ACC 1100 Small Business Accounting (Chapter 2 - 5)

Identify a reason for a firm being ready to pay more for a business than the fair value of its net assets.

The business being purchased has been able to earn a greater than average rate of return on its invested net assets.

common stock is an exampled of what is sometimes referred to as ______ capital

contributed

Which of the following items are capitalized as part of the cost of land acquired? Cost of razing an old building on the land, net of salvage proceeds Title fees Cost of architectural drawings for the construction of a building on the land Purchase price of the land Legal fees Depreciation of the land

cost of razing an old building on the land, net of salvage proceeds - title fees - purchase price of the land - legal fees

Additional paid-in capital account is _____ (debited/credited) for the excess of the market value per share over the par value per share

credited

Towns Co. purchased Timber Inc. for $4,200,000 in cash. The fair value of the net acquired assets were as follows: Inventory = $700,000; Land = $1,000,000; Buildings = $2,000,000; and Notes Payable = $400,000 (Towns Co. assumed the note in full). As a result of this transaction, Towns Co. would:

debit Goodwill for $900,000

Which of the following accounts are examples of intangible assets?

leaseholds customer lists copyrights goodwill

Under U.S. GAAP, goodwill is:

not amortized, but tested annually for impairment

An expenditure should be capitalized if the acquired item will have an economic benefit to the entity that extends beyond the current fiscal year. An example of this is: purchase of machinery research and development costs rent of an office building preventative maintenance costs

purchase of machinery

If the total assets is equal to $10,000, and the total stockholders' equity is equal to $3,000, then: the net income is equal to $7,000 the total liabilities is equal to $7,000 the total current liabilities is equal to $7,000 the total revenues is equal to $7,000

the total liabilities is equal to $7,000

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. The balance of the Accumulated Depreciation account at the end of Year 1 (the first year of the asset's life) under the units-of-production method would be:

(0.50 per mile x total miles driven during Year 1)

Regarding the MACRS rules of calculating depreciation for income tax purposes, which of the following statements are true? (Check all that apply). - The MACRS rules provide accelerated deductions relative to the straight-line alternative. - The MACRS rules eliminate the need to estimate an asset's salvage value. - The MACRS rules must also be used for financial statement purposes if they are used for income tax purposes. - The MACRS rules are based on the units-of-production method. - The MACRS rules simplify the calculation of the useful life of assets relative to the straight-line alternative.

- The MACRS rules provide accelerated deductions relative to the straight-line alternative. - The MACRS rules eliminate the need to estimate an asset's salvage value. - The MACRS rules simplify the calculation of the useful life of assets relative to the straight-line alternative.

paid-in capital includes: - preferred stock - additional paid-in capital - common stock - retained earnings - treasury stock

- preferred stock - additional paid-in capital - common stock

Firm B has $3, $50 par value cumulative preferred stock, 50,000 shares authorized and issued, and 40,000 shares outstanding. Dividends are paid quarterly, and no dividends are in arrears. The quarterly dividend requirement is:

40,000 x $3 x 3/12 = $30,000

The sum of the cash on hand in the petty cash box and the receipts in support of disbursements (called petty cash vouchers): should equal the amount initially put in the petty cash fund. should periodically be closed at the end of the year to Retained Earnings. should equal the balance of the Cash account in the general ledger. should equal the amount reported as net cash flows from operations.

should equal the amount initially put in the petty cash fund.

