Brandman - Accounting for Long-Term Investing and Financing Decisions

Harold's Company purchased machinery worth $100,000. Expected life of the asset is 10 years and salvage value is $10,000. Using the double-declining balance method, calculate the accumulated depreciation at the end of the third year.

$48,800

The Heyman Company issues a $500,000 serial bond on January 1, Year One. At the end of each year, the bond pays $100,000 of the face value plus interest at a 4% rate on the unpaid balance for the period. The bond was sold at an effective yield rate of 5% per year. The present value of $1 at a 5% annual rate in one year is $0.95238, in two years is $0.90703, in three years is $0.86384, in four years is $0.82270, and in five years is $0.78353. The present value of an ordinary annuity at a 5% annual rate for five years is $4.32948. What amount did Heyman Company receive when the bond was issued (rounded)? 1. $483,865 2. $486,590 3. $490,130 4. $492,545

$486,590

On January 1, Year One, the Leisinger Company offers a 10-year zero-coupon bond with a face value of $80,000 to an investor. Leisinger hopes to issue this bond at an annual interest rate of 4%. The investor wants 7%, and they finally agree on 5%. The present value of $1 at 4% annual interest for 10 years is $0.6756 and at 5% for 10 years is $0.6139. The present value of an ordinary annuity of $1 for 10 years at 4% annual interest is $8.1109 and at 5% is $7.7217. What amount does Leisinger Company receive (rounded)? 1. $49,112 2. $54,048 3. $61,774 4. $64,887

$49,112

Hanung Corporation earns $600,000 at the end of a year. Eight percent preferred shares of $100,000 were issued during the year. The number of outstanding shares at the end of the year was 100,000. Calculate its EPS.

$5.92

Sigmoton Enterprises issued 10-year bonds in the amount of $120,000 on November 1, 2016. The bonds pay an annual rate of interest of 5%. Interest payments are made on June 1 and December 1 of each year. Which of the following is the amount of interest expense Sigmoton should record on December 1, 2016 when interest is paid?

$500

Atlanta Enterprises issued 10-year bonds in the amount of $500,000 on December 1, 2016. The bonds pay an annual rate of interest of 10%. Interest payments are made on December 1 of each year. What is the amount of cash Atlanta would receive on December 1, 2016 upon the issuance of the bonds?

$500,000

Silveroaks Corporation has 500,000 shares outstanding of $1 per share par value common stock that was issued for $5 per share, but currently trades on a stock market for $10 per share. The board of directors opts to issue a 10% stock dividend. What will be the reported reduction in retained earnings as a result of this action?

$500,000

If equipment worth $75,000 is purchased for five years and the resulting accumulated depreciation after three years amounts to $20,000, what is the recording amount of the equipment in the fourth year?

$55,000

The Hatcher Company buys a building on January 1, Year One for $9 million. It has no anticipated residual value and should help generate revenues for 30 years. On December 31, Year Three, the company spends another $500,000 to cover the entire structure in a new type of plastic that will extend its useful life for an additional 16 years. On December 31, Year Four, what will Hatcher report as accumulated depreciation for this building?

$600,000

Trubline Company was authorized to issue one million shares of $2 par value common stock. Currently, 700,000 shares remain unissued. What is the value of issued capital?

$600,000

Yarlon issues a serial bond for $200,000. At the end of each year, the bond pays $50,000 of the face value plus an interest of 5% on the unpaid balance for the period. Calculate the interest charged for the second year.

$7,500

Sigmastart Corporation earns $800,000 at the end of a year. Eight percent preferred shares of $200,000 were issued during the year. The number of outstanding shares at the end of the year was 100,000. Calculate its EPS.

$7.84 The preferred dividends amount is $200,000 • 0.08 = $16,000. EPS = (Net earnings - Preferred dividends) ÷ Number of outstanding shares. Thus, ($800,000 - $16,000) ÷ 100,000 = $7.84.

Multi-Co. Company owns a small retail clothing store in a shopping center in Houston, Maine. This store has been reporting a loss in recent years because it is in a relatively remote location. The store cost $1.2 million but its book value has been reduced to $500,000 as the result of depreciation over the years. Cash flows remain positive at $40,000 per year. The store has several possible uses and it could be sold for $530,000. Or the company could continue to hold it for 12 additional years until its utility is consumed. What loss, if any, should the company report at the current time because of the impairment to the value of this asset?

-0-

Eminent Corporation has a beginning retained earnings balance of $250,000, net income for the year is $50,000, interest expense is $25,000, and ending retained earnings balance of the company stood at $300,000. What is the dividend declared for the year?

$0

A $10,000 zero-coupon bond is issued for five years at the rate of 8%. What is the maturity value of the bond if the interest rates fall to 7% after three years?

$10,000 - Zero-coupon bonds have a maturity value equal to its face value.

The Eagleton Corporation has 200,000 shares outstanding of $1 per share par value common stock that was issued for $5 per share, but currently trades on a stock market for $10 per share. The board of directors opts to issue a 5% stock dividend. What will be the reported reduction in retained earnings as a result of this action?

$100,000

Aeralia Incorporated issues 20-year bond with a face value of $200,000 on January 1, Year One. According to the bond contract, cash interest at a stated rate of 3% will be paid each year beginning December 31, Year One. The Explore Investment Company wants to buy this bond at an annual interest rate of 8%. The present value of $1 in 20 years at a rate of 8% is $0.21455. The present value of an ordinary annuity of $1 per year for 20 years at a rate of 8% per year is $9.81815. How much does Explore Investment Company pay Aeralia for this bond (rounded)?

$101,819

Protech Corporation purchased a machinery costing $90,000. The estimated useful life is five years, and the salvage value of the asset is expected to be $15,000. Calculate its annual depreciation expense under the straight-line method.

$15,000

Bovous Company purchased land worth $500,000 and incurred other costs like payments made for legal title of $60,000 and clearing land charges of $40,000.There existed a building on the land. The company paid $750,000 in total. What is the cost of building?

