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Financial Accounting, 13e (Thomas/Tietz) Appendix E: Investments Learning Objective E-1 1) To be classified as a current asset, an investment must either be liquid or the investor must intend to use it to pay a current liability. Answer: FALSE Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) One reason a company invests in securities of other companies is because they may have a long-term strategic plan. Answer: TRUE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

3) GAAP rules for investments differ based on whether an investment is composed of equity securities or debt securities. Answer: TRUE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

4) Equity securities are investments in bonds or notes payable. Answer: FALSE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

5) If an investor owns 25% of the voting stock of an investee, the investor has controlling influence. Answer: FALSE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

6) Investments with insignificant influence: A) are reported at amortized cost on the balance sheet. B) are more liquid than cash. C) are reported at historical cost on the balance sheet. D) are reported using the fair value method on the balance sheet. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

7) Investments with insignificant influence are reported on the: A) income statement using fair value method. B) balance sheet at cost. C) balance sheet using fair value method. D) income statement at cost. Answer: C Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

8) To be classified as a current asset, an investment must meet which of the following criteria: A) the investment must be liquid. B) the investor must intend to either convert the investment to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liability. C) the investment must be easily convertible to cash. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

9) Marathon Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Marathon Corporation is the ________ and Mini Company is the ________. A) investee; investor B) investor; investee C) parent company; subsidiary company D) controlling company; noncontrolling company Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) When an investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is reported on the balance sheet as: A) a current asset. B) a long-term asset. C) stockholders' equity. D) a cash equivalent. Answer: A Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

11) Long-term investments include: A) stocks and bonds that are not liquid or readily convertible to cash. B) securities that the investor expects to hold longer than one year or operating cycle, whichever is longer. C) securities reported in the non-current asset section of the balance sheet. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) Mason Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: D Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) Mason Corporation owns 1,500 shares of Mini Company's common stock. Mini Company has 2,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: C Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Mason Corporation owns 500 shares of Mini Company's common stock. Mini Company has 2,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective E-2 1) Unrealized gains and losses on equity securities when the investor has insignificant influence are reported on the income statement. Answer: TRUE Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) Cash dividends received on stock investments with less than 20% ownership of the investee should be credited to the Equity-Method Investment account. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) Investments in equity securities (stock) can be classified as either current or long-term assets depending on the company's ability and intent to hold or sell them. Answer: TRUE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

4) GAAP requires equity securities (stocks) that comprise an insignificant influence in other companies to be recorded using the fair value method—regardless of whether they are classified as current or longterm assets. Answer: TRUE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

5) Fair (market) value is the amount the owner of a security paid for it. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) An unrealized gain on an equity security when the investor has insignificant influence: A) is recorded when an investment is sold for more than its cost. B) is recorded when an investment is sold for less than its cost. C) is recorded when the fair market value of the investment is more than its cost, but it has not been sold. D) is recorded when the fair market value of the investment is less than its cost, but it has not been sold. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) A company's investment with insignificant influence has a fair market value which exceeds its cost. When recording the year-end adjustment, the: A) Investment in Equity Securities account will be credited. B) Unrealized Gain on Equity Securities account will be credited. C) Unrealized Loss on Equity Securities account will be debited. D) Unrealized Loss on Equity Securities account will be credited. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) Unrealized gains on equity securities when the investor has insignificant influence are reported on the: A) statement of cash flows as investing activities. B) balance sheet as an element of other comprehensive income. C) statement of cash flows as financing activities. D) income statement as Other Income. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

9) Investments in equity securities with insignificant influence were purchased for $400,000, and had a fair value of $410,000 at the end of the year. The adjusting entry to record this difference includes a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Unrealized Loss on Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) Michael Company's investment in equity securities with insignificant influence had a fair value of $34,200 at the end of the prior year. Management decided to sell the investment. The investment was purchased for $30,300. If Michael Company sold this investment for $47,400, Michael will have a(n): A) Gain on Sale of Equity Securities for $17,100. B) Gain on Sale of Equity Securities for $13,200. C) Unrealized Loss on Equity Securities of $13,200. D) Unrealized Gain on Equity Securities of $17,100. Answer: B Explanation: $47,400 - $34,200 = $13,200 gain Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) When a company receives a cash dividend from equity securities with insignificant influence, the journal entry is: A) debit to Investment in Equity Securities and credit Cash. B) debit to Cash and credit to Dividend Revenue. C) debit to Dividend Revenue and credit to Cash. D) debit to Cash and credit to Investment in Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

