Accounting 2011 Test 1 Study Guide

The original cost of a piece of equipment was $150,000. The equipment was depreciated using the straight-line method with annual depreciation of $25,000. After two years, the fair value of the equipment is $105,000. How much is the book value of the equipment at the end of the second year?

$100,000 (150,000 - 25,000 - 25,000)

Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method?

$16,000 50,000 - 10,000 = 40,000 40,000/15,000 = 2.67 2.67 x 2,700 = 7,209 2.67 x 3,300 = 8,811 7,200 + 8,811 ~~ 16,000

A company purchased land and building from a seller for $900,000. A separate appraisal reveals the fair value of the land to be $200,000 and the fair value of the building to be $800,000. For what amount would the company record land at the time of purchase?

$180,000 Land + Building = $1,000,000 Land = 200,000 = 20% Building = 800,000 = 20% 900,000/10 = 90,000 90,000 x 2 = 180,000

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month?

$2,542 Payment per month = $3,042 Interest in month 1 = $500 (3,042 - 500)

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the second month?

$2,555 Payment per month = $3,042 Interest in month 2 = $487 (3,042 - 487)

On January 1, 2021, Lizzy's Lemonade issues 6%, 10-year bonds with a face amount of $83,000 for $77,102, priced to yield 7%. Interest is paid semiannually. What amount of interest expense will be recorded on June 30, 2021, the first interest payment date?

$2,699 Interest expense = Carrying Value x Rate of Interest x Time Period (77,102 x 7%) x 6/12

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

$30,000 ($600,000 x 0.05)

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as interest expense in the second month?

$487 100,000 - 2,542 = 97,458 (97,458 x 6%) x 1/12

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded for interest expense for the first full month?

$500 (100,000 x 6%) x 1/12

A company issues $50,000 of 4%, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate interest expense as of the first semiannual interest payment.

$785 Interest expense = Carrying Value x Rate of Interest x Time Period (52,306 x 3%) x 6/12

A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck's residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation?

$8,000 Depreciation per mile = (Cost of Truck- Residual value)/ Estimated use = (60,000 - 10,000)/100,000 = $0.5 Depreciation expense for first year = Miles driven in first year x Depreciation per mile = (16,000 x 0.5) = $8,000

If Executive Airways borrows $10 million on April 1st, 2020, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 2020?

600,000. (10,000,000 x 0.06)

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

A debit to a liability and a credit to a revenue account.

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

A debit to an asset and a credit to a liability account.

If bonds are issued with a stated interest rate lower than the market interest rate, the bonds will be issued at:

A discount.

Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record:

A gain of $5,000. 100,000 - 65,000 = 35,000 35,000 + n = 40,000

Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:

A loss of $10,000. 65,000 - 25,000 = 40,000 40,000 - 30,000

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at:

A premium.

What matures in installments?

A serial bond.

Over the entire service life of an asset, which depreciation method records the highest total depreciation?

All of the methods (straight-line, double declining, and activity-based) result in the same total depreciation.

What should an interest costs be recorded as?

An asset.

What would an addition which increases future benefit be recorded as?

An asset.

A patent is:

An exclusive 20-year right to manufacture a product or to use a process.

Which of the following is not a current liability? Notes payable due in six months. Current portion of long-term debt. An unused line of credit. Deferred revenue to be earned in nine months.

An unused line of credit.

The asset's cost less accumulated depreciation is called:

Book value.

A long-term asset is recorded at the:

Cost of the asset plus all costs necessary to the asset ready for use.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit cash and credit notes payable for $5,000.

On November 1st, 2020, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1st, 2021. The company should report the following adjusting entry at December 31st, 2021:

Debit interest expense and credit interest payable for $4,000. ((200,000 x 0.12 x 1/12) x 2)

Correctly describe the nature of depreciation.

Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:

Disclosed but not reported as a liability.

What is paid by both the employee and the employer?

FICA taxes.

What are some characteristics of a liability?

It represents a profitable, future sacrifice of economic benefits. It arises from present obligations to other entities. It results from past transactions or events.

What do liabilities represent?

Liabilities represent probable future sacrifices of benefits.

Callable bonds provide:

Potential benefits to the issuer.

Should a contingent liability that is probable and can be reasonably estimated be recorded, disclosed, or paid?

Recorded.

In each succeeding payment on an installment note:

The amount that goes to interest expense decreases.

When a company acquires a new piece of equipment, the total cost is recorded as:

The cost of the equipment plus any sales tax, shipping, and depreciation that comes with it.

Which depreciation method typically results in the highest depreciation expense during the first year of an asset's life?

The double-declining balance method.

What will increase an employer's payroll costs?

The employer's FICA contribution.

The amount of the gain on the sale of equipment equals:

The selling price minus the book value of the equipment.

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

They should not record anything yet. $0.

What is recorded as an intangible asset in the balance sheet?

Trademarks, patents, goodwill, etc.

In most cases, current liabilities are payable within ___ year(s), and long-term liabilities are payable more than ___ year(s) from now.

one; one