Accounting
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.
a credit to Cash of $6,000 a debit to Interest expense of $6,000
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.
a debit to Interest expense of $500 a credit to Interest payable of $500
Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
a lease asset a lease payable
Deferred revenue is classified as
a liability
Units of production or units of output are alternative terms for the --- depreciation method.
activity based
The original cost of an asset minus accumulated depreciation is
book value.
The mixture of debt financing and equity financing a company uses is referred to as the company's --- structure.
capital
A --- gain is an existing uncertainty that might result in a gain.
contingent
The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's --- risk.
default
Companies use accelerated depreciation for tax purposes because
it reduces taxable income in the early years of the asset's life and provides better cash flows.
A(n)--- is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.
lease
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)
lease.
Which of the following costs should be capitalized in the costs of acquiring a building?
legal fees to obtain title realtor commissions purchase price Remodeling building
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
provides benefits to the company.
An estimated residual value ---- the total amount of depreciation recorded over an asset's service life.
reduces
Which depreciation methods allocate the cost of long-term assets based on time?
straight-line declining-balance
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the
straight-line method
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year.
A company's capital structure refers to
the mixture of debt and equity used to finance the company.
Which of the following may be classified as contingent liabilities?
Frequent flyer program awards Future litigation losses Product warranties
A bond will be issued at a premium when the market rate of interest is ______ the stated rate.
less than
Straight-line deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
A contingent liability is an existing --- situation that might result in a loss depending on the outcome of a future event.
uncertain
Other terms used for an activity-based depreciation method are:
units of output method units of production method
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
Straight-line, declining-balance, and activity-based refer to methods commonly used to --- property, plant, and equipment.
depreciation
The allocation of the cost of a tangible asset over its service life is referred to as .----- (Enter one word per blank)
depreciation
The --- rate of interest is an implied rate based on the price investors pay to purchase a bond.
market
The rate of interest on a bond is the --- interest rate printed on the bond, whereas the --- rate of interest is the current rate of interest being paid on investments with similar characteristics.
stated, market
The service life or useful life of an asset is
the estimated use that the company expects to obtain from the asset before disposing of it.
Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should
credit notes payable $5,000.
Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?
Cost of lawn sprinkler system Cost of sidewalks Cost of driveways
A --- liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
A bond will be issued at a discount when the market rate of interest is
greater than the stated rate.
Using the declining balance method, depreciation will be
higher in earlier years, but lower in later years.
Periodic payments on installment notes typically include (Select all that apply.)
a portion that reflects interest. a portion that reduces the outstanding loan balance.
The --- rate of interest is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense
stated
At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?
Reason: ($10,000 - 4,000)/4 years = $1,500 per year
Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should record the following credit amounts.
sales taxes payable of $100. sales revenue of $1,000.
The --- rate of interest is used to compute the cash interest paid to bondholders.
stated
The rate of interest printed on the face of a bond is referred to as the --- interest rate
stated
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
Change in residual value of an asset Change in service life of an asset
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used.
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
Warranty
Lark Corporation believes it is probable the company will lose a lawsuit for $10,000. The journal entry to record the contingent loss will include a
credit to contingent liability for lawsuit $10,000.
Deferred revenues and sales tax payable typically are reported as ----- liabilities.
current
The --- portion of long-term debt is the amount that will be paid within the next year. (Enter only one word.)
current
Liabilities are classified as
current and long-term.
Taxes collected for taxing authorities are recognized as
current liabilities.
If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a
debit to Cash of $100,000 and a credit to Bonds payable of $100,000.
Deferred revenue should be classified as a(n) --- on the balance sheet.
liability
Use of MACRS for tax purposes usually results in --- income tax in the earlier years of an asset's life.
lower
When a contingent event that may give rise to a future loss is likely to occur, it is said to be
probable
---- value is the amount the company expects to receive for the asset at the end of its service life. (Enter one word per blank)
residual
The depreciable cost of an asset is the asset's cost minus its estimated ---- value. Enter one word per blank)
residual
The term used to describe the amount the company expects to receive for an asset at the end of its service life is
residual value
The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.
Cash; Bonds Payable
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at
a premium.
Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:
credit to Notes Payable for $24,000
A(n) ---- is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events.
liability
The cost of land improvements are capitalized separately from land because land improvements tend to have a ---- useful life.
limited
Which of these are parts of the journal entry to record depreciation?
Debit Depreciation Expense Credit Accumulated Depreciation
True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.
True
In accounting, expenditures recorded as assets are said to be _____.
capitalized
The portion of a long-term liability that will be paid within the next year is referred to and reported as the:
current portion of long-term debt
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.
current-year activity or production
Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a:
debit to loss credit to contingent liability
The allocation of the cost of a tangible fixed asset is referred to as ,---- whereas the allocation of the cost of an intangible asset is referred to as----
depreciation, amortization
Common terms used for the market interest rate are:
effective interest rate yield rate
financing refers to obtaining investment from stockholders. (Enter only one word.)
equity
The two types of financing are
equity financing. debt financing.
The terms "effective interest rate" and "yield rate" refer to the --- interest rate.
market
The true interest rate used by investors to value a bond issue is referred to as the:
market interest rate
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
For a manufacturer, the most commonly reported contingent liabilities relate to product ---
warranties
The depreciable cost is
the cost of the asset minus the residual value.
