A-201 Exam 3

You are purchasing an investment today that has a maturity value of $10,000 at the end of 6 years. The current interest rate for similar investments is 8%. In order to calculate what this investment is worth today, you should use a Table Factor from...

The "Present value of $1" Table

If a company issues a note payable when the effective market rate of interest is less than the stated rate, then

the cash received will exceed the maturity value of the note.

Non-interest bearing bonds:

Are always issued at a large discount

On 7/1/2013 Casserole Inc. was sued by Autumn Inc. for $100,000 for failing to follow the terms of a business contract. Casserole Inc.'s attorney thought it was highly probable that Casserole would lose only $80,000. Casserole Inc. made the appropriate accrual entry during 2013. On 2/1/2014 the lawsuit was settled for $70,000 and no further liability existed between the companies. What entry was made by Casserole Inc. on 2/1/2014?

Dr. Contingent Liability $80,000, Cr. Contingent Loss or Other Income $10,000, Cr. Cash $70,000

The entry to record interest expense on a bond issued at a discount is:

Dr. Interest Expense, Cr. Cash, Cr. Discount on Bonds Payable

Which one of the following is the result of the amortization of a discount on a short-term note payable?

Increases liabilities and decreases stockholders' equity

Which method of depreciation is generally considered the easiest method to compute?

Straight Line Method

The interest rate used to calculate the amount of the bond proceeds is the: a) Market Rate of Interest at the date the bonds are issued c) The Stated Rate of Interest

a) Market Rate of Interest at the date the bonds are issued

Which one of the costs below should be included as part of the cost of land? a) Razing an old building b) Cost of a building permit c) Cost of driveways d) Shrubs and trees with limited lives

a) Razing an old building

Turkey Company has a long term asset with a 20 year useful life. Which depreciation methods would result in the lowest net income for the company in year 19 of the long term asset's life?

a) Straight line method

The difference between the book value and the face value of a bond payable is: a) The amount of the unamortized premium or discount c) The amount of the accumulated amortized interest expense

a) The amount of the unamortized premium or discount

If a bond is issued at a premium then: a) The cash paid for interest is more than the interest expense. e) The effective rate is greater than the market rate of interest.

a) The cash paid for interest is more than the interest expense.

When a machine is fully depreciated: a) The net book value is equal to the salvage value, or zero if there is no salvage value. d) The depreciation expense is equal to the accumulated depreciation.

a) The net book value is equal to the salvage value, or zero if there is no salvage value.

A machine is disposed of (thrown away) before the end of its useful life. Assuming the company uses the straight line method of deprecation which of the following statements is always true in this situation? a) The net book value of the machine was more than zero at the date of disposal. b) The salvage value of the machine was more than zero at the date of disposal.

a) The net book value of the machine was more than zero at the date of disposal.

If a loss contingency related to a lawsuit against a firm is deemed to have a reasonable possibility of requiring ultimate payment, then the proper accounting treatment of the loss contingency will a) require note disclosure. d) decrease the debt/equity ratio.

a) require note disclosure.

A non-interest-bearing obligation a) requires recognition of interest expense over the life of the obligation. d) is free of interest expense.

a) requires recognition of interest expense over the life of the obligation.

The purpose of depreciation is: a)To record a portion of the cost of long term assets as expense on the income statement to match against revenue earned from using the asset. d)To account for the loss in market value after the asset is put into use.

a)To record a portion of the cost of long term assets as expense on the income statement to match against revenue earned from using the asset.

Gain contingencies

are almost never accrued and are rarely disclosed.

Depreciation of a plant asset is the process of: a. Allocation of the asset's cost to periods of use b. Asset valuation for balance sheet purposes

a. Allocation of the asset's cost to periods of use

In which of the following situations is the activity method of depreciation most appropriate? a. An asset's service potential (ability to generate revenue) declines with use b. An asset's service potential (ability to generate revenue) declines with the passage of time

a. An asset's service potential (ability to generate revenue) declines with use

Expected warranty costs should be accrued if they are: a. probable that an expense will be incurred and the amount is reasonably estimable. b. possible that an expense will be incurred regardless of whether the amount is estimable or not. c. possible that an expense will be incurred and the amount is reasonably estimable.

a. probable that an expense will be incurred and the amount is reasonably estimable.

On September 30, 2013 Drumstick Corp. issued 10 bonds due in five years with a face value of $1,000 each. The bonds have an annual stated rate of 8%. Which of the following statement is NOT true? a) Drumstick will pay $10,000 at the end of 5 years. They will also pay interest in the last year b) Drumstick is lending money to the investors. c) Drumstick will record bonds payable of $10,000.

b) Drumstick is lending money to the investors.

Which of the following statements about long term asset values is true? b) Most companies test for impairment annually. c) The first test for impairment is to compare the fair market value to the initial cost of the asset.

b) Most companies test for impairment annually.

An increase in accumulated depreciation a) increases total assets. b) decreases total assets. c) decreases the current ratio.

b) decreases total assets.

Salvage value (or residual value) is b) the estimated amount that can be recovered when the asset is sold, traded, or scrapped. d) a physical obsolescence condition.

b) the estimated amount that can be recovered when the asset is sold, traded, or scrapped.

