ACG Questions
A company has the following:: Category Cost Market A $57,000 $50,000 B 40,000 37,000 C 80,000 86,000 If the company values its inventory using lower-of-cost-or-market, the value of the inventory reported on its balance sheet would be
$167,000. SOLUTION: Category Cost Market LCM A $57,000 $50,000 $50,000 B 40,000 37,000 37,000 C 80,000 86,000 80,000 Total LCM = $167,000
A company reported a $40,000 cash inflow provided by operating activities. Additional data for the current year shows the following: It paid $15,000 for equipment It paid a $10,000 note payable It paid $5,000 in dividends Shortly before year-end, it received $20,000 by issuing additional shares of its stock. What is its free cash flow?
$20,000 SOLUTION: Free cash flow equals cash provided by operations minus cash paid for capital expenditures (e.g., buildings, equipment, etc.) and cash dividends. The company has only one cash inflow or out-flow from operating activities (i.e., cash collected from customers) and it has only one capital expenditure (cash paid for new equipment). Free cash flow = $40,000 - 15,000 - 5,000 = $20,000
On January 1, a corporation issued $4,500,000, 6%, 8-year bonds for $5,105,947. Interest is payable annually on January 1. The effective interest rate on the bonds is 4%. Use the effective-interest method to determine the amount of interest expense for the first year.
$204,238 SOLUTION: Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 4% x $5,105,947 = $204,238
The following is information from a certain corporation's financial records for the current fiscal year. i. Cash received from customers, $375,000 ii.Revenue earned, $380,000 iii.Cash paid for wages, $180,000 iv.Wages incurred, $165,000 v.Cash received from shareholders for additional shares of stock, $30,000 What is the company's net income for the current year using the accrual basis of accounting?
$215,000 SOLUTION: Net income using the accrual basis = Revenue earned - expenses incurred including depreciation Net income using the accrual basis = $380,000 - 165,000 = $215,000
Suarez Corporation issued 10-year bonds with a face value of $400,000 and a contractual rate of interest of 6% at 101 on July 1. What is the total cost of borrowing for Suarez Corporation?
$236,000 SOLUTION: The total cost of borrowing equals the sum of the interest payments plus the discount on the bonds, if any, minus the premium on the bonds (if any). Interest payments = Principal x Stated interest rate x Number of periods = $400,000 × 6% × 10 years = $240,000 The bonds were issued at 101, indicating they were issued at a 1% premium (or 1% above their face value). Premium = $400,000 x 1% = $4,000 Total cost of borrowing = $240,000 - 4,000 = $236,000
Which statement is true about reporting receivables on the balance sheet?
Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet. SOLUTION: Allowance for Doubtful Accounts is a contra asset account that is shown as a deduction from Accounts Receivable on the balance sheet in the current asset section.
A company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $90,000 at year-end. The total credit sales were $2,600,000 for the year. Management estimates that 4% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $300 before the year-end adjusting entry for Bad Debt Expense?
Bad Debts Expense 3,900 Allowance for Doubtful Accounts 3,900 SOLUTION: The Allowance for Doubtful Accounts needs an ending credit balance of 4% of $90,000 or $3,600. Since the pre-adjusted debit balance is $300, a credit of $3,900 is necessary to increase it to $3,600. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,900.
What method is normally used to account for treasury stock?
Cost method SOLUTION: Treasury stock is not an asset; it is a contra equity. However, it is recorded at cost similar to assets being recorded at cost.
Which of the following will result in negative gross profits?
Cost of goods sold exceeding sales revenue SOLUTION: Gross profit is net sales revenue less cost of goods sold, operating expense is subtracted later therefore does not affect gross profits. Only when cost of goods sold would exceed net sales revenue can gross profits be negative.
A company's net credit sales for the year are $4,000,000. On December 31, its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?
Credit balance of $12,000 SOLUTION: The ending balance in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be a credit balance equal to 7.5% of $160,000, or $12,000. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
A company factors $400,000 of receivables. The factors assesses a 3% fee on the amount of receivables sold. What journal entry does the company make when the factoring occurs?
Debit Cash for $388,000, debit Service Charge Expense for $12,000, and credit Accounts Receivable for $400,000 SOLUTION: This entry records the receipt of cash as a debit for $388,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $12,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $400,000.
