ex 1 sol - MGT 340 ONLINE EXAM 1 CHAPTERS 1-4 FALL 2007...

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MGT 340 ONLINE EXAM 1 CHAPTERS 1-4 FALL 2007 NAME _____ANSWER KEY_____________________ Problem 1 Prepare journal entries to record the following transactions of Daisy King Ice Cream Company. If an entry is not required, state "No Entry." (a.) Started business by issuing 10,000 shares of capital stock for $20,000. (b.) Signed a franchise agreement to pay royalties of 5% of sales. (c.) Leased a building for three years at $500 per month and paid six months' rent in advance. (d.) Purchased equipment for $5,400, paying $1,000 down and signing a two-year, 10% note for the balance. (e.) Purchased $1,800 of supplies on account. (f.) Recorded cash sales of $800 for the first week. (g.) Paid weekly wages, $320. (h.) Paid for supplies purchased in item (e). (i.) Paid royalties due on first week's sales. (j.) Recorded depreciation on equipment, $50. Answer: (a.) Cash 20,000 Capital stock 20,000 (b.) No Entry. (c.) Prepaid rent 3,000 Cash 3,000 (d.) Equipment 5,400 Cash 1,000 Notes payable 4,400 (e.) Supplies 1,800 Accounts payable 1,800 (f.) Cash 800 Sales revenue 800 (g.) Wages expense 320 Cash 320 (h.) Accounts payable 1,800 Cash 1,800 (i.) Royalty expense 40 Cash 40 (j.) Depreciation expense 50 Accumulated depreciation 50 1
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Problem 2 State the accounting assumption, principle, information characteristic, or constraint that is most applicable in the following cases. 1. All payments less than $25 are expensed as incurred. (Do not use conservatism.) 2. The company employs the same inventory valuation method from period to period. 3. A patent is capitalized and amortized over the periods benefited. 4. Assuming that dollars today will buy as much as ten years ago. 5. Rent paid in advance is recorded as prepaid rent. 6. Financial statements are prepared each year. 7. All significant post-balance sheet events are reported. 8. Personal transactions of the proprietor are distinguished from business transactions. 1. Materiality constraint – since the cost is small 2. Consistency – since we use the same year to year 3. Matching principle or going concern assumption – matching expense to current period 4. Monetary unit assumption – ignoring inflation 5. Matching principle – matching expense to current period 6. Periodicity assumption – issuing financials in a timely manner 7. Full disclosure principle – information disclosed that will make a difference 8. Economic entity assumption - personal separate from business 2
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Problem 3 Farmer & Associates maintains its records on the cash basis. You have been engaged to convert its cash basis income statement to the accrual basis. The cash basis income statement, along with additional information, follows: Farmer & Associates Income Statement (Cash Basis) For the Year Ended December 31, 2004
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