Exam 2- Accounting 2010 Mizzou

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be:

$1,396 explanation: Interest expense in year 1: $20,000 × 10% = $2,000; Principal reduction in year 1: $8,042 − $2,000 = $6,042; Principal balance at beginning of year 2: $20,000 − $6,042 = $13,958; Interest expense in year 2: $13,958 × 10% = $1,396.

On January 6, Year 1, the Mount Jackson Corporation purchased a tract of land for a factory site for $1,500,000. An existing building on the site was demolished and the construction of the new factory building was completed on October 11, Year 1. Additional cost data are shown below: Construction cost of new building$1,760,000Realtor's and attorney's fees15,400Architect's fees relating to construction of new building138,000Cost to demolish old building133,200Salvage recovery from old building(11,000) Which of the following correctly states the capitalized cost of the land and the new factory building, respectively?

$1,637,600 and $1,898,000

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. At the end of Year 5, assuming the equipment had not been sold, the book value of the office equipment using straight-line depreciation and double-declining-balance depreciation, respectively, would be:

$12,000 and $12,000 explanation: At the end of Year 5, the end of the office equipment's 5-year useful life, the book value will be equal to the $12,000 salvage value, regardless of which depreciation method is used.

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $176,967 and $216,400 respectively. Also during Year 1, the corporation declared and paid cash dividends of $27,600 and issued stock dividends valued at $17,000. Total expenses were $42,416. Based on this information, what was the amount of total revenue for Year 1?

$126,449 explanation: $176,967 beginning retained earnings + X revenues − $42,416 expenses − $27,600 cash dividends − $17,000 stock dividends = $216,400 ending retained earnings; X = $126,449.

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $157,900 and $210,400 respectively. Also during Year 1, the corporation declared and paid cash dividends of $24,800 and issued stock dividends valued at $15,000. Total expenses were $40,416. Based on this information, what was the amount of total revenue for Year 1?

$132,716 explanation: $157,900 beginning retained earnings + X revenues − $40,416 expenses − $24,800 cash dividends − $15,000 stock dividends = $210,400 ending retained earnings; X = $132,716.

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,000,000 units over its 5-year useful life and has salvage value of $34,000. Harding produced 265,000 units with the equipment by the end of the first year of purchase. Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year?

$157,145

At the end of the accounting period, Houston Company had $6,000 of par value common stock issued, additional paid-in capital in excess of par value − common of $7,300, retained earnings of $7,000, and $3,500 of treasury stock. The total amount of stockholders' equity is:

$16,800 explanation: $6,000 common stock + $7,300 additional paid-in capital in excess of par value + $7,000 retained earnings − $3,500 treasury stock = $16,800

On January 1, Year 1, Phillips Company made a basket purchase including land, a building and equipment for $380,000. The appraised values of the assets are $20,000 for the land, $340,000 for the building and $40,000 for equipment. Phillips uses the double-declining-balance method of depreciation for the equipment which is estimated to have a useful life of four years and a salvage value of $5,000. The depreciation expense for Year 1 for the equipment is:

$19,000 explanation: $40,000 ÷ ($20,000 + $340,000 + $40,000) = 10% of total appraised value; $380,000 purchase price × 10% = $38,000 cost of equipment; $38,000 × (2 × 25% straight-line rate) = $19,000 depreciation expense in Year 1.

what is the amount of gross margin assuming that weighted cost average is used

$2,970

The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 units @ $7.80 What is the amount of gross margin assuming the weighted average cost flow method is used?

$2,970 explanation: Under the weighted-average method, the average cost of inventory is reported on both the income statement and the balance sheet. Weighted average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit; Gross margin = Sales of (900 × $7.80) − Cost of goods sold of (900 × $4.50) = $2,970.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

$24,800 explanation: $24,000 × 8% × 5/12 = $800 interest payable; $24,000 notes payable + $800 interest payable = $24,800 total liabilities.

what is the amount of gross margin assuming that FIFO is being used

$3,000

On March 1, Bartholomew Company purchased a new stamping machine with a list price of $34,000. The company paid cash for the machine; therefore, it was allowed a 5% discount. Other costs associated with the machine were: transportation costs, $550; sales tax paid, $1,360; installation costs, $450; routine maintenance during the first month of operation, $500. The cost recorded for the machine was:

$34,660 explanation: The cost includes the purchase price (less discounts) plus any costs necessary to get the asset in the location and condition for its intended use. Maintenance costs are the costs of routine maintenance and minor repairs that are incurred to keep an asset in good working order. These costs are expensed in the period in which they are incurred. Cost of machine = $34,000 − ($34,000 × 5%) + $550 transportation + $1,360 sales tax + $450 installation = $34,660.

