Accounting 206 Chp 9-13 VL

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 payments of $14,903 at the end of each year. The principal balance of the note on January 1, Year 2 is (round your answer to the nearest whole dollar).

$93, 097 Interest expense for Year 1 = $100,000 × .08 = $8,000 Principal reduction for Year 1= $14,903 - $8,000 = $6,903 Principal balance end of Year 1 or beginning of Year 2 = $100,000 - $6,903 = $93,097

Which of the following is normally included in the description of cumulative preferred stock when shown in the stockholders' equity section of the balance sheet?

**All of the items are included in the description shown on the balance sheet. - The par value of the stock - The number of shares authorized, issued, and outstanding - The amount of the dividend

Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400 of current liabilities and $2,600 of long-term liabilities shown on its Year 1 balance sheet. Based on this information Omar's debt to assets ratio is

0.75 Debt to Assets Ratio: Total Debt ÷ Total Assets = ($400 + $2,600) ÷ ($1,000 + $3,000) = .75

Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400 of current liabilities and $2,600 of long-term liabilities on its Year 1 balance sheet. Based on this information, Omar's current ratio is.

2.50 Current Ratio: Current Assets ÷ Current Liabilities = $1,000 ÷ $400 = 2.5

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7% payable in cash on December 31 of each year. Which of the following shows the journal entry required to recognize the bond issue on January 1, Year 1?

Cash = 50,000 -debit- Bonds Payable= 50,000 -credit-

A contingent liability is an actual obligation arising from a past event. This statement is

False

A current asset is an asset that is cash or an asset that will be converted into cash within one year or one operating cycle whichever is shorter.

False

All common stockholders have the same rights and privileges. This statement is

False

Assuming that a bond is originally issued at a discount, the carrying value of the bond liability will decrease over the life of the bond. This statement is

False

Paying cash to settle a salaries payable obligation will affect which section of the statement of cash flows?

Operating Activites

Which of the following first required corporations to file quarterly and annual financial statements that are prepared in accordance with Generally Accepted Accounting Principles?

Securities Act of 1934

Which of the following has a single owner?

Sole proprietorship

Select the FALSE statement from the following choices

The longer the number of days to sell inventory, the more liquid a company is.

A classified balance sheet separates assets and liabilities into categories that distinguish between accounts that are identified as current from those that are identified as long-term. This statement is

True

If a company pays interest, it can deduct the interest expense on its tax return, thereby reducing the amount of tax that must be paid. However, if the company pays a dividend, the dividend cannot be deducted on the tax return. These statements are

True

If investors require more interest than the rate of interest stated in a bond, the bond must be sold at a discount in order to motivate the investors to purchase the bond. This statement is

True

If the stated rate of interest of a bond is higher than the rate of interest paid on other bonds of equal risk, the bond will sell for more than face value. This statement is

True

In a business organized as a sole proprietorship, retained earnings and capital acquired from owners are combined is a single account. This statement is

True

Using debt to increase the return on equity is called financial leverage. This statement is

True

When a borrower makes a payment on an installment loan, a portion of the amount paid reduces the principal balance of the note payable. This statement is

True

The Redwood Company determined that its balance in its Accounts Receivable account represented 23% of total assets and that cost of goods sold represented 38% of total revenue. These findings are the result of

Vertical analysis. Vertical analysis uses common size financial statements that are developed by showing individual components of a financial statement as a percent of a key figure on that statement. For example, the accounts receivable balance may be shown as a percentage of total assets. The most common key figure used for the balance sheet is total assets. The most common key figure for the income statement is revenue.

Which of the following is not a common characteristic associated with preferred stock?

Voting rights.

Which of the following ratios is commonly used to measure liquidity?

Working capital ratio Current and quick ratios Accounts receivable turnover ratio Inventory turnover ratio

In general, common stockholders experience

greater risk and greater potential rewards than preferred stockholders.

The debt to asset ratio is a measure of

solvency.

The book value of a share of stock may be

All of the answers are correct. -equal to the market value of the stock. -less than the market value of the stock. -more than the market value of the stock.

According to GAAP a contingent liability can be classified as

All of the answers describe classifications of contingent liabilities.

Which of the following items is normally included in a bond certificate issued by a corporation?

All of the answers represent items that are normally included in a corporate bond certificate. - The face value of the bond - The stated rate of interest - The term to the maturity date

On January 1, Year 1 Graham Corporation issued 200 shares of $5 par value common stock for $40 per share. Which of the following journal entries shows how this event would be recorded on January 1, Year 1?

Cash 8,000 (debit) Common Stock 1,000 (credit) Additional Pain-in Capital in Excess of Par Value 7,000 (credit)

Which of the following is not a date associated with the declaration and payment of dividends?

Date of disposal

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows the journal entry necessary on November 1?

A journal entry is not required on the day of record.

The following information was drawn from the balance sheets of Dakota Company. Year 2 Year 1 Cash 22,000 20,000 Accounts receivable 66,600 60,000 Equipment 259,200 240,000 Land 141,700 130,000 Based on this information, which asset experienced the highest percentage of growth?

Accounts Receivable Change expressed as a percentage is calculated by establishing a base and comparing that point with some alternative. The percentage change is then calculated by the following formula: Percentage change = (Alternative - Base) ÷ Base; In this exercise the computation is as follows: Percentage change = (Amount in Year 2 - Amount in Year 1) ÷ Amount in Year 1 Growth in cash: (22,000 - 20,000) ÷ 20,000 = 10% Growth in accounts receivable: (66,600 - 60,000) ÷ 60,000 = 11% Growth in equipment: (259,200 - 240,000) ÷ 240,000 = 8% Growth in cash: (141,700 - 130,000) ÷ 130,000 = 9%

Which of the following entities receives cash when a company borrows money through a bond issue?

