Midterm 3 - Ch. 9, 11, 12

What is a contingent liability?

A potential liability that depends on some future event. It is a potential, rather than an actual, liability because it depends on a future event.

A graphics design company issued bonds in the amount of $1,000,000 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? A. $800,000 B. $400,000 C. $1,000,000 D. $80,000

A. $800,000

When the yield/market rate of interest is greater than the contractual/stated rate of interest A. bonds will be issued at a premium. B. the financial strength of the issuer is exceptional. C. bonds will be issued at a discount. D. the financial strength of the issuer is suspect.

A. bonds will be issued at a premium.

Which of the following best describes the behavior over time of the components of equal mortgage payments? A. Both interest and reduction in principal increase. B. Both interest and reduction in principal decrease. C. Reduction in principal decreases and interest expense increases. D. Interest expense decreases and reduction in principal increases.

D. Interest expense decreases and reduction in principal increases.

Is painting the office walls considered a capital expenditure?

No.

Gainesville Truck Center has a weekly payroll of $100,000 for its employees. Federal and state income taxes are withheld in the amounts of $17,000 and $4,000, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. Which of the following statements is true regarding the entry to record wages and the related liabilities?

Social security tax payable will be credited in the amount of $6,200.

Failure to record a liability probably will

result in an overstated net income

A company's employees earn $5,000 per day, work 5 days per week (Monday through Friday), and get paid each Friday. If the previous payday was January 26 and the accounting period ends on January 31, what is the ending balance in the wages payable account?

$ 15,000

Assume the tax rate in your state is 8%. Your cash register does not have a key for sales tax. However, the total amount of cash received for sales and sales tax during the month of June was $27,000. Sales for the month of June totaled

$25,000

On January 1, a company vehicle with a useful life of eight years and a residual value of $1,000 was purchased for $25,000. What is the depreciation expense in year 1 using the double-declining-balance method?

$6,250

An unsecured bond is also known as a A. debenture bond. B. registered bond. C. serial bond. D. bond indenture.

A. debenture bond.

What is a capital expenditure?

An expenditure that increases the capacity or efficiency of a plant asset or extends its useful life. Capital expenditures are debited to an asset account. They're also known as balance sheet expenditures.

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a A. debit to the Cash account for $5,500. B. debit to the Interest Expense account for $5,000. C. credit to the Mortgage Payable account for $5,500. D. credit to the Cash account for $5,000.

B. debit to the Interest Expense account for $5,000.

Contingencies must be accrued as liabilities if

Both the company can determine a reasonable estimate of the debt and it is probable the company will suffer a loss.

Keystone Corporation's balance sheet showed the following liability and stockholders' equity amounts: Current Liabilities, $100,000; Bonds Payable, $150,000; Capital Lease Obligations, $20,000; Deferred Income Tax Liability, $5,000; and total stockholders' equity, $500,000. The debt-to-equity ratio is A. 0.20 B. 0.35 C. 0.55 D. 1.22

C. 0.55

A corporation issues bonds that pay interest each April 1 and October 1. The corporation's December 31 adjusting entry could include a A. credit to Cash. B. debit to Bond Interest Payable. C. debit to Unamortized Bond Premium. D. credit to Bond Interest Expense.

C. debit to Unamortized Bond Premium.

Liabilities are

Creditors' claims on total assets Existing debts and obligations Obligations that must be settled or paid at some point in the future by the transfer of assets or services

On January 1, 2017, $1,000,000, 10-year, 10% bonds, were issued at 97. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is A. $9,700 B. $3,000 C. $808 D. $250

D. $250

When the market rate of interest was 9%, Kennesaw Van Lines leased several transfer trucks. The annual payments are $1,000,000 and the life of the lease is 8 years. It is estimated that the useful life of the trucks is 10 years. The present value interest factors for 9% are provided below: n PV($1) PV(annuity) 8 0.502 $5.535 9 0.46 $5.995 10 0.422 $6.418 The company should record the acquisition of the trucks (rounded to nearest thousand) as an asset with a cost of: A. $422,000 B. $502,000 C. $6,418,000 D. $5,535,000

