Financial Accounting Final

Match the following definitions with their appropriate terms. A receivable arising from the sale of goods or services with a verbal promise to pay. The general ledger account that is supported by a subsidiary ledger. The detail for a number of individual items that collectively make up a single general ledger account. The recognition of bad debts expense at the point an account is written off as uncollectible. Account receivable Subsidiary ledger Control account Direct write-off method

A receivable arising from the sale of goods or services with a verbal promise to pay: Account receivable The general ledger account that is supported by a subsidiary ledger: Control account The detail for a number of individual items that collectively make up a single general ledger account: Subsidiary ledger The recognition of bad debts expense at the point an account is written off as uncollectible: Direct write-off method

A change in estimate of an asset's residual value involves restating the income statements of past periods for the estimate change. True False

False

Both stock and bond investments have maturity dates. True False

False

If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the amount of the sale in case of nonpayment from a cardholder. True False

False

Interest is never a part of the cost of property, plant, and equipment or intangible assets. True False

False

Lewisburg Corp. had sales during the year of $15,000,000 and an average accounts receivable of $5,000,000. Its accounts receivable turnover ratio is 0.33 times. True False

False

One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching principle. True False

False

Research and development costs should be presented as intangible assets. True False

False

The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable. True False

False

The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period. True False

False

For each item listed below, identify how it will be reported on the statement of cash flows under the indirect method. Operating activity Not reported separately on the cash flow statement Write-off of a customer's account receivable under the allowance method Decrease in accounts receivable Increase in short-term notes receivable

Operating activity: Decrease in accounts receivable Increase in short-term notes receivable Not reported separately on the cash flow statement: Write-off of a customer's account receivable under the allowance method

Given below is a list of items that may be reported on a statement of cash flows. Identify each as one of the following using the indirect method: Operating Investing Proceeds from the sale of a building Depreciation expense Cost incurred to acquire a patent Payment of research and development costs

Operating: Depreciation expense Payment of research and development costs Investing: Proceeds from the sale of a building Cost incurred to acquire a patent

Match the following definitions with their appropriate terms. The length of time a note is outstanding, that is, the period of time between the date it is issued and the date it matures. The date the promissory note is due. The amount of cash the maker is to pay the payee on the maturity date of the note. The difference between the principal amount of the note and its maturity value. The amount of cash received, or the fair value of the products or services received, by the maker when a promissory note is issued. Principal Maturity date Term Maturity value Interest

The length of time a note is outstanding, that is, the period of the time between the date it is issued and the date it matures: Term The date the promissory note is due: Maturity date The amount of cash the maker is to pay the payee on the maturity date of the note: Maturity value The difference between the principal amount of the note and its maturity value: Interest The amount of cash received, or the fair value of the products or services received, by the maker when a promissory note is issued: Principal

Exeter Corporation purchased a piece of equipment with a price of $80,000 on March 1, 2019. The amounts below are related to the equipment purchase. Match the items below and explain why each revenue expenditure is not capitalized. This item should be included as part of the cost of the equipment. This item should be considered a revenue expenditure. It was necessary for an architect to redesign the work space to accommodate the new equipment. A fee of $6,000 was paid. The company purchased a three-year liability insurance policy to cover possible damage caused by the new equipment at a cost of $6,000. The company financed the equipment purchase with a bank loan. Interest of $3,000 was paid on the loan during 2019.

This item should be included as part of the cost of the equipment: It was necessary for an architect to redesign the work space to accommodate the new equipment. A fee of $6,000 was paid. The item should be considered a revenue expenditure: The company purchased a three-year liability insurance policy to cover possible damage caused by the new equipment at a cost of $6,000. The company financed the equipment purchase with a bank loan. Interest of $3,000 was paid on the loan during 2019.

