accounting test 4 (ch 9, 10, 11) (FINAL!)

On 1/1/X1, Menendez Corp. pays $80,000 to retire its bonds early. At the time of the retirement, the bonds have a face value of $70,000 and a carrying value of $74,000. Question: What should be the amount of gain or loss, if any, the company will record as a result of the early retirement?

On the date of the retirement, the difference between the bond's carrying value and the cash paid equals the gain or loss $6,000 loss

A $500,000 bond issue was sold for $490,000. Therefore, the bonds:

Sold at a discount because the market interest rate was higher than the coupon (stated) rate

When a company borrows funds from creditors, it is considered a form of:

debt financing

Repurchased shares which a company has bought back from stockholders with the intention of reissuing at a later date are known as:

treasury shares.

At the start of 20X5, Happy Corp. had 20,000 shares of $5 par common stock issued and outstanding. All 20,000 shares had been issued in the prior year for $20 per share. On February 1, 20X5, Happy repurchased 6,000 shares of its own stock for $12 per share. It plans to reissue these shares at a future time. Question: What journal entry should Happy make to record the February 1, 20X5 transaction? It should debit __________ for $______________ and credit ___________ for $________________

treasury stock; 72,000; cash; 72,000

Assuming net income for the year is $115,000, what is the net cash flows from operating activities given the following information: Increase in Salaries Payable= $15,000 Depreciation Expense = $6,000 Increase in Prepaid Rent = $24,000 Loss on sale of Equipment = $1,000 Increase in Accounts Payable = $25,000 Increase in Inventory = $20,000

$115,000 NI + $6,000 depreciation expense + $1,000 loss - $24,000 increase in prepaid rent - $20,000 increase in inventory + $15,000 increase in salaries payable + $25,000 increase in A/P = $118,000

Camp Seagull obtains a $85,000, 6%, six-year loan for a new camp bus on January 1, 2020. If the monthly payment is $1,408.70 by how much will the carrying value decrease when the first payment is made on January 31, 2020?

$85,000 x .06 x 1/12 = $425 interest in first month. The principal reduction would be $1,408.70 - $425 = $983.70

For each of the situations described below, indicate whether the bond should be issued at face value, at a premium, or at a discount. (1) If the bond's market interest rate is equal to the face rate of interest, it will be issued at: (2) If the bond's market interest rate is less than the face rate of interest, it will be issued at: (3) If the bond's market interest rate is greater than the face rate of interest, it will be issued at:

(1) face value (2) a premium (3) a discount

Which of the following are common reasons for why a particular company would buy back its own stock? (check all that apply)

- To raise the market price of its stock. - To increase earnings per share. - To distribute excess cash to existing stockholders without paying them a dividend. - To satisfy employee stock ownership plans.

In addition to its common stock, Davenport Corp. had 40,000 shares of $50 par value, 8%, cumulative preferred stock outstanding for all of 20X5. Davenport did not declare any dividends for the past two years (20X4 and 20X3); however, it will declare and pay a dividend of $500,000 in 20X5 to be distributed between its preferred and common shareholders. Question: What portion of the total 20X5 declared dividend amount should common stockholders receive?

20,000

The state charter for Ross Corp. authorizes Ross to sell 900,000 shares. Ross has since issued 600,000 shares. Ross also has 40,000 shares of treasury stock. The number of outstanding shares is:

600,000 shares outstanding - 40,000 shares of Treasury Stock = 560,000 shares outstanding

Velociraptor retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $15 million. The entry to record the retirement will include:

A credit of $3 million to a gain account. $18 million liability retired for $15 million = $3 million gain

Indicate whether each of the following attributes is an advantage or disadvantage of the publicly-held corporate form of business when compared to sole proprietorships and partnerships. - Ability to raise capital - Taxation - The ease in which ownership can be transferred - Volume of paperwork supplied to outside entities - Limited legal liability

Ability to raise capital → advantage Taxation → disadvantage The ease in which ownership can be transferred → advantage Volume of paperwork supplied to outside entities → disadvantage Limited legal liability → advantage

On October 1, Hawking Corp. had 25,000 shares of $3 par value common stock outstanding before it declared a 2-for-1 stock split. At that time, its stock was selling for $150 per share. Question: After the split, how many shares of common stock are outstanding and what is their par value per share?