An accountant has debited an asset account for $800 and credited a liability account for $700. There is one missing part of the transaction. Which of the following cannot be a correct way to complete the recording of the transaction?
Debit a stockholders' equity account for $100. SOLUTION: The basic accounting equation is assets equal liabilities plus equity. It must stay in balance meaning total assets must equal total liabilities plus total stockholders' equity, and this relation must be maintained in every transaction. If a transaction debited assets by $800 then assets increased by $800. If that same transaction also credited a liability account by $700 then it increased liabilities by $700. The missing part of the transaction must cause assets to equal liabilities plus equity. Acceptable options include (1) decreasing (i.e., crediting) a different asset account for $100, (2) increasing (i.e., crediting) a different liability for $100, and (3) increasing (i.e., crediting) an equity account for $100.
The cash register tape indicates sales are $1,500 and sales taxes are $100. What journal entry is needed to record this information?
Debit the Cash account for $1,600, credit the Sales account for $1,500, and credit the Sales Taxes Payable for $100. SOLUTION: The sales taxes obligation must be recognized separately as sales taxes payable because they are paid by the buyer of the product or service (i.e., the customer) and they must be submitted by the retailer to the governmental agency imposing them. Sales taxes are not additional revenues earned by the retailer. Here's a summary of the journal entry.Debit: Cash for $1,600Credit: Sales account $1,500Credit: Sales Taxes Payable for $100
On January 1, a corporation issues $100,000 of 5-year, 8% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?
Debit to Cash for $100,000 SOLUTION: The journal entry for the issuance of bonds issued at face value includes a debit to cash for the proceeds collected (i.e., $200,000) and a credit to obligation associated with the bonds (i.e., Bonds Payable for $200,000). Since the bonds were issued at face value, neither a premium nor a discount would be recorded. No interest is recognized or due on the bonds at the issue date.
Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods purchased as inventory has increased during the period, then the company using
FIFO will have the highest retained earnings. SOLUTION: First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. Increasing prices for inventory suggest that FIFO sells the oldest and cheapest inventory producing the lowest cost of goods sold, the highest net income and retained earnings, and the highest ending inventory. In contrast, increasing prices for inventory suggest that LIFO sells the newest and most expensive inventory producing the highest cost of goods sold, the lowest net income and retained earnings, and the lowest ending inventory.
Which of the following statements is false?
Goodwill is recorded only when an entire business is purchased. The amortization period of an intangible life can exceed 20 years. None of these statements are false. Research and development costs are not expensed when they result to a successful patent. If an intangible asset has a finite life, it should be amortized. SOLUTION: Research and development costs are usually expensed when incurred regardless of whether they produce a patent. The cost of intangibles with indefinite lives are not amortized. Those with definite lives are amortized. Intangibles are amortized over the asset's legal or useful life, whichever is shorter. In order to report goodwill, a company must have entered into an exchange transaction that involves the purchase of an entire business.
A company uses the perpetual inventory system. Which of the following transactions neither increases nor decreases its inventory account?
Granting a customer an allowance by reducing the purchasing price SOLUTION: In a perpetual inventory system, companies record increases to inventory when they buy it and when customers return it, and they record decreases to inventory when they sell it. Paying freight charges to acquire inventory is part of the cost of buying inventory. However, the entry to record the payment of freight costs to ship goods to a customer decrease cash and increase freight out (i.e., delivery expense); it does not affect the inventory account. Similarly, when a grants a customer an allowance by reducing the purchasing price it does not affect the inventory account because sales allowances increase the Sales Returns and Allowances account (debit it) and decreases accounts receivable (credit it).
A corporation declared a cash dividend of $1.00 per share on 20,000 shares of common stock on December 15. The dividend is to be paid one month later on January 15 to stockholders of record on December 30. Which of the following summarizes the effects of the journal entry recorded on the date of payment on January 15?
It decreases liabilities and decreases assets. SOLUTION: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration:It debits the Cash Dividend account (i.e., it decreases stockholders' equity) for the amount of the dividend, and it credits Dividends Payable (i.e., it decreases liabilities) for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable (i.e., it reduces liabilities) and credits Cash (i.e., it reduces assets) for the amount of the dividend paid.
If a company fails to adjust its unearned rent revenue account at year-end, what effect will this have on that month's financial statements?
