final preparation

Currie Company borrowed $20,000 from 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, what is the amount of the interest expense associated with the second payment? (Round your answer to the nearest dollar.) $730 $1,396 $2,000 $8,042

$1,396 Explanation: Year 1 Interest expense = Principal balance on January 1 of $20,000 × 10% = $2,000 Year 1 Principal repayment = Payment of $8,042 − Interest expense of $2,000 = $6,042 Principal balance at beginning of year 2 = Principal balance on January 1 of $20,000 − Principal repayment in Year 1 of $6,042 = $13,958 Year 2 Interest expense = Principal balance on January 1 of $13,958 × 10% = $1,396

On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150. What is the amount of principal repayment included in the payment made on December 31, Year 1? $25,920 $81,150 $74,658 $55,230

$55,230 Response Feedback: Explanation: Year 1 Interest expense = Principal balance on January 1 of $324,000 × 8% = $25,920 Year 1 Principal repayment = Payment of $81,150 − Interest portion of $25,920 = $55,230

Curtain Co. paid dividends of $6,000, $12,000, and $20,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,000 shares of 5%, $200 par value preferred stock outstanding that paid a cumulative dividend. What is the total amount of dividends paid to common shareholders during Year 3? $4,000 $6,000 $8,000 $10,000

$8,000 Explanation: Preferred dividend = 1,000 Outstanding shares × Par value of $200 per share × 5% = $10,000 Dividends in arrears at end of Year 1 = Preferred dividend of $10,000 − Dividends paid in Year 1 of $6,000 = $4,000 Dividends in arrears at end of Year 2 = Preferred dividend of $10,000 + Dividend in arrears from Year 1 of $4,000 − Dividends paid in Year 2 of $12,000 = $2,000 Year 3 Dividends to common shareholders = Dividends paid in Year 3 of $20,000 − (Preferred dividend of $10,000 + Dividend in arrears from Year 2 of $2,000) = $8,000

Which of the following items would be classified as a cash flow from investing activities? 1) Issue common stock for cash 2) Payment on principal of note payable 3) Payment of dividends 4) Sale of equipment for cash 1 and 4 4 only 3 only 1, 2, 3, and 4

4 only Cash flows reported as investing activities include cash receipts (inflows) from selling property, plant, equipment (item 4), or marketable securities, as well as collections from credit instruments such as notes or mortgages receivable. Cash flows reported as investing activities also include cash payments (outflows) for purchasing property, plant, equipment, or marketable securities, as well as for making loans to borrowers. The other items listed (2, 3, and 4) are cash flows reported as financing activities.

Montana Company was authorized to issue 200,000 shares of common stock. The company had issued 50,000 shares of stock when it purchased 10,000 shares of treasury stock. After the purchase of treasury stock, the number of outstanding shares of common stock was which of the following? 190,000 60,000 40,000 50,000

40,000 Explanation: Outstanding stock (total issued stock minus treasury stock) is stock owned by investors outside the corporation. Outstanding shares = 50,000 Issued shares −10,000 Treasury shares = 40,000

Flagler Corporation shows a total of $660,000 in its Common Stock account and $1,600,000 in its Paid-in Capital Excess account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued? 117,500 200,000 82,500 The number of shares cannot be determined using the information provided

82,500 Explanation: Common stock account balance of $660,000 = Number of shares issued (the unknown) × Par value of $8 per share Number of shares issued = $660,000 ÷ $8 = 82,500

Which of the following describes the effect of remitting the sales tax to the tax authority? Decreases liabilities. A claims exchange transaction. Decreases stockholders' equity. All of these answer choices are correct.

A claims exchange transaction. Explanation: Remittance of sales tax decreases assets (cash) and decreases liabilities (sales tax payable).

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet? Interest payable Salaries payable Accounts payable All of these answer choices are correct.

All of these answer choices are correct. Explanation: Current (short-term) liabilities would be those due within one year or an operating cycle, whichever is longer. An operating cycle is defined as the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash. Accounts payable, interest payable, and salaries payable are typically current liabilities.

Which of the following happens as a result of selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%? The cash flow from operating activities increases by $208. Total assets increase by $78. Stockholder's equity increases by $70. All of these answer choices are correct.

