ACCOUNTING 202 FINAL REVIEW

CHAPTER 21
D 21.
Major reasons why a company may become involved in leasing to other companies is (are)
a.
b.
c.
d.
D 22.

Which of the following is an advantage of leasing?

a.
b.
c.
d.

B 23.

A 25.

Leases are not capitalized.

Leases similar to installment purchases are capitalized.
All long-term leases are capitalized.
All leases are capitalized.

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be
sales or purchases. The principal reason that supports this idea is that
a. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.
An essential element of a lease conveyance is that the
a.
b.
c.
d.

B 26.

Off-balance-sheet financing
Less costly financing
100% financing at fixed rates
All of these

Which of the following best describes current practice in accounting for leases?
a.
b.
c.
d.

C 24.

interest revenue.
high residual values.
tax incentives.
all of these.

lessor conveys less than his or her total interest in the property.
lessee provides a sinking fund equal to one year's lease payments.
property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
term of the lease is substantially equal to the economic life of the leased property.

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
a.
b.
c.
d.

No impact as the option does not enter into the transaction until the end of the lease term.
The lessee must increase the present value of the minimum lease payments by the present value of the option price.
The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it
appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

?B P27. The amount to be recorded as the cost of an asset under capital lease is equal to the
a.
b.
c.
d.
A 28.

The methods of accounting for a lease by the lessee are

a.
b.
c.
d.

C 29.

present value of the minimum lease payments.

present value of the minimum lease payments or the fair value of the asset, whichever is lower.
present value of the minimum lease payments plus the present value of any unguaranteed residual value.
carrying value of the asset on the lessor's books.

operating and capital lease methods.

operating, sales, and capital lease methods.
operating and leveraged lease methods.
none of these.

Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.
Not A bc transfers title- not ownership
Not B bc its contains a bargain purchase option
Not D bc its the PV of the MLP not just simply MLP

D 30.

Minimum lease payments may include a

a.
b.
c.
d.

D 31.

Executory costs include

a.
b.
c.
d.

C 32.

penalty for failure to renew.

bargain purchase option.
guaranteed residual value.
any of these.

maintenance.
property taxes.
insurance.
all of these.

In computing the present value of the minimum lease payments, the lessee should
a.
b.
c.
d.

use its incremental borrowing rate in all cases.

use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known
to the lessee.
use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known
to the lessee.
none of these.

**A 33. In computing depreciation of a leased asset, the lessee should subtract
a.
b.
c.
d.
B 34.

a guaranteed residual value and depreciate over the term of the lease.
an unguaranteed residual value and depreciate over the term of the lease.
a guaranteed residual value and depreciate over the life of the asset.
an unguaranteed residual value and depreciate over the life of the asset.

In the earlier years of a lease, from the lessee's perspective, the use of the
a.
b.
c.
d.

capital method will enable the lessee to report higher income, compared to the operating method.
capital method will cause debt to increase, compared to the operating method.
operating method will cause income to decrease, compared to the capital method.
operating method will cause debt to increase, compared to the capital method.

**A P35. A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the
a.
b.
c.
d.
D S40.

If the residual value of a leased asset is guaranteed by a third party

a.
b.
c.
d.

C 47.

asset's remaining economic life.

term of the lease.
life of the asset or the term of the lease, whichever is shorter.
life of the asset or the term of the lease, whichever is longer.

it is treated by the lessee as no residual value.

the third party is also liable for any lease payments not paid by the lessee.
the net investment to be recovered by the lessor is reduced.
it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

The Lease Liability account should be disclosed as

a. all current liabilities.

b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.
??B 52. On December 1, 2011, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the
landlord the following amounts:
Rent deposit
$ 90,000
First month's rent
90,000
Last month's rent
90,000
Installation of new walls and offices
495,000
$765,000
The entire amount of $765,000 was charged to rent expense in 2011. What amount should Goetz have charged to expense for the year
ended December 31, 2011?
a.

$90,000

b.
c.
d.
C *53.

$94,125
$184,125
$495,000

On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean
to make annual payments of $100,000 at the end of each year for ten years with title to pass to Dean at the end of this period. The
machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its
fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present
value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2011

a. lease expense of $100,000.

b. interest expense of $44,734 and depreciation expense of $38,068.
c. interest expense of $53,681 and depreciation expense of $44,734.
d. interest expense of $45,681 and depreciation expense of $67,101.
Always Use Estimated USEFUL LIFE OF ASSET when determining depreciation not life of lease
C 60.