After the split, the number of shares outstanding is 50,000 and the par value per share is 1.50

In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be reported as a(n):

An Increase in A/P would be added to net income as part of the overall adjustment from accrual to cash flows. The increase in A/P allowed us to purchase inventory or supplies that did not require a cash payment (yet).

From largest to smallest, which is the correct order in terms of number of shares involved?

Authorized, Issued, Outstanding

For bonds issued at a discount or at a premium to face value, in each successive entry to recognize interest expense

Both the discount and the premium amortizations will be higher

Which of the following is not true regarding callable bonds? A. This feature allows the borrower to repay the bonds before their scheduled maturity date. B. This feature helps protect the borrower against future decreases in interest rates. C. Callable bonds benefit the bond investor. D. A bond can be both callable and convertible.

C. Callable bonds benefit the bond investor. Callable bonds benefit the issuer. They allow the issuer to buy back the bonds at a fixed price when they so desire

Which of the following transactions is describing a "cash outflow from an operating activity"? A. Cash received from the sale of equipment for a loss. B. Cash paid towards the principle portion of a short-term note payable. C. Cash paid to suppliers for inventory purchases. D. Cash received from customers on account. E. Cash paid to purchase a machine to be used in the business.

C. Cash paid to suppliers for inventory purchases.

When a company has a stock split, which of the following statements is true? A. The par value per share will increase. B. The market price per share will increase. C. The number of shares outstanding will increase. D. Retained earnings will decrease

C. The number of shares outstanding will increase. With a stock split, the company multiplies the shares outstanding and thus decreases the share price.

The mixture of liabilities and stockholders' equity a business uses is called its:

Capital structure

When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds?

Carrying value and interest expense increase.

When bonds are issued at a discount, what happens to the carrying value over the life of the bonds?

Carrying value increases to face value over time for bonds sold at a discount. As CV increases, interest expense will increase since it is calculated as CV x market rate x 6/12.

Which of the following transactions is describing a "cash inflow from financing activity"?

Cash received from the issuance of common stock.

Treasury stock is a(an):

Contra-equity account.

For cash dividends, what is the correct order chronologically (which comes first, then next, and then next)?

Declaration date, Record date, Payment date

When treasury stock is acquired, what is the effect on total stockholders' equity?

Decrease When treasury stock is purchased both stockholders' equity and assets will decline by the cost of the treasury stock. Treasury Stock is a contra-stockholders' equity account.

The acquisition of treasury stock by a corporation:

Decreases its total assets and total stockholders' equity The acquisition of Treasury stock would result in a decrease in cash as well as a decrease in stockholders equity.

Stock dividends and stock splits have the following effects on retained earnings:

Dividends - No change Retained earnings - Decrease Stock splits are simply doubling the amount of stock (in a 2 for 1 split, for example) and decreasing the par value per share amount. No journal entry is prepared for a stock split. Stock dividends require that we transfer an amount from Retained Earnings to Paid-In Capital account balances like Common Stock and Additional Paid-In Capital.

A corporation has cumulative preferred stock outstanding with an annual dividend of $12,000. If no dividends were paid in the two prior years, and a $50,000 dividend is declared this year, how much goes to common stockholders?

Dividends in arrears = $24,000 ($12,000 x 2 prior years). The current year dividend of $12,000 must also be paid so $36,000 goes to preferred shareholders. These leaves $14,000 for the common stockholders.