$150,000

Laettner Company buys an intangible asset on January 1, Year One, for $200,000 to be paid in exactly five years with no additional cash being paid in the interim. A reasonable interest rate is 10% per year. The present value of $1 at a 10% rate to be paid at the end of a five-year period is $0.62092. What does Laettner Company report on its December 31, Year Two balance sheet for this liability? 1. $124,184.00 2. $136,602.40 3. $150,262.64 4. $200,000.00

$150,262.64

Deltin Corporation borrowed $200,000 on April 1, 2014. Interest payments are made annually on April 1, and the annual interest rate is 8%. What amount of interest is due on April 1, 2015?

$16,000

Myers Company leases a boat on January 1, Year One. The lease does qualify as a capital lease. The lease covers four years, with payments of $20,000 annually, beginning on January 1, Year One. The expected life of the boat is six years. Myers annual incremental borrowing rate is 5%. The present value of an ordinary annuity for four years at a 5% rate is $3.54595. The present value of an annuity due for four years at a 5% rate is $3.72325. What amount of depreciation (rounded) should Myers recognize on the boat for Year One if Myers chooses to use the straight-line method? 1. $12,411 2. $13,616 3. $17,730 4. $18,616

$18,616

Omarzen Corporation earns $800,000 at the end of the year. Eight percent preferred shares of $200,000 were issued during the year. The EPS of the company is $6.00 and its P/E ratio is $3.00. What is the market value of its stock?

$18.00

Hanung Corporation purchased land worth $700,000 and incurred other costs like payments made for legal title of $60,000.There existed a building on the land. The company paid $950,000 in total. What is the cost of building?

$190,000

Gammex Company was authorized to issue one million shares of $1 par value common stock. Currently, 600,000 shares remain unissued and 400,000 issued. Out of the 400,000 shares 200,000 shares are outstanding, what is the number of treasury stock held by the company?

200,000 shares

John Doe successfully creates an invention and, on January 1, Year One, receives a patent that gives him the exclusive rights to that invention for 20 years. One year later, John Doe sells all of his rights to the patent to Nahquan Corporation for $3 million. Nahquan pays another $400,000 to a legal firm to help ensure that the right is properly transferred. Nahquan hopes to use the patent for five years and then sell it for $200,000. On December 31, Year Two, another company offers to pay Nahquan $4 million for this intangible asset but that amount is rejected as being too low. On its balance sheet at that time, what balance is reported by Nahquan for the patent?

$2,760,000

A $20,000 zero-coupon bond is issued for eight years at the rate of 8%. What is the maturity value of the bond if the interest rates fall to 7% after three years?

$20,000

Eminent Corporation issues a serial bond for $500,000. At the end of each year, the bond pays $100,000 of the face value plus an interest of 5% on the unpaid balance for the period. Calculate the interest charged for the second year.

$20,000

Moto Corporated purchased copyrights from Bovous Company for $250,000. It promised to pay Bovous after three years and for this arrangement Bovous charges simple interest of 8%. What is the interest expense incurred every year and the total amount paid to Bovous after three years?

$20,000; $310,000

Vega Corporation issued 10-year bonds in the amount of $200,000 on December 1, 2016. The bonds pay an annual rate of interest of 10%. Interest payments are made on December 1 of each year. What is the amount of cash Vega would owe its bondholders after December 1, 2026?

$200,000

The Venture Company issues a 20-year bond with a face value of $500,000 on January 1, Year One. According to the bond contract, cash interest at a stated rate of 2% will be paid each year beginning on December 31, Year One. The Manhattan Investment Company wants to buy this bond but demands an effective annual interest rate of 9%. After some discussion, both parties agree that the bond will be sold to earn an annual interest rate of 8%. The present value of $1 in 20 years at a rate of 8% is $0.21455. The present value of an ordinary annuity of $1 per year for 20 years at a rate of 8% per year is $9.81815. The present value of an annuity due of $1 per year for 20 years at a rate of 8% per year is $10.60360. How much does Manhattan Investment Company pay the Venture Company for this bond (rounded)? 1. $205,457 2. $209,145 3. $213,311 4. $217,445

$205,457

Vega Corporation has a beginning retained earnings balance of $200,000, net income for the year is $50,000, interest expense is $25,000, and dividends declared is $25,000. What is the ending retained earnings balance of the company?

$225,000

James Thorpe invests $100,000 to start a new business. He immediately borrows another $400,000 at a 6% annual interest rate. The business earns a profit on its assets of 10% per year. At the end of one year, Thorpe liquidates all assets at book value and closes the business. What rate of return did he earn on this investment during this year of operations? Ignore income taxes. 1. 10% 2. 14% 3. 15% 4. 26%

26%

On January 1, Year One, a company issues term bonds with a face value of $20 million and an annual stated cash interest rate of 6%. Assume the bonds are issued for $18 million to earn an effective yield rate of 8% per year. If the first interest payment is made on December 31, Year One, what is the liability balance reported on the balance sheet at the end of that day?

$240,000

Voltext Company purchased machinery worth $500,000, and the expected life of the asset is five years and the salvage value is $20,000. Using double-declining balance method, calculate the depreciation expense in year five.

$25,920

The Birmingham Corporation buys a patent from an inventor on January 1, Year One, for $350,000. The company expects the patent to help generate revenues for ten years. It has no residual value, and the straight-line method is always used. On December 31, Year Two, the patent has a fair value of $500,000. The patent is reported on the company's balance sheet on that date at _________________.

$280,000

James Thorpe invests $100,000 to start a new business. He immediately borrows another $400,000 at a 6% annual interest rate. The business, The Mullins Company, issues a $500,000 serial bond on January 1, Year One. At the end of each year, the bond pays $100,000 of the face value plus interest at a 3% rate on the unpaid balance for the period. The bond was sold for $473,200 to yield an effective rate of 5% per year. What will Mullins report for this bond on its December 31, Year Two, balance sheet? 1. $288,953 2. $292,875 3. $295,445 4. $297,905

$288,953

Bover Company purchased machinery worth $600,000. Expected life of the asset is 10 years and salvage value is $50,000. Using the double-declining balance method, calculate the accumulated depreciation at the end of the third year.

$292,800

Assume Talium Metals Incorporated purchased equipment worth $70,000. The life of the equipment is five years and the resulting accumulated depreciation after two years is $15,000. If the equipment is sold for $58,000 in the beginning of the third year, calculate the gain or loss on sale.