C?61.

Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The
six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and
taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of
an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should
record the leased asset at
a. $509,256.
b. $488,661.
c. $434,366.
d. $416,799.
On December 31, 2011, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2019. Equal
annual payments of $200,000 are due on December 31 of each year, beginning with December 31, 2011. The lease is properly classified as
a capital lease on Lang 's books. The present value at December 31, 2011 of the eight lease payments over the lease term discounted at 10%
is $1,173,685. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation
under capital leases on its December 31, 2012 balance sheet is
a. $1,091,054.
b. $1,000,159.
c. $871,054.
d. $1,200,000.
12/31/11: 1173685-200,000= 973685
12/31/12: 200,000 (973685* .10) = 102631.5 973685 102631.5= 871054

Use the following information for questions 62 and 63.

On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make
annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period. The equipment has an
estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder
accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $208,493
at an effective interest rate of 10%.
A 62.

In 2011, Sauder should record interest expense of

a. $15,849.
b. $29,151.
c. $20,849.
d. $34,151.
(208493-50,000) *.10

B 63.

In 2012, Sauder should record interest expense of

D 64.

a. $10,849.
b. $12,434.
c. $15,849.
d. $17,434.
On December 31, 2011, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 30, 2019. Equal
annual payments of $150,000 are due on December 31 of each year, beginning with December 31, 2011. The lease is properly classified as
a capital lease on Kuhns books. The present value at December 31, 2011 of the eight lease payments over the lease term discounted at 10%
is $880,264. Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on
its December 31, 2011 balance sheet is
a.
b.
c.

$880,264.
$818,290.
$792,238.

d. $730,264.
(880,264 150,000)
Use the following information for questions 65 and 66.
On January 1, 2011, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make
annual payments of $60,000 at the end of each year for five years with title to pass to Ogleby at the end of this period. The equipment has an
estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby
accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $227,448
at an effective interest rate of 10%.
C 65.

With respect to this capitalized lease, for 2011 Ogleby should record
a. rent expense of $60,000.
b. interest expense of $22,745 and depreciation expense of $45,489.
c. interest expense of $22,745 and depreciation expense of $32,493.
d. interest expense of $30,000 and depreciation expense of $45,489.
*Interest taken off of 227,448 bc Annual Payments are at END of yr (at same time as interest If it were BEG of every year, interest
would be taken from 227.448-60,000

C 66.

With respect to this capitalized lease, for 2012 Ogleby should record
a. interest expense of $22,745 and depreciation expense of $32,493.
b. interest expense of $20,469 and depreciation expense of $32,493.
c. interest expense of $19,019 and depreciation expense of $32,493.
d. interest expense of $14,469 and depreciation expense of $32,493.
60,000- 22744= 37225 227448-37225 = 190192 * .1 = 19019

D?67.

Emporia Corporation is a lessee with a capital lease. The asset is recorded at $450,000 and has an economic life of 8 years. The lease term
is 5 years. The asset is expected to have a market value of $150,000 at the end of 5 years, and a market value of $50,000 at the end of 8
years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of
depreciation expense would the lessee record for the first year of the lease?
a.
b.
c.
d.

*A68.

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first
payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year
useful life and no salvage value. If Pisa, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa,
Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods
3.57710
3.31213
10%, 4 periods
3.48685
3.16986
a.
b.
c.
d.

C 69.

$90,000
$80,000
$60,000
$50,000

$307,767
$272,728
$284,969
$300,000

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first
payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year
useful life and no salvage value. Pisa, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa,
Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pisa, Inc. in
the first year of the assets life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods
3.57710
3.31213
10%, 4 periods
3.48685
3.16986
a. $0
b. $24,621
c. $17,738
d. $22,798
((86,038*3.57710) 86038) *.08

D70.

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first
payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year
useful life and no salvage value. Pisa, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa,
Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the
second lease payment is made in Year 2?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods
3.57710
3.31213
10%, 4 periods
3.48685
3.16986
a. $86,038
b. $61,417
c. $63,240
d. $68,300
(86038 17738)

C 71.

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first
payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year
useful life and no salvage value. Pisa, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa,
Inc.) is 8%. Pisa, Inc. uses the straight-line method to depreciate similar assets. What is the amount of depreciation expense recorded by
Pisa, Inc. in the first year of the assets life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods
3.57710
3.31213
10%, 4 periods
3.48685
3.16986
a.
b.
c.
d.

