Exam 3 Study Questions

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year? A. $400 B. $320 C. $720 D. $0

A. $400

How does simple interest differ from compound interest? A. Simple interest includes interest earned on the initial investment plus interest earned on previous interest B. Simple interest includes interest earned on the initial investment only C. Simple interest is for a shorter time interval D. Simple interest is for a longer time interval

B. Simple interest includes interest earned on the initial investment only

Bryer Co. purchases all of the assets and liabilities of Stellar Co. for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwill associated with the purchase? A. $800,000 B. $500,000 C. $700,000 D. $0

C. $700,000 Net Assets = Assets - Liabilities Net Assets = 2,000,000 - 1,200,000 = 800,000 Goodwill = Purchase Price - Net Assets Goodwill = 1,500,000 - 800,000 = 700,000

Convertible bonds A. Provide potential benefits only to the issuer B. Provide potential benefits only to the investor C. Provide potential benefits to both the issuer and the investor D. Provide no potential benefits

C. Provide potential benefits to both the issuer and the investor

The company's profitability on each dollar invested in assets is represented by which of the following ratios A. Profit margin B. Asset turnover C. Return on assets D. Return on equity

C. Return on assets

Which of the following ratios measures financial leverage? A. The return on assets ratio B. The inventory turnover ratio C. The times interest earned ratio D. The debt to equity ratio

D. The debt to equity ratio

A company purchased new equipment for $31,000, with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. For the first month's payment, what is the amount to record for interest expense? A. $120 B. $129 C. $68 D. $155

B. $129

Which of the following is not deducted from an employee's salary? A. FICA taxes B. Unemployment Taxes C. Income taxes D. Employee portion of insurance and retirement payments

B. Unemployment Taxes

The city of Summerton has a sales tax rate of 8%. A local convenience store sells merchandise, and the customer pays a total of $38.34. What effect does this transaction have on total liabilities? A. Increase of $3.07 B. Decrease of $38.34 C. Increase of $2.84 D. No effect

C. Increase of $2.84 $38.34/1.08 = 35.5 38.34 - 35.5 = 2.84

Which of the following statements regarding liabilities is not true? A. Liabilities can be for services rather than cash B. Liabilities are reported in the balance sheet for almost every business C. Liabilities result from future transactions D. Liabilities represent probable future sacrifices of benefits

C. Liabilities result from future transactions

Sandwich Express recorded the following costs related to its purchase of a bread machine. Cost of Equipment $20,000 Sales Tax (8%) 1,600 Shipping 2,200 Installation 1,400 Total Costs $25,000 At what amount should Sandwich Express record the bread machine? A. $20,000 B. $21,600 C. $23,800 D. $25,200

D. $25,200

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Calculate the issue price of the bonds, assuming a market interest rate of 5%. A. $47,835 B. $52,246 C. $58,983 D. $47,812

D. $47,812

Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method. A. $16,000 B. $7,200 C. $8,800 D. $20,000

A. $16,000 Purchase Price - RV = Depreciable Expense $50,000 - 10,000 = 40,000 DE/Useful Life = Depreciation Expense per hour $40,000/15,000 = 2.66... Hours of use x Depreciation Expense per hour = Accumulated Depreciation (2,700 + 3,300) x 2.66.. = $16,000

A company needs construction equipment to complete a project over the next 20 months. The equipment costs $10,000. Instead of purchasing the equipment with a 12% note, the company leases the equipment with payments of $300 due at the end of each month. For what amount would the company record the lease liability at the beginning of the lease? A. $5,414 B. $6,000 C. $4,586 D. $10,000

A. $5,414

Equipment was purchased for $50,000. At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company changed its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000. What is depreciation expense in the third year? A. $8,000 B. $5,000 C. $7,000 D. $5,500

A. $8,000 Purchase Price - RV 1 = Depreciable Expense $50,000 - 10,000 = $40,000 DE/Useful Life = Depreciation Expense $40,000/8 = $5,000 $5,000 x 2 yrs = 10,000 Purchase Price- RV 2 - Depreciation Expense yrs 1 & 2 = New DE $50,000 - 8,000 - 10,000 = 32,000 New DE/New Useful Life = New Depreciation Expense $32,000/4 yrs = 8,000

