Accounting Exam 3 Practice Solutions: Liabilities, Equity, Cash Flow

Posted on Aug 14, 2025 in Accounting and Finance

Reporting and Analyzing Current Liabilities

  1. Cobb Company has been under investigation for a potential lawsuit. It is probable that Cobb Company will have to pay $1,000,000 to settle a pollution and environmental damage case. What is the necessary action that Cobb Company should take regarding the lawsuit?

    • a. Record the liability.
    • b. Disclose information about the lawsuit in the notes to the financial statements.
    • c. Nothing because no disclosure is necessary.
    • d. Record the liability and disclose information about the lawsuit in the notes to the financial statements.

  2. Ralph Wallace receives an hourly wage rate of $40, with time and a half for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 50; federal income tax withheld, $400; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the Gross Pay for Ralph?

    ($40 x 40 hours) + ($40 x 1.5 x 10 hours)

    • a. $2,200
    • b. $2,000
    • c. $1,800
    • d. $1,635

  3. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $120; social security tax rate, 6%; and Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. What is the Net Amount to be paid to the employee?

    • a. $568.74
    • b. $601.50 ($15 x 40 hours) + ($15 x 1.5 x 8 hours) = $780 Gross Pay
      • – ($780 × (6% + 1.5%)) Social Security and Medicare
      • – $120 federal income taxes withheld
      $601.50
    • c. $660.00
    • d. $574.90

  4. On June 1, Williams Company issued a $60,000, 6%, 120-day note payable to Brown Industries. Assuming a 360-day year, what is the maturity value of the note?

    • a. $60,000
    • b. $61,200 ($60,000 x 6% x (120 ÷ 360)) + $60,000
    • c. $63,600
    • d. $60,900

  5. On November 1, Williams Company issued a $60,000, 6%, 120-day note payable to Brown Industries. Assuming a 360-day year, what is the amount of interest expense recognized by Williams in the current fiscal year?

    ($60,000 x 6% x (60 ÷ 360))

    • a. $600
    • b. $3,600
    • c. $1,200
    • d. $300

Acct 101 Exam 3 Solutions to Practice Questions 2

Chapter 10: Reporting and Analyzing Long-Term Liabilities

  1. Mitch Company issued $100,000 of 8%, 5-year bonds at 102. Assuming straight-line amortization and annual interest payments, what is the amount of interest Mitch Company must pay the bondholders on the next interest date?

    • a. $7,600
    • b. $8,000
    • c. $7,840
    • d. $8,400

    *Cash Paid = $100,000 × 8% = $8,000

    Cash Paid = Face Value × Contractual Rate

  2. Mitch Company issued $100,000 of 8%, 5-year bonds at 102. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?

    • a. $7,600
    • b. $8,000
    • c. $7,840
    • d. $8,400

    Interest Expense = Cash Paid – Amortization of Premium on Bonds Payable

    *Cash Paid = $100,000 × 8% = $8,000

    *Premium Amortization = ($100,000 x 1.02) – $100,000 = $2,000

    = $2,000 ÷ 5 Years = $400 per year

    Interest Expense = $8,000 – $400 = $7,600

  3. When a bond sells at a discount:

    • a. The contract rate is above the market rate.
    • b. The contract rate is equal to the market rate.
    • c. The contract rate is below the market rate.
    • d. It means that the bond is a zero-coupon bond.

  4. Bonds with a face value of $100,000 and a quoted price of 99 have a selling price of

    • a. $101,000
    • b. $990,000
    • c. $99,000
    • d. $1,010,000

    Solution: $100,000 × 0.99 = $99,000

Acct 101 Exam 3 Solutions to Practice Questions 3

  1. Rockstone Inc. issued $100,000 of 8%, 5-year bonds at 98. Assuming straight-line amortization and annual interest payments, what is the amount of interest Rockstone Inc. must pay the bondholders on the next interest date?

