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ACT 210 Practice Exam 3

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Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 3% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 50 have been repaired. If the estimated cost to repair a goal is $180, what would be the Warranty Liability at the end of the year?

$12,600

Suppose you buy lunch for $15.40 that includes a 8% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much does the restaurant owe for sales tax?

$14.26 for lunch and $1.14 for sales tax

Kansas Enterprises purchased equipment for $79,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $8,400 at the end of five years. Using the double-declining balance method, depreciation expense for 2022 would be:

$18,960 Explanation: Depreciation rate = 2 / 5 = .40 Depreciation expense = [$79,000 − ($79,000 × .40)] × .40 = $18,960.

Northern purchased the entire business of Southern including all its assets and liabilities for $658,000. Below is information related to the two companies: Northern Southern Fair value of assets: $1,042,000 $787,000 Fair value of liabilities: $577,000 $318,000 Reported assets: $816,000 $640,000 Reported liabilities: $497,000 $264,000 Net Income for the year: $48,000 $58,000 How much goodwill did Northern pay for acquiring Southern?

$189,000 Explanation: (Fair Value of Assets - Liabilities) = $469,000 $658,000 - $469,000 = $189,000

Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $71 per phone. For 2021, Talks-A-Lot has sold 540 cell phones and has repaired 13 of them as of December 31, 2021. What amount of warranty liability should be reported at December 31, 2021?

$2,911 Explanation: (540 × 10%) × $71 = $3,834; $3,834 − (13 × $71) = $2,911

A building was purchased for $64,500. The asset has an expected useful life of eight years and depreciation expense each year is $4,000 using the straight-line method. What is the residual value of the building?

$32,500 Explanation: ($64,500 − X) / 8 = $4,000 depreciation expense; therefore X = $32,500

A company purchased a commercial dishwasher by paying cash of $4,100. The dishwasher's fair value on the date of the purchase was $4,460. The company incurred $450 in transportation costs, $230 installation fees, and paid a $130 fine for illegal parking while the dishwasher was being delivered. For what amount will the company record the dishwasher?

$4,780 Explanation: ($4,100 + $450 + $230) The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use.

At the beginning of 2021, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 3% of net sales. Net sales made under warranty in 2021 were $160 million. Five percent of the units sold were returned in 2021 and repaired or replaced at a cost of $3.4 million. The amount of warranty expense in Angel's 2021 income statement is:

$4.8 million

Union Apparel has sales including sales taxes for the month of $551,000. If the sales tax rate is 6%, what are Union Apparel's sales for the month?

$519,811

United Supply has a $30 million liability at December 31, 2021, of which $6 million is payable in each of the next five years. United Supply reports the liability in the balance sheet as a:

$6 million current liability and a $24 million long-term liability.

Kansas Enterprises purchased equipment for $76,000 on January 1, 2021. The equipment is expected to have a ten-year service life, with a residual value of $7,650 at the end of ten years. Using the straight-line method, depreciation expense for 2022 and the book value at December 31, 2022, would be:

$6,835 and $62,330 Explanation: Depreciation expense = (($76,000 − $7,650) / 10 years) = $6,835 Book value = $76,000 − ($6,835 × 2) = $62,330.

A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Purchase price of the land = $620,000 Sale of salvaged parts already on land = $25,000 Demolition of the old building = $22,000 Ground-breaking ceremony (food and supplies) = $1,500 Land preparation and leveling = $7,000

$624,000 Explanation: ($620,000 − $25,000 + $22,000 + $7,000) The ceremony would be expensed.

A company purchased new equipment for $58,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,700; sales tax paid $3,700; and installation cost, $1,900. The cost recorded for the equipment was:

$65,300 Explanation: ($58,000 + $1,700 + $3,700 + $1,900)

The balance sheet of Cattleman's Steakhouse shows assets of $87,300 and liabilities of $14,200. The fair value of the assets is $89,400 and the fair value of its liabilities is $14,200. Longhorn paid Cattleman's $84,420 to acquire all of its assets and liabilities. Longhorn should record goodwill on this purchase of:

$9,220 Explanation: (Fair Value of Assets - Liabilities) = $75,200 $84,420 - $75,200 = $9,220

Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. What loss, if any, should Decorative Concrete report in its income statement?

1.5 Million

Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. What liability, if any, should Decorative Concrete report in its balance sheet?