?C72.

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of $200,000 to
Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an
expected useful life of 5 years. Silver Points incremental borrowing rate is 10%, and it depreciates similar equipment using the doubledeclining balance method. The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is known to Silver
Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2011?
PV Annuity Due PV Ordinary Annuity
PV Single Sum
8%, 5 periods
4.31213
3.99271
.68508
10%, 5 periods
4.16986
3.79079
.62092
a.
b.
c.
d.

?C73.

$0 because the asset is depreciated by Tower Company.

$71,242
$76,942
$75,000

$29,250
$23,400
$26,000
$32,500

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of $200,000 to
Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $73,259 at the end of each year. The
equipment has an expected useful life of 5 years. Silver Points incremental borrowing rate is 10%, and it depreciates similar equipment
using the double-declining balance method. The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is
known to Silver Point Co. What is the book value of the leased asset at December 31, 2011, and what is the balance in the Lease Liability
account?
Book Value of
Leased Asset
a.
$325,000
b.
$260,000
c.
$195,000
d.
$208,000

?A74.

Balance in Lease
Liability________
$219,243
$248,491
$242,643
$248,491

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of $200,000 to
Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an
expected useful life of 5 years. If the selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, what are the equal
annual payments?
PV Annuity Due PV Ordinary Annuity
PV Single Sum
8%, 5 periods
4.31213
3.99271
.68508
10%, 5 periods
4.16986
3.79079
.62092
a.
b.
c.

$73,259
$67,831
$75,822

d.

$81,398

Use the following information for questions 75 through 80. (Annuity tables on page 21-25.)
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 for the purpose of leasing a machine to be used in its
manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $155,213 are due on December 31 of each year.
(b) The fair value of the machine on January 1, 2011, is $400,000. The machine has a remaining economic life of 10 years, with no salvage
value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make
collectibility of future lease payments doubtful.
B 75.
What type of lease is this from Alt Corporation's viewpoint?
a.
b.
c.
d.
B 76.

If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended
December 31, 2011?
a.
b.
c.
d.

C77.

C100.

Operating lease
Capital lease
Sales-type lease
Direct-financing lease

Depreciation Expense
Rent Expense
Interest Expense
Depreciation Expense and Interest Expense

If the present value of the future lease payments is $400,000 at January 1, 2011, what is the amount of the reduction in the lease liability for
Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.)
a. $115,213
b. $123,213
c. $126,734
d. $133,070
YR 1: 400,000- (155213- 400,000 *.10) = 284787
YR 2: 155213 (284787* .1)
Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased
property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75
percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A
Lease B
a. Operating lease
Capital lease
b. Operating lease
Operating lease
c. Capital lease
Capital lease
d. Capital lease
Operating lease

A 101.

On December 31, 2011, Burton, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year
noncancelable lease requiring annual payments of $160,000 beginning December 31, 2011. The lease is appropriately accounted for by
Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2011 balance sheet, Burton should report a lease liability of
a. $606,528.
b. $680,000.
c. $751,344.
d. $766,528.
(160,000*4.7008) 160,000

D102.

On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are
$630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December
31, 2010, and the second payment was made on December 31, 2011. The five lease payments are discounted at 10% over the lease term.
The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2,502,000. The lease
is appropriately accounted for as a capital lease by Harris. In its December 31, 2011 balance sheet, Harris should report a lease liability of
a. $1,902,000.
b. $1,872,000.
c. $1,711,800.
d. $1,492,200.
2010: Right Away, 2,502,000-600,000= 1,902,000 New Lease Liability
2011:Then 600,000 (1,902,000*10%)=409,800 & New Lease Liab=1,902,000-409,800

A103.

A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal
a.
b.
c.
d.

the current liability shown for the lease at the end of year 1.
the current liability shown for the lease at the end of year 2.
the reduction of the lease liability in year 1.
one-tenth of the original lease liability.

Use the following information for questions 104 and 105.

On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of
$150,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a
capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its
plant assets. Aggregate lease payments were determined to have a present value of $900,000, based on implicit interest of 10%.
D104.

In its 2011 income statement, what amount of interest expense should Hernandez report from this lease transaction?

D105.

a. $0
b. $56,250
c. $75,000
d. $90,000
900,000*10%
In its 2011 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?
a.
b.
c.
d.