    • a. $7,600
    • b. $8,000
    • c. $7,840
    • d. $8,400

    *Cash Paid = $100,000 × 8% = $8,000

    Cash Paid = Face Value × Contractual Rate

  2. Rockstone Inc. issued $100,000 of 8%, 5-year bonds at 98. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?

    • a. $7,600
    • b. $8,000
    • c. $7,840
    • d. $8,400

    Interest Expense = Cash Paid + Amortization of Discount on Bonds Payable

    *Cash Paid = $100,000 × 8% = $8,000

    *Discount Amortization = $100,000 – ($100,000 x 0.98) = $2,000

    = $2,000 ÷ 5 Years = $400 per year

    Interest Expense = $8,000 + $400 = $8,400

Acct 101 Exam 3 Solutions to Practice Questions 4

Chapter 11: Reporting and Analyzing Equity

  1. XYZ Company has 300,000 shares of $12 par common stock outstanding. XYZ issues a 3-for-1 stock split. What are the number of common shares outstanding and the par value of those shares after the 3-for-1 stock split?

    • b. 900,000 shares; $4 par
    • a. 300,000 shares; $12 par
    • c. 100,000 shares; $36 par
    • d. 900,000 shares; $12 par

    300,000 shares x 3 = 900,000 shares; $12 par ÷ 3 = $4 par

  2. The charter of a corporation provides for the issuance of 250,000 shares of common stock. Assume that 100,000 shares were originally issued and 35,000 were subsequently reacquired. What is the number of shares outstanding?

    • a. 100,000
    • b. 65,000 (100,000 shares – 35,000 shares)…Issued Shares – Reacquired Shares
    • c. 250,000
    • d. 35,000

Acct 101 Exam 3 Solutions to Practice Questions 4

  1. Wade Company issued 10,000 shares of $5 par common stock for $20 per share. What journal entry should be made on this day?

    • a. No entry required.
    • b.
      Debit Credit
Common Stock, $5 par value 50,000
Paid in Capital in Excess of Par 150,000
Cash 200,000
    • c.
      Debit Credit
Cash 200,000
Common Stock, $5 par value 200,000
    • d.
      Debit Credit
Cash 200,000
Common Stock, $5 par value 50,000
Paid in Capital in Excess of Par 150,000

  2. Outstanding stock of the Brisker Corporation included 100,000 shares of $1 par common stock and 50,000 shares of 5%, $30 par non-cumulative preferred stock. In 20Y1 and 20Y2, Brisker did not declare or pay any dividends. In 20Y3, Brisker declared and paid dividends of $300,000. How much of the 20Y3 dividend was distributed to preferred shareholders?

    • a. $75,000.
    • b. $150,000.
    • c. $300,000.
    • d. $225,000.

    Preferred Dividends: $30 par × 0.05 × 50,000 shares = $75,000

    (Non-Cumulative so dividend is only paid for 20Y3)

  3. Outstanding stock of the Brisker Corporation included 100,000 shares of $1 par common stock and 50,000 shares of 5%, $30 par cumulative preferred stock. In 20Y1 and 20Y2, Brisker did not declare or pay any dividends. In 20Y3, Brisker declared and paid dividends of $300,000. How much of the 20Y3 dividend was distributed to preferred shareholders?

    • a. $75,000.
    • b. $150,000.
    • c. $300,000.
    • d. $225,000.

    Preferred Dividends: $30 par × 0.05 × 50,000 shares = $75,000 each year

    • 20Y1: $75,000
    • 20Y2: $75,000
    • 20Y3: $75,000

    Total: $225,000

    *Total is $225,000 since preferred stock is cumulative.

Acct 101 Exam 3 Solutions to Practice Questions 5

Chapter 12: Reporting and Analyzing Cash Flows

  1. Mighty Mountain Inc. purchased equipment for $80,000, sold land for $300,000, sold common stock for $30,000, borrowed $50,000 with a long-term loan from a bank, and paid cash dividends of $1,000. What is the cash provided or (used by) investing activities on the statement of cash flows?

