Chapters 9-11 Review Quiz
Outstanding stock of the Hall Corporation included 40,000 shares of $5 par common stock and 20,000 shares of 6%, $10 par non-cumulative preferred stock. In 2013, Hall declared and paid dividends of $8,000. In 2014, Hall declared and paid dividends of $24,000. How much of the 2014 dividend was distributed to preferred shareholders? A) $12,000 B) $16,000 C) None of the other answer choices are correct D) $28,000
A) $12,000 Explanation: Preferred stockholders have the right to share in the distribution of corporate income before common stockholders. For example, if the dividend rate on preferred stock is $5 per share, common shareholders cannot receive any dividends in the current year until preferred stockholders have received $5 per share. The first claim to dividends does not, however, guarantee dividends. Dividends depend on many factors, such as adequate retained earnings and availability of cash.
A company sells a plant asset that originally cost $225,000 for $75,000 on December 31, 2014. The accumulated depreciation account had a balance of $175,000 after the current year's depreciation of $22,500 had been recorded. The company should recognize a A) $25,000 gain on disposal B) $25,000 loss on disposal C) $50,000 loss on disposal D) $50,000 gain on disposal
A) $25,000 gain on disposal Explanation: $75,000-($225,000-$175,000)=$25,000 gain on sale (Selling price - [cost − accum. depreciation]) In a disposal by sale, the company compares the book value of the asset with the cash proceeds received from the sale. If the cash proceeds from the sale exceed the book value of the plant asset, a gain on disposal occurs. If the cash proceeds from the sale are less than the book value of the plant asset sold, a loss on disposal occurs.
Bonds with a face value of $300,000 and a quoted price of 102¼ have a selling price of A) $306,750 B) $306,075 C) $300,675 D) $360,675
A) $306,750 Explanation: Bonds may be issued at face value, below face value (discount), or above face value (premium). Bond prices for both new issues and existing bonds are quoted as a percentage of the face value of the bond.
Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par cumulative preferred stock. In 2013, West declared and paid dividends of $4,000. In 2014, West declared and paid dividends of $12,000. How much of the 2014 dividend was distributed to preferred shareholders? A) None of the other answer choices are correct B) $14,000 C) $8,000 D) $6,000
A) None of the other answer choices are correct (Double-check to make sure the answer is correct)
In the balance sheet, the account Premium on Bonds Payable is A) added to bonds payable B) deducted from bonds payable C) classified as a stockholders' equity account. D) classified as a revenue account
A) added to bonds payable Explanation: Premium on bonds payable (or bond premium) occurs when bonds payable are issued for an amount greater than their face or maturity amount. This is caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds.
Sizemore, Inc. has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2014. If the board of directors declares a $30,000 dividend, the A) preferred stockholders will receive the entire $30,000. B) preferred stockholders will receive 1/10th of what the common stockholders will receive. C) preferred stockholders will receive $15,000 and the common stockholders will receive $15,000. D) $30,000 will be held as restricted retained earnings and paid out at some future date.
A) preferred stockholders will receive the entire $30,000.
A company receives $176, of which $16 is for sales tax. The journal entry to record the sale would include a A) Debit Cash $176 AND Debit Sales Taxes Expense $16 AND Credit Sales Revenue $176 AND Credit Sales Taxes Payable $16 B) Debit Cash $176 AND Credit Sales Revenue $160 AND Credit Sales Taxes Payable $16 C) Debit Cash $182 AND Credit Sales Revenue $176 AND Credit Sales Taxes Payable $16 D) Debit Cash $176 AND Credit Sales Revenue $160 AND Credit Sales Taxes Expense $16
B) Debit Cash $176 AND Credit Sales Revenue $160 AND Credit Sales Taxes Payable $16 Explanation: Sales Tax Entry example, if the March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is as follows.
