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Acct 221: Principles of Accounting II

There are 27 questions in this exam. Upload the Answer Sheet when you complete the exam.

For this exam, omit all general journal entry explanations.

Be sure to include correct dollar signs, underlines and double underlines.

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Question 1 (15 points) Statement of Cash Flows

The following is selected information from Murphy Company for the fiscal years ended December 31, 2015: Murphy Company had net income of $500,000. Depreciation was $50,000, purchases of plant assets were $ 250,000, and disposals of plant assets for $500,000 resulted in a $20,000 gain. Stock was issued in exchange for an outstanding note payable of $925,000. Accounts receivable decreased by $25,000. Accounts payable decreased by $10,000. Dividends of $200,000 were paid to shareholders. Murphy Company had interest expense of $5,000. Cash balance on January 1, 2015 was $250,000.

Requirements:Prepare Murphy Company’s statement of cash flows for the year ended December 31, 2015 using the indirect method.

Hint (recall the 3 sections)


Question 2 (10 points)

On January 1, 2015, Baker Company purchased 10,000 shares of the stock of Murphy, and did obtain significant influence. The investment is intended as a long-term investment. The stock was purchased for $70,000, and represents a 25% ownership stake. Murphy made $20,000 of net income in 2015, and paid dividends of $10,000. The price of Murphy’s stock increased from $20 per share at the beginning of the year, to $22 per share at the end of the year.



  1. Prepare the January 1 and December 31 general journal entries for Baker Company.

  2. How much should the Baker Company report on the balance sheet for the investment in Murphy at the end of 2015?

Question 3 (20 Points)

On December 31, 2016, Murphy Inc. had the following balances (all balances are normal):



Preferred Stock, ($100 par value, 5% noncumulative, 50,000 shares authorized, 10,000 shares issued and outstanding)


Common Stock ($10 par value, 200,000 shares authorized, 100,000 shares issued and outstanding)


Paid-in Capital in Excess of par, Common


Retained Earnings


The following events occurred during 2016 and were not recorded:

  1. On January 1, Murphy declared a 5% stock dividend on its common stock when the market value of the common stock was $15 per share. Stock dividends were distributed on January 31 to shareholders as of January 25.

  2. On February 15, Murphy re-acquired 1,000 shares of common stock for $20 each.

  3. On March 31, Murphy reissued 250 shares of treasury stock for $25 each.

  4. On July 1, Murphy reissued 500 shares of treasury stock for $16 each.

  5. On October 1, Murphy declared full year dividends for preferred stock and $1.50 cash dividends for outstanding shares and paid shareholders on October 15.

  6. On December 15, Murphy split common stock 2 shares for 1.

  7. Net Income for 2016 was $275,000.


  1. Prepare journal entries for the transactions listed above.

  2. Prepare a Stockholders’ section of a classified balance sheet as of December 31, 2016.

Question 4 (14 points)

4A. January 1, 2016, Brandon Company issued $100,000 of 5 year 9% bonds when the market rate of interest was 10%.  Brandon received $96,149 for the bond issue. The bonds pay interest on July 1 and January 1.

4B. January 1,2016  ABC Company issues $100,000 of 5 year  9% bonds to yield $104,100 when the market  rate of interest is  8%.The bonds pay interest on July 1 and January 1.

Requirements: Prepare all general journal entries for the 2 bonds issued and any interest accruals and payments for the fiscal year 2016.  What is the carrying amount on the December 31, 2016 Balance Sheet for 4A. and 4B?


Question 5 (10 Points)

John Webb recently graduated from mortuary school. He is considering opening his own funeral home. A funeral home is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served.


Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to burial containers like urns and caskets. An average casket costs $1,200. John’s banker has asked a variety of questions in contemplation of providing a loan for this business.


Required: Provide the solution to each of the following questions.

  1. If the average family is charged $6,000 for services and a burial container, how many families must be served to clear the break-even point?

  2. If the banker believes John will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?

  3. If John believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?

  4. The banker has suggested that John can reduce his fixed costs by $150,000 if he will not buy any vehicles. John can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help John reach the break-even point sooner?