$150,000
$100,000
$90,000
$60,000

CHAPTER 22:
C 37.
An example of a correction of an error in previously issued financial statements is a change
a.
b.
c.
d.
B 38.

from the FIFO method of inventory valuation to the LIFO method.

in the service life of plant assets, based on changes in the economic environment.
from the cash basis of accounting to the accrual basis of accounting.
in the tax assessment related to a prior period.

Counterbalancing errors do not include

a.
b.
c.
d.

errors that correct themselves in two years.

errors that correct themselves in three years.
an understatement of purchases.
an overstatement of unearned revenue.

C39.

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise
was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net
income for the year?
Assets
Liabilities
Stockholders' Equity
Net Income
a.
No effect
Understate
Overstate
Overstate.
b.
No effect
Overstate
Understate
Understate.
c.
Understate
Understate
No effect
No effect.
d.
Understate
No effect
Understate
Understate.

C40.

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the
purchase of these goods in its accounting records, these errors would cause
a.
b.
c.
d.

the ending inventory and retained earnings to be understated.

the ending inventory, cost of goods sold, and retained earnings to be understated.
no effect on net income, working capital, and retained earnings.
cost of goods sold and net income to be understated.

Use the following information for questions 55 and 56.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/10 and 12/31/11 contained the following errors:
Ending inventory
Depreciation expense

2010
$15,000 overstatement
6,000 understatement

2011
$24,000 understatement
12,000 overstatement

A55.

Assume that the 2010 errors were not corrected and that no errors occurred in 2009. By what amount will 2010 income before income taxes
be overstated or understated?
a.
b.
c.
d.

C 56.

$21,000 overstatement
$9,000 overstatement
$21,000 understatement
$9,000 understatement

Assume that no correcting entries were made at 12/31/10, or 12/31/11. Ignoring income taxes, by how much will retained earnings at
12/31/11 be overstated or understated?

a. $24,000 overstatement
b. $21,000 overstatement
c. $30,000 understatement
d. $9,000 understatement
Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
$7,500 understated
$11,000 overstated
Depreciation expense
2,000 understated
An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012. The prepayment was recorded with a debit to
insurance expense. In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until
2012. There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors. Ignore income tax considerations.
D57.

What is the total net effect of the errors on Langley's 2011 net income?
a.
b.
c.
d.

C 58.

What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2011?
a.
b.
c.
d.

C59.

Working capital overstated by $5,000

Working capital overstated by $1,500
Working capital understated by $4,500
Working capital understated by $12,000

What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2011?
a.
b.
c.
d.

A60.

Net income understated by $14,500.

Net income overstated by $7,500.
Net income overstated by $13,000.
Net income overstated by $15,000.

Retained earnings understated by $10,000

Retained earnings understated by $4,500
Retained earnings understated by $2,500
Retained earnings overstated by $3,500

Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office supplies on hand of $24,000 at December 31, 2011
were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these
two errors would cause
a. 2011 net income to be understated $75,000 and December 31, 2011 retained earnings to be understated $24,000.
b. 2010 net income and December 31, 2010 retained earnings to be understated $51,000 each.
c. 2010 net income to be overstated $27,000 and 2011 net income to be understated $24,000.
d. 2011 net income and December 31, 2011 retained earnings to be understated $24,000 each.

Use the following information for questions 61 through 63.

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
$132,000 too high
$156,000 too low
Depreciation expense
84,000 too high

Insurance expense
60,000 too low
60,000 too high
Prepaid insurance
60,000 too high

In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012. No corrections have
been made for any of the errors. Ignore income tax considerations.
A 61.

The total effect of the errors on Bishop's 2011 net income is

a.
b.

understated by $376,800.
understated by $244,800.

c.
d.
B62.

The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by
a.
b.
c.
d.

C63.

overstated by $115,200.
overstated by $199,200.

$328,800.
$268,800.
$184,800.
$136,800.

The total effect of the errors on the amount of Bishop's working capital at December 31, 2011 is understated by
a. $400,800.
b. $316,800.
c. $184,800.
d. $124,800.
(156,000 + 28,800)

Use the following information for questions 64 and 65.

Link Co. purchased machinery that cost $810,000 on January 4, 2009. The entire cost was recorded as an expense. The machinery has a nine-year life
and a $54,000 residual value. The error was discovered on December 20, 2011. Ignore income tax considerations.
D 64.