Which of the following is the appropriate general journal entry to record the declaration of cash dividends for $50,000? A) Debit Paid-in Capital $50,000 AND Creidt Dividends Payable $50,000 B) Debit Cash Dividends $50,000 AND Credit Dividends Payable $50,000 C) Debit Dividends Payable $50,000 AND Credit Cash Dividends $50,000 D) Debit Dividends Payable $50,000 AND Credit Cash $50,000
B) Debit Cash Dividends $50,000 AND Credit Dividends Payable $50,000 Explanation: On the declaration date, the board of directors formally authorizes the cash dividend and announces it to stockholders. The declaration of a cash dividend commits the corporation to a binding legal obligation. Thus, the company must make an entry to recognize the increase in Cash Dividends and the increase in the liability Dividends Payable.
If Quinn Company issues 4,000 shares of $5 par value common stock for $140,000, the account A) Cash will be debited for $120,000 B) Paid-in Capital in Excess of Par Value will be credited for $120,000 C) Common Stock will be credited for $140,000 D) Paid-in Capital in Excess of Par Value will be credited for $20,000
B) Paid-in Capital in Excess of Par Value will be credited for $120,000 Explanation: Issuing Par Value Common Stock for Cash Par value does not indicate a stock's market price. The cash proceeds from issuing par value stock may be equal to, greater than, or less than par value. When a company records the issuance of common stock for cash, it credits the par value of the shares to Common Stock and records in a separate paid‐in capital account the portion of the proceeds that is above or below par value.
The balance in the Accumulated Depreciation account represents the A) cash fund to be used to replace plant assets B) amount charged to depreciation expense since the acquisition of the plant asset C) amount to be deducted from the cost of the plant asset to arrive at its fair market value D) amount charged to depreciation expense in the current period
B) amount charged to depreciation expense since the acquisition of the plant asset Explanation: Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount A) that cannot be determined B) greater than face value C) equal to face value D) less to face value
B) greater than face value
If bonds are issued at a discount, it means that the A) market interest rate is lower than the contractual interest rate B) market interest rate is higher than the contractual interest rate C) financial strength of the issuer is suspect D) bondholder will receive effectively less interest than the contractual rate of interest
B) market interest rate is higher than the contractual interest rate Explanation: When a company issues 10% bonds at a time when the market interest rate of bonds of similar risk are paying 12%. Investors will not be interested in buying the 10% bonds, so their value will fall below their face value. When a bond is sold for less than its face value, the difference between the face value of a bond and its selling price is called a discount. As a result of the decline in the bonds' selling price, the actual interest rate incurred by the company increases to the level of the current market interest rate.
A corporation has the following account balances: Common Stock, $1 par value, $80,000; Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the A) average price per share issued is $3.48 B) number of shares issued is 80,000 C) legal capital is $2,780,000 D) number of shares outstanding is 2,780,000
B) number of shares issued is 80,000 Explanation: Issuing Par Value Common Stock for Cash Par value does not indicate a stock's market price. The cash proceeds from issuing par value stock may be equal to, greater than, or less than par value. When a company records the issuance of common stock for cash, it credits the par value of the shares to Common Stock and records in a separate paid‐in capital account the portion of the proceeds that is above or below par value.
Equipment with a cost of $225,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units of activity method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? A) $54,375 B) $52,500 C) $56,700 D) $56,250
C) $56,700 Explanation: ($225,000 - $15,000) / 10,000 hours = $21 x 2,700 hours = $56,700. (Purchase Price - Salvage value) ÷ 10,000 hours = Depreciation per hour x 2,700 hours.
The following data is available for BOX Corporation at December 31, 2014: Common stock, par $10 (authorized 30,000 shares) $250,000 Treasury stock (at cost $15 per share) $1,200 Based on the data, how many shares of common stock are outstanding? A) 29,920 B) 30,000 C) 24,920 D) 25,000
C) 24,920 Explanation: 25,000-80=24,920 The common stock account is recorded at par value for each share issued. The treasury stock account is recorded at the cost to repurchase each share.
