CHAPTER 9, CHAPTER 10, CHAPTER 11

Eagle Company is a calendar-year company. At the start of the current year, it issued a $1,000,000 notes to a bank. Eagle Company must pay the bank $200,000 plus interest each January 1 for the next five years starting at the beginning of next year. The company will report the note payable on its current year's balance sheet as

Current liabilities, $200,000; Long-term Debt, $800,000.

What is a common reason a company acquire treasury stock?

To reissue the shares to officers and employees under bonus and stock compensation plans

A company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $100 before receiving consulting services. Second, clients must pay $900 once the consulting firm finishes providing services to the client. How does The company account for the second transaction?

Debit the Cash account for $900, debit the Unearned revenue account for $100, and credit the Service revenue account for $1,000.

Corporations have several officers who manage the corporation. The officer who has custody of the corporation's funds and maintains the company's cash position is the

treasurer

On January 1, a corporation issues $2,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. What is the carrying value of the bonds at the end of the first year?

$1,936,000 Solution: ($2,000,000 x .96) + [($2,000,000 x .04)/5 x 1] = 1,936,000

A corporation purchased a piece of land for $50,000. The corporation paid attorney's fees of $5,000 and brokers' commissions of $3,000 in connection with the purchase. An old building on the land was torn down at a cost of $1,500, and proceeds from the scrap were $500. The corporation also assumes $6,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land?

$65,000

On January 1, a corporation issued $4,250,000, 17%, 8-year bonds for $4,841,455. Interest is payable annually on January 1. The effective interest rate on the bonds is 14%. Use the effective-interest method to determine the amount of interest expense for the first year.

$677,804 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 14% x $4,841,455 = $677,804

On March 1 of the current year, a company purchases and places into service new equipment. The cost of the equipment is $55,000. The equipment has an estimated 5-year life and $10,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$7,500

Ervay Company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $12,600. The company redeemed the bonds at 101. What is the company's gain or loss on the redemption?

$7,600 gain Solution: ($500,000 + 12,600) - ($500,000 x 1.01) = $7,600

On January 1, a company issued $6,450,000 of 9%, 3-year bonds for $5,985,246. The bonds pay interest annually on January 1. The effective interest rate on the bonds is 12%. Use the effective-interest method to determine the amount of interest expense for the first year.

$718,230 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 12% x $5,985,246 = $718,230

On January 1, a company issued $5,505,000 of 12%, 6-year bonds for $4,879,993. The bonds pay interest annually on January 1. The effective interest rate on the bonds is 15%. Use the effective-interest method to determine the amount of interest expense for the first year.

$731,999

A corporation issues a $750,000, 12%, 15-year mortgage note. The terms provide for annual installment payments of $95,625. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$738,075

A company purchased machinery for $210,000 on January 1, 2021. The company also paid freight charges of $4,000 and installation costs of $6,000. It is estimated that the machinery will have a $35,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2023 if the straight-line method of depreciation is used?

$74,000 Solution: Depreciation per year = ($210,000 + 4,000 + 6,000 - 35,000)/5 years = $37,000 per year Accumulated depreciation after 2 years = $37,000 x 2 = $74,000

A corporation issues a $750,000, 10%, 15-year mortgage note. The terms provide for annual installment payments of $82,626. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$742,374 Solution: Since interest accrues annually, the first year's interest would be $75,000 (i.e., 10% x $750,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $82,626 payment and the interest component ($75,000), resulting in a principal reduction of $7,626. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $7,626 from $750,000 to $742,374.

A corporation issues a $750,000, 13%, 15-year mortgage note. The terms provide for annual installment payments of $102,319. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$745,181

A corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative, 40,000 shares authorized; 18,000 shares issued $180,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,700,000 shares issued, 2,460,000 shares outstanding, $2,700,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $51,500,000 Retained earnings, $23,000,000 Treasury stock (40,000 shares), $1,050,000 The company's total stockholders' equity is

$76,510,000. Solution: Total stockholders' equity = Preferred stock + Common stock + Paid-in capital in excess of par (for preferred stock & common stock) + Retained earnings - Treasury stock Total stockholders' equity = $180,000 + 2,700,000 + 180,000 + 51,500,000 + 23,000,000 - 1,050,000 = $76,510,000

On May 1 of the current year, Moreno Company purchased a patent from another company for $96,000. The estimated useful life of the patent is 8 years, and its remaining legal life is 12 years. How much is Moreno's amortization expense for the current year?

$8,000 Solution: Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 8 years. Amortization expense for the current year = $96,000/8 years x 8/12 = $8,000.

On August 1 of the current year, Johnson Company purchases and places into service new equipment. The cost of the equipment is $75,000. It has an estimated 3-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$8,333 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = (75,000 - 15,000)/3 years = $20,000 per year Depreciation expense for August 1 through December 31 = $20,000 x 5/12 = $8,333

Which of the following statements regarding the amortization of discounts and premiums on bonds is true?

- The effective interest method applies a constant percentage to the bond carrying value to compute interest expense. - the amount of interest expense increases each period over the life of a discounted bond issue when the effective interest method is used.

Which of the following is a feature associated with preferred stock?

-Dividend preference -Preference to assets in the event of liquidation -Cumulative dividends -Dividends in arrears are not considered to be a liability

Which of the following is true with regard to corporate formations and corporate ownership?

-The New York Stock Exchange is one of the world's most well-known exchanges where corporate stock is bought and sold. -A corporation can issue common stock with a par value that determines the stock's legal capital. -A corporation can issue common stock indirectly to investors, and this tends to occur with the help of an investment banker. -A corporation can issue common stock directly to investors, and this tends to occur among closely held corporations.

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized discount on the bonds is $14,400. If the bonds are retired at 101, what would be the amount the company would pay its bondholders?

1,010,000 Solution: $1,000,000 x 1.01 = $1,010,000

A corporation reported net income of $360,000 and declared and paid dividends of $50,000 on its preferred stock and $125,000 on its common stock. Common stockholders' equity was $1,600,000 at the start of the year and $2,000,000 at the end of the year. Total assets were $2,200,000 at the start of the year and $2,600,000 at the end of the year. What is the company's payout ratio?

34.72%

A company had net income of $400,000, net sales of $10,000,000, paid dividends of $150,000 to the common stockholders, and paid dividends of $50,000 to preferred stockholders. How much is the company's payout ratio?

37.5% Solution: Payout ratio is computed by dividing total cash dividends declared on common stock by net income. Payout ratio = $150,000/$400,000 = 37.5%

A plant asset was purchased on January 1 for $48,000 with an estimated salvage value of $3,000 at the end of its useful life. The current year's depreciation expense is $5,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after adjusting-entries is $25,000. The remaining useful life of the plant asset is

4 years

A purchase of equipment includes a purchase price of $18,000, freight charges of $500, and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and four years, respectively. Under the straight-line method, how much is annual depreciation expense?

4,750 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $2,000)/4 = $4,750 per year.

Consider the following data for a corporation: Net income, $715,000 Preferred stock dividends, $50,000 Market price per share of stock, $25 Average common stockholders' equity, $3,000,000 Cash dividends declared on common stock, $30,000 What is the payout ratio?

4.2%

When using the straight-line depreciation method, which of the following is not a factor that affects the computation of depreciation?

Book Value of the asset

How is the market value of a bond issuance determined?

By adding the present value of the principal amount to the present value of the interest payments

Edmonds Company is a calendar-year company. At the start of the current year, it issued a $250,000 notes to a bank. Edmonds Company must pay the bank $50,000 plus interest each January 1 for the next five years starting at the beginning of next year. The company will report the note payable on its current year's balance sheet as

Current liabilities, $50,000; Long-term Debt, $200,000.

A corporation issues 10-year bonds with a maturity value of $200,000. If the bonds are issued for $204,000, what does this indicate?

The contractual interest rate exceeds the market interest rate.

In the current year, Jefferson Company paid $250,000 to improvement to one of its buildings. If the company's accountant expensed this amount in the current year, which of the following statements is true?

The entry will improperly understate net income for the year.

The journal entry to record issuing bonds at a discount will include a debit to the Cash account for the following amount:

The face value of the bonds minus the amount of the discount

The journal entry to record issuing bonds at a premium will include a debit to the Cash account for the following amount:

The face value of the bonds plus the amount of the premium

Which of the following is a stockholder's right?

The right to share in assets upon liquidation in proportion

Which of the following is a stockholder's right?

The right to share in assets upon liquidation in proportion, the right to vote in the election of board of directors

Which of the following is a stockholder's right?

The right to share in the corporate earnings through receipt of dividends

Which of the following is false with regards to corporations?

The shares of stock of privately held corporations are traded on stock exchanges.

A professional team sells season tickets to its fans. There are 10 home games during the season. This year's season tickets sold for a total of $12,000,000 cash. Which account will be credited by the team upon receipt of the $12,000,000?

Unearned Ticket Revenue

Which of the following is not a characteristic of corporations?

Unlimited liability for owners

Which of the following is not considered to be a characteristic of the corporate form of organization?

Unlimited liability of stockholders, Fewer Taxes

Which one of the following is not a typical current liability?

Unpaid note payable that is due after the next year

Which of the following statements regarding the amortization of discounts and premiums on bonds is false?

When the straight-line and effective interest methods of amortization result in interest that is materially different, GAAP requires use of the straight-line method. The effective interest method applies a non-constant percentage to the bond carrying value to compute interest expense The amount if interest expense decreases each period over the life of a discounted bond issue when the effective interest method is used.

The Lambert Company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $250 before receiving consulting services. Second, clients must pay $750 once the consulting firm finishes providing services to the client. How does The Lambert Company account for the first transaction?

Debit the Cash account for $250 and credit the Unearned Revenue account for $250.

A company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $200 before receiving consulting services. Second, clients must pay $800 once the consulting firm finishes providing services to the client. How does The company account for the second transaction?

Debit the Cash account for $800, debit the Unearned Revenue account for $200, and credit the Service Revenue account for $1,000.

Which of the following is the appropriate general journal entry to record the payment of a previously declared cash dividend?

Debit the Dividends Payable account and credit the Cash account

On January 1, a corporation issues $100,000 of 5-year, 8% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?

Debit to Cash for $100,000

A corporation issued 1,500 shares of common stock at $10 per share. If the stock has a par value of $6 per share, which of the following will be part of the journal entry to record the issuance?

Debit to Cash for $15,000 Solution: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 1,500 x $10 = $15,000 Credit to Common stock = 1,500 x $6 = $9,000 Credit to Paid-in capital in excess of par value = 1,500 x ($10 - $6) = $6,000

A corporation purchases 20,000 shares of its own $10 par value common stock for $25 per share, recording it at cost. What will be the effect on total stockholders' equity?

Decrease by $500,000 Solution: When a company acquires its own stock the acquired stock becomes known as treasury stock. The company reports treasury stock as a contra equity; total stockholders' equity decreases. In this case, it reduces by $500,000 (i.e., 20,000 shares x $25/share = $500,000).

The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)

constant rate of interest

A corporation issues $1,000,000 of 8%, 5-year bonds when bonds of similar risk are paying 9%. The 8% rate of interest is called the __________ rate.

contractual

Corporations have several officers who manage the corporation. The officer who maintains the corporation's accounting records, systems of internal controls, and prepares its financial statements, tax returns, and internal reports is the

controller

The chief accounting officer in a company is known as the

controller

Bonds that may be exchanged for common stock at the option of the bondholders are known as

convertible bonds

A corporation issued 8,000 shares of $10 par value per share stock for $15 per share. The journal entry to record this transaction would include a

credit to Common Stock for $80,000.

A corporation issues 25,000 shares of $50 par value preferred stock for cash at $125 per share. The entry to record the transaction will include a

credit to Preferred Stock for $1,250,000 and a credit to Paid-in Capital in Excess of Par Value for $1,875,000.

Preferred stock has preference or priority over common stock in

both the claim on dividends and the claim on corporate assets when corporations liquidate.

A corporation declared a cash dividend on November 15 to be paid on December 15 to stockholders owning the stock on November 30. Given these facts, the date of November 15, is referred to as the

declaration date

The date on which a cash dividend becomes a binding legal obligation is on the

declaration date

On which dates are entries for cash dividends required?

declaration date and payment date

Over the term or life of a bond issued at a discount, the balance in the Discount on Bonds Payable account will

decrease

The net effects on the corporation of the declaration and payment of a cash dividend are to

decrease assets and decrease stockholders' equity

The net effect of declaring and paying a cash dividend on a company's financial statements is to

decrease assets and decrease stockholders' equity.

The acquisition of treasury stock by a corporation

decreases its total assets and total stockholders' equity.

The year-end balance of the Discount on Bonds Payable is

deducted from Bonds Payable on the balance sheet.

The term applied to the periodic expiration of a plant asset's cost is

depreciation

Placing a restriction on retained earnings will

disclose that a portion of retained earnings is unavailable for dividends.

Dividends in arrears on cumulative preferred stock

must be paid before common stockholders can receive a dividend

If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to

reduce the amount of retained earnings available for dividends to shareholders

All of the following statements regarding retained earnings are true except

retained earnings represents a claim on cash.

When an asset is sold, a gain occurs when the

sale price exceeds the book value of the asset sold.

Stockholders have certain rights. One of these rights is called residual claim. The term residual claim refers to a stockholders' right to

share in assets upon liquidation in proportion to their holdings.

A corporation declared a cash dividend of $1.75 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of declaration on January 15?

t decreases stockholders' equity and increases liabilities.

A change in the estimated useful life of equipment requires

that the amount of periodic depreciation be changed in the current year and in future years.

If everything else is held constant, what will cause earnings per share to increase?

the purchase of treasury stock

All the following are needed for the computation of depreciation except

wage expense of personnel operaring the depreciable asset.

The sale or issuance of bonds for more than their face value

will cause the total cost of borrowing to be less than the bond interest paid.

The sale or issuance of bonds for less than their face value

will cause the total cost of borrowing to be more than the bond interest paid.

A current liability is a debt that can reasonably be expected to be paid

within one year, or the operating cycle, whichever is longer.

The time period for classifying a liability as a current liability rather than as a long-term liability can be determined by whether it is expected to be paid

within one year, or the operating cycle, whichever is longer.

On December 1, 2017, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2017 balance sheet?

$10,000 current liability; $40,000 long-term liability Each year, there is a current maturity of $10,000; the remaining outstanding debt is long-term debt. Since no portion of the principal has been paid by the date in question, there is $50,000 that remains unpaid. This total is split as follows: $10,000 is a current liability and $40,000 is a long-term debt.

A disadvantage of the corporate form of organization is

- tax treatment - additional taxes

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $50,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

300,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $350,000 - 50,000 = $300,000.

Which of the following is an intangible asset that cannot be sold individually in the market place?

Goodwill

Woodland Company declared a cash dividend of $2.00 per share on 50,000 shares of common stock on July 15. The dividend is to be paid one month later on August 15 to stockholders of record on July 31. The correct entry to be recorded on the date of record of July 31 will include a

No journal entry is required.

A corporation issues $800,000 of 10-year, 6% bonds dated January 1 at 109. The journal entry to record the issuance includes

a debit to Cash for $872,000.

The interest expense recorded on an interest payment date is increased

by the amortization of discount on bonds payable

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $3,500. The estimated salvage value and useful life are $4,000 and four years, respectively. Under the straight-line method, how much is annual depreciation expense?

$4,500 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $3,500 for a total of $22,000. Depreciation expense = ($22,000 - $4,000)/4 = $4,500 per year.

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?

$4,500 Solution: The portion of the premiums not yet earned should be recognized as a liability by Sensible. Since there are 3 months remaining on the insurance policy, the remaining liability is 3/12 of $18,000 or $4,500.

A company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 104. What is the company's gain or loss on the redemption?

$6,000 loss

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $350,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $75,000 Treasury stock—preferred, $30,000 Common stock, $200,000 Preferred stock, $175,000 Paid-in capital in excess of par value—preferred, $55,000 How much is total stockholders' equity?

$805,000

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $900,000, its gross margin is $5,000,000, and its net sales are $12,000,000. What is Oahu's return on assets?

22.5% Solution: Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $900,000 divided by $4,000,000 = 22.5%.

A corporation purchases 15,000 shares of its own $20 par value common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity?

Decrease by $525,000 Solution: When a company acquires its own stock the acquired stock becomes known as treasury stock. The company reports treasury stock as a contra equity; total stockholders' equity decreases. In this case, it reduces by $525,000 (i.e., 15,000 shares x $35/share = $525,000).

Willis Company declared a cash dividend of $1.00 per share on 20,000 shares of common stock on December 15. The dividend is to be paid one month later on January 15 to stockholders of record on December 30. Which of the following summarizes the effects of the journal entry recorded on the date of record on December 30?

No journal entry is recorded on the date of record

A corporation declared a cash dividend of $1.00 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of record on January 31?

No journal entry is recorded on the date of record.

A company borrowed $7,000 on July 1 by issuing a 36-month, 10% note. Both the note and the interest will be paid when the note matures. Which statement is true at December 31?

The company has $350 of interest payable that is a long-term liability. Solution: A current liability is a debt the company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within the next year or the operating cycle, whichever is longer. Since both the interest payable and the note payable are expected to be paid more than one year after the financial report date (i.e., this is a 36-month note), they will be considered long-term liabilities. Interest payable = $7,000 x .10 x 6/12 = $350

A company borrowed $70,000 on March 1 by issuing an 18-month, 12% note. Both the note and the interest will be paid when the note matures. Which statement is true at December 31?

