40_Accounting MCQ_08Jan

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Financial Accounting Exam 2

1)

The fundamental accounting equation is a reflection of the:

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Money
measurement concept

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Conservatism
concept

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Dual-aspect
concept

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Historical
cost concept

2)

The historical cost concept reflects the fact that financial
accounting practice favors:

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Reliability over relevance

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Management’s best guess over
historical financial information

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Relevance over reliability

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Consensus market values over historical
financial information

3)

Jon Sports’ inventory account increased from $25,000 on December 31,
2003 to $30,000 on December 31, 2004. Which one of the following items would
be included in the operating section of its 2004 indirect method statement of
cash flows?

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Add
increase in inventory $5,000

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Subtract
increase in inventory ($5,000)

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Add
inventory balance $20,000

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Subtract
inventory balance ($20,000)

4)

Turnkey Systems, Inc. began the month of June, 2004 with a prepaid
expenses balance of $240,000. During the month, debits totaling $110,000 and
credits totaling $80,000 were made to the prepaid expenses account. What was
the June, 2004 ending balance of prepaid expenses?

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A debit balance of $210,000

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A credit balance of $210,000

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A debit balance of $270,000

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A credit balance of $270,000

5)

Pentex and Marbro, small companies in the stationery business, each
had a dollar gross margin of $20,000 during September 2004. Pentex’s September
sales were twice that of Marbro’s. If Pentex’s gross margin as a percentage
of sales for September was 10%, Marbro’s gross margin as a percentage of
sales for the same period was:

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10%

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5%

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20%

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Cannot
be calculated

6)

When an entity recognizes revenue before it has received cash for the
sale, it records an increase in a(n):

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Liability such as ‘Advances from
customers’

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Accounts payable

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Accounts receivable

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Prepaid expense

7)

Juan Foods pays off a long-term debt in full. Which one of the
following statements describes the effect of the sale on Juan Foods?

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Current ratio increases; total debt
to equity ratio decreases

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Current ratio decreases; total debt
to equity ratio decreases

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Current ratio decreases; total debt
to equity ratio increases

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Current ratio increases; total debt
to equity ratio increases

8)

On January 1, 2005, Mansfield Company has a retained earnings balance
of $256,000. During 2005, its net income is $44,000 and it announces and pays
$12,000 in dividends. There is no other dividend-related activity during the
year. Its December 31, 2005 retained earnings balance is:

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$2,12,000

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$2,88,000

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$3,00,000

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$2,24,000

9)

Juan Foods makes a cash sale with a positive gross margin. Which one
of the following statements describes the effect of the sale on Juan Foods?

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Current ratio increases

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Current ratio decreases

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No change to Juan Foods’ current
ratio

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Insufficient information to judge
effect on current ratio

10)

Juan Foods pays off a long-term debt in full. Which one of the
following statements best describes the appropriate book-keeping for this
transaction?

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Debit cash; credit long-term debt

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Debit long-term debt; credit owners’
equity

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Debit owners’ equity; credit
long-term debt

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Debit long-term debt; credit cash

11)

On March 31, 2005, Cars, Inc. owes Preston Devices, one of its
suppliers, $25,000 for previous purchases. During April 2005, Preston sells
Cars devices with a sales price of $10,000 and a cost to Preston of $8,000.
During April Cars pays Preston $12,000 against the amount owed to Preston.
What is the effect of these April transactions on Preston’s balance sheet?

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Cash
increased by $12,000; accounts receivable decreased by $2,000; inventory
decreased by $8,000; retained earnings increased by $2,000.

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Accounts
receivable increased by $2,000; inventory decreased by $8,000; cash increased
by $12,000; retained earnings increased by $12,000.

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Cash
increased by $12,000; retained earnings decreased by $2,000; inventory
decreased by $10,000; accounts receivable decreased by $12,000.

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Cash
increased by $2,000; accounts receivable decreased by $2,000; inventory
decreased by $8,000; retained earnings decreased by $12,000.

12)

Consider the same scenario as in the previous question: On March 31,
2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for
previous purchases. During April 2005, Preston sells Cars devices with a
sales price of $10,000 and a cost to Preston of $8,000. During April Cars
pays Preston $12,000 against the amount owed to Preston. If Preston had no
other sales and records no other collections from customers during the month
of April, the operating section of Preston’s indirect method statement of
cash flows for April will show the following de-accrual adjustments to net
income:

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Subtract
change in accounts receivable; add change in inventory.

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Add
change in accounts receivable; subtract change in inventory

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Add
change in accounts receivable; add change in inventory.

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Subtract
change in accounts receivable; subtract change in inventory.