Why do accountants need to know how to calculate present value and future values? b)Because these calculations help business owners make a variety of business decisions. c) Because PV and FV are used in matching revenues and expenses.

b)Because these calculations help business owners make a variety of business decisions.

During 2010 Jump Inc. sold trampolines to their customers for $72,000. The trampolines come with an extended warranty that covers general defects and certain repairs. Based on past history the company estimates that warranty claims costing 5% of sales will ultimately be claimed by customers. The company follows U.S. GAAP when preparing its financial statements. What entries should be made by Jump Inc. during 2010 related to the warranty promises: a. The company should record only the amount of the actual warranty costs paid during 2010. b. The company should record warranty expense and warranty liability of $3,600. c. The company should treat the warranty expense as a contingent liability and should consult with their attorneys to determine the amount of the expected loss. d. Record sales $72,000 and allowance for bad debt of $3,600.

b. The company should record warranty expense and warranty liability of $3,600.

A lawsuit for damages of $2,000,000 was filed against Unlucky Corporation on March 1, 2009 by Winner Corporation. Unlucky's lawyers believe it is highly probable that Unlucky will lose this lawsuit. The lawyers believe the loss will range between $1,500,000 and $1,800,000. Settlement is expected to occur in early 2010. What accounting entry is needed for Unlucky Corporation for the year ending December 31, 2009? c) Accrue a contingent liability of $1,500,000 e) No disclosure or accrual necessary since the lawsuit will not be settled until 2010

c) Accrue a contingent liability of $1,500,000 Use lower end of estimate if no "best" estimate is given

A lawsuit for damages of $100,000 was filed against Platter Corporation on July 1, 2013 by Cranberry Corporation. Platter's lawyers believe it is highly probable that Platter will lose this lawsuit. The lawyers believe the loss will range between $110,000 and $150,000. Settlement is expected to occur in early 2014. What accounting entry will be made by Platter Corporation for the year ending December 31, 2013? c) Accrue a contingent liability of $110,000 e) No disclosure or accrual necessary since the lawsuit will not be settled until 2014

c) Accrue a contingent liability of $110,000

A suit for breach of contract seeking damages of $2,000,000 was filed against Doug's Range Rovers on March 1, 2003. Doug's legal counsel believes that an unfavorable outcome is highly probable. A reasonable estimate of the court's award to the plaintiff is $600,000. Settlement is expected to occur during the latter part of 2003. What accounting is necessary for the year ending June 30, 2003? b) Accrue a contingent liability of $2,000,000 and provide note disclosure explaining the contingency c) Accrue a contingent liability of $600,000 and provide note disclosure explaining the contingency

c) Accrue a contingent liability of $600,000 and provide note disclosure explaining the contingency

Which one of the following depreciation methods will typically result in the smallest amount of taxes paid during the early periods of an asset's life? c) Double-declining-balance d) Straight-line

c) Double-declining-balance

Which of the following situations will NOT result in a liability on Mayflower Inc.'s 12/31/2013 balance sheet? c) Mayflower Corp. sues one of its competitors for patent violations. Mayflower's attorney's feel there is a high probability the company will win the lawsuit and be awarded a gain of $10,000. Don't record gain contingenies.

c) Mayflower Corp. sues one of its competitors for patent violations. Mayflower's attorney's feel there is a high probability the company will win the lawsuit and be awarded a gain of $10,000. Don't record gain contingenies.

The sum of the balance of a "Fixed Asset" account and the related accumulated depreciation account is termed a)market value. b)contra asset. c) net book value or book value.

c) net book value or book value.

The interest rate used to calculate the interest paid by the borrower under a note payable agreement is a. the market rate of interest. b. the effective interest rate. c. the stated interest rate.

c. the stated interest rate.

Present value... I. Is the opposite of future value II. Is today's value of a future amount or payment III. Is always less than future value (assume interest rates are positive) a) I only b)II only c) I and II d)I and III e) I, II, and III

e) I, II, and III

The process of allocating the cost of plant and equipment over the time period they are used is referred to as

depreciation.

Which of the following does not equal the proceeds received from issuing bonds? a) The bond issuance amount. b) The present value of the cash interest payments plus the present value of the maturity amount of the bond. c) The face value of the bond less the initial discount or plus the initial premium. d) The initial net book value of the bond. e) All of the above are the same as the amount of the bond proceeds.

e) All of the above are the same as the amount of the bond proceeds.

Timothy Corporation had the following expenditures related to a building used in its manufacturing center. Which of these expenditures should be capitalized on the balance sheet and depreciated over the building's useful life? I. $150,000 initial cost of building (useful life of 30 years) II. $1,000 cost of cleaning and maintenance in the building. III. $3,000 of painting costs completed during the building's 5th year. IV. $500 for replacement of damaged lighting during the building's 7th year. V. $25,000 porch added to the front of the building during the buildings 2nd year (porch should last 10 years) a) I, II, III, IV, V b) I, III, V c) I, II, III, & V d) I & III e) I, V

e) I, V

Righteous Sisters borrowed $30,000 from the bank by signing a 9-month note payable. The proper accounting treatment of recording the note will

increase assets and liabilities.

Interest expense is calculated by multiplying the stated rate of interest by the maturity value if the note payable if it is issued at

par.

Contingent liabilities whose ultimate payment is highly probable and is able to be estimated must be

recorded in the body of the balance sheet.