Lincoln County retires a $50 million bond issue when the carrying value of the bonds is $48 million, but the market value of the bonds is $54 million. Lincoln County will record the retirement as A. A debit of $6 million of Loss due to early extinguishment B. A credit of $6 million to Gain due to early extinguishment C. No gain or loss on retirement D. A debit to Cash for $54 million

A. A debit of $6 million of Loss due to early extinguishment

Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Western's legal counsel believes it is probable that Western will have to pay an estimated amount in the range of $75,000 to 175,000, with all amounts in the range considered equally likely. How should Western report this litigation? A. As a liability for $75,000 with disclosure of the range B. As a liability for $125,000 with disclosure of the range C. As a liability for $175,000 with disclosure of the range D. As a disclosure only. No liability is reported

A. As a liability for $75,000 with disclosure of the range

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be A. Disclosed but not reported as a liability B. Disclosed and reported as a liability C. Neither disclosed not reported as a liability D. Reported as a liability but not disclosed

A. Disclosed but not reported as a liability

Current Liabilities A. May include contingent liabilities B. Include obligations payable within one year or one operating cycle, whichever is shorter C. Can be satisfied only with the payment of cash D. Are preferred by most companies over long-term liabilities

A. May include contingent liabilities

Which of the following expenditures should be recorded as an expense? A. Repairs and maintenance that maintain current benefits B. Adding a major new component to an existing asset C. Replacing a major component of an existing asset D. Successful legal defense of an intangible asset

A. Repairs and maintenance that maintain current benefits

Present value represents A. The value today of receiving money in the future B. The amount that an investment today will grow to be in the future C. The difference between the initial investment and the growth of that investment over time D. A series of equal payments

A. The value today of receiving money in the future

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account? A. $0 B. $2,000 C. $8,000 D. $10,000

B. $2,000

Cooper wants to save for college. Assuming he puts $5,000 into an account at the end of each year for five years and earns 12% compounded annually, how much will he have saved by the end of the fifth year (rounded to the nearest whole dollar)? A. $25,000 B. $31,764 C. $18,024 D. $14,096

B. $31,764

Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest expense for the year ended December 31, 2022? A. $0 B. $4.5 million C. $1.5 million D. $6 million

B. $4.5 million 100,000,000x0.06x9/12

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate the carrying value of the bonds after the first semiannual interest payment A. $51,306 B. $52,091 C. $49,000 D. $51,521

B. $52,091

A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets A. 12.5% B. 8.0% C. 4.5% D. 5.0%

B. 8.0% Net Sales/Avg. Total Sales = Asset Turnover $4,000,000/$5,000,000 = 0.8 Profit Margin x Asset Turnover = Return on Assets 0.1 x 0.8 = 0.08

The book value of an asset is equal to the A. Replacement Cost B. Asset's cost less accumulated depreciation C. Asset's fair value less its historical cost D. Historical cost plus accumulated depreciation

B. Asset's cost less accumulated depreciation

Serial bonds are A. Bonds backed by collateral B. Bonds that mature in installments C. Bonds the issuer can repurchase at a fixed price D. Bonds issued below the face amount

B. Bonds that mature in installments

When bonds are issued at a premium, what happens to the carrying value and interest expense each period over the life of the bonds? A. Carrying value and interest expense increase B. Carrying value and interest expense decrease C. Carrying value decreases and interest expense increases D. Carrying value increases and interest expense decreases

B. Carrying value and interest expense decrease

We normally record a long-term asset at the A. Cost of the asset only. B. Cost of the asset plus all costs necessary to get the asset ready for use. C. Appraised value. D. Cost of the asset, but subsequently adjust it up or down to appraised value.

