ACG Final Practice 2
On August 1, Crestview Company purchased equipment for $16,000. The equipment's estimated salvage value is $1,000. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a
$1,250 debit to Depreciation Expense and a $1,250 credit to Accumulated Depreciation. Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (16,000 - 1,000)/5 = $3,000 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $3,000 per year x 5/12 = $1,250.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.
Vista Corporation has assets of $3,000,000, common stock of $780,000, and retained earnings of $475,000. What are the company's liabilities?
$1,745,000 The basic accounting equation is: Assets = Liabilities + Equity This equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity.Equity equals paid-in capital (i.e., common stock) plus retained earnings.Equity = 780,000 + 475,000 = 1,255,000 Re-arranging the accounting equation to solve for liabilities yields the following:Liabilities = Assets - Equity Fill-in assets and equity into the accounting equation and solve for liabilities.Liabilities = Assets - Equity = 3,000,000 - 1,255,000 Liabilities = 1,745,000
At September 30, Kayne Company has the following information: Cash balance per bank, $9,500 Deposits in transit, $1,255 Notes receivable and interest collected by bank, $750 Bank charge for check printing, $50 Outstanding checks, $650 NSF check, $250 What is the company's adjusted cash balance at the end of September 30?
$10,105. Adjusted cash balance = cash per bank - outstanding checks + deposits in transitAdjusted cash balance = 9,500 - 650 + 1,255 = 10,105
Crawford Company started the year with $30,000 in its Common Stock account and a credit balance in Retained Earnings of $20,000. During the year, the company earned net income of $44,000 and declared and paid $3,000 of dividends. In addition, the company sold additional common stock amounting to $10,000. As a result, its total stockholders' equity at the end of the year would be
$101,000 Ending contribution capital = Beginning contributed capital + additional stock issuedEnding contributed capital = 30,000 + 10,000 = 40,000Ending retained earnings = Beginning retained earnings + net income - dividendsEnding retained earnings = 20,000 + 44,000 - 3,000 = 61,000Total equity = contributed capital + retained earningsTotal equity = 40,000 + 61,000 = 101,000
Lamore Company reports the following for the current year:i. Sales on account totaled $150,000ii. Cash collected from customers totaled $120,000iii. Wages paid to employees totaled $100,000iv. Wage expense incurred totaled $110,000v. Prepaid $5,000 for rent that will be incurred next yearWhat is Lamore's net income for the current year using cash-basis accounting?
$15,000 Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurred including prepaid expensesNet income using the cash-basis = $120,000 - 100,000 - 5,000 = $15,000
Corian Company purchased equipment and incurred these costs: Cash price, $24,000; Sales taxes, $1,200; Insurance during transit, $200; Annual maintenance costs, $400. What amount should be recorded as the cost of the equipment?
$25,400 All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($24,000 + $1,200 + $200 = $25,400). The $400 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.
In the current year, Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It also spent $20,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?
$35,000 Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.
Hogan Company has bonds with a principal value of $1,000,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 101. What is the company's gain or loss on the redemption?
$4,000 gain When a company retires bonds before maturity, it is necessary to:1. Eliminate the carrying value of the bonds at the redemption date,2. Record the cash paid to redeem the bonds, and3. Recognize the gain or loss on redemption for the difference between 1 and 2.In this case, the bond was issued at a premium so the carrying value equals the bond's principal plus unamortized premium.Carrying value = Principal plus unamortized premium = $1,000,000 + 14,000 = $1,014,000The company can redeem this bond at 101 which means it can redeem this bond by paying the bondholder 101% of the bond's principal value.Cash paid to redeem the bonds = $1,000,000 x 1.01 = $1,010,000Determining the gain or loss on the redemption of bonds:1. Recognize gain if the cash paid to redeem bonds is less than their carrying value.2. Recognize loss if the cash paid to redeem bonds in more than their carrying value.The cash paid to redeem the bonds is less than the carrying value of bonds redeemed so recognize a gain. The gain equals the excess of the carrying value over the cash paid (i.e., $1,014,000 - 1,010,000 = $4,000).
