Accounting 2101 - 7 through 9 Exam Study Set

On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company should report interest payable on December 31, 2024, in the amount of:

$1,000. Explanation ($100,000 × 6%) × 2/12 = $1,000

Carpenter Incorporated estimates warranty expense at 4% of sales. Sales during the year were $14 million and warranty expenditures during the year were $49,500. What was the balance in the Warranty Liability account at the end of the year?

$510,500 Explanation $14 million × 4% = $560,000;$560,000 − 49,500 = $510,500

A company purchased a delivery truck on January 1, 2024, for $100,000. The truck has an estimated life of 10 years and an estimated residual value of $10,000. If the company uses double-declining balance, what would be the book value of the truck after two years?

$64,000 Explanation Year 1 depreciation: $100,000 × (2 / 10) = $20,000 Year 2 depreciation: ($100,000 − $20,000) × (2 / 10) = $16,000 Book value = $100,000 − ($20,000 + $16,000) = $64,000

A company issues a $200,000, 5%, six-year note on January 1, 2024. What amount will be recorded for interest expense for the first month's payment on January 31, 2024?

$833.33 Explanation $200,000 × 5% × 1/12 = $833.33

On January 1, Midwest Specialty Foods purchased equipment for $25,000. Residual value at the end of an estimated four-year service life is expected to be $2,500. The machine operated for 2,600 hours in the first year, and the company expects the machine to operate for a total of 15,000 hours. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based. (Do not round your intermediate calculations.)

(1) Straight-line Depreciation expense = $25,000 − $2,500 / 4 years = $5,625 (2) Double-declining-balance Depreciation expense = $25,000 × 2/4 = $12,500 (3) Activity-based Depreciation expense = $25,000 − $2,500 / 15,000 hours = $1.50 per hour × 2,600 hours = $3,900

On November 1, Bahama Cruise Lines borrows $6 million and issues a six-month, 7% note payable. Interest is payable at maturity. Determine the financial statement effects of (1) the issuance of the note and (2) the adjusting entry for interest owed by December 31, the end of the reporting period.

(2) Income Statement: 70,000 Interest Expense (under Expenses) = -70,000 (net income) Balance Sheet: 70,000 Interest Payable (Liabilities) + -70,000 (Stockholders' Equity) Explanation $6,000,000 × 0.07 × 2/12 = $70,000

Required information Skip to question [The following information applies to the questions displayed below.] On January 1, 2024, Evanston Corporation borrowed $10 million from a local bank to construct a new building over the next three years. The loan will be paid back in three equal installments of $3,880,335 on December 31 of each year. The payments include interest at a rate of 8%. Create an amortization schedule for this loan on scratch paper. Use amounts from the amortization schedule to record each installment payment. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Enter your answer in dollars, not millions. (i.e., $5.5 million should be entered as 5,500,000.).)

(Couldn't be bothered to fix number 3)

A company purchased a piece of equipment by paying $5,000 cash. Shipping cost of $400 to get the equipment to its factory was also incurred. The fair value of this equipment is $7,000. For what amount should the company report the equipment?

5400 $5,000 + $400 = $5,400

A company purchased new equipment for $59,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,500; sales tax paid, $2,000; and installation cost, $2,400. The total capitalized cost reported for the equipment was:

64900 Explanation $59,000 + $1,500 + $2,000 + $2,400 = $64,900

Which of the following is not a current liability?

A note payable due in 2 years

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be:

Disclosed and reported as a liability.

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

Disclosed, but not reported as a liability.

Garcia Electronics is a leading manufacturer of digital camera equipment. Assume the following transactions occur during the year ended December 31, 2024. Accounts receivable were $28.9 million (all credit) at the end of 2024. Although no specific customer accounts have been shown to be uncollectible, the company estimates that 2% of accounts receivable will eventually prove uncollectible. Garcia Electronics is the plaintiff in a $4.9 million lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is virtually certain that Garcia Electronics will win and be awarded $3.4 million. In November 2024, Garcia Electronics became aware of a design flaw in one of its digital camera models. A product recall appears probable and would likely cost the company $590,000. Garcia Electronics is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably likely Garcia Electronics will lose the case, and potential losses are estimated to be in the range of $2.4 to $3.4 million. Required: Determine the appropriate way Garcia Electronics would report the contingencies. Record any amounts as a result of each of these contingencies if required. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Enter your answers in dollars, not in millions. For example, $5.5 million should be entered as 5,500,000.)

Explanation 1.Bad debt expense: $28.9 million × 2% = $578,000 2.Garcia Electronics has a contingent gain that is probable and reasonably estimable. Contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. 4.The likelihood of loss is reasonably possible rather than probable, so no journal entry is recorded. However, full disclosure of the contingent liability and the estimated range of loss between $2.4 and $3.4 million is disclosed in notes to the financial statements.

Pretzelmania, Incorporated, issues 5%, 10-year bonds with a face amount of $53,000 for $53,000 on January 1, 2024. Interest is paid semiannually on June 30 and December 31. Required: 1. & 2. Record the bond issue on January 1, 2024 and first interest payment on June 30, 2024. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Explanation 2.Cash ($53,000 × 5% × ½) = $1,325

On January 1, Hawaiian Specialty Foods purchased equipment for $43,000. Residual value at the end of an estimated four-year service life is expected to be $3,070. The company expects the machine to operate for a total of 33,000 hours. The machine operated for 3,200 hours in the first year and 3,500 hours in the second year. Record depreciation expense for the first two years using the activity-based method. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Explanation Year 1Depreciation Expense($43,000 − $3,070) / 33,000 hours = $1.21/hour(3,200 hours × $1.21 = $3,872) Year 2Depreciation Expense($43,000 − $3,070) / 33,000 hours = $1.21/hour(3,500 hours × $1.21 = $4,235)

Finley Company is looking for a new office location and sees a building with a fair value of $640,000. Finley also notices that much of the equipment in the existing building would be useful to its own operations. Finley estimates the fair value of the equipment to be $104,000. Finley offers to buy both the building and the equipment for $690,000, and the offer is accepted. Determine the amounts Finley should record in the separate accounts for building and equipment. (Do not round intermediate calculations.)

