ACCT 410 MOCK EXAM 1

On October 1, 2024, Sonoma Company leased equipment from Napa Incorporated in lease payable in five equal annual payments of $350,000, beginning October 1, 2025. Similar transactions have carried an 12% interest rate. The right-of-use asset would be recorded at:

$1,261,673.

On January 1, 2024, Solo Incorporated issued 1,600 of its 11%, $1,000 bonds at 98.2. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2034. Solo paid $58,000 in bond issue costs. Solo uses straight-line amortization. What is the carrying value of the bonds reported in the December 31, 2024, balance sheet?

$1,521,880

Cramer Company sold five-year, 6% bonds on October 1, 2024. The face amount of the bonds was $130,000, while the issue price was $138,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2024, income statement (assume straight-line amortization)?

$1,550

On January 31, 2024, B Corporation issued $550,000 face value, 9% bonds for $550,000 cash. The bonds are dated December 31, 2023, and mature on December 31, 2033. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2024, balance sheet?

$12,375

On January 1, 2024, Legion Company sold $290,000 of 8% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $253,860, priced to yield 10%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2024, in the amount of:

$12,693

On January 1, 2024, G Corporation agreed to grant all its employees two weeks paid vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2024, G's employees each earned an average of $830 per week. A total of 470 vacation weeks earned in 2024 were not taken during 2024. Wage rates for employees rose by an average of 4 percent by the time vacations actually were taken in 2025. What is the amount of G's 2025 salaries expense related to 2024 vacation time?

$15,604

Technoid Incorporated sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2024. The manufacturing cost of the computers was $18 million. This noncancelable lease had the following terms: Lease payments: $3,144,993 semiannually; first payment on January 1, 2024; remaining payments on June 30 and December 31 each year through June 30, 2028. Lease term: 5 years (10 semiannual payments). No residual value; no purchase option. Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 9% semiannually. Fair value of the computers on January 1, 2024: $22 million. What is the outstanding balance of the lease liability in Lone Star's balance sheet on June 30, 2024?

$17,406,965

Peterson Photoshop sold $2,500 in gift cards on a special promotion on October 15, 2024, and sold $3,750 in gift cards on another special promotion on November 15, 2024. Of the cards sold in October, $250 were redeemed in October, $625 in November, and $750 in December. Of the gift cards sold in November, $375 were redeemed in November and $875 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2024, Peterson would show a deferred revenue account for the gift cards with a balance of:

$2,500.

On January 1, 2024, Packard Corporation leased equipment to Hewlitt Company. The lease term is 11 years. The first payment of $452,000 was made on January 1, 2024. Remaining payments are made on December 31 each year, beginning with December 31, 2024. The equipment cost Packard Corporation $3,319,253. The present value of the lease payments is $3,352,781. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 9%, what will be the balance reported as a liability by Hewlitt in its balance sheet on December 31, 2025?

$2,501,738

On January 1, 2024, an investor paid $303,000 for bonds with a face amount of $365,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2025 (assume annual interest payments and amortization)?

$30,410

Auerbach Incorporated issued 4% bonds on October 1, 2024. The bonds have a maturity date of September 30, 2034 and a face value of $370 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2025. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $314,955,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2025?

$317,003,650

Universal Travel Incorporated borrowed $499,000 on November 1, 2024, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2025. In connection with this note, Universal Travel Incorporated should report interest payable at December 31, 2024, in the amount of:

$4,990.

Auerbach Incorporated issued 4% bonds on October 1, 2024. The bonds have a maturity date of September 30, 2034 and a face value of $250 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2025. The effective interest rate established by the market was 6%. How much cash interest does Auerbach pay on March 31, 2025?

$5.00 million

On June 1, 2024, Dirty Harry Company borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $540,000 and a discount rate of 10%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2024?

$531,000

B Corporation has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2024, B's unadjusted balance of liability for compensated absences was $34,000. B estimated that there were 320 total vacation days and 160 sick days available at December 31, 2024. B's employees earn an average of $192 per day. In its December 31, 2024, balance sheet, what amount of liability for compensated absences is B required to report?

$61,440

Francisco leased equipment from Julio on December 31, 2024. The lease is a 10-year lease with annual payments of $154,000 due on December 31 of each year beginning December 31, 2024. The present value of the lease payments is $974,550. Francisco's incremental borrowing rate is 14% for this type of lease. The implicit rate of 12% is known by the lessee. What should be the balance in Francisco lease liability on December 31, 2025?

$765,016

On June 30, 2024, Blue, Incorporated leased a machine from Large Leasing Corporation. The lease agreement calls for Blue to make semiannual lease payments of $183,294 over a five-year lease term, payable each June 30 and December 31, with the first payment on June 30, 2024. Blue's incremental borrowing rate is 12%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Large constructed the machine at a cost of $1,187,000. Determine the price at which Large is "selling" the machine (present value of the lease payments) on June 30, 2024. What would be the amounts related to the lease that Large would report in its balance sheet at December 31, 2024? (Ignore taxes.) What would be the amounts related to the lease that Large would report in its income statement for the year ended December 31, 2024? (Ignore taxes.)

1. Present value $1,430,000 2. Lease receivable $1,138,214 3. Income $317,802

n 2024, Holyoak Incorporated offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,300 of these products during the year. By year-end of 2024, 7,400 coupons had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 90% of customers use the coupon. Holyoak recognizes coupon expense in the period coupons are issued. What is the coupon promotion liability that Holyoak should report in its December 31, 2024, balance sheet?

37,400

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?

Both bonds sell for the same amount.

Interest expense is the:

Effective interest rate times the amount of the debt outstanding during the interest period.

The interest rate that determines the amount of interest expense each interest date is referred to as the:

Effective rate.

The interest rate that is printed on the bond certificate is referred to as any of the following except:

Effective rate.

From the perspective of the lessee, leases may be classified as either:

Finance or operating.

From the perspective of the lessor, two possible lease classifications are:

Operating or sales-type.

How would the outstanding balance (book value) of bonds payable be affected by the amortization of each of the following? Premium Discount a. No effect No effect b. No effect Increase c. Increase Decrease d. Decrease Increase

Option D

Distinguishing between operating and finance leases is due in large part to the accounting concept of:

Substance over form.

The method used to pay interest depends on whether the bonds are:

Registered or coupon.

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

The company intended to refinance the debt and did so prior to issuance of the financial statements

Which of the following is not among the criteria for classifying a lease as a finance lease?

The lease term is for substantially all of the remaining economic life of the underlying asset.

Classifying liabilities as either current or long-term helps creditors assess:

The relative risk of a firm's liabilities.

We classify a lease as a finance lease if the:

lessee obtains control of the use of the asset.

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than:

the major part of the remaining economic life of the leased property.

For the lessee to account for a lease as a finance lease, the lease must meet:

Any one of the five criteria specified by GAAP regarding accounting for leases.

Most corporate bonds are:

Debenture bonds.

On January 1, 2024, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $250,000 for the machine and is leasing it to Zone for $38,000 per year, an amount that will return 9% to Calloway. The present value of the lease payments is $250,000. The lease payments are due each January 1, beginning in 2024. What is the appropriate interest entry on December 31, 2024?

General Journal Debit Interest receivable 19,080 Credit Interest revenue 19,080

Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:

Materiality