QUIZ TWO

Please answer all multiple choice questions and problems.

1.  If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognize the loss
a. is not required since the share prices will likely rebound in the long run.
b. will show a debit to an expense account.
c. will show a debit to an unrealized loss account that is deducted in the stockholders’ equity section of the balance sheet.
   d. will show a credit to a contra-asset account that appears in the stockholders’ equity section of the balance sheet.
 

 2.  A creditor would be most interested in evaluating which of the following ratios?
 a.   Asset turnover
 b.   Earnings per share
 c.   Payout ratio
 d.   Current asset ratio  
  
  
3.  In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in
a. the financing section.
b a separate schedule or note to the financial statements.
c. the stockholders’ equity section.
d. the “extraordinary” section.

4. The following data are available for Two-off Company.
    Increase in accounts payable $120,000
    Increase in bonds payable 200,000
    Sale of investments 150,000
    Issuance of common stock 160,000
    Payment of cash dividends 60,000

Net cash provided by financing activities is:
  a. $420,000.
   b. $360,000.
  c. $330,000
  d. $300,000.

5.   Which of the following transactions does not affect cash during a period?
a Collection of an accounts receivable
b. Sale of treasury stock
c. Write-off of an uncollectible account
d. Exercise of the call option on bonds payable

6.  The current carrying value of Lane’s $800,000 face value bonds is $797,000. If the bonds are retired at 102, what would be the amount Lane would pay its bondholders?
a. $797,000
b. $816,000
c. $800,000
d. $812,940

7.  Horizontal analysis evaluates a series of financial statement data over a period of time
a. that has been arranged from the highest number to the lowest number.
b. that has been arranged from the lowest number to the highest number.
c. to determine the amount and/or percentage increase or decrease that has taken place.
d. to determine which items are in error.

8.  Which one of the following is not a characteristic generally evaluated in analyzing financial statements?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency

 9.  A major disadvantage resulting from the use of bonds is that
a. earnings per share may be lowered.
b. bondholders have voting rights.
c. interest must be paid on a periodic basis.
d. taxes may increase.

10.      If an investment is being accounted for according to the equity method, all of the       following statements apply except the:
a. investor must own more than 50% of the outstanding stock of the investee.
b. investment is recorded initially at the cost price paid at acquisition.
c. investment account is debited for the investor’s share of net income when reported by the investee.
d. investment account is credited when cash dividends are received from the investee.

11. Regarding a parent company and its subsidiary:
a. both companies maintain separate accounting records.
b. the subsidiary may prepare separate financial statements.
c. the parent must prepare consolidated financial statements.
d. All of the above answers are correct.

12.  Which one of the following affects cash during a period?
a. Recording depreciation expense
b. Declaration of a cash dividend
c. Payment of an accounts payable
d. Write-off of an uncollectible account receivable

13. A bond issued at a discount indicates that at the date of issue:
a. its contract rate was lower than the prevailing market rate of interest on similar bonds.
b. its contract rate was higher than the prevailing market rate of interest on similar bonds.
c. the bonds were issued at a price greater than their face value.
d. the bonds are noninterest-bearing.

14. If bonds are originally sold at a discount using the straight-line amortization method:
a. Interest expense in the earlier years of the bond’s life will be less than the interest to be paid.
b. Interest expense in the earlier years of the bond’s life will be the same as interest to be paid.
c. Unamortized discount is added to the face value of the bond to determine its carrying value.
d. Unamortized discount is subtracted from the face value of the bond to determine its carrying value.

15. Outside parties use financial statement analysis for:
a. assessing the results of past management performance.
b. Helping in decisions on investing.
c. Helping in decisions on extending credit.
d All of the above answers are correct.
 

16.  What is (are) the difference(s) between a statement of cash flows under the direct method and one under the indirect method?
a. The method of determining cash flows from investing activities.
b. The method of determining cash flows from financing activities.
c. The method of determining cash flows from operating activities.
d. All of the above choices are true.