Link's income statement for the year ended December 31, 2011, should show the cumulative effect of this error in the amount of
a.
b.
c.
d.

C65.

$726,000.
$642,000.
$558,000.
$0.

Before the correction was made, and before the books were closed on December 31, 2011, retained earnings was understated by

a. $810,000.
b. $726,000.
c. $642,000.
d. $558,000.
Use the following information for questions 66 and 67.
Ernst Company purchased equipment that cost $750,000 on January 1, 2010. The entire cost was recorded as an expense. The equipment had a nineyear life and a $30,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on
December 10, 2012. Ernst is subject to a 40 % tax rate.
A66.

Ernsts net income for the year ended December 31, 2010, was understated by
a.
b.
c.
d.

C 67.

$402,000.
$450,000.
$670,000.
$750,000.

Before the correction was made and before the books were closed on December 31, 2012, retained earnings was understated by
a.
b.
c.
d.

$332,000.
$336,000.
$354,000.
$450,000.

CHAPTER 23
C21.

It is an objective of the statement of cash flows to

a.
b.
c.
d.

disclose changes during the period in all asset and all equity accounts.
disclose the change in working capital during the period.
provide information about the operating, investing, and financing activities of an entity during a period.
none of these.

C22.

The primary purpose of the statement of cash flows is to provide information

a.
b.
c.
d.

C23.

Of the following questions, which one would not be answered by the statement of cash flows?
a.
b.
c.
d.

B24.

D 25.

a. Statements of cash flows

b. Balance sheets
c. Income statements
d. Statements of retained earnings
Cash equivalents are

c.
d.

addition to net income in arriving at net cash flow from operating activities.
deduction from net income in arriving at net cash flow from operating activities.
cash outflow from investing activities.
cash outflow from financing activities.

A statement of cash flows typically would not disclose the effects of

a.
b.
c.
d.

B30.

re-recording all income statement transactions that directly affect cash in a separate cash flow journal.
estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to
the entire array of income statement transactions.
eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.
eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
a.
b.
c.
d.

B29.

addition adjustment to net income in the cash flows from operating activities section.
cash outflow from investing activities.
cash inflow from investing activities.
cash inflow from financing activities.

To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by
a.
b.

B 28.

treasury bills, commercial paper, and money market funds purchased with excess cash.
investments with original maturities of three months or less.
readily convertible into known amounts of cash.
all of these.

A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event
would be reflected as a(n)
a.
b.
c.
d.

C27.

Where did the cash come from during the period?

What was the cash used for during the period?
Were all the cash expenditures of benefit to the company during the period?
What was the change in the cash balance during the period?

The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial
statements?

a.
b.
c.
d.
D 26.

about the operating, investing, and financing activities of an entity during a period.
that is useful in assessing cash flow prospects.
about the cash receipts and cash payments of an entity during a period.
about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.

capital stock issued at an amount greater than par value.

stock dividends declared.
cash dividends paid.
a purchase and immediate retirement of treasury stock.

When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net
cash provided by operating activities?
a.
b.
c.
d.

A change in interest payable

A change in dividends payable
A change in income taxes payable
All of these are adjustments.

D31.Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows:
Direct Method
Indirect Method
a.
Outflow
Inflow
b.
Inflow
Inflow
c.
Outflow
Outflow
d.
No effect
No effect
C32.

In a statement of cash flows, the cash flows from investing activities section should report
a.
b.
c.
d.

??C33.

Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year?
a.
b.
c.
d.

?B34.

the issuance of common stock in exchange for a factory building.

stock dividends received.
a major repair to machinery charged to accumulated depreciation.
the assignment of accounts receivable.

Five items
Four items
Three items
Two items

Which of the following would be classified as a financing activity on a statement of cash flows?
a.
b.
c.
d.

Declaration and distribution of a stock dividend

Deposit to a bond sinking fund
Sale of a loan receivable
Payment of interest to a creditor

B35.The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating
activities) as a(n)

C 44.

a. addition to net income.

b. deduction from net income.
c. investing activity.
d. financing activity.
When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is added to net
income to compute cash provided by/used by operating activities?
a.
b.
c.
d.

B45.

Increase in accounts receivable.

Gain on sale of land.
Amortization of patent.
All of the above are added to net income to arrive at cash flow from operating activities.

