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BUSA 201 - Mr. Farina
Homework #2 - Chapters 3, 4 and 5
INSTRUCTIONS: (1) Complete P3-37, P4-44, P5-43, P5-46, and the
“Corrected Balance Sheet” problem below.
Attach your completed answers to this sheet, in order.
(2) Complete the objective questions below.
Indicate whether the sentence or statement is true or false.
1. Sinking fund assets consisting of cash and securities held for the redemption of bonds or stocks are normally
classified as investments.
2. A negative retained earnings balance is reported in the asset section of the balance sheet.
3. The other expenses and losses section of a multiple-step income statement usually includes items identified
with the peripheral activities of the company.
4. The effects of a strike and gains or losses from the abandonment of property, plant, or equipment used in the
business are normally reported as extraordinary items.
5. Items that meet only one of the criteria for extraordinary items are reported separately, net of tax effect, as
part of income from continuing operations.
6. The issuance of equity securities in exchange for land and buildings is not reported in the body of the
statement of cash flows, but disclosed separately.
7. All transactions with investment securities, trading securities, available-for-sale securities, and held-tomaturity securities are reported in the investing section of the statement of cash flows.
8. Original maturity, for the determination of cash equivalency, is defined as the date of original issuance of the
9. Contingent liabilities are always reported on the balance sheet.
____ 10. Events that take place during the "subsequent events" period may have an impact upon the balance sheet and
the other basic financial statements for the preceding year, but these events cannot affect the amounts reported
in the statements.
____ 11. When the indirect method is used, separate disclosure of interest paid and income taxes paid is required.
____ 12. In current practice, the most common revenue recognition point is "point-of-sale."
____ 13. Under generally accepted accounting principles, revenue recognition normally occurs upon receipt of cash.
____ 14. Revenues and gains are generally recognized when they are realized or realizable and they have been earned
through substantial completion of the activities involved in the earnings process.
____ 15. Costs of collection, bad debt losses from uncollectible receivables, and possible product warranty costs are
examples of expenses that directly relate to revenues for the period.
____ 16. To qualify as a cash equivalent, an item generally must be readily convertible to cash and have an original
maturity of three months or less.
____ 17. Losses on sales of assets are subtracted from net income in computing cash flow from operating activities.
____ 18. Current assets are normally listed on the balance sheet in the order of their dollar value.
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____ 19. Which of the following characteristics may result in the reclassification of a liability from current to
a. Violation of a subjective acceleration clause.
b. Violation of an objective acceleration clause.
c. A demand provision for payment.
d. Refinancing after the balance sheet date.
____ 20. Martin Corporation was organized on January 3, 2007. Martin was authorized to issue 50,000 shares of
common stock with a par value of $10 per share. On January 4, Martin issued 30,000 shares of common stock
at $25 per share. On July 15, Martin issued an additional 10,000 shares at $20 per share. Martin reported
income of $33,000 during 2007. In addition, Martin declared a dividend of $.50 per share on December 31,
2007. The amount reported on Martin Corporation's December 31, 2007, balance sheet as additional paid-in
capital was
a. $400,000.
b. $550,000.
c. $563,000.
d. $950,000.
____ 21. A material loss should be presented separately as a component of income from continuing operations when it
a. infrequent in occurrence and unusual in nature.
b. infrequent in occurrence but not unusual in nature.
c. a cumulative effect-type change in accounting principle.
d. an extraordinary item.
____ 22. When a business segment is discontinued during the year, the gain or loss on disposal
a. is reported as an extraordinary item.
b. should include operating losses of the current period up to the measurement date.
c. excludes operating losses during the phase-out period.
d. should be shown net of applicable income taxes.
____ 23. The measurement date applied to a gain or loss from the disposal of a business segment is determined by the
a. date that the entity makes a formal commitment of disposal.
b. date that the assets are sold.
c. last day of the fiscal year in which the decision to dispose is made.
d. date that operations cease (if disposal is by abandonment).
____ 24. When preparing a statement of cash flows using the indirect method, the amortization of trademarks should be
reported as a(n)
a. increase in cash flows from investing activities.
b. reduction in cash flows from investing activities.
c. increase in cash flows from operating activities.
d. reduction in cash flows from operating activities.
____ 25. Stiggins Corporation had the following account balances for 2007:
Accounts Payable ......................
Prepaid Rent Expense ..................
Accounts Receivable (net) .............
December 31
January 1
Stiggins' 2007 net income is $450,000. What amount should Stiggins include as net cash provided by
operating activities in its 2007 statement of cash flows?
a. $436,200
b. $445,200
c. $453,600
d. $454,200
____ 26. Chow Company's 2007 income statement reported cost of goods sold as $135,000. Additional information is
as follows:
Inventory .................
Accounts Payable ..........
December 31, 2007
December 31, 2006
If Chow uses the direct method, what amount should Chow report as cash paid to suppliers in its 2007
statement of cash flows?
a. $121,000
b. $134,000
c. $136,000
d. $149,000
____ 27. Which of the following transactions is included as an investing activity on the statement of cash flows?
a. Sale of a business segment
b. Issuance of bonds payable at a discount
c. Purchase of treasury stock
d. Sale of capital stock
The balance sheet at December 31, 2007 for Mitchell Company follows:
Accounts Receivable
Prepaid insurance and other
Property, plant and equipment
Total assets
$ 55,000
Miscellaneous liabilities
Loan payable
Accounts payable
Common stock
Additional paid-in capital
Total liabilities and
owner's equity
$ 4,500
Management has hired you to consult with them on the balance sheet. During the course of your review, you
find the following:
(A) Doubtful accounts receivable total $5,000.
(B) An advertising campaign costing $20,000 completed in the current year was debited to the Inventories
account, as it was expected to help sell the inventories faster.
(C) The Loan Payable amounts represents a note payable to the bank, which is repayable in equal annual
principal payments of $8,540 each October 1, plus interest at 10%. The last payment was made on October 1,
(D) Amounts payable for 2007 income taxes are $22,000.
(E) Miscellaneous liabilities of $4,500 consist of $8,000 of salary payable, less $3,500 advances to officers.
Management expects the officers to repay the advances in 2008.
(F) The common stock represents 150,000 shares of $1 par common stock issued in 2000. The company
received $250,000 upon issuance of shares.
(G) Prior years' net income and dividends were closed to Additional Paid-in Capital.
(H) Cash includes a $5,000 bank certificate of deposit purchased October 1, 2007. This certificate matures
March 30, 2008.
(I) The cost of the property, plant and equipment is $435,000.
Prepare a corrected balance sheet with accounts properly classified.