ACCT Test 3

If the proceeds from a sale of equipment is greater than the book value of the equipment as on the date of sale, a loss is recorded.

false

Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets.

false

The issuance of common stock affects both paid-in capital and retained earnings.

false

The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares.

false

The total earnings of an employee for a payroll period is referred to as the net pay.

false

if the market rate of interest is 6% and a corporation's bonds bear interest at 7%, the bonds will sell at a discount.

false

Which of the following is not an intangible asset? a. Copyright b. Trademark c. Long-term receivable d. Goodwill

long-term receivable

The accounting term depreciation measures:

the amount of asset cost allocated to expense over periods benefited.

depreciation

the periodic recording of the cost of fixed assets as an expense

Which of the following statement is true about intangible assets? a. They are not held for resale. b. They are usually presented in the balance sheet as fixed assets. c. They are short-lived assets. d. They have physical existence.

they are not held for resale

characteristics of fixed assets

they exist physically and are tangible they are owed and used by the company in its normal operations they are not offered for sale as part of normal operations

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

true

Is the purchased item (cost) long-lived?

If yes, the item is capitalized as an asset on the balance sheet as either a fixed asset or an investment. If no, the item is classified and recorded as an expense.

A current asset account must be increased for revenue expenditures since they benefit only the current period.

false

Amortization refers to systematic periodic transfer of the cost of a fixed asset to an expense account.

false

Expenditures made to extend an asset's life are called revenue expenditures.

false

accelerated depreciation method

A depreciation method that provides for a higher depreciation amount in the first year of the asset's use, followed by a gradually declining amount of depreciation.

stock dividend

A distribution of shares of stock to stockholders.

bonds

A form of interest-bearing note used by corporations to borrow on a long-term basis.

Costs recorded as an expense

-Vandalism -Mistakes in installation -Uninsured theft -Damage during unpacking and installing -Fines for not obtaining proper permits from governmental agencies

Under the straight-line method, the amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000, and a useful life of 5 years, will be ?

18,000 initial cost - residual value divided by useful life

Paleota Company purchased a patent from Finise for $234,000. At the time of purchase, the patent had a remaining useful life of 10 years. Determine the patent amortization expense for the first year.

23,400

earnings per share (eps)

A measure of profitability computed by dividing net income, reduced by preferred dividends, by the number of shares outstanding.

straight-line method

A method of depreciation that provides for equal periodic depreciation expense over the estimated life of a fixed asset.

double-declining-balance method

A method of depreciation that provides periodic depreciation expense based on the declining book value of a fixed asset over its estimated life.

trademark

A name, term, or symbol used to identify a business and its products. renewed every 10 years

An equipment was purchased for $15,000. It has a useful life of 5 years and a residual value of $4,000. Determine the depreciation expense for the first year using the double-declining-balance method?

6,000 1/5 years times 2 times face value

cash dividend

A cash distribution of earnings by a corporation to its shareholders.

preferred stock

A class of stock with preferential rights over common stock.

ratio of liabilities to stockholders' equity

A comprehensive leverage ratio that measures the relationship of the claims of creditors to stockholders' equity.

fixed asset turnover

A ratio measuring the efficiency of a company's use of its fixed assets; computed by dividing net sales by average fixed assets.

ratio of stockholders equity to total assets

A ratio that indicates the percent of a company's total assets that are financed with equity; equals one minus the ratio of liabilities to total assets.

stated value

A value, similar to par value, approved by the board of directors of a corporation for no-par stock.

copyright

An exclusive right to publish and sell a literary, artistic, or musical composition. good for 70 years beyond author's death

goodwill

An intangible asset of a business that is created from favorable factors such as location, product quality, reputation, and managerial skill, as verified from a merger transaction.

fringe benefits

Benefits provided to employees in addition to wages and salaries.

revenue expenditures

Costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets.

temporary differences

Differences between taxable income and income before income taxes that are created because items are recognized in one period for tax purposes and in another period for income statement purposes.

permanent differences

Differences between taxable income and income before income taxes that are created because some revenues are exempt from tax or some expenses are not deductible.

patents

Exclusive rights to produce and sell goods with one or more unique features. Good for 20 years

net pay

Gross pay less payroll deductions; the amount the employer is obligated to pay the employee.