When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is deducted from net
income to compute cash provided by/used by operating activities?

a. Decrease in accounts receivable.

b. Gain on sale of land.
c. Amortization of patent.
d. All of the above are deducted from net income to arrive at cash flow from operating activities.
D47.Dolan Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Moss
Co. during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cash flows
(indirect method), the $25,000 should
a.
b.
c.
d.

not be shown.
be shown as cash inflow from investing activities.
be shown as cash outflow from financing activities.
be shown as a deduction from net income in the cash flows from operating activities section.

C50.How should significant noncash transactions be reported in the statement of cash flows according to FASB Statement No. 95?
a.
b.
c.
d.

They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions."
Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major
component of the transaction.
These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule
at the bottom of the statement or appear in a separate supplementary schedule to the financials.
They should be handled in a manner consistent with the transactions that affect cash flows.

Use the following information for questions 51 and 52.

Napier Co. provided the following information on selected transactions during 2011:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury stock
Loans made to affiliated corporations
Dividends paid to preferred stockholders
Proceeds from issuing preferred stock
Proceeds from sale of equipment
A51.

$250,000
500,000
950,000
150,000
350,000
100,000
400,000
50,000

The net cash provided (used) by investing activities during 2011 is

a. $50,000.
b. $(300,000).
c. $(550,000).
d. $(1,250,000).
(50,000 350,000)

B52.

The net cash provided by financing activities during 2011 is

a. $550,000.
b. $650,000.
c. $800,000.
d. $900,000.
(500-150-100+400)

The balance sheet data of Kohler Company at the end of 2011 and 2010 follow:
Cash
Accounts receivable (net)
Merchandise inventory
Prepaid expenses
Buildings and equipment
Accumulated depreciationbuildings and equipment
Land
Totals
Accounts payable
Accrued expenses
Notes payablebank, long-term
Mortgage payable
Common stock, $10 par
Retained earnings (deficit)

2011
$ 50,000
120,000
140,000
20,000
180,000
(36,000)
180,000
$654,000
$136,000
24,000

2010
$ 70,000
90,000
90,000
50,000
150,000
(16,000)
80,000
$514,000
$110,000
36,000
80,000

60,000
418,000
318,000
16,000
(30,000)
$654,000
$514,000
Land was acquired for $100,000 in exchange for common stock, par $100,000, during the year; all equipment purchased was for cash. Equipment
costing $10,000 was sold for $4,000; book value of the equipment was $8,000 and the loss was reported as an ordinary item in net income. Cash
dividends of $20,000 were charged to retained earnings and paid during the year; the transfer of net income to retained earnings was the only other
entry in the Retained Earnings account. In the statement of cash flows for the year ended December 31, 2011, for Naley Company:
C 53.

The net cash provided by operating activities was

a.
b.
c.
d.

$52,000.
$66,000.
$56,000.
$48,000.
$16,000 + $20,000 + $30,000 = $66,000 (NI)??
($10,000 $2,000) $4,000 = $4,000 (Loss)
$36,000 + $2,000 $16,000 = $22,000 (Depr. exp.)
$66,000 $30,000 $50,000 + $30,000 + $4,000 + $22,000 + $26,000 $12,000 56,000.

D54.

The net cash provided (used) by investing activities was

a.
b.
c.
d.

C55.

The net cash provided (used) by financing activities was

a.
b.
c.
d.

A56.

C 63.

$ -0-.
$(20,000).
$(40,000).
$60,000.
-$80,000 + $60,000 $20,000 = ($40,000).

The following information on selected cash transactions for 2011 has been provided by Mancuso Company:
Proceeds from sale of land
$160,000
Proceeds from long-term borrowings
400,000
Purchases of plant assets
144,000
Purchases of inventories
680,000
Proceeds from sale of Mancuso common stock
240,000
What is the cash provided (used) by investing activities for the year ended December 31, 2011, as a result of the above information?
a.
b.
c.
d.

D57.

$26,000.
$(40,000).
$(136,000).
$(36,000).
$4,000 loss ($180,000 + $10,000 $150,000) = ($36,000). [No land bc was exchanged for common stock not effecting cash]

$16,000
$256,000.
$160,000.
$800,000.

