acc210 exam 4

if sales revenue = $500,000 and A/R increased by $25,000 cash received from customers on a direct method SCF equals

$475,000

For bonds issued at a discount or at a premium to face value, in each successive entry to recognize interest expense

Both the discount and the premium amortizations will be higher

Which of the following statements best describes the purpose of a statement of cash flows for a corporation?

Its purpose is to summarize the company's cash inflows and cash outflows for the year

which of the following would be classified as an financing activity

borrowing cash from a bank to be used to buy land

Bonds which permit the issuing company to pay the bondholders back before the bonds' scheduled maturity date are called:

callable bonds

Repurchased shares which a company has bought back from stockholders with the intention of reissuing at a later date are known as:

treasury shares

accounting for bond retirements - prior to maturity (early retirement) example

(left) bonds payable 100,000 loss on retirement 10,000 (right) discount on B/P 5,000 cash 105,000

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 5%. The market rate of interest is 3%. Price = $124,016 journal entry

1/1/2022 (left) cash 124,016 (right) premium on B/P 24,016 bonds payable 100,000 6/30/2022 (left) interest expense 1,860 premium on B/P 640 (right) cash 2,500 1860 = 124016 x .03 x 6/12 2500 = 100,000 x .05 x 6/12 640 balances entry

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 6%. The market rate of interest is 7%. Price = $90,804 journal entry

1/1/2022 (left) cash 90,804 discount on B/P 9,196 (right) bonds payable 100,000 6/30/2022 (left) interest expense 3,178 (right) discount on B/P 178 cash 3,000 3178 = 90,804 x .07 x 6/12 3000 = 100,000 x .06 x 6/12 178 = balances journal entry

A corporation declares and distributes a 20% stock dividend at a time when there are 10,000 shares outstanding (before the dividend). The common stock has a par value of $1/share and a market value of $15/share. What will be the debit made to retained earnings to record this stock dividend?

10,000 shares x 20% = 2,000 shares x $15/share = $30,000.

A corporation has cumulative preferred stock outstanding with an annual dividend of $12,000. If no dividends were paid in the two prior years, and a $50,000 dividend is declared this year, how much goes to common stockholders?

14,000 Dividends in arrears = $24,000 ($12,000 x 2 prior years). The current year dividend of $12,000 must also be paid so $36,000 goes to preferred shareholders. These leaves $14,000 for the common stockholders

Glenwood Corp. reported net sales of $400,000 on its income statement for 20X6.Question: If its accounts receivable balance increased by $25,000 from the beginning to the end of 20X6, how much cash did Glenwood collect from customers in 20X6? Do not use decimals or cents in your response.

375000

On 1/1/X1, Jupiter Corp. pays $40,000 to retire its bonds early. At the time of the retirement, the bonds have a face value of $42,000 and a carrying value of $45,000. Question: What should be the amount of gain or loss, if any, the company will record as a result of the early retirement?

5,000 gain

Tar Heel, Inc. retires a $15 million (face value) bond issue when the carrying value of the bonds is $13 million, but the market value of the bonds is $17 million. The entry to record the retirement will include:

A loss of $4 million

To determine a bond price on the issue date we will need to use:

Both the PV of $1 table and the PV of an annuity table

What is the effect on cash when a company records depreciation expense for the year?

Cash does not change

For cash dividends, what is the correct order chronologically (which comes first, then next, and then next)?

Declaration date, Record date, Payment date

James Corp. only has common stock outstanding. For 20X5 and 20X6, it generated the same amount of net income; however, it had more shares outstanding in 20X6 than in 20X5. As a result, which of the following statements is true regarding its earning per share (EPS)?

EPS for 20X6 will be lower

When bonds are issued at a premium and the effective interest method is used for amortization of the premium, at each subsequent interest payment date, the cash paid is

Greater than the interest expense recognized

if I've invested $10,000 in a corporation that declares bankruptcy

I could lose the entire $10,000

Quark Corp. issues bonds on January 1, 2020 with a face value of $100,000, a coupon (stated) rate of 8%, and they mature in ten years. The market rate is 10% on January 1, 2020. The bonds sell for $87,538 and pay interest semi-annually on 6/30 and 12/31 each year. What is the amount of interest expense recognized by Quark on June 30, 2020?