Some firms assign a _____ (slate/stated/legal) value per share, which is essentially par value by a different name

stated

For income tax purposes, most firms use the MACRS rates for determining depreciation deductions because:

the MACRS rates provide accelerated deductions relative to the straight-line alternative

When land is sold, a gain or loss will be reported on the income statement for an amount equal to: the difference between the selling price and the market value of the land. the difference between the replacement cost of the land and the market value of the land. the difference between the selling price and the cost of the land. the difference between the replacement cost of the land and the cost of the land.

the difference between the selling price and the cost of the land

when land is sold, a gain or loss will be reported on the income statement for an amount equal to: - the difference between the selling price and the market value of the land. - the difference between the replacement cost of the land and the market value of the land. - the difference between the selling price and the cost of the land. - the difference between the replacement cost of the land and the cost of the land.

the difference between the selling price and the cost of the land

The difference between the gross and net methods of recording the accounts payable relates to: the amount of cash discounts allowed. both the timing of the recognition of cash discounts and the amount of cash discounts allowed. the timing of the recognition of cash discounts. neither the timing of the recognition of cash discounts nor the amount of cash discounts allowed.

the timing of the recognition of cash discounts.

If the total assets is equal to $15,000 and the total liabilities is equal to $9,000, then the total assets is overvalued by $6,000. the total stockholders' equity is equal to $6,000. the total liabilities is undervalued by $6,000. the total stockholders' equity is equal to $24,000.

the total stockholders' equity is equal to $6,000

Buildings and equipment are recorded at their original cost, which includes the purchase price plus all ordinary and necessary costs incurred: to get the building or equipment ready for its use in the operations of the firm. to obtain legal title to the building or equipment. to get the building or equipment ready for sale in the ordinary course of business. to use the building or equipment in a manner that will enhance the firm's profitability.

to get the building or equipment ready for its use in the operations of the firm.

When the tenant of an office building makes modifications to the office space, the cost of these modifications is a capital expenditure to be amortized over their useful life _____.

to the tenant or over the life of the lease, whichever is shorter

Current maturities of long-term debt are a current liability representing that portion of long-term debt that:

will be maturing within a year of the balance sheet date.

Current assets include cash and other assets that are expected to be converted to cash or used up: within a year, or an operating cycle, whichever is longer. within a year, or an operating cycle, whichever is shorter. within a year. within an operating cycle.

within a year, or an operating cycle, whichever is longer.

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. The balance of the Accumulated Depreciation account at the end of Year 1 (the first year of the asset's life) under the double-declining-balance method would be:

$24,000

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life to Velco of 5 years and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. The balance of the Accumulated Depreciation account at the end of Year 3 (the third year of the asset's life) under the straight-line method would be:

$30,000

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. The balance of the Accumulated Depreciation account at the end of Year 2 (the second year of the asset's life) under the double-declining-balance method would be:

$38,000

Assume that land, buildings, and equipment were acquired for a lump-sum purchase price of $100,000. Appraised values were as follows: land, $40,000; buildings, $100,000; and equipment, $20,000. Buildings would be recorded for: $62,500. $60,000. $50,000. $100,000.

$62,500 (reason: $62,500 = (100,000 / (40,000 + 100,00 + 20,000)) = 62.5% * 100,000

If a parcel of land was acquired for $50,000 in Year 1 and sold for $120,000 in Year 10, a _____. gain on the sale of land would be recognized in Year 10 for $70,000 less any depreciation recorded between Year 1 and Year 10. $70,000 gain would be recognized gradually between Year 1 and Year 10 as the land appreciated, based on appraisal values. gain on the sale of land would be recognized in Year 10 for $120,000 less the most recent appraisal value of the land. $70,000 gain on the sale of land would be recognized in Year 10.

$70,000 gain would be recognized gradually between Year 1 and Year 10 as the land appreciated, based on appraisal values.

common stockholders: - are the ultimate owners of the corporation; they have a residual ownership claim to the corporation's asset - experience no upper limit to the value of their ownership interests - generally assume considerably less risk than do bondholders

- are the ultimate owners of the corporation; they have a residual ownership claim to the corporation's asset - experience no upper limit to the value of their ownership interests

Common stockholders: - do not have any personal liability for corporate debts and thus cannot be forced by creditors to invest additional amounts to make up for losses. - have a claim to all assets that remain in the entity after all liabilities and preferred stock claims have been satisfied. - are entitled to receive specific predetermined amounts of dividends each year, either as a dollar amount or percentage of par value.

