Financial Accounting Cornett Exam 5

Which of the following stockholder payout ratios measures the proportion of dividends to earnings?

Dividend payout ratio

The Jones Corporation issues 10,000 shares of $50 par value preferred stock for cash at $70 per share. The entry to record the transaction will consist of a debit to Cash for $700,000 and a credit or credits to:

Preferred Stock for $500,000 and Additional Paid-in Capital for $200,000.

When will bonds sell at a discount?

The stated rate of interest is less than the market rate of interest at the time of issue.

A significant disadvantage of leverage occurs when __________

the interest on debt exceeds earnings

Contributed capital is __________

the total amount of par plus total additional paid-in capital

As warranty claims are paid to customers, including parts and labor expenditures, __________

the warranty liability is reduced

Premium and discount accounts are called

valuation accounts

Cash paid for preferred stock dividends should be shown on the statement of cash flows under:

financing activities

Most liabilities are recognized when __________

goods or services are received or money is borrowed

Issued shares represent the:

number of shares that the corporation has distributed to owners to date.

Under the effective interest method, the cash paid on each interest payment date will:

remain constant regardless of the issuance price.

Accounting for leased assets reflects the underlying concept of whether or not a company has obtained the __________

risks and benefits of ownership

An important indicator of the purchasing power of money is

the CPI (consumer price index)

When interest-bearing bonds are issued at a discount, how is the interest expense for the period calculated using the effective interest rate method?

the amount of interest payment for the period plus the discount amortization for the period

On January 1, 2012, Nunn Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on June 30 and December 31. The market rate is 12%. Refer to the information provided for Nunn Inc. The interest payment on June 30, 2012, is:

$36,000

Assume that Big Co. issued $570,000, 6.5% bonds at face value on January 1. The interest is payable annually on January 1. How much interest will be accrued at year-end on December 31?

$37,050 ($570,000 x 0.065 x 1)

Many companies structure a lease to

- provide lower cost financing through tax advantages - create protection against obsolescence - use less cash up front by leasing instead of buying

If XYZ Corporation paid dividends totaling $100,000 to common stockholders at the time when there were 10,000 shares of common stock outstanding, what was the dividend per share amount?

$10 ($100,000 / 10,000)

If $100,000, 5% bonds are sold at 103, what amount will be credited to Bonds Payable?

$100,000 (bonds payable credit is always equal to the face value of the bonds)

If $110,000 face value bonds are issued at 95, how much cash would the corporation receive for the bonds?

$104,500 ($110,000 x 0.95)

The interest charged by the bank, at therate of 9%, on a 3-month, discounted notepayable for $100,000 is:

$2,250

Use the information provided for Nunn Inc. to answer the question(s) using the effective interest method. On January 1, 2012, Nunn Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on June 30 and December 31. The market rate is 12%. Refer to the information provided for Flounder Inc. The interest expense on the bonds on June 30, 2012, is:

$39,741.38.

Amazon issued bonds in the amount of$500,000 with a stated interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10 years, what would be the total amount of interest paid over the life of the bonds?

$400,000

On January 1, Jernigan Corporation's Retained Earnings had a credit balance of $460,000. The company's preferred shareholders were paid dividends of $15,000 in October. While preparing financial statements at the end of the year, the accountant noticed an error in calculating interest expense for the previous year, which caused interest expense to be understated by $8,500. Assuming that Jernigan pays taxes at 35%, by how much will retained earnings be adjusted?

$5,525 debit ($8,500 x (1 - 0.35))

Assume a company issues a bond with a face value of $600,000. The bond matures in 10 years and has a 9% interest rate. If interest on the bond is paid annually, how much interest will be paid on the bond each year?

$54,000 ($600,000 x 0.09 x 12/12)

On January 1, 2012, Nunn Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on June 30 and December 31. The market rate is 12%. Refer to the information provided for Nunn Inc. What is the carrying value of the bonds after the first interest payment is made on June 30, 2012?