Interest expense = carrying value x market rate x time Interest expense = $87,538 x .10 x 6/12 = $4,377

At any time, a Bond's Carrying Value Equals

Original issue price adjusted for any amortization of a discount or premium

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 5%. The market rate of interest is 3%. Price = ?

PV annuity (n=30 I= 1.5%) payment = 100,000 x 5% x 6/12 = 2,500 plus PV lump sum of 100,000 (n=30 I= 1.5%) 2,500 x 24.01584 = 60,040 100,000 x .63976 = 63,976 $124,016 (premium)

Which of the following transactions would generally result in an investing cash inflow?

Receive cash from the sale of land

Durham Corp.'s is a local service-oriented company. All of its sales are on account. If Durham's "Accounts Receivable" balances on 1/1/X6 and 12/31/X6 were $40,000 and $48,000, respectively, what can we determine about the dollar amount of sales on account relative to the dollar amount of cash collections on account for the year?

Sales on account were higher than cash collections on account

A $500,000 bond issue was sold for $490,000. Therefore, the bonds:

Sold at a discount because the market interest rate was higher than the coupon (stated) rate

Which of the following types of information is required to be included in a corporation's articles of incorporation (also known as its corporate charter)? (select all that apply

The correct answers are: the nature of the corporation's primary business activities, the types of shares to be issued, information regarding its board of directors

Which of the following is NOT one of the fundamental rights possessed by common stockholders?

The right to make hiring and firing decisions with respect to the senior executive team (e.g., the CEO and his/her senior leadership team)

The direct and indirect methods are two allowable methods a company can choose from when presenting the operating activity section of its statement of cash flows. Which of the following statements is correct with respect to the net cash flows from operating activities amount computed by these methods?

The two methods should produce the same net cash flows from operating activities amount.

Which of the following are common reasons for why a particular company would buy back its own stock? (check all that apply)

To raise the market price of its stock., To distribute excess cash to existing stockholders without paying them a dividend., To increase earnings per share., To satisfy employee stock ownership plans.

Seaside issues a bond with a coupon (stated) interest rate of 10%, face value of $500,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond?

Use n = 10 and i = 4% for Table 2 and 4 factors PV of payments (4) = $25,000 x 8.11090 = $202,773 PV of face value (2) = $500,000 x .67556 = $337,780 Price = $202, 773 + 337,780 = $540,553 The correct answer is: $540,553

if using the indirect method, what is the required adjustment if the inventory balance decreased by 50,000 this year

add $50,000 to net income

Indicate whether each of the following attributes is an advantage or disadvantage of the publicly-held corporate form of business when compared to sole proprietorships and partnerships. Ability to raise capital Volume of paperwork supplied to outside entities Limited legal liability The ease in which ownership can be transferred Taxation

advantage disadvantage advantage advantage disadvantage

private corporations

are NOT regulated by the sec

The total number of shares a corporation may sell or issue is known as:

authorized number of shares

"As time goes by, the principal portion of each installment payment should ___

be increasing

A/R - 1/1 = $250,000 A/R - 12/31 = $180,000 sales revenue = $1,000,000 how much cash was received?

cash (left) 1,070,000 A/R (right) 70,000 sales revenue (right) 1,000,000

A/R - 1/1 = $175,000 A/R - 12/31 = $275,000 sales revenue = $1,500,000 how much cash was received?

cash (left) 1,400,000 a/r(left) 100,000 sales revenue (right) 1,500,000

issued 1,000 shares of $1 par value common stock for $18,500 cash journal entry

cash (left) 18,500 common stock (right) 1,000 additional paid in capital (right) 17,500

reissued 200 shares of company treasure stock for $4,400 ($22 per share)

cash (left) 4,400 treasury stock (right) 4,000 additional paid in capital (right) 400