D. $5,535,000

Assume a 5% interest rate, your grandfather would like to share his fortune with you by paying you $1,200 over 4 years. Which of the following cash-flow streams has the highest present value? Year1 Year2 Year3 Year4 a. $500 $400 $200 $100 b. $100 $200 $400 $500 c. $300 $300 $300 $300 d. Any of the above, since they each sum to $1,200.

a. $500 $400 $200 $100

The following totals for the month of November were taken from the payroll register of Levine Company: Salaries expense $12,000 Social security and Medicare taxes withheld 550 Income taxes withheld 2,500 Medical insurance deductions 250 Life insurance deductions 200 Salaries subject to federal and state unemployment taxes of 6.2 percent 4,000 The entry to record the payment of net payroll would include a a. debit to Salaries Payable for $12,000. b. debit to Salaries Payable for $8,500. c. debit to Salaries Payable for $7,950. d. credit to Cash for $9,050.

b. debit to Salaries Payable for $8,500.

If bonds are issued at par, it means that the a. financial strength of the issuer is suspect. b. market interest rate is the same as the stated/contractual interest rate. c. market interest rate is higher than the stated/contractual interest rate. d. market interest rate is lower than the stated/contractual interest rate.

b. market interest rate is the same as the stated/contractual interest rate.

The cost of intangible assets with definite useful life should be amortized over a. 40 years. b. the shorter of its legal life or its useful life. c. the longer of its legal life or its useful life. d. its useful life.

b. the shorter of its legal life or its useful life.

Knollwood Corporation issued $296,000 of 30-year, 8 percent bonds at 106 on one of its semiannual interest payment dates. The straight-line method of amortization is to be used. How much bond interest expense will be recorded on the next interest payment date? a. $11,840 b. $11,240 c. $11,544 d. $12,136

c. $11,544

Suffolk Corporation issued $90,000 of 20-year, 6 percent bonds at 98 on one of its semiannual interest payment dates. The straight-line method of amortization is to be used. How much bond interest expense will be recorded on the next interest payment date? a. $5,400 b. $2,700 c. $2,745 d. $5,445

c. $2,745

n FV($1) @ 6% FV(annuity) 10 1.791 $13.18 11 1.898 $14.97 12 2.012 $16.87 Thomas wants to make a one-time investment into a stock index fund of $2,000 this year. Assuming that this fund generates a 6% compounding interest rate annually, how much will Thomas have in his account after 12 years? a. $3,582. b. $3,796. c. $4,024. d. $26,360.

c. $4,024.

Bonds payable with face value of $500,000 and term of 20 years were issued on January 1, 2017, for $510,000. On the maturity date, what amount will the company pay to bondholders? a. $25,000 b. $510,000 c. $500,000 d. $2,550

c. $500,000

The amortization of premium on bonds payable a. will increase bond interest expense. b. should take place over a period not to exceed 40 years. c. will decrease bond interest expense. d. will increase bond interest revenue.

c. will decrease bond interest expense.

The exclusive right to reproduce and sell a literary, artistic, or musical work is called a

copyright

Westot's Retail Store regularly makes payments to a state government for the sales taxes resulting from its sales to customers. These sales taxes a. should appear on Westot's income statement as an expense. b. are based upon a company's gross profit in most states. c. are long-term liabilities when they have been paid. d. are collected by Westot's as an agent for the state's taxing authority

d. are collected by Westot's as an agent for the state's taxing authority

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a a. debit to the Mortgage Payable account for $600,000. b. credit to the Cash account for $600,000. c. debit to the Cash account for $600,000. d. credit to the Mortgage Payable account for $600,000.

d. credit to the Mortgage Payable account for $600,000.

Which of the following assets is not subject to depreciation, depletion, or amortization? a.Gas fields b.Patents c.Land improvements, such as parking lots and fences d.Land

d.Land

An asset that costs $7,000 and has accumulated depreciation of $5,200 is sold for $1,000. The ensuing journal entry would include a

debit to Loss on Sale of Asset of $800

A company purchases a coal mine for $1,000,000. It estimates that the mine contains 5,000,000 tons of coal and has a five-year life with no salvage value. If the company extracts and sells 800,000 tons during the first year, how much accumulated depletion should be recorded?