- do not have any personal liability for corporate debts and thus cannot be forced by creditors to invest additional amounts to make up for losses. - have a claim to all assets that remain in the entity after all liabilities and preferred stock claims have been satisfied.

Buildings and equipment are recorded at their original cost, which includes the purchase price plus: material, labor, and overhead costs for equipment made by a firm's own employees. the cost of paving a parking lot next to the building and lighting for the parking lot. installation and shakedown costs. interest costs incurred during the construction phase of a building. the cost of the land that is being used for the building's construction site.

- installation and shakedown costs- interest costs incurred during the construction phase of a building- material, labor and overhead costs for equipment made by a firm's own employees

stockholders' equity captions usually seen in a balance sheet include - treasury stock - common stock - foreign currency translation adjustment - additional paid-in capital - bonds payable - cost of goods sold

- paid in capital - treasury stock - common stock - additional paid-in capital

Stockholders' equity captions usually seen in a balance sheet include:

- retained earnings - accumulated other comprehensive income (loss) - preferred stock

Which of the following factors are normally considered in determining whether to capitalize or to expense an expenditure? The potential income tax reduction in the current year that results from expensing the item Whether the purchased item will provide economic benefits to the entity that extend beyond the current year Whether the purchased item represents a material expenditure to the company Whether the expenditure helps to fulfill the company's social responsibilities

- whether the purchased item represents a material expenditure to the company- the potential income tax reduction in the current year that results from expensing the item- whether the purchased item will provide economics benefits to the entity that extend beyond the current year

Wiggs Co. purchased Wolves Inc. for $6,000,000 in cash. The fair value of the net acquired assets were as follows: Inventory = $1,500,000; Land = $1,000,000; Buildings = $2,000,000; and Mortgage Payable = $600,000 (Wiggs Co. assumed the mortgage in full). As a result of this transaction, Wiggs Co. would report goodwill for:

2,100,000

Which of the following statements are true about the assets of a firm? Assets are probable future economic benefits to the firm. Assets result from past transactions or events of the firm. Assets must be tangible to be recorded on the balance sheet of a firm. Assets represent the amount of resources controlled by the firm. The economic benefits associated with assets must be obtained or controlled by the firm. Accounts receivable are not assets because the cash has not yet been received by a firm.

Assets are probable future economic benefits to the firm Assets represent the amount of resources controlled by the firm the economic benefis associated with assets must be obtained or controlled by the firm

The entry to record a short-term borrowing is: Dr. Cash Cr. other financing sources dr. cash cr. bonds payable dr. cash cr. short term debt dr. notes receivable cr. short term debt

DR cash CR short-term debt

Identify the correct statements about accounting for depletion of natural resources.

Depletion expense allowed for federal income tax purposes frequently differs from that recognized for financial accounting purposes. Depletion expense is recorded in the income statement for the related natural resources.

Stills Inc. leases a machine and agrees to make annual lease payments of $14,000 for 3 years. The present value of all of the lease payments is $38,000. The entry to record this transaction is:

Dr Equipment 38,000 Cr Lease Liability 38,000

Crosby Co. leases a machine and agrees to make annual lease payments of $11,000 for 5 years. The present value of all of the lease payments is $40,000. The entry to record this transaction is:

Dr. Equipment 40,000 Cr. Lease Liability 40,000

the entry to record accrued interest in the borrower's book is: dr. interest expense cr. interest income dr. interest expense cr. interest payable dr. interest receivable cr. interest income dr. interest expense cr. cash

Dr. Interest Expense Cr. Interest Payable

At the inception of a financing lease, the financial statements effects are:

Dr. noncurrent asset Cr. noncurrent liability

Which of the following statements are true about liabilities of a firm? Liabilities are amounts owed to other entities. Liabilities include accounts receivable, merchandise inventory, and accounts payable. Liabilities are reported in the income statement. Liabilities are claims against the firm by its creditors. Liabilities are present obligations to transfer assets or provide services to other organizations.