Inventory - 1/1 = $500,000 Inventory - 12/31 = $675,000 A/P - 1/1 = $350,000 A/P - 12/31 = $280,000 Cost of Goods Sold = $4,400,000 how much cash was spent buying inventory?

cogs (left) 4,400,000 inventory (left) 175,000 A/P (left) 70,000 cash (right) 4,645,000

the issuance of 1000 shares of $1 par value common stock for $12 cash per share will include a

credit to additional paid-in capital for $11,000

the purchase of 1000 company shares of $1 par value common stock for $11 cash per share will include a

debit to treasury stock for 11,000

Milton Corp. retired its bonds early which resulted in a loss of $80,000. Question: In the journal entry to record the retirement, how should the loss be recorded, and what will be the effect of the loss on the company's net income? a " loss" account should be ______ , and the loss will cause the company net income to _______

debited, decrease

When a company borrows funds from creditors, it is considered a form of:

debt financing

Assuming a term bond is issued at a premium, the interest expense amount calculated every period using the effective interest method should be ____

decreasing

A company issues a bond with a face value of $600,000 for an issue price of a $563,000. This bond is being issued at a:

discount

Which of the following is an example of a contra liability account?

discount on bonds payable

board of directors declared a $0.25 cash dividend (10,000 shares outstanding) journal entry

dividends (left) 2,500 dividends payable (right) 2,500

Operating activity cash flows exclude:

dividends paid

paid dividends to common stockholders of record journal entry

dividends payable (left) 2,500 cash (right) 2,500

For each of the situations described below, indicate whether the bond should be issued at face value, at a premium, or at a discount. If the bond's face interest rate is equal to the market rate of interest, it will be issued at: If the bond's face interest rate is greater than the market rate of interest, it will be issued at: If the bond's face interest rate is less than the market rate of interest, it will be issued at:

face value premium discount

True or False: If a company reports net income on its income statement, it should always report positive as opposed to negative cash flows from operating activities on its statement of cash flows.

false

True or False: When a company borrows money to finance the purchase of an asset to use in its business, one of their likely goals is to earn a rate of return on that asset which is lower than the interest rate on the loan borrowing.

false

True or False: All else being equal, as a company's debt to equity ratio increases, the lower the risk of bankruptcy.

false

True or False: Corporations are required to have a par value for their common stock.

false

True or False: When stock is issued for more than its par value, the excess is considered to be revenue and should be reported on the income statement.

false

When comparing common and preferred stock, indicate whether each of the following statements is true or false. Preferred shareholders are guaranteed to receive a dividend in any year in which the corporation makes a profit.

false

When comparing common and preferred stock, indicate whether each of the following statements is true or false. Preferred shareholders are guaranteed to receive a higher dividend amount than common shareholders

false

When deciding on whether to finance its operations through the issuance of stock or through the issuance of bonds, companies often consider tax effects. True or False: Both interest expense related to bonds as well as dividends paid are tax deductible.

false

From the corporation's perspective, the issuance of its stock is an example of which type of business activity?

financing

Hokie, Inc. reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $26,000 and $24,000, respectively. Assuming that all relevant information has been presented, Hokie's net cash flows from operating activities would be:

he two adjustments to net income would be to add $3,000 for the decrease in A/R and to subtract $2,000 for the decrease in A/P. $135,000 + $3,000 - $2,000 = $136,000

if a bond is issued at a discount the bonds carrying value will

increase until maturity date

Assuming a term bond is issued at a discount, the carrying value over time should be ___

increasing

Assuming a term bond is issued at either a premium or a discount, the carrying value on the issuance date should be equal to the bond's ____

issue price

Which of the following statements regarding an S-corporation is true

it cannot have more than 100 stockholders

Hillsborough Enterprises Inc.'s cash account balance went from $20,000 to $30,000 from the beginning to the end of its calendar year, respectively. Question: If it had net cash inflows from operating activities of $200,000 and net cash outflows from investing activities of $260,000, what were its net cash flows from financing activities?

