Intermediate Acct EXAM 1

Dividends are not paid on

treasury common stock.

On January 1, 2014, Ann Price loaned $112,695 to Joe Kiger. A zero-interest-bearing note (face amount, $150,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2016. The prevailing rate of interest for a loan of this type is 10%. The present value of $150,000 at 10% for three years is $112,695. What amount of interest income should Ms. Price recognize in 2014?

$11,270. $112,695 × .10 = $11,270.

Glavine Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $297,000. The proceeds allocated to the common stock is

$135,000 [(6,000 × $25) ÷ [(6,000 × $25) + (9,000 × $20)]] × $297,000 = $135,000.

Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $264,000. The proceeds allocated to the preferred stock is

$144,000 [(7,500 × $20) ÷ [(5,000 × $25) + (7,500 × $20)]] × $264,000 = $144,000.

On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a credit of

$160,000 to Premium on Bonds Payable. ($4,000,000 × 1.04) - $4,000,000 = $160,000 premium.

On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .627 Present value of 1 for 8 periods at 8% .540 Present value of 1 for 16 periods at 3% .623 Present value of 1 for 16 periods at 4% .534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652 The issue price of the bonds is

$3,534,240. $2,136,000 + $1,398,240 = $3,534,240.

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?

$300,000; $140,000 3,000,000 × .10 × $1 = $300,000; $300,000 - $160,000 = $140,000.

On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2014 income statement of Macklin Corporation would be

$46,000 [($4,000,000 × .05) × 3/12] - [($160,000 ÷ 10) × 3/12] = $46,000.

Yurman Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, 2013 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2013. Outstanding service contracts at December 31, 2013 expire as follows: During 2014 During 2015 During 2016 $150,000 $240,000 $105,000 What amount should be reported as unearned service contract revenues in Yurman's December 31, 2013 balance sheet?

$495,000 $150,000 + $240,000 + $105,000 = $495,000.

On June 30, 2014, when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as follows: Capital stock (par value $50; 50,000 shares issued) $2,500,000 Premium on capital stock 600,000 Retained earnings 4,200,000 If a 100% stock dividend were declared and distributed, capital stock would be

$5,000,000. (50,000 × $50) + $2,500,000 = $5,000,000.

Roasten Corp.'s payroll for the pay period ended October 31, 2014 is summarized as follows: F.I.C.A. = $94,000 UNEMPLOYMENT = 34,000 Assume the following payroll tax rates: F.I.C.A. for employer and employee 7% each Unemployment 3% What amount should Roasten accrue as its share of payroll taxes in its October 31, 2014 balance sheet?

$7,600. ($94,000 × .07) + ($34,000 × .03) = $7,600.

On January 1, 2014, Solis Co. issued its 10% bonds in the face amount of $6,000,000, which mature on January 1, 2024. The bonds were issued for $6,810,000 to yield 8%, resulting in bond premium of $810,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2014, Solis's adjusted unamortized bond premium should be

$754,800. $810,000 - [($6,000,000 × .10) - ($6,810,000 × .08)] = $754,800.

Vanco Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2011, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2013 may first be taken on January 1, 2014. Information relative to these employees is as follows: Year Hourly Vacation days Vacation days wages earned used 2013 $20.50 10 0 2014 22.50 10 8 2015 25.50 10 10 Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2015?

$84,000. ($25.50 × 8 × 10 × 35) + ($22.50 × 8 × 2 × 35) = $84,000.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

- Payment of the compensation is probable. - The obligation relates to the rights that vest or accumulate. - The obligation is attributable to employee services already performed.

A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to

A paid-in capital account.

acid test ratio

ATR = (Cash + AR + short term investments) / current liab.

What is a contingency?

An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

Which of the following is the proper way to report a gain contingency?

As a disclosure only.

A company buys an oil rig for $3,000,000 on January 1, 2014. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events?

Depreciation expense of $323,133 and interest expense of $23,133 ($3,000,000 + $231,330) ÷ 10 = $323,133; $231,330 × .10 = $23,133.

Which of these is not included in an employer's payroll tax expense?

Federal income taxes

Which of the following is not an acceptable treatment for the presentation of current liabilities?

Offsetting current liabilities against assets that are to be applied to their liquidation.

The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is

either the proportional method or the incremental method.

Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2014. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Operating expense of $800,000 and liability of $800,000

Which of the following situations may give rise to unearned revenue?

Selling magazine subscriptions.

What is a discount as it relates to zero-interest-bearing notes payable?

The discount represents the cost of borrowing.

How do you determine the acid-test ratio?

The sum of cash, short-term investments and net receivables divided by current liabilities.

On September 1, 2014, Valdez Company reacquired 20,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit

Treasury Stock for $300,000. 20,000 × $15 = $300,000.

Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders

bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

Martinez Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be

the minimum of the range.

current ratio

current assets : current liabilities

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2014 for the purchase of $250,000 of inventory. The face value of the note was $253,900. Greeson used a "Discount on Note Payable" account to initially record the note. Assuming that the discount will be amortized equally over the 3-month period and that there was no adjusting entry made for November, the adjusting entry made at December 31, 2012 will include a

debit to Interest Expense for $2,600. $253,900 - $250,000 = $3,900. $3,900 × 2/3 = $2,600.

An example of an item which is not a liability is

dividends payable in stock.

Stockholders' equity is generally classified into two major categories:

earned capital and contributed capital.

Each of the following are included in both the current ratio and the acid-test ratio except

inventory

The pre-emptive right enables a stockholder to

none of these answers are correct.

Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2014, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a

property dividend.

The pre-emptive right of a common stockholder is the right to

share proportionately in any new issues of stock of the same class.

If management wishes to "capitalize" part of the earnings, it may issue a

stock dividend.

Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

the cause for action occurred during the accounting period covered by the financial statements.

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

the market rate multiplied by the beginning-of-period carrying amount of the bonds.