Financial Accounting Exam #3

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

$0

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?

$1.5 million

If Speedy Travel, Inc. borrows $50 million on September 1 for one year at 9% interest, how much interest expense should it record by December 31 of that same year?

$1.5 million

The Open Grill incurred the following costs in acquiring a new piece of land: What is the total recorded cost of the land?

$100,800.

Tasty Inn and Out incurred the following costs related to its purchase of equipment. What is the recorded cost of the equipment?

$11,900

A company purchased land and building from a seller for $900,000. A separate appraisal reveals the fair value of the land to be $200,000 and the fair value of the building to be $800,000. For what amount would the company record land at the time of purchase?

$180,000

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?

$2,000

Sandwich Express incurred the following costs related to its purchase of a bread machine. At what amount should Sandwich Express record the bread machine?

$25,200

A company has the following three assets with the information provided: Determine the amount of the impairment loss, if any.

$3 million

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

$30,000

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?

$4.5 million

On October 1, a franchise was purchased for $2,000,000. The franchise agreement is for 10 years. What is the amount of amortization expense by the end of the first year, December 31 (using partial year straight-line amortization)?

$50,000

The Cheese Factory incurred the following costs related to acquiring a new piece of equipment: What is the total recorded cost of the equipment?

$59,000.

The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year?

$60,000

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?

$700,000

A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck's residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation?

$8,000

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?

$8,000

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?

$8,000.

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.

8.0%

Accumulated depreciation is:

A contra-asset.

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

A debit to a liability and a credit to a revenue account.

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

A debit to an asset and a credit to a liability account

Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record:

A gain of $5,000

Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:

A loss of $10,000.

Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record

A loss of $10,000.

Which of the following is properly recorded as an intangible asset?

A purchased patent

If equipment is retired, which of the following accounts would be debited?

Accumulated depreciation

Which of the following represents a characteristic of a liability?

All of these are characteristics of a liability

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

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

An addition which increases future benefit

Which of the following expenditures should be capitalized?

An improvement to a tangible asset.

Which of the following is not a current liability?

An unused line of credit

Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

As a liability for $500,000 with disclosure of the range.

The asset's cost less accumulated depreciation is called:

Book value

The acid-test ratio is

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

We normally record a long-term asset at the

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

A long-term asset is recorded at the:

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

The current ratio is:

Current assets divided by current liabilities

Which of the following is reported as a current liability?

Current portion of long-term debt

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit Cash, $5,000; Credit Notes Payable, $5,000

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record?

Debit Notes Receivable, $5,000; Credit Cash, $5,000

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:

Debit interest expense and credit interest payable, $4,000

Which of the following correctly describes the nature of depreciation?

Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.

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

Disclosed but not reported as a liability

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:

Disclosed but not reported as a liability.

Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset's life?

Double declining balance method.

Which of the following increases an employer's payroll costs?

Employer's FICA contribution

Which of the following is paid by both the employee and the employer?

FICA taxes

Which of the following intangible assets are not amortized?

Goodwill

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?

Increase of $2.84

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the borrowing of cash to be paid back in five years affect each ratio?

Increase the current ratio and increase the acid-test ratio

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 included in calculating the acid-test ratio?

Inventory

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

It must be payable in cash

Which of the following statements regarding liabilities is true?

Liabilities represent probable future sacrifices of benefits

Which of the following statements regarding liabilities is not true?

Liabilities result from future transactions

Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):

Liability.

Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life?

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

Current liabilities

May include contingent liabilities

Return on assets is equal to:

Net income divided by average total assets

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?

No asset or gain is reported

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?

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

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?

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

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

Ordinary repairs and maintenance.

An exclusive 20-year right to manufacture a product or to use a process is a:

Patent.

Return on assets is equal to:

Profit margin times asset turnover.

Assume that Airline Accessories' current ratio is greater than 1. Which of the following will decrease its current ratio?

Purchasing inventory on account.

A contingent liability that is probable and can be reasonably estimated must be

Recorded

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

Repairs and maintenance that maintain current benefits.

Which of the following is not recorded as an intangible asset in the balance sheet?

Research and development.

The company's profitability on each dollar invested in assets is represented by which of the following ratios:

Return on assets

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Sales tax payable

Which of the following will result in higher depreciation expense in the first year of the asset's life?

Short service life and low residual value.

Research and development costs

Should be expensed

The balance in the Accumulated Depreciation account represents

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

Which of the following is true in comparing the current ratio with the acid-test ratio?

The current ratio will always be at least as large as the acid-test ratio.

Which of the following statements is true regarding the amortization of intangible assets?

The expected residual value of most intangible assets is zero.

Interest expense is recorded in the period in which

The interest is incurred

The amount of the gain on the sale of equipment equals:

The selling price minus the book value of the equipment.

Which of the following statements is false regarding the amortization of intangible assets?

The service life of an intangible asset is always equal to its legal life.

Which of the following is not deducted from an employee's salary?

Unemployment taxes

We record interest expense on a note payable in the period in which

We incur interest

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

$450,000

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?

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

The book value of an asset is equal to the

Asset's cost less accumulated depreciation.

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?

$16,000.

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much is the estimated warranty liability reported in the balance sheet this year?

$25,000

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?

$400

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

one; one