Liabilities will be overstated and revenues will be understated. SOLUTION: Receiving rent from tenants in advance of the lease period results in an increase in cash and an in-crease in a liability called unearned rent revenue. By the end of the year, some or all of the unearned rent revenue has been earned and the company should record an adjusting entry that decreases the balance of the unearned revenue account and increase rent revenue. If the company forgot to record this adjusting entry, unearned rent revenue would be overstated and rent revenue would be understated.
Which of the following is not based on accrual accounting?
Net cash provided by operating activities SOLUTION: Net cash provided by operating activities is not based on accrual accounting.
Under what inventory system is cost of goods sold determined at the end of an accounting period?
Periodic inventory system SOLUTION: Under the periodic inventory system, cost of goods sold for the period is calculated by adding purchases for the period to the beginning inventory balance and subtracting the ending inventory balance.
Which of the following is true with regards to bond discounts?
Reporting a bond discount on the balance sheet decreases the bond's carrying value. SOLUTION: For bonds issued at a discount, carrying value is the bond payable (in the amount of the principle) minus the discount on the bond payable. For bonds issued at a premium, carrying value is the bond payable (in the amount of the principle) plus the premium on the bond payable.
Which of the following will not be shown on the income statement for a merchandising company?
Retained earnings SOLUTION: The sales section appears first followed by cost of goods sold. The difference between sales and cost of goods sold is gross profit.
Retained earnings at the end of the period is equal to which of the following?
Retained earnings at the beginning of the period plus net income minus dividends SOLUTION: Stockholders' equity includes contributed capital (e.g., common stock) and retained earnings. Retained earnings is an equity account. It is generated from the company's net income since the company began operations minus dividends paid since it began operations. Beginning retained earnings plus net income minus dividends equals ending retained earnings.
Which account will have a zero balance after closing entries have been journalized and posted?
Salaries and Wages Expense SOLUTION: Closing entries transfer the balances from temporary accounts, such as revenues, expenses, and dividends, to the retained earnings account. Revenues are closed by debiting each revenue account. Expenses are closed by crediting each expense account. Some companies close revenues and expenses to an income summary account and then close the income summary account to retained earnings. Dividends are closed directly to the retained earnings account. Closing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. After closing them, revenues, expenses, and dividends have zero balances.
A corporation paid employee wages on Friday, December 26. It will pay the next payroll on week later. There is one working day in the month after December 28 (i.e., Dec. 31). Employees work 5 days a week and the company pays $500 a day in wages. What will be the adjusting entry to accrue wages expense at the end of December?
Salaries and Wages Expense....................... 500 Salaries and Wages payable............... 500 SOLUTION: The corporation incurs one day of wage expense that it must record as a year-end adjusting entry using a rate of $500 per day. Debit salaries and wages expense for $500 and credit salaries and wages payable for $500.
Which of the following is evidence that a transaction has occurred that needs to be recording in a company's accounting records?
Source document SOLUTION: The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. What is examined is the transaction's source document (e.g., sales receipts is an example of a source document). A source documents is evidence that a transaction has occurred. By the way, the second step is to enter the transaction information in the journal (i.e., journalize the transaction).
A company borrowed $70,000 on March 1 by issuing an 18-month, 12% note. Both the note and the interest will be paid when the note matures. Which statement is true at December 31?
The company has $7,000 of interest payable that is a current liability. SOLUTION: A current liability is a debt the company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within the next year or the operating cycle, whichever is longer. Since both the interest payable as of December 31 and the note payable are expected to be paid within one year, they both will be considered current liabilities. Interest payable = $70,000 x .12 x 10/12 = $7,000
Which of the following is an inventory account?
Work in process SOLUTION: Equipment is not an inventory account. Equipment consists of items used in the production of income that are not held for sale. Inventory can include raw materials, work in process, and finished goods. Raw materials is an inventory account that contains the cost of materials that have not yet been started into the production process. Work in process is an inventory account that contains the cost of goods started, but not completed. Finished goods is an inventory account that contains the cost of goods completed that are ready to sell.
A trial balance will not balance if
a $50 cash dividend was debited to Dividends for $500 and credited to cash for $50. SOLUTION: A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.
