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94 I. True/False – If the statement is FALSE, you must explain why or correct it to get credit (3 points) 1. When a particular account receivable is determined to be uncollectible, the journal entry to write off the account reduces net income. True False (circle one) If false, explain below or correct above: 2. The allowance for doubtful accounts is reported as a contra-asset. True False (circle one) If false, explain below or correct above: 3. The stockholders’ equity section of a balance sheet includes both capital that has been contributed by owners as well as retained earnings. True False (circle one) If false, explain below or correct above: 4. One example of an operating revenue would be the revenue created by the sale of an automobile at a car dealership. True False (circle one) If false, explain below or correct above: 5. Purchasing supplies for cash results in an increase in total assets for the purchasing company. True False (circle one) If false, explain below or correct above: 95 6. Revenue accounts typically have credit balances because they increase stockholders’ equity. True False (circle one) If false, explain below or correct above: 7. Accrued expenses are initially recorded as assets and when they are later used, expenses will increase and assets will decrease. True False (circle one) If false, explain below or correct above: 8. Closing the revenue and gain accounts at year-end requires that these accounts be debited. True False (circle one) If false, explain below or correct above: 9. When a company sells equipment for cash at a loss, cash flows from investing activities decreases. True False (circle one) If false, explain below or correct above: 10. The difference between the direct and indirect methods of cash flows statement preparation only affects how cash flows from operations are reported. True False (circle one) If false, explain below or correct above: 96 II. Multiple Choice – Circle the correct answer. (4 points) 11. Superior has provided the following information for its recent year of operation: The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000. The additional paid-in capital account balance increased $2,500 during the year. The retained earnings balance at the beginning of the year was $75,000 and the year- end balance was $91,000. Net income was $26,000. How much were Superior’s Dividends during its most recent year of operations? A) $10,000 B) $42,000 C) $26,000 D) The amount cannot be determined from the information provided. 12. Colby Corporation has provided the following information: x Operating revenues were $199,700. x Operating expenses were $111,000. x Interest expense was $9,200. x A gain from the sale of equipment was $3,300. x Income tax expense was $36,000. x Prepaid rent went up by $7,700 for the year. How much was Colby’s Net Income? A. $39,100 B. $48,300 C. $52,700 D. $46,800 97 13. On December 31, 2014, The Bates Company's revenues total $300,000 and expenses total $160,000 before consideration of the following: Accrued wages total $11,000; Accrued revenues total $36,000; Depreciation expense is $17,000; Rental revenue of $9,000 was earned; The income tax rate is 40% of income before income taxes. What is Bates' net income after consideration of the above information? A. $94,200 B. $157,000 C. $140,000 D. $88,800 14. Which of the following transactions would not be reported within the investing section of the cash flow statement? A. The cash sale of land at a gain. B. The purchase of a building for cash. C. The purchase of a stock investment for cash. D. The cash receipt of a dividend from a stock investment. 15. Canadian Beer reported equipment sold for $222 million cash and new equipment purchased for $1,515 million cash. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show: A. An inflow of $222 million and an outflow of $1,515 million. B. An inflow of $222 million and an outflow of $150 million. C. Cash paid for equipment of $1,293 million. D. A net outflow of $1,365 million. 16. Which of the following journal entries is created as the result of an accrual? A. Deferred Revenue Revenue B. Interest Expense Interest Payable C. Cash Deferred Revenue D. Revenue Receivable Unearned Revenue 98 17. At the beginning of April, Warren Corporation's assets totaled $240,000 and liabilities totaled $60,000. During April the following summarized transactions occurred: Additional shares of stock were sold for $20,000 cash. A building costing $95,000 was purchased using $10,000 cash and by signing an $85,000 long-term note payable. Short-term investments costing $9,000 were purchased using cash. $10,000 was paid to an employee as a loan; the employee signed a six-month note in exchange for the loan. How much are Warren's total liabilities at the end of April? A. $145,000 B. $155,000 C. $165,000 D. $135,000 18. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the following statements concerning the land sale is correct? A. The land account was credited for $51,000. B. The revenue account was debited for $51,000. C. Operating income increased $12,000. D. Income before income taxes increased $12,000. 19. Smith Corporation has provided the following information: Cash sales totaled $125,000. Credit sales totaled $279,000. Cash collections from customers for services yet to be provided totaled $38,000. An $11,000 gain from the sale of property and equipment occurred. Interest income totaled $7,700. How much were Smith's operating revenues? A. $404,000 B. $411,700 C. $442,000 D. $460,700 99 20. At year-end, Chief Company has a balance of $10,000 in accounts receivable, of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates that 10% of accounts more than 30 days overdue are uncollectible, while 1% of current accounts that are not overdue are uncollectible. How much is bad debt expense for the year using the aging of receivables method? A. $90 B. $190 C. $290 D. $100 100 III – Free Response Questions – Please answer each question as completely as possible. Show your work for partial credit. 21. For each of the following transactions by Cloud Company in 2018, prepare the required adjusting journal entry that would be made at the end of the fiscal year on December 31, 2018. Assume that any initial journal entries were made correctly, but no adjusting entries have been made during the year. (3 points each) a) On July 1, 2018, Cloud invested $10,000 in a one-year certificate of deposit that pays 6% interest per year. Cloud will not receive the interest until the certificate of deposit matures on July 1, 2019. b) On October 1, 2018, Cloud received $1,000 from a customer for services to be provided over the next six months. c) On November 5, 2018, Cloud purchased supplies for $500. A physical inventory count revealed that $150 of these supplies were still on hand at year end. No other entries related to supplies were recorded after the initial purchase. 