$3,000

Epsitron borrowed $100,000 on May 1, 2011. Interest payments are made semiannually on May 1 and November 1, and the annual interest rate is 6%. The company will debit Interest Expense on May 1, 2012 in the amount of::

$3,000

Harold's Corporation borrowed $100,000 on August 1, 2014. Interest payments are made annually on January 1, and the annual interest rate is 9%. Which of the following is the amount of interest expense Harold will accrue on December 31, 2014?

$3,750

Fayole's Corporation has a beginning retained earnings balance of $250,000, net income for the year is $50,000, interest expense is $25,000, and ending retained earnings balance of the company stood at $270,000. What is the dividend declared for the year?

$30,000

Fayole Services has two assets. The first is land with a cost of $750,000 and a fair value of $1 million. The second is a building with a net book value of $1.2 million and a fair value of $1.7 million. Larsez Corporation pays $3.5 million to acquire Fayole Services. Noble Consulting Incorporated, an equity valuation firm, has estimated the fair value of Fayole as $3.2 million. What will be the amount of goodwill reported in Larsez's financial statements?

$300,000

Lance Company has three assets. The first is land with a cost of $700,000 and a fair value of $1 million. The second is a building with a net book value of $2 million but a fair value of $3 million. Finally, the company has a trademark that has no reported value (it has been fully depreciated) but is worth $400,000. The Empire Company offers $4.4 million for all the ownership shares of Lance. Lance owners counter with a price of $5.1 million. After nine days of negotiations, Empire pays $4.7 million to acquire Lance Company. When the financial statements of the two companies are consolidated, what amount will be reported as goodwill? 1. -0- 2. $300,000 3. $700,000 4. $2 million

$300,000

Osgood Company buys an intangible asset on January 1, Year One, for $300,000. The company will make this payment at the end of Year Three. In the interim, interest payments of $27,000 will be made each year based on a reasonable rate. On January 1, Year One, what amount is reported for the intangible and the liability? 1. $300,000 2. The present value of $300,000 3. The present value of $327,000 4. The present value of $381,000

$300,000 - Present value is only used when a reasonable interest is not explicitly stated and paid.

Giant Company buys all the outstanding stock of Small Company on January 1, Year One. Subsequently, on the consolidated balance sheet as of December 31, Year Five, Giant and Consolidated Subsidiary reported a goodwill balance of $300,000. Which of the following is most likely to be true? 1. $300,000 is the value of Small on this date in excess of the value of its assets minus its liabilities. 2. $300,000 is the excess amount paid by Giant to acquire Small unless the value of that figure has become impaired since the purchase. 3. $300,000 is the excess amount paid by Giant to acquire Small less any amortization since January 1, Year One. 4. $300,000 is the fair value of the goodwill on December 31, Year Five.

$300,000 is the excess amount paid by Giant to acquire Small unless the value of that figure has become impaired since the purchase.

Guthrie Company buys an intangible asset on January 1, Year One, for a single $500,000 payment in exactly five years with no additional cash being paid in the interim. A reasonable interest rate is 10% per year. The present value of $1 at a 10% rate to be paid at the end of a five-year period is $0.62092. What interest is recognized in each of the first two years? 1. -0- in Year One and -0- in Year Two 2. $31,046 in Year One and $31,046 in Year Two 3. $31,046 in Year One and $34,150.60 in Year Two 4. $50,000 in Year One and $50,000 in Year Two

$31,046 in Year One and $34,150.60 in Year Two.

On June 30, Year One, a company issues 10-year term bonds with a total face value of $600,000. Only interest at a 4% annual rate is paid each June 30 and December 31 beginning at the end of Year One. These bonds were issued for $375,680 to earn a negotiated rate of 10% per year over the 10-year term. What does the company report on its December 31, Year One, balance sheet for this liability? 1. $380,775 2. $381,225 3. $382,464 4. $383,646

$382,464

Gloria's Corporation issues four percent $100 preferred stock at a premium of $5. What is the amount of dividends paid to preferred stockholders?

$4 per share

The Tiny Company creates a logo for a product line and gets a copyright on it. The entire cost is $40,000, and the logo is expected to have a useful life of 10 years. One year later, Gigantic Company buys all the ownership stock of Tiny Company. At that point in time, the logo has gained national prominence and is thought to be worth $400,000. If Gigantic prepares a consolidated balance sheet immediately after acquiring Tiny, what is reported for this logo? $36,000 $400,000 $436,000 $440,000

$400,000

Friday Corporation issues a two-year bond on January 1, Year One, with a $300,000 face value and a stated annual cash rate of 8%. The bond was sold to earn an effective annual rate of 12%. Interest payments are made quarterly beginning on April 1, Year One. The present value of $1 at a 3% rate in eight periods is $0.78941. The present value of $1 at a 12% rate in two periods is $0.79719. The present value of an ordinary annuity of $1 at a 3% rate for eight periods is $7.01969. The present value of an ordinary annuity of $1 at a 12% rate for two periods is $1.69005. What amount will Friday receive for this bond? 1. $276,055 2. $278,941 3. $284,785 4. $285,179

278,941

A company signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $10,000 per year with the first payment made immediately. The company has an incremental borrowing rate of 6%. This lease qualifies as a capital lease. The present value of an ordinary annuity of $1 for eight periods at an annual interest rate of 6% is $6.20979. The present value of an annuity due of $1 for eight periods at an annual interest rate of 6% is $6.58238. If financial statements are produced after this lease has been signed and settled, which of the following balances will be reported (rounded)? 1. Leased asset of $62,098 and lease liability of $52,098 2. Leased asset of $52,098 and lease liability of $62,098 3. Leased asset of $65,824 and lease liability of $55,824 4. Leased asset of $55,824 and lease liability of $65,824

3. Leased asset of $65,824 and lease liability of $55,824

A lessee signs a three-year lease for $79,000 per year to gain use of a machine. The machine has an expected useful life of five years. At the end of this three-year period, the machine is expected to be worth $60,000. The lessee has the right to buy it at that time for $50,000. The required payments are not the equivalent of the acquisition value of this asset. Which of the following is true for the lessee? 1. The lease is a capital lease. 2. The lease is an operating lease. 3. The lease might be a capital lease but not enough information is available. 4. The lease will be an operating lease if one of the four criteria is met.

