MGMT 200 Purdue Exam 2 Chapters 5-8

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

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What is the amount of net revenues (sales minus sales discounts) as of March 23?

$11,760

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

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

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

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a credit of $500 and that the company estimates 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be:

$5,100

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)? (Do not round intermediate calculations.)

$50,000

A company purchased a $500,000 tract of land that is intended to be the site of a new office complex. The company incurred additional costs and realized salvage proceeds as follows: Demolition of existing building on site$75,000Legal and other fees to close escrow 15,000Proceeds from sale of demolition scrap 10,000 What would be the capitalized cost of the land?

$580,000

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a debit of $500 and that the company estimates 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be:

$6,100

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

Schmidt Company's accounts Receivable balance is $100,000, its adjusted balance in Allowance for uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net amount of accounts receivable is:

$96,000

A company purchased land, a building, and equipment for one price of $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?

(100,000+700,000+200,000)/$100,000(Land) Take that decimal and multiply it by the original cost of $800,000 for the final answer which is $80,000

Which of following best describes a merchandising company?

A company that purchase products that are primarily in finished form for resale to customers

Using the allowance method, the entry to record a write-off of accounts receivable will include

A debit to Allowance for Uncollectible Accounts

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

An informal agreement that allows a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork is known as:

A line of credit

Which of the following represents a characteristic of a liability?

A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events.

The effect of writing off a specific account receivable is:

A reduction in the Allowance for Uncollectible Accounts

A(n) ______ receivable is an informal credit arrangement with trade customers, whereas a(n) ______ receivable is a formal signed credit arrangement between a creditor and a debtor.

Account, Note

The direct write-off method is not normally an acceptable method for GAAP because it fails to report:

Accounts receivable for the net amount of cash expected to be collected

Which of the following is considered a "contra" account?

Accumulated depreciation

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

Accumulated depretiation

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.

Using a balance sheet approach to estimate bad debts involves calculating the desired ending balance in which account?

Allowance for uncollectible accounts

Accounts receivable are normally reported at the:

Amount expected to be collected

The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:

An addition to the Buildings account

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

An addition which increases future benefit

Research and development costs should be:

An expense in the period incurred

Which of the following is not a current liability?

An unused line of credit

Gains on the sale of long-term assets for cash:

Are the excess of the cash received over the book value

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?

As a liability for $100,000 with disclosure of the range, because when no amount within a range of potential losses appears more likely than others, the liability is recorded at the minimum amount in the range

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

Accounts receivable are best describes as:

Assets of the company representing the amount owed by customers.

Cost of goods sold equals:

Beginning inventory+net purchases-ending inventory

A sales discount is recorded by the seller as an:

Contra revenue account

The largest expense on a retailer's income statement is typically:

Cost of goods sold

A long-term asset is recorded as

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

Using a periodic inventory system, recording the sale of inventory on account would include:

Debit Accounts Receivable; credit Sales Revenue.

A company estimates that $17,000 will be uncollectible, it already has a balance of $3,000 credit in its Allowance for uncollectible accounts. What will be recorded in its year-end adjusting entry?

Debit Bad Debt Expense for $14,000

Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Bear essentials record?

Debit Cash $50,000; Credit Notes Payable $50,000

Using a perpetual inventory system, the purchase of inventory on account would be recorded as

Debit Inventory; credit Accounts Payable.

Using a periodic inventory system, the purchase of inventory on account would be recorded as

Debit Purchases; credit Accounts Payable

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.

The entry to write down inventory from cost to net realizable value at the end of the year includes a:

Debit to Cost of Goods Sold

At the end of the year, Marline Corporation determines that its ending inventory has a cost of $2,000 and a net realizable value of $1,900. What would be the effect of the adjustment to write down inventory to net realizable value?

Decrease in net income

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

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 likely, a contingent liability should be:

Disclosed but not reported as a liability.

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, 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

Note disclosure is required for material potential losses when the loss is at least reasonably possible:

Even if the amount is not reasonably estimable

What's paies by both the employee and the employer?

FICA taxes

The amount of impairment loss is the excess of the book value over:

Fair value

Which of the following levels of profitability in a multiple-step income statement represents revenues from the sale of inventory less the cost of that inventory?

Gross profit

Under the direct write-off method, uncollectible accounts are recorded:

In the period the account is determined actually uncollectible.

Fan Company purchases inventory on account. The entry to record this purchase using a perpetual inventory system would include a debit to:

Inventory

In a perpetual inventory system, the purchase of inventory is debited to:

Inventory

One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:

Inventory

Which of the following is NOT a reason why a company might prefer to report a liability as long-term rather than current?

It may increase interest rates on borrowing

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.

A perpetual inventory system measures cost of goods sold by:

Making entries to the inventory account for each purchase and sale

Which of the following levels of profitability in a multiple-step income statement represents all revenues less all expenses?

Net Income

The percentage-of-receivables method for accounting for uncollectible accounts focuses on the:

Net amount of cash expected to be collected

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.

A company accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?

No effect on the accounting equation

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

Ordinary repairs and maintenence

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

Patent

A contingent liability should be recorded in a company's financial statements only if the likelihood of a loss occurring is:

Probable and the amount of the loss can be reasonably estimated.

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

Recorded

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

Research and developement

On July 8, Ray Inc. Sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15?

Sales discount=$600x100 printers x 2%=$1,200 Record as Cash debit 58,500 Sales Discounts debit 1,200 Accounts receivable 60,000

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 best describes credit sale?

Sales to customers on account

A multiple-step income statement provides the advantage of:

Separating revenues and expenses based on their different types of activities.