Explanation: Building: $690,000/$744,000 × $640,000 =$593548.4 Equipment: $690,000 / $744,000 × $104,000 = $96,451.6 IMAGE:

Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years.

False Declining-balance depreciation will be higher than straight-line depreciation in earlier years, but lower in later years.

Accumulated Depreciation is a liability account.

False Accumulated Depreciation is a contra (or negative) asset account.

Cash received from the sale of salvaged materials increases the total capitalized cost of land.

False Cash received from the sale of salvaged materials decreases the total capitalized cost of land.

As each monthly payment of an installment note payable is recorded, the amount of interest expense does not change.

False Explanation Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The monthly payment amount does not change. Interest expense equals the prior month's carrying value times the interest rate. The amount of interest expense decreases with each payment (since the carrying value is decreasing) and the amount paid on the note's principal balance increases.

We record interest expense in the period in which we pay it, rather than in the period we incur it.

False Explanation Interest expense is recorded in the period incurred, not in the period in which we pay it.

In a classified balance sheet, we categorize all liabilities as current.

False Explanation Liabilities may be classified as either current or long-term.

We report a gain if we sell an asset for less than book value.

False We report a gain if we sell an asset for more than book value.

Named in honor of the late Dr. F. C. "Phog" Allen, the Kansas Jayhawks' head coach for 39 years, Allen Fieldhouse is labeled by many as one of the best places in America to watch a college basketball game. Allen Fieldhouse has a seating capacity of 16,700. Assume the basketball arena sells out all 16 home games before the season begins, and the athletic department collects $29,392,000 in ticket sales. Required:1. What is the average price per season ticket and average price per individual game ticket sold? 2. & 3. Record the advance collection of $29,392,000 in ticket sales and the revenue earned after the first home game is completed.

Per Season Ticket: 1,760 Per Individual Game Ticket: 110 Explanation 1. $29,392,000/16,700 = $1,760 per season ticket $1,760/16 games = $110 per individual game ticket 2-3: See image. 3. Sales revenue: $29,392,000/16 games = $1,837,000

Match the correct reporting method for each of the items listed below.

See Image

Which of the following is the primary source of corporate equity financing?

Stockholders

The current portion of long-term debt is:

The amount that will be paid within one year of the balance sheet date.

Gains on the sale of long-term assets for cash are:

The excess of the cash received over the book value.

The Environmental Protection Agency (EPA) is in the process of investigating a possible water contamination issue at the manufacturing facility of Northwest Forest Products. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavorable settlement is estimated to be $25 million. Determine how the estimated cost of the settlement will affect the current financial statements.

The potiential loss and liability should not be recorded but should be disclosed in the notes to the financial statements. Explanation Northwest Forest Products has a contingent liability that is reasonably possible and reasonably estimable at $25 million. Since the loss is reasonably possible, but not probable, we will disclose the situation, but not record the potential loss and liability in the financial records. Details regarding the investigation by the EPA, the reasonable possibility of an assessment, and the amount of settlement should be disclosed in the notes to the financial statements.

A company is said to be liquid if it has sufficient cash (or other current assets convertible to cash in a relatively short time) to pay currently maturing debts.

True

A contingent liability is an existing, uncertain situation that might result in a loss.

True

A liability is an obligation of a company to transfer some economic benefit in the future.

True

Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit.

True

We report a loss if we sell an asset for less than book value.

True

When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable.

True

When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable.

True

Intangible assets have no physical substance and generally represent exclusive rights that provide benefits to owners.

True

Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan.

True

Losses have the effect of reducing net income, while gains increase net income.

True

Property, plant, and equipment are types of tangible assets.

True

Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life.

True

Sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government.

True

The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records.

True

The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities.

True

The adjusting entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability.

True

Typically, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable in more than one year.

True

With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life.

True

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

When the equipment is sold.

Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs.

True

Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation.

True

Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments.

True

Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life.

True

Given a choice, most managers would choose to record an obligation as long-term rather than current.

True

If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a note to the financial statements to describe the contingency.

True

If the likelihood of loss is remote, disclosure of a contingency usually is not required.

True

In an activity-based depreciation method, we allocate an asset's cost based on its use.

True

Which of the following statements regarding liquidity ratios is true?

A high working capital generally indicates the ability to pay current liabilities on a timely basis.

On December 2, 2023, Quebecor Printing received cash from customers for online subscriptions to begin in 2024. What would be the appropriate journal entry at the time cash was received on December 2, 2023?

Debit Cash, credit Deferred Revenue

Deferred Revenues is a(n):

Liability account.

Sales taxes collected by a company on behalf of the state and local governments are recorded as a(n):

Liability.

For a ten-year installment note, the portion of the periodic installment payment that represents interest in the third year is:

More than in the fourth year. Explanation Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. Interest expense equals the prior month's carrying value times the interest rate. The amount of interest expense decreases with each payment (since the carrying value is decreasing) and the amount paid on the note's principal balance increases.

A company's liquidity refers to its ability to:

Pay currently maturing debts.

The current portion of long-term debt should be:

Reported as a current liability in the balance sheet.