Which of the following transactions is describing a "cash inflow from an investing activity"? A. Cash received from a bank loan. B. Cash paid to purchase supplies. C. Cash received from the issuance of common stock. D. Cash paid to stockholders as a dividend. E. Cash received from the sale of land for a loss

E. Cash received from the sale of land for a loss

The purchase of treasury stock is classified in the statement of cash flows as a(n):

Financing activity

At the beginning of 20X5, Brittle Inc. had total asset and total liabilities of $600,000 and $385,000, respectively. The following occurred during 20X5: earned net income of $205,000, declared and paid dividends totaling $25,000, and received $45,000 cash from the issuance of new shares of stock. Question: What should be Brittle's ending stockholders' equity balance at 12/31/X5?

First, calculate the beginning stockholders' equity balance by applying the accounting equation. The beginning stockholders' equity balance is increased by net income, decreased by dividends declared, and increased by the cash received from new stock issuance. Answer: 440000

Highland Inc. and Morrison Corp. have a return on equity of 30% and 28.5%, respectively. When comparing their return on equity percentages, which of the following statements is true?

For every $1 of investors' resources, Highland Inc. earned more on the dollar than Morrison Corp.

When bonds are issued at a premium and the effective interest method is used for amortization of the premium, at each subsequent interest payment date, the cash paid is:

Greater than the interest expense recognized

The main difference between the indirect and direct methods of preparing a statement of cash flows is:

In the presentation of only the operating activity section.

Bakerson, Inc. issued a five-year corporate bond with a face value of $300,000 and a 5% coupon rate for $290,000. What effect would the bond issuance have on Bakerson's fundamental accounting equation?

Increase assets and liabilities.

Bakerson, Inc. issued a five-year corporate bond with a face value of $300,000 and a 5% coupon rate for $290,000. What effect would the bond issuance have on Bakerson's fundamental accounting equation?

Increase assets and liabilities. Both assets and liabilities increase by the amount borrowed--$290,000.

Quark Corp. issues bonds on January 1, 2020 with a face value of $100,000, a coupon (stated) rate of 8%, and they mature in ten years. The market rate is 9% on January 1, 2020. The bonds sell for $93,496 and pay interest semi-annually on 6/30 and 12/31 each year. What is the amount of interest expense recognized by Quark on June 30, 2020?

Interest expense = carrying value x market rate x time Interest expense = $93,496 x .09 x 6/12 = $4,207

Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were $12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's net cash flows from operating activities would be:

Net Income $200,000 A/R decrease 3,000 A/P increase 2,000 CF from operations $205,000

When a company purchases Treasury Stock

One stockholders' equity account increases and one asset account decreases

Issued stock refers to the number of shares:

Outstanding plus treasury shares.

A stock dividend would:

Result in a transfer of retained earnings to contributed capital. Retained earnings is what dividend payments come out of. If a company were to give stock dividends, they would take the amount out of retained earnings and put it in contributed capital since it would no longer be in their hands.

On January 1, Richfield Corporation had 800,000 shares of $10 par value common stock outstanding. On March 31 the company declared a 10% stock dividend when the market value of the stock was $15 per share. As a result of this event,

Richfield's Retained Earnings account decreased $1,200,000. The small stock dividend will be valued at $15 market value per share. 800,000 shares x 10% = 80,000 shares issued x $15/sh = $1,200,000 charged to RE

A type of corporation which avoids double taxation is a(n):

S corporation.

The issuer of a 5% common stock dividend to common stockholders should debit retained earnings for an amount equal to the

Small stock dividends are valued at the market value of the shares issued. This would be the amount debited to the retained earnings account.

A company sells equipment for $25,000 and records a gain on sale of $5,000. How would this information be used to determine cash flow from operating activities under the indirect method?

Subtract $5,000 from net income We would need to subtract the gain from net income since it is unrelated to operating activities

Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:

The $12,000 interest paid would be classified as an operating activity. The $6,000 dividend payment is a financing activity.

In each succeeding payment on an installment note:

The amount of interest expense decreases.

The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $18,000 in 2021. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021?