A company reported the following amounts at the end of the year: total sales revenue = $500,000; sales discounts = $10,000; sales allowances = $15,000; net revenues = $440,000. What amount did the company report for sales returns for the year?

So, for this I used the criteria for a Net revenue total and plugged in a variable where sales returns would ussually be then I solved for the variable and got $35,000 The work looks like: 500,000-10,000-15,000-B=440,000

Which of the following amortization methods is most commonly used?

Straight-line

Which of the following best describes accounts receivable?

The amount of cash owed to a company by its customers from the sale of goods or services on account

The current portion of long-term debt is:

The amount that will be paid within one year of the balance sheet date

Interest expense is recorded in the period in which:

The interest in incurred

The receivables turnover ratio includes:

The number of times during a year that the average accounts receivables were collected

A company's inventory turnover ratio measures:

The number of times the company sells its average inventory balance during the year.

The inventory turnover ratio measures:

The times per period the average inventory balance is sold

The lower the cost and net realizable value rule causes losses in the value of inventory to be recognized in the period when:

The value of inventory declines below cost

Suppose Windell Corporation understates its ending inventory amount. What effect will this have on the reported amount of net income in the year of the error?

Understate net income

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

Unemployment taxes

What kind of account is Accumulated depreciation?

a "contra" account

Accumulated depreciation is a

contra-asset

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

one,one

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

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

On April 1, 20X1, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are due on March 31, 20X2 (one year later). Assuming Nelson Inc. has a December 31 year-end, on March 31, 20X2, Nelson Inc. will record interest revenue of:

$2,000

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

What amounts are included when you calculate NET REVENUE?

-Add: Service Revenue (Include any reductions for trade discounts) -Add: Sales Revenue -Minus: Sales returns -Minus: Sales Allowances -Minus: Sales discounts(Contra revenue account)

The entry to record the estimate for uncollectible accounts includes

-Bad debt expense DEBIT -Allowance for Uncollectibe accounts CREDIT

What are included in an employers payroll tax? All of them

-Employers portion of FICA -Federal unemployment tax -State unemployment tax

A manufacturers inventory consists of what type of inventory?

-Raw materials -Finished goods -Work-in-process

Which of the following amounts would be used to calculate net revenues for the current year? All of the above choices included

-Total Sales revenue, for the current year -Actual sales returns, allowances, and discounts for the current year -Estimated sales, returns, and allowances that will occur next year as a result of sales transactions in the current year

Which of the following are withheld from an employee's salary? 1)FICA taxes. 2)Federal and state unemployment taxes. 3)Federal and state income taxes. 4)Employee portion of health insurance.

1,3,4

A company's liquidity refers to its:

Ability to pay currently maturing debts

Danton Hardware Company uses a perpetual inventory system. How should Danton record the return of inventory previously purchases on account for $200?

Accounts Payable, DEBIT Inventory, CREDIT

When a company provides services on account, which account is Debited and which account is Credited?

Accounts Receivable, Debited Service Revenue Credited

Which of the following is not a characteristic 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.

B. It must be payable in cash

The asset's cost less accumulated depreciation is called:

Book value

At December 31, Gill Co. reported accounts receivable of $238,000 and al allowance for uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:

Calculate 3% of $238,000 which is $7,140 and subtract $600 from that, because there is already a credit on uncollectible accounts and we need to add to that to get the correct value. So the answer would be $6,540

Fan Company sells inventory on account. The entry or entries to record this sale using a perpetual inventory system would include a:

Debit to Accounts Receivable Credit to Sales Revenue Debit to Cost of Goods Sold

In a period when inventory costs are rising, the inventory method that most likely result in the highest ending inventory is:

FIFO

Which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs?

FIFO

Which of the following intangible assets are not amortized?

Goodwill

On Aug 4th, Sanders provides services to Fredrickson for $5,000, terms 3/10, n/30. Fredrickson pays for the services on Aug 12. What amount would Sanders record as revenue on Aug 4th?

He would record revenue of $5,000, because he provided $5,000 worth of service on Aug 4th

Which cost flow assumption must be used for financial reporting if it is also used for tax reporting?

LIFO

Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue?

LIFO

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the:

LIFO reserve

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:

Liabilities until the product or service is provided

Deferred Revenue is a(n):

Liability account

If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account

Net accounts receivable do not change

On December 31, 2021, Larry's Used Cars had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2022, Larry's wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2022. Bad debt expense for 2022 would be:

Starting (AUCA)Allowance for Uncollectible accounts value=$1,325 Write off of (AUCA) =$1,465(Debit which lowers the balance) He wants the (AUCA) balance to be=$1,280 so he takes the initial value of $1,325 and subtracts the write off of $1,465 and gets -140 which he adds $1,280 to and 140 again to bring the account to zero and gets the final answer for the adjusting entry to be $1,420

On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25?

Take 2% of $500 and record it as a Debit to Sales discount for $10

The balance in the Accumulated Depreciation account represents

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

The depreciable cost used in calculating depreciation expense is:

The asset's cost minus its estimated residual value

The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:

The balance sheet method

Which of the following represents the balance of Cost of Goods Sold at the end of the year?

The cost of inventory sold during the year

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.

Assets acquired in a lump-sum purchase are valued based on:

Their relative fair values

A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated useful life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation?

You subtract 15,000 from 3,000 and divide that by the 4 year estimated service life. You will get an answer of $3,000 and since they are asking about two years you multiply $3,000 by 2 to get an answer of $6,000

To calculate the lower of cost and net realizable method you

use whatever the lowest unit cost is and record that into the calulation