Liabilities are amounts owed to other entities. Liabilities are claims against the firm by its creditors Liabilities are present obligations to transfer assets or provide services to other organizations

Which of the following statements are true about liabilities of a firm? Liabilities represent the amount of resources controlled by the firm Liabilities are probable future sacrifices of economic benefits Liabilities are sometimes referred to as owners' equity Accounts payable is an example of liabilities

Liabilities are probable future sacrifices of economic benefits Accounts payable is an example of liabilities

Which of the following is true regarding the balance sheet components? Assets are the obligations of the organization. Stockholders' equity are the owners' claims to the organization's liabilities. Liabilities are the obligations of the organization. Liabilities are the resources of the organization.

Liabilities are the obligations of the organization

Which of the following statements is true about goodwill once it is considered to be partially impaired and has been written down to its partially impaired value?

No subsequent upward adjustments are permitted for recoveries of fair value.

Which of the following statements are true regarding common stock terminology? If a firm issues true no-par-value stock, any amounts received above $10 per share are recorded as additional paid-in capital. Some firms assign a stated value per share, which is effectively treated the same as the par value per share. In most states, stockholders' equity cannot be reduced below the legal capital of the corporation by paying dividends or purchasing treasury stock.

Some firms assign a stated value per share, which is effectively treated the same as the par value per share. In most states, stockholders' equity cannot be reduced below the legal capital of the corporation by paying dividends or purchasing treasury stock.

Which of the following are true of intangible assets? The cost of obtaining intangible assets should be capitalized. Intangible assets are amortized over their remaining useful life or their statutory life, whichever is longer. Intangible assets are amortized over their remaining useful life or their statutory life, whichever is shorter.

The cost of obtaining intangible assets should be capitalized. Intangible assets are amortized over their remaining useful life or their statutory life, whichever is shorter.

Identify a true statement about goodwill that is considered to be impaired and has been written down to its impaired fair value.

The impaired fair value would become the new book value that would be used as the reference to determine further impairment in future years.

Which of the following statements is true regarding what each financial statement of an entity reports? The income statement reports an entity's earnings for a period. The balance sheet reports an entity's financial position at the end of a period. The statement of stockholders' equity reports the financial position at the end of a period. The balance sheet reports the entity's earnings for a period. The statement of cash flows reports the entity's cash flows during a period.

The income statement reports an entity's earnings for a period The balance sheet reports an entity's financial position at the end of a period The statement of cash flows reports the entity's cash flows during a period

accumulated depreciation is: - a contra asset account - a revenue account - an expense account - a liability account

a contra asset account

One of the effects of a goodwill impairment loss on the financial statements is that:

a loss is recognized, which decreases net income

Stockholders' equity captions usually seen in a balance sheet include: accumulated other comprehensive income (loss) deferred income taxes sales accumulated depreciation preferred stock

accumulated other comprehensive income (loss) retained earnings preferred stock

Leasehold improvements made with respect to leased assets are recorded as:

assets by the lessee for the cost of expenditures properly capitalized.

The balance sheet is a listing of the organization's: assets, liabilities, and stockholders' equity assets, liabilities, revenues, and expenses assets, liabilities, and revenues revenues, expenses, gains, and losses

assets, liabilities, and stockholders' equity

Stockholders' equity is the ownership right of the stockholders ________________ in the that remain after subtracting the ____________ of the corporation.

assets; liabilities

The maximum number of shares the corporation is legally approved to issue is the number of shares _______ (authorized/issued/outstanding).