Which of the following statements about treasury stock is true? A) Few corporations have treasury stock. B) Companies acquire treasury stock to decrease earnings per share. C) Purchasing treasury stock is done to eliminate hostile shareholder buyouts. D) Companies acquire treasury stock to increase the number of shares outstanding
C) Purchasing treasury stock is done to eliminate hostile shareholder buyouts. Explanation: Many corporations have treasury stock. E.g. in the U.S. approximately 65% of companies have treasury stock. During one quarter, companies in the Standard & Poor's 500‐stock index spent a record of about $118 billion to buy treasury stock. In a recent year, Nike purchased more than 6 million treasury shares. At one point, stock repurchases were so substantial that a study by two Federal Reserve economists suggested that a sharp reduction in corporate purchases of treasury shares might result in a sharp drop in the value of the U.S. stock market.
On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a A) credit to Discount on Bonds Payable, $8,000 B) debit to Interest Expense, $120,000 C) credit to Discount on Bonds Payable, $16,000 D) debit to Interest Expense, $240,000
C) credit to Discount on Bonds Payable, $16,000 Explanation: The amortization of discount on bonds payable is treated as an additional interest expense over the life of the bonds. When the same amount of bond discount amortization is recorded each year, it is referred to as straight-line amortization.
Equipment that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a A) loss of $6,000 B) credit to the Equipment account for $18,000 C) gain of $6,000 D) credit to Accumulated Depreciation for $60,000
C) gain of $6,000 Explanation: In a disposal by sale, the company compares the book value of the asset with the cash proceeds received from the sale. If the cash proceeds from the sale exceed the book value of the plant asset, a gain on disposal occurs. If the cash proceeds from the sale are less than the book value of the plant asset sold, a loss on disposal occurs.
A characteristic of a plant asset is that it is A) intangible B) not currently used in the business but held for future use C) used in the operations of a business D) held for sale in the ordinary course of the business
C) used in the operations of a business Explanation: Plant assets are called various names—property, plant, and equipment; plant and equipment; and fixed assets. By whatever name, these assets are expected to be of service to the company for a number of years. Except for land, plant assets decline in service potential (ability to produce revenue) over their useful lives.
A plant asset with a cost of $240,000 and accumulated depreciation of $228,000 is sold for $28,000. What is the amount of the gain or loss on disposal of the plant asset? A) $28,000 loss B) $16,000 loss C) $28,000 gain D) $16,000 gain
D) $16,000 gain Explanation: In a disposal by sale, the company compares the book value of the asset with the cash proceeds received from the sale. If the cash proceeds from the sale exceed the book value of the plant asset, a gain on disposal occurs. If the cash proceeds from the sale are less than the book value of the plant asset sold, a loss on disposal occurs.
Burke Company purchases land for $90,000 cash. Burke assumes $2,500 in property taxes due on the land. The title and attorney fees totaled $1,000. Burke has the land graded for $2,200. They paid $10,000 for paving of a parking lot. What amount does Burke record as the cost for the land? A) $93,200 B) $105,700 C) $90,000 D) $95,700
D) $95,700
The following information is provided for Coldwater Company and Northwest Corporation. (in $ millions) Corporation Coldwater Northwest Net Income 2014 $275 $390 Net Sales 2014 1,500 4,100 Total assets 12/31/12 1,000 2,400 Total assets 12/31/13 1,050 3,000 Total assets 12/31/14 1,150 4,000 What is Coldwater's asset turnover for 2014? A) 0.25 times B) 0.73 times C) 4.00 times D) 1.36 times
D) 1.36 times Explanation: Asset turnover indicates how efficiently a company uses its assets to generate sales—that is, how many dollars of sales a company generates for each dollar invested in assets. It is calculated by dividing net sales by average total assets. When we compare two companies in the same industry, the one with the higher asset turnover is operating more efficiently. It is generating more sales per dollar invested in assets.