12) The Investment in Equity Securities account when the investor has insignificant influence is reported on the: A) income statement using the equity method. B) income statement using the fair value method. C) balance sheet using the equity method. D) balance sheet using the fair value method. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

13) At the beginning of the year, an investment in equity securities with insignificant influence was purchased for $400,000, and it has a fair value of $420,000 at the end of the year. The year-end journal entry will have a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Gain on Sale of Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

14) If an investor owns less than 20% of the common stock of another company as a long-term investment: A) the equity method of accounting should be used for the investment. B) the investor has a controlling interest in the investee. C) the investor usually has little or no influence on the investee. D) the investor has significant influence on the investee. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) For accounting purposes, the method used to account for long-term investments in common stock is determined by: A) the size of the investor. B) the size of the investor when compared to the size of the investee. C) vote by the Board of Directors of the investor. D) the investor's percentage ownership of the investee's stock. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) If 15% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is: A) the equity method. B) the consolidation method. C) the fair value method. D) the lower of cost or market method. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) The fair value method of accounting for long-term investments in stock should be used when the: A) investor owns less than 20% of the outstanding stock of the investee. B) investor has significant influence over the investee's operating decisions and policies. C) investor has little or no influence on the investee. D) A and C. Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) An investor receives a cash dividend from an investment with 3% ownership and insignificant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Interest Revenue C) a debit to Cash and credit to Equity-Method Investment D) a debit to Cash and credit to Interest Receivable Answer: A Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) Jones Corporation purchases $600,000 of Basic Corporation's stock on October 1, 2024 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2024 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2024, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. What is the journal entry on December 31, 2024 for the unrealized loss or gain on the equity securities? A) a debit to Unrealized Gain on Equity Securities for $50,000 and a credit to Investment in Equity Securities for $50,000 B) a debit to Unrealized Loss on Equity Securities for $50,000 and a credit to Investment in Equity Securities for $50,000 C) a debit to Investment in Equity Securities for $50,000 and a credit to Unrealized Loss on Equity Securities $50,000 D) a debit to Investment in Equity Securities for $50,000 and a credit to Unrealized Gain on Equity Securities $50,000 Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) On January 1, 2022, Max Company purchased 1,000 shares of Engel common stock at $41 per share. Max owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Engel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Engel's stock is $45 per share. On February 1, 2023, the Engel's stock is sold for $50 per share. What is the journal entry on December 31, 2022 for the unrealized loss or gain on the equity securities? A) a debit to Unrealized Gain on Equity Securities for $4,000 and a credit to Investment in Equity Securities for $4,000 B) a debit to Unrealized Loss on Equity Securities for $4,000 and a credit to Investment in Equity Securities for $4,000 C) a debit to Investment in Equity Securities for $4,000 and a credit to Unrealized Loss on Equity Securities $4,000 D) a debit to Investment in Equity Securities for $4,000 and a credit to Unrealized Gain on Equity Securities $4,000 Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) On January 1, 2022, Max Company purchased 6,000 shares of Engel common stock at $49 per share. Max owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Engel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Engel's stock is $54 per share. On February 1, 2023, the Engel's stock is sold for $59 per share. What is the journal entry on February 1, 2023 for the sale of the stock? A) a debit to cash for $354,000; credit to Investment in Equity Securities for $324,000 and credit to Gain on Sale of Equity Securities for $30,000. B) a debit to cash for $354,000; credit to Investment in Equity Securities for $294,000 and credit to Gain on Sale of Equity Securities for $60,000. C) a debit to cash for $294,000 and debit to Loss on Sale of Equity Securities for $60,000; credit to Investment in Equity Securities for $354,000. D) a debit to cash for $354,000; credit to Investment in Equity Securities for $354,000. Answer: A Explanation: Date Accounts Debit Credit 2023 2/1 Cash (6,000 × $59 = $354,000) 354,000 Investment in Equity Securities (6,000 × $54) 324,000 Gain on Sale of Equity Securities 30,000 Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) Smith Corporation purchases $620,000 of TMI Corporation's stock on October 18, 2024 at cost. Smith owns less than 2% of TMI's outstanding shares, and thus has insignificant influence. On December 1, 2024, Smith Corporation received a cash dividend of $12,000 on the TMI Corporation's stock. On December 31, 2024, Smith Corporation's investment in TMI Corporation has a fair value of $600,000. Required: Prepare the necessary journal entries. Explanations are not required. Date