1.5 milllion

Retained Earnings

= (All net income since the company began) - (All dividends since the company began)

Acid Test Ratio

= (Cash + Current Investments + Accounts Receivable) / Current Liabilities

Times Interest Earn Ratio

= (Net Income + Interest Expense + Tax Expense) / Interest Expense

Earnings Per Share

= (Net Income - Dividends on Preferred Stock) / Average Shares of Common Stock Outstanding)

Working Capital

= Current Assets - Current Liabilities

Current Ratio

= Current Assets / Current Liabilities If Current ration is greater than 1 there are more assets than liabilities

Return On Equity

= Net Income / Average Stockholders' Equity

Price Earnings Ratio

= Stock Price / Earnings Per Share

Return on Assets

= net income / average total assets

Debt to Equity Ratio

= total liabilities / stockholders' equity

Callable Bond

A bond that the issuer has the right to pay off before its maturity date

Privately held company

A company that does not offer shares of stock for sale to the public

Treasury Stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use. Buying back stock decreases stockholder equity

Which of the following represents a characteristic of a liability?

A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events.

Over the entire service life of an asset, which depreciation method records the highest total depreciation?

All the methods result in the same total depreciation.

Depreciation in accounting is the:

Allocation of an asset's cost to an expense over time.

Depreciation

Allocation of an assets cost to an expense over time

Which of the following expenditures should be recorded as an asset?

An addition which increases future benefit.

Contingent Gain

An existing uncertain situation that might result in a gain We don't record contingent gains unless gain is known with certainty

Contingent Liability

An existing uncertain situation that might result in a loss Only recorded if a loss is probable and the amount is reasonably estimable.

Which of the following is not a current liability?

An unused line of credit.

Dividends

Are distributions by a corporation to their stockholders Are not paid on treasury stock

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $130,000 to $230,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?

As a liability for $130,000 with disclosure of the range.

Book value

Book value equals the original cost of the assets minus the accumulated depreciation.

Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. Should this contingent liability be reported, disclosed in a note only, or both?

Both

Record the sale of ovens.

Cash (Debit) = Sale Price Example: $510,000 Accumulated Depreciation (Debit) = $132,000 Loss/Gain (Debit) = $59,000 Equipment (Credit) = Original Price Example: $701,000

A long-term asset is recorded at the:

Cost of the asset plus all costs necessary to the asset ready for use.

Amortize Patent

Debit Amortization Expense Credit Patent

Retire bonds at maturity

Debit Bonds Payable Credit Cash

Issue bonds at face amount

Debit Cash Credit Bonds Payable

Issue Bond at Premium

Debit Cash Credit Bonds Payable Credit Premium on Bonds Payable

Issue no-par value common stock

Debit Cash Credit Common Stock

Issue common stock above par value

Debit Cash Credit Common Stock (Shares x Par Value) Credit Additional Paid In Capital (Difference)

Record Deferred Revenue

Debit Cash Credit Deferred Revenue

Record the sale of season tickets

Debit Cash Credit Deferred Revenue

Record the Issuance of Note Payable

Debit Cash Credit Notes Payable

Record the issuance of a note payable

Debit Cash Credit Notes Payable

Record the issuance of the note payable

Debit Cash Credit Notes Payable

Record collection on note and interest

Debit Cash Credit Notes Receivable Credit Interest Receivable Credit Interest Revenue

Record Sales and Sales Tax

Debit Cash Credit Sales Revenue Credit Sales Tax Payable

Issue Bonds at a Discount

Debit Cash Debit Discount on Bonds Payable Credit Bonds Payable

On July 8, Compusoft receives $350,000 from a customer toward a cash sale of $1.10 million for customized computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $640,000. What journal entries should Compusoft record on July 8 and August 1? Assume Compusoft uses the perpetual inventory system. Record the cash received in advance for computer equipment.

Debit Cash $350,000 Credit Deferred Revenue $350,000

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.1 million cash on October 1, 2021, to provide working capital for anticipated expansion. Precision signs a one-year, 9% promissory note to Midwest Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year-end. Record the issuance of the note by Precision Castparts.

Debit Cash $39,100,000 Credit Notes Payable $39,100,000

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.1 million cash on October 1, 2021, to provide working capital for anticipated expansion. Precision signs a one-year, 9% promissory note to Midwest Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year-end. Prepare the journal entries on September 30, 2022, to record payment of the notes payable at maturity. Record the receipt of cash at maturity for Midwest Bank.

Debit Cash $42,619,000 Credit Interest Revenue $2,639,250 Credit Interest Receivable $879,750 Credit Notes Receivable $39,100,000

The University of Michigan football stadium, built in 1927, is the largest college stadium in America, with a seating capacity of 109,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $71.94 million in ticket sales. Record the advance collection of $71.94 million in ticket sales and the revenue earned after the first home game is completed. Record the advance collection in ticket sales.