101 22) Sagaworth, Inc. reported the following information: 2015 Income Statement Net loss $380,000 Depreciation expense 150,000 Amortization expense 25,000 Balance Sheet: 2015 2014 Accounts Receivable $200,000 $230,000 Inventory 140,000 160,000 Prepaid Expenses 40,000 30,000 Equipment, Net 85,000 45,000 Accounts Payable 190,000 180,000 Accrued Liabilities 50,000 45,000 Taxes Payable 10,000 20,000 Required: Determine Sagaworth’s Net Cash Flow from Operating Activities for 2015 under the indirect method (12 points). 102 23. Prior to the year-end adjustment to record bad debt expense for 2014, the general ledger of Stickler Company included the following accounts and ending balances: Allowance for Doubtful Accounts $1,000 credit balance Bad Debt Expense 0 Accounts Receivable 200,000 Cash collections on Accounts Receivable during 2014 amounted to $450,000. Sales Revenue during 2014 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of these credit sales made in 2014 would eventually become uncollectible. a) Show the complete T-Account for the Accounts Receivable account in 2014. (2 points) b) Prepare the journal entry necessary for recording the Bad Debt expense for 2014. (3 points) c) Determine the adjusted 2014 year-end balance of the allowance for doubtful accounts. (2 points) d) Determine what will be reported as Accounts Receivable, Net on the 2014 Balance Sheet. (2 points) 103 IV – Company Analysis– Instructions: Use Amazon’s 2013 annual report to answer the following questions. Its fiscal year ends December 31, 2013, and FY2013 refers to the fiscal year ended December 31, 2013. Treat each item below independently. Watch the dates on the statements. All numbers on the financial statements and in the problems are in millions (except per share data). 24. Did Amazon pay dividends in 2013? If yes, how much? If no, how do you know? (5 points) 25. Assume that during 2013, Amazon sold gift certificates for $1,730. In addition, assume that they recognized revenue of $96 for gift certificates that were expired or never used by customers. What was the amount of gift cards redeemed in 2013? [Hint: Use Note 1] (5 points) 26. Using the Statement of Cash Flows, fill in the blanks below with the appropriate amounts. Remember to indicate whether the amount is positive or negative. (4 points) A. Cash and cash equivalents, beginning of 2013: $_________ B. Net cash provided by (used in) financing activities in 2013: $_________ C. Net change in cash and cash equivalents in 2013: $_________ D. Cash and cash equivalents, end of period in 2013: $_________ 104 27. Amazon’s unearned revenue increased during the year (see Note 1). Which was larger in 2013? [circle your answer] (4 points) a) Cash received in 2013 for services not yet performed. b) Revenue earned in 2013 that corresponds to cash received in prior periods. 28. Assume all inventory purchases during the year were made on account and that all accounts payable relate to inventory purchases. Using the financial statements provided, please estimate the following for 2013. a) Inventory purchases in 2013. (4 points) b) Use your answer from (a) to estimate cash paid to suppliers in 2013. (4 points) 29. Assume that Amazon wrote off accounts receivable of $135 in 2013. In that case, what was the amount of recognized bad debt expenses during 2013? [Hint: Use Note 1] (3 points) 105 30. What was the total amount that Amazon reported for its depreciation and amortization expenses in 2013? (3 points) 31. Assume that Amazon made the following mistake in preparation of its 2013 statements, and no adjustments were made: Amazon inadvertently recorded the adjusting entry for accrued utilities twice in December, 2013. What would be the effect of the error on the following amounts at year-end of 2013? Circle U/S for understate, O/S for overstate, or NE for no effect. Ignore income tax effects. (8 points) A) Total Liabilities US OS NE B) Cash Flow from Financing Activities US OS NE C) Total Assets US OS NE D) Stockholders’ Equity at Year-End US OS NE 107 108 109 OMITTED OMITTED 112 I. True/False – If the statement is FALSE, you must explain why or correct it to get credit (3 points) 1. When a particular account receivable is determined to be uncollectible, the journal entry to write off the account reduces net income. True False (circle one) If false, explain below or correct above: The write-off of a specific receivable does not affect net income because no expense or revenue account is involved. Net income is only reduced when the original bad debt expense is recorded. 2. The allowance for doubtful accounts is reported as a contra-asset. True False (circle one) If false, explain below or correct above: 3. The stockholders’ equity section of a balance sheet includes both capital that has been contributed by owners as well as retained earnings. True False (circle one) If false, explain below or correct above: As we’ve discussed, contributed capital is capital that has been contributed by owners (whether they’re individual owners of the firm or stockholders). 4. One example of an operating revenue would be the revenue created by the sale of an automobile at a car dealership. True False (circle one) If false, explain below or correct above: This is an operating revenue since a car dealership is presumably in the business of selling cars. 113 5. Purchasing supplies for cash results in an increase in total assets for the purchasing company. True False (circle one) If false, explain below or correct above: It results in no change since one asset (supplies) is increased, but another (cash) is decreased. 6. Revenue accounts typically have credit balances because they increase stockholders’ equity. True False (circle one) If false, explain below or correct above: 7. Accrued expenses are initially recorded as assets and when they are later used, expenses will increase and assets will decrease. True False (circle one) If false, explain below or correct above: Deferred expenses are initially recorded as assets and then, when later used, increase expenses and decrease assets. Accrued expenses are recorded as a liability until paid. 8. Closing the revenue and gain accounts at year-end requires that these accounts be debited. True False (circle one) If false, explain below or correct above: 9. When a company sells equipment for cash at a loss, cash flows from investing activities decreases. True False (circle one) If false, explain below or correct above: Cash flows from investing will still increase since there was a positive inflow from the sale of the equipment. The loss is added back to the cash flows from operations. 