A subsidiary is a separate legal entity that is owned or controlled by another entity. True False

True

When land and building are acquired for a lump sum, the purchase amount should be allocated on the basis of the market values of the two assets. True False

True

Utah Co. sold merchandise to Big Sky Corp. on December 1, 2017, for $9,000 and accepted a promissory note for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah's accounting period ends on December 31. What amount should Utah recognize as interest revenue on the maturity date of the note? a. $120 b. $60 c. $180 d. $0

a. $120

Benton Corporation The data below are for Benton Corporation for 2017: Accounts Receivable—January 1, 2017 $334,000 Credit sales during 2017 850,000 Collections from credit customers during 2017 725,000 Customer accounts written off as uncollectible during 2017 12,000 Allowance for doubtful accounts (credit balance) (after write-off of uncollectible accounts) 1,700 Estimated uncollectible accounts based on an aging analysis 13,200 Refer to the data for Benton Corporation. If the aging approach is used to estimate bad debts, what should the balance in Allowance for Doubtful Accounts be after the bad debts adjustment? a. $13,200 b. $14,900 c. $26,900 d. $11,500

a. $13,200

Sweetson Enterprises' comparative balance sheets included accounts receivable of $220,300 at December 31, 2017, and $200,900 at December 31, 2018. Sales reported on Sweetson's 2018 income statement amounted to $2,350,000. What is the amount of cash collections that Sweetson will report in the Operating Activities category of its 2018 statement of cash flows assuming that the direct method is used? a. $2,369,400 b. $2,771,200 c. $2,330,600 d. $2,350,000

a. $2,369,400

Chambersburg Corp. The following information is for Chambersburg Corp. for 2018 and 2017. Chambersburg uses the straight-line depreciation method. 2018 2017 Property, plant, and equipment $ 250,000 $190,000 Accumulated depreciation 100,000 85,000 Depreciation expense 62,500 47,500 Net sales 1,000,000 900,000 Average total assets 625,000 475,000 Refer to the information for Chambersburg Corp. Using the 2018 data, what is the average age of Chambersburg's property, plant, and equipment (rounded to two decimal places)? a. 1.60 years b. 2.50 years c. 10.00 years d. 4.00 years

a. 1.60 years

When are consolidated financial statements prepared? a. If one company owns more than 50% of another company b. Only if one company owns 100% of another company c. At the option of an investor company d. At the option of an investee company

a. If one company owns more than 50% of another company

The comparative balance sheets of Midnite Corp. for 2018 and 2017 indicate that short-term trade notes receivable increased from $5,000 in 2016 to $75,000 in 2018. How will this change be reported on Midnite's statement of cash flows, if Midnite uses the indirect method? a. It will be reported as a deduction from net income in the Operating Activities section. b. It will be added to net income in the Operating Activities section. c. It will be included in the amount of cash and cash equivalents at the end of 2018. d. It will be reported as a cash outflow in the Investing Activities section.

a. It will be reported as a deduction from net income in the Operating Activities section.

Yellow Dog Transit sold an old truck on December 31, 2017, for $18,400 cash. The following data were available when the truck sold: Acquisition cost $75,000 Estimated residual value at time of acquisition 8,000 Accumulated depreciation on December 31, 2017, after adjustment 53,600 When this transaction is recorded, it should include a(n) a. Loss on Disposal account for $3,000. b. decrease of $21,400 to the Truck account. c. Gain on Disposal account for $3,000. d. Gain on Disposal account for $5,000.

a. Loss on Disposal account for $3,000

Which statement is true concerning operating assets? a. Operating assets are used over two or more periods to generate revenues. b. Operating assets have no physical properties. c. A company's operating assets are important to its short-term liquidity. d. All operating assets are reported on the balance sheet.

a. Operating assets are used over two or more periods to generate revenues.

Which of the following would appear on the balance sheet as a current liability? a. Premium offers in cereal boxes b. The possible loss from a lawsuit c. Potential damages from possible explosions in a fireworks factory d. A loss from an anticipated strike by employees

a. Premium offers in cereal boxes

Select the financial statement on which the user would most likely find the answer to the question given. (Select all that apply.) How much depreciation expense did the company report during the year? a. Statement of cash flows b. Balance sheet c. Statement of retained earnings d. Income statement

a. Statement of cash flows

Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long? a. The company may need to borrow to acquire operating cash. b. The company should expand operations with its excess cash. c. Cash flows from operations may be higher than expected for the company's sales. d. The company may offer trade discounts to lengthen the collection period.

a. The company may need to borrow to acquire operating cash.