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

$37,890 and $0 explanation: $36,000 × 7% × 9/12 months = $1,890 interest payable on December 31, Year 1; $36,000 note payable + $1,890 interest payable = $37,890; the note is repaid before the end of Year 2, so there is no remaining liability.

The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 units @ $7.80 What is the amount of cost of goods sold assuming the LIFO cost flow method is used?

$4,100 explanation:Under LIFO, the cost of the items purchased last is reported on the income statement, and the cost of the items purchased first is reported on the balance sheet. Cost of goods sold = (100 × $4.80) + (500 × $4.60) + (300 × $4.40) = $4,100

The Miller Company recognized $190,000 of service revenue earned on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from accounts receivable. The company estimates that it will be unable to collect 3% of its sales on account. The net realizable value of Miller's receivables at the end of Year 2 was:

$48,300 explanation: $0 beginning balance + $190,000 revenue on account − $136,000 collections = $54,000 ending accounts receivable balance; $0 beginning balance + $5,700 uncollectible accounts expense − $0 write-offs = $5,700 ending allowance for doubtful accounts balance; $54,000 − $5,700 = $48,300 net realizable value

Domino Company uses the aging of accounts receivable method to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During the year, the company wrote off $4,640 in uncollectible accounts. In preparation for the company's Year 2 estimate, Domino prepared the following aging schedule:

$6,132 explanation:($104,000 × 1%) + ($45,000 × 5%) + ($9,920 × 10%) + ($4,440 × 25%) + ($3,800 × 50%) = $7,292 estimated ending allowance balance; $5,800 beginning allowance balance + uncollectible accounts expense − $4,640 write-offs = $7,292 ending allowance balance; uncollectible accounts expense = $7,292 − $5,800 + $4,640 = $6,132

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $16,000, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:

$600 explanation: ($36,000 cost − $12,000 salvage value) ÷ 5 years = $4,800 annual depreciation expense; $36,000 cost − (3 years × $4,800) accumulated depreciation = $21,600 book value at the end of Year 3. $16,000 proceeds from sale − $21,600 = ($5,600) loss on sale of equipment; $30,000 revenue − $19,000 cash expenses − $4,800 depreciation expense − $5,600 loss on sale = $600 net income

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report during the years ending December 31, Year 1 and Year 2, respectively, would be:

$720 and $240 explanation:$16,000 × 6% × 9/12 months = $720 interest revenue in April − December, Year 1; $16,000 × 6% × 3/12 months = $240 interest revenue in January − March, Year 2

Laramie Company paid $800,000 for a purchase that included land, building, and office furniture. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Land, $100,000, Building, $740,000, and Office Furniture, $160,000. Based on this information the cost that would be allocated to the land is:

$80,000 explanation:The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to building = Appraised amount for land of $100,000 ÷ Total appraised values of $1,000,000 (or $100,000 + $740,000 + $160,000) = 10%; Allocation of actual purchase price to land = Total purchase price of $800,000 purchase price × 10% = $80,000.

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account. During the accounting period the business borrowed $30,000 from a bank, earned $18,000 of net income, and Scott withdrew $12,000 cash from the business. Based on this information, at the end of the accounting period Scott's capital account contained a balance of:

$81,000 explanation: $75,000+$18,000 net income-$12,000 withdrawal= $81,000 ending balance in capital account

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value − common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

$82,500 explanation: $660,000 total par value ÷ $8 par value per share = 82,500 shares issued

On January 1, Year 1, Missouri Company purchased a truck that cost $57,000. The truck had an expected useful life of 10 years and a $6,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is:

$9,120 explanation: $57,000 × (2 × 10%) = $11,400 depreciation expense in Year 1. ($57,000 − $11,400) × (2 × 10%) = $9,120 depreciation expense in Year 2.

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Using double-declining-balance depreciation, what the amount of depreciation expense and the amount of book value, respectively, that would appear on the December 31, Year 3 financial statements?

$960 and $12,000 explanation: ($34,000 + $2,000) × (2 × 20%) = $14,400 depreciation in Year 1Ending book value in Year 1 = $36,000 − $14,400 = $21,600$21,600 × (2 × 20%) = $8,640 depreciation in Year 2Ending book value in Year 2 = $21,600 − $8,640 = $12,960$12,960 − $12,000 salvage value = $960 depreciation expense in Year 3 ($12,960 × 40% would depreciate the office equipment below its $12,000 salvage value)$14,400 + $8,640 + $960 = $24,000 accumulated depreciation at the end of Year 3

Madison Company owned an asset that had cost $44,000. The company sold the asset on January 1, Year 4, for $16,000. Accumulated depreciation on the day of sale amounted to $32,000. Based on this information, the sale would result in:

A $16,000 cash inflow in the investing activities section of the cash flow statement.