3. The lease might be a capital lease but not enough information is available.

A company leases a truck for its operations. The accountant is attempting to determine if this lease is a capital lease or an operating lease. Which of the following statements is true? 1. The reported liability balance is likely to be higher in an operating lease. 2. A prepaid rental account is likely to be reported in a capital lease. 3. The leased asset will appear in the financial statements if this is an operating lease. 4. Both depreciation expense and interest expense are recognized for a capital lease.

4. Both depreciation expense and interest expense are recognized for a capital lease.

Fayole Incorporated was authorized to issue one million shares of $2 par value common stock. Currently, 100,000 shares remain unissued. What is the number of treasury shares if 850,000 shares are outstanding?

50,000 shares

Eminent Company was authorized to issue one million shares of $1 par value common stock. Currently, 400,000 shares remain unissued. In addition, the company is holding 25,000 treasury shares. What is the number of shares outstanding?

575,000 shares

Aeralia Incorporated was authorized to issue one million shares of $1 par value common stock. Currently, no shares remain unissued. In addition, the company is holding 25,000 treasury shares. What is the number of shares outstanding?

975,000 shares

Which of the following is a serial bond?

A bond that pays a fixed amount of principal and interest on the unpaid balance.

A business purchases a property for $60,000 and sells it for $120,000 after two years. Payments will be collected for three years after the sale. For tax purposes, assume that the transaction qualified for use of the installment sales method and the assumed tax rate is 20%. What type of tax treatment is provided for this transaction?

A deferred tax liability of $12,000 is recorded in the year of sale.

What is a stock dividend?

A stock dividend is a dividend distributed to shareholders by issuing additional shares of stock rather than cash; it increases the number of shares outstanding but each owner's interest in the company stays the same.

What is true of a zero coupon bond?

A zero-coupon bond is a debt instrument that includes no interest payments; these bonds are issued at a discount with the difference between the cash received at the beginning and the cash paid on the maturity date serving as interest for that period of time.

The Weddington Company reports a number of assets on its balance sheet. Which of the following should not be included as an intangible asset? Copyright Account receivable Patent Franchise

Accounts Receivable

An asset costing $40,000 is used by Tinplate Incorporated for three years and the accumulated depreciation is $10,000 at the end of the third year. The salvage value of the asset is $3,000 and the market value of the asset is $35,000. If the company wants to replace the existing asset with a new one, it would cost them $45,000. The accounts manager reported the value of the asset to be $30,000 in the financial statement. What justifies the accounts manager's action?

All assets should be reported in the balance sheet at an amount which is equal to the difference of historical cost and annual depreciation cost.

An asset costing $50,000 is used by Tilco Incorporated for three years and the accumulated depreciation is $15,000 at the end of the third year. The salvage value of the asset is $3,000 and the market value of the asset is $35,000. If the company wants to replace the existing asset with a new one, it would cost them $55,000. The accounts manager reported the value of the asset to be $35,000 in the financial statement. Which argument justifies the accounts manager's action?

All assets should be reported in the balance sheet at the market value.

An asset costing $50,000 is used by Silco Semiconductors Incorporated for three years and the accumulated depreciation is $15,000 at the end of the third year. The salvage value of the asset is $3,000 and the market value of the asset is $35,000. If the company wants to replace the existing asset with a new one, it would cost them $55,000. The accounts manager reported the value of the asset to be $55,000 in the financial statement. Which argument justifies the accounts manager's action?

All assets should be reported in the balance sheet at the replacement value.

Select an item that should be accounted as a research cost.

An automobile company incurring expenses to develop a patent

Weisz Company buys an intangible asset on January 1, Year One, for $300,000 to be paid in exactly three years. No additional amounts are mentioned in the contract although a reasonable interest rate is 8% per year. The present value of $1 at an 8% rate to be paid at the end of a three-year period is $0.79383. What does the company report on the date of acquisition? 1. Asset of $238,149 and liability of $238,149 2. Asset of $300,000 and liability of $238,149 3. Asset of $238,149 and liability of $300,000 4. Asset of $300,000 and liability of $300,000

Asset of $238,149 and liability of $238,149

At the beginning of Year Three, the Kelvin Company owned equipment that appeared on its balance sheet with a cost of $7 million and accumulated depreciation of $2 million. The equipment was purchased two years earlier and assigned a useful life of six years. The estimated residual value was $1 million. At the beginning of Year Three, Kelvin made several modifications to the equipment that increased its remaining useful life from four years to five years. No other changes occurred as a result of these modifications. Their cost was $50,000. The balance in the accumulated depreciation account on December 31, Year Three is _________.

Balance in Accumulated Depreciation = $2,760,000

Identify the most important risk associated with debt financing.

Bankruptcy

What are bonds?

Bonds are a type of debt instrument where interest is paid at regular time intervals with the entire face value due at the end of the contract period.

What is true of a post retirement benefit?

Both the expense and related liability are recorded when the person is actually working for the company.

Which is a prevalent method of deferring tax payments?

By moving reported gains and revenue into the future

Dazzle's Corporation issues 8% bonds worth $100,000. However, the company expects the market interest rate to fall by 2% after three years. What can be inferred about the type of bonds issued?

Callable bonds are issued so that the funds could be raised at a lower rate.

Harold's Corporation issues 10% bonds worth $300,000. However, the company expects the market interest rate to fall by 2% after three years. What type of bonds should the company issue?

Callable bonds should be issued so that the funds could be raised at a lower rate.

What forms the basic ownership of a corporation?

Common stock

What is the motive for a corporation to buy back its own shares as treasury stock?

Corporations repurchase shares of stock to reduce the risk of a hostile takeover.

A patent worth $500,000 is reported by Frontline Corporation. The company estimates the life of the patent to be 10 years. How is it recorded at the end of first year?

Debit $50,000 to Amortization Expense and credit $50,000 to Patent

Harold's Corporation issued a $200,000 note payable for cash to raise additional capital for expansion. What is the journal entry for the transaction?