    • a. $220,000
    • b. ($380,000)
    • c. $299,000
    • d. $79,000

    ($80,000) Equipment Purchased + $300,000 sale of land = $220,000 cash provided by investing activities

  2. Which of the following is deducted from net income as an adjustment under the indirect method of preparing the statement of cash flows?

    • a. Salaries Payable Increase.
    • b. Loss on the Sale of Land.
    • c. Accounts Receivable Increase.
    • d. Accounts Receivable Decrease.

  3. Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?

    • a. Depreciation Expense
    • b. Gain on the Sale of Land.
    • c. Prepaid Insurance Increase.
    • d. Accounts Payable Decrease.

  4. The following information is available from the current period financial statements:

    • Net income $200,000
    • Depreciation expense 30,000
    • Gain from sale of land 15,000
    • Decrease in inventory 25,000
    • Decrease in accounts payable 35,000

    The net cash flow from operating activities using the indirect method is

    • a. $200,000
    • b. $185,000
    • c. $205,000
    • d. $275,000

    $200,000 + $30,000 – $15,000 + $25,000 – $35,000 = $205,000

  5. Indicate which section of the statement of cash flow Neuman Company’s issuance of common stock for cash would be classified?

    • a. Operating Activities
    • b. Investing Activities
    • c. Financing Activities
    • d. Noncash Investing and Financing Activities

Acct 101 Exam 3 Solutions to Practice Questions 6

  1. An employee earns $60 per hour and 1.5 times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 80 hours during the week. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and the federal income tax to be withheld was $900. In addition, earnings of $2,000 are subject to state and federal unemployment compensation taxes at the federal rate of 0.8% and the state rate of 5.4%.

    (a) Determine the gross pay for the week.

    Regular pay (40 hrs. × $60) $2,400.00

    Overtime pay (40 hrs. × $60 x 1.5) 3,600.00

    Gross pay $6,000.00

    (b) Determine the net pay for the week

    Gross pay $6,000.00

    Less: Social security tax (6% × $6,000) $360.00

    Medicare tax (1.5% × $6,000) 90.00

    Federal withholding 900.00 (1,350.00)

    Net pay $4,650.00

    (c) Record the journal entry that the employer needs to make to record the employees’ earnings on August 31st

    Account Names Date Debit Credit
Wages Expense Aug. 31 6,000
Social Security Tax Payable 360
Medicare Tax Payable 90
Employees Federal Income Tax Payable 900
Wages Payable 4,650

    (d) Record the journal entry that the employer needs to make to record the employers’ payroll taxes on August 31st

    Account Names Date Debit Credit
Payroll Tax Expense Aug. 31 574
Social Security Tax Payable 360
Medicare Tax Payable 90
State Unemployment Tax Payable 108
Federal Unemployment Tax Payable 16

    *State Unemployment Tax Payable 108——$2,000 x 5.4%

    *Federal Unemployment Tax Payable 16——–$2,000 x 0.8%

Acct 101 Exam 3 Solutions to Practice Questions 7

  1. On January 1, 2023, Vassy Corporation issued $500,000, 10%, 10-year bonds dated January 1, 2023, at 92. The bonds pay semiannual interest. The company uses the straight-line method of amortization and has a calendar year end.

    a. What amount was received for the bonds?

    $460,000 ($500,000 x 0.92)…….. (Face val. × 92%)

    b. What is the amount of the discount?

    $40,000 [Face val. – (Face val. × 92%)] = $500,000 – $460,000 = $40,000

    c. How much interest is paid each interest period?

    $25,000 ($500,000 × .10 × (1/2)) = $25,000

    d. What is the discount amortization for the first interest period on June 30, 2023?

    $2,000 = Discount ÷ (10 Years × 2) = $40,000/20 interest periods = $2,000

    e. How much interest expense is recorded on the first interest date on June 30, 2023?

    $27,000 = Interest Paid + Amortized Discount = $25,000 + $2,000 = $27,000

    f. What is the carrying value of the bonds after the first interest date on June 30, 2023?