Barnes Company's financial records report the following accounts and balances at the end of the year: Accounts Payable..................... $ 4,000 Accounts Receivable................. 4,700 Cash............................................. 14,100 Common Stock........................... 5,600 Dividends.................................... 2,200 Interest expense........................ 18,500 Notes Payable............................ 5,200 Prepaid Insurance....................... 2,700 Retained earnings....................... 2,400 Service revenue....................... 25,000 What would the company show as its total credits on its trial balance?
$42,200 Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $42,200 (i.e., 4,700 + 14,100 + 2,200 + 2,700 + 18,500 = 42,200).Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $42,200 (i.e., 4,000 + 5,600 + 5,200 + 2,400 + 25,000 = 42,200).
Suarez Corporation issued 10-year bonds with a face value of $600,000 and a contractual rate of interest of 7% at 98 on July 1. What is the total cost of borrowing for Suarez Corporation?
$432,000 The total cost is the sum of the interest payments and the difference between the cash received from bondholders and the maturity value of the bonds.Principal at maturity = $600,000 Interest payments = $600,000 × 7% × 10 years = $420,000Total cash paid to bondholders = $1,020,000Cash received from bondholders (98% × $600,000) = $588,000Total cost of borrowing = $1,020,000 - 588,000 = $432,000
Salt Company has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO and a periodic inventory system is
$438 Goods available for sale is 300 units Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using FIFO & periodic, the cost of goods sold includes the oldest 200 units and ending inventory includes the 100 newest units. Ending inventory = 90 units at $4.40/unit + 10 units x $4.20/unit = $396 + 42 = $438
On January 1, Pierce Corporation issues $500,000, 5-year, 12% bonds at 95 with interest payable on January 1. What is the carrying value of the bonds at the end of the third interest period if amortization is $5,000 per year using the straight-line amortization method?
$490,000 After three interest periods, the carrying value of the bonds will have increased by three times the annual discount amortization of $5,000, or a total of $15,000. The original carrying value of $475,000 plus the three years of discount amortization amounts to $490,000 as the carrying value at the end of the third interest period.
Schneider Trucking Inc. purchased a new truck on January 1 of the current year for $160,000. Its expected useful life is 6 years and its salvage value is estimated at $30,000. What is the depreciation expense for the current year using the double-declining balance method?
$53,333 The depreciation expense for the first year would be the truck's cost times 2 divided by the life in years = $160,000 x (2 x 1/6) = $53,333.
Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par non-cumulative preferred stock. In 2019, West declared and paid dividends of $4,000. In 2020, West declared and paid dividends of $12,000. How much of the 2020 dividend was distributed to preferred shareholders?
$6,000 Dividend to preferred shareholders = 10,000 x $10 x 6% = $6,000
Sierra Company's accounting records show the following account balances: Beginning Inventory $ 125,000 Ending Inventory 96,000 Freight-In 9,500 Freight-Out 4,000 Purchases 630,000 Purchase Returns and Allowances 48,800 Purchase Discounts 8,500 The company uses the periodic inventory system. Based on the information above compute cost of goods sold.
$611,200 Net purchases = Purchases - Purchase discounts - Purchase R&A + Freight In Net purchases = 630,000 - 8,500 - 48,800 + 9,500 = 582,200 Cost of goods sold = Beginning inventory + Net purchases - Ending inventory Cost of goods sold = 125,000 + 582,200 - 96,000 = 611,200
The financial records for Harold Corporation included the following information: Accounts receivable, $60,000 Accounts payable, $20,000 Cash, $25,000 Common stock, $10,000 Dividends, $10,000 Insurance expense, $5,000 Salaries and wages expense, $50,000 Sales revenue, $120,000 Based on this information, how much was its net income?
$65,000 Net income equals the revenues earned during the year minus the expenses incurred during the year. Use the balances of the revenue and expense accounts to measure revenues and expenses.Net income = Revenue - expenses Net income = $120,000 - 50,000 - 5,000 = $65,000
The following information is related to the beginning of the year balances. Accounts receivable, $2,100,000 Allowance for doubtful accounts (credit balance), $180,000 During the current year, sales on account were $580,000 and collections from customers were $344,000. Also during the current year, the company wrote off $32,000 in uncollectible accounts. At year-end, the company's credit manager estimates that $216,000 of the outstanding accounts receivable will be uncollectible. Bad debt expense for the current year is
$68,000. At the end of the period, accounts receivable has a balance of $2,100,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is will have a balance equal to $216,000 (i.e., given). Prior to the adjusting entry, the Allowance for Doubtful Accounts has a credit balance of $148,000 (i.e., $180,000 - 32,000 = $148,000). The adjusting entry records the difference of $36,000 (i.e., $216,000 - 148,000 = $68,000). This adjustment records Bad Debt Expense and the change to the Allowance for Doubtful Accounts.
