Accounting 204 Final

Jefferson Company borrowed $6,000 on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of cash outflow from operating activities that Jefferson would report in Year 1 and Year 2, respectively would be

$0, and $360. *Total annual interest = $6,000 × 0.06 = $360 Since the total amount of interest is paid on the maturity date in Year 2, there would be zero cash outflow in Year 1 and $360 in Year 2.

Alpha Corporation was organized on January 1, Year 1. Alpha reported $200,000 of before tax income during Year 1 and paid a $30,000 cash dividend to its stockholders. Assuming a corporate income tax rate of 30% and a personal income tax rate of 15%, the after closing balance in the retained earnings account of December 31, Year 1 is

$110,000.

Which of the following is a widely recognized source of pressure to commit fraud in the business environment?

Intimidation from superiors

Which of the following first required corporations to file quarterly and annual financial statements that are prepared in accordance with Generally Accepted Accounting Standards?

Securities Act of 1934

Both bonds payable and notes payable are obligations that usually arise from borrowing money. This statement is

True

If investors require more interest than the rate of interest stated in a bond, the bond must be sold at a discount in order to motivate the investor to purchase the bond. This statement is

True

In a business organized as a sole proprietorship, retained earnings and capital acquired from owners are combined is a single account. This statement is

True

Partnerships are frequently managed by the owners of the business. This statement is

True

Sarbanes Oxley is a major fraud case that motivated Congress to establish rules governing internal control. This statement is

True

Warranty obligations are contingent liabilities that must be recognized and reported in a company's published financial statements. This statement is

True

When a borrower makes a payment on an installment loan, a portion of the amount paid reduces the principal balance of the note payable. This statement is

True

Standard Company has a contingent liability that has a likelihood of actual occurrence that is classified probable. Also, the amount of the liability can be reasonably estimated. Under these circumstances, Standard is required to

recognize a liability and an expense in its financial statements.

An unqualified audit opinion suggests that all aspects financial statements are in compliance with generally accepted accounting principles (GAAP). This statement is

False

Yang Company sold merchandise for $2,000. The event is subject to a state sales tax of 9%. Based on this information, Yang would be required to

recognize sales tax liability of $180. *($2,000 × 0.09)

Each time a payment is made on an installment note, the portion of the payment associated with interest expense increases. This statement is

False

The entire cash outflow resulting from a payment on an installment loan is shown as a financing activity on the statement of cash flows. This statement is

False

The implementation of an effective internal control system eliminates the possibility of fraud. This statement is

False

Yang Company sold merchandise for $2,000 cash. The event is subject to a state sales tax of 9%. Recognizing the sale will require Yang to

Increase: assets, liability, & revenue

A line of credit normally has a fixed interest rate and a one year term to maturity. This statement is

False

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be

$270, and $90

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Assuming a straight-line amortization of the discount, the amount of interest expense recognized on the December 31, Year 1 income statement is

$3,600

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30 (2) Returned 1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable within the discount period for the inventory purchased in Event 1 Immediately after the three events have been recognized, the balance in the inventory account is

$3,960 * ($5,000 original cost - $1,000 purchase return - $40 cash discount)

Alpha Associates was organized on January 1, Year 1. Alpha was organized as a partnership. Alpha reported $200,000 of before tax income during Year 1 and the partners withdrew $30,000 from the company. Assuming a corporate income tax rate of 30% and a personal income tax rate of 15%, the total amount of tax collected by the government is

$30,000.

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Based on this information, the carrying value of the bond liability on January 1, Year 1 is

$48,000 *[($50,000 - ($50,000 × 0.04)]

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Based on this information, the carrying value of the bond liability on January 1, Year 6 is

$48,500

On September 1, Year 1 Western Company borrowed $36,000 cash. The one-year note carried a 5% rate of interest. The amount of interest expenseon the income statement and the amount of cash flow from operating activities shown on Western's December 31, Year 1 financial statements would be

$600 interest expense and zero cash outflow from operating activities. *The amount of interest expense is computed as follows: Total annual interest = $36,000 × 0.05 = $1,800 Monthly interest = $1,800 annual interest ÷ 12 months = $150 Interest expense in Year 1 = $150 per month × 4 months = $600 Since the total amount of interest will be paid on the maturity date in Year 2, the cash flow associated with interest expense in Year 1 is zero.

Alpha Associates was organized on January 1, Year 1. Alpha was organized as a corporation. Alpha reported $200,000 of before tax income during Year 1 and paid a $30,000 cash dividend to its stockholders. Assuming a corporate income tax rate of 30% and a personal income tax rate of 15%, the total amount of tax collected by the government is

$64,500.

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 annual payments of $14,903 at the end of each year. The amount of interest expense shown on the Year 2 income statement is (round your answer to two decimal places).