$666,097.78

Roberts Company issued $1,100,000 of 7% bonds due in 5 years with interest payable annually on December 31. The yield rate was 6%. The bond was issued with a premium of $46,336. The cash paid on December 31 of the first year will be $77,000. How much will interest expense be (rounded to the nearest dollar) using the effective interest rate method?

$68,780 (1,100,000 + 46,336 = 1,146,336 x 0.06 x 12/12)

How is the quick ratio calculated?

(Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

How is the cash ratio calculated?

(cash + marketable securities) / current liabilities

Which of the following is included in stockholders' equity?

- Capital stock - Retained earnings - Accumulated other comprehensive income - Treasury stock

Beimesche Corporation's corporate charter authorizes the business to issue 1,000,000 shares of common stock. 220,000 shares were issued when the corporation was formed. Two years later, 170,000 additional shares were issued. In Year 3, the company reacquired 35,000 shares of its own stock. At the beginning of Year 5, Beimesche issued 80,000 shares of previously unissued stock. How many shares are authorized as of December 31, Year 5?

1,000,000

If Big Co. had net income of $900,000 and paid dividends of $99,000 to its common stockholders, what would be the dividend payout?

11% ($99,000 / $900,000)

Interest to be paid on an 24-month, $2,000 loan at 6% interest is

240 ($2,000 x 0.06 x 24/12)

Strong Company uses accrual accounting and has the following data from its year-end financial statements: total assets $345,000; total liabilities $45,000; total equity $300,000; long-term debt $24,000; operating income $40,000; interest expense $10,000. What is the times interest earned for Strong Company for this year?

4.00 times (Accrual basis = operating income / interest expense)

Which of the following is an example of other comprehensive income?

An increase in the market value of available-for-sale securities

Which of the following would require a prior period adjustment?

An overstatement of interest expense

On which of the following financial statements does the stockholders' equity section appear?

Balance sheet

How is the operating cash flow ratio calculated?

Cash Flows from Operating Activities / Current Liabilities

Cash dividends are by far the most common form of dividend. The payment of cash dividends is preceded by an official announcement or declaration. There are three important dates regarding the payment of dividends. Which of the following is NOT an important date for the payment of dividends in the current year? Commitment date Payment date Date of record Declaration date

Commitment date

Which of the following is the entry that will be made to record the repayment of the bond at maturity?

Debit: Bonds Payable Credit: Cash

Carney's Feed Mill sells grain for horses, cattle, pigs, goats, and chickens. The local 4-H clubs had several fundraisers to purchase feed for the animals during the county fair to be held in July. On May 25, the clubs purchased $3,000 worth of feed, 2/3 to be delivered when the county fair starts on July 28 and the remaining feed to be delivered in week 2 of the fair, which starts on August 4. Which of the following is true of the journal entry recorded on May 25?

Debit: Cash $3,000 Credit: Unearned Sales Revenue $3,000

Bonds require the payment of interest periodically. When the interest on the bonds is paid, the journal entry to record the payment of this interest is __________

Debit: Interest Expense Credit: Cash

People's National Bank loaned $4,600 to Rhoades Resort for 12 months at 6% interest. The loan was signed on September 1. Rhoades Resort's year ends on December 31. What is the adjusting entry recorded by Rhoades Resort on December 31?

Debit: Interest Expense $92 Credit: Interest Payable $92

When making an adjusting journal entry to record the estimated warranty liability, which of the following entries would be made?

Debit: Warranty Expense Credit: Warranty Liability

Kerry's Kampers sells all new campers with a 12-month warranty. Kerry's estimates that 5% of these campers will require warranty service. Based on past experience, Kerry's estimates that the average claim will be $590. Kerry's sold 320 campers during the year. No warranty work has been performed as of December 31. As of January 31 of the following year, Kerry's incurs $240 cost for parts and $550 in labor costs related to warranty repairs. Which of the following is the journal entry to be recorded on December 31?