Dawson Corporation has the following information available for the current year: Item.......................................(in $ millions) Issued common stock.................. 45 Repurchase of common stock... 65 Paid dividends .................................. 75 Net income ....................................... 130 Beginning Common Stock balance .. 475 Beginning Retained Earnings balance 625 Based in this information, what is Dawson's Retained Earnings balance (in $ millions) at the end of the current year?
$680 Ending retained earnings = Beginning retained earnings + net income - dividends Ending retained earnings = $625 + 130 - 75 = $680
Danielle Inc. has 10,000 shares of 4%, $40 par, non-cumulative preferred stock and 50,000 shares of $4 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $100,000 dividend this year. What amount of the total dividend will be paid to common stockholders?
$84,000 Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears.Preferred stockholder dividend = 10,000 x 4% x $40 = $16,000Total dividends available = $100,000Dividends available to common stockholders = $84,000
A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is that (i) cost of goods sold is _________________ and (ii) net income is __________________.
(i) Understated and (ii) Overstated In the periodic inventory system, cost of goods sold is computed at the end of the period using a formula that includes ending inventory which is determined by taking a physical inventory. Sometimes, the ending inventory is mis-counted (i.e., understated or overstated). An error in ending inventory results in an error in cost of goods sold in the opposite direction. For example, understating ending inventory overstates cost of goods sold. Moreover, an error in cost of goods sold causes an error in gross profit, net income, retained earnings, and stockholders' equity. For example, overstating cost of goods sold understates gross profit and retained earnings.
In its first year, Raydine Inc. reported sales revenue of $1,250,000, net income of $200,000, and paid dividends of $26,000 to common stockholders. It also paid dividends on its 10,000 shares of 5%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,500,000 at the end of the year. How much is the company's return on common stockholders' equity in its first year?
11.11% The return on common stockholders' equity is calculated by dividing the net income less the preferred stockholders' dividends by the average common stockholders' equity:[$200,000 - (10,000 shares x $100/share x 5%)] ÷ [($1,200,000 + $1,500,000) ÷ 2] = 11.11%.
Helix Company purchased merchandise with an invoice price of $1,000 and credit terms of 1/10, n/40. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
12% The company buying merchandise can wait 10 days and still receive a 1% discount. Otherwise, it can wait an additional 30 days and pay the full invoice amount without being overdue. In other words, a 30-day difference produces 1% interest. An interest rate of 1% in 30 days is equivalent to an interest rate of 12% in 360 days (i.e., 1% x 360/30).Alternatively:The company must pay the invoice no later than 40 days after the sale. If it pays no later than 10 days after the invoice date, the company gets a 1% discount (i.e., 1% x $1,000 = $10). So, the company can save $10 if it pays 40 days before the due date.Interest = Principal x Interest rate x Time$10 = $1,000 x Interest rate x (40-10)/360Solving for the interest rate:Interest rate = [360/(40-10)] x $10/$1,000 = 0.12 (i.e., 12%)
A company uses straight-line depreciation. It purchased a truck for $42,000. The truck's salvage value is $2,000. The truck's monthly depreciation expense is $500. What is the truck's useful life?
6.67 years The depreciable cost equals the cost minus the salvage value; it is the $42,000 purchase price less $2,000 salvage value, which is $40,000. The annual depreciation cost is $500 per month or $6,000 per year. Since $40,000 will be depreciated by $6,000 per year, the useful life is 6.67 years (i.e., $40,000/$6,000 per year = 6.67 years).
For which of the following errors should the appropriate amount be subtracted from the cash balance per bank statement on a company's bank reconciliation?