The term "Retained Earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

The term "retained earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

which of the following statements best describes the term "par value"?

An amount used in determining a corporation's legal capital

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400.

Which of the following represents the impact of a taxable cash sale of $500 on the accounting equation if the sales tax rate is 4%?

An increase to cash for $520, an increase to sales tax payable for $20, and an increase to sales revenue for $500.

Where is treasury stock reported on a corporation's balance sheet?

As a deduction from total stockholders' equity, following retained earnings

Which of the following statements is a reason why a company would buy treasury stock?

Because management believes the market price of stock is undervalued To have stock available to issue to employees in stock option plans To avoid a hostile takeover

which of the following terms is used to identify the process of expense recognition for property, plant and equipment?

Depreciation

Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?

Ending inventory will be lower if Blake uses the weighted average cost flow method than if the FIFO cost flow method was used.

When prices are falling, LIFO will result in

Higher income and higher inventory valuation than FIFO

Ogilvie Corporation issued 12,000 shares of no-par stock for $40 per share. Ogilvie was authorized to issue 35,000 shares. What effect will this event have on the company's financial statements?

Increase assets by $480,000, increase stockholders' equity by $480,000

Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:

Increase by $640,000 explanation: Common stock will increase by $400,000, the par value, and paid-in capital in excess of par value will increase by $240,000, for a total increase in stockholders' equity of $640,000.

At a time of declining prices, which cost flow method will result in the highest ending inventory?

LIFO

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?

LIFO

Which of the following would be classified as a tangible asset?

Land

Which of the following is a reason why a corporation may choose not to pay dividends?

The board and management prefer to reinvest all net income for future growth The corporation does not have adequate cash The corporation does not have adequate retained earnings

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

The outcome is probable and can be reasonably estimated.

which of the following is not normally a preference given to the holders of preferred stock?

The right to vote before the common stockholders at the corporation's annual meeting.

Which of the following is not an advantage of accepting credit cards from retail customers?

There are fees charged for the privilege of accepting credit cards.

Benitez Company had sales of $540,000 in Year 1. The company expects to incur warranty expenses amounting to 2% of sales. There were $7,200 of warranty obligations paid in cash during Year 1. Based on this information:

Warranty expenses would decrease net earnings by $10,800 in Year 1. Cash would decrease by $7,200 as a result of the accounting events associated with warranties in Year 1. The warranties payable account would increase by $3,600 in Year 1.

When do the effects of product warranties appear on the statement of cash flows?

When there is a settlement of a warranty claim made by a customer.

Which of the following entities would report income tax expense on its income statement?

a corporation

Which form of business organization is established as a legal entity separate from its owner?

corporation

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year, Kincaid reported $72,500 of credit sales. Kincaid also wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Kincaid's entry required to recognize the uncollectible accounts expense for Year 2 will:

decrease total assets and net income

Interest charges on notes payable may be based on a(n):

fixed or variable interest rate

the par value of a company's stock

has little connection to the market value of stock

Which of the following is not considered an advantage of the corporate form of business organization?

lack of government regulation

Bonds payable are usually classified on the balance sheet as:

long-term liabilities

The amount of accounts receivable that is actually expected to be collected is known as the:

net realizable value

which of the following statements about types of business entitles is true?

one advantage of a corporation is ability to raise capital

On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

reduce total stockholders' equity by $4,375 explanation: ($24,000 cost − $1,000 salvage) ÷ 8 years = $2,875 original annual depreciation; $2,875 × 4 years = $11,500 accumulated depreciation at time of improvement; ($24,000 original cost − $11,500 accumulated depreciation + $6,000 improvement − $1,000 salvage) ÷ 4 remaining years = $4,375 new annual depreciation; Recognizing the Year 5 depreciation expense decreases assets (book value of the asset) and increases expenses (depreciation expense) by $4,375. Net income and stockholders' equity (retained earnings) also decrease by $4,375.

A company that uses the allowance method to account for uncollectible accounts:

reports the net realizable value of its accounts receivable on the balance sheet

At the end of the current accounting period, Ringgold Company recorded depreciation of $15,000 on its equipment. The effect of this entry on the company's balance sheet is to decrease:

stockholders' equity and decrease assets

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

to repay the interest and repay the debt

which of the following is a negative or contra equity account?

treasury stock

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

zero