13)

Planet Music buys all of its inventory on credit. During 2005, Planet
Music’s inventory account increased by $10,000. Which of the following
statements must be true for Planet Music during 2005?

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It
made payments of less than $10,000 to suppliers.

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It
made cash payments of $10,000 to suppliers.

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It
made more cash payments to its suppliers than it recorded as cost of goods
sold.

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It
paid less cash to suppliers than it recorded as cost of goods sold.

14)

On December 31, 2005, Juan Foods purchases a van for $12,000. How does
the purchase of the van affect Juan Foods’ 2005 income statement?

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Decreases
sales by $12,000

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Increases
operating expenses by $12,000

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No
material effect

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Increases
cost of goods sold by $12,000

15)

To be recorded as a liability, an item must meet three specific
conditions. Two of them are: it must involve probable future sacrifice of
economic resources by the entity, and it must be a present obligation that
arose as a result of a past transaction. Which one of the following is the
third condition?

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The
item must reduce the market value of the recording entity

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It
must involve a transfer of resources to another entity

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It
must involve the expenditure of cash now or in the future

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It
must not cause total liabilities to exceed total assets

16)

The next 9 questions are based on Patnode Inc.’s balance sheets at
year end 2004 and 2005.

During 2005, Patnode announced and paid dividends of $1,000, the only
dividend-related activity during the year. What was its 2005 net income?

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$5,600

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$3,600

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$4,600

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Cannot be estimated

17)

During 2005, Patnode had a cash outflow of $15,000 for investing
activities and a cash inflow of $7,000 from financing activities. Its 2005
cash flow from operations was:

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Outflow
of $15,000

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Inflow
of $15,000

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Outflow
of $8,000

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Inflow
of $8,000

18)

Patnode’s 2005 statement of cash flows contains four items in the
financing section. Three of them are: Short-term debt issued, $15,000;
Short-term debt paid, ($10,000) and Dividends paid, ($1,000). What is the
fourth item in the financing section?

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Retained earnings, $4,600

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Common stock issued, $3,000

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Long-term debt paid, ($3,000)

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Cash from financing, $3,000

19)

How much total depreciation and amortization expense did Patnode
record during 2005?

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$10,000

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$6,000

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$3,000

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$5,000

20)

During 2005, Patnode recorded sales of $17,000. How much cash did it
collect from its customers?

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$17,000

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$14,000

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$3,000

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Cannot be estimated

21)

Which one of the following items will not appear in the operating
section of Patnode’s 2005 indirect method cash flow statement?

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Deduct: increase in accounts
receivable $3,000

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Add: decrease in accounts payable
$1,000

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Add: increase in taxes payable $2,400

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Add: decrease inventories $6,000

22)

What is Patnode’s current ratio at the end of 2004?

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2.46

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0.41

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1.12

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0.89

23)

What is Patnode’s total debt to equity ratio at the end of 2004
(rounded to two decimal places)?

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5.3

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0.19

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0.25

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4.04

24)

Patnode recorded a 2005 tax expense of $3,000. What amount did it pay
to the tax authorities during 2005?

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$2,400

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$7,000

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$600

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$5,400

25)

Kirby, Inc. records a sale with a gross margin of $1,400. Which one of
the following statements correctly describes the effect of such a sale on its
balance sheet?

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Common stock increases by $1,400

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The sales revenue account increases
by $1,400

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The gross margin account increases by
$1,400

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The retained earnings account
increases by $1,400

26)

Sandy Robbins is the sole owner of a hair salon. He often takes small
amounts of “lunch money” from the cash register, figuring that
“it is my business anyway.” His accountant, however, insists that
Sandy make a note of the cash he takes, and at the end of the each accounting
period, she debits owners’ equity and credits the cash account for the total
amount that Sandy has taken during the period.

In recording the cash withdrawals even though Sandy is sole
proprietor, the accountant is correctly applying the:

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Matching
concept

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Entity
concept

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Materiality
concept

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Conservatism
concept

27)

Anderson Electronics’ 2005 return on sales percentage is 20%. Its 2005
net income is $40,000. What is its 2005 sales?

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$4,00,000

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$80,000

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$2,00,000

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$1,00,000

28)

Anderson Electronics’ 2005 return on sales percentage is 20%. Its 2005
net income is $40,000. What is its 2005 sales?

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$4,00,000

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$80,000

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$2,00,000

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$1,00,000

29)

During June 2005, Bextra Inc. recorded sales of $55,000 but only
$20,000 was collected in cash from customers. Cost of goods sold of $38,000.
What was the effect of these sales on Bextra’s current ratio?