A check written by the company for $300 was incorrectly recorded by the bank as $30. Amounts added to the cash balance per bank statement include deposits in transit and bank errors that erroneously decreased the company's bank account balance. The bank decreased the company's balance by $30 when it should have decreased it by $300. Correcting this error requires subtracting $270 from the cash balance per bank statement.
When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain?
A debit to Cash, a credit to Notes Receivable, and a credit to Interest Revenue The entry to record this transaction will have a debit to Cash, a credit to Notes Receivable and a credit to Interest Revenue.
Which one of the following statements is true?
A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. A manufacturing operation utilizes raw materials, work in process, and finished goods as inventory account classifications. A merchandising company buys goods that are ready to sell and does not manufacture them.
A company increases its prepaid rent account's balance when it pays its landlord, but the company fails to record its adjusting entries at the end of the current year. What is the effect of this omission? Group of answer choices
Assets will be overstated, net income will be overstated, and stockholders' equity will be overstated. Paying for rent in advance of the lease period results in an increase in prepaid rent and a decrease in cash. By the end of the year, some or all of the prepaid rent has expired and the company should record an adjusting entry that decreases the balance of the prepaid rent account and increase rent expense. If the company forgot to record a prepaid rent adjusting entry, prepaid rent would be overstated and rent expense would be understated.
Which of the following statements is true?
Credits decrease assets and increase liabilities. The normal balance of any account is the side which increases that account. Debits increase assets, expenses, and dividends. The normal balance of assets, expenses, and dividends is a debit balance. Credits increase liabilities, equities, and revenues. The normal balance of liabilities, equities, and revenues is a credit balance.
Clark Corporation uses the perpetual inventory system. On May 1, Clark Corporation purchased merchandise on account for $10,000 with terms 2/10, n/30. Clark Corporation returns merchandise with an invoice price of $1,000 to the seller on May 7. On May 10, Clark Corporation pays for the merchandise it retains. How would Clark Corporation record the return of merchandise on May 7?
Debit accounts payable for $1,000; credit inventory for $1,000. The company purchasing merchandise uses the perpetual inventory system. When it purchases inventory, it should debit the inventory account for the invoice price of merchandise purchased, and when it returns merchandise it credits the inventory account for the invoice price of the portion of the merchandise returned to the seller.
A company receives an order from a customer on December 29. On December 30, the company delivers the goods to the customer. The company mailed an invoice to the customer on December 31 stating payment is due no later than January 15. The company receives a check from the customer for the full amount due on January 2. The company follows the revenue recognition principle and accrual-basis accounting. On what day should the company recognize revenue for this order?
December 30 Under the revenue recognition principle, revenue is earned when the performance obligation is satisfied. The performance obligation is satisfied when the company provides the goods to the customer.
Handy Inc. permits only designated personnel such as cashiers to handle cash receipts. What principle is being applied? Group of answer choices
Establishment of responsibility Control is most effective when only one person is responsible for a given task. Segregation of duties occurs when different individuals are responsible for related activities, and the responsibility for record-keeping is separated from the physical custody of the asset. Independent internal verification occurs when data prepared by employees is verified. Rotation of employees deter employees from attempting thefts since they will not be able to conceal the actions while they are away.
In periods of deflation, what will LIFO produce?
Higher net income than FIFO LIFO (i.e., last-in, first-out) uses the cost of the most recently purchased inventory to determine cost of goods sold. Declining prices (i.e., deflation) suggests the most recently purchased inventory is the least expensive inventory. As a result, LIFO and deflation produces the lowest cost of goods sold (i.e., low expenses). Low cost of goods sold produces high gross profit (i.e., gross margin), high net income, high retained earnings, and high total stockholders' equity. Low cost of goods sold (i.e., selling the less expensive inventory) also produces high ending inventory (i.e., keeping the expensive inventory) and high total assets.Chapter 6, Learning objective 3
Which one of the following is a primary component of an internal control system?
Monitoring The five primary components of an internal control system are (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring.Chapter 7, Learning objective 1: Define fraud and internal control.
Which trial balance will likely list the smallest number of accounts?
Post-closing trial balance Companies prepare three trial balances in the following sequence: (1st) the trial balance, (2nd) the adjusted trial balance, and (3rd) the post-closing trial balance. The adjusted trial balance includes all of the accounts listed on the trial balance, and it might have a few additional accounts as the result of recording adjusting entries. The post-closing trial balance does not list revenues, expenses, or dividends because those accounts have been closed by the closing entries.