A corporation issues $4,000,000 face value of 10-year, 8% bonds dated January 1 at 97. The journal entry to record the issuance includes
a debit to Discount on Bonds Payable for $120,000. SOLUTION: The company issuing bonds is borrowing money and it is issuing bonds as evidence of the loan. The company that issues the bonds will debit Cash for the amount of cash received in exchange for issuing the bonds (i.e., $4,000,000 face value x 97% = $3,880,000). The issuing company will also credit Bonds Payable for the face value of the bonds issued (i.e., $4,000,000). Note that the company issued $4,000,000 face value of bonds but it received less cash than this amount when it issued the bonds. The company issued these bonds at a discount, so the issuing company will need to debit the Discount on Bonds Payable account for the difference between the face value of the bonds issued and the cash collected from issuing them (i.e., Discount = $4,000,000 - $2,880,000 = $120,000). Increase the Discount on Bonds Payable account by debiting it. The issuer debits Discount on Bonds Payable by $120,000 when issuing these bonds.
The obligation to pay for goods purchased from suppliers is called a(n)
account payable SOLUTION: Debts and obligations are amounts owed. These are referred to as liabilities. For example, when a company buys supplier on account it has not yet paid for the supplies. Rather, the company owes the supplier. Such a liability would be call an account payable.
Accrued expenses are expenses incurred but not yet paid or recorded. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause
an understatement of expenses and an understatement of liabilities. SOLUTION: If a company fails to record a year-end adjusting entry for accrued expenses, the company's expenses will be understated. Understating expenses overstates retained earnings and stockholders' equity. Failing to accrue expenses also understates amounts owed understating liabilities.
Powell Company purchased equipment for $500 cash. As a result of this event,
assets increased and decreased by the same amount. Total assets remained unchanged. SOLUTION: A purchase of equipment for cash is recorded as an increase in equipment (which is an asset) and a decrease in cash (which is an asset). Thus, an asset exchange occurs with one asset increasing and another decreasing. Total assets is unchanged.
The difference between an asset's cost and its accumulated depreciation is called
book value. SOLUTION: Book value is cost less accumulated depreciation. Market value is the value at which the item could be sold under normal selling conditions. Fair value is the value at which the item could be sold under normal selling conditions. "Real value" does not have a specific meaning in the context of accounting.
A company purchased office supplies costing $3,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:
debit Supplies Expense for $2,100 and credit Supplies for $2,100. SOLUTION: When the company bought supplies it recorded them as an asset so it debited the supplies account. Supplies is a prepaid expense; prepaid expenses are costs that expire either with the passage of time or through use. By the end of the period, a portion of the supplies had been used. An adjusting entry is necessary to reduce the supplies account so that it will report the actual amount of sup-plies on hand at the end of the period. The adjusting entry debits supplies expense and credits supplies by $2,100 (i.e., $3,000 - $900 = $2,100)
In the credit terms of 1/10, n/30, the "30" represents the
number of days when the invoice price is due if payment does not occur within the discount period. SOLUTION: The terms 1/10, n/30 indicate that the discount is 1% if payment is made within 10 days of the invoice date. If the payment is not made within 10 days, no discount is offered and the invoice price is due no later than 30 days after the invoice date.
The balance sheet
reports the assets, liabilities, and stockholders' equity at a specific date. SOLUTION: The balance sheet reports a company's assets, liabilities, and equities at a specific point in time such as of the end of a year. In contrast, the other financial statements (e.g., income statement, etc.) report certain financial results for a period of time such as a year.
Stockholders of a corporation directly elect
the board of directors. SOLUTION: Stockholders (also called shareholders) have certain rights as the owners of the corporation. One of these rights is the right to vote in the election of the corporation's board of directors. The corporation's board of directors chooses the company's offices; company officers are not hired directly by shareholders.
If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates
the mathematical equality of the accounting equation. SOLUTION: A trial balance where debits equal credits simply states the mathematical equality of the accounting equation. If the trial balance' debits equals credits, errors can still exist (e.g., perhaps a company's accountant forgot to record a transaction causing debits and credits to both be wrong by the same amount).
Posting
transfers journal entries to ledger accounts. SOLUTION: Companies journalize transactions. Each journal entry summarizes a certain transaction or adjusting entry. Next, companies post the journal entries to the ledger. The procedure of transferring journal entry amounts to the ledger accounts is called posting. Posting is a required step in the recording process. If it is not done, the ledger's account balances will not be correct.