114 10. The difference between the direct and indirect methods of cash flows statement preparation only affects how cash flows from operations are reported. True False (circle one) II. Multiple Choice – Circle the correct answer. (4 points) 11. Superior has provided the following information for its recent year of operation: The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000. The additional paid-in capital account balance increased $2,500 during the year. The retained earnings balance at the beginning of the year was $75,000 and the year- end balance was $91,000. Net income was $26,000. How much were Superior’s Dividends during its most recent year of operations? A) $10,000 B) $42,000 C) $26,000 D) The amount cannot be determined from the information provided. 75,000 + 26,000 – Dividends = 91,000, so Dividends = 10,000 12. Colby Corporation has provided the following information: x Operating revenues were $199,700. x Operating expenses were $111,000. x Interest expense was $9,200. x A gain from the sale of equipment was $3,300. x Income tax expense was $36,000. x Prepaid rent went up by $7,700 for the year. How much was Colby’s Net Income? A. $39,100 B. $48,300 C. $52,700 D. $46,800 199,700 – 111,000 – 9,200 + 3,300 – 36,000 = $46,800 115 13. On December 31, 2014, The Bates Company's revenues total $300,000 and expenses total $160,000 before consideration of the following: Accrued wages total $11,000; Accrued revenues total $36,000; Depreciation expense is $17,000; Rental revenue of $9,000 was earned; The income tax rate is 40% of income before income taxes. What is Bates' net income after consideration of the above information? A. $94,200 B. $157,000 C. $140,000 D. $88,800 (300,000 – 160,000 – 11,000 + 36,000 – 17,000 + 9,000)* (1-0.4) 14. Which of the following transactions would not be reported within the investing section of the cash flow statement? A. The cash sale of land at a gain. B. The purchase of a building for cash. C. The purchase of a stock investment for cash. D. The cash receipt of a dividend from a stock investment. 15. Canadian Beer reported equipment sold for $222 million cash and new equipment purchased for $1,515 million cash. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show: A. An inflow of $222 million and an outflow of $1,515 million. B. An inflow of $222 million and an outflow of $150 million. C. Cash paid for equipment of $1,293 million. D. A net outflow of $1,365 million. 16. Which of the following journal entries is created as the result of an accrual? A. Deferred Revenue Revenue B. Interest Expense Interest Payable C. Cash Deferred Revenue D. Revenue Receivable Unearned Revenue 116 17. At the beginning of April, Warren Corporation's assets totaled $240,000 and liabilities totaled $60,000. During April the following summarized transactions occurred: Additional shares of stock were sold for $20,000 cash. A building costing $95,000 was purchased using $10,000 cash and by signing an $85,000 long-term note payable. Short-term investments costing $9,000 were purchased using cash. $10,000 was paid to an employee as a loan; the employee signed a six-month note in exchange for the loan. How much are Warren's total liabilities at the end of April? A. $145,000 B. $155,000 C. $165,000 D. $135,000 60,000 + 85,000 18. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the following statements concerning the land sale is correct? A. The land account was credited for $51,000. B. The revenue account was debited for $51,000. C. Operating income increased $12,000. D. Income before income taxes increased $12,000. 19. Smith Corporation has provided the following information: Cash sales totaled $125,000. Credit sales totaled $279,000. Cash collections from customers for services yet to be provided totaled $38,000. An $11,000 gain from the sale of property and equipment occurred. Interest income totaled $7,700. How much were Smith's operating revenues? A. $404,000 B. $411,700 C. $442,000 D. $460,700 125,000 + 279,000 117 20. At year-end, Chief Company has a balance of $10,000 in accounts receivable, of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates that 10% of accounts more than 30 days overdue are uncollectible, while 1% of current accounts that are not overdue are uncollectible. How much is bad debt expense for the year using the aging of receivables method? A. $90 B. $190 C. $290 D. $100 $9,000*1% + $1,000*10% = $190 “target” ending balance. With a current credit balance of $100, they need to record another $90 of bad debt expense for the year to get to the target balance. 118 III – Free Response Questions – Please answer each question as completely as possible. Show your work for partial credit. 21. For each of the following transactions by Cloud Company in 2018, prepare the required adjusting journal entry that would be made at the end of the fiscal year on December 31, 2018. Assume that any initial journal entries were made correctly, but no adjusting entries have been made during the year. (3 points each) a) On July 1, 2018, Cloud invested $10,000 in a one-year certificate of deposit that pays 6% interest per year. Cloud will not receive the interest until the certificate of deposit matures on July 1, 2019. Interest Receivable (+A) 300 Interest Revenue (+R, +SE) 300 One point for each of the correct accounts (correctly debited/credited), and one point for the correct dollar amount. b) On October 1, 2018, Cloud received $1,000 from a customer for services to be provided over the next six months. Unearned Revenue (-L) 500 Service Revenue (+R, +SE) 500 One point for each of the correct accounts (correctly debited/credited), and one point for the correct dollar amount. c) On November 5, 2018, Cloud purchased supplies for $500. A physical inventory count revealed that $150 of these supplies were still on hand at year end. No other entries related to supplies were recorded after the initial purchase. Supplies Expense (+E, -SE) 350 Supplies Inventory (-A) 350 One point for each of the correct accounts (correctly debited/credited), and one point for the correct dollar amount. 119 22. Sagaworth, Inc. reported the following information: 2015 Income Statement Net loss $380,000 Depreciation expense 150,000 Amortization expense 25,000 Balance Sheet: 2015 2014 Accounts Receivable $200,000 $230,000 Inventory 140,000 160,000 Prepaid Expenses 40,000 30,000 Equipment, Net 85,000 45,000 Accounts Payable 190,000 180,000 Accrued Liabilities 50,000 45,000 Taxes Payable 10,000 20,000 Required: Determine Sagaworth’s Net Cash Flow from Operating Activities for 2015 under the indirect method (12 points). Net cash flow used in operating activities = $(160,000). If the total CFO is incorrect, -2 points for each account missing (e.g. Prepaid expenses) OR for each account included that should not be there (e.g., Equipment). - 1 point for each account correctly in there, but with the sign backwards (e.g., added when it should have been subtracted). 