accounting chapter 7-9 multiple choice
When bonds are issued by a company, the accounting entry typically shows an
increase in liabilities and an increase in stockholders' equity
Bonds are sold at a premium if the
market rate of interest was less than the stated rate at the time of issue
When bonds are issued at a premium, the interest expense for the period is the amount of interest payment for the period
minus the premium amortization for the period
ABC Advisers is being sued by a former customer. ABC's lawyers say that it is possible, but not probable, that the company will lose the lawsuit and the trial should last approximately 18 more months. Should ABC lose, they will most likely have to pay approximately $750,000. How should this lawsuit be reported in the financial statements?
no effect on the balance sheet or income statement, but described in the footnotes
When bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period
plus the discount amortization for the period
When reporting liabilities on a balance sheet, in theory, what measurement should be used ?
present value of the future outflow
The bond issue price is determined by calculating the
present value of the stream of interest payments and the present value of the maturity amount
Matching Principle
recognize expenses in the same period as the revenues they help to generate
Warranty expense
recorded in the period of sale
To record warranties, the adjusting journal entry would be?
debit Warranty Expense and credit Warranty Liability
When deprecation is recorded each period, what account is debited
depreciation expense
Interest Calculation
face value x annual interest rate x fraction of the year
The cost principle that requires that a company record fixed assets at
historical cost
In 2013, Drew Company issued $220,000 of bonds for $189,640. If the stated rate of interest was 6% and the yield was 6.73%, how would Drew calculate the interest expense for the first year on the bonds using the effective interest method?
$189,640 x 6.73%
Cox inc acquired a machine for $800,000 on January 1, 2013. The machine has a salvage value of $20,000 and a 5-year useful life. Cox expects the machine to run for 15,000 machine hours. The machine was actually used for 4,200 hours in 2013 and 3,450 hours in 2014. What would be the balance in the accumulated depreciation account at the end of the second year, if the straight-line method were used?
(Machine price- salvage value)/useful life useful life x years machine was used (800000-20000)/ 5 years=156000 156000x2 years = 312000
Kinsella Corporation's balance sheet showed the following amounts: current liabilities, $75,000; total liabilities, $100,000, total assets, $200,000. What is the long-term debt equity ratio?
0.25
McLauglin Corporation's balance sheet showed the following amounts: current liabilities, $75,000; total liabilities, $100,000; total assets, $200,000. What is the debt to total assets ratio?
0.50
Willow Corporation's balance sheet showed the following amounts: current liabilities, $5,000; bonds payable $1,500; lease obligations, $2,300. Total stockholders' equity was $6,000. The debt to equity ratio is
1.47
(JE) Charger earned income of $800,000 for the year for tax purposes. Its effective tax rate is 35%. These taxes must be paid by April 15 of next year.
12/31/19 Dr: Income Tax Expense $280,000 Cr: Income Tax Payable $280,000
(JE) Charger pays its employees $5,000 every Friday for a 5-day work week. This year December 31 falls on a Wednesday.
12/31/19 Dr: Wages Expense $3,000 Cr: Wages Payable $3,000 1/2/20 Dr: Wages Payable $3,000 (2019) Dr: Wages Expense $2,000 (2020) Cr: Cash $5,000
Chapman Inc. purchased a piece of equipment in 2012. Chapman depreciated the equipment on a straight-line basis over a useful life of 10 years and used a residual value of $12,000. Chapman's depreciation expense for 2013 was $11,000. What was the original cost of the building?
122000
Heston Company acquired a patent on January 1, 2013 for $75,000. The patent has a remaining legal life of 15 years, but Heston expects to receive benefits from the patent for only 5 years. What amount of amortization expense does Heston record in 2013 related to the patent?
15000
Murnane Company purchased a machine on February 1, 2009, for $100,000. In January 2013, when the book value of the machine is $70,000, Murnane believes the machine is impaired due to recent technological advances. Murnane expects the machine to generate future cash flow of $10,000 and has estimated the fair value of the machine to be $55,000. What is the loss from impairment?
15000
Sean Corp. issued a $40,000, 10-year bond, with a stated rate of 8%, paid semiannually. How much cash will the bond investors receive at the end of the first interest period?
1600
Cox inc acquired a machine for $800,000 on January 1, 2013. The machine has a salvage value of $20,000 and a 5-year useful life. Cox expects the machine to run for 15,000 machine hours. The machine was actually used for 4,200 hours in 2013 and 3,450 hours in 2014. What would be the balance in the accumulated depreciation account at December 31, 2014, if the double checking balance method were used?
192000
Cox inc acquired a machine for $800,000 on January 1, 2013. The machine has a salvage value of $20,000 and a 5-year useful life. Cox expects the machine to run for 15,000 machine hours. The machine was actually used for 4,200 hours in 2013 and 3,450 hours in 2014. What amount would Cox record as depreciation expense for 2013 if the units of production method were used?
218400
Jerabek Inc. decided to sell one of its fixed assets that had a cost of $55,000 and accumulated depreciation of $35,000 on July 1, 2013. On that date, Jerabek sold the fixed asset for $15,000. What was the resulting gain or loss from the sale of the asset?
5000 loss
Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
60000
Bradley Company purchased a machine for $34,000 on January 1. It depreciates the machine using the straight-line method over a useful life of 8 years and a $2,000 residual value. After using the machine for 2 years, Bradley revised its estimate of residual value 1000 and shortened the machines useful life to 4 more years. Depreciation expense for 2013 is
6250
Statement regarding depreciation methods
The use of higher estimated life and higher residual value will lower the annual amount of depreciation expense recognized on the income statement.