$7448 *Interest expense for Year 1 = $100,000 × 0.08 = $8,000 Principal reduction for Year 1= $14,903 - $8,000 = $6,903 Principal balance end of Year 1 or beginning of Year 2 = $100,000 - $6,903 = $93,097 Interest expense for Year 2 = $93,097 × 0.08 = $7,448

Knoll Company started Year 2 with a $500 in cash, $500 in supplies, and $1,000 in common stock accounts. During Year 2 the company experienced the following events. (1) Paid $400 cash to purchase supplies. (2) Physical count revealed $100 of supplies on hand at the end of Year 2. Based on this information the amount of supplies expense reported on the Year 2 income statement is

$800

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 annual payments of $14,903 at the end of each year. The principal balance of the note on January 1, Year 2 is (round your answer to the nearest whole dollar).

$93, 097 *Interest expense for Year 1 = $100,000 × 0.08 = $8,000 Principal reduction for Year 1= $14,903 - $8,000 = $6,903 Principal balance end of Year 1 or beginning of Year 2 = $100,000 - $6,903 = $93,097

Home Accessories' bank statement showed a $120 NSF check. Which of the following shows how recognizing this check will affect Home Accessories' financial statements?

(120) + 120 = NA NA | NA NA NA | (120) OA

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 annual payments of $14,903 at the end of each year. Which of the following shows how the first payment on December 31, Year 1 will affect Barnes financial statements? (Note: all amounts shown in the model are rounded to the nearest whole dollar).

(14903) = (6903) + (8000) | NA - 8000 = (8000) |(8000) OA (6903) FA

Which of the following shows how the event "collected cash for services to be rendered in the future" affects a company's financial statements?

+ + NA | NA NA NA | +OA

Which of the following shows how paying cash to reduce long-term liabilities will affect a company's financial statements?

- - NA | NA NA NA | -FA

Which of the following shows how paying off a warranty obligation will affect a company's financial statements?

- - NA | NA NA NA |-OA

Which of the following shows how remitting (paying) sales tax will affect the financial statements of the company making the payment?

- - NA |NA NA NA | -OA

If a company recognizes $5,000 of accrued salary expense on December 31, Year 1,

-on January 1, Year 2 there will be a zero balance in the Accrued Salaries Expense account. -on January 1, Year 2 there will be a $5,000 balance in the Accrued Salaries Payable account. -the December 31, Year 1 expense recognition will not affect the cash account. *All of the answers are correct.

According to GAAP a contingent liability can be classified as

-probable and estimable. -reasonably possible, or probable but not estimable. -remote. *All of the answers describe classifications of contingent liabilities.

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. During Year 2, the company experienced the following accounting events. • Paid of $500 of its note payable. • Earned $700 of cash revenue. • Paid $400 of cash expenses. • Paid a $100 cash dividend. Based on this information alone, what percent of the company's assets at the end of Year 2 were provided by creditors?

20%

Wilson Company earned $2,000 of cash sales. Sales tax is 6%. Which of the following shows how this event would affect the company's financial statements (ignore the effects of cost of goods sold)?

2120 = 120 + 2000 | 2000 - NA = 2000 | 2120 OA

At the beginning of Year 2, Donald company had $5,000 of inventory on hand. During the accounting period, Donald purchased inventory costing $25,000 and sold inventory for $32,000. Operating expenses were $2,000 during the accounting period. A physical count of inventory on December 31, Year 2 revealed $4,000 of inventory on hand. Based on this information, cost of goods sold is

26,000 *Cost of goods sold is $26,000 ($30,000 cost of goods available for sale - $4,000 ending inventory).

On November 1, Year 1 Cove Company borrowed $7,000 cash to from Shelter Company. The one-year note carried a 7% rate of interest. Which of the following shows how the loan will affect Cove's financial statements on November 1, Year 1?

7000 = 7000 + NA | NA NA NA | 7000 FA

Which of the following is an accurate definition of the term asset?

A resource that will be used to produce revenue

Year 2 Year 1 Cash 22,000 20,000 Accounts receivable 66,600 60,000 Equipment 259,200 240,000 Land 141,700 130,000 Based on this information, which asset experienced the highest percentage of growth?

Accounts receivable.

Which of the following opinions is the least favorable opinion issued by an external auditor?

Adverse opinion

On December 1, Year 3 Walton Company paid $3,600 cash for office space to be used during the coming year. This event is

An asset exchange transaction

Barton Company has a line of credit with Sea View Bank. Barton can borrow up to $200,000 at any time over the course of Year 2. The following table shows the interest rate expressed as an annual percentage along with the amounts borrowed and repaid during the first three months of Year 2. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance.

Based on this information, the amount of interest expense Barton would recognize in February is $150 *Principal balance = $25,000 - $5,000 = $20,000 Interest expense = $20,000 Principal balance × (0.09 annual rate / 12 months) = $150

Barton Company has a line of credit with Sea View Bank. Barton can borrow up to $200,000 at any time over the course of Year 2. The following table shows the interest rate expressed as an annual percentage along with the amounts borrowed and repaid during the first three months of Year 2. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance.