Debit Cash and credit Note Payable for $200,000

Heights Corporation issued a $500,000 note payable for cash to raise additional capital for expansion. What is the journal entry for the transaction?

Debit Cash and credit Note Payable for $500,000

Alba Entertainment Incorporated bought the copyright of a music album for $250,000. The company wishes to maintain the copyright for five years. What is the recording journal entry for the transaction?

Debit Copyright for $250,000 and credit Cash for $250,000

The depreciation expense of machinery for Alto Corporation is $30,000. What is the journal entry to record the transaction?

Debit Depreciation Expense account and credit Accumulated Depreciation account for $30,000

Harold's company signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $10,000 per year with the first payment made at the beginning of the year. The company has an incremental borrowing rate of 10% and the lease is considered as a capital lease. The present value of an ordinary annuity of $1 for eight periods at an annual interest rate of 8 percent is $5.74664. The present value of an annuity due of $1 for eight periods at an annual interest rate of 8% is $6.20637. Record the journal entry of the initial payment made.

Debit Lease Liability for $10,000 and credit Cash for $10,000

Deltin Corporation signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $30,000 per year with the first payment made at the beginning of the year. The company has an incremental borrowing rate of 10% and the lease is considered as a capital lease. The present value of an ordinary annuity of $1 for eight periods at an annual interest rate of 8% is $5.74664. The present value of an annuity due of $1 for eight periods at an annual interest rate of 8 percent is $6.20637. Which account is debited to record the initial payment?

Debit Lease Liability for $30,000

Carlton Corporation signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $50,000 per year with the first payment made at the beginning of the year. The company has an incremental borrowing rate of 10% and the lease is considered as a capital lease. The present value of an ordinary annuity of $1 for eight periods at an annual interest rate of 8% is $5.74664. The present value of an annuity due of $1 for eight periods at an annual interest rate of 8% is $6.20637. Which account is debited to record the initial payment?

Debit Lease Liability for $50,000

Unilever Corporation signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $20,000 per year with the first payment made at the beginning of the year. The company has an incremental borrowing rate of 10% and the lease is considered as a capital lease. The present value of an annuity due of $1 for eight periods at an annual interest rate of 10% is $5.86842. Using present value, select which account of the capital lease is debited.

Debit Leased Machine for $117,368.40

Aeralia Company signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $20,000 per year with the first payment made at the beginning of the year. The company has an incremental borrowing rate of 10 percent and the lease is considered as a capital lease. The present value of an annuity due of $1 for eight periods at an annual interest rate of 10 percent is $5.86842. Using present value, select the correct account of the capital lease.

Debit Leased Machine for $117,368.40 and credit Lease Liability for $117,368.40

Anchor Company leased an cruise for seven years and the expected life of the cruise is 10 years. The company may use it only for five years and the cruise may be useable to 15 years if it is in good condition. Based on the information, which of the following statements is true?

Depreciation should be charged for seven years.

What is the procedure of determining the post retirement liability?

Determining the post retirement future payments and calculating the present value of such payments

Identify an advantage preferred stockholders have over common stockholders.

Dividends are first paid to preferred stockholders before made to common stockholders.

What advantage do preferred stockholders have over common stockholders?

Dividends are first paid to preferred stockholders before made to common stockholders.

Which of the following satisfies an accelerated depreciation method?

Double declining method

Using the double-declining depreciation method than the straight-line method, a company can save more money. Which of the following justifies this statement?

Double declining results in a higher depreciation expense in the initial years resulting in lower earnings, lower taxes, and higher cash flows and an earlier cash flow increases savings due to time value of money.

What is the formula for calculating EPS?

EPS = (Net Earnings-Preferred Dividends) ÷ Number of Outstanding Shares.

Which statement indicates the method to calculate the EPS?

EPS is calculated by dividing net earnings of an entity by the outstanding shares.

Which of the following is considered in capitalizing the cost of land?

Fees paid to obtain legal title

What is the rule applied as per U.S. GAAP for recording the acquisition of intangible assets whose payments are made on a future date?

Financial accounting rules require interest on delayed payments to be computed and reported based on a reasonable rate, even if not specifically mentioned in the debt agreement.

On January 1, Year One, a company spends $39,000 to buy a new piece of machinery with an expected residual value of $3,000 and a useful life of 10 years. The straight-line method of depreciation is applied but not the half-year convention. On October 1, Year Three, the company wants to exchange this asset (which is now worth $31,000) for a new machine worth $40,000. To finalize the exchange, the company also pays cash of $9,000. What is the gain or loss on the trade?

Gain of $1,900.

While exchanging an old asset for a new one, how are the books of recording depreciation affected?

In a trade of one asset for another, the net book value of the old asset is removed from the records while the new asset is recorded at the fair value surrendered.

What is true of intangible assets?

Intangible assets are assets that lack physical substance and which are expected to help generate revenues for more than one year.

Johnson Company issues an eight-year $50,000 zero-coupon bond on January 1, Year One. After serious negotiations between the company and the investor, this bond is sold for $31,371 to yield an effective annual rate of 6%. What is reported in Johnson's financial statements at the end of Year Two if the effective rate method is applied? (All numbers are rounded.) 1. Interest expense of $1,882 and a bond payable of $33,253. 2. Interest expense of $1,882 and a bond payable of $35,135. 3. Interest expense of $1,995 and a bond payable of $35,248. 4. Interest expense of $2,015 and a bond payable of $35,285.

Interest expense of $1,995 and a bond payable of $35,248.

The O'Neil Company issues a six-year $40,000 zero-coupon bond on January 1, Year One. At that time, most companies are able to borrow money at an annual rate of 10%. O'Neil is in such good financial health that the bond is sold for $25,207 to yield a negotiated rate of 8% per year. What is reported in O'Neil's financial statements at the end of Year One if the effective rate method is applied? (All numbers are rounded.) 1. Interest expense of $2,017 and a bond payable of $27,224. 2. Interest expense of $2,112 and a bond payable of $27,319. 3. Interest expense of $2,215 and a bond payable of $27,422. 4. Interest expense of $2,521 and a bond payable of $27,728.