The preferred dividend is $6 per share (6% x $100 par value). Since there are 1,000 preferred shares the annual dividend is $6,000. If omitted in 2020 and the preferred stock is cumulative then the company must pay both the 2020 and 2021 dividends to the preferred shareholders ($12,000 in all) and the remaining $6,000 will go to the common shareholders.

Which of the following is NOT one of the fundamental rights possessed by common stockholders?

The right to make hiring and firing decisions with respect to the senior executive team (e.g., the CEO and his/her senior leadership team)

Hokie, Inc. reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $26,000 and $24,000, respectively. Assuming that all relevant information has been presented, Hokie's net cash flows from operating activities would be:

The two adjustments to net income would be to add $3,000 for the decrease in A/R and to subtract $2,000 for the decrease in A/P. $135,000 + $3,000 - $2,000 = $136,000

A corporation declares and distributes a 20% stock dividend at a time when there are 10,000 shares outstanding (before the dividend). The common stock has a par value of $1/share and a market value of $20/share. What will be the debit made to retained earnings to record this stock dividend?

This is a small stock dividend (less than 25%) so the charge to retained earnings will be for the market value of the shares distributed. 10,000 shares x 20% = 2,000 shares x $20/share = $40,000.

Tar Heel, Inc. retires a $15 million (face value) bond issue when the carrying value of the bonds is $13 million, but the market value of the bonds is $17 million. The entry to record the retirement will include:

We retire bonds with a carrying value of $13 million by paying $17 million. That's a loss on retirement of $4 million

On March 1, Mill Corp. had 50,000 shares of common stock authorized and 23,000 shares of $2 par common stock issued and outstanding when it declared a $.55 (fifty-five cents) per share dividend to be paid on March 31. (1) The journal entry on March 1 should have a debit to (a) for $(b) and a credit to (c) for $(d)

a - dividends b - 12650 c - dividends payable d - 12650

On March 1, Mill Corp. had 50,000 shares of common stock authorized and 23,000 shares of $2 par common stock issued and outstanding when it declared a $.55 (fifty-five cents) per share dividend to be paid on March 31. The journal entry on March 31 should have a debit to (a) for $(b) and a credit to (c) for $(d)

a - dividends payable b - 12650 c - cash d - 12650

Operating activity cash flows exclude: a. Dividends paid b. Dividends received c. Interest paid d. Interest received e. Operating activities include all of these

a. Dividends paid

Which of the following is a reason that a corporation would prefer to issue stock instead of bonds? a. The risk of going bankrupt is less. b. Dividend payments can be deducted for income tax purposes but interest payments cannot c. Expansion is accomplished without surrendering ownership control d. All of the other answer choices are correct

a. The risk of going bankrupt is less. - Bankruptcy risk is reduced when issuing stock because dividends are not required to be declared and you do not have to pay stockholders' back at some set future date. - Dividends are not tax deductible (but interest payments are) - Issuing stock does bring in new ownership so control (percentage of ownership by existing owners) is reduced.

Which of the following is correct about the statement of cash flows? a. A company with a net loss will always have a net cash outflow from operating activities b. Paying dividends to investors creates a cash outflow from financing activities. c. The repayment of long-term debt is a cash inflow from financing activities d. Collecting interest earned from a note receivable creates a cash inflow from investing activities

b. Paying dividends to investors creates a cash outflow from financing activities. There is no one-for-one correspondence between the sign of net income or net loss and cash flows from operating activities. The receipt of interest is classified as an operating activity. The repayment of long-term debt is a financing activity but would be a cash outflow not an inflow.