A company acquires land for $140,000 cash. Additional costs are as follows: Removal of shed, $1,000 Filling and grading, $2,500 Salvage value of lumber of shed, $200 Broker commission, $4,000 Paving of parking lot, $13,000 Closing costs, $1,700 The company should record the acquisition cost of the land as
$149,000 SOLUTION: Purchase price, 140,000Add: Removal of shed less salvages (i.e., 1,000 - 200), 800 Add: Filling and grading, 2,500 Add: Broker's commission, 4,000 Add: Closing costs, 1,700 Acquisition costs of land, 149,000 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land.
Sugar Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using LIFO and a periodic inventory method, the amount allocated to cost of goods sold for July is
$1,380 SOLUTION: Goods available for sale is $2,000 (i.e., 100 units)Ending inventory = 32 unitsCost of goods sold = goods available for sale - ending inventory = 100 units - 32 units = 68 unitsUsing LIFO & periodic, the cost of goods sold includes the newest 68 units and ending inventory includes the 32 oldest units.Cost of goods sold = $220 + [(100 - 32 - 10) x $20] = $1,380
On January 1, a company purchased equipment for $18,000. The estimated salvage value is $4,000 and the estimated useful life is 5 years. On December 31 of the fourth year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by two years giving it a total life of 7 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the fourth year?
$1,400 SOLUTION: The annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($18,000 - $4,000)/5 years = $2,800 per year. The depreciable cost that remains is $18,000 - $4,000 - (3 years x $2,800) = $5,600. This amount is allocated over the remaining useful life, and the remaining useful life is 4 years (i.e., 7 total years minus 3 expired years). Depreciation in the third year is $1,400 (i.e., $5,600/4 years).
Financial information for a certain corporation is presented below: Operating expenses $ 35,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 What is the company's net sales?
$125,000 SOLUTION: Net sales = Sales - Sales returns & allowances - Sales discounts Net sales = $140,000 - 12,000 - 3,000 = $125,000
During its first year of operations, a corporation had revenues of $65,000 and expenses of $33,000. One the last day of the first year, the corporation borrowed $8,000 and paid cash dividends of $18,000. What is the balance in retained earnings at year-end?
$14,000 credit SOLUTION: Ending retained earnings = Beginning retained earnings + Revenues - Expenses - Dividends Ending retained earnings = $0 + 65,000 - 33,000 - 18,000 = $14,000 Note: This is the company's first-year so its beginning retained earnings is zero. Retained earnings is an equity account; it normally has a credit balance. Certain transactions do not affect retained earnings, such as borrowing money by issuing a note and purchasing equipment.
A company has the following asset account balances: Buildings and equipment, $9,200,000; Accumulated depreciation, $1,200,000; Patents, $750,000; Land Improvements, $1,000,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?
$14,000,000 SOLUTION: Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $14,000,000. (i.e., 9,200,000+1,000,000+5,000,000-1,200,000=14,000,000).
At the start of the current year, a company paid for the following in cash: Equipment, $25,000,000 Goodwill, $4,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $2,500,000 Research and development, $2,000,000 Supplies, $3,000,000 Trademarks, $1,000,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.
$250,000 SOLUTION: The intangibles are trademarks patents and goodwill. Only patents are amortized. Amortization expense for the year equals $2,500,000/10 = $250,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.
A company's accounting records show the following account balances: Beginning Inventory $ 50,000 Ending Inventory 20,000 Freight-In 14,500 Freight-Out 20,000 Purchases 244,000 Purchase Returns and Allowances 7,400 Purchase Discounts 8,000 The company uses the periodic inventory system. Based on the information above compute cost of goods sold.
$273,100 SOLUTION: Net purchases = Purchases - Purchase discounts - Purchase R&A + Freight In Net purchases = 244,000 - 8,000 - 7,400 + 14,500 = 243,100 Cost of goods sold = Beginning inventory + Net purchases - Ending inventory Cost of goods sold = 50,000 + 243,100 - 20,000 = 273,100
A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value - preferred stock 80,000 Paid-in capital in excess of par value - common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $28,000, the corporation's common stockholders would receive
$40,000. SOLUTION: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $28,000. Current year dividend to preferred stockholders = $400,000 x 8% = $32,000 Total paid to preferred stockholders = $28,000 + 32,000 = $60,000 Total paid to common stockholders = $100,000 - 60,000 = $40,000
The maturity value of a $40,000, 9%, 40-day note receivable is
$40,400. SOLUTION: The interest on a $40,000, 9%, 40-day note receivable is $400. Interest = Principal x annual interest rate x number of years = $40,000 x 9% x 40/360 = $400. When computing interest on notes described in days, such as 180 days, assume that the full year has 360 days. Maturity value = principal + interest = $40,000 + 400 = $40,400.