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

Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life? A. Short service life, high residual value, and straight-line depreciation B. Long service life, high residual value, and straight-line depreciation C. Short service life, low residual value, and double-declining-balance depreciation D. Long service life, high residual value, and double-declining-balance depreciation

B. Long service life, high residual value, and straight-line depreciation

Assuming a current ratio of 1.00 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio? A. Increase the current ratio and increase the acid-test ratio B. No change to the current ratio and decrease the acid-test ratio C. Decrease the current ratio and decrease the acid-test ratio D. Increase the current ratio and decrease the acid-test ratio

B. No change to the current ratio and decrease the acid-test ratio

Which of the following is true for bonds issued at a discount? A. The stated interest rate is greater than the market interest rate B. The market interest rate is greater than the stated interest rate C. The stated interest rate and the market interest rate are equal D. The stated interest rate and the market interest rate are unrelated

B. The market interest rate is greater than the stated interest rate

We record interest expense on a note payable in the period in which A. We pay cash for interest B. We incur interest C. We pay cash and incur interest D. We pay cash or incur interest

B. We incur interest

Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest payable for the year ended December 31, 2021? A. $0 B. $4.5 million C. $1.5 million D. $6 million

C. $1.5 million 100,000,000x0.06x3/12

What is the future value of $100 invested in an account for eight years that earns 10% annual interest, compounded semiannually (rounded to the nearest whole dollar)? A. $214 B. $216 C. $218 D. $220

C. $218

A company purchased new equipment for $31,000, with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. After the first month's payment, what is the balance of the note? A. $30,723 B. $29,640 C. $29,769 D. $30,871

C. $29,769

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate interest expense as of the first semiannual interest payment A. $1,570 B. $1,000 C. $785 D. $375

C. $785

Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record A. No gain or loss B. A gain of $10,000 C. A loss of $10,000 D. A loss of $40,000

C. A loss of $10,000 Purchase Price - Accum. Depreciation = RV $95,000 - 30,000 = 65,000 $65,000 > $55,000

The acid-test ratio is A. Current assets divided by current liabilities B. Cash and current investments divided by current liabilities C. Cash, current investments, and accounts receivable divided by current liabilities D. Cash, current investments, accounts receivable, and inventory divided by current liabilities

C. Cash, current investments, and accounts receivable divided by current liabilities

Which of the following statements is true regarding the amortization of intangible assets? A. Intangible assets with a limited useful life are not amortized B. The service life of an intangible asset is always equal to its legal life C. The expected residual value of most intangible assets is zero D. In recording amortization, Accumulated Amortization is always credited

C. The expected residual value of most intangible assets is zero

A company has the following three assets with the information provided: ($ in millions) Equip. Land Building Book Value $8 $20 $12 Estimated total future cash flows 6 35 14 Fair value 5 30 10 Determine the amount of the impairment loss, if any. A. $0 B. $5 million C. $10 million D. $3 million

D. $3 million

Which of the following typically represents an advantage of leasing over purchasing and asset with and installment note? A. Lease payments often are lower than installment payments B. Leasing generally requires less cash upfront C. Leasing typically offers greater flexibility and lower costs in disposing of an asset D. All of the above are advantages of leasing

D. All of the above are advantages of leasing

Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Smith's legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation? A. An asset for $125,000 B. A gain for $125,000 C. As both an asset and a gain for $125,000 D. No asset or gain is reported

D. No asset or gain is reported

Which of the following is not a primary source of corporate debt financing? A. Bonds B. Notes C. Leases D. Receivables

D. Receivables

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as A. Sales tax expense B. Sales tax revenue C. Sales tax receivable D. Sales tax payable

D. Sales tax payable

Research and development costs A. Are recorded as research and development assets B. Are capitalized and then amortized C. Should be included in the cost of the patent they relate to D. Should be expensed

D. Should be expensed

The balance in the Accumulated Depreciation account represents A. The amount charged to expense in the current period B. A contra expense account C. A cash fund to be used to replace plant assets D. The amount charged to depreciation expense since the acquisition of the plant asset

D. The amount charged to depreciation expense since the acquisition of the plant asset