Debit: Warranty Expense $9,440 Credit: Warranty Liability $9,440

Which of the following statements about dividends is true? - Dividends are required to be paid every year on common stock outstanding. - Dividends represent distributions of accumulated net income. - Dividends are only paid to preferred stockholders. - Dividends are the same as interest.

Dividends represent distributions of accumulated net income

One of the main disadvantages of the corporate form is the:

Double taxation of dividends

A primary driver of an increase in stock price is profitability. Which of the following ratios is used to evaluate stockholder profitability?

Earnings per share

Although long-term creditors are concerned with a company's short-term liquidity, they are primarily concerned with its long-term solvency. Which of the following ratios is NOT used to analyze a company's debt load? Debt to total assets Earnings per share Debt to equity Long-term debt to equity

Earnings per share

Businesses are required by law to pay payroll taxes based on wages and salaries paid to employees. These payroll taxes are liabilities until they are paid to the taxing authority. Which of the following is NOT a payroll tax liability? Federal Excise Tax Medicare Tax State Unemployment Tax Social Security Tax (FICA)

Federal Excise Tax

The present value of interest payments is calculated as __________

Interest payment x PV of an annuity

One of the most important managerial functions involves finding potential creditors, arranging attractive credit terms, structuring borrowing with lenders, and arranging to have enough cash coming in to pay which of the following?

Liabilities

Which of the following would most likely be classified as a current liability? Two-year notes payable Bonds payable Mortgage payable Portion of long-term debt due within one year

Portion of long-term debt due within one year

Beimesche Corporation is formed on January 2 and is authorized to issue 1,200,000 shares of $1 par value common stock and 100,000 shares of $25 par value preferred stock with a 6% dividend rate. On, January 30, 300,000 common shares were issued at $5 per share and 4,500 preferred shares were issued at $35 per share. Which of the following statements regarding the journal entries on January 30 to record the stock issuance is true?

Preferred Stock is credited for $112,500

The present value of principal payments is calculated as __________

Principal Payment x PV of a single sum

Historically, when companies borrowed, they locked themselves into long-term contracts. Now many companies use short-term borrowing, such as revolving credit, as part of their financing plan. The downside is that short-term interest rates are subject to change. Investors are interested in a company's ability to make interest payments. What ratio is an indicator of the company's ability to make interest payments?

Times interest earned

If bonds are issued at 101.25, this means that:

a $1,000 bond sold for $1,012.50.

If the likelihood that the contingent liability will occur is probable and a reasonable estimate of the loss can be made, __________

a journal entry is made to record the liability

The excess of sales price of treasury stockover its cost should be credited to:

additional paid-in capital

Under the effective interest method, which of the following calculates the effective interest expense?

carrying value x yield rate x time (in years)

Long-term debt that is due to mature over the next year is reported as a __________

current liability

When a corporation declares a stock dividend, which of the following is true?

equity remains the same

Which of the following is consistent with the accounting for a contingent liability? Estimating uncollectible receivables Recording unearned revenues Adjustments for NSF checks LIFO reserve adjustments

estimating uncollectible receivables

If bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will:

decrease as the bonds approach their maturity date.

Many stockholders choose to invest in preferred stock because:

dividends are distributed to preferred stockholders before common stockholders.

Current liabilities are:

due and payable within one year

Stock options are similar to stock warrants in that they grant the right to buy stock at a set price for a certain period of time. Corporations frequently grant these rights to __________

employees and executives

When a corporation declares a cash dividend, which of the following is true?

equity decreases

All of the following are reasons that a corporation may purchase treasury stock EXCEPT: if it needs the stock for its employee stock bonus program. if it desires to make an investment in its own stock and is reported as an asset. to buy out the ownership of stockholders. to increase the reported amount of earnings per share.

if it desires to make an investment in its own stock and is reported as an asset.

When a company borrows money from a bank, it typically signs a formal agreement with the bank. The company also creates a liability that must be recorded in its accounting records. This liability is called a(n) __________

note payable