Simnet Exam 2 Review

Which of the following statements about aging accounts receivable is true?

Higher percentages are applied to older accounts

If a bond sells at a discount, the effective rate of interest will be ______ the stated rate of interest.

Higher than

When bonds are issued at a discount, the carrying value on the balance sheet ______ each year.

Increases

Fred's Fans purchased two identical fans for resale. Fan 1 was purchased in April and cost $76. Fan 2 was purchased in May and cost $80. One of the fans was sold in June for $100. Which inventory cost flow method would result in a $20 gross margin?

LIFO 100 (revenue)- 80 (cost of goods sold)

When bonds are issued at a premium, the annual interest expense is ______ the cash outflow from operating activities recorded for the payment.

Less than

When a company recognizes uncollectible accounts expense, total ______.

Net income decreases Assets decrease Equity decreases

Estimating uncollectible accounts expense improves the usefulness of financial statements by ______.

Providing a clearer picture of managerial performance Better matching expense with the revenue it helped produce Reporting the amount the company actually expects to collect

The cost of a building includes ______.

Realtor commissions Purchase price Renovation costs

Limiting dividend payments or salary increases are examples of ___________ that may be included in loan agreements.

Restrictive covenants

All other things being equal, using debt financing instead of financing with equity will ______ retained earnings.

Results in a higher level of

Bonds that mature at specified intervals throughout the life of the total issue are called

Serial bonds

The ability to repay liabilities in the long run is ______.

Solvency

The debt-to-asset ratio is one tool used to measure _________. while the primary ratio used to evaluate liquidity is the

Solvency, current ratio

When a bond is issued at a premium, the _________, rate of interest is higher than the __________ rate of interest

Stated, effective

Collecting cash on a credit card receivable affects the ______.

Statement of Cash Flows Balance Sheet

Current assets include ______.

Supplies Interest receivable

The longer an account receivable remains outstanding, the ___________ likely it is to be collected.

less

The method focuses on estimating the most accurate balance for the Allowance for Doubtful Accounts account that appears on the year-end balance sheet is called the percent of

receivables method

Current items are also referred to as _________ term and noncurrent items as____________ term

short, long

Which of the following statements are true?

A bond certificate describes the issuer's obligation to pay interest and repay the principal The amount due at maturity is called the face value of the bond

Double-declining-balance depreciation results in ______.

A large amount of depreciation in the first year of an asset's life and progressively smaller levels of expense in each succeeding year

The highest rating (lowest risk) that a company issuing bonds can receive is ______.

AAA

Assets that are expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer are called ______ assets.

Current

Assets are usually divided into two major classifications:

Current and noncurrent

The spread between the rate of interest paid on borrowing and the rate of interest earned on investments is a company's

Financial leverage

When a company can increase earnings by borrowing money at a lower percentage than they can invest the proceeds, ______ occurs.

Financial leverage

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. As a result on this, the statement of cash flows shows a cash flow from ______ activities of _______.

Financing, $48,000 50,000*0.96=48,000

It is assumed that companies will continue to operate under the

Going concern assumption

The carrying value of a bond liability that was issued at a premium will be ______ the face value of the bond liability.

Greater than

To simplify computing taxable income, MACRS uses the ______________ which does not require taxpayers to calculate depreciation from the exact date of purchase to the exact date of disposal

Half-year convention

Bond obligations normally ______.

Have longer terms to maturity than bank notes

For tax purposes, the most desirable depreciation method is the one that produces the ______ amount of depreciation expense.

Highest

When bonds are issued at a discount, the cash outflow for interest related to the discount ______.

Is included in the payment made at maturity

The modified accelerated cost recovery system (MACRS) ______.

Is the maximum depreciation currently allowed under tax law Specifies the useful life for designated categories of assets

A company experienced an event that caused assets, liabilities and cash flow from financing activities to increase, but had no effect on net income. This could have been due to ______.