17.  If $60,000 convertible bonds with a carrying value of $70,000 are converted into 9,000 shares of $4 par value common stock, the journal entry to record the conversion is
a. Bonds Payable   70,000
  Common Stock    70,000

b. Bonds Payable   60,000
 Premium on Bonds Payable   10,000
  Common Stock    70,000

c. Bonds Payable   70,000
  Discount on Bonds Payable    10,000
  Common Stock    36,000
  Paid-in Capital in Excess of Par    24,000

d. Bonds Payable   60,000
 Premium on Bonds Payable   10,000
  Common Stock    36,000
  Paid-in Capital in Excess of Par    34,000

18. The exchange of common stock for a building would be dealt with as a:
a. negative cash flow from investing activities.
b. significant financing and investing activity that did not affect cash and would be reported in a separate schedule
c. positive cash flow from financing activities.
d. would not be reported.

19.  A stock dividend that is recorded using fair market value is a
a. large stock dividend.
b. small stock dividend
c. cash dividend.
d. contingent dividend.

20.  All of the following statements about short-term investments are true except:
a. Short-term investments are also called marketable securities
b. Trading securities are always classified as short-term investments.
c. Short-term investments are listed below accounts receivable in the current asset section of the balance sheet.
d Short-term assets must be readily marketable.
 
PROBLEM 1
James (investor) Corporation acquires 35% of the common shares of Heck (investee) Company for $300,000 on January 1, 2014.  For 2014, Heck reports net income of $50,000 and paid dividends of $16,000. 
Instructions
(a) Prepare the entries for these transactions that James Corporation would make in the space provided below.
(b) Compute the balance in the stock investment account of James Corporation

NOTE:  Use the tab keys to move within the tables.

PROBLEM 2
On January 1, James Corporation issued $400,000, 6%, 5-year bonds at 103. Interest is payable semiannually on July 1 and January 1. Straight-line amortization method is used.

Instructions
Prepare journal entries to record the
(a) Issuance of the bonds.
(b) Payment of interest on July 1, assuming no previous accrual of interest. Need to also show the entry of the amortization of the premium to interest.
(c) Accrual of interest on December 31. Need to also show the entry of the amortization of the premium to interest.

PROBLEM 3
On January  1, Papel Corporation issued $250,000, 7%, 5-year bonds at 96. Interest is payable semiannually on July 1 and January 1.

Instructions
Prepare journal entries to record the
(a) Issuance of the bonds.
(b) Interest entries at time of payment on July 1, assuming no previous accrual of interest. Need to also show the entry of the amortization of the discount to interest.
(c)  Interest entries for the accrual of interest on December 31. Need to also show the entry of the amortization of the discount to interest

PROBLEM 4
Here are comparative balance sheets for Mary Jane Company.

 
MARY JANE COMPANY
Comparative Balance Sheets
December 31
Assets  2014   2013
Cash $72,710   $22,001
Accounts receivable 85,652   76,161
Inventories 169,800   188,601
Land 75,070   100,300
Equipment 259,540   200,580
Accumulated depreciation (65,861)   (32,198)
     Total $596,911   $555,445
      
Liabilities and Stockholders’ Equity   
Accounts payable $39,209   $46,636
Bonds payable 151,530   203,230
Common stock ($1 par) 214,140   175,750
Retained earnings 192,032   129,829
     Total $596,911   $555,445

Additional information:
1. Net income for 2014 was $101,690, depreciation was $33,663.
2. Cash dividends of $39,487 were declared and paid.
3. Bonds payable amounting to $51,700 were redeemed for cash $51,700.
4. Common stock was issued for $38,390 cash.
5. Land was sold for $25,230 cash, there was no loss.
6. Equipment was purchased for $58,960 cash.

Instructions
Prepare a statement of cash flows for 2014 using the indirect method. Use the template provided on the next page.
MARY JANE COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2014