Problem A-I — Multiple Choice.
Choose the best answer for each of the following questions and enter the identifying letter in the space provided.
1.How does failure to record accrued revenue distort the financial reports?
a.It understates revenue, net income, and current assets.
b.It understates net income, stockholders’ equity, and current liabilities.
c.It overstates revenue, stockholders’ equity, and current liabilities.
d.It understates current assets and overstates stockholders’ equity.
2.A contingent liability which is normally accrued is
a.notes receivable discounted.
b.accommodation endorsements on customer notes.
c.additional compensation that may be payable on a dispute now being arbitrated.
d.estimated claims under a service warranty on new products sold.
3.Which of the following items is a current liability?
a.Bonds due in three months (for which there is an adequate sinking fund classified as a long-term investment). b.Bonds due in three years.
c.Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d.Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
4.On June 15, 2012 Stine Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2012 would be
a.assets and stockholders’ equity were overstated but liabilities were not affected.
b.stockholders’ equity was the only item affected by the omission.
c.assets and liabilities were understated but stockholders’ equity was not affected.
d.assets and stockholders’ equity were understated but liabilities were not affected.
5.Reversing entries are most commonly used in relation to year-end adjusting entries that
a.allocate the expired portion of a depreciable asset to expense.
b.amortize intangible assets.
c.provide for bad debt expense.
d.accrue interest revenue on notes receivable.
6.Of the following adjusting entries, which one would cause an increase in assets at the end of the period?
a.The entry to record the earned portion of rent received in advance.
b.The entry to accrue unrecorded interest expense.
c.The entry to accrue unrecorded interest revenue.
d.The entry to record expiration of prepaid insurance.
7.Why is it necessary to make adjusting entries?
a.The accountant has made errors in recording external transactions. b.Certain facts about the affairs of the business are not included in the ledger as built up from external transactions. c.The accountant wants to show the largest possible net income for the period. d.The accountant wants to show the net cash flow for the year.
8.Notes to financial statements should not be used to
a.describe the nature and effect of a change in accounting principles.
b.identify substantial differences between book and tax income.
c.correct an improper financial statement presentation.
d.indicate basis for asset valuation.
9.Consistency is best demonstrated when
a.expenses are reported as charges against the period in which incurred.
b.the effect of changes in accounting methods is properly disclosed.
c.extraordinary gains and losses are not reported on the income statement.
d.accounting procedures are adopted which give a consistent rate of net income.
10.The current assets section of a balance sheet should never include
a.a receivable from a customer not collectible for over one year.
b.the premium paid on short-term bond investment.
c.goodwill arising from the purchase of a going business.
d.customers' accounts with credit balances.
Problem A-II — Adjusting and Reversing Entries.
The following list of accounts and...