120 23. Prior to the year-end adjustment to record bad debt expense for 2014, the general ledger of Stickler Company included the following accounts and ending balances: Allowance for Doubtful Accounts $1,000 credit balance Bad Debt Expense 0 Accounts Receivable 200,000 Cash collections on Accounts Receivable during 2014 amounted to $450,000. Sales Revenue during 2014 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of these credit sales made in 2014 would eventually become uncollectible. A. Show the complete T-Account for the Accounts Receivable account in 2014. (2 points) If wrong overall, ½ point deducted for each amount in the wrong spot of the T-account. B. Prepare the journal entry necessary for recording the Bad Debt expense for 2014. (3 points) Bad Debt Expense (+E, -SE) 12,000 Allow. For Doubtful Accts 12,000 *12,000 comes from 600,000 credit sales x 2% that are expected to be uncollectible. If wrong overall, 1 point deducted if set up correctly but math is wrong (e.g., 800,000 x 2% instead of 600,000 x 2%). 2 points deducted if journal entry account names are right but % of receivables method was used instead of % of sales. C. Determine the adjusted 2014 year-end balance of the allowance for doubtful accounts. (2 points) The new balance is $13,000 ($1,000 existing balance + additional $12,000 recorded). No penalty if error carried forward from Part B but used correctly. D. Determine what will be reported as Accounts Receivable, Net on the 2014 Balance Sheet. (2 points) Accounts Receivable, Net will be $187,000 (200,000 ending balance in Gross receivables less $13,000 in Allowance for Doubtful Accounts). No penalty if errors carried forward from Parts A/C but used correctly otherwise. BB 50,000 Sales 600,000 450,000 Collections EB 200,000 Accounts Receivable 121 IV – Company Analysis– Instructions: Use Amazon’s 2013 annual report to answer the following questions. Its fiscal year ends December 31, 2013, and FY2013 refers to the fiscal year ended December 31, 2013. Treat each item below independently. Watch the dates on the statements. All numbers on the financial statements and in the problems are in millions (except per share data). 24. Did Amazon pay dividends in 2013? If yes, how much? If no, how do you know? (5 points) ANSWER: 0 Retained Earnings 1,916 Beg. 274 Net Income 0 Dividends 2,190 End There is no partial credit for saying “no” without explaining why not, using some form of the above. 25. Assume that during 2013, Amazon sold gift certificates for $1,730. In addition, assume that they recognized revenue of $96 for gift certificates that were expired or never used by customers. What was the amount of gift cards redeemed in 2013? [Hint: Use Note 1] (5 points) ANSWER: 1,334 (see below) Unredeemed Gift Certificates 1,100 Beg. 1,730 Unearned gift certificates sold 96 Expired or never redeemed 1,334 Redeemed 1,400 End If wrong overall, 1 point deducted if BB/EB are the wrong ones from the notes. 1 point deducted for any other component of the T-Account that’s missing or entered with the wrong sign. 122 26. Using the Statement of Cash Flows, fill in the blanks below with the appropriate amounts. Remember to indicate whether the amount is positive or negative. (4 points) A. Cash and cash equivalents, beginning of 2013: $__8,084_ B. Net cash provided by (used in) financing activities in 2013: $__(539)__ C. Net change in cash and cash equivalents in 2013: $__574__ D. Cash and cash equivalents, end of period in 2013: $__8,658_ 1 point of partial credit for each answer. 27. Amazon’s unearned revenue increased during the year (see Note 1). Which was larger in 2013? [circle your answer] (4 points) c) Cash received in 2013 for services not yet performed. d) Revenue earned in 2013 that corresponds to cash received in prior periods. Since unearned revenue went up, Amazon must have received more cash for services not yet performed than they were able to record as revenue from cash received in prior periods. 28. Assume all inventory purchases during the year were made on account and that all accounts payable relate to inventory purchases. Using the financial statements provided, please estimate the following for 2013. A) Inventory purchases in 2013. (4 points) 6,031 BB + Purchases – 54,181 Cost of Sales = 7,411 EB, so Purchases = 55,561 If wrong overall, 1 point deducted if used 1,410 from SCF and got 55,591 instead of answer above, 2 points deducted if I can tell your setup is right but you used the wrong COGS. No partial credit if your answer was just the change in the inventory account. B) Use your answer from (A) to estimate cash paid to suppliers in 2013. (4 points) 13,318 BB + 55,561 Purchases – Cash Paid = 15,133 EB, so Cash Paid = 53,746 If wrong overall, 1 point deducted if I can tell your setup is right but used the wrong BB/EB for Accounts payable. 2 points deducted if I can tell your setup is right but you’re missing purchases from Part A. No penalty for wrong amounts from Part A carried forward and used correctly in the setup. No partial credit if answer was just the change in accounts payable. 123 29. Assume that Amazon wrote off accounts receivable of $135 in 2013. In that case, what was the amount of recognized bad debt expenses during 2013? [Hint: Use Note 1] (3 points) 116 BB + Bad Debt Expense – 135 Writeoffs = 153 EB Also counted correctly if you entered the 135 in writeoffs twice and came up with Bad Debt Expense of 307. If wrong overall, 1 point deducted if you treated additions as if they were separate from bad debt expense (bad debt expense IS the addition to the allowance). 30. What was the total amount that Amazon reported for its depreciation and amortization expenses in 2013? (3 points) $3,253 (from Statement of Cash Flows) No penalty if you also incorporated the amortization of unearned revenue from the SCF. If wrong overall, 2 points deducted if you just reported depreciation expense of $2.5M from the note (which does not include amortization), 2 points deducted if your answer was EB – BB of accumulated depreciation for the year ÅThis does not represent depreciation expense, because we’re not given any information about the accumulated depreciation on assets that were sold/disposed of (so we don’t have the credit amount necessary to solve for depreciation expense if we try to use the changes in the accumulated depreciation T- account). 31. Assume that Amazon made the following mistake in preparation of its 2013 statements, and no adjustments were made: Amazon inadvertently recorded the adjusting entry for accrued utilities twice in December, 2013. What would be the effect of the error on the following amounts at year-end of 2013? Circle U/S for understate, O/S for overstate, or NE for no effect. Ignore income tax effects. (8 points) A) Total Liabilities US OS NE B) Cash Flow from Financing Activities US OS NE C) Total Assets US OS NE D) Stockholders’ Equity at Year-End US OS NE Recorded: Utilities Expense $X Utilities Payable $X TWICE rather than once. Correcting Entry is: Utilities Payable $X Utilities Expense $X

