Unit 3

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

$450,000

Which of the following is not a current liability?

An unused line of credit.

The acid-test ratio is

Cash, current investments, and accounts receivable divided by current liabilities.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the borrowing of cash to be paid back in five years affect each ratio?

Increase the current ratio and increase the acid-test ratio.

Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):

Liability.

An exclusive 20-year right to manufacture a product or to use a process is a:

Patent.

Interest expense is recorded in the period in which:

The interest is incurred.

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

$0.

The Open Grill incurred the following costs in acquiring a new piece of land: Cost of the land $ 80,000 Commissions 4,800 Liability insurance for the first year 1,200 Cost of removing existing building 20,000 Sale of salvaged materials (4,000 ) Total costs $ 102,000 What is the total recorded cost of the land?

$100,800.

Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method?

$16,000.

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?

$2,000.

A company has the following three assets with the information provided: Equipment Land Building Book value $ 8 $ 20 $ 12 Estimated total future cash flows 6 35 14 Fair value 5 30 10 Determine the amount of the impairment loss, if any.

$3 million.

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

$30,000.

On October 1, a franchise was purchased for $2,000,000. The franchise agreement is for 10 years. What is the amount of amortization expense by the end of the first year, December 31 (using partial year straight-line amortization)? (Do not round intermediate calculations.)

$50,000.

The Cheese Factory incurred the following costs related to acquiring a new piece of equipment: Cost of the equipment $ 50,000 Sales tax (8%) 4,000 Shipping 3,000 Installation 2,000 Depreciation during the first month 1,000 Total costs $ 60,000 What is the total recorded cost of the equipment?

$59,000.

The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year?

$60,000.

Equipment was purchased for $50,000. At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company changed its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000. What is depreciation expense in the third year?

$8,000.

A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets.

8.0%.

Accumulated depreciation is:

A contra-asset.

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

A debit to an asset and a credit to a liability account.

Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record:

A gain of $5,000.

Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:

A loss of $10,000.

Which of the following is properly recorded as an intangible asset?

A purchased patent.

Which of the following represents a characteristic of a liability?

All of these are characteristics of a liability.

Over the entire service life of an asset, which depreciation method records the highest total depreciation?

All the methods result in the same total depreciation.

Depreciation in accounting is the:

Allocation of an asset's cost to an expense over time.

Which of the following expenditures should be recorded as an asset?

An addition which increases future benefit.

Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

As a liability for $500,000 with disclosure of the range.

The book value of an asset is equal to the

Asset's cost less accumulated depreciation.

A long-term asset is recorded at the:

Cost of the asset plus all costs necessary to the asset ready for use.

The current ratio is:

Current assets divided by current liabilities.

Which of the following is reported as a current liability?

Current portion of long-term debt.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit Cash, $5,000; Credit Notes Payable, $5,000.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record?

Debit Notes Receivable, $5,000; Credit Cash, $5,000.

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:

Debit interest expense and credit interest payable, $4,000.

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:

Disclosed but not reported as a liability.

Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset's life?

Double declining balance method.

Which of the following increases an employer's payroll costs?

Employer's FICA contribution.

Which of the following is paid by both the employee and the employer?

FICA taxes.

Which of the following intangible assets are not amortized?

Goodwill.

Which of the following expenditures should be recorded as an asset?

Interest costs during the construction period of a new building.

Which of the following is not included in calculating the acid-test ratio?

Inventory.

Which of the following is not a characteristic of a liability?

It must be payable in cash.

Return on assets is equal to:

Net income divided by average total assets.

Which of the following expenditures should be recorded as an expense?

Ordinary repairs and maintenance.

Return on assets is equal to:

Profit margin times asset turnover.

A contingent liability that is probable and can be reasonably estimated must be

Recorded.

Which of the following is not recorded as an intangible asset in the balance sheet?

Research and development.

The company's profitability on each dollar invested in assets is represented by which of the following ratios:

Return on assets.

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Sales tax payable.

Which of the following is true in comparing the current ratio with the acid-test ratio?

The current ratio will always be at least as large as the acid-test ratio.

Which of the following statements is true regarding the amortization of intangible assets?

The expected residual value of most intangible assets is zero.

We record interest expense on a note payable in the period in which

We incur interest.

In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.

one; one

Bryer Co. purchases all of the assets and liabilities of Stellar Co. for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwill associated with the purchase?

$700,000.

Which of the following is not deducted from an employee's salary?

Unemployment taxes.