The following information is provided for Coldwater Company and Northwest Corporation. (in $ millions) Corporation Coldwater Northwest Net Income 2014 $275 $390 Net Sales 2014 1,500 4,100 Total assets 12/31/12 1,000 2,400 Total assets 12/31/13 1,050 3,000 Total assets 12/31/14 1,150 4,000 What is the Northwest's return on assets for 2014? A) 11.4% B) 13.0% C) 12.7% D) 11.1%
D) 11.1% Explanation: An overall measure of profitability is the return on assets. This ratio is computed by dividing net income by average total assets. (Average assets are commonly calculated by adding the beginning and ending values of assets and dividing by 2.) Return on assets indicates the amount of net income generated by each dollar of assets. Thus, the higher the return on assets, the more profitable the company.
The 2014 financial statements of Harper Co. contain the following selected data (in millions). Current assets $90 Total assets 160 Current liabilities 40 Total liabilities 75 Cash 8 Interest expense 5 Income taxes 10 Net income 16 The debt-to-assets ratio is A) 6.2 times B) 2.13% C) 44.4% D) 46.9%
D) 46.9% Explanation: One measure of a company's solvency is the debt to assets ratio. The debt to assets ratio is calculated as total liabilities (debt) divided by total assets. This ratio indicates the extent to which a company's assets are financed with debt.
On January 1, Quentin Corporation had 600,000 shares of $10 par value common stock outstanding. On March 31 the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event, A) Paid-in Capital in Excess of Par Value account increased $300,000 B) Stock Dividends account increased $900,000 C) Total stockholders' equity was unaffected D) All of the other answer choices are correct
D) All of the other answer choices are correct
West County Bank agrees to lend Drake Builders Company $200,000 on January 1. Drake Builders Company signs a $200,000, 6%, 6-month note. What is the adjusting entry required if Drake Builders Company prepares financial statements on March 30? A) Debit Interest Expense $6,000 AND Credit Interest Payable $6,000 B) Debit Interest Expense $9,000 AND Credit Interest Payable $9,000 C) Debit Interest Expense $12,000 AND Credit Interest Payable $12,000 D) Debit Interest Expense $3,000 AND Credit Interest Payable $3,000
D) Debit Interest Expense $3,000 AND Credit Interest Payable $3,000 Explanation: Interest accrues over the life of the note, and the issuer must periodically record that accrual as a debit to interest expense and a credit to interest payable.
The book value of an asset is equal to the A) blue book value relied on by secondary markets B) asset's fair value less its historical cost C) replacement cost of the asset D) asset's cost less accumulated depreciation
D) asset's cost less accumulated depreciation Explanation: Net Book Value is the value of fixed assets after deducting the accumulated depreciation from the original cost of fixed assets. Accumulated depreciation is the total cumulative depreciation expense over the life of the plant asset.
If the market rate of interest is greater than the contractual rate of interest, bonds will sell A) at a premium B) at face value C) only after the stated rate of interest is increased D) at a discount
D) at a discount Explanation: When a company issues 10% bonds at a time when the market interest rate of bonds of similar risk are paying 12%. Investors will not be interested in buying the 10% bonds, so their value will fall below their face value. When a bond is sold for less than its face value, the difference between the face value of a bond and its selling price is called a discount. As a result of the decline in the bonds' selling price, the actual interest rate incurred by the company increases to the level of the current market interest rate.
The amount of stock that may be issued according to the corporation's charter is referred to as the A) issued stock B) outstanding stock C) unissued stock D) authorized stock
D) authorized stock Explanation: The authorization of common stock does not result in a formal accounting entry. The reason is that the event has no immediate effect on either corporate assets or stockholders' equity. However, the corporation discloses in the stockholders' equity section of the balance sheet the number of shares authorized.
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $60,000 FICA taxes withheld 4,590 Income taxes withheld 12,500 Medical insurance deductions 2,250 Federal unemployment taxes 160 State unemployment taxes 1,080 The entry to record accrual of employer's payroll taxes would include a A) credit to FICA Taxes Payable for $9,180 B) credit to Payroll Tax Expense for $1,240 C) debit to Payroll Tax Expense for $1,240 D) debit to Payroll Tax Expense for $5,830
D) debit to Payroll Tax Expense for $5,830