94 I. True/False – If the statement is FALSE, you must explain why or correct it to get credit (3 points) 1. When a particular account receivable is determined to be uncollectible, the journal entry to write off the account reduces net income. True False (circle one) If false, explain below or correct above: 2. The allowance for doubtful accounts is reported as a contra-asset. True False (circle one) If false, explain below or correct above: 3. The stockholders’ equity section of a balance sheet includes both capital that has been contributed by owners as well as retained earnings. True False (circle one) If false, explain below or correct above: 4. One example of an operating revenue would be the revenue created by the sale of an automobile at a car dealership. True False (circle one) If false, explain below or correct above: 5. Purchasing supplies for cash results in an increase in total assets for the purchasing company. True False (circle one) If false, explain below or correct above: 95 6. Revenue accounts typically have credit balances because they increase stockholders’ equity. True False (circle one) If false, explain below or correct above: 7. Accrued expenses are initially recorded as assets and when they are later used, expenses will increase and assets will decrease. True False (circle one) If false, explain below or correct above: 8. Closing the revenue and gain accounts at year-end requires that these accounts be debited. True False (circle one) If false, explain below or correct above: 9. When a company sells equipment for cash at a loss, cash flows from investing activities decreases. True False (circle one) If false, explain below or correct above: 10. The difference between the direct and indirect methods of cash flows statement preparation only affects how cash flows from operations are reported. True False (circle one) If false, explain below or correct above: 96 II. Multiple Choice – Circle the correct answer. (4 points) 11. Superior has provided the following information for its recent year of operation: The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000. The additional paid-in capital account balance increased $2,500 during the year. The retained earnings balance at the beginning of the year was $75,000 and the year- end balance was $91,000. Net income was $26,000. How much were Superior’s Dividends during its most recent year of operations? A) $10,000 B) $42,000 C) $26,000 D) The amount cannot be determined from the information provided. 12. Colby Corporation has provided the following information: x Operating revenues were $199,700. x Operating expenses were $111,000. x Interest expense was $9,200. x A gain from the sale of equipment was $3,300. x Income tax expense was $36,000. x Prepaid rent went up by $7,700 for the year. How much was Colby’s Net Income? A. $39,100 B. $48,300 C. $52,700 D. $46,800 97 13. On December 31, 2014, The Bates Company's revenues total $300,000 and expenses total $160,000 before consideration of the following: Accrued wages total $11,000; Accrued revenues total $36,000; Depreciation expense is $17,000; Rental revenue of $9,000 was earned; The income tax rate is 40% of income before income taxes. What is Bates' net income after consideration of the above information? A. $94,200 B. $157,000 C. $140,000 D. $88,800 14. Which of the following transactions would not be reported within the investing section of the cash flow statement? A. The cash sale of land at a gain. B. The purchase of a building for cash. C. The purchase of a stock investment for cash. D. The cash receipt of a dividend from a stock investment. 15. Canadian Beer reported equipment sold for $222 million cash and new equipment purchased for $1,515 million cash. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show: A. An inflow of $222 million and an outflow of $1,515 million. B. An inflow of $222 million and an outflow of $150 million. C. Cash paid for equipment of $1,293 million. D. A net outflow of $1,365 million. 16. Which of the following journal entries is created as the result of an accrual? A. Deferred Revenue Revenue B. Interest Expense Interest Payable C. Cash Deferred Revenue D. Revenue Receivable Unearned Revenue 98 17. At the beginning of April, Warren Corporation's assets totaled $240,000 and liabilities totaled $60,000. During April the following summarized transactions occurred: Additional shares of stock were sold for $20,000 cash. A building costing $95,000 was purchased using $10,000 cash and by signing an $85,000 long-term note payable. Short-term investments costing $9,000 were purchased using cash. $10,000 was paid to an employee as a loan; the employee signed a six-month note in exchange for the loan. How much are Warren's total liabilities at the end of April? A. $145,000 B. $155,000 C. $165,000 D. $135,000 18. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the following statements concerning the land sale is correct? A. The land account was credited for $51,000. B. The revenue account was debited for $51,000. C. Operating income increased $12,000. D. Income before income taxes increased $12,000. 19. Smith Corporation has provided the following information: Cash sales totaled $125,000. Credit sales totaled $279,000. Cash collections from customers for services yet to be provided totaled $38,000. An $11,000 gain from the sale of property and equipment occurred. Interest income totaled $7,700. How much were Smith's operating revenues? A. $404,000 B. $411,700 C. $442,000 D. $460,700 99 20. At year-end, Chief Company has a balance of $10,000 in accounts receivable, of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates that 10% of accounts more than 30 days overdue are uncollectible, while 1% of current accounts that are not overdue are uncollectible. How much is bad debt expense for the year using the aging of receivables method? A. $90 B. $190 C. $290 D. $100 100 III – Free Response Questions – Please answer each question as completely as possible. Show your work for partial credit. 21. For each of the following transactions by Cloud Company in 2018, prepare the required adjusting journal entry that would be made at the end of the fiscal year on December 31, 2018. Assume that any initial journal entries were made correctly, but no adjusting entries have been made during the year. (3 points each) a) On July 1, 2018, Cloud invested $10,000 in a one-year certificate of deposit that pays 6% interest per year. Cloud will not receive the interest until the certificate of deposit matures on July 1, 2019. b) On October 1, 2018, Cloud received $1,000 from a customer for services to be provided over the next six months. c) On November 5, 2018, Cloud purchased supplies for $500. A physical inventory count revealed that $150 of these supplies were still on hand at year end. No other entries related to supplies were recorded after the initial purchase. 