Norwood, Inc. Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an estimated life of eight years, or 12,500 hours of operation. The crane was purchased on January 1, 2017, and was used 2,700 hours in 2017 and 2,600 hours in 2018. Refer to the information for Norwood, Inc. If Norwood uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2018? a. $18,750 b. $15,000 c. $14,063 d. $20,000

b. $15,000

Grove City Corp. On January 1, 2017, Grove City Corp. purchased a ship for $2,000,000. It has a ten-year useful life and a residual value of $50,000. The company uses the double-declining-balance method. What was the depreciation expense for Grove City Corp. for the year ended December 31, 2017? a. $390,000 b. $400,000 c. $195,000 d. $0

b. $400,000

On January 15, 2017, the accounts receivable balance was $7,000 and the balance in Allowance for Doubtful Accounts was $700. On January 16, 2017, a $200 uncollectible account was written off. The net realizable value of accounts receivable on January 16 immediately after the write-off is a. $7,900. b. $6,300. c. $6,500. d. $6,800.

b. $6,300

Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to a. $91,800. b. $90,900. c. $90,000. d. $90,450.

b. $90,900

Comfort Shoes received a promissory note from a customer on April 1, 2017. The face amount of the note is $2,000; the terms are 12 months and 8% annual interest. At the maturity date, the customer pays for the note and interest. Comfort Shoes made the proper adjustment at the end of December for interest. The effect of recognizing the transaction on the maturity date is a(n) a. increase to Notes Receivable. b. decrease to Notes Receivable. c. decrease to Cash. d. increase to Discount on Notes Receivable.

b. decrease to Notes Receivable

Calculator The accounting life of intangible assets is determined by a. their legal lives. b. their legal lives or useful lives, whichever is shorter. c. the tax life mandated by the IRS. d. their useful lives.

b. their legal lives or useful lives, whichever is shorter.

Lynx Corp. The data presented below for Lynx Corp. are for the year ended December 31, 2017: Sales (100% on credit) $1,000,000 Sales returns 30,000 Accounts receivable (December 31, 2017) 170,000 Allowance for doubtful accounts (credit balance) (before adjustment at December 31, 2017) 1,300 Estimated amount of uncollectible accounts based on aging analysis 14,000 See the data for Lynx Corp. If Lynx Corp. uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debts expense for 2017? a. $13,700 b. $15,300 c. $12,700 d. $14,000

c. $12,700

If Rope Inc. receives $23,825 from credit card collections and has an average rate of 4.7% charged by the credit card company, its credit card sales during the period were a. $111,978. b. $50,691. c. $25,000. d. $22,705.

c. $25,000

Greer Company purchased land for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land? a. $256,000 b. $281,000 c. $282,200 d. $284,600

c. $282,200

Mayflower Company had a machine with a cost of $123,000 and accumulated depreciation of $87,000 that was sold at for a gain of $5,000. What amount of cash was received from the sale? a. $36,000 b. $30,000 c. $41,000 d. $128,00

c. $41,000

Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000. The truck had an estimated life of six years and an estimated residual value of $24,000. On January 1, 2016, the company made major repairs of $20,000 to the truck that extended the life one year. Thus, starting with 2017, the truck has a remaining life of five years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. What is the book value of the truck to be reported on the balance sheet at December 31, 2017? a. $50,000 b. $62,000 c. $56,000 d. $44,000

c. $56,000

Wexford Co. Wexford Co. purchased a new delivery truck at the beginning of 2017. The truck has a cost of $37,000, an estimated life of five years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2017. The truck was driven 20,000 miles during 2017 and 24,000 miles during 2018. The number of expected miles over five years is 100,000. Refer to the information about Wexford Co. Wexford Co. wants to use the depreciation method that will result in the highest depreciation expense for 2017. Which method should be used? a. Straight-line b. Units-of-production c. Double-declining-balance d. All methods create the same income in 2017.

c. Double-declining-balance

How should intangible assets be disclosed on the balance sheet? a. At the estimated market value at the balance sheet date b. At cost in the Current Assets section c. Net of the costs already amortized d. As a reduction of stockholders' equity

c. Net of the costs already amortized

When using the allowance method, what are the effects on the accounting equation when a company writes off a bad debt? a. Assets and stockholders' equity increase. b. Assets and stockholders' equity decrease. c. There is no effect on overall assets or equity. d. Assets increase and stockholders' equity decreases.

c. There is no effect on overall assets or equity.

