Financial Accounting Practice Problems for Chapters 8-10

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? a. $2.0 million. b. $1.8 million. c. $1.5 million. d. $0

$0.

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.

$129.

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.

$4.5 million.

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.

1.5 million.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record? a. debit cash, $5,000; credit notes receivable, $5,000. b. debit notes receivable, $5,000; credit cash, $5,000. c. debit cash, $5,000; credit notes payable, $5,000. d. debit notes payable, $5,000; credit cash, $5,000.

debit cash, $5,000; credit notes payable, $5,000.

WOTF is not an advantage of debt financing? a. interest is tax deductible. b. the cost of borrowing may be lower than the return on equity. c. the ownership interest of current stockholders is unchanged. d. debt financing often has no maturity date.

debt financing often has no maturity date.

WOTF 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.

liabilities result from future transactions.

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.

may include contingent liabilities.

WOTF is not a primary source of corporate debt financing? a. bonds. b. notes. c. leases. d. receivables.

receivables.

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.

we incur interest.

If Speedy Travel, Inc. borrows $50 million on September 1 for one year at 9% interest, how much expense should it record by December 31 of that same year? a. $4.5 million. b. $3.0 million. c. $1.5 million. d. $0

$1.5 million.

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

$2,000.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month? a. $500. b. $6,000. c. $3,042. d. $2,542.

$2,542.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the second month? a. $2,529. b. $2,555. c. $3,042. d. $2,542.

$2,555

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? a. $30,000. b. $25,000. c. $10,000. d. $5,000

$25,000.

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. $30,723 b. $29,640. c. $29,769. d. $30,871.

$29,769.

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? a. $30,000. b. $25,000. c. $10,000. d. $5,000.

$30,000.

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? a. $400. b. $320. c. $720. d. $0

$400.

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? a. $300,000 b. $450,000 c. $150,000 d. $600,000

$450,000

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as interest expense in the second month? a. $500. b. $513. c. $487. d. $6,000.

$487

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.

$5,414.

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded for interest expense for the first full month? a. $500. b. $6,000. c. $3,042. d. $2,542.

$500.

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? a. $0 b. $12,000 c. $8,000 d. $24,000

$8000

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as: a. a debit to a revenue and a credit to a liability account. b. a debit to a revenue and a credit to an asset account. c. a debit to an asset and a credit to a revenue account. d. a debit to a liability and a credit to a revenue account.

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. a debit to an asset and a credit to a liability account. b. a debit to a revenue and a credit to an asset account. c. a debit to an asset and a credit to a revenue account. d. a debit to a liability and a credit to a revenue account.

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

WOTF is not a primary source of long-term debt financing? a. notes payable. b. accounts payable. c. leases. d. bonds.

accounts payable.

WOTF typically represents an advantage of leasing over purchasing an asset with an 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 answers choices are advantages of leasing.

all of the answer choices are advantages of leasing.

A company leases an office building for 24 months. At the beginning of the lease period, the lessee (user) would: a. record a lease asset. b. record a lease liability. c. record a lease for the present value of the 24 lease payments. d. all of the answers are correct.

all of the answers are correct.

Which of the following represents a characteristic of a liability? a. a probable future sacrifice of economic benefits. b. arising from present obligations to other entities. c. resulting from past transactions or events. d. all of these are characteristics of a liability.

all of these are characteristics of a liability.

WOTF is not a current liability? a. notes payable due in six months. b. current portion of long-term debt. c. an unused line of credit. d. deferred revenue to be earned in nine months.

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? a. as a liability for $700,000 with disclosure of the range. b. as a liability for $600,000 with disclosure of the range. c. as a liability for $500,000 with the disclosure of the range. d. as a disclosure only. no liability is reported.

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

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.

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

WOTF is reported as a current liability? a. notes payable due in two years. b. notes payable due in 15 months. c. current portion of long term debt. d. unused line of credit.

current portion of long-term debt.

On November 1, 20X1, a company signed a $200,000, 12% six-month note payable with the account borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1: a. debit interest expense and credit interest payable, $4,000. b. debit interest expense and credit cash, $4,000. c. debit interest expense and credit interest payable, $12,000. d. debit interest expense and credit cash, $12,000.

debit interest expense and credit interest payable, $4,000.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record? a. debit cash, $5,000; credit notes receivable, $5,000. b. debit notes receivable, $5,000; credit cash, $5,000. c. debit cash, $5,000; credit notes payable, $5,000. d. debit notes payable, $5,000; credit cash, $5,000.

debit notes receivable, $5,000; credit cash, $5,000.

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: a. disclosed but not reported as a liability. b. disclosed and reported as a liability. c. neither disclosed or reported as a liability. d. reported as a liability but not disclosed.

disclosed but not repeated 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 possible, a contingent liability should be... a. disclosed but not reported as a liability. b. disclosed and reported as a liability. c. neither disclosed nor reported as a liability. d. reported as a liability but not disclosed.

disclosed but not reported as a liability.

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.

increase of $2.84.

WOTF is not a characteristics of a liability? a. it represents a probable, future sacrifice of economic benefits. b. it must be payable in cash. c. it arises from present obligations to other entities. d. it results from past transactions or events.

it must be payable in cash.

A company's capital structure refers to: a. its mixture of current versus long-term assets. b. its mixture of current versus long-term liabilities. c. its mixture of liabilities and stockholders' equity. d. its mixture of paid-in capital versus retained earnings.

its mixture of liabilities and stockholders' equity.

An advantage of leasing an asset rather than purchasing the asset is: a. leases are not reported as liabilities in the balance sheet. b. leases typically require less cash upfront to begin using the asset. c. lease payments are tax deductible while depreciation on a purchased asset is not. d. leased assets are more likely to generate additional profits than are purchased assets.

leases typically require less cash upfront to begin using the asset.

WOTF statements regarding liabilities is true? a. liabilities are always payable in cash. b. liabilities are all reported as current in the balance sheet. c. liabilities result from future transactions. d. liabilities represent probable future sacrifices of benefit.

liabilities represent probable future sacrifices of benefit.

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. as an asset for $125,000. b. as a gain for $125,000. c. as both an asset and a gain for $125,000. d. no asset or gain is reported.

no asset or gain is reported.

In most cases, current liabilities are payable within ________ year(s), and long-term liabilities are payable more than ________ year(s) from now. a. one;two b. one;one c. two;two d. one;ten

one;one

A contingent liability that is probable and can be reasonably estimated must be a. disclosed b. not disclosed. c. recorded. d. paid.

recorded

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.

sales tax payable.

In each succeeding payment on an installment note: a. the amount that goes to interest expense increases. b. the amount that goes to interest expense decreases. c. the amount that goes to interest expense is unchanged. d. the amounts paid for both interest and principal increase proportionately.

the amount that goes to interest expense decreases.

Interest expense is recorded in the period in which: a. the interest is paid. b. the interest is incurred. c. the interest is paid or incurred. d. the interest is paid and incurred.

the interest is incurred.