The company has $7,000 of interest payable that is a current liability.

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $375,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $60,000 Treasury stock—preferred, $20,000 Common stock, $200,000 Preferred stock, $175,000 Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?

Solution: Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $375,000 - $20,000 + $60,000 - $20,000 + $200,000 + $175,000 + $60,000 = $830,000

Which of the following would not be considered an advantage of the corporate form of organization?

Taxation, government regulation

Which of the following statements is true?

The amortization period of a patent is the lesser of its useful life or 20 years, whichever is shorter.

Which of the following is true for bonds that have been issued at a premium?

The carrying value of the bonds will decrease over the life of the bonds.

Which of the following is true for bonds that have been issued at a discount?

The carrying value of the bonds will increase over the life of the bonds - The discount indicates that the cost of the bonds is higher than the bond interest paid.

If a company properly reports goodwill as an intangible asset on its books, which of the following must be true?

The company purchased another company.

Which of the following is true for bonds that have been issued at a premium?

The premium indicates that the cost of the bonds is lower than the bond interest paid.

Which of the following two ratios multiplied together yields the return on assets ratio?

The profit margin ratio and the asset turnover ratio

Which event does not require a journal entry?

The record date of a cash dividend

A professional team sells season tickets to its fans. There are 10 home games during the season. This year's season tickets sold for a total of $12,000,000 cash. What will be credited by the team after each home game is played?

Ticket Revenue for $1,200,000 Solution: Performance by the team generates revenue and decreases its obligation. Each home game generates $1,200,000 of ticket revenue. Debit the Unearned Ticket Revenue for $1,200,000 and credit Ticket Revenue for $1,200,000.

A company owns one depreciable asset. The balance in the company's Accumulated Depreciation account represents the

amount charged to depreciation expense since the acquisition of the depreciable asset.

In computing depreciation, salvage value is

an estimate of a plant asset's value at the end of its useful life.

A permanent decline in the market value of an asset is called

an impairment

Which of the following measures provides an indication of how efficient a company is in employing its assets?

asset turnover ratio

The book value of an asset is equal to the

asset's cost less accumulated depreciation

Plant assets are ordinarily presented in the balance sheet

at cost less accumulated depreciation

Stockholders have certain rights. One of these rights is called preemptive right. The term preemptive right refers to a stockholders' right to

keep the same percentage ownership when new shares of stock are issued.

Which statement is true about additions to plant assets?

they are capitalized

Which of the following is an intangible asset that is not amortized?

trademark

The officer that is generally responsible for maintaining the cash position of the corporation is the

treasurer

Which ratio is computed by dividing net income by net sales?

the profit margin ratio

Walker Company's average total assets are $200,000, net sales total to $100,000, and net income is $40,000. How much net income did Walker Company generate for each dollar of assets invested?

$0.20 Solution: $40,000/$200,000 = $0.20. Chapter 9, Learning objective 6: Describe methods for evaluating the use of plant assets.

Walker Company's average total assets are $240,000, net sales total to $140,000, and net income is $90,000. How much net income did Walker Company generate for each dollar of assets invested?

$0.375 Solution: $90,000/$240,000 = $0.375.

Which one of these statements is true?

Research and development costs are expensed in the year incurred.

The effect of the declaration of a cash dividend by the board of directors is to

Increase total liabilities and decrease total stockholders' equity.

On January 1, a corporation issued $6,000,000, 18%, 10-year bonds for $6,579,987. Interest is payable annually on January 1. The effective interest rate on the bonds is 16%. Use the effective-interest method to determine the amount of interest expense for the first year.

$1,052,798 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 16% x $6,579,987 = $1,052,798

On January 1, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $4,000 and the estimated useful life is 5 years. On December 31 of the fourth year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by two years giving it a total life of 7 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the fourth year?

$1,400

What is the total stockholders' equity based on the following account balances? Common Stock has a $1,300,000 balance. Paid-In Capital in Excess of Par has a $100,000 balance. Retained Earnings has a $360,000 credit balance. Treasury Stock has a $60,000 balance.

$1,700,000 Solution: Stockholders' equity: Paid-in capital: Common stock, $1,300,000 Paid-In Capital in Excess of Par, $100,000 Retained earnings, $360,000 Total paid in capital and retained earnings, $1,760,000 Less: Treasury stock, $60,000 Total stockholders' equity, $1,700,000

On October 1, 2017, a company issued a note payable of $100,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2019 balance sheet?

$10,000 current liability; $70,000 long-term liability Each year, there is a current maturity of $10,000; the remaining outstanding debt is long-term debt. Since $20,000 of the principal has been paid by the date in question, there is $80,000 that remains unpaid. This total is split as follows: $10,000 is a current liability and $70,000 is a long-term debt.

A company has the following asset account balances: Buildings, $9,500,000; Accumulated depreciation, $1,500,000; Patents, $750,000; Land Improvements, $800,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

$13,800,000

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $1,200 and 5 years, respectively. How much is the accumulated depreciation under the straight-line method after three years?

$16,200 Solution: The purchase price includes all costs necessary to get the truck ready to use: $27,000 + $500 + $700 = $28,200. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($28,200 - $1,200)/5 years = $5,400. Accumulated depreciation after three years = $5,400 x 3 = $16,200.

On March 1 of the current year, Franz Company purchases and places into service new equipment. The cost of the equipment is $40,000. The equipment has an estimated 10-year life and $5,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$2,917 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($40,000 - 5,000)/10 years = $3,500 per year Depreciation expense for March 1 through December 31 = $3,500 x 10/12 = $2,917

On March 1 of the current year, Freddy Company purchases and places into service new equipment. The cost of the equipment is $200,000. The equipment has an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$28,333 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($200,000 - 30,000)/5 years = $34,000 per year Depreciation expense for March 1 through December 31 = $34,000 x 10/12 = $28,333

A company's average total assets is $240,000, average total equity is $150,000, and net sales is $60,000. Its return on assets is 12%. What was the company's net income?

$28,800 Solution: Return on assets is net income divided by average total assets. Alternatively, net income equals average total assets times the return on assets. Net income = $240,000 x 12% = $28,800.

Bazydlo Corporation bought equipment for $320,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years. The depreciable cost of the equipment is

$280,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $320,000 - 40,000 = $280,000.

A company borrows $92,500 on September 1 from a bank. It signs a $92,500, 11%, 18-month note. How much interest expense should the company record on December 31 if the company uses a calendar year-end and records adjusting entries only at year-end?

$3,392

A company's average total assets is $200,000, average total equity is $120,000, and net sales is $100,000. Its return on assets is 15%. What was the company's net income?

$30,000

A company purchased machinery for $125,000 on July 1, 2021. The company also paid freight charges of $10,000 and installation costs of $15,000. It is estimated that the machinery will have a $20,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

$39,000

A corporation recorded a loss of $6,000 when it sold equipment that originally cost $56,000 for $10,000. Accumulated depreciation on the equipment must have been

$40,000.

A corporation issues a $500,000, 5%, 15-year mortgage note. The terms provide for annual installment payments of $48,171. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$476,829

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $6,000 and an estimated useful life of 8 years. How much is depreciation expense for the first year under the straight-line method?

$5,500 Solution: The annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($6,000) divided by the useful life (8 years) resulting in an annual depreciation value of $5,500. Depreciation expense per year = (50,000 - 6,000)/8 = 5,500 per year.

On April 1 of the current year, 2021, Hall Company paid $90,000 for a patent issued 10 years earlier. The amount of amortization expense recognized by the company for the current year would be

$6750 Solution: Patents are intangible assets with useful lives of 20 years after which they expire. A copyright issued 10 years earlier has 10 years of remaining useful life. Intangibles that can be amortized (e.g., patents) are amortized using a straight-line method with no salvage value. The current year is a partial year (i.e., April 1 through December 31). Amortization expense = $90,000/10 years x 9/12 = $6,750

On January 1, Blick Corp. issues $200,000 of 5-year, 7% bonds at 97. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?

$76000 Solution: The total cost of borrowing equals the sum of the interest payments plus the discount on the bonds, if any, minus the premium on the bonds (if any). Interest payments = Principal x Stated interest rate x Number of periods = $200,000 × 7% × 5 years = $70,000 The bonds were issued at 97, indicating they were issued at a 3% discount (or 3% below their face value). Discount = $200,000 x 3% = $6,000 Total cost of borrowing = $70,000 + 6,000 = $76,000

A company purchased land for $80,000. The company also assumes $15,000 of accrued taxes on the property, incurred $8,000 to remove an old building, and received $4,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$99,000 Solution: All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The company should include the purchase price of $80,000, the assumption of accrued taxes of $15,000 (i.e., the buyer agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $8,000 less the payment received for the salvaged materials in the amount of $4,000. This results in an acquisition cost of $99,000.

The following information is provided for Northwest Corporation (in $ millions): Net income for the current year is $390; net income for the prior year was $350. Net sales for the current year is $4,100; net sales for the prior year were $3,800. Total assets as of the end of the current year was $4,000; total assets as of the end of the prior year was $3,000. What is the company's asset turnover ratio for the current year?

1.17 times Solution: Assets turnover ratio = Net sales/Average total assets Return on assets = $4,100/[($3,000 + 4,000)/2] = 1.17 or 1.17 times per year

A company's average total assets are $275,000, depreciation expense is $20,000, and accumulated depreciation is $80,000. Net income is $1,500,000. Net sales total $325,000. What is the asset turnover?

1.18 Solution: The asset turnover is net sales divided by the average total assets: $325,000/$275,000 = 1.18 times.

A company's average total assets are $250,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,200,000. Net sales total $300,000. What is the asset turnover?

1.2 Solution: The asset turnover is net sales divided by the average total assets: $300,000/$250,000 = 1.2 times.

A company's average total assets are $200,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,000,000. Net sales total $250,000. What is the asset turnover?

1.25 Solution: The asset turnover is net sales divided by the average total assets: $250,000/$200,000 = 1.25 times.

What term is used for bonds that give the bondholder an option to exchange the bond for shares of the company's common stock?

Convertible bonds

Consider the following data for a corporation: Net income, $780,000 Preferred stock dividends, $60,000 Market price per share of stock, $5,000,000 Average common stockholders' equity, $3,500,000 Cash dividends declared on common stock, $20,000 What is the payout ratio?

2.56%

Which of the following is not true of a corporation?

Corporate losses must be paid personally by the corporation's shareholders.

The following data is available for a certain corporation: Common stock, par $10 (authorized 30,000 shares), $250,000 Treasury stock (at cost $15 per share), $1,200 Based on the data, how many shares of common stock are issued?

25,000 Solution: The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $250,000 and common stock has a $10 par value per share the company the company must have 25,000 shares of common stock outstanding (i.e., $250,000/$10 per share = 25,000 shares).

If 1,000 shares of $2 par common stock are reacquired by a corporation for $4 a share, by how much will total stockholders' equity change?

4,000 decrease Solution: Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $4 per share = $4,000.

On April 1 of the current year, Frey Company purchases and places into service new equipment. The cost of the equipment is $75,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

4,500 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($75,000 - 15,000)/10 years = $6,000 per year Depreciation expense for April 1 through December 31 = $6,000 x 9/12 = $4,500

A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $10,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?

5 years Solution:The depreciable cost equals the cost minus the salvage value; it is the $40,000 purchase price less $10,000 salvage value, which is $30,000. The annual depreciation cost is $6,000. Since $30,000 will be depreciated by $6,000 per year, the useful life is 5 years (i.e., $30,000/$6,000 per year = 5 years).

Karen's Craft shop bought equipment for $40,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $8,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Karen's decides to shorten the estimated useful life by 3 years giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

8,000 Solution: Original depreciation per year: ($40,000 - 8,000)/8 years = $4,000 per year. Revised depreciation per year: ($40,000 - 2 x 4,000 - 8,000)/(5-2) = $8,000 per year

Hogan Company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $12,000. The company redeemed the bonds at 104. What is the company's gain or loss on the redemption?

8,000 loss

A professional team sells season tickets to its fans. There are 10 home games during the season. This year's season tickets sold for a total of $12,000,000 cash. What will be the Unearned Ticket Revenue account balance after three home games have been played?

8,400,000

In a recent year Hough Corporation had net income of $90,000, interest expense of $15,000, and tax expense of $18,000. What was the company's times interest earned for the year?

8.2

Which of the following statements is false?

Research and development costs are not expensed when they result to a successful patent.

Which one of the following will maximize a company's reported net income in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

Which one of the following will minimize depreciation expense in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

A $500,000 bond is redemption at 96 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the redemption?

A $3,000 of gain

A corporation issued 10,000 of $1 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance?

A credit of $10,000 to Common Stock

Which of the following does not affect retained earnings?

Additional investment by stockholders

Which of the following is an acceptable way to express the useful life of a depreciable asset?

All of these

Which of the following is a feature associated with preferred stock?

All of these Solution: Preferred stockholders have priority over common stockholders in receiving dividends, priority over common stockholders to receive assets when a corporation is liquidated, and if cumulative, are entitled to receive current and unpaid prior-year dividends before common stockholders receive any dividends. However, dividends in arrears are not considered to be a liability; the board of directors is not under an obligation to declare dividends.

Which of the following is not a common reason for acquiring treasury stock?

increase the number of shares outstanding

What method is normally used to account for treasury stock?

Cost method.

On January 1, a corporation issues $200,000 of 5-year, 7% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?

Credit to Bonds Payable for $200,000

A corporation issued 3,000 shares of $5 par value common stock for $6 per share. Which of the following is included in the journal entry to record the issuance?

Credit to Common Stock for $15,000 Solution: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 3,000 x $6 = $18,000 Credit to Common stock = 3,000 x $5 = $15,000 Credit to Paid-in capital in excess of par value = 3,000 x ($6 - $5) = $3,000

A corporation issued 5,000 shares of $15 par value preferred stock at $18 per share. Which of the following will be part of the journal entry to record the issuance?

Credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $15,000

Which type of stock can be in arrears?

Cumulative preferred stock

A company sold a plant asset for $3,000. It had a cost $10,000 and its accumulated depreciation is $7,500. What gain or loss did the company experience?

Gain of $500 Solution: Book value is $2,500 ($10,000 - $7,500). Since the proceeds ($3,000) exceed the book value ($2,500) by $500, there is a gain.

Which of the following is not amortized?

Goodwill

Forming a corporation does not necessarily involve

Incurring debt

What is the effect of amortizing a bond discount?

It increases the carrying value of the bonds.

Which of the following costs should not be included in the cost of a building?

Parking lot repaving

A corporation issued 2,000 bonds with a face value of $1,000 each at 97. The journal entry to record the issuance includes

a debit to Discount on Bonds Payable for $60,000.

A corporation issued a 9%, 5-year, $100,000 bond when the market rate of interest was 7%. The bond sell at

a premium

If the market interest rate for a bond is lower than the stated interest rate, the bond will sell at

a premium

Stockholders of a corporation directly elect

board of directors

A company receives $192, of which $16 is for sales tax. The journal entry to record the sale with sales tax would include a

credit to Sales Taxes Payable for $16.

A corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of payment of May 15 will include a

debit to the Dividends Payable account and a credit to the Cash account.

Woodland Company declared a cash dividend of $2.00 per share on 50,000 shares of common stock on July 15. The dividend is to be paid one month later on August 15 to stockholders of record on July 31. The correct entry to be recorded on the date of payment of August 15 will include a

debit to the Dividends Payable account and a credit to the Cash account.

The amortization of a bond discount will result in reporting an amount of interest expense for an interest period that

exceeds the amount of cash to be paid for interest for the period.

Recording depreciation each period is necessary in accordance with the

expense recognition principle

A patent

has a legal life of 20 years.

A company paid $200,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $80,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's entry to record the insurance proceeds will include a

loss on disposal of plant assets of $20,000 Solution: Remove the asset and its accumulated depreciation from the company's books while recording the cash received from the insurance company. Record a gain or loss so that debits being recorded equal the credits being recorded. Gains are recorded with credits, and losses are recorded with debits. Debit cash for $100,000 Debit accumulated depreciation for $80,000 Debit loss on the disposal of plant assets for $20,000 Credit the equipment account for $200,000

When a plant asset is retired, the difference between the plant asset's cost and the accumulated depreciation of the same plant asset is

recognized on the income statement as a loss on disposal of plant asset Solution: When plant assets are retired, the company retiring the asset (i) credits the plant asset's account in the amount of its cost, (ii) debits the Accumulated Depreciation account for the entire amount of the plant asset's depreciation, and (iii) recognizes a loss for the difference. Note that when a company retires a plant asset there is no cash or other consideration received because the plant asset is not sold or exchanged. Also, accumulated depreciation never exceeds an asset's cost, so the retirement of a plant asset never produces a gain. Rather, they produce losses (unless the cost equals the accumulated depreciation and neither gain nor loss is produced).

A corporation declared a cash dividend on November 15 to be paid on December 15 to stockholders owning the stock on November 30. Given these facts, the date of November 30, is referred to as the

record date

At the start of its first year, a corporation issued 10,000 shares of 7%, $100 par value, cumulative preferred stock and 40,000 shares of $1 par value common stock. There were no dividends declared in the first year. In its second year, the corporation declared and paid dividends of $150,000. What is the amount of dividends received by the common stockholders in the second year?