authorized

An entity's financial position at the end of a reporting period is reported on the: balance sheet statement of cash flows income statement statement of stockholders' equity

balance sheet

identify the impacts of a short term borrowing on the financial statements current assets increase retained earnings increase cash increases net income increases current liabilities increase working capital increases

cash increases current assets increase current liabilities increase

The amount in the Cash account, which is reported as an asset on the balance sheet, includes: checking account balances undeposited receipts including checks money on hand in petty cash funds IOUs from credit worthy customers supplies on hand savings account balances

checking account balances money on hand in petty cash funds undeposited receipts including checks savings account balances

A machine that cost $7,000 when new and had a net book value of $2,000 was sold for $1,400. The journal entry to record the sale of the machine would include a:

credit to machine for $7,000

Equipment that cost $16,000 when new and had $12,000 of accumulated depreciation was sold at a loss of $300. The journal entry to record the sale of the equipment would include all of the following except:

debit to accumulated depreciation for $4,000

Furniture that cost $10,000 when new and had $4,000 of accumulated depreciation was sold at a gain of $1,200. The journal entry to record the sale of the furniture would include all of the following except:

debit to gain on sale of furniture for $1,200

Preferred stock is different from common stock in that preferred stock:

does not generally have voting rights has a limited claim on the company's assets in the event of liquidation has several debt-like features

the entry made to record the impairment of goodwill is:

dr goodwill impairment loss cr. goodwill

The entry to record accrued interest in the borrower's books has which of the following effects on the financial statements?

expenses are increased net income is decreased current liabilities are increased

Maintenance expenditures should be capitalized if they:

extend the useful life and/or increase the salvage value of an asset

Goodwill results from the purchase of one firm by another:

for a price that is greater than the fair value of the net assets acquired.

Which of the following accounts are examples of intangible assets? trademarks patents prepaid insurance franchises brand names accounts receivable

franchises brand names patents trademarks

A truck that cost $43,000 was sold for $25,000 at a time when it's net book value was $14,000. As a result of this transaction, the company would have recorded a:

gain on sale of truck for $11,000

Relative to the straight-line method, the effects of using an accelerated depreciation method during inflationary times are:

greater amounts reported as depreciation expense and lower amounts reported as net income.

Current maturities of long-term debt are reported _____. in the concurrent liability section along with long-term debt in the noncurrent liability section but separately from long -term debt in the current liability section but separately from short-term debt in the current liability section along with short-term debt

in the current liability section but separately from short-term debt

An entity's earnings for a reporting period are reported on the: statement of stockholders' equity statement of cash flows balance sheet income statement

income statement

At the inception of a financing lease, the financial statements effects are to:

increase noncurrent assets and noncurrent liabilities by equal amounts with no effect on stockholders' equity.

Taking the following list on an item-by-item basis (i.e., without considering the other listed factors), a maintenance expenditure should be capitalized if the expenditure: - is required by law or regulation - increases the salvage value of the asset - extends the useful life of the asset - is material in amount

increases the salvage value of the asset. extends the useful life of the asset.

Over the life of a financing lease, which of the following effects occur on the income statement of the lessee? - rent expense is debited (increased) on an annual basis - interest expense is debited (increased) on an annual basis - Interest income is credited (increased) on an annual basis. - Depreciation expense is debited (increased) on an annual basis. - Accumulated depreciation is credited (increased) on an annual basis.

interest expense is debited (increased) on an annual basis depreciation expense is debited (increased) on an annual basis

The balance sheet: is like a movie of the organization's progress over a period of time, such as a year. focuses on the organization's cash flows at a specific point in time. is like a snapshot of the organization's financial position, frozen at a specific point in time. focuses on the organization's earnings for a period of time.

is like a snapshot of the organization's financial position, frozen at a specific point in time.