(JE) Charger borrowed $280,000 with a note payable dated August 1. This note specifies 6%. The interest and principal are due on March 31 of the following year.
8/1/19 Dr: Cash $280,000 Cr: N/P, bank $280,000 12/31/19 Dr: Interest Expense $7,000 Cr: Interest Payable $7,000 3/31/19Dr: N/P, bank $280,000 Dr: Interest Payable $7,000 (2019) Dr: Interest Expense $4,200 (2020) Cr: Cash $291,200
Installment bonds differ form typical bonds in what way?
A portion of each installment bond payment pays down the principal balance
Kinsella Seed borrowed $200,000 on October 1, 2019 at 10% interest. The interest and principal are due on October 1, 2020.What journal entry should be made with respect to the interest payment on October 1, 2020?
A.) DR: Interest Expense 15,000; DR: Interest Payable 5,000; CR: Cash 20,000
Accrued Liabilities and Non accrued
Accrued- interest payable, wages payable, property taxes payable Non accrued- accounts payable
Serenity Company issued $100,000 of 6%, 10-year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,732. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually.
Amortization of the premium for the first interest period will be $613
Liabilities are recognized in exchange for?
Borrowing money, services, and goods
Current and Non current liabilities
Current- accounts payable, unearned revenue, sales tax payable Non current- bonds payable due in 5 years
Kramerica Inc. sold 350 oil drums to Thompson Manufacturing for $75 each. In addition to the $75 sale price per drum, there is a $1 per drum federal excise tax and a 7% state sales tax. What journal entry should be made to record this sale?
D.) debit Accounts Receivable 28,438; credit Excise Taxes Payable (FED) 350; credit Sales Taxes Payable (State) 1,838; credit Sales Revenue 26,250
Kinsella Seed borrowed $200,000 on October 1, 2019 at 10% interest. The interest and principal are due on October 1, 2020. What journal entry should be recorded on December 31, 2019?
Debit interest expense 5000, credit interest payable 5000
Howton Paper Company purchased $1,400,000 of timberland in 2012 for its paper operations. Howton estimates that there are 10,000 acres of timberland, and it cut 2,000 acres in 2013. The land is expected to have residual value of $200,000 once all the timber is cut. Which of the following is true with regard to depletion?
Depletion will cause Howton's timber inventory to increase.
All of the following represent taxes commonly collected by businesses from customers EXCEPT?
Does represent-city sales tax, federal excise tax, state sales tax Does not represent- unemployment taxes
What best describes the discount on bonds payable account?
a contra liability
Which of the following statements regarding leases is false?
If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet
Payroll taxes typically include all of the following EXCEPT?
Include- social security taxes, medicare taxes, federal unemployment taxes Does not include- federal excise taxes
Bower co sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7%, and interest is paid annually on Dec. 31. What entry would be made on December 31 when the interest is paid?
Interest ExpenseDiscount on Bonds payableCash
On January 2, 2013, Sylvester Metals Co. leased a mining machine from EDH Leasing Corp. The lease qualifies as an operating lease. The annual payments are $4,000 paid at the end of each year, and the life of the lease is 10 years. What entry would Sylvester make when the machine is delivered by EDH?
No entry is necessary
Intangible assets
Patent Trademark Goodwill
Normal repair and maintenance of an asset is an example of what?
Revenue expenditure
Which of the following statements regarding bonds payable is true?
The entire principal amount of most bonds mature on a single date
Which of the following lease conditions would result in a capital lease to the lessee?
The lessee can purchase the property for $1 at the end of the lease term
WVA Mining Company has leased a machine from Franklin Machinery Company. The annual payments are $6,000, and the life of the lease is 8 years. It is estimated that the useful life of the machine is 9 years. How would WVA record the acquisition of the machine?
The machine would be recorded as an asset, at the present value of $6,000 for 8 years
True/False Statement
True- The average age of the fixed asset is computed by dividing accumulated depreciation by depreciation expense If net sales increase he fixed asset turnover ratio will decrease False- The fixed asset turnover ratio assists managers in determining the estimated future capital expenditures that are needed. A relatively low fixed asset turnover ratio signals that a company is efficiently using its assets
True and False statements
True-no journal entries or footnotes are necessary if the probability of a contingent liability is remote False-a contingent liability should always be recorded in the footnotes to the financial statements, a contingent liability should always be recorded within the financial statements, a company can choose to record a contingent liability either within its financial statements or in the footnotes to the financial statements
If bonds are issued at 101.25, this means that
a $1,000 bond sold for $1,012.50
The result of using the effective interest method of amortization of the discount on bonds is that
a constant interest rate is charged against the debt carrying value
How to find cost of equipment if purchase price is 68500, cost of trial runs is 400, installation costs are 325, sales tax is 3425
add all four of the numbers together and you get the total, which is 72650
The premium on bonds payable account is shown on the balance sheet as
an addition to a long-term liability
Bonds are a popular source of financing because
bond interest expense is deductible for tax purposes, while dividends paid on stock are not
When a credit is made to federal income taxes withholding payable account related to taxes withheld from an employee, the corresponding debit is made to?
wages expense
When should a contingent liability be recognized?
when reasonable estimation can be made, and when the contingent liability us probable