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Current ratio increases

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Current ratio decreases

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Current ratio remains unchanged

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Insufficient information provided to
judge effect on current ratio

30)

Which one of the following statements is not true
about statements of cash flows prepared according to U.S. GAAP?

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The operating section of the indirect
method starts with the net income of the period

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In the indirect method statement, the
period’s depreciation is added to net income because it is a source of cash

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Interest payments are included in the
operating section of the direct method statement

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The investing section of the direct
method statement for a period is identical to the investing section of the
indirect method statement for the same period

31)

A company raised $50,000 in cash by taking a one-year loan of $10,000
and a 5-year loan of $40,000. Which of the following is the correct journal
entry to record this transaction?

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Debit short-term debt $40,000; debit
retained earnings $10,000; credit cash $50,000

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Debit short-term debt $50,000; credit
cash $50,000

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Debit cash $50,000; credit long-term
debt $50,000

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Debit cash $50,000; credit short-term
debt $10,000; credit long-term debt $40,000

32)

Which one of the following statements describes the rules about
posting transactions into T-accounts in the ledger?

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For
assets, debits are entered on the left; for liabilities, credits are entered
on the left

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For
assets, credits are entered on the left; for liabilities, debits are entered
on the left

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Debits
on the left; credits on the right

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Credits
on the left; debits on the right

33)

Baxtra, Inc. pays $20,000 in cash as interest to its lenders during
2005. According to U.S. GAAP, in which section of the statement of cash flows
would this payment be included?

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The
operating section

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The
financing section

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The
investing section

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Depends
on whether cash flow statement is direct or indirect method.

34)

Taylor Company had a salaries payable balance of $18,000 on December
31, 2004. During 2005, it paid $50,000 in cash as salaries, and recorded a
salary expense of $50,000. Its December 31, 2005 salaries payable balance is:

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$50,000

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$18,000

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$1,00,000

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Cannot
be determined from the information provided

35)

On April 30, 2005, Zono Electronics, Inc. made a payment of $3,500 to
Imperial Distributors, a supplier. Choose the statement that best describes
the recording of this financial transaction by Imperial Distributors.

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Debit
cash $3,500; credit accounts payable $3,500

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Debit
accounts receivable $3,500; credit cash $3,500

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Debit
accounts payable $3,500; credit cash $3,500

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Debit
cash $3,500; credit accounts receivable $3,50

36)

Sardi Company estimates its 2005 tax expense to be $80,000. It makes a
cash payment of $20,000 to the tax authorities on December 31, 2005. How
should this transaction be recorded by Sardi?

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Debit
tax expense $80,000; credit cash $60,000; credit taxes payable $20,000

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Debit
tax expense $80,000; credit cash $20,000; credit taxes payable $60,000

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Debit
tax expense $80,000; credit cash $20,000

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Debit
tax expense $80,000; credit cash $20,000; credit accounts payable $60,000

37)

On June 1, 2005, Planet Music has accounts payable of $45,000. During
the month, debits of $3,000 and credits of $11,000 were made to the account.
At the end of June 2005, what was the accounts payable balance?

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A
credit balance of $53,000

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A
debit balance of $42,000

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A
credit balance of $56,000

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A
debit balance of $53,000

38)

Barnaby & Sons receives a large shipment of goods from its
supplier. It pays $58,000 at the time of delivery and promises to pay the
remaining $42,000 within the next two months. What is appropriate journal
entry for this transaction?

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Debit
cash $42,000; debit inventory $16,000; credit accounts payable $58,000;

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Debit
inventory $100,000; credit cash $58,000; credit accounts payable $42,000

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Debit
accounts payable $58,000; credit cash $42,000; credit inventory $16,000

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Debit
accounts payable $58,000; debit cash $42,000; credit inventory $100,000

39)

Annie’s Fitness sells a set of free weights to a customer for $1,000.
The customer pays $600 in cash and puts the rest on her store credit account.
Which one of the following statements describes the most appropriate
accounting for the transaction?

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Debit
cash $600; debit accounts receivable $400; credit cost of good sold $1000

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Debit
cash $600; debit accounts receivable $400; credit revenues $1,000

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Debit
revenues $1,000; credit cash $600; credit accounts receivable $400

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Debit
cash $600; debit accounts receivable $400; credit inventory $1,000

40)

Annie’s Fitness sells a set of free weights to a customer for which
Annie’s had paid $750. Which one of the following statements describes the
most appropriate accounting for the transaction?

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Debit cost of goods sold expense
$750; credit cash $750

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Debit inventory $750; credit cost of
goods sold expense $750

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Debit cost of goods sold expense
$750; credit inventory $750

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Debit inventory $750; credit accounts
payable $750

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