101 22) Sagaworth, Inc. reported the following information: 2015 Income Statement Net loss $380,000 Depreciation expense 150,000 Amortization expense 25,000 Balance Sheet: 2015 2014 Accounts Receivable $200,000 $230,000 Inventory 140,000 160,000 Prepaid Expenses 40,000 30,000 Equipment, Net 85,000 45,000 Accounts Payable 190,000 180,000 Accrued Liabilities 50,000 45,000 Taxes Payable 10,000 20,000 Required: Determine Sagaworth’s Net Cash Flow from Operating Activities for 2015 under the indirect method (12 points). 102 23. Prior to the year-end adjustment to record bad debt expense for 2014, the general ledger of Stickler Company included the following accounts and ending balances: Allowance for Doubtful Accounts $1,000 credit balance Bad Debt Expense 0 Accounts Receivable 200,000 Cash collections on Accounts Receivable during 2014 amounted to $450,000. Sales Revenue during 2014 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of these credit sales made in 2014 would eventually become uncollectible. a) Show the complete T-Account for the Accounts Receivable account in 2014. (2 points) b) Prepare the journal entry necessary for recording the Bad Debt expense for 2014. (3 points) c) Determine the adjusted 2014 year-end balance of the allowance for doubtful accounts. (2 points) d) Determine what will be reported as Accounts Receivable, Net on the 2014 Balance Sheet. (2 points) 103 IV – Company Analysis– Instructions: Use Amazon’s 2013 annual report to answer the following questions. Its fiscal year ends December 31, 2013, and FY2013 refers to the fiscal year ended December 31, 2013. Treat each item below independently. Watch the dates on the statements. All numbers on the financial statements and in the problems are in millions (except per share data). 24. Did Amazon pay dividends in 2013? If yes, how much? If no, how do you know? (5 points) 25. Assume that during 2013, Amazon sold gift certificates for $1,730. In addition, assume that they recognized revenue of $96 for gift certificates that were expired or never used by customers. What was the amount of gift cards redeemed in 2013? [Hint: Use Note 1] (5 points) 26. Using the Statement of Cash Flows, fill in the blanks below with the appropriate amounts. Remember to indicate whether the amount is positive or negative. (4 points) A. Cash and cash equivalents, beginning of 2013: $_________ B. Net cash provided by (used in) financing activities in 2013: $_________ C. Net change in cash and cash equivalents in 2013: $_________ D. Cash and cash equivalents, end of period in 2013: $_________ 104 27. Amazon’s unearned revenue increased during the year (see Note 1). Which was larger in 2013? [circle your answer] (4 points) a) Cash received in 2013 for services not yet performed. b) Revenue earned in 2013 that corresponds to cash received in prior periods. 28. Assume all inventory purchases during the year were made on account and that all accounts payable relate to inventory purchases. Using the financial statements provided, please estimate the following for 2013. a) Inventory purchases in 2013. (4 points) b) Use your answer from (a) to estimate cash paid to suppliers in 2013. (4 points) 29. Assume that Amazon wrote off accounts receivable of $135 in 2013. In that case, what was the amount of recognized bad debt expenses during 2013? [Hint: Use Note 1] (3 points) 105 30. What was the total amount that Amazon reported for its depreciation and amortization expenses in 2013? (3 points) 31. Assume that Amazon made the following mistake in preparation of its 2013 statements, and no adjustments were made: Amazon inadvertently recorded the adjusting entry for accrued utilities twice in December, 2013. What would be the effect of the error on the following amounts at year-end of 2013? Circle U/S for understate, O/S for overstate, or NE for no effect. Ignore income tax effects. (8 points) A) Total Liabilities US OS NE B) Cash Flow from Financing Activities US OS NE C) Total Assets US OS NE D) Stockholders’ Equity at Year-End US OS NE 107 108 109 OMITTED OMITTED 112 I. True/False – If the statement is FALSE, you must explain why or correct it to get credit (3 points) 1. When a particular account receivable is determined to be uncollectible, the journal entry to write off the account reduces net income. True False (circle one) If false, explain below or correct above: The write-off of a specific receivable does not affect net income because no expense or revenue account is involved. Net income is only reduced when the original bad debt expense is recorded. 2. The allowance for doubtful accounts is reported as a contra-asset. True False (circle one) If false, explain below or correct above: 3. The stockholders’ equity section of a balance sheet includes both capital that has been contributed by owners as well as retained earnings. True False (circle one) If false, explain below or correct above: As we’ve discussed, contributed capital is capital that has been contributed by owners (whether they’re individual owners of the firm or stockholders). 4. One example of an operating revenue would be the revenue created by the sale of an automobile at a car dealership. True False (circle one) If false, explain below or correct above: This is an operating revenue since a car dealership is presumably in the business of selling cars. 113 5. Purchasing supplies for cash results in an increase in total assets for the purchasing company. True False (circle one) If false, explain below or correct above: It results in no change since one asset (supplies) is increased, but another (cash) is decreased. 6. Revenue accounts typically have credit balances because they increase stockholders’ equity. True False (circle one) If false, explain below or correct above: 7. Accrued expenses are initially recorded as assets and when they are later used, expenses will increase and assets will decrease. True False (circle one) If false, explain below or correct above: Deferred expenses are initially recorded as assets and then, when later used, increase expenses and decrease assets. Accrued expenses are recorded as a liability until paid. 8. Closing the revenue and gain accounts at year-end requires that these accounts be debited. True False (circle one) If false, explain below or correct above: 9. When a company sells equipment for cash at a loss, cash flows from investing activities decreases. True False (circle one) If false, explain below or correct above: Cash flows from investing will still increase since there was a positive inflow from the sale of the equipment. The loss is added back to the cash flows from operations. 