With respect to installment notes where the installment payment stays the same over time, there is a pattern we should expect to see with respect to the portion of each payment allocated towards interest compared to the portion allocated towards the outstanding loan balance. "As time goes by, the interest portion of each installment payment should _____________"

be decreasing

Bonds which permit the bondholder to convert the bonds into shares of stock are called:

convertible bonds

Which of the following transactions would generally result in an investing cash inflow? a. Receive cash from borrowing at the bank b. Receive cash from customers c. Receive cash dividends from a company whose stock we have invested in d. Receive cash from the sale of land e. Receive cash from stockholders for the issuance of common stock

d. Receive cash from the sale of land

Jamison Inc. issued 15,000 shares of its $6 par value common stock for $15 per share. The journal entry to record this transaction should include the following: (check all that apply)

debit "Cash" for $225,000., credit "Common Stock" for $90,000., credit "Additional Paid-in Capital" for $135,000.

Milton Corp. retired its bonds early which resulted in a loss of $80,000. Question: In the journal entry to record the retirement, how should the loss be recorded, and what will be the effect of the loss on the company's net income? Answer: A "Loss" account should be __________________, and the loss will cause the company's net income to ______________

debited, decrease

Assuming a term bond is issued at a premium, the carrying value over time should be

decreasing

Assuming a term bond is issued at a premium, the interest expense amount calculated every period using the effective interest method should be

decreasing

A company issues a bond with a face value of $600,000 for an issue price of a $563,000. This bond is being issued at a:

discount

Bonds sell at a _____________ to their face value when their coupon or stated rate of interest is less than the rate the market demands on the date of issue

discount

Which of the following is an example of a contra liability account? a. Bonds Payable b. Premium on Bonds Payable c. Interest Payable d. Note Payable e. Allowance for Uncollectible Accounts f. Discount on Bonds Payable

f. discount on bonds payable

True or False: The times interest earned ratio measures how many times during the year a company can borrow money before it becomes bankrupt.

false

True or False: When stock is issued for more than its par value, the excess is considered to be revenue and should be reported on the income statement.

false

True or false: For purposes of electing the company's board of directors, preferred stockholders can cast more votes than common stockholders.

false

True or false: Preferred shareholders are guaranteed to receive a higher dividend amount than common shareholders.

false

True or false: When a company borrows money to finance the purchase of an asset to use in its business, one of their likely goals is to earn a rate of return on that asset which is lower than the interest rate on the loan borrowing.

false

When deciding on whether to finance its operations through the issuance of stock or through the issuance of bonds, companies often consider tax effects. True or False: Interest expense related to bonds is not tax-deductible whereas dividends paid to stockholders are tax-deductible.

false

From the corporation's perspective, the issuance of its stock is an example of which type of business activity?

financing

Which of the following stages of equity financing comes last in the traditional order of progression?

initial public offering (IPO).

Assuming a term bond is issued at either a premium or a discount, the carrying value on the issuance date should be equal to the bond's

issue price

Bonds which are collateralized by specific assets in the event the borrowing company defaults on bond payments are called:

secured bonds

Assuming a term bond is issued at a premium, the cash interest payment calculated every period should:

stay the same

Bonds which require the full face value (principal) amount to be paid back on the bond's maturity date are called:

term bonds

The total number of shares a corporation may sell or issue is known as:

the authorized number of shares.

Which of the following types of information is required to be included in a corporation's articles of incorporation (also known as its corporate charter)? (select all that apply)

the nature of the corporation's primary business activities, the types of shares to be issued, information regarding its board of directors

Assuming a company has net income for the year, the end of year dollar balance in the "Total Stockholders' Equity" column of the statement of stockholders' equity should exactly match which of the following:

the total stockholders' equity balance on the balance sheet

True or False: Dividends declared and paid have no effect on a corporation's common stock account balance.

true

True or False: If the Red Company has a debt to equity ratio of 2.3 while the Blue Company has a debt to equity ratio of 1.9, one could say that Red Company is more financially leveraged than Blue Company.

true

True or False: In some states, corporations are not required to have a par value associated with their common stock.

true

True or False: The main reason a company declares a stock split is to lower the market price per share of its stock.

true

True or false: In a year in which dividends are declared, preferred stockholders receive their portion of dividends before common stockholders receive theirs.

true

True or false: In the event the corporation is dissolved, preferred stockholders receive their share of assets before common stockholders.

true