$10,000 Solution: The preferred stock is cumulative so there are never dividends in arrears. Annual dividend to be paid to preferred shareholders = 10,000 shares x (7% x $100) = $70,000 Dividends in arrears = Annual dividend to be paid to preferred stockholders - Dividend paid to preferred stockholders Dividend in arrears = $70,000 - 0 = $70,000 Second year dividend to preferred stockholders = Annual dividend to be paid to preferred stockholders + dividends in arrears Second year dividend to preferred stockholders =$70,000 + 70,000 = $140,000 Dividend paid to common stockholders = Dividend - Dividend to preferred stockholders Dividend to common stockholders = $150,000 - 140,000 = $10,000

If 1,000 shares of $6 par common stock are reacquired by a corporation for $10 a share, by how much will total stockholders' equity change?

$10,000 decrease Solution: Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $10 per share = $10,000.

A corporation issues 10%, 10-year bonds with a face value of $100,000 for $98,000. Using the effective-interest amortization method, how much is the interest expense for the first year if the effective interest rate is 10.53%?

$10,319 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 10.53% x $98,000 = $10,319.

Ralph's Wrecker Service bought equipment for $70,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $14,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Ralph's decides to shorten the estimated useful life by 2 years giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

$10,500 Solution: Original depreciation per year = [(70,000 - 14,000)/8] x 2 = 7,000 Revised depreciation per year = [(70,000 - 2 x 7,000 - 14,000]/ (6-2)= 10,500

A corporation has 10,000 shares of 10%, $100 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years of business. The company declares and pays $400,000 of dividends in its third year. How much of the third year's dividend will be paid to common stockholders?

$100,000 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 10% x $100 = $100,000 Preferred dividends in arrears for two years ($100,000 × 2) = $200,000 Preferred for current year = $100,000 Total dividends to preferred stockholders = $300,000 Total dividends available = $400,000 Dividends available to common stockholders = $100,000

A company purchased land for $80,000. The company also assumes $16,000 of accrued taxes on the property, incurred $9,000 to remove an old building, and received $4,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$101,000 Solution: All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The company should include the purchase price of $80,000, the assumption of accrued taxes of $16,000 (i.e., the buyer agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $9,000 less the payment received for the salvaged materials in the amount of $4,000. This results in an acquisition cost of $101,000.

A company purchases land for $90,000 cash. The company assumes $2,500 in property taxes due on the land owed by the previous owner. The title and attorney fees totaled $1,000. The company pays to have the land graded for $2,200. They paid $10,000 for paving of a parking lot. The company spent $12,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $1,500. What amount does the company record as the cost for the land?

$106,200 Solution: Total cost = $90,000 + $2,500 + $1,000 + $2,200 + ($12,000 - 1,500) = $106,200

Able Towing Company purchased a tow truck for $50,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 8 years with an estimated salvage value of $10,000. At the end of the fourth year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the fourth year?

$11,000 Solution: For the first three years, the annual depreciation expense is ($50,000 - $10,000)/8 years = $5,000 per year. In the fourth year, before depreciation is recorded, the asset's book value is ($50,000 - 3 x 5,000 = $35,000), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($35,000 - $2,000)/(6-3) = $11,000. Note: There are three years of useful life including the fourth, fifth, and sixth years.

A company has the following asset account balances: Buildings and equipment, $8,900,000; Accumulated depreciation, $1,800,000; Patents, $850,000; Land Improvements, $1,200,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

$13,300,000 Solution: Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $13,300,000. (i.e., 8,900,000+1,200,000+5,000,000-1,800,000=13,300,000).

Rhonda's Rose Shop bought equipment for $80,000 on January 1 of its first year. The equipment's original estimated useful life is 5 years and its estimated salvage value is $10,000. The company uses the straight-line method of depreciation. On December 31 of its second year, before year-end adjusting entries have been recorded, Rhonda's decides to extend the estimated useful life 1 year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the second year?

$11,200 Solution: Original depreciation per year: ($80,000 - 10,000)/5 years = $14,000 per year. Revised depreciation per year: ($80,000 - 1 x 14,000 - 10,000)/(6-1) = $11,200 per year

On May 1 of the current year, 2021, Hall Company paid $90,000 for a copyright issued 65 years earlier. The amount of amortization expense recognized by the company for the current year would be

$12,000 Solution: Copyrights are intangible assets with useful lives of 70 years after which they expire. A copyright issued 65 years earlier has five years of remaining useful life. Intangibles that can be amortized (e.g., copyrights) are amortized using a straight-line method with no salvage value. The current year is a partial year (i.e., May 1 through December 31). Amortization expense = $90,000/5 years x 8/12 = $12,000

On April 1 of the current year, Moreno Company purchased a patent from another company for $80,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 5 years. How much is Moreno's amortization expense for the current year?

$12,000 Solution: Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 5 years. Amortization expense for the current year = $80,000/5 years x 9/12 = $12,000.

At the start of its first year, a corporation issued 40,000 shares of $5 par common stock for $25 per share and 20,000 shares of 6%, $10 par non-cumulative preferred stock for $100 per share. The corporation declared and paid dividends of $8,000 in the first year. In its second year, the corporation declared and paid dividends of $24,000. How much of the second year dividend was distributed to preferred shareholders?

$12,000 Solution: The preferred stock is non-cumulative so there are never dividends in arrears. Dividend to preferred shareholders = 20,000 shares x (6% x $10) = $12,000

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. At the end of the third year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the third year?

$12,100 Solution: For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100. Note: There are four years of useful life including the third, fourth, fifth, and sixth years.

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $3,200 and 4 years, respectively. How much is the accumulated depreciation under the straight-line method after two years?

$12,500 Solution: The purchase price includes all costs necessary to get the truck ready to use: $27,000 + $500 + $700 = $28,200. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($28,200 - $3,200)/4 years = $6,250. Accumulated depreciation after three years = $6,250 x 2 = $12,500.

Santiago Corporation bought equipment on January 1. The equipment cost $320,000 and had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years and straight-line depreciation is used. The book value of the equipment at the end of the fifth year would be

$120,000 Solution: Depreciation per year = ($320,000 - 40,000)/7 years = $40,000 per year Accumulated depreciation after 5 years = $40,000 x 5 = $200,000 Book value = Cost minus accumulated depreciation Book value = $320,000 - 200,000 = $120,000

A company purchased machinery for $850,000 on July 1, 2021. The company also paid freight charges of $5,000 and installation costs of $20,000. It is estimated that the machinery will have a $75,000 salvage value at the end of its 10-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

$120,000 Solution: Depreciation per year = ($850,000 + 5,000 + 20,000 - 75,000)/10 years = $80,000 per year Accumulated depreciation after 1.5 years = $80,000 x 1.5 = $120,000

At the start of the current year, a company paid for the following in cash: copyrights, $200,000 equipment, $25,000,000 goodwill, $3,500,000 inventory, $1,500,000 land, $15,000,000 patents. $1,000,000 R&D, $1,500,000 supplies, $1,500,000 trademarks, $1,200,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$120,000 Solution: The intangible are copyrights, trademarks, patents and goodwill. R&D is NOT and intangible assent even though R&D may lead to new intangibles, such as patents or copyrights. Trademarks have 20 lives, but they are renewable. Since they can be renewed, their lives are NOT considered to be limited and they are NOT amortized. Foodwill has an uncertain life, and they are not amortized. They only amortizable intangibles owned by this company are copyrights of $200,000 and patents of $1,000,000. Amortizing these intangibles over 10 years results in an annual amortization expense of $120,000 ($1,200,000/ 10 years = $120,000 per year).

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 9 years with an estimated salvage value of $6,000. At the end of the sixth year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 7 years and to change its estimated salvage value to $4,000. How much depreciation expense should be recorded for the sixth year?

$13,000 Solution: For the first five years, the annual depreciation expense is ($60,000 - $6,000)/9 years = $6,000 per year. In the sixth year, before depreciation is recorded, the asset's book value is ($60,000 - 5 x 6,000 = $30,000), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($30,000 - $4,000)/(7 - 5) = $13,000. Note: There are two years of useful life including the sixth and seventh years.

On January 1, a corporation issued $2,250,000, 7%, 12-year bonds for $2,648,846. Interest is payable annually on January 1. The effective interest rate on the bonds is 5%. Use the effective-interest method to determine the amount of interest expense for the first year.

$132,442

A company has the following asset account balances: Buildings and equipment, $9,200,000; Accumulated depreciation, $1,200,000; Patents, $750,000; Land Improvements, $1,000,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

$14,000,000 Solution: Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $14,000,000. (i.e., 9,200,000+1,000,000+5,000,000-1,200,000=14,000,000).

An asset purchased on January 1 for $60,000 has an estimated salvage value of $3,000. The current useful life is 8 years. How much is total accumulated depreciation using the straight-line method at the end of the second year of life?

$14,250

On January 1, a corporation issued $1,000,000, 14%, 5-year bonds. The bonds sold for $1,084,096. This price resulted in an effective interest rate of 13% on the bonds. Interest is payable annually on January 1. Use the effective-interest method to determine the amount of interest expense for the first year.

$140,932 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds carrying value. The cash paid is the contractual or stated interest rate times the face amount of the bonds. Bond interest expense for the first interest date = $1,084,096 x 13% = $140,932.

On January 1, a company issued $2,220,000 of 5%, 4-year bonds for $2,069,608. Interest is payable annually on January 1. The effective interest rate on the bonds is 7%. Use the effective-interest method to determine the amount of interest expense for the first year.

$144,873 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 7% x $2,069,608 = $144,873

A company acquires land for $140,000 cash. Additional costs are as follows: Removal of shed, $1,000 Filling and grading, $2,500 Salvage value of lumber of shed, $200 Broker commission, $4,000 Paving of parking lot, $13,000 Closing costs, $1,700 The company should record the acquisition cost of the land as

$149,000 Solution: Purchase price, 140,000 Add: Removal of shed less salvages (i.e., 1,000 - 200), 800 Add: Filling and grading, 2,500 Add: Broker's commission, 4,000 Add: Closing costs, 1,700 Acquisition costs of land, 149,000 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land.

Santiago Corporation bought equipment on January 1. The equipment cost $350,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years and straight-line depreciation is used. The book value of the equipment at the end of the fourth year would be

$150,000 Solution: Depreciation per year = ($350,000 - 50,000)/6 years = $50,000 per year Accumulated depreciation after 4 years = $50,000 x 4 = $200,000 Book value = Cost minus accumulated depreciation Book value = $350,000 - 200,000 = $150,000

A company acquires land for $150,000 cash. Additional costs are as follows: Removal of shed, $200 Filling and grading, $2,000 Salvage value of lumber of shed, $80 Broker commission, $5,000 Paving of parking lot, $15,500 Closing costs, $1,200. The company should record the acquisition cost of the land as

$158,320 Solution: Purchase price, 150,000 Add: Removal of shed less salvages (i.e., 200 - 80), 120 Add: Filling and grading, 2,000 Add: Broker's commission, 5,000 Add: Closing costs, 1,200 Acquisition costs of land, 158,320 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land.

A plant asset with a cost of $240,000 and accumulated depreciation of $228,000 is sold for $28,000. What is the amount of the gain or loss on disposal of the plant asset?

$16,000 gain Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$240,000 - 228,000 = $12,000 Since the sales price is is larger than the book value the company recognizes a gain. It is computed as follows: Gain = Sales proceeds from selling the asset - Book value of the asset sold Gain = $28,000 - 12,000 = $16,000

In the current year, Brogan Company sold equipment for $20,000. The original cost was $70,000, the estimated salvage value was $4,000, and the expected useful life was 6 years. The equipment was fully depreciated. How much is the gain or loss on the sale?

$16,000 gain Solution: The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $4,000 = $16,000 gain.

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 103. What is the company's gain or loss on the redemption?

$16,000 loss $44,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a premium so the carrying value equals the bond's principal plus unamortized premium. Carrying value = Principal plus unamortized premium = $1,000,000 + 14,000 = $1,014,000 The company can redeem this bond at 103 which means it can redeem this bond by paying the bondholder 103% of the bond's principal value. Cash paid to redeem the bonds = $1,000,000 x 1.03 = $1,030,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,030,000 - 1,014,000 = $16,000).

A corporation has 10,000 shares of 7%, $100 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years of business. The company declares and pays $375,000 of dividends in its third year. How much of the third year's dividend will be paid to common stockholders?

$165,00 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 7% x $100 = $70,000 Preferred dividends in arrears for two years ($70,000 × 2) = $140,000 Preferred for current year = $70,000 Total dividends to preferred stockholders = $210,000 Total dividends available = $375,000 Dividends available to common stockholders = $165,000

Santiago Corporation bought equipment on January 1, Year 1. The equipment cost $360,000 and had an expected salvage value of $40,000. The life of the equipment was estimated to be 5 years and straight line depreciation is used. The book value of the equipment at the end of the third year would be

$168,000 Solution: Depreciation per year = ($360,000 - 40,000)/5 years = $64,000 per year Accumulated depreciation after 3 years = $64,000 x 3 = $192,000 Book value = Cost minus accumulated depreciation Book value = $360,000 - 192,000 = $168,000.

Equipment was purchased for $90,000. Freight charges paid to acquire the equipment amounted to $4,200. There was a cost of $12,000 for building a foundation for the equipment and installing the equipment. It is estimated that the equipment will have a $18,000 salvage value at the end of its 5-year useful life. Depreciation expense each full year using the straight-line method will be

$17,640 Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $90,000 + 4,200 + 12,000 = $106,200 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($106,200 - 18,000)/5 years $17,640 per year

At the start of the current year, a company paid for the following in cash: equipment, $25,000,000 patent, $1,700,000 goodwill, $2,800,000 inventory, $1,500,000 land, $15,000,000 R&D, $1,500,000 supplies, $3,000,000 trademarks, $500,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$170,000

On January 1, a corporation issued $3,000,000, 7%, 9-year bonds for $3,426,469. Interest is payable annually on January 1. The effective interest rate on the bonds is 5%. Use the effective-interest method to determine the amount of interest expense for the first year.

$171,323

Rawlings Company purchased a machine for $80,000 on January 1 of the current year and depreciates it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $26,000 on June 30 of the fifth year, what would be the company's gain or loss from the sale?

$18,000 loss Solution: The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $80,000 - [($80,000/10 years) x 4.5 years] = $44,000. The gain (loss) on the sale = sales price minus book vale = $26,000 - $44,000 = ($18,000).

A corporation issues $200,000, 9%, 10-year bonds on January 1 for $192,000. Interest is paid annually on January 1. If the corporation uses the straight-line method to amortize bond premiums and discounts, the amount of bond interest expense in the first year is

$18,800 olution: If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. If a bond is issued at a premium, interest expense includes the interest paid in the form of cash minus the amortization of premium. If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. This bond was issued for less than its face value so it was issued at a discount. Interest paid in cash = Face value times the contractual interest rate = $200,000 x 9% = $18,000 per year Straight-line amortization per year = ($200,000 - $192,000)/10 = $800 per year These bonds were issued at a discount: Interest expense = $18,000 - $800 = $17,200

Suarez Corporation issued 10-year bonds with a face value of $300,000 and a contractual rate of interest of 6% at 99 on July 1. What is the total cost of borrowing for Suarez Corporation?

$183,000 Solution: The total cost of borrowing equals the sum of the interest payments plus the discount on the bonds, if any, minus the premium on the bonds (if any). Interest payments = Principal x Stated interest rate x Number of periods = $300,000 × 6% × 10 years = $180,000 The bonds were issued at 99, indicating they were issued at a 1% discount (or 1% below their face value). Discount = $300,000 x 1% = $3,000 Total cost of borrowing = $180,000 + 3,000 = $183,000

On January 1, Blick Corp. issues $250,000 of 10-year, 8% bonds at 104. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?

$190,000 Solution: The total cost of borrowing equals the sum of the interest payments plus the discount on the bonds, if any, minus the premium on the bonds (if any). Interest payments = Principal x Stated interest rate x Number of periods = $250,000 × 8% x 10 years = $200,000 The bonds were issued at 96, indicating they were issued at a 4% premium (or 4% above their face value). Premium = $250,000 x 4% = $10,000 Total cost of borrowing = $200,000 - 10,000 = $190,000

On January 1, Jamaica Company purchased equipment for $15,000. The estimated salvage value is $3,000 and the estimated useful life is 4 years. On December 31, 2017 of the third year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by one year giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the third year?

$2,000

Hogan Company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $12,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$2,000 gain Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a premium so the carrying value equals the bond's principal plus unamortized premium. Carrying value = Principal plus unamortized premium = $500,000 + 12,000 = $512,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. Cash paid to redeem the bonds = $500,000 x 1.02 = $510,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is less than the carrying value of bonds redeemed so recognize a gain. The gain equals the excess of the carrying value over the cash paid (i.e., $512,000 - 510,000 = $2,000).

A $500,000 bond is redeemed at 97 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the bond redemption?

$2,000 of loss Solution: The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were redeemed for $485,000 ($500,000 x 97%) and the carrying value is $483,000, the company should record a loss of $2,000.

The following is available for Thomas Company: Beginning retained earnings is $2,500. Net loss for the year is $200. Cash dividends declared but not paid until next year $100. What is this year's year-end retained earnings balance?