Issuing a bond with a 20 year term

Benson Company purchased two identical inventory items. The item purchased first cost $40. The second item cost $42. If one of the items were sold, which cost flow method would produce the highest amount of cost of goods sold?

LIFO

The objective of tax reporting is to

Minimize tax expense

The depreciable cost of an asset is the cost of the asset ______.

Minus the salvage value

When a company issues a bond at a premium, the amount of cash collected from the issue is ______ the face value of the bond.

More than

Intangible assets with an identifiable useful life include ______.

Patents Copyrights

On January 1, Year 1, Ocean Enterprises issued bonds with a face value of $60,000, a stated rate of interest of 8% and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 9% at the time the bonds were issued, so bonds sold for $57,666. Ocean Enterprises uses the effective interest rate method to amortize bond discount. Based on this information, the amount of the discount amortized in Year 1 equals ______.

$390 (57,666(0.09)5,190-(60,000*0.08)4,800= 390

Walt Company issued $100,000 of bonds at face value. The bonds carried an 9 percent annual interest rate. Assuming Walt has an effective income tax rate of 30 percent, the company's after tax interest cost of debt equals $

$6,300 9,000(1-0.3)

Jack Company issued a $12,000 note payable on September 1, Year 1 for a one year term. Interest was set at 5% per year. In Year 2, Jack would recognize cash outflow from operating activities of ______.

$600 12,000*0.05= 600

On January 1, Year 1, Hector Incorporated issued bonds with a face value of $120,000, a stated rate of interest of 8% and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 7% at the time the bonds were issued so the bonds sold for $124,920. Hector uses the effective interest rate method to amortize the premium. Based on this information, the amount of interest expense recognized in Year 1 equals ______.

$8,744 124,920*0.07= 8,744

A $1,000 face value bond issued at 105 will have a carrying value of ______ immediately after the issue.

$1,050 1,000*1.05=1,050

Assume that a $1,000 face value bond sells at a $100 discount. If the bond has a 7% stated rate of interest and a 5 year term to maturity, the effective rate of interest is approximately ______.

10% (1,000*0.07)+(100/5)= 90 90/900= 10%

On January 1, Year 1, Dixon Company issued bonds with a $50,000 face value at 104. The bonds have a 10 year term and a 8% stated rate of interest. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, the recognition of interest expense on December 31, Year 1 reduces cash by $_________, and increases expenses by $

4,000. 3,800

Barton Enterprises purchased a delivery truck for $32,000. The estimated salvage value of the truck at the end of its 5 year estimated useful life is $4,000. Based on this information, the double-declining-balance rate is

40% (1/5)=20%*2= 40%

Assume that a $1,000 face value bond sells at a $200 discount. If the bond has a 6.2% stated rate of interest and a 20 year term to maturity, the effective rate of interest is approximately ______.

9.0% (1,000*0.062)+(200/20)= 72 72/800=0.09

When bonds are called prior to the maturity date, the call price is usually ______ face value which results in ______.

Above, a loss

A company experienced an event that caused total assets and net income to increase, but had no affect on cash flow. This could have been caused by ______.

Accepting a credit card for services provided

All of the following are current assets except ______.

Accounts payable

When a company allows a customer to "buy now and pay later," the company's right to collect cash in the future is called a(n)

Accounts receivable

All the the following are current liabilities except ______.

Accounts receivable Short-term recievables

Which methods of estimating uncollectible accounts provides the best measure of the allowance for doubtful accounts?

Aging of receivables Percent of receivables

An account receivable is created when a company ______.

Allows a customer to buy now and pay later

The term used when recognizing expense for intangible assets with identifiable useful lives is called

Amortization

GAAP requires disclosure of ______ the net realizable value of receivables and/or the amount of the allowance account.

Both

Issuing companies have the option to redeem (pay off) the debt before the maturity date with

Callable bonds

Another term for book value is ______.

Carrying value

When a company makes a cash payment for interest on a bond that was issued at face value, ______ decreases.