Is the asset used in normal operations?

If yes, the asset is classified and recorded as a fixed asset. If no, the asset is classified and recorded as an investment.

contingent liabilities

Potential liabilities if certain events occur in the future.

ratio of liabilities to total assets

Sometimes called the debt ratio, it indicates the percent of a company's total assets that are financed with debt.

treasury stock

Stock that a corporation has once issued and then reacquired.

bond indenture

The contract between a corporation issuing bonds and the bondholders.

capital expenditures

The costs of acquiring fixed assets, adding a component, or replacing a component of a fixed asset.

market rate of interest

The effective rate of interest at the time the bonds were issued.

residual value

The estimated value of a fixed asset at the end of its useful life.

discount on bonds payable

The excess of the face amount of bonds over their issue price.

premium on bonds payable

The excess of the issue price of bonds over their face amount.

taxable income

The income of a corporation that is subject to taxes as determined according to the tax laws.

par

The monetary amount printed on a stock certificate.

contract rate

The periodic interest to be paid on the bonds that is identified in the bond indenture; expressed as a percentage of the face amount of the bond.

amortization

The periodic transfer of the cost of an intangible asset to expense.

depletion

The process of transferring the cost of natural resources to an expense account.

price-earnings ratio

The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.

stock split

The reduction in the par or stated value of common stock and issuance of a proportionate number of additional shares.

outstanding stock

The stock in the hands of stockholders.

payroll

The total amount paid to employees for a certain period.

gross pay

The total earnings of an employee for a payroll period.

three factors that determine the depreciation expense for a fixed asset

asset's initial cost asset's expected useful life asset's estimated residual value

intangible assets

assets that do not exist physically

Which of the following expenditures would be included in the cost of a fixed asset? a. Vandalism b. Sales taxes c. Mistakes in installation d. Uninsured theft

b. sales taxes

Depreciable cost is computed as:

cost less residual value

All amounts paid to get an asset in place and ready for use are referred to as:

cost of an asset

depletion rate

cost of resource divided by estimated total units of resource

Expenditures for research and development are generally recorded as:

current operating expenses

depletion expense

depletion rate x quantity extracted

Which of the following is a characteristic of fixed assets? a. Fixed assets that are no longer used in operations are still classified as fixed assets. b. Fixed assets do not exist physically. c. Fixed assets are offered for sale as part of normal operations. d. Fixed assets are long-term or relatively permanent assets.

fixed assets are long-term or relatively permanent assets

Patents, copyrights, trademarks, and goodwill are long-lived assets that are used in the operations of a business and are not held for sale.

intangible assets

fixed assets

long-term or relatively permanent assets such as equipment, machinery, buildings, and land aka plant assets, property, plant, and equipment

During the first year of operations, a company granted warranties on its products. The estimated cost of the product warranty liability at the end of the year is $12,750. The product warranty expense of $12,750 should be recorded in the year the related product sale is made.

true

During the first year of operations, employees earned vacation pay of $50,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the first year of operations.

true

FICA tax becomes a liability to the federal government at the time the employees are paid.

true

FICA tax is a payroll tax that is paid by both the employee and the employer.

true

Federal unemployment compensation tax is a tax that is paid only by employers.

true

Fixed assets are reported at their book value on the balance sheet.

true

Goodwill refers to the excess of purchase price of a business over the fair value of its net assets.

true

If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $13,500.

true

If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 35,000.

true

In order to record a contingent liability, the liability must be probable and reasonably estimated.

true

Intangible assets do not exist physically.

true

Most employers are required to withhold a portion of the earnings of each employee for FICA tax.

true

Obligations that depend on future events and are based on past transactions are contingent liabilities.

true

Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends.

true

The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity.

true

The double-declining-balance method of depreciation is also referred to as an accelerated depreciation method.

true

The ratio of liabilities to total assets is also called the debt ratio.

true

When the market rate of interest is more than the contract rate of a bond, the bond will sell for a discount.

true

liabilities that are due and payable beyond one year or paid out of noncurrent assets are termed long-term liabilities.

true