    $462,000

    Amount Received + Discount Amortized for the Period = $460,000 + $2,000 = $462,000 OR

    Face Amount – Unamortized Discount = $500,000 – $38,000 = $462,000

    Prepare all the journal entries that Vassy Corporation would make related to this bond issue through December 31, 2023.

    (a) The issuance of the bonds on January 1, 2023.

    Account Date Debit Credit
Cash Jan. 1 2023 460,000
Discount on Bonds Payable 40,000
Bonds Payable 500,000

    (b) The semiannual interest payment and the discount amortization on June 30, 2023.

    Account Date Debit Credit
Bond Interest Expense Jun. 30 2023 27,000
Discount on Bonds Payable 2,000
Cash 25,000

    (c) The semiannual interest payment and the discount amortization on December 31, 2023.

    Account Date Debit Credit
Bond Interest Expense Dec. 31 2023 27,000
Discount on Bonds Payable 2,000
Cash 25,000

Acct 101 Exam 3 Solutions to Practice Questions 8

  1. Journalizing transactions. Below are various transactions that took place during the year for Raymond Inc. Please use the lines below to record the correct journal entry. If no journal entry is needed write “NO JOURNAL ENTRY.”

    Jan. 1: Raymond Inc. issues 5,000 shares of $1 par common stock for $10 per share.

    Feb. 5: Raymond Inc. buys back 2,000 of its own shares for $12 per share.

    Mar. 15: Raymond Inc. acquired a building from Rizzo Corporation that had a fair value that could not be determined. In exchange, Ray Inc. issued 20,000 shares of its $1 par common stock that had a market value of $16 per share.

    April 20: Raymond Inc. calls for a 3-for-2 stock split.

    May 10: Raymond Inc. declares a $6,000 cash dividend to be paid to shareholders.

    May 25: Shareholders as of this day will receive the dividend declared on May 10.

    May 31: Raymond Inc. pays the $6,000 dividend declared on May 10.

    Example: Bought supplies for $500 on Jan. 1.

    Supplies Jan. 1 500
Cash 500
        
    Cash Jan. 1 50,000
Common Stock, $1 Par-Value 5,000
Paid-in Capital in Excess of Par, Common 45,000
        
    Treasury Stock, Common Feb. 5 24,000
Cash 24,000
        
    Building Mar. 15 320,000
Common Stock, $1 Par-Value 20,000
Paid-in Capital in Excess of Par, Common 300,000

    NO JOURNAL ENTRY Apr. 20

    Retained Earnings May 10 6,000
Common Dividends Payable 6,000

    NO JOURNAL ENTRY May 25

    Common Dividends Payable May 31 6,000
Cash 6,000

Acct 101 Exam 3 Solutions to Practice Questions 9

  1. Below are a list of items found on the Statement of Cash Flows. For each item write if it is found in the Operating section, Investing section, or Financing section. Also, write if the items are Added or Subtracted to calculate the change in cash on the Statement of Cash Flows.

    OPERATING, INVESTING,

    OR FINANCING

    ADDED or

    SUBTRACTED

    Example: Increase in accounts payable. OPERATING ADDED

    1. Gain on sale of equipment. Operating Subtracted
    2. Purchased land. Investing Subtracted
    3. Decrease in accounts payable. Operating Subtracted
    4. Issuance of Bonds Financing Added

  2. The net income reported on the income statement for the current year was $150,000.

    Land that was purchased 10 years ago sold for an $80,000 gain. Balances of the current asset and current liabilities accounts at the beginning and end of the year are as follows:

    End of Year Beginning of Year

    Cash $ 90,000 $ 85,000

    Accounts receivable (net) 50,000 75,000

    Accounts payable 60,000 70,000

    Prepare the cash flows from Operating Activities Section of the statement of cash flows, using the indirect method.

    Cash flows from operating activities:

    Net income $150,000

    Adjustments to reconcile net income to net cash flow from operating activities:

    Gain on sale of land (80,000)

    Changes in current operating assets and liabilities:

    Decrease in accounts receivable 25,000

    Decrease in accounts payable (10,000)

    Net cash flow from operating activities $85,000