$2,200 Solution: Ending retained earnings = Beginning retained earnings + net income - dividends (i.e., declared) Ending retained earnings = $2,500 - 200 - 100 = $2,200

On April 1 of the current year, La Presa Company sells some equipment for $18,000. The original cost was $50,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $28,000. How much is the gain or loss on the sale?

$2,250 loss First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $42,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 8,000) and a life of 6 years, the depreciation is $7,000 per year. In the current year, depreciation expense is $1,750 (i.e., $7,000 per year x 3/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $29,750 (i.e., $28,000 + $1,750). Book value equals cost minus accumulated depreciation. Book value is $20,250 (i.e., $50,000 - $29,750). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $18,000 - 20,250 = ($2,250) (i.e., loss).

On January 1, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $2,000 and the estimated useful life is 5 years. On December 31 of the third year, before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by one year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the third year?

$2,400 Solution: The annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($18,000 - $2,000)/5 years = $3,200 per year. The depreciable cost that remains is $18,000 - $2,000 - (2 years x $3,200) = $9,600. This amount is allocated over the remaining useful life, and the remaining useful life is 4 years (i.e., 6 total years - 2 expired years). Depreciation in the third year is $2,400 (i.e., $9,600/4 years).

On January 1, a company issued $4,500,000 of 6%, 8-year bonds for $5,105,947. Interest is payable annually on January 1. The effective interest rate on the bonds is 4%. Use the effective-interest method to determine the amount of interest expense for the first year.

$204,238

On February 1 of the current year, Fritz Company purchases and places into service new equipment. The cost of the equipment is $135,000. The equipment has an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$21,083 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($135,000 - 20,000)/5 years = $23,000 per year Depreciation expense for February 1 through December 31 = $23,000 x 11/12 = $21,083

The current carrying value of Pierce's $900,000 face value bonds is $896,600. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$21,400 loss Solution: $896,600 - ($900,000 x 1.02) = $21,400

On January 1, Blick Corp. issues $250,000 of 10-year, 8% bonds at 96. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?

$210,000

On July 1 of the current year, Fred Company purchases and places into service new equipment. The cost of the equipment is $90,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,750 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($90,000 - 15,000)/10 years = $7,500 per year Depreciation expense for July 1 through December 31 = $7,500 x 6/12 = $3,750

Hamlet Company issued $2,500,000, 10-year, 9% bonds on January 1 for $2,650,000. Interest is to be paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the amount of bond interest expense to be recognized in the year issued is

$210,000 Solution: Interest paid in cash = Face value times the contractual interest rate = $2,500,000 x 9% = $225,000. Straight-line amortization of bond premiums and discounts is similar to straight-line depreciation. Straight-line amortization and depreciation both allocate an initial equally over a period of time. This bond has a premium of $150,000 (i.e., $2,650,000 - $2,500,000). Using straight-line amortization, this amount is spread equally over the life of the bond. Annual amortization = $150,000/10 years = $15,000 per year. By the time the bond reaches maturity in 10 years, the premium will have been fully amortized (i.e., it will be equal to zero) and the bond's carrying value will equal its face value. If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. If a bond is issued at a premium, interest expense includes the interest paid in the form of cash minus the amortization of premium. These bonds were issued at a premium: Interest expense = $225,000 - $15,000 = $210,000

Equipment was purchased for $72,000 on January 1. Freight charges paid to acquire the equipment amounted to $2,000. There was also a cost of $3,000 for building a foundation for the equipment and installing the equipment. It is estimated that the equipment will have a $10,000 salvage value at the end of its 6-year useful life. The straight-line method of depreciation is used. What is the amount of accumulated depreciation at the end of the second year of using the asset and after adjusting entries have been recorded?

$22,333. Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $72,000 + 2,000 + 3,000 = $77,000 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($77,000 - 10,000)/6 years = $11,167 per year Accumulated depreciation after two years = 2 x $11,667 = $22,333

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Trademarks $14,000,000 Research and development 8,000,000 Copyrights 1,500,000 Patents 2,000,000 Goodwill 5,000,000

$22,500,000 Solution: For this company, intangibles include trademarks, copyrights, patents, and goodwill. Intangibles = $14,000,000 + 1,500,000 + 2,000,000 = $5,000,000 = $22,500,000

In a recent year, Lehigh Corporation has a times interest earned ratio of 8.00. Its interest expense is $40,000 and its tax expense is $50,000. What was the company's net income?

$230,000 Solution: Times interest earned = Income before interest and taxes divided by interest expense Times interest earned = (Net income + interest expense + tax expense)/Interest expense Substitute what is known: 8.00 = (Net income + 40,000 + 50,000)/40,000 Solve for net income: 8.00 x 40,000 = Net income + 40,000 + 50,000 320,000 = Net income + 40,000 + 50,000 Net income = 320,000 - 40,000 - 50,000 = 230,000

In a recent year, Lehigh Corporation has a times interest earned ratio of 12.00. Its interest expense is $25,000 and its tax expense is $40,000. What was the company's net income?

$235,000 Solution: Times interest earned = Income before interest and taxes divided by interest expense Times interest earned = (Net income + interest expense + tax expense)/Interest expense Substitute what is known: 12.00 = (Net income + 25,000 + 40,000)/25,000 Solve for net income: 12.00 x 25,000 = Net income + 25,000 + 40,000 300,000 = Net income + 25,000 + 40,000 Net income = 300,000 - 25,000 - 40,000 = 235,000

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $75,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $27,000, the corporation's common stockholders would receive

$24,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $27,000. Current year dividend to preferred stockholders = 15,000 x $20 x 8% = $24,000 Total paid to preferred stockholders = $27,000 + 24,000 = $51,000 Total paid to common stockholders = $75,000 - 51,000 = $24,000

Hogan Company has bonds with a principal value of $500,000 outstanding. The unamortized discount on the bonds is $14,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$24,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a discount so the carrying value equals the bond's principal minus unamortized discount. Carrying value = Principal minus unamortized discount = $500,000 - 14,000 = $486,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. Cash paid to redeem the bonds = $500,000 x 1.02 = $510,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $510,000 - 486,000 = $24,000).

A corporation issues a $250,000, 9%, 30-year mortgage note. The terms provide for annual installment payments of $24,334. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$246,167

A corporation issues a $250,000, 7%, 30-year mortgage note. The terms provide for annual installment payments of $20,147. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$247,353

A corporation issues a $250,000, 9%, 30-year mortgage note. The terms provide for annual installment payments of $24,334. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$248,166 Solution: Since interest accrues annually, the first year's interest would be $22,500 (i.e., 9% x $250,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $24,334 payment and the interest component ($22,500), resulting in a principal reduction of $1,834. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $1,834 from $250,000 to $248,166.

A corporation has 2,500 shares of 6%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid a $5,000 dividend. This year the dividend declared and paid was $30,000. What amount of this dividend will be paid to the preferred stockholders?

$25,000 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the prior year and the current year. Total dividend = 2,500 x 6% x $100 = $15,000 Preferred dividends in arrears for prior year ($15,000 - $5,000) = $10,000 Preferred dividends for current year = 15,000 Total dividends to preferred stockholders = $25,000

A corporation has 2,000 shares of cumulative preferred stock with a $100 par value per share and a 5% dividend rate. The dividends are in arrears for two years. If the corporation plans to distribute $55,000 as dividends in the current year, how much will the common stockholders receive?

$25,000 Solution: Stockholders who own cumulative preferred stock receive an allocation for each of the past two years (i.e., the preferred stock is in arrears for two years meaning dividends were not paid in those years) and an allocation for the current year. The remaining balance, if there is any, is allocated to the common stockholders. Preferred dividend for current year = 2,000 shares x $100/share x 5% = $20,000 Preferred dividends in arrears for two years ($10,000 × 2) = $20,000 Total dividends to preferred stockholders = $30,000 Total dividends available = $55,000 Dividends available to common stockholders = $55,000 - 30,000 = $25,000

Jack's Copy Shop bought equipment for $180,000 on January 1 of its first year. The equipment's original estimated useful life is 3 years and its estimated salvage value is $30,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Jack's decides to extend the estimated useful life 1 year giving it a total life of 4 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

$25,000 Solution: Original depreciation per year: ($180,000 - 30,000)/3 years = $50,000 per year. Revised depreciation per year: ($180,000 - 2 x 50,000 - 30,000)/(4-2) = $25,000 per year

A company's average total assets is $250,000, average total equity is $150,000, and net sales is $80,000. Its return on assets is 10%. What was the company's net income?

$25,000 Solution: Return on assets is net income divided by average total assets. Alternatively, net income equals average total assets times the return on assets. Net income = $250,000 x 10% = $25,000.

A company purchased equipment and incurred these costs: Cash price, $24,000; Sales taxes, $1,200; Insurance during transit, $200; Annual maintenance costs, $400. What amount should be recorded as the cost of the equipment?

$25,400 Solution: All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($24,000 + $1,200 + $200 = $25,400). The $400 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.

At the start of the current year, a company paid for the following in cash: Equipment, $25,000,000 Goodwill, $4,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $2,500,000 Research and development, $2,000,000 Supplies, $3,000,000 Trademarks, $1,000,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$250,000

Given the following account balances at year end, how much is amortization expense on Analog Enterprises' income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $2,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; and Goodwill, $4,500,000. The company also paid $2,000,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

$250000 Solution: The intangibles are trademarks patents and goodwill. Only patents are amortized. Amortization expense for the year equals $2,500,000/10 = $250,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

Bonds with a face value of $250,000 and a quoted price of 101¼ have a selling price of

$253,125

Jim's Coffee Shop bought equipment for $300,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $60,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, Jim's decides to revise the estimated salvage value to $48,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

$26,400 Solution: Original depreciation per year: ($300,000 - 60,000)/10 years = $24,000 per year. Revised depreciation per year: ($300,000 - 5 x 24,000 - 48,000)/(10-5) = $26,400 per year

A company purchased equipment and incurred these costs: Cash price, $25,000; Sales taxes, $1,400; Insurance during transit, $300; Annual maintenance costs, $300. What amount should be recorded as the cost of the equipment?

$26,700 Solution: All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($25,000 + $1,400 + $300 = $26,700). The $300 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.

Equipment was purchased for $68,000 on January 1. Freight charges paid to acquire the equipment amounted to $2,800. There was also a cost of $8,000 for building a foundation for the equipment and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. The straight-line method of depreciation is used. What is the amount of accumulated depreciation at the end of the second year of using the asset and after adjusting entries have been recorded?

$26,720 Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $68,000 + 2,800 + 8,000 = $78,800 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($78,800 - 12,000)/5 years = $13,360 per year Accumulated depreciation after two years = 2 x $13,660 = $26,720

A company purchases land for $250,000. The company also assumes $3,000 in property taxes due on the land owed by the previous owner. The title and attorney fees totaled $2,000. The company spent $10,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,500. What amount does the company record as the cost for the land?

$262,500 Solution: Total cost = $250,000 + $3,000 + $2,000 + ($10,000 - 2,500) = $262,500

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $75,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $24,000, the corporation's common stockholders would receive

$27,000

A company purchased equipment and incurred these costs: Cash price, $26,000; Sales taxes, $1,200; Insurance during transit, $400; Annual maintenance costs, $500. What amount should be recorded as the cost of the equipment?

$27,600

On January 1, a company issued $4,000,000 of 6%, 10-year bonds for $3,454,800. Interest is payable annually on January 1. The effective interest rate on the bonds is 8%. Use the effective-interest method to determine the amount of interest expense for the first year.

$276,384

On January 1, Blick Corp. issues $150,000 of 20-year, 9% bonds at 94. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?

$279,000

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years. The depreciable cost of the equipment is

$280,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $320,000 - 40,000 = $280,000.

On October 1 of the current year, Mann Company purchased and places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,000 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($80,000 - 20,000)/5 years = $12,000 per year Depreciation expense for October 1 through December 31 = $12,000 x 3/12 = $3,000

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Buildings and Equipment $18,000,000 Accumulated depreciation 4,000,000 Research and development 1,500,000 Patents 3,000,000 Accounts receivable 5,000,000 The total amount reported on the balance sheet as intangible assets would be

$3,000,000

On March 1 of the current year, Franklin Company purchases and places into service new equipment. The cost of the equipment is $25,000. The equipment has an estimated 5-year life and $5,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,333 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = (25,000 - 5,000)/5 years = $4,000 per year Depreciation expense for March 1 through December 31 = $4,000 x 10/12 = $3,333

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense?

$3,600 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $3,000)/5 = $3,600 per year.

Jeremy's Photo Store bought equipment for $60,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $12,000. The company uses the straight-line method of depreciation. On December 31 of its fourth year, before year-end adjusting entries have been recorded, Jeremy's decides to extend the estimated useful life 3 years giving it a total life of 11 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the fourth year?

$3,750 Solution: Original depreciation per year: (60,000 - 12,000)/8 years = 6,000 per year. Revised depreciation per year: (60,000 - 3 x 6,000 - 12,000)/(11-3) = 3,750 per year

A corporation has 8,000 shares of 5%, $50 par, non-cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $50,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$30,000 Solution: Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 8,000 x 5% x $50 = $20,000 Total dividends available = $50,000 Dividends available to common stockholders = $30,000

A corporation has 4,000 shares of cumulative preferred stock with a $100 par value per share and a 5% dividend rate. The dividends are in arrears for two years. If the corporation plans to distribute $90,000 as dividends in the current year, how much will the common stockholders receive?

$30,000 Solution: Stockholders who own cumulative preferred stock receive an allocation for each of the past two years (i.e., the preferred stock is in arrears for two years meaning dividends were not paid in those years) and an allocation for the current year. The remaining balance, if there is any, is allocated to the common stockholders. Preferred dividend for current year = 4,000 shares x $100/share x 5% = $20,000 Preferred dividends in arrears for two years ($20,000 × 2) = $40,000 Total dividends to preferred stockholders = $60,000 Total dividends available = $90,000 Dividends available to common stockholders = $90,000 - 60,000 = $30,000

A company does not segregate sales and sales taxes when it charges customers at the register. Its register total for a given day is $3,250, which includes a 4% sales tax. How much should be recognized as sales revenue and sales taxes payable, respectively?

$3125 and $125

A plant asset with a cost of $480,000 and accumulated depreciation of $456,000 is sold for $56,000. What is the amount of the gain or loss on disposal of the plant asset?

$32,000 gain.

Bazydlo Corporation bought equipment for $360,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

$320,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $360,000 - 40,000 = $320,000.

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $75,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $18,000, the corporation's common stockholders would receive

$33,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $18,000. Current year dividend to preferred stockholders = 15,000 x $20 x 8% = $24,000 Total paid to preferred stockholders = $18,000 + 24,000 = $42,000 Total paid to common stockholders = $75,000 - 42,000 = $33,000

On January 1, a corporation issued $1,000,000, 9% bonds for $960,000. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable annually on January 1. The company uses the effective-interest method of amortizing bond discount. At the end of the first year, how much should the corporation report as unamortized bond discount?

$34,000 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds' carrying value. The cash paid is the coupon or stated interest rate times the face amount of the bonds. The difference is the amount amortized for one year. The original discount is $40,000 ($1,000,000 - $960,000). The amortization for the first year is equal to the difference between the cash interest to be paid ($1,000,000 x 9% = $90,000) and interest expense ($960,000 x 10% = $96,000), or $6,000. The amortization of $6,000 is subtracted from the original discount of $40,000 to arrive at the unamortized bond discount at the end of the first year of $34,000.c

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized discount on the bonds is $14,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$34,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a discount so the carrying value equals the bond's principal minus unamortized discount. Carrying value = Principal minus unamortized discount = $1,000,000 - 14,000 = $986,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. Cash paid to redeem the bonds = $1,000,000 x 1.02 = $1,020,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,020,000 - 986,000 = $34,000).

In the current year, Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It also spent $20,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

$35,000 Solution: Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

Given the following account balances at year end, how much is amortization expense on Analog Enterprises income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $1,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; Goodwill, $4,500,000; and Copyrights of $2,000,000. The company also paid $500,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

$350,000 Solution: The intangibles are trademarks patents and goodwill. Only patents and copyrights are amortized. ($1,500,000 + 2,000,000)/10 = $350,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value - preferred stock 80,000 Paid-in capital in excess of par value - common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $32,000, the corporation's common stockholders would receive

$36,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $32,000. Current year dividend to preferred stockholders = $400,000 x 8% = $32,000 Total paid to preferred stockholders = $32,000 + 32,000 = $64,000 Total paid to common stockholders = $100,000 - 64,000 = $36,000

Solution: For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100. Note: There are four years of useful life including the third, fourth, fifth, and sixth years.

$3750 Solution: Original depreciation per year: (60,000 - 12,000)/8 years = 6,000 per year. Revised depreciation per year: (60,000 - 3 x 6,000 - 12,000)/(11-3) = 3,750 per year

On January 1, a company issued $3,500,000 of 10%, 7-year bonds for $3,180,537. Interest is payable annually on January 1. The effective interest rate on the bonds is 12%. Use the effective-interest method to determine the amount of interest expense for the first year.

$381,664 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 12% x $3,180,537 = $381,664

On May 1 of the current year, La Presa Company sells some equipment for $25,000. The original cost was $50,000, the estimated salvage value was $5,000, and the expected useful life was 5 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $18,000. How much is the gain or loss on the sale?

