PACE Sample Exam Solutions

Solutions have been provided for selected question to assist in checking your answers to the sample exam.

Question

6. A brand new company has a building costing $10,000, machinery costing $5,000, cash of $700, and a bank loan of $7,850. What is the owner's equity?

Accounting Formula: Assets = Liabilities + Equity

$10,000 + $5,000 + $700 = $8,750 + $8,750

10. Total Assets equal:

Accounts Receivable..................$ 5,000

Cash............................................ 14,000

Equipment.................................. 11,000

Supplies on hand........................ 700

Total...............................$30,700

11. Net Income equals:

Services performed....................$ 45,000

Insurance expense...................... (3,000)

Misc.expenses............................. (900)

Rent expense............................... (2,500)

Salaries expense..........................(19,000)

Supplies expense......................... (1,200)

Net income.....................$ 18,400

12. On December 31, if net income equals $15,000 and the ending owner's equity is $20,000, and Forbes invested an additional $2,600 in his business, while withdrawing $6,000 during the year, the beginning owner's equity for this year was:

Work problem in reverse: Ending owner's equity.................$ 20,000

Withdrawals.................................. 6,000

Owner's investment...................... (2,600)

Net income.................................... (15,000)

Beginning owner's equity.............$ 8,400

13. Current Assets equal:

Accounts Receivable..................$ 5,000

Cash............................................ 14,000

Supplies on hand......................... 700

Current Assets.............................$19,700

20. A truck was purchased on July 1 for $20,000. The estimated salvage value is $2,000. The estimated useful life is 3 years. Using straight-line method of depreciation, the amount of depreciation in the adjusting entry at fiscal year-end on December 31 is:

$20,000 - $2,000 = $6,000 per year ........½ Year = $6,000 / 2 = $3,000

3 years

21. A company paid in advance $4,800 for two years of prepaid insurance, which started on	May 1. Insurance expense for the year ended December 31 is:

$4,800 / 24 months = $200 per month.........$200 x 8 months = $1,600

27.	Rowe Inc. has a contract to construct a building for a price of $100. So far it has spent $60 of costs and it estimates an additional $20 will be needed to finish the building. How much profit can be recognized using the percentage of completion method?

To Date Cost Percentage = Cost Incurred / Est. Cost of Project

75% = $60	$80

Revenue Earned = Price x 75% = ( $100 x 75% = $75)

Current Profit = Revenue - Expenses = ($75 - $60 = $15)

28. Warriner, Ltd. Sells widgets for $100, costing $70 with payments to be made in 10 equal installments of $10. If 3 payments have been received this year, using the installment basis of revenue recognition, what is the realized profit?

Profit per Payment	Profit Realized after 3 Payments

Price of Widget – $100	Profit per Widget ( $30 / 10) = $ 3

Cost of Widget – (70)	Payments Received............... x 3

Profit per Widget – $ 30	Profit to date......................... $ 9

31. Specific identification inventory is:

Beginning inventory............. 10 @ $3 = $ 30

April purchase...................... 5 @ $5 = 25

June purchase....................... 2 @ $7 = 14

August purchase................... 20 @ $8 = 160

Totals....................... .37............. $229

32. FIFO inventory is:

August purchase................... 20 @ $8 = $ 160

June purchase....................... 12 @ $7 = 84

April purchase...................... 5 @ $5 = 25

Totals........................ 37.............. $269

33. LIFO inventory is:

Beginning inventory............. 10 @ $3 = $ 30

February purchase................ 5 @ $4 = 20

April purchase...................... 15 @ $5 = 75

June purchase....................... 7 @ $7 = 49

Totals........................ 37.............. $174

34. Weighted-Average inventory is:

$369 / 62 units = $ 5.95 per unit.........$5.95 x 37 units = $220

37. Second year straight-line depreciation is:

$80,000 - $20,000 = $12,000 per year (all years)

5 years

38. Second year units-of-production depreciation is:

$80,000 - $20,000 = $5 per unit............$5 x 4,000 units = $20,000

12,000 units

39. Second year sum-of-the-year's-digits depreciation is:

$80,000 - $20,000 = $60,000 depreciable cost.........$60,000 x 4/15 = $16,000

40. Second year double declining-balance depreciation is:

100% = 20% x 2 = 40% annual rate

5 years

Year 1....$80,000 x 40% = $32,000 depreciation.........Ending Balance....$48,000

Year 2....$48,000 x 40% = $19,200 depreciation

47. Which appears to have greater financial leverage?

Firm A	Firm B	Firm C

Debt	$2	$40	$15

Equity	$8	$60	$35

Debt / Equity 25%	67%	43%

48. Which firm appears to have greater financial leverage based on times-interest-earned ratio?

Firm A	Firm B	Firm C

EBIT	$50	$100	$75

Interest	10	15	5

EBIT / Interest 5	6.7	15