Capitalizing an expenditure rather than recording it as a revenue expenditure a. affects the total book value of plant assets on the balance sheet, but has no effect on the amount of net income reported during an accounting period. b. affects the amount of net income reported during an accounting period, but has no effect on the total book value of plant assets on the balance sheet. c. affects the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period. d. has no effect on the book value of plant assets on the balance sheet or the amount of income reported on the income statement.

c. affects the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period.

The equity method of accounting for an investment is used when a company purchases a. 100% of the debt securities of a second company. b. more than 20% of the debt securities of a second company. c. more than 20% of the equity securities of a second company. d. 15% of the equity securities of a second company.

c. more than 20% of the equity securities of a second company.

For each of the following items, indicate whether each would be treated as a capital expenditure revenue expenditure Costs related to acquiring an asset, such as sales or excise taxes, transportation, insurance during shipment Costs incurred prior to using the asset, such as costs to prepare the asset for use, installation costs Costs incurred after putting the asset into service that keep the asset in normal operating condition Costs incurred after putting the asset into service that would extend the asset's useful life

capital expenditure: Costs related to acquiring an asset, such as sales or excise taxes, transportation, insurance during shipment. Costs incurred prior to using the asset, such as costs to prepare the asset for use, installation costs. Costs incurred after putting the asset into service that would extend the asset's useful life. revenue expenditure: Costs incurred after putting the asset into service that would extend the asset's useful life

Darrin Brown bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values: land, $320,000; building, $370,000; and equipment, $60,000. What cost should be allocated to the building? a. $399,281 b. $695,000 c. $370,000 d. $342,867

d. $342,867

Pocono Co. purchased a patent at the beginning of 2017 for $490,000. Economic benefits were expected for seven years, but the patent's legal life was 20 years. Also, during 2017, the company incurred research and development costs of $150,000. Patent amortization expense for 2017 is a. $72,143. b. $24,500. c. $150,000. d. $70,000.

d. $70,000

Where can the amounts needed to compute the accounts receivable turnover ratio be found? a. The income statement b. The balance sheet c. The statement of cash flows d. Both the income statement and balance sheet

d. Both the income statement and balance sheet

How will the payee of the promissory note record the note on its books? a. The promissory note will be recorded as revenue. b. The promissory note will be recorded as an expense. c. The promissory note will be recorded as a liability. d. The promissory note will be recorded as an asset.

d. The promissory note will be recorded as an asset.

Depreciation is a. the difference between the original cost and salvage value of an asset. b. the cash allocated each period to maintain a plant asset. c. an accumulation of funds to replace the related plant asset. d. an effort to achieve proper matching of the cost of operating assets.

d. an effort to achieve proper matching of the cost of operating assets.

There are some liabilities, such as income tax payable, for which the amounts must be estimated. Failure to estimate these amounts and record them would be a violation of the a. convention of conservation. b. practice of consistency. c. concept of historical cost. d. matching principle.

d. matching principle.

Assuming a company uses the allowance method, the entry to recognize the write-off of the specific uncollectible accounts will a. decrease total assets and total equity. b. increase total assets and total equity. c. increase total assets and decrease total equity. d. not affect total assets or total equity.

d. not affect total assets or total equity.

Depreciation is a process by which a. the decline in market value of plant and equipment is determined and recorded. b. replacement funds are accumulated for plant and equipment. c. the difference between current market value and historical cost of plant and equipment is determined. d. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset.

d. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset.

Using different depreciation methods for book purposes versus tax purposes for the same asset is a. contrary to GAAP. b. not allowed since the amount can only be calculated one way or the other, not both. c. against the Internal Revenue Code, and as such, against the law. d. the direct result of the differing goals of financial and tax accounting.

d. the direct result of the differing goals of financial and tax accounting.