Interest expense of $2,017 and a bond payable of $27,224.

The Reynolda Company issues an eight-year $80,000 zero-coupon bond on January 1, Year One. After serious negotiations, this bond is sold for $54,144 to yield an effective annual rate of 5%. What is reported in Reynolda's financial statements at the end of Year Two if the straight-line method is applied to this discount? (All numbers are rounded.) 1. Interest expense of $3,232 and a bond payable of $60,608. 2. Interest expense of $3,268 and a bond payable of $60,680. 3. Interest expense of $3,304 and a bond payable of $60,752. 4. Interest expense of $3,304 and a bond payable of $60,752.

Interest expense of $3,232 and a bond payable of $60,608.

On January 1, Year One, the Leaver Company signs a nine-year note payable with a face value of $800,000 and a stated annual cash interest rate of 7%. Interest will be paid annually beginning on January 1, Year Two. Which of the following statements is true? 1. Interest expense of $56,000 is recognized on January 1, Year Two. 2. Interest payable of $56,000 is reduced on January 1, Year Two. 3. No interest expense is reported for Year One because no interest was paid in that year. 4. No interest liability is recorded at the end of Year One because payment is not due until Year Two.

Interest payable of $56,000 is reduced on January 1, Year Two.

The Consetti Company acquires a patent for $932,000 to be used in its daily operations. However, the value of this patent rises dramatically so that three years later, it is worth $3.2 million. Which of the following is not a reason that this fair value is ignored when the asset is reported on the Consetti's balance sheet? 1.Investors are not interested in the fair value of the patent or other intangible assets. 2. Fair value can change often so that any one figure is not necessarily relevant for a long period of time. 3. Different fair values might be estimated by different people. 4. Noncurrent assets are acquired to help generate revenues and not for resale purposes.

Investors are not interested in the fair value of the patent or other intangible assets.

Which of the following is true of the double declining method of depreciation?

It assigns larger expenses to the initial years of an asset's service and smaller expenses to the later years.

What are the factors to be considered in the calculation of a depreciation expense of an asset using the straight-line depreciation method?

It considers the historical cost of an asset, its useful life, the salvage value, and the allocation pattern.

The owners of a company contribute $100,000 to acquire its capital stock. Another $200,000 is borrowed from a bank. In its first year, the company earns a reported net income of $50,000. If the company then pays a cash dividend of $10,000, what is the impact of this distribution on the debt-to-equity ratio? 1. There is no effect on the debt-to-equity ratio. 2. It goes up. It was 1.33 to 1.00 and now is 1.43 to 1.00. 3. It goes down. It was 1.33 to 1.00 and now is 1.25 to 1.00. 4. It goes down. It was 1.43 to 1.00 and now is 1.33 to 1.00.

It goes up. It was 1.33 to 1.00 and now is 1.43 to 1.00.

Tylo Company buys an intangible asset on January 1, Year One, for a single $400,000 payment in exactly four years with no additional cash being paid in the interim. A reasonable interest rate is 10% per year. The present value of $1 at a 10% rate to be paid at the end of a four-year period is $0.68301. How does the annual recognition of interest over those four years impact the recorded amount of the intangible asset? 1. It has no effect. 2. It increases the reported asset by $6,830.10 per year. 3. It increases the reported asset by $27,320.40 per year. 4. It increases the reported asset by $40,000.00 per year.

It has no effect.

Which of the following is an advantage of debt financing?

It helps companies to increase its reported net income by earning more money on borrowed funds than the associated cost of interest.

What can be inferred if Vertise Company repurchases a large amount of stock from public that constitutes 30% of its issued capital of $10 million?

It indicates that management believes the stock is undervalued at its current market price.

What is an operating lease?

It is a rental agreement where the benefits and risks of ownership are not conveyed from the lessor to the lessee.

What is a callable bond?

It is a type of debt instrument that can be repaid before the due date because of falling interest rates.

If an intangible asset has a finite life, how is it reported as per GAAP?

It is amortized.

Frontline Company leased an aircraft for seven years. The expected life of the aircraft is 11 years. Identify the type of leasing.

It is an operating lease.

Identify the reason for EPS being closely monitored for investment purposes.

It is considered to be linked to the market price of a company's capital stock.

On its income statement for the current year, the Acme Corporation reported an expense for research and development of $236 million. What information is conveyed by this balance? 1. It is an amortization expense associated with patents, copyrights, and other intangible assets. 2. It is the amount spent on projects that failed during the year. 3. It is the amount spent on all research and development activities during the year. 4. It is the amount spent on all projects during the year that did not become at least 50% likely to achieve status as an asset.

It is the amount spent on all research and development activities during the year.

What is the date of record with respect to dividends?

It is the date on which stock must be held for a shareholder to be entitled to the receipt of a dividend.

What is meant by the par value of a stock?

It is the minimum amount of money owners must legally leave in the business.

Which of the following is true of goodwill?

It is the price paid by one company to acquire another that is in excess of the fair value of net identifiable assets and liabilities.

Which of the following justifies historical cost?

It is the starting basis for the balance sheet presentation of assets such as inventory, land, and equipment.

Julia owns 1,000 of the 10,000 outstanding shares of Bluo Company. The net assets of the company are $5 million. It distributes a four percent stock dividend. For each one hundred shares that a stockholder possesses, Bluo Company issues an additional four shares. What is the effect on Julia's financial position after this issue?

Julia's financial position remains the same.

Select an item that has an infinite life with respect to depreciation.

Land

Eminent Company purchases a building and the land on which it sits for $500,000. The company plans to allocate 80% of the cost to land and 20% of cost to building. Identify the journal entry to record the transaction.

Land 400,000 Building 100,000 Cash 500,000

What is true of land improvements?

Land improvements are assets attached to land with a finite life.

Tree Company buys all the ownership stock of Leaf Company. Leaf holds one intangible worth $10,000, but it is not separately consolidated by Tree after the purchase. What is the most likely reason that this intangible was not included by the new parent? 1. Leaf owned the intangible rather than Tree. 2. The intangible did not have a finite life and, therefore, could not be viewed as an asset. 3. Leaf must sell the intangible directly to Tree before it can be reported by the parent. 4. Leaf did not have contractual or legal rights to the intangible, and it could not be separated from the company and sold.