$4,000 loss First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $45,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 5,000) and a life of 5 years, the depreciation is $9,000 per year. In the current year, depreciation expense is $3,000 (i.e., $9,000 per year x 4/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $21,000 (i.e., $18,000 + 3,000). Book value equals cost minus accumulated depreciation. Book value is $29,000 (i.e., $50,000 - $21,000). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $25,000 - 29,000 = ($4,000) (i.e., loss).

Southern Company purchased machinery with a list price of $64,000. The seller granted Southern Company a 10 percent discount so Southern paid $57,600 for the machinery. Southern Company also paid $400 for shipping and paid sales tax of $3,000 to purchase the machinery. Southern Company estimates that the machinery will have a useful life of 10 years and a salvage value of $20,000. If Southern Company uses straight-line depreciation, annual depreciation will be

$4,100 Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $57,600 + 400 + 3,000 = $61,000 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($61,000 - 20,000)/10 years $4,100 per year

A company has the following asset account balances: Buildings and equipment, $5,800,000; Accumulated depreciation, $1,600,000; Patents, $1,050,000; Inventory, $1,000,000; and Goodwill, $4,000,000. How much will be reported on the balance sheet under property, plant & equipment?

$4,200,000 Solution: Buildings and equipment less accumulated depreciation are the only amounts included under Plant & Equipment: $5,800,000 - $1,600,000 = $4,200,000.

A company has the following asset account balances: Buildings and equipment, $6,200,000; Accumulated depreciation, $1,800,000; Patents, $950,000; Inventory, $1,000,000; and Goodwill, $4,000,000. How much will be reported on the balance sheet under property, plant & equipment?

$4,400,000

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Trademarks $250,000 Accounts Receivable 3,000,000 Research and development 2,500,000 Goodwill 1,500,000 Retained earnings 1,200,000 Copyrights 2,700,000

$4,450,000

At the start of its first year, a corporation issued 5,000 shares of 8%, $50 par value, non-cumulative preferred stock and 100,000 shares of $1 par value common stock. The corporation declared and paid dividends of $15,000 in the first year. In its second year, the corporation declared and paid dividends of $60,000. What are the dividends received by the common stockholders in the second year?

$40,000 Solution: The preferred stock is non-cumulative so there are never dividends in arrears. Dividend to preferred shareholders = 5,000 shares x (8% x $50) = $20,000 Dividends to common shareholders = $60,000 - 20,000 = $40,000

In the current year, Pierce Company incurred $160,000 of research and development costs in its laboratory to develop a new product. It also spent $25,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

$40,000 Solution: Only the $25,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

A company sells a plant asset that originally cost $240,000 for $80,000 on December 31 of the current year. The accumulated depreciation account had a balance of $120,000 after the current year's depreciation of $20,000 had been recorded. The company should recognize a

$40,000 loss on disposal. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$240,000 - $120,000 = $120,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $120,000 - 80,000 = $40,000

On October 1, Year 1, Best Buy purchased an asset for $10,000, with a $2,000 estimated salvage value, and a 5-year useful life. How much is the year 1 depreciation expense using the straight-line method?

$400 Solution: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($10,000 - $2,000)/5 x 3/12 = $400. Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.

Given the following account balances at year end, how much is amortization expense on Analog Enterprises' income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $2,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; Goodwill, $4,500,000; and Copyrights, $1,500,000. The company also paid $2,000,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

$400,000 Solution: The intangibles are trademarks patents, goodwill, and copyrights. Only patents and copyrights are amortized. Amortization expense for the year equals ($2,500,000 + $1,500,000)/10 = $400,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

A corporation issued 10-year bonds with a face value of $600,000 and a contractual rate of interest of 7% at 102. What is its total cost of borrowing?

$408,000

On January 1, a corporation issued $1,000,000, 9% bonds for $951,000. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable annually on January 1. The company uses the effective-interest method of amortizing bond discount. At the end of the first year, how much should the corporation report as unamortized bond discount?

$43,900

A company does not segregate sales and sales taxes when it charges customers at the register. Its register total for a given day is $4,515, which includes a 5% sales tax. How much should be recognized as sales revenue and sales taxes payable, respectively?

$4300 and $215 Solution: The amount of sales can be computed by dividing total cash received by one plus the sales tax rate. The computation is as follows: $4,515/(1 + .05) = $4,300. The sales tax payable is the difference between what was charged the customer and the amount recorded as sales revenue: $4,515 - 4,300 = $215.

A corporation issued 10-year bonds with a face value of $600,000 and a contractual rate of interest of 7% at 98 on July 1. What is the total cost of borrowing?

$432,000

A company borrows $86,500 on August 1 from a bank. It signs a $86,500, 12%, 18-month note. How much interest expense should the company record on December 31 if the company uses a calendar year-end and records adjusting entries only at year-end?

$4325 Solution: Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding. Remember—all interest rates are annual interest rates unless designated otherwise. This note generates 12% interest if it were outstanding the entire year. At December 31, two months of interest has accrued and should be recognized as interest expense and interest payable. December 31: $86,500 x 12% x 5/12 = $4,325.

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value - preferred stock 80,000 Paid-in capital in excess of par value - common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $24,000, the corporation's common stockholders would receive

$44,000. Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $24,000. Current year dividend to preferred stockholders = $400,000 x 8% = $32,000 Total paid to preferred stockholders = $24,000 + 32,000 = $56,000 Total paid to common stockholders = $100,000 - 56,000 = $44,000

A corporation has 10,000 shares of 6%, $50 par, non-cumulative preferred stock and 75,000 shares of $4 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $75,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$45,000 Solution: Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 10,000 x 6% x $50 = $30,000 Total dividends available = $75,000 Dividends available to common stockholders = $45,000

A corporation issues a $500,000, 7%, 15-year mortgage note. The terms provide for annual installment payments of $54,897. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$458,813 Solution: Since interest accrues annually, the first year's interest would be $35,000 (i.e., 7% x $500,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $54,897 payment and the interest component ($35,000), resulting in a principal reduction of $19,897. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $19,897 from $500,000 to $480,103. The second annual payment's interest is 7% of the outstanding mortgage principal of $480,103, or $33,607. The second annual payment of $54,897 is allocated as $33,607 paid towards interest and the remaining $21,290 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $458,813.

A company purchased land for $420,000. It also paid a real estate brokers' commission of $22,000 and spent $33,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,500. The company also assumed $4,000 in property taxes due on the land owed by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$476,500. Solution: Total cost = $420,000 + $22,000 + ($33,000 - 2,500) + 4,000 = $476,500

On January 1, a corporation issued $3,500,000, 15%, 7-year bonds for $3,809,583. Interest is payable annually on January 1. The effective interest rate on the bonds is 13%. Use the effective-interest method to determine the amount of interest expense for the first year.

$495,246 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 13% x $3,809,583 = $495,246

On January 1, a company issued $6,250,000 of 6%, 5-year bonds for $5,520,690. Interest is payable annually on January 1. The effective interest rate on the bonds is 9%. Use the effective-interest method to determine the amount of interest expense for the first year.

$496,862

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $5,000 and an estimated useful life of 9 years. How much is depreciation expense for the first year under the straight-line method?

$5,000 Solution: The annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($5,000) divided by the useful life (9 years) resulting in an annual depreciation value of $5,000. Depreciation expense per year = (50,000 - 5,000)/9 = 5,000 per year.

A $500,000 bond is redeemed at 98 when the carrying value of the bond is $485,000. Which of the following is one effect of recording the redemption?

$5,000 of loss Solution: The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were redemption for $490,000 ($500,000 x 98%) and the carrying value is $485,000, the company should record a loss of $5,000.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Land, $15,000,000; Equipment, $25,000,000; Franchises, $500,000; Trademarks, $1,700,000; and Goodwill, $2,800,000. The company also paid $1,500,000 for research & development during the current year.

$5,000,000 Solution: The intangibles are trademarks of $1,700,000, franchises of $500,000, and goodwill of $2,800,000 totaling $5,000,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights.

A company purchased factory equipment on June 1 of the current year, for $96,000. It is estimated that the equipment will have a $6,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31 of the current year is

$5,250.

A company does not segregate sales and sales taxes when it charges customers at the register. Its register total for a given day is $5,724, which includes a 6% sales tax. How much should be recognized as sales revenue and sales taxes payable, respectively?

$5,400 and $324 Solution: The amount of sales can be computed by dividing total cash received by one plus the sales tax rate. The computation is as follows: $5,724/(1 + .06) = $5,400. The sales tax payable is the difference between what was charged the customer and the amount recorded as sales revenue: $5,724 - 5,400 = $324.

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Research and development $1,500,000 Accounts Receivable 4,000,000 Trademarks 1,000,000 Goodwill 2,500,000 Equipment 1,500,000 Patents 2,000,000

$5,500,000

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Copyrights, $200,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Patents, $1,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; and Goodwill, $3,500,000. The company also paid $1,500,000 for research & development during the current year.

$5,900,000

At the start of its first year, a corporation issued 10,000 shares of 7%, $100 par value, non-cumulative preferred stock and 40,000 shares of $1 par value common stock. There were no dividends declared in the first year. In its second year, the corporation declared and paid dividends of $120,000. What is the amount of dividends received by the common stockholders in the second year?

$50,000 Solution: The preferred stock is non-cumulative so there are never dividends in arrears. Dividend to preferred shareholders = 10,000 shares x (7% x $100) = $70,000 Dividends to common shareholders = $120,000 - 70,000 = $50,000

On January 1, a company issued $8,000,000 of 4%, 9-year bonds for $5,601,901. The bonds pay interest annually on January 1. The effective interest rate on the bonds is 9%. Use the effective-interest method to determine the amount of interest expense for the first year.

$504,171

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $280,000 Treasury stock, $10,000 Dividends payable, $30,000 Paid-in capital in excess of par value, $60,000 Common stock, $175,000 How much is total stockholders' equity?

$505,000 Solution: Total stockholders' equity = Retained earnings - treasury stock + paid-in capital in excess of par value + common stock Total stockholders' equity = $280,000 - $10,000 + $60,000 + $175,000 = $505,000 Note: Dividends Payable is a liability.

A corporation's December 31, 2021 balance sheet showed the following: 6% preferred stock, $50 par value, cumulative, 30,000 shares authorized; 12,000 shares issued $ 600,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $12,000, the corporation's common stockholders would receive

$52,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $12,000. Current year dividend to preferred stockholders = 12,000 x $50 x 6% = $36,000 Total paid to preferred stockholders = $12,000 + 36,000 = $48,000 Total paid to common stockholders = $100,000 - 48,000 = $52,000

A corporation's balance sheet shows the following: Preferred stock, $20 par value, 8% cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 What is the corporation's total stockholders' equity?

$53,880,000 Solution: Preferred stock, $300,000 Common stock, $19,500,000 Paid-in capital in excess of par value—preferred stock, $60,000 Paid-in capital in excess of par value—Common stock, $27,000,000 Total paid-in capital, $46,860,000 Add: Retained earnings, $7,650,000 Less: Treasury stock, ($630,000) Total stockholders' equity, $53,880,000

A company has bonds with a principal value of $1,000,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 104. What is the company's gain or loss on the redemption?

$54,000 loss

A corporation issues a $600,000, 7%, 20-year mortgage note. The terms provide for annual installment payments of $56,636. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$568,704 Solution: Since interest accrues annually, the first year's interest would be $42,000 (i.e., 7% x $600,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $56,636 payment and the interest component ($42,000), resulting in a principal reduction of $14,636. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $14,636 from $600,000 to $585,364. The second annual payment's interest is 7% of the outstanding mortgage principal of $585,364, or $40,976. The second annual payment of $56,636 is allocated as $40,976 paid towards interest and the remaining $15,660 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $569,704.

A corporation issues a $600,000, 8%, 20-year mortgage note. The terms provide for annual installment payments of $61,111. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$572,728

When equipment is sold for cash in an amount that is less than its book value, the company debits the following

(i) Accumulated Depreciation, (ii) Cash, and (iii) Loss on Disposal of Plant Assets

At the beginning of the current year, a company purchased machinery for $60,000. It has a salvage value of $6,000 and an estimated useful life of 9 years. How much is depreciation expense for the first year under the straight-line method?

$6,000 Solution: The annual depreciation is calculated as the sum of the purchase price ($60,000) less the salvage value ($6,000) divided by the useful life (9 years) resulting in an annual depreciation value of $6,000. Depreciation expense per year = (60,000 - 6,000)/9 = 6,000 per year.

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$6,000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a premium so the carrying value equals the bond's principal plus unamortized premium. Carrying value = Principal plus unamortized premium = $1,000,000 + 14,000 = $1,014,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. Cash paid to redeem the bonds = $1,000,000 x 1.02 = $1,020,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,020,000 - 1,014,000 = $6,000).

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Copyrights, $500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; and Goodwill, $4,500,000. The company also paid $2,000,000 for research & development during the current year.

$6,000,000 Solution: The intangibles are copyrights of $500,000, trademarks of $1,000,000, and goodwill of $4,500,000 totaling $6,000,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights.

Southern Company purchased machinery with a list price of $96,000. The seller granted Southern Company a 10 percent discount so Southern paid $86,400 for the machinery. Southern Company also paid $600 for shipping and paid sales tax of $4,500 to purchase the machinery. Southern Company estimates that the machinery will have a useful life of 10 years and a salvage value of $30,000. If Southern Company uses straight-line depreciation, annual depreciation will be

$6,150

A company purchased factory equipment on April 1 of the current year, for $96,000. It is estimated that the equipment will have a $12,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31 of the current year is

$6,300 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($96,000 - 12,000)/10 years = $8,400 per year Depreciation expense for April 1 through December 31 = $8,400 x 9/12 = 6,300

On May 1 of the current year, Fredericks Company purchases and places into service new equipment. The cost of the equipment is $115,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$6,667 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($115,000 - 15,000)/10 years = $10,000 per year Depreciation expense for May 1 through December 31 = $10,000 x 8/12 = $6,667

A company purchased machinery for $410,000 on July 1, 2021. The company also paid freight charges of $7,000 and installation costs of $8,000. It is estimated that the machinery will have a $25,000 salvage value at the end of its 10-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

$60,000

A company purchased land for $560,000. The company also paid a real estate brokers' commission of $24,000 and spent $20,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,000. The company additionally assumed $5,000 in property taxes due on the land owed by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$607,000. Solution: Total cost = $560,000 + $24,000 + ($20,000 - 2,000) + 5,000 = $607,000

The current carrying value of Kennett's $600,000 face value bonds is $597,750. If the bonds are retired at 102, what would be the amount Kennett would pay its bondholders?

$612,000 Solution: $600,000 x 1.02 = $612,000

A corporation's balance sheet shows the following: Preferred stock, $20 par value, 8% cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value - preferred stock 80,000 Paid-in capital in excess of par value - common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (40,000 shares) 840,000 What is the corporation's total paid-in capital?

$62,480,000

Bonds with a face value of $600,000 and a quoted price of 103½ have a selling price of

$621,000 Solution: Proceeds from the sale of bonds with a face value of $600,000 at 103½ equals $600,000 x 1.0350 or $621,000. Equivalently, $600,000 x 103.50% = $621,000. Chapter 10, Learning objective 4, Pool 5

On September 1, Year 1, Best Buy purchased an asset for $9,000, with a $1,500 estimated salvage value, and a 4-year useful life. How much is the Year 1 depreciation expense using the straight-line method?

$625 Solution: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($9,000 - $1,500)/4 x 4/12 = $625.

Joan's Jewelry Shop bought equipment for $100,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $25,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, Joan's decides to revise the estimated salvage value to $20,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

$8,500. Solution: Original depreciation per year: ($100,000 - 25,000)/20 years = $7,500 per year. Revised depreciation per year: ($100,000 - 5 x 7,500 - 20,000)/(10-5) = $8,500 per year

Rick's Printing Shop bought equipment for $50,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $10,000. The company uses the straight-line method of depreciation. On December 31 of its second year, before year-end adjusting entries have been recorded, Rick's decides to shorten the estimated useful life by 3 years giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the second year?

$8,750 Solution: Original depreciation per year = [($50,000 - $10,000)/8] x 1 = $5,000 Revised depreciation per year = [($50,000 - 5,000) - $10,000]/(5-1) = $8,750

A corporation has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at the end of the current year. Last year was its first year, and it did not declare a dividend in its first year. This year, it declares and pays $200,000 in dividends. What is the amount of dividends received by the common stockholders in the current year?

$80,000 Solution: Dividends must be paid first to preferred stockholders before determining how much of the dividend remains for common stockholders. If preferred stock is cumulative then dividends not paid to preferred stockholders in previous years must be paid in addition to the current year's preferred stockholders' dividend before paying common stockholders. The number of years cumulative preferred stock is in arrears identifies how many prior years of preferred stock dividends had not yet been paid. Preferred stockholders receive the stock's par value per share times the number of outstanding shares times the dividend rate (i.e., stated either as a percentage or a dollar value per share) times one plus the number of years in arrears. Preferred stockholders' dividend = 10,000 shares x $100 per share x 6% x (1+1) = $80,000 Common stockholders receive the remaining dividend = $200,000 - 120,000 = $80,000

Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized premium on the bonds is $12,000. The company redeemed the bonds at 102. What is the company's gain or loss on the redemption?