Stockholders' equity: is the equity in the assets that remain after subtracting the liabilities. is sometimes referred to as net assets. is sometimes referred to as owners' equity. is sometimes referred to as net sales. is sometimes referred to as net income. is sometimes referred to as net worth. is measured as the fair value of the shareholders' equity interests in the corporation's assets.

is the equity in the assets that remain after subtracting the liabilities is sometimes referred to as net assets is sometimes referred to as owners' equity is sometimes referred to as net worth

The number of _______ (authorized/issued/treasury) shares is the number of shares of stock that have actually been transferred from the corporation to the stockholders.

issued

If the book value of goodwill does not exceed its fair value, goodwill _____.

it is not considered impaired

When using an accelerated depreciation method during inflationary times, in the later years of an asset's life, depreciation expense will be _____. less than it would be using the straight-line depreciation method and net income would be lower. less than it would be using the straight-line depreciation method and net income would be higher. more than it would be using the straight-line depreciation method and net income would be higher. more than it would be using the straight-line depreciation method and net income would be lower.

less than it would be using the straight-line depreciation method and income would be higher

When using an accelerated depreciation method during inflationary times, in the later years of an asset's life, depreciation expense will be _____. more than it would be using the straight-line depreciation method and net income would be higher more than it would be using the straight-line depreciation method and net income would be lower less than it would be using the straight-line depreciation method and net income would be lower less than it would be using the straight-line depreciation method and net income would be higher

less than it would be using the straight-line depreciation method and net income would be higher

A basket purchase transaction results when two or more concurrent assets are purchased for a lump-sum purchase price that is: - less than the total book value of the individual assets acquired. - greater than the total book value of the individual assets acquired. - less than the total appraised fair value of the individual assets acquired. - greater than the total appraisal fair value of the individual assets acquired.

less than the total appraised fair value of the individual assets acquired.

building .... $300,000 __________ ______ ... _______ net book value of building .... $180,000

less: accumulated depreciation (120,000)

A machine that cost $32,000 was sold for $24,000 at a time when it's net book value was $29,000. As a result of this transaction, the company would have recorded a:

loss on sale of machine for $5,000

if a parcel of land that costs $130,000 last year was sold for $110,000 this year, a ____

loss on the sale of the land of $20,000 would be recognized this year

Cash account is debited for the ______ (market/par) value per share of common stock issued.

market

identify the impact of recording the cash received in advance from customers Cash increases. working capital increases current liabilities increase unearned revenues are recorded and this increases net income net income is not affected

net income is not affected current liabilities increase cash increases

Depletion is usually recognized:

on a straight-line basis

Accounts payable are normally shown: on the balance sheet as a current liability, net of anticipated cash discounts. on the balance sheet as a noncurrent liability, but not reduced by anticipated cash discounts. on the income statement as an expense, but not reduced by anticipated cash discounts. on the balance sheet as a current liability, but not reduced by anticipated cash discounts.

on the balance sheet as a current liability, but not reduced by anticipated cash discounts.

Land that is owned and used in the operations of the firm is shown on the balance sheet as its: replacement cost original cost original cost less accumulated depreciation current market value

original cost

In most states, the _____ (par/stated/slate) value per share represents the legal capital on the corporation.

par

Intangible assets include:

patents, trademarks, copyrights, and customer lists.

Assets are _____________ future economic benefits obtained or controlled by a particular entity as a result of _______ transactions or events.

probable; past

Calculate the amount of interest (straight basis) on a 6-month loan of $2,000 at a 15 percent interest rate

$2,000 x 0.15 x 6/12 (interest calculation straight-basis: interest = principal x rate x time (in years)

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life to Velco of 5 years and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. Depreciation expense for Year 3 (the third year of the asset's life) under the straight-line method would be:

$10,000

Assume that land, buildings, and equipment were acquired for a lump-sum purchase price of $100,000. Appraised values were as follows: land, $40,000; buildings, $100,000; and equipment, $20,000. Equipment would be recorded for:

$12,500 (reasoning: $12,500 = $20,000 / ($40,000 + $100,000 + $20,000)) = 12.5% x $100,000 .... pg 191)

Calculate the amount of interest (straight basis) on a 2-year loan of $2,000 at a 15 percent interest rate.

$2,000 x 0.15 x 2 = $600