Selected information from Dinkel Company's 2011 accounting records is as follows:

Proceeds from issuance of common stock
$ 400,000
Proceeds from issuance of bonds
1,200,000
Cash dividends on common stock paid
160,000
Cash dividends on preferred stock paid
60,000
Purchases of treasury stock
120,000
Sale of stock to officers and employees not included above
100,000
Dinkel's statement of cash flows for the year ended December 31, 2011, would show net cash provided (used) by financing activities of
a. $60,000.
b. $(220,000).
c. $160,000.
d. $1,360,000.
$400,000 + $1,200,000 $160,000 $60,000 $120,000 + $100,000 = $1,360,000.
During 2011, Stout Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Stout,
converted into common shares of Stout
$ 360,000
Payment in 2011 of cash dividend declared in 2010 to
preferred shareholders
186,000
Payment for the early retirement of long-term bonds payable
(carrying amount $2,220,000)
2,250,000
Proceeds from the sale of treasury stock (on books at cost of $258,000)
300,000
The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2011 should be
a. $1,590,000.
b. $1,776,000.
c. $2,136,000.
d. $2,148,000.
$300,000 $186,000 $2,250,000 = $2,136,000.

C64.Hager Company sold some of its plant assets during 2011. The original cost of the plant assets was $750,000 and the accumulated depreciation
at date of sale was $700,000. The proceeds from the sale of the plant assets were $105,000. The information concerning the sale of the plant
assets should be shown on Hager's statement of cash flows (indirect method) for the year ended December 31, 2011, as a(n)
a.
b.
c.
d.

subtraction from net income of $55,000 and a $50,000 increase in cash flows from financing activities.
addition to net income of $55,000 and a $105,000 increase in cash flows from investing activities.
subtraction from net income of $55,000 and a $105,000 increase in cash flows from investing activities.
addition of $105,000 to net income.
$105,000 ($750,000 $700,000) = $55,000, $105,000 (proceeds).

B65.

An analysis of the machinery accounts of Noller Company for 2011 is as follows:

Balance at January 1, 2011

Purchases of new machinery in 2011
for cash
Depreciation in 2011
Balance at Dec. 31, 2011

Machinery
$500,000
200,000

$700,000

Accumulated
Depreciation
$125,000

100,000
$225,000

Machinery, Net of
Accumulated
Depreciation
$375,000
200,000
(100,000)
$475,000

The information concerning Noller's machinery accounts should be shown in Noller's statement of cash flows (indirect method) for the year
ended December 31, 2011, as a(n)
a.
b.
c.
d.
C66.

subtraction from net income of $100,000 and a $200,000 decrease in cash flows from financing activities.
addition to net income of $100,000 and a $200,000 decrease in cash flows from investing activities.
$100,000 increase in cash flows from financing activities.
$200,000 decrease in cash flows from investing activities.

Equipment which cost $213,000 and had accumulated depreciation of $114,000 was sold for $111,000. This transaction should be shown
on the statement of cash flows (indirect method) as a(n)
a. addition to net income of $12,000 and a $111,000 cash inflow from financing activities.
b. deduction from net income of $12,000 and a $99,000 cash inflow from investing activities.
c. deduction from net income of $12,000 and a $111,000 cash inflow from investing activities.
d. addition to net income of $12,000 and a $99,000 cash inflow from financing activities.
$111,000 ($213,000 $114,000) = $12,000, $111,000 (proceeds).

C 67.

During 2011, equipment was sold for $156,000. The equipment cost $252,000 and had a book value of $144,000. Accumulated
DepreciationEquipment was $687,000 at 12/31/10 and $735,000 at 12/31/11. Depreciation expense for 2011 was
a. $60,000.
b. $96,000.
c. $156,000.
d. $192,000.
$735,000 $687,000 + ($252,000 $144,000) = $156,000.

Use the following information for questions 68 and 69.

Equipment that cost $300,000 and had a book value of $156,000 was sold for $180,000. Data from the comparative balance sheets are:
12/31/11
12/31/10
Equipment
$2,160,000
$1,950,000
Accumulated Depreciation
660,000
570,000
B68.

Depreciation expense for 2011 was

a. $258,000.
b. $234,000.
c. $54,000.
d. $36,000.
$660,000 $570,000 + ($300,000 $156,000) = $234,000.

A 69.

Equipment purchased during 2011 was

a.
b.
c.
d.

$510,000.
$300,000.
$210,000.
$90,000.

The balance in retained earnings at December 31, 2010 was $720,000 and at December 31, 2011 was $582,000. Net income for 2011 was $500,000.
A stock dividend was declared and distributed which increased common stock $200,000 and paid-in capital $110,000. A cash dividend was declared
and paid.
B75.