Cash Cash flow from operating activities Retained earnings

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, the ______.

Cash account increases by $2,120 Sales tax liability increases by $120

The cost of equipment includes ______.

Cash discount from the list price Purchase price Ordinary installation cost

Property, plant, and equipment includes ______.

Computer Land Buildings

True Stories Company sold the rights to a documentary film. They are expecting significant revenue in Year 1. The revenue stream is expected to decrease steadily until it reaches zero in Year 5. Based on this, which depreciation method should be used to most closely match the expense to the revenue stream the asset produces?

Double-declining-balance

The salvage value of an asset is the ______.

Expected market value of a fully depreciated asset

Which of the following entities does not publish ratings of the risk of default as guides to bond investors?

Federal Government

The collection of a receivable due from a credit card company has no effect on _____.

Income Statement Total assets

Which of the following is deductible for tax purposes?

Interest expense only

Walt Company issued $100,000 of bonds at face value. The bonds carried an 9 percent annual interest rate. Assuming Walt has an effective income tax rate of 30 percent, the company's after tax interest rate is ______.

6.3% 0.09(1-0.3)

Issuing bonds at a discount is a(n) ______ transaction.

Asset source

Able Company purchased a computer for $6,000. The estimated salvage value was $200. When accumulated depreciation totaled $4,500, the computer was sold for $1,200. As a result of the asset disposal, Able recognized a ______.

$300 loss $6,000-$4,500=1,500 1,200-1,500= -300

The seller of a bond is called the _________, and the buyer of a bond is called the

Borrower, lender

A company experienced an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This could have been caused by ______.

Borrowing money with a two year term to maturity

True or false: If the effective interest rate method of amortizing bond discount is used, the cash outflow from operating activities increases as the interest expense increases.

False

True or false: Recording the year-end adjustment for uncollectible accounts expense directly reduces the Accounts Receivable account.

False

True or false: Paying off a note and accrued interest is reported as a cash outflow from financing activities on the statement of cash flows.

False Note is financing, but interest is operating

Convertible bonds ______.

Have priority claims in bankruptcy settlements Can be exchanged for common stock or other specified ownership interest Offer guaranteed interest payments

An asset must be recorded at the amount paid plus any amounts paid necessary to get the asset in the location and condition for its intended us under the

Historical cost concept

Recognizing accrued interest expense affects the ______.

Income statement Balance sheet

The matching principle is not relevant to ______ reporting.

Income tax

When a company reinstates an account receivable that had previously been written-off, the balance of the Accounts Receivable and Allowance for Doubtful Accounts account both ______.

Increase

Recognizing uncollectible accounts expense under the direct write-off method includes a(n) ______.

Increase to uncollectible accounts expense and a decrease to accounts receivable

When a bond discount is amortized using the effective interest rate method, the amount of interest expense recognized ______ as the carrying value of the bond liability increases.

Increases

When interest expense is recognized on a bond issued at a discount, the carrying value of the bond ______.

Increases

A company experienced an event that had no affect on total assets, net income, or cash flow. This event could have been due to ______.

Writing off an uncollectible account

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assuming BLC uses double-declining-balance depreciation, depreciation expense for Year 2 is ______.

$12,000 (48,000*0.5= 24,000) 48,000-24,000 *0.5= 12,000

The Black Limo Company (BLC) purchased a limo on January 1, of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. At the beginning of Year 3, the limo was sold for $30,000. Assuming BLC used straight-line deprecation, the disposal resulted in a ______.

$2,000 gain 48,000-20,000= 28,000(book value) 30,000-28,000= 2,000

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, Simms will recognize ______.

$2,120 cash flow from operating activities a $120 liability on the Balance sheet

On January 1, Year 1, Dixon Company issued bonds with a $50,000 face value at 96. The bonds have a 10 year term and an 8% stated rate of interest. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, the amount of interest expense on the income statement for Year 1 is $___________, and the cash outflow from operating activities for Year 1 is $

$4,200. 4,000 (50,000*0.96=48,000) 50,000-48,000/10= 200 4000+200=$4,200

Jack Company issued a $12,000 note payable on September 1, Year 1 for a one year term. Interest was set at 5% per year. In Year 2, Jack would recognize interest expense of ______.

