the annual accounting period the adjusting entries for the following three
items have not been made. You are to provide the 2010 adjusting entry for each item.
A. Unpaid wages for the last two days of December, 2010 amounting to $3,200 have not been
recorded (disregard payroll taxes).
B. On December 1, 2010 rent revenue of $600 was collected for December and January rent.
(Rent revenue was credited for a total of $600).
C. A $4,000, six-month, 10% interest-bearing note payable was signed on October 1, 2010.
No adjusting entries have been made during the year.
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85. Sharp Company borrowed $500,000 on a 6% one-year, interest bearing note dated
November 1, 2009. The annual accounting period ends on December 31. Assume that
adjusting entries are only made at December 31, the company's fiscal year end, give journal
entries for:
A. November 1, 2009.
B. December 31, 2009.
C. October 31, 2010.
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86. Wolf Company borrowed $5,000 on an 8% (annual rate). interest-bearing note payable on
March 1, 2008. The maturity date of the note (and payment of all interest) is September 1,
2009. The accounting period ends December 31. Give the entry for each of the following
dates. Assume simple interest and that adjusting entries are made annually. Round to the
nearest dollar.
A. March 1, 2008
B. December 31, 2008
C. September 1, 2009.
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87. The following data were provided by the detailed payroll records of Mountain
Corporation for the month of March 2009:
FICA taxes at a 7.65% rate (no employee had reached the maximum).
Required:
A. Give the March 31, 2009 entry to record the payroll and the related employee deductions.
B. Give the March 31, 2009 entry to record the employer's FICA payroll tax expense.
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88. The following is a partial list of account balances for Coen, Inc. as of December 31, 2010
Required:
Prepare the liability section of Coen Inc.'s classified balance sheet for December 31, 2010.
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89. The following data is available for Tommy's Toys for the years 2006 through 2009:
A. Calculate the accounts payable turnover ratio for the following years:
1. 2009
2. 2008
3. 2007
B. Calculate the number of days it is taking Tommy's Toys to pay their vendors (assume a
365 day year):
1. 2009
2. 2008
3. 2007
C. Explain whether Tommy's Toys is doing a better job of paying their vendors in a timely
manner.
A1. 7.34($7,506/ [1,023 + 1,022]/2)
A2. 8.05 ($7,646/ [1,022 + 878]/2)
A3. 8.79 ($7,799/ [878 + 896]/2).
B1. 50 days (365/7.34)
B2. 45 days (365/8.05)
B3. 42 days (365/8.79).
C. Over the three year period, Tommy's Toys accounts payable turnover ratio has decreased
and the number of days it takes them to pay vendors has increased from 42 in 2007 to 50 days
in 2009. If their suppliers offer them credit terms of 30 days, then Tommy's Toys is taking
almost twice that time to pay them. It would be a good idea to compare the accounts payable
turnover ratio of competitors with that of Tommy's Toys to see if they are in line with other
similar companies.
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91. In a recent year, The Walt Disney Company reported the following increases or decreases
in current assets and current liabilities. Identify whether each of these increases or decreases
caused cash to increase or decrease. Show increases with a (+) in front of the amount and
decreases with a (
) in front of the amount in the column labeled cash effect.
$848, (4)
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92. Melissa is considering several possible investment alternatives when the market rate of
interest is 8%.
Option 1: Melissa could receive $10,000 today.
Option 2: Melissa could receive $3,000 at the end of each year for four years.
Option 3: Melissa could receive $15,000 five years from now.
Required:
A. Calculate the present value of each option assuming Melissa can earn 8% on any of the
investment funds.
B. Which option results in the greatest financial benefit to Melissa?
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93. Meade Company has accumulated a cash fund to use for future expansion. The following
accumulation schedule for the fund was prepared. The column titles are omitted on purpose:
Required:
Refer to the schedule above and respond to the following questions.