Debit Cash $71,940,000 Credit Deferred Revenue $71,940,000

Debit Cash $750,000 Debit Deferred Revenue $350,000 Credit Sales Revenue $1,100,000

Resell Treasury Stock Above Cost EX: Company buys 100 treasury stock for $30 then sells for $35

Debit Cash (100 Shares x $35) Credit Treasury Stock (100 Shares x $30) Credit Additional Paid In Capital (100 Shares x $5)

Resell treasury stock below cost EX: Company buys 100 treasury stock for $30 then sells for $25

Debit Cash (100 x $25) Debit Additional Paid In Capital (100 x $5) Credit Treasury Stock (100 x $30)

Issue Preferred Stock Above Par Value EX: Issue 1000 preferred stock at $40 with a par value of $30

Debit Cash (1000 x $40) Credit Preferred Stock (1000 x $30) Credit Additional Paid In Capital (Difference)

Record the sale of delivery truck (Loss)

Debit Cash (What you sold for) Debit Accumulated Depreciation Debit Loss (Loss of money from sale) Credit Equipment (Original cost of asset)

Record the sale of delivery truck (Gain)

Debit Cash (What you sold for) Debit Accumulated Depreciation Credit Equipment (Original cost of asset) Credit Gain (Profit gained from sale)

Debit Cost of Goods Sold $640,000 Credit Inventory $640,000

Record revenue from a deferred revenue source

Debit Deferred Revenue Credit Sales Revenue

Record the revenue recognized after the first game

Debit Deferred Revenue Credit Sales Revenue

Debit Deferred Revenue $11,990,000 Credit Sales Revenue $11,990,000

Record annual depreciation for year 1 Company Purchases Oven for $1200 with a service life of 4 years.

Debit Depreciation Expense = $300 Credit Accumulated Depreciation = $300

Declare Cash Dividends

Debit Dividends (Dividends are payable for common and preferred stock) Credit Dividends Payable

Pay Cash Dividends

Debit Dividends Payable Credit Cash

Purchase equipment with cash

Debit Equipment Credit Cash

Pay Semiannual Interest (Bond Face Value)

Debit Interest Expense Credit Cash

Pay Semiannual Interest (Discount on Bond)

Debit Interest Expense Credit Discount on Bonds Payable (difference) Credit Cash

Record the Interest Payable

Debit Interest Expense Credit Interest Payable

Record the adjustment for interest payable

Debit Interest Expense Credit Interest Payable

Pay semiannual interest (Bond at a premium)

Debit Interest Expense Debit Premium on Bonds Payable Credit Cash

Debit Interest Expense $879,750 Credit Interest Payable $879,750 Total Interest = $3,519,000 Interest Per Month = $293,250 Interest From October thru December = $879,750

Record Interest Incurred but not paid

Debit Interest Expense (Ex: $10000 x 5% x 3/12) Credit Interest Payable

On September 1, 2021, Daylight Donuts signed a $150,000, 8%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2022. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2021. In recording the payment of the note plus accrued interest at maturity on March 1, 2022, Daylight Donuts would:

Debit Interest Expense, $2,000 Explanation: Total Interest / 6

Record Interest earned but not received

Debit Interest Receivable Credit Interest Revenue

Debit Interest Receivable $879,750 Credit Interest Revenue $879,750

Record a contingent liability

Debit Loss Credit Contingent liability

Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. What entry, if any, should be recorded? Record the contingent liability if needed.

Debit Loss $1,500,000 Credit Contingent Liability $1,500,000

Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $450,000 to $700,000. If necessary, record the appropriate journal entry.

Debit Loss $450,000 Credit Contingent Liability $450,000

Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. The likelihood of a loss occurring is probable and the estimated loss is $600,000. If necessary, record the appropriate journal entry.

Debit Loss $600,000 Credit Contingent Liability $600,000

Record the Payment of Note

Debit Notes Payable Debit Interest Expense Debit Interest Payable Credit Cash

Record the payment of Note Payable and interest

Debit Notes Payable Debit Interest Expense Debit Interest Payable Credit Cash

Record the payment of the note and interest at maturity

Debit Notes Payable Debit Interest Payable Debit Interest Expense Credit Cash

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.1 million cash on October 1, 2021, to provide working capital for anticipated expansion. Precision signs a one-year, 9% promissory note to Midwest Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year-end. Prepare the journal entries on September 30, 2022, to record payment of the notes payable at maturity. Record the repayment of the note at maturity for Precision Castparts.