$400 12,000*0.05/12= 50*8= 400

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. Immediately after the issue, the carrying value of the bond liability was $

$48,000 50,000*0.96=48,000

A $10,000 face value bond that sells for 95 1/4 will yield cash proceeds of ______.

$9,525 10,000*0.9525=9525

Bond premiums reduce the ______ interest rate.

Effective

The actual rate of interest a company must pay on a bond is called the

Effective rate of interest

When compared to other creditors, the holder of an unsubordinated debenture has a(n) ______ priority claim.

Equal

The number of years a company expects to use a long-term asset is referred to as the

Estimated useful life

The percent of receivables method of estimating uncollectible accounts expense focuses on ______.

Estimating the most accurate balance for the allowance for doubtful accounts

The call price of a callable bond normally ______ the face value of the bond.

Exceeds

When a company recognizes a cash payment for interest expense on a bond that was issued at a discount, ______.

The cash payment is less than the interest expense Total assets decrease The carrying value of the bond liability increases

When bonds issued at a discount are called prior to maturity, ______ is recorded in the financing section of the statement of cash flows.

The entire cash payment

The method of deprecation chosen affects ______.

The timing, but not the total amount of expense recognized

When a company recognizes depreciation expense, ______.

Total assets decrease Accumulated Depreciation increases

When a company uses the allowance method and reinstates an account receivable that had previously been written-off, total assets ______.

and cash flow from operating activities both do not change

Barton Enterprises purchased a delivery truck for $32,000. It had an expected useful life of 5 years and a $4,000 salvage value. Assuming Barton uses straight-line depreciation, depreciation expense for Year 2 is ______.

$5,600 (32,000-4,000/5)

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 96. As a result on this, the Bonds Payable account increases by ______.

$50,000 Face value of the bond is recorded in the Bonds payable account

On January 1, Year 1, Dixon Company issued 10-year, 8% bonds with a $50,000 face value at 102. As a result, the statement of cash flows will report a cash inflow of ______ activities.

$51,000 from financing

Frost Company accepted a credit card for $6,000 of services it provided to a customer. The credit card carried a card fee amounting to 5% of sales. Recognizing this event would cause increases of ______.

$6,000 to Service Revenue $300 to Credit Card Expense $5,700 to Accounts Receivable

On January 1, Year 1, Hector Incorporated issued bonds with a face value of $120,000, a stated rate of interest of 8% and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 7% at the time the bonds were issued so the bonds sold for $124,920. Hector uses the effective interest rate method to amortize the premium. Based on this information, the amount of the premium amortized in Year 1 equals ______.

$856 9,600-8,744(0.07*124,920)=856

Land ______.

Is a component of property, plant, and equipment Has an infinite life

A current asset is an asset that ______.

Is expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer

When bonds sell at a discount, it means that the selling price is ______ the face value.

Less than

Long-term debt that is due within one year for which the company does not plan to use current assets to repay is classified as a ______ liability

Long-term

When compared to other creditors, the holder of a subordinated debenture has a(n) ______ priority claim.

Lower

Hector Company purchased two identical inventory items. The item purchased first cost less the item purchased last. If Hector uses the weight average cost flow system, the cost of goods sold will be ______.

Lower than if LIFO is used Higher than if FIFO is used

When a company recognizes a cash revenue event that is subject to state sales tax, the balance in the Cash account increases by ______ the amount of revenue.

More than

When a company recognizes a cash payment for interest expense on a bond that was issued at a premium, ______.

Net income decreases Total assets decrease

A company experienced an event that had no affect on total assets, net income, or cash flow. This event could have been due to ______

Reinstating an account receivable

When assets are acquired in a basket purchase, accountants commonly allocate the purchase price using the

Relative market value method

Until its maturity, the liability for a term bond issued at face value ______

Remains constant and the liability for an installment note decreases

MACRS ______.