Leaf did not have contractual or legal rights to the intangible, and it could not be separated from the company and sold.

What is the formula for calculating P/E Ratio?

Market Price per share ÷ EPS

A bond priced at $980, has a coupon rate of 10%. What can be inferred?

Market interest rate is more than 10%.

Uninder Company's bond is priced at $990 and has a coupon rate of 10%. What can be inferred from the given data?

Market interest rate is more than 10%.

On January 1, Year One, the Capricorn Corporation borrows money on a loan paying 9% interest each year. The money is used to construct a new building, which takes exactly one year to complete. The building has a 20-year expected life with no residual value. In determining net income for Year One, which of the following statements is true?

Neither interest expense or depreciation expense is recognized in Year One.

How are the retained earnings calculated in a year?

Net income - Dividends

Harold's Corporation purchased land which has a fence worth $10,000, sewer systems worth $15,000, trees worth $15,000, and shrubbery worth $16,000. As per GAAP, how should the company report these items?

Only the fence is recognized as assets and depreciated over its life.

Which type of lease is favorable for a lessee?

Operating lease

What is the minimum amount of money that owners must legally leave in the business?

Par value of the stock

The Singler Company has 20,000 shares outstanding of $100 par value preferred stock with a 6% annual dividend rate. The company also has five million shares of $1 par value common stock outstanding. No dividends at all were paid in either Year One or Year Two. Near the end of Year Three, a cash dividend of $400,000 is scheduled to be distributed. If the preferred stock dividend is noncumulative, how is this dividend distributed? 1. Preferred—$60,000, Common—$340,000 2. Preferred—$120,000, Common—$280,000 3. Preferred—$240,000, Common—$160,000 4. Preferred—$360,000, Common—$40,000

Preferred—$120,000, Common—$280,000

The Hansbrough Company has 20,000 shares outstanding of $100 par value preferred stock with a 6% annual dividend rate. This company also has five million shares of $1 par value common stock outstanding. No dividends at all were paid in either Year One or Year Two. Near the end of Year Three, a cash dividend of $400,000 is scheduled to be distributed. If the preferred stock dividend is cumulative, how is this dividend allocated? 1. Preferred—$60,000, Common—$340,000 2. Preferred—$120,000, Common—$180,000 3. Preferred—$240,000, Common—$160,000 4. Preferred—$360,000, Common—$40,000

Preferred—$360,000, Common—$40,000

What method of calculating interest is applied for recording the acquisition of intangible assets whose payments are made on a future date??

Present value method of cash flows is applied.

What is an example of a basket purchase?

Purchasing building along with the land

A company has equipment with a cost of $50,000 and a net book value at present of $15,000. The equipment is actually worth $18,000. It is traded along with cash of $12,000 for a truck that has a value of $30,400. The company's reported gain or loss on this exchange is ___________.

Reported Gain of $3,000.

How are research and development costs reported on the balance sheet as per U.S. GAAP?

Research and development costs are expensed as incurred.

What is retained earnings?

Retained earnings is the income not distributed to stockholders.

Sara owns 1,000 of the 10,000 outstanding shares of Deltin Company. The net assets of the company are $10 million. It distributes a five percent stock dividend. For every one hundred shares that a stockholder possesses, Deltin Company issues an additional five shares. What is the effect on Sara's financial position after this issue?

Sara's financial position remains the same.

Harlop Corporation purchased land which has a parking slot worth $10,000, sidewalk worth $20,000, trees worth $12,000, and shrubbery worth $18,000.As per GAAP, how should the company report shrubbery and trees?

Shrubbery and trees should be capitalized and can be included in the cost of land.

What can be inferred if the retained earnings are reduced at par value of the stock while issuing stock dividends?

Stock dividend issued is 30% of outstanding shares.

Silverlight Corporation's market price is trading at $5,500. It has a par value of $10. The company's earnings are strong and indicate promising future. However, there are no investors willing to invest in this stock as it is highly priced. Which of the solutions can be implemented to attract more investors?

Stock dividends can be issued as it would result in a decrease in market price and induce demand.

Essence Corporation purchases machinery worth $600,000 and estimates its useful life to be 10 years. The expected salvage value is $30,000. At the end of the fifth year, the company officials receive an offer to sell the machinery for $275,000. What is the amount of accumulated depreciation and should the company accept the offer?

The amount of accumulated depreciation is $285,000. The offer should not be accepted as it is less than the net book value

Vertise Company purchased a land worth $500,000. It incurred legal fees of $25,000 to attain the title, clearing the land charges for $15,000, and the salary paid to the architect amounted $15,000. The financial analyst of the company has recorded the cost of the land as $550,000. What can be inferred about the analyst's action?

The analyst has incorrectly reported $550,000 as the cost of land. He should instead report $540,000 which is the sum of the cost of land, land-clearing charges, and legal fees.

What is the inference drawn if there is a gain on sale from an asset?

The company depreciated the asset at a higher rate than the actual depreciation.

The market price of SmallSuns Corp is $20. After the company declared its financial results, the stock price dropped to $17 in three days. The company paid a 20% dividend on the par value of $1 to its shareholders. The ending retained earnings balance dropped drastically after the results. Which of the following justifies the fall in price?

The company incurred a net loss in the current year.

The market price of Zenson's Corp is $20. After the company declared its financial results, the stock price dropped to $16 in four days. The company paid a 10% dividend on the par value of $1 to its shareholders. The ending retained earnings balance dropped drastically after the results. Which of the following justifies the fall in price?

The company incurred a net loss in the current year.

Alphexta Corporation has an increasing trend of retained earnings, growing at a stable rate of 10%. The ending retained earnings for three years are as follows: $250,000, $275,000, and $302,500. However, the net income of the company is stable at $25,000, $24,000, and $27,000 respectively. What can be inferred from the data?

The company is not paying dividends to its shareholders and might be stocking the excess cash for future expansion.

Updelt Company was authorized to issue one million shares of $1 par value common stock. Currently, 600,000 shares remain issued. The company is not performing in comparison with its peers as the sales are below standards and the profit margin is stagnant. However, the earnings per share of the company increased from $3 to $3.5. What could be the reason for this increase?