it had cash net inflows from financing activities of $70,000

A convertible bond

may be converted to common stock at the discretion of the owner

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 5%. The market rate of interest is 3%. Entry for 12/31/2022?

new B/P carrying value : 100,000 + 23,376 = 123,376 12/31/2022 (left) interest expense 1851 premium on B/P 649 (right) cash 2500 1851 = 123,376 x .03 x 6/12 2500 = 100,000 x .05 x 6/12 649 balances entry

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 5%. The market rate of interest is 7%. Price = $81,608 journal entry

new B/P carrying value = 100,000 - 18,036 = 81,964 12/31/22 interest expense (left) 2,869 discount on B/P (right) 369 cash (right) 2,500 2869 = 81964 B/p value x .07 market rate x 6/12 2500 = 100,000 fv x .05 coupon x 6/12 369 balances journal entry

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 6%. The market rate of interest is 7%. entry for 12/31/2022?

new B/P carrying value = 100,000 x 9018 = 90,982 12/31/2022 (left) interest expense 3184 (right) discount on B/P 184 cash 3000 3184 - 90,082 x .07 x 6/12 3000 =100,000 x .06 x 6/12 184 = balances journal entry

When a company purchases Treasury Stock

one stockholders equity account increases and one asset account decreases

which section on the statement of cash flows appears first

operating activities

cash dividend receipts reported as

operating activity cash flow

From smallest to largest, which is the correct order in terms of number of shares involved?

outstanding, issued, authorized

which of the following would be classified as an investing activity

purchasing a new piece of equipment for cash

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 5%. The market rate of interest is 7%. Price = ?

pv annuity (n=30 I=3.5%) payment = 100,000 x 5% x 6/12 = 2,500 plus pv lump sum 100,000 (n=30 I=3.5%) 2,500 x 18.39205 = 45,980 100,000 x .35628 = 35,628 $81,608 (discount)

Assume that we issue $100,000 (face value) of bonds on 1/1/2022. These bonds pay interest semi-annually on 6/30 and 12/31 each year and mature in 15 years. The coupon rate is 6%. The market rate of interest is 7%. Price = ?

pv annuity 4 (n=30, I=3.5%) = 100,00 x 6% x 6/12 = 3,000 plus pv lump sum 2 (n=30, I=3.5%) 3,000 x 18.39205 = 55,176 100,000 x .35628 = 35,628 $90,804

Assuming a term bond is issued at a premium, the cash interest payment calculated every period should ____

stay the same

Bonds which require the full face value (principal) amount to be paid back on the bond's maturity date are called:

term bonds

Assume a company's income statement shows a "Loss on the Sale of Equipment" totaling $25,000.Question: How should this loss be treated on the reconciliation to adjust net income to net cash flows from operating activities?

the amount of the loss should be added to net income

If a Bond's coupon (stated) interest rate exceeds the market rate of interest on the issue date

the bond will sell for a premium

if a bond is retired before maturity date

the gain or loss = carrying value - price paid

Assuming a company has net income for the year, the end of year dollar balance in the "Total Stockholders' Equity" column of the statement of stockholders' equity should exactly match which of the following:

the total stockholders' equity balance on the balance sheet

True or False: Dividends return earnings made by the corporation to its stockholders.

true

True or False: The higher a company's times interest earned ratio, the more likely it is that the company can pay its interest obligations as they become due.

true

True or False: The main reason a company declares a stock split is to lower the market price per share of its stock.

true

When comparing common and preferred stock, indicate whether each of the following statements is true or false. For purposes of electing the company's board of directors, only common shareholders usually have a vote.

true

When comparing common and preferred stock, indicate whether each of the following statements is true or false. In a year in which dividends are declared, preferred stockholders receive their portion of dividends before common stockholders receive theirs.

true

Bonds which are not collateralized by specific assets in the event the borrowing company defaults on bond payments are called:

unsecured bonds

a corporation has cumulative preferred stock outstanding with an annual dividend of $5,000. if no dividends were paid in two prior years, and a $16,000 dividend is declared this year, how much goes to common stockholders?

$1,000