Accounts

Answer: Date Oct. 18, 2024

Dec. 1, 2024

Debit

Accounts Investment in Equity Securities Cash

Credit

Debit Credit 620,000 620,000

Cash

12,000 Dividend Revenue

Dec. 31, 2024

12,000

Unrealized Loss on Equity Securities Investment in Equity Securities

Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20,000 20,000

23) Jones Corporation purchases $500,000 of Basic Corporation's stock on October 1, 2024 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2024 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2024, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. Required: Prepare the necessary journal entries. Explanations are not required. Date

Accounts

Answer: Date Oct. 1, 2024

Dec. 1, 2024

Debit

Accounts Investment in Equity Securities Cash

Credit

Debit Credit 500,000 500,000

Cash

15,000 Dividend Revenue

Dec. 31, 2024

15,000

Unrealized Loss on Equity Securities Investment in Equity Securities

Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

50,000 50,000

24) On January 1, 2022, Innocente Company purchased 1,000 shares of Entel common stock at $40 per share. Innocente owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Entel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Entel's stock is $44 per share. On February 1, 2023, the Entel's stock is sold for $48 per share. Prepare the journal entries on: 1. January 1, 2022 2. June 1, 2022 3. December 31, 2022 4. February 1, 2023 Explanations are not required. Answer: Date Accounts 2022 1/1 Investment in Equity Securities Cash (1,000 × $40 = $40,000) 6/1

2022 12/31

2023 2/1

Debit

Credit

40,000 40,000

Cash (1,000 × $0.5) Dividend Revenue

500 500

Investment in Equity Securities Unrealized Gain on Equity Securities (1,000 × ($44 - $40))

4,000

Cash (1,000 × $48 = $48,000) Investment in Equity Securities Gain on Sale of Equity Securities

48,000

4,000

44,000 4,000

Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective E-3 1) When an investor owns 35% of the stock of another business, cash dividends received from the investee company are recorded by decreasing the Equity-method Investment account. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2) The equity method is used to account for stock investments in which the investor company owns less than 20% of the outstanding stock of the investee. Answer: FALSE Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) Investments accounted for by the equity method are recorded initially at cost. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) If an investor owns between 20% and 50% of an investee's voting stock, it is assumed that the investor has significant influence over the investee. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Under the equity method, when the investee reports net income, the Equity-method Investment account increases. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Under the equity method, the investor applies his percentage of ownership in recording his share of the investee's net income, but not dividends. Answer: FALSE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Cash dividends received on stock investments with more than 20% ownership of the investee, but less than 50% ownership, should be credited to the Equity-method Investment Revenue account. Answer: FALSE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) An investor receives a cash dividend from an investment with 48% ownership and significant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Equity-Method Investment C) a debit to Equity-Method Investment and a credit to Dividend Revenue D) a memorandum entry only Answer: B Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) When an investor owns between 20% and 50% of the outstanding stock of another company, the ________ method is used to account for the stock investment. A) fair value B) equity C) consolidated D) available-for-sale Answer: B Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) An investor who may significantly influence the business activities of the investee should report the investment using the: A) fair value method. B) consolidated method. C) equity method. D) available-for-sale method. Answer: C Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) Under the equity method, the Equity-method Investment account is debited when the: A) investee reports net income. B) investee reports net loss. C) investor receives a cash dividend. D) investment is sold. Answer: A Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) A company that owns 40% of the common stock of another business recognizes revenue from the investment when: A) the investor sells the shares in the investee company. B) the investee issues a cash dividend. C) the investee recognizes net income. D) the investee issues a stock dividend. Answer: C Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

73) In the following table, indicate the effects of failing to recognize each of the indicated adjustments by writing "O" for overstated and "U" for understated. If there is no effect, write "NE." Effect on Net Income

Failure to Record: Depreciation on building Use of supplies on hand

Effect on Assets

Effect on Effect on Stockholders' Liabilities Equity

Effect on Assets O O

Effect on Effect on Stockholders' Liabilities Equity NE O NE O

U NE

NE U

U O

NE U

O NE

U U

Earning of interest on bank account Salaries owed but not paid Earning of service revenue received in advance Accrual of service revenue Answer:

Failure to Record: Depreciation on building Use of supplies on hand

Effect on Net Income O O

Earning of interest on bank account U Salaries owed but not paid O Earning of service revenue received in advance U Accrual of service revenue U Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

74) On September 1, Barnes Enterprises prepaid $18,000 for six months' rent. The rental period begins on September 1. Barnes adjusts the accounts only at December 31, the end of this fiscal year. Prepare the journal entry for September 1 and the adjusting entry for December 31. Omit explanations. Date

Accounts

Debit

Answer: Date Accounts 9/1 Prepaid Rent Cash 12/31

Credit

Debit Credit 18,000 18,000

Rent Expense Prepaid Rent $18,000 ÷ 6 = $3,000 per month $3,000 × 4 months = $12,000