Based on this information, the amount of interest expense Barton would recognize in January is $125 *Interest expense = $25,000 Principal balance × (0.06 annual rate / 12 months) = $125

The framework that is used to assess the effectiveness of a company's internal control was established by the

Committee of Sponsoring Organizations of the Treadway Commission

Which of the following is a disadvantage of a corporate form of business?

Double taxation

Which of the accounts is closed at the end of an accounting period?

Expense, dividend, revenue

A contingent liability is an actual obligation arising from a past event. This statement is

False

Which of the following entities receives cash when a company borrows money through a bond issue?

Issuer

Tom Tom Toys, Inc. has sales of $500,000 in Year 1. Tom Tom warrants its products and estimates warranty expense to be 2% of sales. Which of the following shows how the year end adjusting entry for warranty expense would affect the company's financial statements?

NA = 10,000 + (10,000) |NA - 10,000 = (10,000) |NA

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will effect Gomez's financial statements?

NA = 1000 + (1000) | NA - 1000 = (1000) | NA

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest expense in Year 2 will effect Gomez's financial statements?

NA = 1400 + (1400) |NA - 1400 = (1400) | NA

A strong set of internal controls is designed to minimize which of the following factors that motivate fraud?

Opportunity

Forest Beach Company experienced an event that had the following effects on its financial statements. - - NA |NA NA NA |-FA Which of the following events could have caused these effects?

Paid cash to settle the principal balance of note payable

On June 1 of Year 1 Doe Company paid $1,800 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information alone, the amount of prepaid insurance and insurance expense shown on the Year 2 financial statements would be

Prepaid Insurance: zero Insurance Expense: $750

Homeland Security Systems experienced an event that had the following effects on its financial statements. NA + - |NA + - |NA Which of the following events would have caused these effects?

Recognizing a contingent liability that has a probable chance of occurring and is estimable

Which of the following has a single owner?

Sole proprietorship

Which of the following accounts would most likely need to be adjusted at the end of an accounting cycle?

Supplies

Explorer Supplies, Inc. had sales of $120,000 in Year 1. Explorer warrants its products and estimates warranty expense to be 3% of sales. Which of the following shows how the year end adjusting entry would affect the company's assets, liabilities, and stockholders' equity?

Total Assets: NA Liabilities: 3,600 Stockholders' equity: (3,600)

Taylor Tools, Inc. has sales of $200,000 in Year 1. Taylor warrants its products and estimates warranty expense to be 4% of sales. Which of the following shows how the year end adjusting entry would affect the company's assets, liabilities, and cash flow from operating activities?

Total Assets: NA Liabilities: 8000 Cash flow from operating activities: NA

Zack's, Inc. sold land that cost $85,000 for $70,000 cash. As a result of this event

Total assets decreased

A company is not required to recognize or disclose a contingent liability that has a remote chance of actually occurring. This statement is

True

Accrued interest expense will appear on the income statement but not on the statement of cash flows. This statement is

True

The income statement presents

a comparison of the benefits and the sacrifices a company experiences from its operations

To determine the true cash balance

add deposits in transit to and subtract outstanding checks from the unadjusted bank balance. *Unadjusted bank balance + Deposits in transit - Outstanding checks = True cash balance

Rex Company's bank statement shows a $200 NSF check. To determine the true cash balance the

amount of the NSF check must be subtracted from the unadjusted book balance.

Paying cash to purchase inventory is

an asset exchange transaction.

Barnett Company paid a cash dividend. This event is

an asset use transaction

Yang Company paid $180 cash to settle its sales tax liability. This event will

decrease assets and liabilities.

The adjusting entry required to recognize warranty expense will cause

equity to decrease and will not affect cash flow from operating activities.

The adjusting entry required to recognize warranty expense will cause

liabilities to increase and equity to decrease.

GreyCo has initiated a lawsuit against PhilCo for a copyright violation. Negotiations between the lawyers representing the two companies suggest that it is probable that GreyCo will win the case and will collect a $1,000,000 settlement fee. Generally Accepted Accounting Principles (GAAP)

requires PhilCo to recognize a $1,000,000 contingent liability but does not permit GreyCo to recognize a $1,000,000 contingent asset.

When a company collects cash from accounts receivable,

total assets are not affected.

Horizontal analysis compares financial statement data across two or more accounting periods. This statement is

true.

Percentage analysis sidesteps the materiality problems of comparing different size companies by measuring changes in percentages rather than absolute amounts. This statement is

true.

The Redwood Company determined that its balance in its Accounts Receivable account represented 23% of total assets and that cost of goods sold represented 38% of total revenue. These findings are the result of

vertical analysis.