The amount of the cash dividend was

a. $248,000.
b. $328,000.
c. $442,000.
d. $638,000.
$720,000 + $500,000 ($200,000 + $110,000) X = $582,000

X = $328,000.

D76.

The stock dividend should be reported on the statement of cash flows (indirect method) as
a.
b.
c.
d.

C77.

an outflow from financing activities of $200,000.

an outflow from financing activities of $310,000.
an outflow from investing activities of $310,000.
Stock dividends are not shown on a statement of cash flows.

The following information was taken from the 2011 financial statements of Dunlop Corporation:
Bonds payable, January 1, 2011
$ 500,000
Bonds payable, December 31, 2011
2,000,000
During 2011

A $450,000 payment was made to retire bonds payable with a face amount of $500,000.

Bonds payable with a face amount of $200,000 were issued in exchange for equipment.
In its statement of cash flows for the year ended December 31, 2011, what amount should Dunlop report as proceeds from issuance of
bonds payable?
a. $1,500,000
b. $1,750,000
c. $1,800,000
d. $2,200,000
$2,000,000 $500,000 + $500,000 $200,000 = $1,800,000.

78.Lindsay Corporation had net income for 2011 of $3,000,000. Additional information is as follows:
Depreciation of plant assets
$1,200,000
Amortization of intangibles
240,000
Increase in accounts receivable
420,000
Increase in accounts payable
540,000
Lindsay's net cash provided by operating activities for 2011 was
a. $4,560,000.
b. $4,440,000.
c. $4,320,000.
d. $1,680,000.
$3,000,000 + $1,200,000 + $240,000 - $420,000 + $540,000 = $4,560,000.
A79.

Net cash flow from operating activities for 2011 for Spencer Corporation was $300,000. The following items are reported on the financial
statements for 2011:
Cash dividends paid on common stock
20,000
Depreciation and amortization
12,000
Increase in accounts receivables
24,000
Based on the information above, Spencers net income for 2011 was
a. $312,000.
b. $296,000.
c. $264,000.
d. $256,000.
X + $12,000 $24,000 = $300,000; X = $312,000.

A 80.

During 2011, Orton Company earned net income of $384,000 which included deprecia-tion expense of $78,000. In addition, the company
experienced the following changes in the account balances listed below:
Increases
Decreases
Accounts payable
$45,000
Accounts receivable
$12,000
Inventory
36,000
Accrued liabilities
24,000
Prepaid insurance
33,000
Based upon this information what amount will be shown for net cash provided by operating activities for 2011?

a. $492,000
b. $465,000
c. $285,000
d. $267,000
$384,000 + $78,000 + $45,000 $36,000 + $12,000 $24,000 + $33,000 = $492,000.
A81.

Minear Company reported net income of $340,000 for the year ended 12/31/11. Included in the computation of net income were:
depreciation expense, $60,000; amortization of a patent, $32,000; income from an investment in common stock of Brett Inc., accounted for
under the equity method, $48,000; and amortization of a bond discount, $12,000. Minear also paid an $80,000 dividend during the year.
The net cash provided by operating activities would be reported at:
a.

$396,000.

b. $316,000.
c. $284,000.
d. $204,000.
$340,000 + $60,000 + $32,000 $48,000 + $12,000 = $396,000.

Ex. 23-127Preparation of statement of cash flows (format provided).

The balance sheets for Kinder Company showed the following information. Additional
information concerning transactions and events during 2011 are presented below.
Kinder Company
Balance Sheet
Cash
Accounts receivable (net)
Inventory
Long-term investments
Property, plant & equipment
Accumulated depreciation
Accounts payable
Accrued liabilities
Long-term notes payable
Common stock
Retained earnings

December 31
2011
2010
$ 30,900$ 10,200
43,300
20,300
35,000
42,000
0
15,000
236,500
150,000
(37,700)
(25,000)
$308,000
$212,500
$ 17,000
21,000
70,000
130,000
70,000
$308,000

Additional data:
1. Net income for the year 2011, $76,000.
2. Depreciation on plant assets for the year, $12,700.
3. Sold the long-term investments for $28,000 (assume gain or loss is ordinary).
4. Paid dividends of $35,000.
5. Purchased machinery costing $26,500, paid cash.
6. Purchased machinery and gave a $60,000 long-term note payable.
7. Paid a $40,000 long-term note payable by issuing common stock.

$ 26,500
17,000
50,000
90,000
29,000
$212,500