Question 6 (5 points)

XYZ manufactures tote bags. The forecasted income statement for the year before any special orders included sales of $4,000,000 (sales price is $10 per unit.) Manufacturing cost of goods sold is anticipated to be $3,200,000. Selling expenses are expected to be $300,000, and operating income is projected at $500,000. Fixed costs included in these forecasted amounts are $1,200,000 for manufacturing cost of goods sold and $100,000 for selling expenses. Murphy is offering a special order to buy 50,000 tote bags for $7.50 each. There will be no additional selling expenses, and sufficient capacity exists to manufacture the extra tote bags.


Requirements: Prepare an incremental analysis schedule to demonstrate what amount operating income would increase or decrease as a result of accepting the special order.

Hint: think differences between accepting the order or not.


Question 7 (6 points)

RSW Company manufactures 10,000 units of wheel sets for use in its annual production. Costs are as follows: direct materials are $20,000; direct labor is $55,000; variable overhead is $45,000; and fixed overhead is $70,000. Murphy Company has offered to sell RSW 10,000 units of wheel sets for $18 per unit. If RSW accepts the offer, some of the facilities presently used to manufacture wheel sets could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to wheel sets would be totally eliminated.


Requirements: Prepare an incremental analysis schedule to demonstrate if RSW should accept Murphy’s offer.

Hint: Set up 2 columns and show differences in income and costs for each column.

Multiple choice questions allocated 1% point each. Make your selection by recording the letter in the answer box provided. Use capital letters when you enter your answer on the answer sheet.

Question 8:

Assume that actual overhead consisted of $30,000 for indirect labor, $20,000 for indirect material, and $10,000 for depreciation of factory equipment.  Based on the preset rates, $65,000 of overhead was applied to work in process.


a.   Overhead is overapplied.

b.   This is viewed as an unfavorable situation.

c.   There will be a $5,000 debit balance in Factory Overhead.

d.   All of the above.

e.   None of these


Question 9:

The contract interest rate for bonds:

A.   must equal the effective interest rate.

B.   is greater than the effective interest rate when bonds are issued at a discount.

C.   has no relation to the cash flow associated with a particular bond.

D.   will fluctuate over the life of a bond.

E.   None of these.

Question 10:

Norman Corporation issued $100,000 of 7%, 15-year bonds on January 1, 2014 at 102. The proper entry to record issuance of the bonds includes a debit to Cash for:


a.   $100,000.

b.   $101,000.

c.   $101,167.

d.   $102,000..

e.   None of these.

Question 11:

Which of the following statements about treasury stock is true?


a.   Excess of the sales price over cost should be credited to retained earnings.

b.   Gains are not recorded on treasury stock transactions but losses are.

c.   Re-acquiring treasury stock causes stockholders equity to decrease.

d.   Re-acquiring treasury stock causes stockholders equity to increase.

e.   Losses on treasury stock transactions are recorded in income.


Question 12:

Maxlo Company has 100,000 shares of common stock outstanding. On April 15, the board declared a $.30 dividend to be paid to stockholders of record on May 4.  The dividend was paid on May 15.  The proper journal entry for Maxlo Company on May 15 does include:


a.   a debit to Dividends Payable for $30,000.

b.   a debit to Dividends for $30,000.

c.   a debit to Cash for $30,000.

d.   Both A and C, above.

e.   None of these.

Question 13:

Assume the following sales data for a company:





If 2007 is the base year, what is the percentage increase in sales from 2007 to 2009?





Question 14:

Alpha Corporation has cumulative preferred stock.  If dividends are not declared in a period, then those dividends are:


a.considered a liability.

b.called dividends in arrears.

c.distributions of earnings.

d.never paid.


Question 15:

Maloney Company’s balance sheet include cash ($4,000,000), accounts receivable ($16,000,000), inventories ($10,000,000), prepaid expenses ($2,000,000), accounts payable ($9,000,000), and accrued expenses ($7,000,000).  These are the only current items.


a.   The quick ratio is 2:1.

b.   The quick ratio is 1.25:1.

c.   The current ratio is 1.875:1.

d.   Both A and C.

e.   None of these.


