五, Western F1nanclal Accountlng(35 )
l. True or False: (5)
a. The term cash includes currency, coin, checks, money orders, and government bonds and notes.
b. SPecial journals are used primarily to record unusual transactions.
c. When the aCquisition of a subsidiary’s stock is treated as a peling of interests, subsid-iary retained earnings at aCquisition can be included as part of consolidated retained earnings.
d. The consolidated inome statement always rePOrts all revenues and exPenses of both the parent and sudsidiary.
e. When a subsidiary is aCquired by the purchase of its stock by the parent, the retained earnings of the subsidiary as of the date of acquisition are not included in consolidated retained earnings.
2. Multple -- choice(5)
A.While preparing a bank reconciliation, an accountant discovered that a $372 check re- turnde with the bank statement had been recorded erroneously in the dePOsitor’s accounting records as $327. In preParing the bank reconciliation the appropriate action to correct this error would be to:
a. Add $45 to the balance Per the depositor’s records.
b. Add $45 to the balance per the bank statement.
c. Deduct $45 from the balance Per the bank statement.
d. Deduct $45 from the balance per the dePOsitor’s records.
B. The Allowance for Boubtful Accounts represents:
a. Cash set aside to make up for bad debt losses.
b. The amount of uncollectible accounts written off to date.
c. The difference between total credit sales and collections on credit sales.
d. The difference between the face vaIue of accounts receivable and the net realizable value of accounts receivable.
C. A credit memorandum should be issued when:
a. Merchandise is sold on account.
b. A customer makes a credit purchase fOr an amount in excess of his or her credit lindt.
c. A seller decides to reduce the balance of an account receivable for easons other than pay- ment by hte customer.’
d. A buyer considers it appropriate to reduce the balance of an account payable for reasons other than rnaking paymnt tO the creditor.
D. A callable preferred stock entitles the corPOration to
a. redeem the stock for its par value
b. redeem the stock at a previously sPecified price
c. redeem the stock for the total amount paid by the shareholder at the time the stock was issued
d. redeem the stock in exchange for common stock
E. Financial leverage involves
a. using preferred stock to retain voting contro of a corPoration
b. the issuance of bonds because the firm is umable to sell stock
c. uaing funds with a limited rate of return to finance a portion of the assets of the firm
d. mone of these
3. The stockholders’ equty of Sutton Corporation at Dec. 31, 1996, is shown below: stock- holders’ equity: ’
Common stock, $10 par, l00, 000 shares authorized, 40, 000 shares issued ..’ $400, 000
Additional paid -- in capitsl: common stock..’ -.’ ... .., ... ... ... . ... $200, 000
Total paid -- in capital.-’ ..’ ... ... ... ... ... -.. ... ... . . ... .-. $600, 000
Retained earnings"’ ..’ .-. ... ... ... .’. ... ... ... ... ... ... ... ... $l, 500, 000
Total stockholders’s equity.-’ ..’ ... ... -.. ... -.. ... ... ... .. .. ... $2, 100, 000
Transactions affecting stockholders’ equity during 1997 are as follows:
Mar. 31 A 5 -- for -- 4 stock split proPOsed by the board of directors was approved by vote of the stockholders. The l0, 000 mew shares were distributed to stockholders.
Apr. 1 The company purchased 2, 000 shares of its common stock on the open market at $37 Per share.
July 1 The company reissued 1, 000 shares of treasury stock at $45 per share.
July 1 Issued for cash 20, 000 shares of preniously unissued $8 pre value common stock at a price of $45 per share.’
Dec. 1 A cash dividend of $l per share was declared, pay3ble on Dec. 30, to stockho1ders of record at Dec. 14
Dec. 22 A 10% stock dividend was declared; the dividend shares are to be distributed on
Jan. 15 of the fOllowing year. The market price of the stock on Dec. 22 was $48 per share.
The net income for the year ended Dec. 31, 1997, amounted to $177, 000, after an ex- traordinary loss of $35, 400 (met of relafed income tax benefits).
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