Specifies the useful life for assets Classifies office furniture as 7-year property

True or false: Bond prices are normally expressed as a percentage of the face value.

True

True or false: Bonds that do not pay high enough interest to attract buyers may be discounted in order to make them more attractive.

True

Under the direct write-off method, uncollectible accounts expense is recognized ______.

When an account is determined to be uncollectible

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assuming BLC uses straight-line depreciation, depreciation expense for Year 2 is ______.

$10,000 48,000-8,000/4= 10,000

Barton Enterprises estimates that 1% of revenue will be uncollectible. If Barton's revenue for the year is $250,000, and ending accounts receivable equals $102,500, the uncollectible accounts expense shown on the income statement, using the percent of revenue method, will be $

$2,500 0.01*250,000

Barton Enterprises purchased a delivery truck for $32,000 with an estimated salvage value of $6,000. The truck was sold for $28,000. Assuming accumulated depreciation of $6,500 at the time of disposal, Barton recognized a(n) ______.

$2,500 gain 32,000-6,500= 25,500 28,000-25,500= $2,500

Gamma Company borrowed $5,000 on October 1, Year 1. The note had a one-year term and an annual interest rate of 6%. In Year 2 Gamma will recognized accrued interest expense of $

$225 5,000*0.06/12=25 *9= 225

At the end of year 1, Barton Enterprises had accounts receivable of $32,000. Revenue for year 1 was $438,000. Barton Enterprises estimates that 2% of revenue will be uncollectible. Using the percent of revenue method, uncollectible accounts expense on the Year 1 income statement will be ______.

$8,760 438,000*0.02

Depreciation expense is the ______.

Amount of an asset's cost that is allocated to expense during an accounting period

The allowance for doubtful accounts is ______.

An estimate that represents the amount of accounts receivable a company expects to be uncollectible

The net realizable value of accounts receivable is ______.

An estimate that represents the amount of cash a company expects to collect from its accounts receivable The ending balance of accounts receivable less an allowance representing the amount of accounts a company expects to be uncollectible

Cash collected on a receivable is a(n) ______ transaction.

Asset exchange

Disadvantage of using the direct write-off method of recognizing uncollectible accounts expense include ______.

Assets are overstated Expenses are not matched with revenue

When a company makes a cash payment for interest on a bond that was issued at face value, ______

Assets decrease Expenses increase

Under the allowance method, recognition of uncollectible accounts expense is made ______.

At the end of the accounting period

Uncollectible accounts expense is frequently called

Bad debts expense

Recognizing uncollectible accounts expense under the direct write-off method affects the ______.

Balance sheet Income Statement

Accepting a credit card with a fee for services rendered affects the ______.

Balance sheet Income statement

Making the year-end adjustment for uncollectible accounts expense impacts the ______.

Balance sheet Income statement

The recognition of depreciation expense affects the ______,

Balance sheet Income statement

At maturity, the repayment of a bond issued at a discount will affects the ______.

Balance sheet Statement of cash flows

Collecting an account receivable impacts the ______.

Balance sheet Statement of cash flows

Issuing a bond to borrow money affects the ______.

Balance sheet Statement of cash flows

Paying off the principal balance of a note payable affects the ______.

Balance sheet Statement of cash flows

When using the allowance method, writing off an uncollectible accounts receivables affects accounts on the ______.

Balance sheet only

Acquiring a group of assets in a single transaction is known as a(n)

Basket purchase

Recognizing accrued interest expense is a(n) ______ transaction.

Claims exchange

To reduce the risk that they won't get paid, lenders frequently require borrowers to pledge designated assets as

Collateral

A company experienced an accounting event that caused the net realizable value of receivables to decrease. This event could have happened when the company ______.

Collected an account receivable Recognized uncollectible accounts expense

Ending inventory plus cost of goods sold is always equal to ______.

