Accounting Test 3

Interest expense is recorded in the period in which: The interest is incurred. If Speedy Travel, Inc. borrows $50 million on September 1 for one year at 9% Interest, how much interest expense should it record by December 31 of that same year?

$1.5 million

Which of the following represents a characteristic of a liability

A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events

Which of the following is not a primary source of long-term debt financing?

Accounts payable

If equipment is retired, which of the following accounts would be debited?

Accumulated Depreciation

Which of the following definitions describes a serial bond

Matures in installments.

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?

$0

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 is the estimated warranty liability reported in the balance sheet in 2015?

$25,000.

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

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

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 higher than the market interest rate, the bonds will be issued at:

A premium

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

All the methods result in the same total depreciation.

Depreciation in accounting is the

Allocation of an asset's cost to an expense over time.

Which of the following leases is just like a rental?

An operating lease

Which of the following is not a current liability?

An unused line of credit.

Which of the following is true regarding a company assuming more debt?

Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds.

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds' carrying value will be:

At face amount

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will:

Both decrease

A long-term asset is recorded at the

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

The current ratio is

Current assets divided by current liabilities.

Which of the following is reported as a current liability

Current portion of long-term debt.

Which depreciation method has the highest cost in the first year

DD

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

Debit Cash, $5,000; Credit Notes Payable, $5,000

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

Debit Notes Receivable, $5,000; Credit Cash, $5,000

Which of the following is not an advantage of debt financing?

Debt financing often has no maturity date.

How is depreciation described

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

Which of the following increases an employer's payroll costs?

Employer's FICA contribution.

Which of the following is paid by both the employee and the employer?

FICA

Which of the following intangible assets are not amortized?

Goodwill

If bonds are issued at a discount, interest expense will be

Higher than cash interest paid.

If bonds are issued at a discount, over the life of the bonds, the carrying value will:

Increase

Which of the following expenditures should be recorded as an asset

Interest costs during the construction period of a new building.

Bonds issued at a premium are

Issued above face value.

Which of the following is a reason why some companies lease rather than buy?

Leasing can improve the balance sheet by reducing long-term debt.

Which of the following statements regarding liabilities is true

Liabilities represent probable future sacrifices of benefits.

What expenditures are recorded as assets?

Long term repairs, additions, improvements, winning legal defense, and materials.

Animal World issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Animal World decides to call the bonds. The company estimates that over the next eight years, they will save $16 million of cash interest. The journal entry to retire the bonds will include a:

Loss of $2 million.

Return on assets is equal to:

Net income divided by average total assets. Profit margin times asset turnover.

What expenditures should be recorded as an expense?

Ordinary repairs and maintenance.

Convertible bonds

Provide potential benefits to both the lender and the borrower.

Callable bonds

Provide potential benefits to the issuer

Assume that Airline Accessories' current ratio is greater than 1. Which of the following will decrease its current ratio?

Purchasing inventory on account.

Which of the following is not recorded as an intangible asset on the balance sheet?

R&D

Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is less common?

Secured and serial

In each succeeding payment on an installment note:

The amount that goes to interest expense decreases.

Which of the following is true in comparing the current ratio with the acid-test ratio?

The current ratio will always be at least as large as the acid-test ratio.

Financial leverage is best measured by which of the following ratios?

The debt to equity ratio

Which of the following statements is FALSE regarding the amortization of intangible assets?

The service life of an intangible asset is always equal to its legal life.

Accumulated Depreciation is

contra-asset

If bonds are issued at a discount, over the life of the bonds, interest expense will:

increase

Which of the following is not included in calculating the acid-test ratio?

inventory

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

one; two

A contingent liability that is probable and can be reasonably estimated must be:

recorded