All of these answer choices are correct. Explanation: Sales tax collected = $200 × 4% = $8 Cash collected = Sale of $200 + Sales tax of $8 = $208 The transaction increases cash flow from operating activities by $208. The transaction increases assets (cash) by $208 and decreases assets (inventory) by its cost of $130, resulting in a net increase in assets of $78 (or $208 − $130). It also increases liabilities by the sales tax collected of $8 and increases stockholders' equity (retained earnings) by $70. Thus: Increase in assets of $78 = Increase in Liabilities of $8 + Stockholders' equity of $70. The increase in stockholders' equity is also explained as follows. Revenues (sales) increase by $200 and expenses (cost of goods sold) increase by $130, which results in an increase in net income of $70 (which increases retained earnings).

During Year 1, its first year of operations, Benitez Co. reported sales of $800,000. At the end of Year 1, the company estimated its warranty obligation at 3% of sales. During Year 1, the company paid $13,000 cash to settle warranty claims. Which of the following statements is true? Warranty expenses would decrease net earnings by $24,000 in Year 1. Cash decreased by $13,000 as a result of the accounting events associated with warranties in Year 1. The warranties payable account has a credit balance of $11,000 at the end of Year 1. All of these answer choices are correct.

All of these answer choices are correct. Explanation: Year 1 Warranty expense = $800,000 × 3% = $24,000 The entry to accrue the warranty obligation increases liabilities (credit warranties payable) and increases expenses (debit warranty expense) by $24,000. The entry for the settlement of the warranty claims decreases assets (credit cash) and decreases liabilities (debit warranties payable) by $13,000. Thus, at the end of Year 1, the warranties payable account has a credit balance of $11,000 (or credit of $24,000 − debit of $13,000). Cash decreases by $13,000 when the warranty obligations are settled.

Which of the following correctly describes an installment note? An installment note requires equal interest payments with the entire principal balance paid at maturity. An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note. The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note.

An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. Explanation: Loans that require payments of principal and interest at regular intervals (amortizing loans) are typically represented by installment notes. As the principal balance of the note decreases over time the portion of the payment that is applied to interest expense decreases. However, the amount of the payment remains constant.

Which of the following cash transactions is classified as an investing activity on the statement of cash flows? Cash received from revenue Cash borrowed Cash collected on a loan Cash received from revenue

Cash collected on a loan Response Feedback: Loans given by the company are investing activities therefore when the other party pays back the loan that cash receipt is an investing activity on the cashflow (inflow). Loans received by the company are financing activities.

Which of the following cash transactions is not classified as an operating activity? All of these answer choices would not be shown under operating activities. Cash paid for interest. Cash paid for dividends. Cash received from dividends. All of these answer choices would not be shown under operating activities.

Cash paid for dividends. Response Feedback: Explanation: Cash flows reported as operating activities include cash receipts from revenues, including interest and dividend revenue and cash payments for expenses, including interest expense. Cash paid for dividends is reported as a cash outflow in the financing activities section of the statement of cash flows.

Which of the following is not an item deducted from salary expense to arrive at net pay? FICA tax for Social Security FICA tax for Medicare Federal unemployment tax These answer choices are all deducted from salary expense to arrive at net pay

Federal unemployment tax Explanation: Federal unemployment tax is paid entirely by the employer; as such, it is not withheld from an employee's pay.

What is the current ratio used to evaluate? Solvency Liquidity Equity Profitability

Liquidity The primary ratio used to evaluate liquidity is the current ratio. Liquidity describes the ability to generate sufficient short-term cash flows to pay obligations as they come due.

Which of the following describes, in part, how the declaration of a stock dividend affects the elements of the financial statements? Decreases total assets Increases total stockholders' equity Decreases paid-in capital in excess of par value-common No effect on total stockholders' equity

No effect on total stockholders' equity Explanation: A stock dividend is an equity exchange transaction. A stock dividend decreases retained earnings, increases common stock, and increases paid-in capital in excess of par value-common stock. There is no effect on total stockholders' equity.