On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?
$26,000
Which account is credited in a journal entry to record depreciation on machinery?
Accumulated Depreciation
Which of the following are commonly used depreciation methods?
Activity-based Declining-balance Straight-line
Depreciation
Allocation of the cost of a tangible fixed asset
Amortization
Allocation of the cost of an intangible asset
Depletion
Allocation of the cost of natural resources
Notes payable is classified as a liability that has which of the following effects?
Creates interest expense on the income statement
What are the two classifications for liabilities?
Current Long-term
On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?
Debit to Cash $100,000 Credit to Note Payable $100,000
True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.
False
True or false: Depreciation is a valuation method for property and equipment.
False
Which of the following are possible benefits of leasing an asset rather than purchasing an asset?
Improvement in cash flows Protection against declining asset value Lower periodic payments on the asset
Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?
Legal fees to secure title Commissions Costs to remove an old building
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
Probable Remote Reasonably possible
A contingent liability is recorded if which conditions are met?
The amount of the loss can be reasonably estimated. It is probable that a future loss will occur.
Which of the following are typically shown in an amortization schedule related to an installment notes payable? (Select all that apply.)
The carrying value of the note at the beginning of the period The cash paid each payment period The carrying value of the note at the end of the period
Which of the following are typically shown in an amortization schedule related to an installment notes payable?
The cash paid each payment period The carrying value of the note at the beginning of the period The carrying value of the note at the end of the period
Common current liabilities include:
The current portion of long-term debt Sales tax payable Deferred revenues
Which of the following is an important criteria used to determine the reporting of a contingent liability?
The likelihood of future payment or loss
Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?
Title insurance Costs to remove an old building Legal fees to secure title Grading the land
Which of the following does not differ among the different depreciation methods?
Total depreciation recognized over the asset's service life.
Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:
a discount
For accounting purposes, depreciation is
an allocation of a cost of an asset.
An interest rate, unless otherwise specified, is typically a(n) ---- rate.
annual
Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)
annual, 12 month rate.
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides .
benefits
The original cost of the asset less the accumulated depreciation is the ---- of the asset.
book value
The formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:
debt
financing refers to borrowing money from creditors.
debt
Financing with --- requires borrowing, whereas financing with 0--- requires issuing shares of stock.
debt, equity
A change in accounting estimate requires a company to account for the change
in the current and future years
Loans requiring periodic payments of interest and principle are referred to as --- notes.
installment
The distinction between land and land improvements is that:
land has an indefinite life
Improved cash flows is a common advantage of acquiring equipment through ---
leasing
A loss that is judged to be probable and for which the amount is reasonably estimable should be
recorded
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the --- life of the asset.
service
Straight-line and declining balance methods allocate the cost of a long-term asset based on --- time , Correct Unavailable, while an activity-based method allocates the cost of an asset based on its ---
time, use
A(n) --- payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
accounts
At the beginning of a lease period, the lessee records
a lease asset and lease payable for the present value of the lease payments.
In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:
equity
Obtaining a note payable for cash results in a(n) ______.
increase in assets and an increase in liabilities
The allocation of the cost of a tangible fixed asset is referred to as ,------ whereas the allocation of the cost of an intangible asset is referred to as . -----
depreciation, amortization
Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a(n) .----
warranty
Where is the account accumulated depreciation on equipment found on the financial statements?
As a contra account to equipment on the balance sheet
What are the two criteria used to determine whether a contingent liability is reported in the financial statements?
The likelihood of payment The ability to estimate the amount of payment
A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)
accounts payable
The term ------ means to record an expenditure as an asset.
capitalize
At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?
($100,000 - 20,000)/10 years = $8,000 per year
At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:
$10,000 - $(2,000 - (10,000 x .06) = $8,600
On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?
$100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true?
Clem will depreciate the machine for $150,000 over its service life.
Which of the following items should be capitalized as land improvements?
Cost of parking lots Cost of sidewalks Cost of fences
The journal entry to recognize the signing of an installment notes payable includes:
Debit Cash Credit Notes Payable
The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:
Default risk
Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?
Interest expense based on the beginning period carrying value and the effective rate of the loan The decrease in the carrying value of the note The cash paid each payment period The carrying value of the note at the end of the period
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
The formula for straight-line depreciation is
(cost - residual value)/service life.
During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?
Reason: $50,000 - (5,120 - 4,000 interest) $48,880.
What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life?
Total assets are lower. Net income is lower.
Depreciation is a process of cost -----, and not a process of valuation.
allocation
Straight-line
commonly used for financial statement purposes
MACRS
commonly used for tax reporting
The feature that distinguishes loss --- from other liabilities is the uncertain outcome.
contingencies
A transaction or event in which the outcome is uncertain is referred to as a(n)
contingency
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ---- liabilities.
contingent
The accumulated depreciation account is classified as a(n)
contra asset
A probable future sacrifice of economic benefits arising from present obligations of an entity to transfer assets or provide services as a result of past transactions or events is a(n)
liability
The flipside of a contingent gain is a contingent
loss