On October 1 of the current year, a company purchased an asset for $10,000. It has a $2,000 estimated salvage value and a 5-year useful life. How much is the current year depreciation expense using the straight-line method?
$400 SOLUTION: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($10,000 - $2,000)/5 x 3/12 = $400.Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.
Using the allowance method, the uncollectible accounts for the year are estimated to be $40,000. The Allowance for Doubtful Accounts has a $9,000 debit balance before recording the year-end adjusting entries. What is the bad debt expense for the period?
$49,000 SOLUTION: After the year-end adjusting entry, the allowance for doubtful accounts will equal $40,000 with a credit balance because the allowance for doubtful accounts is a contra assets (and contra assets normally have credit balances). Prior to the year-end adjusting entry, it has a $9,000 debit balance. So, the year-end adjusting entry will increase it by $49,000; the year-end adjusting entry will credit the allowance for doubtful accounts by $49,000 with a corresponding debit to the bad debt expense for $49,000.
A company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $14,000. The company redeemed the bonds at 104. What is the company's gain or loss on the redemption?
$6,000 loss SOLUTION: 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, and 3. 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 = $500,000 + 14,000 = $514,000The company can redeem this bond at 104 which means it can redeem this bond by paying the bondholder 104% of the bond's principal value.Cash paid to redeem the bonds = $500,000 x 1.04 = $520,000Determining 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 more than the carrying value of bonds redeemed so recognize a loss. The loss equals the excess of the cash paid over the carrying value (i.e., $520,000 - 514,000 = $6,000).
A corporation reported net income of $250,000 and paid dividends of $10,000 on its common stock and $50,000 on its preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. Total assets was $1,900,000 at the start of the year and $2,100,000 at the end of the year. What is the company's return on common stockholder's equity?
14.29% SOLUTION: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equityReturn on common stockholders' equity = (250,000 - 50,000)/(1,200,000 + 1,600,000)/2) = 14.29%.
At the start of the current year, a company's Allowance for Doubtful Accounts had a credit balance of $36,000. During the current year, it had net credit sales of $1,500,000 and it wrote-off $60,000 of accounts receivable as uncollectible. The company's accounts receivable at the end of the year is $400,000. Past experience indicates that the allowance should be 10% of the balance in receivables. What is the bad debt expense for the year?
$64,000 SOLUTION: At the end of the period, accounts receivable has a balance of $400,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is has a balance equal to 10% of the end-of-period accounts receivable balance (i.e., given). So, the Allowance for Doubtful Accounts needs a credit balance of $40,000 (i.e., 10% x $400,000 = $40,000). Prior to recording the adjusting entry, it had a debit balance of $24,000 (i.e., credit balance of $36,000 but debited by $60,000 when receivables were written-off). In order to change the balance from a $24,000 debit balance to a $40,000 credit balance, the company needs to credit the Allowance for Doubtful Accounts by $64,000.
A company began the year with retained earnings of $570,000. During the year, the company did the following: Recognized revenues, $600,000 Issued common stock, $50,000 Incurred expenses, $380,000 Declared and paid dividends, $140,000 What is its retained earnings at the end of the year?
$700,000 SOLUTION: Ending retained earnings = Beginning retained earnings + Net income - Dividends Replace net income with revenue - expenses Ending retained earnings = Beginning retained earnings + Revenue - Expenses - Dividends Ending retained earnings = 570,000 + 600,000 - 380,000 - 140,000 Ending retained earnings = 650,000
A corporation issues a $750,000, 10%, 15-year mortgage note. The terms provide for annual installment payments of $82,626. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?
$733,985 SOLUTION: Since interest accrues annually, the first year's interest would be $75,000 (i.e., 10% x $750,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $82,626 payment and the interest component ($75,000), resulting in a principal reduction of $7,626. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $7,626 from $750,000 to $742,374. The second annual payment's interest is 10% of the outstanding mortgage principal of $742,374, or $74,237. The second annual payment of $82,626 is allocated as $74,237 paid towards interest and the remaining $8,389 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $733,985.