$8000 loss Solution: When a company retires bonds before maturity, it is necessary to: 1. Eliminate the carrying value of the bonds at the redemption date, 2. Record the cash paid to redeem the bonds, and 3. Recognize the gain or loss on redemption for the difference between 1 and 2. In this case, the bond was issued at a premium so the carrying value equals the bond's principal plus unamortized premium. Carrying value = Principal plus unamortized premium = $1,000,000 + 12,000 = $1,012,000 The company can redeem this bond at 102 which means it can redeem this bond by paying the bondholder 102% of the bond's principal value. Cash paid to redeem the bonds = $1,000,000 x 1.02 = $1,020,000 Determining the gain or loss on the redemption of bonds: 1. Recognize gain if the cash paid to redeem bonds is less than their carrying value. 2. Recognize loss if the cash paid to redeem bonds in more than their carrying value. The cash paid to redeem the bonds is more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $1,020,000 - 1,012,000 = $8,000).

A corporation has 10,000 shares of 4%, $40 par, non-cumulative preferred stock and 50,000 shares of $4 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $100,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$84,000 Solution: Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 10,000 x 4% x $40 = $16,000 Total dividends available = $100,000 Dividends available to common stockholders = $84,000

A corporation issues a $900,000, 9%, 25-year mortgage note. The terms provide for annual installment payments of $91,626. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$877,792 Solution: Since interest accrues annually, the first year's interest would be $81,000 (i.e., 9% x $900,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $91,626 payment and the interest component ($81,000), resulting in a principal reduction of $10,626. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $10,626 from $900,000 to $889,374. The second annual payment's interest is 9% of the outstanding mortgage principal of $889,374, or $80,044. The second annual payment of $91,626 is allocated as $80,044 paid towards interest and the remaining $11,582 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $877,792.

A corporation issues a $900,000, 10%, 25-year mortgage note. The terms provide for annual installment payments of $99,151. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$880,782 Solution: Since interest accrues annually, the first year's interest would be $90,000 (i.e., 10% x $900,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $99,151 payment and the interest component ($90,000), resulting in a principal reduction of $9,151. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $9,151 from $900,000 to $890,849. The second annual payment's interest is 10% of the outstanding mortgage principal of $890,849, or $89,085. The second annual payment of $99,151 is allocated as $89,085 paid towards interest and the remaining $10,066 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $880,782.

A corporation issues a $900,000, 9%, 25-year mortgage note. The terms provide for annual installment payments of $91,626. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$889,374 Solution: Since interest accrues annually, the first year's interest would be $81,000 (i.e., 9% x $900,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $91,626 payment and the interest component ($81,000), resulting in a principal reduction of $10,626. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $10,626 from $900,000 to $889,374.

An asset purchased on January 1 for $40,000 has an estimated salvage value of $4,000. The current useful life is 8 years. How much is total accumulated depreciation using the straight-line method at the end of the second year of life?

$9,000 Solution: The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($40,000 - $4,000)/8 years = $4,500 At the end of the second year, there will be two years of accumulated depreciation for a total of $9,000.

A corporation issues 10%, 10-year bonds with a face value of $100,000 for $102,000. Using the effective-interest amortization method, how much is the interest expense for the first year if the effective interest rate is 9.47%?

$9,659

A company purchased land for $80,000. The company also assumes $12,000 of accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$95,000 Solution: All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The company should include the purchase price of $80,000, the assumption of accrued taxes of $12,000 (i.e., the buyer agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $5,000 less the payment received for the salvaged materials in the amount of $2,000. This results in an acquisition cost of $95,000.

What is the total stockholders' equity based on the following account balances? Common Stock has a $750,000 balance. Paid-In Capital in Excess of Par has a $50,000 balance. Retained Earnings has a $175,000 credit balance. Treasury Stock has a $25,000 balance.

$950,000 Solution: Stockholders' equity: Paid-in capital: Common stock, $750,000 Paid-In Capital in Excess of Par, $50,000 Retained earnings, $175,000 Total paid in capital and retained earnings, $975,000 Less: Treasury stock, $25,000 Total stockholders' equity, $950,000

A corporation issues a $1,000,000, 11%, 20-year mortgage note. The terms provide for annual installment payments of $125,576. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$967,135 Solution: The first year's payment of $125,576 pays the first year's interest is $110,000 (i.e., 11% x $1,000,000 x 1 year) and principal of $15,576 (i.e., reduction in principal = payment - interest = $125,576 - 110,000 = $15,576. The principal is reduced from $1,000,000 by $15,576 to $984,424. The second year's annual payment of $125,576 pays interest of $108,287 (i.e., 11% x $984,424 x 1 year) and principal of $17,289 (i.e., reduction of principal = payment - interest = $125,576 - 108,287 = $17,289). The principal is reduced from $984,424 by $17,289 to $967,135.

A company purchase land for $84,000. It also paid a real estate agent brokers' commission of $5,000 and spent $7,000 demolishing an old building on the land before starting the new one. Proceeds form salvage of the dem building were $1,200. The company also assumed $3,000 in property taxes due on the land owned by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$97,800. Solution: Total cost = $84,000 + $5,000 + (7,000 - 1,200) + 3,000 = $97,800

A corporation issues a $1,000,000, 10%, 20-year mortgage note. The terms provide for annual installment payments of $117,460. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$982,540 Solution: Since interest accrues annually, the first year's interest would be $100,000 (i.e., 10% x $1,000,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $117,460 payment and the interest component ($100,000), resulting in a principal reduction of $17,460. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $17,460 from $1,000,000 to $982,540.

A corporation issues a $1,000,000, 11%, 20-year mortgage note. The terms provide for annual installment payments of $125,576. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$984,424

During the current year, Ronald Corporation reported net sales of $1,500,000, net income of $900,000, and depreciation expense of $100,000. Ronald also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Ronald's asset turnover ratio is

1.2 times Solution: Assets turnover ratio = Net sales/Average total assets Return on assets = $1,500,000/[($1,000,000 + 1,500,000)/2] = 1.2 or 1.2 times per year

The following information is provided for Nguyen Company (in $ millions): Net income for the current year is $275; net income in the prior year was $250. Net sales for the current year is $1,500; net sales in the prior year were $1,400. Total assets as of the end of the current year is $1,150; total assets as of the end of the prior year is $1,050. What is the company's asset turnover ratio for the current year?

1.36 times Solution: Assets turnover ratio = Net sales/Average total assets Return on assets = $1,500/[($1,050,000 + 1,150)/2] = 1.36 or 1.36 times per year

The following information is for Hutchinson Company: Net income, $920,000 Common stock dividends, $100,000 Preferred stock dividends, $50,000 Average total assets, $6,600,000 Average common stockholders' equity, $4,000,000 Average preferred stockholders' equity, $1,000,000 What is the payout ratio?

10.87% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/920,000 = 10.87%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

The following information is provided for a certain company (in $ millions): Net income for the current year is $390 Net income for the prior year was $350 Net sales for the current year is $4,100 Net sales for the prior year were $3,800 Total assets as of the end of the current year was $4,000 Total assets as of the end of the prior year was $3,000 What is the company's return on assets for the current year?

11.1%

On May 1, Year 1, Best Buy purchased an asset for $12,000, with a $1,500 estimated salvage value, and a 6-year useful life. How much is the Year 1 depreciation expense using the straight-line method?

1167 Solution: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($12,000 - $1,500)/6 x 8/12 = $1,167.

If 1,000 shares of $5 par common stock are reacquired by a corporation for $12 a share, by how much will total stockholders' equity change?

12,000 decrease

On January 1, a corporation issued $3,750,000, 5%, 4-year bonds for $4,028,783. Interest is payable annually on January 1. The effective interest rate on the bonds is 3%. Use the effective-interest method to determine the amount of interest expense for the first year.

120,863

The following data is available for a certain corporation at December 31: Common stock, par $2 (authorized 300,000 shares) $ 250,000 Treasury stock (at cost $10 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding?

124,880

In its first year, a corporation reported sales revenue of $1,300,000, net income of $200,000, and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,800,000 at the end of the year. How much is the company's payout ratio?

13% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 26,000/200,000 = 13.00%.

The following information is for a certain company: Net income, $750,000 Preferred stock dividends, $25,000 Common stock dividends, $100,000 Beginning common stockholders' equity, $5,000,000 Ending common stockholder's equity, $6,000,000 Average market price of common stockholders' equity, $7,500,000 What is the return on common stockholders' equity?

13.18% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (750,000 - 25,000)/(5,000,000 + 6,000,000)/2) = 13.18%.

The following information is for a given company: Net income, $750,000 Preferred stock dividends, $25,000 Common stock dividends, $100,000 Beginning common stockholders' equity, $5,000,000 Ending common stockholder's equity, $6,000,000 Average market price of common stockholders' equity, $7,500,000 What is the payout ratio?

13.33% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/750,000 = 13.33%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

In a recent year Granada Corporation had net income of $200,000, interest expense of $20,000, and tax expense of $50,000. What was the company's times interest earned for the year?

13.5 Solution: ($200,000 + $20,000 + $50,000) / $20,000 = 13.50

Those most responsible for hiring the Chief Executive Officer is (are) the

Board of directors

The following information is for a certain company: Net income, $750,000 Common stock dividends, $25,000 Preferred stock dividends, $75,000 Average total assets, $7,000,000 Average common stockholders' equity, $5,000,000 Average preferred stockholders' equity, $1,000,000 What is the return on common stockholders' equity?

13.50% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (750,000 - 75,000)/$5,000,000 = 13.50%.

A corporation reported net income of $300,000 and paid dividends of $25,000 on its common stock and $80,000 on its preferred stock. Common stockholders' equity was $1,500,000 at the start of the year and $1,750,000 at the end of the year. Total assets was $2,000,000 at the start of the year and $2,500,000 at the end of the year. What is the company's return on common stockholder's equity?

13.54% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (300,000 - 80,000)/(1,500,000 + 1,750,000)/2) = 13.54%.

The following information pertains to a certain company for the current year: Average total assets, $300,000 Average common stockholders' equity, $150,000 Sales revenue, $100,000 Net income, $25,000 Dividends on common stock, $6,000 Dividends on preferred stock, $4,000 What is the company's return on common stockholders' equity for the current year?

14% Solution: Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (25,000 - 4,000)/150,000 = 14%

Oahu Industries' average total assets for the year are $5,000,000, its average total stockholders' equity for the year are $2,500,000, its net income is $700,000, its gross margin is $2,500,000, and its net sales are $10,000,000. What is Oahu's return on assets?

14% Solution: Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $700,000 divided by $5,000,000 = 14%.

A corporation reported net income of $250,000 and paid dividends of $10,000 on its common stock and $50,000 on its preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. Total assets was $1,900,000 at the start of the year and $2,100,000 at the end of the year. What is the company's return on common stockholder's equity?

14.29% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (250,000 - 50,000)/(1,200,000 + 1,600,000)/2) = 14.29%.

Rawlings Company purchased a machine for $70,000 on January 1 of the current year and depreciated it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $29,000 on June 30 of the fourth year, what would be the company's gain or loss from the sale?

16,500 loss Solution: The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $70,000 - [($70,000/10 years) x 3.5 years] = $45,500. The gain (loss) on the sale = sales price minus book vale = $29,000 - $45,500 = ($16,500). Chapter 9, Learning objective 5: Explain how to account for the disposal of plant assets.

A corporation reported net income of $360,000 and paid dividends of $125,000 on its common stock and $50,000 on its preferred stock. Common stockholders' equity was $1,600,000 at the start of the year and $2,000,000 at the end of the year. Total assets was $2,200,000 at the start of the year and $2,600,000 at the end of the year. What is the company's return on common stockholder's equity?

17.22% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (360,000 - 50,000)/(1,600,000 + 2,000,000)/2) = 17.22%.

Consider the following data for a corporation: Net income, $760,000 Preferred stock dividends, $60,000 Market value of common stockholders' equity, $7,500,000 Beginning common stockholders' equity, $3,800,000 Ending common stockholders' equity, $4,200,000 Common stock dividends, $20,000 What is the return on common stockholders' equity?

17.50% Solution: Return on common stockholders' equity = Net income less preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = ($760,000 - $60,000)/$4,000,000 = 17.5%.

The following information pertains to a certain company for the current year: Average total assets, $1,500,000 Average common stockholders' equity, $500,000 Sales, $250,000 Net income, $100,000 Dividends on common stock, $25,000 Dividends on preferred stock, $10,000 What is the company's return on common stockholders' equity for the current year?

18% Solution: Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (100,000 - 10,000)/500,000 = 18%

The following information is for a certain company: Net income, $920,000 Preferred stock dividends, $100,000 Common stock dividends, $50,000 Beginning common stockholders' equity, $4,000,000 Ending common stockholder's equity, $5,000,000 Average market price of common stockholders' equity, $6,000,000 What is the return on common stockholders' equity?

18.22% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (920,000 - 100,000)/(4,000,000 + 5,000,000)/2) = 18.22%.

A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's depreciation expense is $4,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after adjusting entries is $24,000. The remaining useful life of the plant asset is

2 years Solution: Depreciation per year = (Cost - salvage value)/Useful life Solving for useful life: Useful life = ($40,000 - 8,000)/$4,000 = 8 years Years expired = Accumulated depreciation/Depreciation per year = $24,000/$4,000 = 6 years Remaining life = Useful life - Years expired = (8 - 6) = 2 years.

Among Pima Company's records, it has the following selected accounts after posting adjusting entries: Accounts payable, $16,000 9-month, 8%, note payable, $46,000 Income tax expense, $5,000 Salaries and wages expense, $23,000 3-year, 10% note payable, $200,000 Salaries and wages payable, $10,000 Mortgage payable ($22,000 due next year), $1,000,000 Rent payable, $8,000 Current assets are $210,000 at year-end. How much is Pima's current ratio at year-end?

2.06 Solution: Liabilities are classified as current if they will be paid with current assets within one year or the current operating cycle, whichever is longer. Examples of current liabilities include accounts payable, notes payable due in 12 months or less months, income tax payable, salaries and wages payable, the portion of mortgage payable due next year, and rent payable. Current liabilities = $16,000 + 46,000 + 10,000 + 22,000 + 8,000 = $102,000

Consider the following data for a corporation: Net income, $800,000 Preferred stock dividends, $50,000 Market value of common equity, $5,000,000 Beginning common stockholders' equity, $3,800,000 Ending common stockholder's equity, $4,200,000 Common stock dividends, $20,000 What is the payout ratio?

2.50% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 20,000/800,000 = 2.50%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

Consider the following data for a corporation: Net income, $760,000 Preferred stock dividends, $60,000 Market price per share of stock, $7,500,000 Average common stockholders' equity, $4,000,000 Cash dividends declared on common stock, $20,000 What is the payout ratio?

2.63%

Among Pima Company's records, it has the following selected accounts after posting adjusting entries: Accounts payable, $14,000 6-month, 8%, note payable, $44,000 Income tax payable, $5,000 Salaries and wages expense, $23,000 3-year, 10% note payable, $200,000 Salaries and wages payable, $8,000 Mortgage payable ($20,000 due next year), $1,000,000 Rent payable, $6,000 Current assets are $256,000 at year-end. How much is Pima's current ratio at year-end?

2.64 Solution: Liabilities are classified as current if they will be paid with current assets within one year or the current operating cycle, whichever is longer. Examples of current liabilities include accounts payable, notes payable due in 12 months or less, income tax payable, salaries and wages payable, the portion of mortgage payable due next year, and rent payable. Current liabilities = $14,000 + 44,000 + 5,000 + 8,000 + 20,000 + 6,000 = $97,000 Current ratio = current assets divided by current liabilities = $256,000/$97000 = 2.64

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $800,000, its gross margin is $2,000,000, and its net sales are $10,000,000. What is Oahu's return on assets?

20% Solution: Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $800,000 divided by $4,000,000 = 20%.

In the current year, a corporation reported net income of $120,000, paid dividends of $25,000 on common stock, and $20,000 of dividends on preferred stock. The corporation's common stockholders' equity was $450,000 at the beginning of the year and its common stockholders' equity is $550,000 at the end of the year. The company's return on common stockholders' equity for the current year is

20.0% Solution: Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (120,000 - 20,000)/[(450,000 + 550,000)/2] = 20%

The following information is for a certain company: Net income, $920,000 Common stock dividends, $100,000 Preferred stock dividends, $50,000 Average total assets, $6,600,000 Average common stockholders' equity, $4,000,000 Average preferred stockholders' equity, $1,000,000 What is the return on common stockholders' equity?

21.75%

The following data is available for a certain corporation: Common stock, par $10 (authorized 30,000 shares), $250,000 Treasury stock (at cost $15 per share), $1,200 Based on the data, how many shares of common stock are outstanding?

24,920 Solution: The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $250,000 and common stock has a $10 par value per share the company the company must have 25,000 shares of common stock outstanding (i.e., $250,000/$10 per share = 25,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. Treasury stock reduced the number of shares outstanding. With $1,200 of treasury stock recorded on the company's books and a $15 cost per share the company must have 80 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 124,880 shares outstanding (i.e., 25,000 - 80 = 24,920).

The following information is provided for a certain company (in $ millions): Net income for the current year is $275 Net income in the prior year was $250 Net sales for the current year is $1,500 Net sales in the prior year were $1,400 Total assets as of the end of the current year is $1,150 Total assets as of the end of the prior year is $1,050 What is the company's return on assets for the current year?