Which of the following would not be a cash flow from financing activities? Borrowing on a long-term note payable Repayment of principal on bonds payable Payment of interest on bonds payable Payment of a cash dividend

Payment of interest on bonds payable Explanation: Cash flows reported as financing activities include cash receipts (inflows) from borrowing money and issuing stock and cash payments (outflows) to repay debt, purchase treasury stock, and pay dividends. Cash flows reported as operating activities include cash payments for expenses, including interest expense.

Which of the following would not be presented in the financing section of the statement of cash flows? Purchased a new office building by issuing a note payable Purchased treasury stock Repayment of long-term bonds payable Issuing of preferred stock

Purchased a new office building by issuing a note payable Explanation: Cash flows reported as financing activities include cash receipts (inflows) from borrowing money and issuing stock and cash payments (outflows) to repay debt, purchase treasury stock, and pay dividends. Purchasing a building by issuing a note payable would be reported as a noncash investing and financing activity in the schedule of noncash investing and financing

Why are bonds sometimes issued at a discount? The stated rate of interest is higher than the rate being paid on investments in the securities market with comparable risk. The stated rate of interest is the same as the rate being paid on investments in the securities market with comparable risk. The stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk. The bonds are being issued between interest payment dates.

The bonds are being issued between interest payment dates. Discounting is necessary to increase the interest on the bond so that the effective rate is equal to the market rate of interest.

Which of the following describes the only difference between the direct and indirect methods of preparing the statement of cash flows? The manner in which cash flows from operating activities is presented. The manner in which cash flows from investing activities is presented. The manner in which cash flows from financing activities is presented. Whether a schedule of noncash items needs to be presented.

The manner in which cash flows from operating activities is presented. Under generally accepted accounting principles, the operating activities section of the statement of cash flows can be presented using either the direct or the indirect method.

Which of the following accounts appear in the liabilities section of the balance sheet? Accounts payable, notes payable, allowance for doubtful accounts Warranties payable, notes payable, accounts payable Notes payable, allowance for doubtful accounts, credit card receivables Accounts payable, allowance for doubtful accounts, warranties payable

Warranties payable, notes payable, accounts payable Explanation: Accounts payable, warranties payable, and notes payable, all appear in the liabilities section of the balance sheet. The allowance for doubtful accounts and credit card receivables appear in the assets section of the balance sheet.

The owners of X Company invested $2,000 in the company. X Company used the cash to invest in Y Company. On X's statement of cash flows these transactions would be classified, respectively, as an investing activity and an investing activity. an investing activity and an investing activity. a financing activity and a financing activity a financing activity and an investing activity. an investing activity and a financing activity.

a financing activity and an investing activity. Response Feedback: Receiving cash from the owners is a financing activity and using this cas to invest in another company is an investing activity.

Issuing a note for the purchase of land is an example of an investing activity. a financing activity. a noncash investing and financing activity. a cash an investing and financing activity

a noncash investing and financing activity There is no cash involved in this transaction , therefore it is a noncash investing and financing activity.

The indirect method for preparing the operating activities section of the statement of cash flows begins with the amount of sales revenue reported on the income statement. False True

false Explanation: The indirect method starts with net income.

Treasury Stock is reported on the balance sheet between the liabilities and stockholders' equity sections. true false

false Explanation: Treasury stock is reported within the stockholders' equity section of the balance sheet after retained earnings.

Employers must withhold unemployment taxes from employee salaries. true false

false Unemployment tax is paid by the employer and is not withheld from employee salaries.

The amount of revenue a company recognizes on the income statement normally differs from the amount of cash collected from customers: true false

true Many aspects of accrual accounting, such as recognizing revenues and expenses on account, can cause differences between the amount of net income reported on a company's income statement and the amount of net cash flow it reports from operating activities.

Personal liability is a significant disadvantage of the partnership form of business organization. true false

true Explanation: Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies. In fact, partners are responsible not only for their own actions but also for those taken by any other partner on behalf of the partnership. The benefit of limited liability is one of the most significant reasons limited liability companies and corporations are so popular.

Monthly remittance of sales tax due has no effect on the income statement, but reduces cash flow from operating activities. true false

true Remittance of sales tax decreases assets (cash) and liabilities (sales tax payable). It does not affect the income statement. It is reported as a cash outflow for operating activities.