Which of the following is not an effective internal control over cash disbursements? Group of answer choices
Requiring personnel who authorize cash disbursements to work continuously without vacations Requiring employees (including employees who disburse cash) to take periodic vacations is a cash disbursement control. Employees can hide certain forms of embezzlement it they are always in control of cash disbursements, but leaving for vacations often leads to scams, embezzlement's , thefts, etc. being uncovered by the person temporarily filling in for the person on vacation.
Which of the following is comprised of two parts: (1) common stock and (2) retained earnings?
Stockholders' equity Stockholders' equity is comprised of two parts: (1) common stock and (2) retained earnings. Common stock arises when a company issues new shares of its stock. Retained earnings is the net income retained in the corporation rather than paid to shareholders as dividends.
Which of the following is the most appropriate definition of accounting information?
The information system that identifies, records, and communicates the economic events of an organization to interested users The accounting information system identifies, records, and communicates the economic events of an organization to interested users.
Companies prepare various types of trial balances. Which trial balance likely lists the smallest number of accounts for a given company?
The post-closing trial balance Companies prepare three trial balances: (i) trial balance (i.e., before recording adjusting entries), (ii) the adjusted trial balance (i.e., which is prepared after recording adjusting entries), and (iii) the post-closing trial balance (i.e., which is prepared after recording closing entries). The adjusted trial balance shows the balances of all accounts, including those adjusted at the end of the accounting period. The post-closing trial balance lists only permanent accounts (i.e., balance sheet accounts) because the temporary accounts (e.g., income statement accounts) will have been closed to zero in preparation for the next year. The trial balance prepared before recording adjusting entries likely lists most of a company's accounts but a few do not yet have balances (e.g., depreciation expense) and will not be listed.There is no "pre-disclosure trial balance."
If everything else is held constant, what will cause earnings per share to increase?
The purchase of treasury stock The purchase of treasury stock reduces the number of shares outstanding, which is the denominator of EPS. With a smaller denominator, earnings per share is larger.
A corporation issues $1,000,000 of 8%, 5-year bonds when bonds of similar risk are paying 9%. The 8% rate of interest is called the __________ rate
contractual The interest rate printed on the bonds is the contractual, face, or stated rate. Yield, effective, and market rates are different terms to describe the interest rate that an investment can earn in the market.
Jay John Inc. recently paid a $50,000 installment on its 20-year mortgage. Out of the $50,000 total payment, $20,000 went towards reducing the principal, and the balance went towards interest. The journal entry to record this transaction includes a
debit Mortgage Payable for $20,000. When an installment payment is made on a mortgage note, the interest is a debit to Interest Expense and the reduction in principal is a debit to Mortgage Payable. Out of the $50,000 total payment, $20,000 reduces the mortgage payable for principal paid and the balance of $50,000 (i.e., $30,000) was for interest expense. Credit cash for the $50,000 total payment.
The adjusting entry to record estimated uncollectible accounts receivable using the allowance method includes a
debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts When using an allowance method for uncollectible accounts, a company records a year-end adjusting entry by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.
Carpenter Company pays the current month's rent. This transaction will immediately affect the
income statement, retained earnings statement, cash flows statement, and balance sheet. When a company pays the current month's rent, it decreases cash which affects the balance sheet and the cash flows statement. It also records rent expense which affects the income statement. Since it affects net income, it indirectly affects retained earnings and the retained earnings statement.
The purpose of the ledger is to
provide the balance in each account as well as track changes in their balances. The entire group of accounts maintained by a company is referred collectively as the ledger. The ledger provides more than just account names. The ledger provides the balance in each of the accounts as well as keeps track of changes in these accounts' balances.
Under the allowance method of accounting for uncollectible accounts,
the net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. When an account receivable is written-off by a company using the allowance method, the company reduces accounts receivable (i.e, which reduces assets) and it reduces the allowance for doubtful accounts (which reduces a contra asset and increases assets). The net effect on total assets is zero. Under the allowance method of accounting for uncollectible accounts, the net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