Debit Notes Payable $39,100,000 Debit Interest Expense $2,639,250 Debit Interest Payable $879,750 Credit Cash $42,619,000

Record the acceptance of a note

Debit Notes Receivable Credit Cash

Debit Notes Receivable $39,100,000 Credit Cash $39,100,000

Purchase Patent with cash

Debit Patent Credit Cash

Purchase Treasury Stock

Debit Treasury Stock Credit Cash

Record liability for warranties

Debit Warranty Expense Credit Warranty Liability

Record actual warranty expenditures

Debit Warranty Liability Credit Cash

Deferred Revenue

Deferred Revenue is a liability account, not a revenue account.

Formula for Activity Based Depreciation

Depreciation Rate = Depreciable Cost / Total Units Expected to be produced Ex: $40000 / 10000 Expected Hours = $4 Per Hour

Activity based method

Depreciation rate = (Assets cost - residual value) / Units of service life. Ex: miles/hours

Declining balance method

Double Declining Depreciation Rate = 2 / service life Multiply the rate by book value until it reaches its residual value.

Interest

Face Value x Interest Rate x Fraction of the year

Straight line method

Find depreciation expense: (Assets Cost - Residual Value) / Service Life = x per year

Corporation

Have to undergo double taxation Have more paper work

Which of the following expenditures should be recorded as an asset?

Interest costs during the construction period of a new building.

Which of the following is not a characteristic of a liability?

It must be payable in cash.

Return on Assets

Net Income / Average Total Assets

Profit Margin

Net Income / Net Sales

Asset Turnover

Net Sales / Average Total Assets

Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. The likelihood of a loss occurring is reasonably possible and the estimated loss is $600,000. If necessary, record the appropriate journal entry.

No Entry Required

Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. The likelihood of a loss occurring is remote, while the estimated potential loss is $600,000. If necessary, record the appropriate journal entry.

No Entry Required

Intangible Assets

No physical substance. Assets in this category include patents, trademarks, copyrights, franchises, and goodwill.

Loss

Occurs when we sell an asset for less than book value

Gain

Occurs when we sell an asset for more than book value

Long term liabilities

Payable in more than one year

Current Liabilities / Short term liabilities

Payable within one year

The University of Michigan football stadium, built in 1927, is the largest college stadium in America, with a seating capacity of 109,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $71.94 million in ticket sales. What is the average price per season ticket and average price per individual game ticket sold?

Per season ticket (71,940,000 / 109,000) = 660 Per Individual Game Ticket ((71,940,000 / 109,000) / 6) = 110

Long Term Assets

Record all long term assets at their cost plus all expenditures necessary to get the asset ready for use.

Term Bond

Requires payment of the bond at the single maturity date.

Serial Bond

Requires payments in installments over a series of years

Current Portion of Long Term Debt

The amount that will be paid within one year from the balance sheet date.

Residual Value

The amount the company expects to receive from selling the asset at the end of its service life.

Cost of equipment

The cost of equipment is the actual purchase price plus all other expenses required to prepare the asset for use.

Service Life

The estimated use the company expects to receive from the asset before disposing of it.

Depreciation Method

The pattern in which an assets depreciable cost is allocated over time. Straight-line method, Declining balance method, Activity based Method

Limited Liabilty

The responsibility of a business's owners for losses only up to the amount they invest; limited partners and shareholders (stockholders) have limited liability.

Intangible Assets

We record intangible assets at their original purchase price plus all other costs, such as legal fees, necessary to get the asset ready for use.

Patents

When a firm purchases a patent, it records the patent as an intangible asset at its purchase price plus other costs such as legal fees and filing fees to secure the patent.

S Corporation

a form of corporation that avoids double taxation by having its income taxed as if it were a partnership

Corporation

an entity that is legally sperate from its owners and pays its own income taxes

Quick Assets

includes only cash, current investments, and accounts receivable

Long Term Debt Financing

long-term loans (notes), leases, and corporate bonds

Issued Stock

number of shares that have been sold to investors A company usually does not issue all of their authorized stock

In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.

one; one

Invested Capital

the amount of money paid into a company by its owners

Initial Public Offering (IPO)

the first time a company issues stock that may be bought by the general public

Par Value

the legal capital per share of stock that's assigned when the corporation is first established

Authorized Stock

the total number of shares available to sell, stated in the company's articles of incorporation

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