A. What was the fund's goal in dollars?
B. What was the annual contribution to the fund?
C. What interest rate was earned?
D. What amount of interest was earned in 2006? 2008?
E. Give the entry on 12/31/2007.
A. $22,001
B. $4,811
C. $433
$4,811 = 9%
$905
$10,055 = 9%
$1,419
$15,771 = 9%
D. 2006: -0-; 2008: $905
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94. Border Company purchased a truck that cost $17,000. The company signed a $17,000
note payable that specified four equal annual payments (at each year-end), each of which
includes a payment on the principal and interest on the unpaid balance at 10% per annum. The
present value of an annuity factor is 3.1699 (I = 10%, n = 4.)
A. Compute the amount of each equal payment (round to the nearest dollar).
B. Give the entry to record the purchase of the truck.
C. Give the entry to record the first annual payment on the note (assume no interest has been
accrued during the year).
D. Will the interest paid with the first annual payment be more or less than the interest paid
with the second annual payment? Explain your answer.
A. $17,000
D. The interest paid on the first installment will be more than the interest on the second
payment because the principal is lower.
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95. Fold and Hold Corporation purchased a machine which had a current cash equivalent cost
of $38,971 on January 1, 2009. Fold and Hold paid cash of $10,000 and signed an interestbearing note for the balance, payable in six equal annual installments on each December 31
beginning with December 31, 2009. The note specified a 10% interest rate on the unpaid
balance. The present value of an annuity factor is 4.3553 (I = 10%, n = 6.)
A. Give the entry to record the purchase on January 1, 2009 (round to the nearest dollar).
B. Give the entry to record the first installment payment on December 31, 2009 (round to the
nearest dollar).
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96. Information Company purchased an asset that cost $70,000 on January 1, 2009.
Arrangements were made with the supplier to pay $10,000 cash on January 1, 2009, and the
balance was to be paid over a three-year period, with equal annual payments of $24,553 to be
made at the end of 2009, 2010, and 2011. Each payment will include principal plus interest on
the unpaid balance at 11% per year.
A. Complete the following table:
C. Interest decreases over time because part of each debt payment reduces principal. As a
result, over time the debt principal decreases each year.
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98. Why are present value concepts and applications so important when companies purchase
equipment financed by the seller?
Present value concepts are very important in seller-financed purchases because the debt
payments will include principal and interest payments. The equipment should be capitalized at
an amount equal to the present value of the purchase. That is, the asset account should reflect
what the equipment could have been acquired for in terms of "today's dollars". The additional
amounts for interest are charges for borrowing. These interest amounts should be reported as
interest expense as incurred.
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99. The following table values are provided for use in solving the following independent
problems (show computations):
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100. At the beginning of Year 1, Parks Corporation placed $10,000 in a savings account at
9%.
A. Assuming no withdrawals, complete the following tabulation (round to the nearest dollar).
B. Give the required journal entry at the end of Year 10 to record only the year 10 earnings:
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Matching Questions
101. Match the liabilities with their usual classification on the balance sheet.
1. Bond payable, current portion
2. Mortgage payable (due in two years)
3. FICA taxes payable
4. Accounts payable
5. Notes payable (due in three years)
6. Rent payable
7. Interest payable
8. Income tax payable
9. Accounts receivable
10. Accumulated depreciation
11. Cash deposits (advances) received from customers
for services to be performed in six months
12. Employee income taxes withheld
13. Bond payable (due in six years)
14. Allowance for doubtful accounts
15. Deferred income tax (a credit balance)
Current liability
Current liability
Current liability
Long-term liability
Current liability
Long-term liability
Current liability
Long-term liability
Current or longterm liability
Not a liability
6
3
7
2
1
5
11
13
Current liability
Not a liability
Current liability
Not a liability
Current liability
12
9
4
14
8
15
10
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102. Indicate the interest concept which each of the following items exemplifies.
1. A single sum is deposited to create a fund at the end of
three years. The amount of the fund is to be determined
2. A current debt is to be paid in four equal installments at the
end of each of the next four years. The amount of each
installment is to be determined
3. An equal amount is deposited in a savings account at the
end of each year in order to accumulate a fund for a trip to
Japan at the end of the fourth year. The amount of the annual
deposit is to be determined
4. The cash equivalent price of a machine is to be determined
assuming a specified single sum is to be paid two years after
the acquisition date
Present value
of $1. 4
Future value
of $1. 2
Future value
of annuity of
$1. 3
Present value
of annuity of
$1. 1
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