25% Solution: Return on assets = Net income/Average total assets Return on assets = $275/[($1,050 + 1,150)/2] = 0.25 or 25%

In the current year, a corporation reported net income of $240,000, paid dividends of $25,000 on common stock, and $40,000 of dividends on preferred stock. The corporation's common stockholders' equity was $700,000 at the beginning of the year and its common stockholders' equity is $900,000 at the end of the year. The company's return on common stockholders' equity for the current year is

25% Solution: Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (240,000 - 40,000)/[(700,000 + 900,000)/2] = 25%

At the start of its first year, a corporation issued 5,000 shares of 8%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock. The corporation declared and paid dividends of $15,000 in the first year. In its second year, the corporation declared and paid dividends of $60,000. What are the dividends received by the preferred stockholders in the second year?

25,000 Solution: The preferred stock is cumulative so there are never dividends in arrears. Annual dividend to be paid to preferred shareholders = 5,000 shares x (8% x $50) = $20,000 Dividends in arrears = Annual dividend to be paid to preferred stockholders - Dividend paid to preferred stockholders Dividend in arrears = $20,000 - 15,000 = $5,000 Second year dividend to preferred stockholders = Annual dividend to be paid to preferred stockholders + dividends in arrears Second year dividend to preferred stockholders =$20,000 + 5,000 = $25,000 Dividend paid to common stockholders = Dividend - Dividend to preferred stockholders Dividend to common stockholders = $150,000 - 140,000 = $10,000

On January 1, a company issued $3,700,000 of 6%, 7-year bonds is $3,141,342. The bonds pay interest annually on January 1. The effective interest rate on the bonds is 9%. Use the effective-interest method to determine the amount of interest expense for the first year.

282721 Solution: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 9% x $3,141,342 = $282,721

A corporation reported net income of $340,000 and paid dividends of $100,000 on its common stock and $40,000 on its preferred stock. Common stockholders' equity was $1,600,000 at the start of the year and $2,000,000 at the end of the year. Total assets were $2,250,000 at the start of the year and $2,750,000 at the end of the year. What is the company's payout ratio?

29.41% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/340,000 = 29.41%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

An asset was purchased on January 1 for $74,000 has an estimated salvage value of $10,000. The depreciation expense in the second year is $12,800 and the balance of the Accumulated Depreciation account after the adjusting entries are recorded in the second year is $25,600. If the company uses the straight-line method, what is the asset's remaining useful life?

3 years Solution: Since the depreciable cost is $64,000 (i.e., $74,000 purchase price less the salvage value of $10,000) and the annual depreciation is $12,800, it has a 5-year life. The balance in Accumulated Depreciation indicates that 2 years of life have been consumed ($25,600/$12,800 per year = 2 years). Of the total 5 years of life, 3 years remain.

Consider the following data for a corporation: Net income, $750,000 Preferred stock dividends, $50,000 Market price per share of stock, $25 Average common stockholders' equity, $3,000,000 Cash dividends declared on common stock, $25,000 What is the payout ratio?

3.3% Payout ratio is cash dividends declared to common stockholders divided by net income. Payout ratio = $25,000/$750,000 = 3.3%

A corporation's December 31, 2021 balance sheet showed the following: 6% preferred stock, $50 par value, cumulative, 30,000 shares authorized; 12,000 shares issued $ 600,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $32,000, the corporation's common stockholders would receive

32,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $32,000. Current year dividend to preferred stockholders = 12,000 x $50 x 6% = $36,000 Total paid to preferred stockholders = $32,000 + 36,000 = $68,000 Total paid to common stockholders = $100,000 - 68,000 = $32,000

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value - preferred stock 80,000 Paid-in capital in excess of par value - common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $28,000, the corporation's common stockholders would receive

40,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $28,000. Current year dividend to preferred stockholders = $400,000 x 8% = $32,000 Total paid to preferred stockholders = $28,000 + 32,000 = $60,000 Total paid to common stockholders = $100,000 - 60,000 = $40,000

Suarez Corporation issued 10-year bonds with a face value of $600,000 and a contractual rate of interest of 7% at 102 on July 1. What is the total cost of borrowing for Suarez Corporation?

408,000 Solution: The total cost of borrowing equals the sum of the interest payments plus the discount on the bonds, if any, minus the premium on the bonds (if any). Interest payments = Principal x Stated interest rate x Number of periods = $600,000 × 7% × 10 years = $420,000 The bonds were issued at 102, indicating they were issued at a 2% premium (or 2% above their face value). Premium = $600,000 x 2% = $12,000 Total cost of borrowing = $420,000 - 12,000 = $408,000

A corporation issues a $500,000, 6%, 15-year mortgage note. The terms provide for annual installment payments of $51,481. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

455,748

The following data is available for a certain corporation at December 31: Common stock, par $4 (authorized 500,000 shares) $200,000 Treasury stock (at cost $20 per share) $10,000 Based on the data, how many shares of common stock are outstanding?

49,500 The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $200,000 and common stock has a $4 par value per share the company the company must have 50,000 shares of common stock issued (i.e., $200,000/$4 per share = 50,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $10,000 of treasury stock recorded on the company's books and a $20 cost per share the company must have 500 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 50,000 - 500 = 49,500).

The following data is available for a certain corporation at December 31: Common stock, par $4 (authorized 500,000 shares) $200,000 Treasury stock (at cost $20 per share) $10,000 Based on the data, how many shares of common stock are outstanding?

49,500 The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $200,000 and common stock has a $4 par value per share the company the company must have 50,000 shares of common stock issued (i.e., $200,000/$4 per share = 50,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $10,000 of treasury stock recorded on the company's books and a $20 cost per share the company must have 500 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 50,000 - 500 = 49,500).

An asset was purchased on January 1 for $48,000. It has an estimated salvage value of $3,000. The depreciation expense in the fourth year is $5,000 and the balance of the Accumulated Depreciation account after the adjusting entries are recorded in the fourth year is $20,000. If the company uses the straight-line method, what is the asset's remaining useful life?

5 years Solution: Since the depreciable cost is $45,000 (i.e., $48,000 purchase price less the salvage value of $3,000) and the annual depreciation is $5,000, it must have a 9-year life. The balance in Accumulated Depreciation indicates that 4 years of life have been consumed (i.e., $20,000/$5,000 per year = 4 years). Of the total 9 years of life, 5 years remain.

The following information is for Hutchinson Company: Net income, $920,000 Preferred stock dividends, $100,000 Common stock dividends, $50,000 Beginning common stockholders' equity, $4,000,000 Ending common stockholder's equity, $5,000,000 Average market price of common stockholders' equity, $6,000,000 What is the payout ratio?

5.43% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 50,000/920,000 = 5.43%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $300,000 Treasury stock, $10,000 Dividends payable, $20,000 Paid-in capital in excess of par value, $55,000 Common stock, $200,000 How much is total stockholders' equity?

545,000

A company uses straight-line depreciation. It purchased a truck for $42,000. The truck's salvage value is $6,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?

6 years Solution: The depreciable cost equals the cost minus the salvage value; it is the $42,000 purchase price less $6,000 salvage value, which is $36,000. The annual depreciation cost is $6,000. Since $36,000 will be depreciated by $6,000 per year, the useful life is 6 years (i.e., $36,000/$6,000 per year = 6 years).

When a corporation started, it issued 40,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par non-cumulative preferred stock. Last year, it declared and paid dividends of $4,000. This year, it declared and paid dividends of $12,000. How much of this year's dividend was distributed to preferred shareholders?

6,000 Solution: Dividend to preferred shareholders = 10,000 x $10 x 6% = $6,000

In a recent year Hart Corporation had net income of $125,000, interest expense of $30,000, and tax expense of $40,000. What was Hart Corporation's times interest earned for the year?

6.5

In a recent year, Sherwood Day Corporation had sales of $500,000, net income of $150,000, interest expense of $30,000, and tax expense of $20,000. What was Day Corporation's times interest earned for the year?

6.67

In a recent year, Sherwood Day Corporation had sales of $500,000, net income of $200,000, interest expense of $40,000, and tax expense of $30,000. What was Day Corporation's times interest earned for the year?

6.75 Solution: Times interest earned is computed by dividing income before interest and taxes by interest expense. Times interest earned = ($200,000 + $40,000 + $30,000)/$40,000, or 6.75.

An asset was purchased on January 1 for $53,000 has an estimated salvage value of $3,000. The depreciation expense for the third year is $5,000 and the balance of the Accumulated Depreciation account after the third year's adjusting entries are recorded is $15,000. If the company uses the straight-line method, what is the asset's remaining useful life?

7 years Solution: Since the depreciable cost is $50,000 (i.e., $53,000 purchase price less the salvage value of $3,000) and the annual depreciation is $5,000, it has a 10-year life. The balance in Accumulated Depreciation indicates that 3 years of life have been consumed (i.e., $15,000/$5,000 per year = 3 years). Of the total 10 years of life, 7 years remain. Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.

In a recent year Garvey Corporation had net income of $100,000, interest expense of $20,000, and tax expense of $30,000. What was Garvey Corporation's times interest earned for the year?

7.5

A corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $200,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding, $2,600,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $52,000,000 Retained earnings, $23,500,000 Treasury stock (40,000 shares), $1,020,000 The company's total stockholders' equity is

77,460,000.

The following data is available for a certain corporation at December 31: Common stock, par $5 (authorized 250,000 shares) $400,000 Treasury stock (at cost $15 per share) $ 3,000 Based on the data, how many shares of common stock are outstanding?

79,800

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $400,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $55,000 Treasury stock—preferred, $30,000 Common stock, $200,000 Preferred stock, $180,000 Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?

845,000 Solution: Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $400,000 - $20,000 + $55,000 - $30,000 + $200,000 + $180,000 + $60,000 = $845,000

In its first year, a corporation reported sales revenue of $1,100,000, net income of $186,000 and paid dividends of $26,000 to common stockholders. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. How much is the company's return on common stockholders' equity in its first year?

9.0 Solution: The return on common stockholders' equity is calculated by dividing the net income less the preferred stockholders' dividends by the average common stockholders' equity: [$186,000 - (10,000 shares x $100/share x 6%)] ÷ [($1,200,000 + $1,600,000) ÷ 2] = 9%.

The following data is available for a certain corporation at December 31: Common stock, par $4 (authorized 500,000 shares) $400,000 Treasury stock (at cost $20 per share) $ 5,000 Based on the data, how many shares of common stock are outstanding?

99,750 The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $400,000 and common stock has a $4 par value per share the company the company must have 80,000 shares of common stock issued (i.e., $400,000/$4 per share = 100,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $5,000 of treasury stock recorded on the company's books and a $20 cost per share the company must have 250 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 100,000 - 250 = 99,750).

The following data is available for a certain corporation at December 31: Common stock, par $3 (authorized 250,000 shares) $300,000 Treasury stock (at cost $12 per share) $1,200 Based on the data, how many shares of common stock are outstanding?

99,900

A corporation issued 8,000 of $2 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance?

A credit of $16,000 to Common Stock

A corporation issued 10,000 of $3 par value common stock for $7 per share. Which of the following will be part of the journal entry to record the issuance?

A credit of $30,000 to Common Stock

A corporation issues 1,000 shares of $10 par value common stock at par. Which of the following will be part of the journal entry to record the issuance?

A credit to Common Stock for $10,000

A corporation issues 1,000 shares of $7 par value common stock at par. Which of the following will be part of the journal entry to record the issuance?

A credit to Common Stock for $7,000

A corporation issues 1,000 shares of $8 par value common stock at par. Which of the following will be part of the journal entry to record the issuance?

A credit to Common Stock for $8,000

A corporation retires its $100,000 face value bonds at 104 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $102,745. Which of the following is part of the entry to record the bond redemption

A debit of $2,745 to Premium on Bonds Payable

Kant Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $103,745. Which of the following is part of the entry to record the bond redemption?

A debit of $3,745 to Premium on Bonds Payable

A corporation issues 3,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to:

Common Stock $30,000 and Paid-in Capital in Excess of Par Value $12,000.

A corporation recently paid the latest installment on its 20-year mortgage. Out of the $30,000 total payment, $3,000 went towards reducing the principal, and the balance went towards interest. Which of the following is one part of the entry to account for the principal payment?

A debit to Mortgage Payable for $3,000 Solution: When an installment payment is made on a mortgage note, the interest is a debit to Interest Expense and the reduction in principal is a debit to Mortgage Payable. Out of the $30,000 total payment, $3,000 reduces the mortgage payable for principal paid and the balance of $30,000 (i.e., $27,000) was for interest expense. Credit cash for the $30,000 total payment.

Mohling Company typically sells subscriptions on an annual basis, and publishes eight times a year. The company sells 45,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions?

A debit to the Cash account for $450,000 and credit an unearned revenue account for $450,000. Solution: Selling 45,000 subscriptions for $10 per subscription involves collecting $450,000 of cash from customers and the creation of a $450,000 obligation to provide magazines during the subscription period. Debit cash for $450,000 and credit unearned revenue for $450,000. Chapter 10, Learning objective 3

Which one of the following will maximize depreciation expense in the fist year of owning an asset?

A short estimated life, a low salvage value, and declining balance depreciation

If a company issues 5,000 shares of $5 par value common stock for $210,000, the account

Common Stock will be credited for $25,000.

Where is common stock listed in the stockholders' equity section of the balance sheet?

As part of paid-in capital

Which of the following is an advantage of the corporate organizational form?

Continuous life

Which of the following statements is true with regards to bonds?

Callable bonds can be redeemed by the issuing company at a stated dollar amount prior to maturity.

A company issues a $200,000, 6%, 6-month note on December 1. It has a December 31 year-end. The entry made by the the company on December 1 to record the issuance of the note is

Cash .............................................................................. 200,000 Notes Payable................................................ 200,000

Bonds with a $4,000,000 face value are issued by a certain corporation at 97. The corporation's journal entry to record the issuance is

Cash....................................................... 3,880,000 Discount on Bonds Payable.......................120,000 Bonds Payable.....................................................4,000,000

A company issues a $200,000, 8%, 9-month note on September 1. It uses a December 31 year-end. The entry made by the company on September 1 to record the issuance of the note is

Cash............................................................................... 200,000 Notes Payable................................................ 200,000

Bonds with a $4,000,000 face value are issued by a certain corporation at 102. The corproation's journal entry to record the issuance is

Cash................................................................4,080,000 Premium on Bonds Payable.....................................80,000 Bonds Payable......................................................4,000,000

Bonds with a $4,000,000 face value are issued by a certain corporation at 102. The corproation's journal entry to record the issuance is

Cash................................................................4,080,000 Premium on Bonds Payable.....................................80,000 Bonds Payable......................................................4,000,000 Solution: Cash proceeds from issuing bonds = Bond face value x Issue price as a percentage of face value Cash proceeds from issuing bonds = $4,000,000 x 102% = $4,080,000

The cash register tape indicates sales are $2,000 and sales taxes are $155. What journal entry is needed to record this information?

Debit the Cash account for $2,155, credit the Sales account for $2,000, and credit the Sales Taxes Payable for $155.

A corporation has equipment that originally cost $90,000. Its accumulated depreciation is $36,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $36,000 Debit the Loss on Disposal of Plant Assets account for $54,000 Credit the Equipment account for $90,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation =$90,000 - 36,000 = $54,000 Since the sales price is zero and the book value is more than zero the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $54,000 - 0 = $54,000 The company will debit the loss, and it will credit the plant asset for its cost, debit the accumulated depreciation for its balance

A corporation has equipment that originally cost $70,000. Its accumulated depreciation is $52,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $52,000 Debit the Loss on Disposal of Plant Assets account for $18,000 Credit the Equipment account for $70,000

A corporation has equipment that originally cost $80,000. Its accumulated depreciation is $68,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $68,000 Debit the Loss on Disposal of Plant Assets account for $12,000 Credit the Equipment for $80,000

Which of the following is the appropriate general journal entry to record the declaration of cash dividends?

Debit the Cash Dividends account and credit the Dividends Payable account

The cash register tape indicates sales are $1,000 and sales taxes are $75. What journal entry is needed to record this information?

Debit the Cash account for $1,075, credit the Sales account for $1,000, and credit the Sales Taxes Payable for $75.

The cash register tape indicates sales are $1,500 and sales taxes are $100. What journal entry is needed to record this information?

Debit the Cash account for $1,600, credit the Sales account for $1,500, and credit the Sales Taxes Payable for $100.

When a bond is sold at a premium, at what value is it reported on the balance sheet?

Face value plus any unamortized premium

A company issues a $150,000, 4%, one-year note on March 1. What is its year-end adjusting entry required if the the company prepares financial statements on December 31?

Interest Expense............................................................. 5,000 Interest Payable................................................. 5,000

A company issues a $200,000, 8%, 9-month note on November 1. What is the year-end adjusting entry required if the the company prepares financial statements on December 31?

Interest Expense.............................................................. 2,667 Interest Payable................................................. 2,667

A corporation declared a cash dividend of $1.00 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of payment on February 15?

It decreases liabilities and decreases assets

A corporation declared a cash dividend of $1.00 per share on 20,000 shares of common stock on December 15. The dividend is to be paid one month later on January 15 to stockholders of record on December 30. Which of the following summarizes the effects of the journal entry recorded on the date of payment on January 15?