A company has liabilities of $4,300,000, common stock of $2,450,000, and retained earnings of $1,250,000. It has assets of
$8,000,000 SOLUTION: The basic accounting equation is: Assets = Liabilities + EquityThis 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 = 2,450,000 + 1,250,000 = 3,700,000 Fill-in assets and equity into the accounting equation and solve for liabilities. Assets = Liabilities + Equity = 4,300,000 + 3,700,000 Assets = $8,000,000
On August 1 of the current year, a company purchases and places into service new equipment. The cost of the equipment is $75,000. It has an estimated 3-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?
$8,333. SOLUTION: Depreciation expense per year = (Cost - salvage value)/LifeDepreciation expense per year = (75,000 - 15,000)/3 years = $20,000 per yearDepreciation expense for August 1 through December 31 = $20,000 x 5/12 = $8,333
A partial list of a corporation's accounts shows the following account balances: Retained earnings, $375,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $60,000 Treasury stock—preferred, $20,000 Common stock, $200,000 Preferred stock, $175,000 Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?
$830,000 SOLUTION: Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $375,000 - $20,000 + $60,000 - $20,000 + $200,000 + $175,000 + $60,000 = $830,000
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) gross profit is ________________ and (ii) retained earnings is ___________________.
(i) Overstated and (ii) Overstated SOLUTION: 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.
A corporation has current assets of $3,010,000, current liabilities of $2,050,000, total assets of $10,000,000 and total liabilities of $6,000,000. If it pays $100,000 of its accounts payable what will its current ratio be? (rounded)
1.49 SOLUTION: Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,010,000 - $100,000) / ($2,050,000 - $100,000) Current ratio = 1.49 (i.e., 1.49 to 1 or 1.49:1)
Based on the following data, what is the current ratio? Accounts payable................................ $ 64,000 Accounts receivable........................... 114,000 Accumulated depreciation.............. 160,000 Cash...................................................... 60,000 Equipment......................................... 1,500,000 Inventory.............................................. 138,000 Long-term investments..................... 160,000 Notes payable (due in 3 months)...... 56,000 Notes payable (due in 2 years)......... 200,000 Patents................................................ 100,000 Prepaid insurance................................. 2,000 Short-term investments...................... 80,000
3.28 SOLUTION: Current ratio = current assets/current liabilitiesCurrent assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer. Current assets = Cash + Accounts receivable + inventory + short-term investments + prepaid insurance Current assets = 60,000 + 114,000 + 138,000 + 80,000 + 2,000 = 394,000Current liabilities = liabilities to be paid in one year or operating cycle, whichever is longer. Current liabilities = Accounts payable + Notes payable (short-term) Current liabilities = 64,000 + 56,000 = 120,000 Current ratio = 394,000/120,000 = 3.28
The financial statements of a company reports net credit sales of $300,000. Its cost of goods sold is $100,000. Its net accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. Its inventory is $45,000. What is the average collection period for accounts receivable in days (rounded)?
48.7 days SOLUTION: Accounts receivable turnover = Net credit sales divided by average net accounts receivable Accounts receivable turnover = 350,000/[(40,000+30,000)/2] = 10.0 Average collection period (i.e., days in receivable) = 365/Accounts receivable turnover Average collection period (i.e., days in receivable) = 365/10.0 = 36.5 days
A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $10,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?
5 years SOLUTION: The depreciable cost equals the cost minus the salvage value; it is the $40,000 purchase price less $10,000 salvage value, which is $30,000. The annual depreciation cost is $6,000. Since $30,000 will be depreciated by $6,000 per year, the useful life is 5 years (i.e., $30,000/$6,000 per year = 5 years).
A company has the the following: Net income for the current year is $150,000 Net income for the prior year was $135,000 Net sales for the current year is $250,000 Net sales for the prior year were $240,000 Total assets as of the end of the current year is $2,410,000 Total assets as of the end of the prior year was $1,980,000 What is the company's return on assets for the current year?
6.8% SOLUTION: Assets turnover ratio = Net sales/Average total assets Return on assets = $150,000/[($2,410,000 + 1,980,000)/2] = 6.8 or 6.8 times per year
A company has the following: Sales revenue, $515,000 Beginning inventory, $75,000 Ending inventory, $105,000 Cost of goods sold, $405,000 Net income, $25,000 What is its days in inventory?