12,000 12,000

Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

75) Fisher Accounting's fiscal year ends on July 31. Accounts are adjusted only on the last day of the fiscal year. On July 31, before adjusting journal entries were prepared, the balance of Supplies was $1,250. A physical count revealed $800 of supplies on hand. Prepare the July 31 adjusting journal entry. Omit explanations. Date

Accounts

Debit

Answer: Date Accounts 7/31 Supplies Expense Supplies

Credit

Debit

Credit 450 450

$1,250 - $800 = $450 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

76) Jackson Company holds a $50,000 note receivable dated July 1, 2023, with 10% interest. What adjusting entry is needed on December 31, 2023? Date

Answer: Date 12/31/23

Accounts

Debit

Accounts Interest Receivable Interest Revenue

Debit

Credit

Credit 2,500 2,500

$50,000 × .10 × 6/12 = $2,500

Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

77) Barker Enterprises paid $30,000 cash for a new auto on January 1, 2022, the first day of its fiscal year. The auto is expected to remain useful for six years. At the end of six years, the auto's value is expected to be zero. Accounts are adjusted only on the last day of the fiscal year. Make the journal entries for January 1, 2022 and for December 31, 2022. Omit explanations. Date

Accounts

Debit

Answer: Date: 2022 Accounts 1/1 Auto Cash 12/31

Credit

Debit Credit 30,000 30,000

Depreciation Expense, Auto Accumulated Depreciation, Auto $30,000 ÷ 6 years = $5,000 per year

5,000 5,000

Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

78) On November 1 of the current year, a company received $9,600 for services to be performed evenly over the next six months. If no adjusting entry was made on December 31 of the current year, how much would net income be overstated or understated by? Answer: $9,600 ÷ 6 = $1,600 revenue per month. $1,600 × 2 months earned = $3,200 If this is not recorded, then $3,200 of revenues would not get recorded. This would understate net income by $3,200. Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

79) On November 1 of the current year, a company received $9,600 for services to be performed evenly over the next six months. If no adjusting entry was made on December 31 of the current year, how much would net income be overstated or understated by? Answer: $9,600 ÷ 6 = $1,600 revenue per month. $1,600 × 2 months earned = $3,200 If this is not recorded, then $3,200 of revenues would not get recorded. This would understate net income by $3,200. Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

80) A company purchased medical equipment for $200,000 on January 1, 2022. The company determined that the yearly depreciation expense is $20,000. What will be the ending balance in the Accumulated Depreciation—Medical Equipment on December 31, 2024? What is the book value of the equipment on December 31, 2024? Answer: $20,000 depreciation per year × 3 years = $60,000 accumulated depreciation $200,000 cost - $60,000 accumulated depreciation = $140,000 book value. Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

81) A company purchased supplies during the year totaling $26,000. At the end of the year, they made an adjusting entry to record $15,000 of supplies that had been used during the year. The ending balance in the Supplies account after the adjustment was $12,000. The beginning balance in the Supplies account was: Answer: x + 26,000 - 15,000 = 12,000 x = 12,000 – 26,000 + 15,000 x = 1,000 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective 3-4 1) The beginning balance of retained earnings appears on the balance sheet and the statement of retained earnings. Answer: FALSE Explanation: Only the ending retained earnings appears on the balance sheet. Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) The financial statements can be prepared from the adjusted trial balance. Answer: TRUE Diff: 1 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

3) The income statement is the last financial statement prepared. Answer: FALSE Diff: 1 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

4) The balance sheet reports assets, liabilities, and stockholders' equity. Answer: TRUE Diff: 1 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

5) The statement of retained earnings reports the revenues and individual expenses. Answer: FALSE Diff: 1 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

6) In what order are the financial statements generally prepared? A) balance sheet, income statement, and statement of retained earnings B) income statement, statement of retained earnings, and balance sheet C) income statement, balance sheet, and statement of retained earnings D) statement of retained earnings, balance sheet, and income statement Answer: B Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

7) The revenues and expenses appear on which financial statement? A) statement of retained earnings B) income statement C) balance sheet D) dividends statement Answer: B Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

8) The ending retained earnings balance is found on the: A) statement of retained earnings. B) income statement. C) balance sheet. D) both the statement of retained earnings and the balance sheet. Answer: D Diff: 3 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

9) The financial statements are prepared from which columns of the trial balance worksheet? A) unadjusted trial balance columns B) adjusted trial balance columns C) adjustment columns D) closing entries columns Answer: B Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