The company is repurchasing its shares and reducing the outstanding shares in the market.

Barrow Company was authorized to issue 10 million shares of common stock with a $0.50 par value. Initially, two million shares were issued for $2 per share. Later, another three million were issued at $3 per share. Assuming the revenue increases, what is the most likely conclusion drawn out of this data?

The company requires capital to expand its business.

Wingz Company was authorized to issue 10 million shares of common stock with a $1 par value. Initially, three million shares were issued for $2 per share. Later, another three million were issued at $3 per share. Assuming the revenue increases, what is the most likely conclusion drawn out of this data?

The company requires capital to expand its business.

The Johnson Corporation hires 100 employees in Year One. At that time, the organization makes a promise to each of its employees. If they will work for Johnson for twenty years, the company will pay for the college education of all their children. At that time, none of the employees has a child who will start college until after the next six years. Which of the following statements is true? 1. The company should report an expense and a liability at the end of Year One. 2. The company should start reporting an expense and a liability after six years. 3. The company should start reporting an expense in Year One but no liability. 4. The company will never report this promise as an expense and a liability.

The company should report an expense and a liability at the end of Year One.

On its most recent balance sheet, the Randle Company reports a noncurrent liability of $30 million as an accrued postretirement benefit obligation. Which of the following statements is least likely to be true? 1. The amount to be paid will be more than $30 million. 2. The company will have the $30 million in cash payments scheduled out at set times. 3. The $30 million figure is a culmination of a number of difficult estimations.

The company will have the $30 million in cash payments scheduled out at set times.

Essence Company was authorized to issue ten million shares of common stock with a $1 par value. Initially, three million shares were issued for $2 per share or $20 million. Later, another three million were issued at $3 per share. What can be inferred from this data?

The company's capital in excess of par is $6 million.

On December 31, Year One, the Sliyvoid Corporation leases a large machine for five years, its entire expected life. Depreciation is recorded using the straight-line method. Payments are $12,000 per year starting on December 31, Year One and every December 31 thereafter. The incremental borrowing rate is 10% per year. The present value of an annuity due at a 10% rate for five periods is $4.16987. The present value of an ordinary annuity at a 10% rate for five periods is $3.79079. What is the net book value of the leased asset on December 31, Year Two? 1. $30,431 2. $36,392 3. $37,875 4. $40,030

The contract is for the entire life of the asset so it is capital lease. The first payment is made immediately which makes this series of payments an annuity due (virtually every lease is an annuity due). Present value of the future cash flows is $12,000 times $4.16987 or $50,038 (rounded). Annual depreciation is $50,038/5 years or $10,008 (rounded). After one year, on December 31, Year Two, the net book value of the leased asset is $40,030 ($50,038 less $10,008).

If an intangible asset has been acquired by a parent company from its subsidiary, how would it be reported?

The fair value of an intangible asset is recorded by the parent as an asset but only if contractual or other legal rights have been gained or the intangible can be separated and sold.

In a trade of one asset for another, a company reported a net loss. Which statement justifies the transaction?

The fair value of the new asset is more than the net book value of the old asset.

Which of the following is true of serial bonds?

The interest expense reduces every year due to principal repayment.

Which of the following is true of a capital lease?

The legal ownership is conveyed to the lessee at the end of the lease period.

Vertize Corporation earns an EPS of $4.00 at the end of the year. Eight percent preferred shares of $200,000 were issued during the year. It has a P/E ratio of $3.00. If there is an increase of $1 in EPS assuming P/E remaining constant, what can be concluded?

The market price would increase by $3.

Using double declining method, how does selling an asset early in its life result in a gain?

The net book value falls quickly at first because of the high initial expense levels.

Identify the definition of issued capital.

The number of shares of a corporation that have been sold or conveyed to owners

What will the change in retained earnings be if a stock dividend is in excess of 20-25% of the outstanding shares?

The retained earnings are reduced at par value of the stock.

Trends Corporation issued a stock dividend of 50,000 shares on its one million shares of $1 each. The fair value of the stock is $6. The book value of the stock is $5. The retained earnings balance is $2 million. What conclusion can be drawn from the above data?

The retained earnings balance is reduced by $300,000 as the stock dividend issued is less than 25% of the outstanding shares.

Transun Corporation issued a stock dividend of 50,000 shares on its one million shares of $1 each. The fair value of the stock is $8. The retained earnings balance is $2 million. What inference can be drawn from the above data?

The retained earnings balance is reduced by $400,000 as the stock dividend issued is less than 25% of the outstanding shares.

Which is true of an operating lease?

There is no bargain purchase option in the lease contract.

On December 31, Year One, the Brangdon Corporation leases a truck to use in its operations. The truck has a life of 10 years, although the lease is only for six years. Payments are $10,000 per year with the first payment made immediately. No interest payments are made but Brangsdon has an incremental borrowing rate of 9%. The present value of an annuity due at a 9% rate for six periods is $4.88965. The present value of an ordinary annuity at a 9% rate for six periods is $4.48592. If this is an operating lease, what figure is recorded initially as the capitalized cost of the truck? 1. Zero 2. $38,897 3. $44,859 4. $48,897

This lease is identified as an operating lease and, therefore, no amount is reported as the capitalized cost of the truck. A capitalized cost for the leased asset is only recognized in a capital lease.

What are issued shares of a corporation's own stock that have been reacquired?

Treasury stock

A company buys a machine on October 1, Year One, for $500,000 with a $100,000 estimated residual value and an expected life of 10 years. The straight-line method of depreciation and the half-year convention are both used. On December 31, Year Three, company officials examine the machine and decide that it will only be able to generate $406,000 in future cash flows over its remaining life. It has a fair value at that date of $338,000. From an accounting perspective, the asset's value is not impaired, and no loss should be recognized. Is this true or false?

True

Mega Corporation acquires an intangible asset for $800,000 and spent $100,000 for its legal title and fees. The company estimates a useful life of 10 years and a residual value of $50,000. After two years, Frayole Holdings Inc. offers $770,000 to purchase the asset. Should the offer be accepted by the company?

Yes, because the gain is $40,000