114 10. The difference between the direct and indirect methods of cash flows statement preparation only affects how cash flows from operations are reported. True False (circle one) II. Multiple Choice – Circle the correct answer. (4 points) 11. Superior has provided the following information for its recent year of operation: The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000. The additional paid-in capital account balance increased $2,500 during the year. The retained earnings balance at the beginning of the year was $75,000 and the year- end balance was $91,000. Net income was $26,000. How much were Superior’s Dividends during its most recent year of operations? A) $10,000 B) $42,000 C) $26,000 D) The amount cannot be determined from the information provided. 75,000 + 26,000 – Dividends = 91,000, so Dividends = 10,000 12. Colby Corporation has provided the following information: x Operating revenues were $199,700. x Operating expenses were $111,000. x Interest expense was $9,200. x A gain from the sale of equipment was $3,300. x Income tax expense was $36,000. x Prepaid rent went up by $7,700 for the year. How much was Colby’s Net Income? A. $39,100 B. $48,300 C. $52,700 D. $46,800 199,700 – 111,000 – 9,200 + 3,300 – 36,000 = $46,800 115 13. On December 31, 2014, The Bates Company's revenues total $300,000 and expenses total $160,000 before consideration of the following: Accrued wages total $11,000; Accrued revenues total $36,000; Depreciation expense is $17,000; Rental revenue of $9,000 was earned; The income tax rate is 40% of income before income taxes. What is Bates' net income after consideration of the above information? A. $94,200 B. $157,000 C. $140,000 D. $88,800 (300,000 – 160,000 – 11,000 + 36,000 – 17,000 + 9,000)* (1-0.4) 14. Which of the following transactions would not be reported within the investing section of the cash flow statement? A. The cash sale of land at a gain. B. The purchase of a building for cash. C. The purchase of a stock investment for cash. D. The cash receipt of a dividend from a stock investment. 15. Canadian Beer reported equipment sold for $222 million cash and new equipment purchased for $1,515 million cash. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show: A. An inflow of $222 million and an outflow of $1,515 million. B. An inflow of $222 million and an outflow of $150 million. C. Cash paid for equipment of $1,293 million. D. A net outflow of $1,365 million. 16. Which of the following journal entries is created as the result of an accrual? A. Deferred Revenue Revenue B. Interest Expense Interest Payable C. Cash Deferred Revenue D. Revenue Receivable Unearned Revenue 116 17. At the beginning of April, Warren Corporation's assets totaled $240,000 and liabilities totaled $60,000. During April the following summarized transactions occurred: Additional shares of stock were sold for $20,000 cash. A building costing $95,000 was purchased using $10,000 cash and by signing an $85,000 long-term note payable. Short-term investments costing $9,000 were purchased using cash. $10,000 was paid to an employee as a loan; the employee signed a six-month note in exchange for the loan. How much are Warren's total liabilities at the end of April? A. $145,000 B. $155,000 C. $165,000 D. $135,000 60,000 + 85,000 18. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the following statements concerning the land sale is correct? A. The land account was credited for $51,000. B. The revenue account was debited for $51,000. C. Operating income increased $12,000. D. Income before income taxes increased $12,000. 19. Smith Corporation has provided the following information: Cash sales totaled $125,000. Credit sales totaled $279,000. Cash collections from customers for services yet to be provided totaled $38,000. An $11,000 gain from the sale of property and equipment occurred. Interest income totaled $7,700. How much were Smith's operating revenues? A. $404,000 B. $411,700 C. $442,000 D. $460,700 125,000 + 279,000 117 20. At year-end, Chief Company has a balance of $10,000 in accounts receivable, of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates that 10% of accounts more than 30 days overdue are uncollectible, while 1% of current accounts that are not overdue are uncollectible. How much is bad debt expense for the year using the aging of receivables method? A. $90 B. $190 C. $290 D. $100 $9,000*1% + $1,000*10% = $190 “target” ending balance. With a current credit balance of $100, they need to record another $90 of bad debt expense for the year to get to the target balance. 118 III – Free Response Questions – Please answer each question as completely as possible. Show your work for partial credit. 21. For each of the following transactions by Cloud Company in 2018, prepare the required adjusting journal entry that would be made at the end of the fiscal year on December 31, 2018. Assume that any initial journal entries were made correctly, but no adjusting entries have been made during the year. (3 points each) a) On July 1, 2018, Cloud invested $10,000 in a one-year certificate of deposit that pays 6% interest per year. Cloud will not receive the interest until the certificate of deposit matures on July 1, 2019. Interest Receivable (+A) 300 Interest Revenue (+R, +SE) 300 One point for each of the correct accounts (correctly debited/credited), and one point for the correct dollar amount. b) On October 1, 2018, Cloud received $1,000 from a customer for services to be provided over the next six months. Unearned Revenue (-L) 500 Service Revenue (+R, +SE) 500 One point for each of the correct accounts (correctly debited/credited), and one point for the correct dollar amount. c) On November 5, 2018, Cloud purchased supplies for $500. A physical inventory count revealed that $150 of these supplies were still on hand at year end. No other entries related to supplies were recorded after the initial purchase. Supplies Expense (+E, -SE) 350 Supplies Inventory (-A) 350 One point for each of the correct accounts (correctly debited/credited), and one point for the correct dollar amount. 119 22. Sagaworth, Inc. reported the following information: 2015 Income Statement Net loss $380,000 Depreciation expense 150,000 Amortization expense 25,000 Balance Sheet: 2015 2014 Accounts Receivable $200,000 $230,000 Inventory 140,000 160,000 Prepaid Expenses 40,000 30,000 Equipment, Net 85,000 45,000 Accounts Payable 190,000 180,000 Accrued Liabilities 50,000 45,000 Taxes Payable 10,000 20,000 Required: Determine Sagaworth’s Net Cash Flow from Operating Activities for 2015 under the indirect method (12 points). Net cash flow used in operating activities = $(160,000). If the total CFO is incorrect, -2 points for each account missing (e.g. Prepaid expenses) OR for each account included that should not be there (e.g., Equipment). - 1 point for each account correctly in there, but with the sign backwards (e.g., added when it should have been subtracted). 