Cost of goods available for sale

Taxes payable are classified as ______.

Current liability

When a company uses the percent of revenue method, adopting more rigorous credit standards will likely ______ the percentage use.

Decrease

The amount of an asset's cost that is allocated to expense during an accounting period is called ______ expense.

Depreciation

The term used to recognize expense for property, plant, and equipment is ______.

Depreciation

Book value is the ______.

Difference between an asset's cost as shown on the balance sheet and its accumulated depreciation

Assuming that an asset is used more in the early years and less in the later years of its estimated useful life, the amount of net income will be smoothed over the asset's useful life if the ______ method of deprecation expense is used.

Double-declining balance

Under generally accepted accounting principles, the direct write-off method is ______.

Only allowed if uncollectible accounts are not material

The average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash is commonly called the ______ cycle.

Operating

At maturity, the repayment of a bond issued at a discount will affect cash flow from ______ activities.

Operating Financing

The average time it takes a business to convert cash to inventory, inventory to accounts receivable and accounts receivable back to cash is called a(n)

Operating cycle

A company experienced an event that caused total assets and liabilities to decrease and a cash outflow from operating activities to appear on the statement of cash flows. This could have been caused by ______.

Paying off an accrued interest payable

A company experienced an event that caused total assets and liabilities to decrease and a cash outflow from financing activities to appear on the statement of cash flows. This could have been caused by ______.

Paying off the principle balance of a loan

Which method focuses on estimating the most accurate balance for the Allowance for Doubtful Accounts account that appears on the year-end balance sheet?

Percent of receivables

When uncollectible accounts expense is determined by taking a percentage of sales, the approach is called the ______ method.

Percent of revenue

Which method of estimating uncollectible accounts focuses on the measurement of net income?

Percent of revenue

A company experienced an accounting event that caused the net realizable value of receivables to decrease. This event could have happened when the company ______.

Recognized uncollectible accounts expense Collected an account receivable

Over a 5-year term, interest expense for a term bond issued at face _______ and interest expense for an installment note ______.

Remains constant, decreases

The percentage used to estimate uncollectible accounts expense under the percent of revenue method is ______.

Sometimes adjusted for anticipated future circumstances Usually based on past collection experiences

Most bonds require the issuer to make cash interest payments based on a(n)

Stated interest rate

Issuing a note to borrow money affects the ______.

Statement of Cash flows Balance sheet

On January 1, Year 1, Dixon Company issued bonds with a $50,000 face value at 104. The bonds had a 10 year term and a 8% stated rate of interest. This bond issue affects the ______.

Statement of cash flows Balance sheet

Paying off the accrued interest on a note payable affects the ______.

Statement of cash flows Balance sheet

The depreciation method that produces equal amounts of depreciation expense each accounting period is the ______ method.

Straight-line

When an asset is used evenly over its useful life to generate the same amount of revenue each period, the method used to depreciate the asset to best match revenues and expenses is ______ depreciation.

Straight-line

An asset that has a physical presence is known as a(n) ______ asset.

Tangible

Bonds that mature on a specified date in the future are called

Term bonds

The going concern assumption assumes ______.

That companies will pay their obligations in full That companies will continue to operate

True or false: Companies may choose to issue bonds in order to lower their interest costs.

True

True or false: Due to the MACRS half-year convention, 5-year property is actually depreciated over a 6-year period.

True

True or false: Except for the amounts, the financial statement effects are the same regardless of the depreciation method used.

True

True or false: Land has an infinite life.

True

True or false: Recognizing uncollectible accounts expense increases the accuracy of the financial statements.

True

True or false: Regardless of whether a company uses straight-line, double-declining-balance or units-of-production depreciation, the total amount of depreciation expense recognized over the useful life of an asset is the same. The methods simply assign different amounts to accounting periods

True

Units-of-production depreciation results in ______.

Varying amounts of depreciation expense dependent on the use of the asset each accounting period