It decreases liabilities and decreases assets.

Which of the following best describes depreciation?

It is a cost allocation method.

In the stockholders' equity section of the balance sheet, where and how is treasury stock reported?

It is reported as a deduction appearing after both total paid-in capital and retained earnings.

Which one of the following is false concerning a retained earnings restriction?

It is reported on the income statement.

Which statement describes the market interest rate?

It is the rate investors demand for loaning funds.

What is the nature of a bond premium?

It reduces the cost of borrowing.

Which of the following is not a depreciable asset?

Land

Which of the following is considered an advantage of the corporate form of organization?

Limited liability of stockholders

Which of the following is a characteristic of partnerships?

Limited life

A company sold a plant asset for $3,000. It had cost $12,000 and its accumulated depreciation is $8,500. What gain or loss did the company experience?

Loss of $500 Solution: Book value is $3,500 ($12,000 - $8,500). Since the book value ($3,500) exceed the proceeds ($3,000) by $500, there is a loss.

Bonds payable with a face value of $200,000 and a carrying value of $197,000 are redeemed prior to maturity at 99. Which of the following will result?

Loss on redemption of $1,000 The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. The company had to pay $198,000 ($200,000 x 99%) for bonds with a carrying value of $197,000. The difference between the $198,000 and $197,000 is a loss on redemption.

Bonds payable with a face value of $200,000 and a carrying value of $196,000 are redeemed prior to maturity at 102. Which of the following will result?

Loss on redemption of $8,000. Solution: The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The company had to pay $204,000 (i.e., $200,000 x 102%) for bonds with a carrying value of $196,000. The cash paid exceeds the carrying value so an $8,000 loss on redemption occurs.

Which of the following is a characteristic of sole proprietorships?

Low taxation

Conrad Inc. made an ordinary repair to a piece of equipment. What account should the company debit as a result of this transaction?

Maintenance and Repairs Expense

Which of the following least likely would be classified as a current liability?

Mortgage payable Bonds payable

A corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of record of April 30 will include a

None of these Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration: It debits the Cash Dividends account for the amount of the dividend, and it credits Dividends Payable for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash for the amount of the dividend paid.

Which of the following gives the recipient the right to manufacture, sell, or otherwise control an invention for a period of 20 years?

Patent

Which of the following accounts is listed first in the stockholders' equity section of the balance sheet?

Preferred stock if preferred stock had been issued. Otherwise, common stock is listed first.

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?

Price of replacing the plant asset. Solution: Depreciable assets are depreciated over their useful lives using a depreciation method (such as straight-line depreciation). To compute depreciation, one must know the asset's cost, salvage value, estimated useful life, and which depreciation method is being used.

Which one of the following is not a right of preferred stockholders?

Priority voting rights

Which of the following is false with regards to corporations?

Privately held corporations tend to have more shareholders than publicly traded corporations.

Which of the following is true with regards to bond discounts?

Reporting a bond discount on the balance sheet decreases the bond's carrying value.

Which of the following is a typical current liability?

Sales taxes payable

If a corporation incurred a net loss in the current year, which of the following is true?

The company debited Retained Earnings in a closing entry.

Which one of the following is not an ownership right of a stockholder in a corporation?

To declare dividends on the common stock

A corporation issued 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $12.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?

Treasury Stock for $1,200

A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 50 of those shares for $9.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?

Treasury Stock for $450 Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 50 shares x $9/share = $450. Debit the Treasury Stock account to increase it.

A corporation issued 1,000 shares of its $1.00 par value common stock for $8.00 per share and later repurchased 200 of those shares for $3.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?

Treasury Stock for $600

A corporation issued 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $14.00 per share. Which of the following will be recorded when the repurchase of the shares is journalized?

Treasury Stock will be debited for $1,400

A corporation issued 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $15.00 per share. Which of the following will be recorded when the repurchase of the shares is journalized?

Treasury Stock will be debited for $1,500. Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 100 shares x $15/share = $1,500. Debit the Treasury Stock account to increase it.

A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 100 of those shares for $16.00 per share. Which of the following will be recorded when the repurchase of the shares is journalized?

Treasury Stock will be debited for $1,600 Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 100 shares x $16/share = $1,600. Debit the Treasury Stock account to increase it.

A corporation began business by issuing 200,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $40,000. The year-end account balances would show

a $1,000,000 credit balance in the Common Stock account.

A corporation began business by issuing 250,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $50,000. The year-end account balances would show

a $1,250,000 credit balance in the Common Stock account.

A corporation began business by issuing 200,000 shares of $3 par value common stock for $19 per share. During its first year, the corporation sustained a net loss of $100,000. The year-end account balances would show

a $3,200,000 credit balance in Paid-in Capital in Excess of Par Value account. Solution: When issuing common stock for more than its par value, credit the common stock account for the par value and credit the Paid-in capital account in excess of par value—Common stock the for excess. Common stock = 200,000 shares x $3/share = $600,000 Paid-in capital in excess of par value—Common stock = 200,000 shares x ($19/share - $3/share) = $3,200,000 Retained earnings = $100,000 (debit balance due to the loss)

A corporation issues $4,000,000 10-year, 8% bonds dated January 1 at 103. The journal entry to record the issuance will include

a credit to Bonds Payable for $4,000,000. Solution: The company issuing bonds is borrowing money and it is issuing bonds as evidence of the loan. The company that issues the bonds will debit Cash for the amount of cash received in exchange for issuing the bonds (i.e., $4,000,000 face value x 103% = $4,120,000). The issuing company will also credit Bonds Payable for the face value of the bonds issued (i.e., $4,000,000). Note that the company issued $4,000,000 face value of bonds but it received more cash than this amount when it issued the bonds. The company issued these bonds at a discount, so the issuing company will need to credit the Premium on Bonds Payable account for the difference between the face value of the bonds issued and the cash collected from issuing them (i.e., Premium = $4,120,000 - $4,000,000 = $120,000). Increase the Premium on Bonds Payable account by crediting it. The issuer credits Premium on Bonds Payable by $120,000 when issuing these bonds.

A corporation issues $500,000 of 20-year, 7% bonds dated January 1 at 95. The journal entry to record the issuance will include

a credit to Bonds Payable for $500,000

A corporation issues $2,000,000 of 10-year, 9% bonds dated January 1 at 110. The journal entry to record the issuance will include

a credit to Premium on Bonds Payable for $200,000.

A corporation issues $5,000,000 of 30-year, 4% bonds dated January 1 at 106. The journal entry to record the issuance will include

a credit to Premium on Bonds Payable for $300,000.

Handel Enterprises issued 2,000 bonds with a face value of $1,000 each at 102. The journal entry to record the issuance includes

a credit to Premiums on Bonds Payable for $40,000.

Nashville Rail Co. issued $100,000 in 10-year bonds at 103. It is 10 years later and the final interest payment is being made and recorded. The journal entry that Nashville records for the redemption of its bonds at maturity includes

a debit to Bonds Payable for $100,000.

A corporation issues $1,600,000 of 20-year, 6% bonds dated January 1 at 92. The journal entry to record the issuance will include

a debit to Cash for $1,472,000

A corporation issues $2,000,000 of 15-year, 7% bonds dated January 1 at 99. The journal entry to record the issuance includes

a debit to Cash for $1,980,000

A corporation issues $600,000 of 10-year, 8% bonds dated January 1 at 96. The journal entry to record the issuance includes

a debit to Cash for $576,000.

A corporation issues $4,000,000 face value of 10-year, 8% bonds dated January 1 at 97. The journal entry to record the issuance includes

a debit to Discount on Bonds Payable for $120,000.

A corporation issues $7,000,000 of 10-year, 5% bonds dated January 1 at 98. The journal entry to record the issuance will include

a debit to Discount on Bonds Payable for $140,000 Solution: Debit the Cash account for $6,860,000 Debit the Discount on Bonds Payable account for $140,000 Credit the Bonds Payable account for $7,000,000 Debit the Cash account for the amount of cash collected from issuing the bonds = Face value times 98% = $7,000,000 x 98% = $6,860,000 Credit the Bonds Payable account for the face value of the bonds, $7,000,000 These bonds were issued for a discount (i.e., issue at 98 implies a 2% discount); debit the Discount on Bonds Payable account by the difference between the face value and the amount of cash collected from issuing the bonds, $140,000 = $7,000,000 - $6,860,000; alternatively: the discount (or premium) equals the face value time the difference between 100% and the issuance percentage (i.e., $7,000,000 x (100% - 98%) = $140,000

On October 1, a company borrowed $50,000 from a bank for four months at 8%. Interest was properly accrued on December 31. The journal entry needed to record the payment of the note and interest on the due date includes

a debit to Interest Payable for $1,000. Solution: Interest is calculated by multiplying the loan's principal multiplied by the annual interest rate multiplied by the time period during which interest accrued. Remember—all interest rates are annual interest rates unless designated otherwise. This note generates 8% interest only if it is outstanding the entire year. On December 31, three months of interest was properly accrued; an adjusting entry was recorded for (i) Interest Expense and (ii) Interest Payable for accrued interest: $50,000 x 8% x 3/12 = $1,000. On the due date (i.e., one month after the start of the next year), an additional one month of interest expense would need to be recognized and paid: $50,000 x 8% x 1/12 = $333. Both the interest payable that was accrued on December 31 and the interest expense that accrued during the first month of the second calendar year need to be paid when the note is due. Likewise, the note's principal must also be paid. Here's a summary of the journal-entry for the date of payment: Debit: Notes Payable for $50,000 Debit: Interest Payable for $1,000 Debit: Interest Expense for $333 Credit: Cash for $51,333

If a corporation's stock is not traded on a stock exchange, the corporation is referred to as a closely held corporation which is another name for

a privately held corporation

If a corporation's stock is traded on a stock exchange, such as the New York Stock Exchange (NYSE), the corporation is classified as

a publicly held corporation

The year-end balance of the Premium on Bonds Payable is

added to Bonds Payable on the balance sheet

Which one of the following is not an advantage of corporations?

additional taxes

Corporations have several officers who manage the corporation. The officer who has overall responsibility for managing the business is the

chief executive officer

What term is used for bonds that give the issuing company an option to redeem (or buy back) the bonds prior to maturity for a stated dollar amount?

callable bonds

Treasury Stock

can be held indefinitely, does not have voting rights, is a contra equity account

When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the

carrying value of the bonds at the beginning of the period by the effective interest rate.

A corporation issues 30,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will include a

credit to Preferred Stock for $3,000,000 and a credit to Paid-in Capital in Excess of Par Value for $300,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $3,300,000 (i.e., 30,000 shares x $110 per share). Credit preferred stock for $3,000,000 (i.e., 30,000 shares x $100 per share). Credit paid-in capital in excess of par--preferred stock for $300,000 (i.e., 30,000 shares x $10 per share).

A corporation issues 50,000 shares of $75 par value preferred stock for cash at $100 per share. The entry to record the transaction will include a

credit to Preferred Stock for $3,750,000 and a credit to Paid-in Capital in Excess of Par Value for $1,250,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $5,000,000 (i.e., 50,000 shares x $100 per share). Credit preferred stock for $3,750,000 (i.e., 50,000 shares x $75 per share). Credit paid-in capital in excess of par--preferred stock for $1,250,000 (i.e., 50,000 shares x $25 per share).

A company paid $300,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $120,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's entry to record the insurance proceeds will include a

credit to the Equipment account for $300,000.

A corporation recently paid a $50,000 installment on its 20-year mortgage. Out of the $50,000 total payment, $20,000 went towards reducing the principal, and the balance went towards interest. The journal entry to record this transaction includes a

debit Mortgage Payable for $20,000 When an installment payment is made on a mortgage note, the interest is a debit to Interest Expense and the reduction in principal is a debit to Mortgage Payable. Out of the $50,000 total payment, $20,000 reduces the mortgage payable for principal paid and the balance of $50,000 (i.e., $30,000) was for interest expense. Credit cash for the $50,000 total payment.

A truck that cost $45,000 is discarded as worthless. The truck had already been depreciated by $39,000. The entry to record this event would include a

debit to Loss on Disposal of Plant Assets for $6,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation =$45,000 - 39,000 = $6,000 Since the sales price is zero and the book value is more than zero the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $6,000 - 0 = $6,000 This loss reduces the company's income before taxes by $6,000. The company will debit the loss.

A truck that cost $48,000 is discarded as worthless. The truck had already been depreciated by $40,000. The entry to record this event would include a

debit to Loss on Disposal of Plant Assets for $8,000

The following totals for the month of June were taken from the payroll records of a certain company: Salaries, $100,000 FICA taxes withheld, $6,650 Income taxes withheld, $18,000 Federal unemployment taxes, $550 State unemployment taxes, $3,100 The entry to record accrual of employer's payroll taxes would include a

debit to Payroll Tax Expense for $10,300 Solution: When recording payroll for employees' salaries and wages, the company records the employee's FICA taxes payable, the employee's federal income taxes payable, the employee's state income taxes payable, and any other employee payroll deductions in addition to the amount owed to the employee for the employee's salaries and wages after reductions for the payroll withholdings mentioned above. However, this question asks for the employer's payroll taxes. The employer's payroll tax deduction includes the employer's portion of FICA taxes payable, federal unemployment taxes payable, and state unemployment taxes payable. The employer's payroll taxes = FICA taxes + Federal unemployment taxes + State unemployment taxes The employer's payroll taxes = $6,650 + 550 + 3,100 = $10,300.

Woodland Company declared a cash dividend of $2.00 per share on 50,000 shares of common stock on July 15. The dividend is to be paid one month later on August 15 to stockholders of record on July 31. The correct entry to be recorded on the date of declaration of July 15 will include a

debit to the Dividends account and a credit to the Dividends Payable account. Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration: It debits the Dividends account and it credits Dividends Payable account. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash.

Equipment that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a

gain of 6,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation =$72,000 - 60,000 = $12,000 Since the sales price is more than the book value the company recognizes a gain, computed as follows: Gain = Sales proceeds from selling the asset - Book value of the asset sold Gain = $18,000 - 12,000 = $6,000 The company will debit the loss, and it will credit the plant asset for its cost, debit the accumulated depreciation for its balance, and debit cash for the amount of cash collected from the purchaser.

A $750,000 bond was redeemed at 103 when the carrying value of the bond was $777,500. The entry to record the redemption would include a

gain on bond redemption of $5,000 Solution: $777,500 - ($750,000 x 1.03) = $5,000

A corporation paid $210,000 for a machine four years ago. This year, the machine was completely destroyed in a fire. The accumulated depreciation on the equipment is $84,000; that amount includes depreciation for the current year. An insurance check for $240,000 was received based on the replacement cost of the equipment. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's journal-entry to record the insurance proceeds will include a

gain on disposal of $114,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$210,000 - 84,000 = $126,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $240,000 - 126,000 = $114,000

A company paid $132,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $60,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's entry to record the insurance proceeds will include a

gain on disposal of plant assets of $28,000. Solution: Remove the asset and its accumulated depreciation from the company's books while recording the cash received from the insurance company. Record a gain or loss so that debits being recorded equal the credits being recorded. Gains are recorded with credits, and losses are recorded with debits. Debit cash for $100,000 Debit accumulated depreciation for $60,000 Credit the equipment account for $132,000 Credit a gain on the disposal of plant assets for $28,000

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount

greater than face value

Corporations have several officers who manage the corporation. One such officer is the treasurer. The treasurer

has custody of the corporation's funds and maintains the company's cash position

Secured bonds are bonds that

have specific assets of the issuer pledged as collateral

If bonds are issued at a premium, the stated interest rate is

higher than the market rate of interest

When bonds are issued at a premium, the total interest cost of the bonds over the life on the bonds is equal to the amount of

interest paid over the life of the bond minus the amount of premium at sale point.

If the market rate of interest is 12%, a $10,000, 10%, 10-year bond that pays interest annually would sell at an amount

less than face value.

Which one of the following costs will not be included in the cost of equipment?

maintenance costs

Harrison Corporation sold equipment for $20,000. The equipment had an original cost of $60,000 and accumulated depreciation of $30,000. Ignoring the tax effect, as a result of the sale

net income will decrease $10,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$60,000 - 30,000 = $30,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $30,000 - 20,000 = $10,000 This loss reduces the company's income before taxes by $10,000. Ignoring taxes, it also reduces net income by $10,000.

Higgins Corporation sold its equipment for $32,000. The equipment had an original cost of $96,000 and accumulated depreciation of $48,000. Ignoring the tax effect, as a result of the sale

net income will decrease $16,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$96,000 - 48,000 = $48,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $48,000 - 32,000 = $16,000 This loss reduces the company's income before taxes by $16,000. Ignoring taxes, it also reduces net income by $16,000.

When there is a change in a depreciable asset's useful life or salvage value

only that asset's current and future years' depreciation will be affected.

Goodwill can be recorded

only when there is an exchange transaction involving the purchase of an entire business.

The cost of a plant asset, such as equipment, machinery, and buildings used in the operation of a company, is expensed

over its useful life

A corporation declared a cash dividend on November 15 to be paid on December 15 to stockholders owning the stock on November 30. Given these facts, the date of December 15, is referred to as the

payment date

If the market rate of interest is lower than the contractual interest rate, the bonds will sell at

premium

The two ways that a corporation can be classified based on whether their ownership is traded on a stock exchange are

publicly held and privately held.