Question 16:

Selected information for 2014 is: cost of goods sold, $5,400,000; average inventory, $1,800,000; net sales, $7,200,000; average receivables, $960,000; and net income, $720,000.  Assuming a 360-day year, what was the inventory turnover ratio for 2014?


a.   333

b.   3

c.   7.5

d.   20

e.   None of these.


Question 17:

On the schedule of cost of goods manufactured:


a.   beginning work-in-process plus direct materials used equals manufacturing costs.

b.   cost of goods manufactured is the same thing as total manufacturing costs.

c.   work-in-process will necessarily increase if total manufacturing costs increase.

d.   factory overhead plus beginning work-in-process equals manufacturing costs.

e.   None of these.

Question 18:

Which costing method seems ideally suited to the production of homogenous products in continuous throughput?

a.   Activity-based costing.

b.   Job order costing.

c.   Process costing.

d.   Absorption costing.

e.   None of these.


Question 19:

White Company uses a job order cost system and applies overhead based on estimated rates.  The overhead application rate is based on total estimated overhead costs of $200,000 and direct labor hours of 50,000.  For job 836, direct labor hours were 800.

a.   Factory Overhead should be debited for $3,200.

b.   Factory Overhead should be credited for $3,200.

c.   Overhead Expense should be debited for $3,200.

d.   Overhead Expense should be credited for $3,200.

e.   None of these.

Question 20:

For job 1838, there were 1,000 direct labor hours, and actual overhead was $500 for depreciation and $1,400 for indirect labor.  Overhead is applied at $2 per direct labor hour.  Which account should be debited for $1,900?

a.   Work in Process.

b.   Cost of Goods Sold.

c.   Factory Overhead.

d.   Cost of Goods Manufactured.

e.   None of these.


Question 21:

7,000 units in a process that are 70% complete are referred to as


a.7,000 equivalent units of production.

b.2,100 equivalent units of production.

c.4,900 equivalent units of production.

d.   2,100 inequivalent units of production


Question 22:

A process cost system would be used for all of the following products except



b.computer chips.

c.soft drinks.

d.fur coats


Question 23:

Killox Company makes units that each requires 2 pounds of material at $3 per pound.  500 and 700 units will be built in May and June, respectively.  Frick keeps material on hand at 20% of the next month’s production needs.  How much is the material cost for May’s output?

a.   $2,400

b.   $3,000

c.   $3,240

d.   $4,200

e.   None of these.

Question 24:

Anticipated unit sales are January, 5,000; February, 4,000; and March 8,000.  Finished goods are consistently maintained at 80% of the following month’s sales.  If units cost $10 each to produce, how much is February’s total cost of production?

a.   $0

b.   $40,000

c.   $72,000

d.   $80,000

e.   None of these.

Question 25:

Total production of 1,000 units of finished goods required 3,900 actual hours at $12 per hour.  The standard is 4 hours per unit of finished goods, at a standard rate of $11 per hour.  Which of the following statements is true?

a.   The labor rate variance is $3,900 favorable.

b.   The labor rate variance is $4,000 unfavorable.

c.   The labor efficiency variance is $1,100 unfavorable.

d.   The labor efficiency variance is $1,100 favorable.

e.   None of these.

Question 26:

If beginning work in process was 600 units, 1,400 additional units were put into production, and ending work in process was 500 units, how many units were completed?


a.   500

b.   900

c.   1,500

d.   2,000

e.   None of these.


Question 27:

Cost of goods manufactured is calculated as follows:


a.Beginning WIP + direct materials used + direct labor + manufacturing overhead + ending WIP.

b.Direct materials used + direct labor + manufacturing overhead – beginning WIP + ending WIP.

c.Beginning WIP + direct materials used + direct labor + manufacturing overhead – ending WIP.

d.Direct materials used + direct labor + manufacturing overhead – ending WIP – beginning WIP.

e.   None of the above

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