120 23. Prior to the year-end adjustment to record bad debt expense for 2014, the general ledger of Stickler Company included the following accounts and ending balances: Allowance for Doubtful Accounts $1,000 credit balance Bad Debt Expense 0 Accounts Receivable 200,000 Cash collections on Accounts Receivable during 2014 amounted to $450,000. Sales Revenue during 2014 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of these credit sales made in 2014 would eventually become uncollectible. A. Show the complete T-Account for the Accounts Receivable account in 2014. (2 points) If wrong overall, ½ point deducted for each amount in the wrong spot of the T-account. B. Prepare the journal entry necessary for recording the Bad Debt expense for 2014. (3 points) Bad Debt Expense (+E, -SE) 12,000 Allow. For Doubtful Accts 12,000 *12,000 comes from 600,000 credit sales x 2% that are expected to be uncollectible. If wrong overall, 1 point deducted if set up correctly but math is wrong (e.g., 800,000 x 2% instead of 600,000 x 2%). 2 points deducted if journal entry account names are right but % of receivables method was used instead of % of sales. C. Determine the adjusted 2014 year-end balance of the allowance for doubtful accounts. (2 points) The new balance is $13,000 ($1,000 existing balance + additional $12,000 recorded). No penalty if error carried forward from Part B but used correctly. D. Determine what will be reported as Accounts Receivable, Net on the 2014 Balance Sheet. (2 points) Accounts Receivable, Net will be $187,000 (200,000 ending balance in Gross receivables less $13,000 in Allowance for Doubtful Accounts). No penalty if errors carried forward from Parts A/C but used correctly otherwise. BB 50,000 Sales 600,000 450,000 Collections EB 200,000 Accounts Receivable 121 IV – Company Analysis– Instructions: Use Amazon’s 2013 annual report to answer the following questions. Its fiscal year ends December 31, 2013, and FY2013 refers to the fiscal year ended December 31, 2013. Treat each item below independently. Watch the dates on the statements. All numbers on the financial statements and in the problems are in millions (except per share data). 24. Did Amazon pay dividends in 2013? If yes, how much? If no, how do you know? (5 points) ANSWER: 0 Retained Earnings 1,916 Beg. 274 Net Income 0 Dividends 2,190 End There is no partial credit for saying “no” without explaining why not, using some form of the above. 25. Assume that during 2013, Amazon sold gift certificates for $1,730. In addition, assume that they recognized revenue of $96 for gift certificates that were expired or never used by customers. What was the amount of gift cards redeemed in 2013? [Hint: Use Note 1] (5 points) ANSWER: 1,334 (see below) Unredeemed Gift Certificates 1,100 Beg. 1,730 Unearned gift certificates sold 96 Expired or never redeemed 1,334 Redeemed 1,400 End If wrong overall, 1 point deducted if BB/EB are the wrong ones from the notes. 1 point deducted for any other component of the T-Account that’s missing or entered with the wrong sign. 122 26. Using the Statement of Cash Flows, fill in the blanks below with the appropriate amounts. Remember to indicate whether the amount is positive or negative. (4 points) A. Cash and cash equivalents, beginning of 2013: $__8,084_ B. Net cash provided by (used in) financing activities in 2013: $__(539)__ C. Net change in cash and cash equivalents in 2013: $__574__ D. Cash and cash equivalents, end of period in 2013: $__8,658_ 1 point of partial credit for each answer. 27. Amazon’s unearned revenue increased during the year (see Note 1). Which was larger in 2013? [circle your answer] (4 points) c) Cash received in 2013 for services not yet performed. d) Revenue earned in 2013 that corresponds to cash received in prior periods. Since unearned revenue went up, Amazon must have received more cash for services not yet performed than they were able to record as revenue from cash received in prior periods. 28. Assume all inventory purchases during the year were made on account and that all accounts payable relate to inventory purchases. Using the financial statements provided, please estimate the following for 2013. A) Inventory purchases in 2013. (4 points) 6,031 BB + Purchases – 54,181 Cost of Sales = 7,411 EB, so Purchases = 55,561 If wrong overall, 1 point deducted if used 1,410 from SCF and got 55,591 instead of answer above, 2 points deducted if I can tell your setup is right but you used the wrong COGS. No partial credit if your answer was just the change in the inventory account. B) Use your answer from (A) to estimate cash paid to suppliers in 2013. (4 points) 13,318 BB + 55,561 Purchases – Cash Paid = 15,133 EB, so Cash Paid = 53,746 If wrong overall, 1 point deducted if I can tell your setup is right but used the wrong BB/EB for Accounts payable. 2 points deducted if I can tell your setup is right but you’re missing purchases from Part A. No penalty for wrong amounts from Part A carried forward and used correctly in the setup. No partial credit if answer was just the change in accounts payable. 123 29. Assume that Amazon wrote off accounts receivable of $135 in 2013. In that case, what was the amount of recognized bad debt expenses during 2013? [Hint: Use Note 1] (3 points) 116 BB + Bad Debt Expense – 135 Writeoffs = 153 EB Also counted correctly if you entered the 135 in writeoffs twice and came up with Bad Debt Expense of 307. If wrong overall, 1 point deducted if you treated additions as if they were separate from bad debt expense (bad debt expense IS the addition to the allowance). 30. What was the total amount that Amazon reported for its depreciation and amortization expenses in 2013? (3 points) $3,253 (from Statement of Cash Flows) No penalty if you also incorporated the amortization of unearned revenue from the SCF. If wrong overall, 2 points deducted if you just reported depreciation expense of $2.5M from the note (which does not include amortization), 2 points deducted if your answer was EB – BB of accumulated depreciation for the year ÅThis does not represent depreciation expense, because we’re not given any information about the accumulated depreciation on assets that were sold/disposed of (so we don’t have the credit amount necessary to solve for depreciation expense if we try to use the changes in the accumulated depreciation T- account). 31. Assume that Amazon made the following mistake in preparation of its 2013 statements, and no adjustments were made: Amazon inadvertently recorded the adjusting entry for accrued utilities twice in December, 2013. What would be the effect of the error on the following amounts at year-end of 2013? Circle U/S for understate, O/S for overstate, or NE for no effect. Ignore income tax effects. (8 points) A) Total Liabilities US OS NE B) Cash Flow from Financing Activities US OS NE C) Total Assets US OS NE D) Stockholders’ Equity at Year-End US OS NE Recorded: Utilities Expense $X Utilities Payable $X TWICE rather than once. Correcting Entry is: Utilities Payable $X Utilities Expense $X

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