10) When preparing the balance sheet, the final balancing element of the balance sheet is: A) Cash. B) Net income. C) Retained earnings. D) Dividends. Answer: C Diff: 3 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

11) The balance sheet reports: A) assets, liabilities, and stockholders' equity. B) the changes in retained earnings. C) assets, liabilities, revenues, and expenses. D) revenues and expenses. Answer: A Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

12) ________ will not be found on the statement of retained earnings. A) Net income B) Dividends C) Cash D) Net loss Answer: C Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

13) When preparing the financial statements, why is the income statement prepared first? A) The income statement is used to prepare the balance sheet. B) The income statement is the easiest statement to prepare. C) The income statement is the most important statement to investors and creditors. D) Net income or net loss from the income statement is used for the statement of retained earnings. Answer: D Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

14) When using the trial balance worksheet to prepare the statement of retained earnings, what information is used from the trial balance worksheet? A) net income or net loss B) revenues and expenses C) beginning balance of retained earnings and dividends D) cash balance Answer: C Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

15) The balance sheet reports the retained earnings balance at the end of a fiscal year. What is the source of this ending balance of retained earnings? A) Trial Balance Worksheet B) Adjusted Trial Balance C) Unadjusted Trial Balance D) Statement of Retained Earnings Answer: D Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

16) The statement of retained earnings reports a company's net income or net loss for a period of time. What is the source of the amount of net income or net loss? A) Balance Sheet B) Cash Dividend Statement C) Trial Balance Worksheet D) Income Statement Answer: D Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

17) The statement of retained earnings reports the amount of dividends declared over a period of time. What is the source of the amount of dividends declared? A) Balance Sheet B) Income Statement C) Adjusted Trial Balance D) Cash Dividend Statement Answer: C Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

18) Dolhune Company has a balance of $20,000 in Retained Earnings as of January 1, 2023. For the year ended December 31, 2023, Dolhune had a net loss of $16,400. $3,000 was declared and paid in dividends for the year. Prepare the Statement of Retained Earnings for the year ended December 31, 2023. Include a proper heading. Answer: Dolhune Company Statement of Retained Earnings For the Year Ended December 31, 2023 Retained earnings, January 1, 2023 Less: Net loss Subtotal Less: Dividends declared Retained earnings, December 31, 2023

Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

$20,000 (16,400) 3,600 (3,000) $600

19) A company has the following information available for the year ending December 31, 2023: Service Revenue Operating Expenses Gain on Sale of Land Loss on Sale of Equipment Retained Earnings, 12/31/2023 Dividends declared in 2023

$91,300 $52,900 $32,000 ($2,000) $100,000 $22,000

Required: Calculate the company's (A) net income or loss for the year ending December 31, 2023 and (B) the balance in Retained earnings on January 1, 2023, the beginning of the fiscal year. Answer: A. Revenues + Gain - Operating Expenses - Loss = Net Income $91,300 + $32,000 - $52,900 - $2,000 = $68,400 B. Beginning retained earnings + Net income - Dividends declared = Ending retained earnings x = Beginning Retained Earnings x + $68,400 - $22,000 = $100,000 x = $53,600 Diff: 3 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

20) Shelby, Inc.'s fiscal year ended June 30, 2023 and the company is preparing annual financial statements. List the financial statements in the order in which they are prepared. For each statement, include a proper heading. Do not include the statement of cash flows. Answer: Shelby, Inc. Income Statement Year ended June 30, 2023 Shelby, Inc. Statement of Retained Earnings Year ended June 30, 2023 Shelby, Inc. Balance Sheet June 30, 2023

Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

21) Why is the income statement prepared first and the balance sheet prepared last? Answer: The income statement reports net income or net loss, the result of revenues minus expenses. Revenues and expenses affect stockholders' equity, thus net income is then transferred to retained earnings. The ending balance of retained earnings is the final balancing element of the balance sheet. The amount is taken from the statement of retained earnings. Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

22) Michael Company has just completed operations for the year ended December 31, 2024. This is the second year of operations for the company. The following data have been assembled for the business: Accounts Payable Accounts Receivable Accumulated Dep. - Equipment Cash Common Stock Dividends declared Equipment Insurance Expense Income Tax Expense

$12,200 Office Expense 18,500 Rent Expense 4,000 Salaries Payable 10,200 Retained Earnings, Jan. 1, 2024 9,000 Salaries Expense 5,000 Service Revenue 15,000 Utilities Expense 4,000 Supplies 4,500

$6,500 9,600 3,000 8,300 40,000 84,000 6,200 1,000

Prepare the income statement, statement of retained earnings, and balance sheet. Use a proper heading.