81.1 days SOLUTION: Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($405,000 ÷ [($75,000 + $105,000) ÷ 2]) = 81.1 days
A company started the year with $75,000 in its common stock account and a credit balance in retained earnings of $42,000. During the year, the company earned net income of $60,000 and declared and paid $17,500 of dividends. In addition, the company sold additional common stock amounting to $32,000. As a result, the amount of its retained earnings at the end of the year would be
84,500 SOLUTION: Ending retained earnings = $84,500 = Beginning Retained Earnings + Net Income - Dividends Ending retained earnings = 42,000 + 60,000 - 17,500
A corporation issued 10,000 of $1 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the corporation's issuance of common stock?
A credit of $10,000 to Common Stock SOLUTION: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value.Debit to Cash = 10,000 x $5 = $50,000Credit to Common stock = 10,000 x $1 = $10,000Credit to Paid-in capital in excess of par value = 10,000 x ($5 - $1) = $40,000
A corporation uses the perpetual inventory system. On April 1, it sells merchandise on account for $15,000 with terms 1/15, n/30. The corporation had paid $9,000 to acquire the merchandise. On April 7, its customer returns merchandise with an invoice price of $1,000. The merchandise returned to the corporation had cost the corporation $600. On April 30, the corporation receives payment for the merchandise retained its customer. The journal entry that the corporation records when it receives the payment from its customer on April 30 includes a
debit to cash for $14,000. SOLUTION: The company selling merchandise uses the perpetual inventory system. When it collects payment for the balance due after the discount period, it collects the invoice price of the inventory not returned by the purchaser without any sales discount. The cash collected by the seller is $14,000 (i.e., $15,000 - 1,000 = $14,000).
A corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of declaration of April 15 will include a
debit to the Cash Dividends account and a credit to the Dividends Payable account. SOLUTION: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration:It debits the Cash Dividends account for the amount of the dividend, and it credits Dividends Payable for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash for the amount of the dividend paid.
Declaring and paying a cash dividend will
decrease retained earnings. SOLUTION: Dividends are payments from corporations to their stockholders. Dividends are declared by the corporation's board of directors; they are not expenses. Dividends decrease the corporation's retained earnings
Accounting information should be neutral in order to enhance
faithful representation.
The effects of stockholders investing cash in exchange for additional shares of stock on the basic accounting equation are to
increase assets and increase stockholders' equity. SOLUTION: Basic accounting equation: Assets = Liabilities + Stockholders' EquityA purchase of equipment for cash is recorded as an increase in equipment (which is an asset) and a decrease in cash (which is an asset). Thus, an asset exchange occurs with one asset increasing and another decreasing.
Issuing new shares of common stock will
increase common stock. SOLUTION: The issuance of common stock increases the common stock account; it does not affect retained earnings.
A transaction increased a company's assets by $5,000 and increased its stockholders' equity by $5,000. This transaction could have been a(n)
investment of cash into the business by the stockholders. SOLUTION: The basic accounting equation is Assets = Liabilities + Equity; it must always balance. A $5,000 increase in assets combined with a $5,000 increase in stockholders' equity keeps the accounting equation in balance. An investment by stockholders' increases assets (i.e., cash) and stockholders' equity (i.e., common stock).
A business organized as a corporation....
is tax disadvantaged compared to sole proprietorships and partnerships. SOLUTION: Owners of sole proprietorships are called proprietors. A sole proprietor has a sole owner (i.e., it has one owner). Partnerships have two or more co-owners. Corporations have one or more owners called stockholders. Corporations incur tax at the business level and stockholder level (i.e., double taxation) while proprietorships and partnerships do not incur business level taxes (i.e., single taxation) indicating that sole proprietorships and partnerships are tax-advantaged relative to corporations. Corporations can raise capital (i.e., investments) from any number of owners giving them an advantage in terms of fund-raising relative to sole proprietorships and partnership. Owners of corporations are not personally liable for the corporation's debts (i.e., stock-holders have limited liability), but proprietors and partners are generally personally liable for their proprietorships' and partnerships' debts (i.e., unlimited liability).
The segment of a corporation's annual report that describes the corporation's accounting methods is the
notes to the financial statements. SOLUTION: The annual report includes a section called the notes to the financial statements. The notes to the financial statements identify the corporation's accounting methods and policies used to prepare the financial statements and provide explanation of uncertainties and contingencies.