$160,000

Focal Point Engineering purchased a trademark at the beginning of 2017 for $200,000. Although the trademark's legal life is 20 years, economic benefits were expected for only 10 years. Also, during 2017, the company incurred research and development costs of $200,000. The book value of the trademarks at December 31, 2017, is

$180,000

On January 1, a company vehicle with a useful life of eight years and a residual value of $1,000 was purchased for $25,000. What is the depreciation expense in year 3 under straight-line depreciation?

$3,000

During July, Audio City sold 200 radios for $50 each. Each radio had cost Audio City $32 to purchase and carried a two-year warranty. If 5 percent typically need to be replaced over the warranty period and one actually is replaced during July, for what amount in July should Audio City debit Product Warranty Expense?

$320

A company issues $200,000 of 20-year, 6 percent bonds at 95. If interest is paid semiannually, what is the amount of bond interest expense recorded (assuming straight-line amortization) on any interest date? A. $5,750 B. $6,000 C. $6,250 D. $6,500

$6,250

Elway Company purchases land for $85,000 cash. Elway assumes $2,500 in property taxes due on the land. The title and attorney fees totaled $1,000. Elway has the land graded for $2,200. They paid $10,000 for paving of a parking lot. What does Elway record as the cost for the land?

$90,700

Examples of capital expenditures:

*Buildings (including subsequent costs that extend the useful life of a building) *Computer Equipment *Furniture and fixtures *Land (including the cost of upgrading the land) *Machinery *Software *Vehicles

Should goodwill be expensed in the year it is acquired?

No.

What is goodwill?

The excess of the cost to purchase another company over the market value of its net assets (assets minus liabilities). It is the value paid above the net worth of the company's assets and liabilities.

Notes payable provide the lender

Written documentation of the obligation Interest income

Does a pending lawsuit involve a contingent liability?

Yes. It is a potential liability.

n FV($1) @ 6% FV(annuity) 10 1.791 $13.18 11 1.898 $14.97 12 2.012 $16.87 Thomas wants to make an investment into a stock index fund of $2,000 per year for 12 years. Assuming that this fund generates a 6% interest rate, how much will Thomas have in his account after 12 years? a. $33,740. b. $299,40. c. $26,360. d. $4,024.

a. $33,740.

Gunder Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $18,900. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $900 b. $945 c. $45 d. It cannot be determined.

a. $900

Which of the following is not an intangible asset? a. Research and development costs b. Copyrights c. Franchise and licenses d. Goodwill

a. Research and development costs

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage at the end of the first month will be a. $595,000. b. $599,500. c. $600,000. d. $594,500.

b. $599,500.

n PV($1) @ 6% PV(annuity) 10 0.558 $7.360 11 0.527 $7.887 12 0.497 $8.384 Assuming 6% interest compounded annually, what amount must be deposited today so that $24,000 may be withdrawn at the end of 12 years? a. $24,000. b. $11,928. c. $12,648. d. $19,450.

b. $11,928.

n PV($1) @ 6% PV(annuity) 10 0.558 $7.360 11 0.527 $7.887 12 0.497 $8.384 What is the present value of 12 annual payments of $ 2,000 at 6 percent annual interest rate? a. $24,000. b. $16,768. c. $11,928. d. $19,450.

b. $16,768.

Equipment was purchased for $17,000. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $3,940. b. $3,340. c. $2,860. d. $2,800

b. $3,340.

10. The following costs were incurred to acquire and prepare land for a new parking lot: purchase price of land, $900,000; cost to clear the land, $40,000; cost of paving, $35,000; and cost of lighting for the parking lot, $20,000. How much should be recorded in the Land Improvements account? a. $20,000 b. $35,000 c. $55,000 d. $40,000

c. $55,000

Fast Corporation borrowed $150,000 on March 1, 2017, signing a one-year, 7% note payable to City Bank. The adjusting entry required on December 31, 2017, includes a a. debit to Interest Expense of $10,500. b. debit to Cash of $180,000. c. credit to Interest Payable of $8,750. d. credit to Interest Revenue of $8,750.

c. credit to Interest Payable of $8,750.

The cost of tearing down a building situated on land just purchased should be

debited to the Land account

On October 1st, a company borrowed $60,000 from Eighth National Bank on a 1-year, 7% note. If the company's fiscal year ends on December 31st, a year-end adjusting entry is required to increase

interest payable by $1,050