Issue

A provision of a bond certificate that requires a sinking fund is designed to protect the

Lender.

Which of the following is a disadvantage of a corporate form of business?

Double taxation

Each time a payment is made on an installment note, the portion of the next payment associated with interest expense increases. This statement is

False

If a corporation sells treasury stock for more than it paid to acquire the stock, it will record a gain that will be shown in the nonoperating section of the income statement. This statement is

False

On the balance sheet, paid-in excess accounts are normally shown after the retained earnings account. This statement is

False

Paying cash to settle a previously declared dividend will reduce the balance of the retained earnings account. This statement is

False

The entire cash outflow resulting from a payment on an installment loan is shown as a financing activity on the statement of cash flows. This statement is

False

The lender issues a bond certificate to the borrower. This statement is

False

The number of shares a corporation has outstanding may exceed the amount of shares authorized. This statement is

False

Treasury stock is listed as the first account under the stockholders' equity section of the balance sheet. This statement is

False

A company is not required to recognize or disclose a contingent liability that has a remote chance of actually occurring. This statement is

True

A company's profitability may suffer from holding too much working capital. This statement is

True

A corporation may have issued more shares of stock than it has outstanding. This statement is

True

Accrued interest expense will appear on the income statement but not on the statement of cash flows. This statement is

True

Assuming that a bond is originally issued at a premium, the carrying value of the bond liability will decrease over the life of the bond. This statement is

True

Both bonds payable and notes payable are obligations that usually arise from borrowing money. This statement is

True

Each time a payment is made on an installment note, the portion of the next payment associated with notes payable increases. This statement is

True

Horizontal analysis compares financial statement data across two or more accounting periods. This statement is

True

Partnerships are frequently managed by the owners of the business. This statement is

True

Percentage analysis sidesteps the materiality problems of comparing different size companies by measuring changes in percentages rather than absolute amounts. This statement is

True

The amount of revenue shown on the income statement may differ from the amount of cash inflow from operating activities shown on the statement of cash flows. This statement is

True

The length of an operating cycle is the time it takes to turn cash into inventory, then inventory into accounts receivable, and then accounts receivable back into cash. This statement is

True

The par value or stated value of stock represents the amount of legal capital that a corporation must maintain for the protection of the creditors. This statement is

True

The current ratio is calculated by

dividing current assets by current liabilities.

The debt to assets ratio is calculated by

dividing total liabilities by total assets.

A balance sheet that displays assets and liabilities into current versus noncurrent categories is commonly called a

classified balance sheet.

The accounting records of Nowaczyk Company contained the following account balances: Cash $2,000; Accounts Receivable $8,000; Inventory $12,000; Prepaid Items $3,000; and current liabilities of $20,000. Based on this information Nowaczyk's

current ratio is higher than its quick ratio. current ratio is 1.25 to 1. quick ratio is 0.50 to 1. Current assets = Cash + Accounts Receivable + Inventory + Prepaids: $2,000 Cash + $8,000 Accounts Receivable + $12,000 Inventory + $3,000 Prepaids = $25,000 Total Quick assets = Current Assets - Inventory - Prepaids: Quick assets = $25,000 Current Assets - $12,000 Inventory - $3,000 Prepaids = $10,000 Total Current ratio = $25,000 Current Assets ÷ $20,000 Current Liabilities = 1.25 to 1 Ratio Quick ratio = $10,000 Quick Assets ÷ $20,000 Current Liabilities = 0.50 to 1 Ratio

Which of the following statement is true?

Ratio analysis is used to assess a company's profitability. Liquidity ratios are used to measure a company's ability to pay its current obligations. Solvency ratios are used to measure a company's ability to pay its total obligations.

Homeland Security Systems experienced an event that had the following effects on its financial statements. Assets = NA = Liabilities = + + Equity = - - Revenue = NA - Expense = + = Net Income = - - Statement of CF = NA Which of the following events would have caused these effects?

Recognizing a contingent liability that has a probable chance of occurring and is estimable. Contingent liabilities that are remote do not have to be recognized or disclosed. Contingent liabilities that have a reasonably possible chance of occurring but are not estimable must be disclosed in the footnotes to financial statements but are not recognized in the financial statements. Only contingent liabilities that have a probable chance of occurring and that are estimable require disclosure in the financial statements.

Which of the following is a reason a company would acquire treasury stock?

Reduce the likelihood of a hostile takeover

Aero Company is able to earn a 12% return on assets. The Company can issue bonds that have an 8% interest rate. Based on this information alone

the company's return on equity will increase if the company issues bonds and invests the proceeds. If a company borrows money (issues bonds) with an interest rate of 8% and invests the funds at 12%, the 4% spread (difference) will act to increase the return on equity.

Standard Company has a contingent liability that has a likelihood of actual occurrence that is classified probable. Also, the amount of the liability can be reasonably estimated. Under these circumstances, Standard is required to

recognize a liability and an expense in its financial statements. If a contingent liability is classified as probable and estimable, GAAP requires that the liability and related expense be shown in the financial statements.

GreyCo has initiated a lawsuit against PhilCo for a copyright violation. Negotiations between the lawyers representing the two companies suggest that it is probable that GreyCo will win the case and will collect a $1,000,000 settlement fee. Generally Accepted Accounting Principles (GAAP)

requires PhilCo to recognize a $1,000,000 contingent liability but does not permit GreyCo to recognize a $1,000,000 contingent asset. Due to the conservatism principle GAAP frequently requires potential expenses and liabilities to be reported while it prohibits reporting potential gains and assets.

Senath Company's annual report reveals net credit sales of $240,000 and average accounts receivable of $20,000. The report also shows an average inventory balance of $10,000 and cost of goods of $200,000. Based on this information (treat any partial day as a whole day)

the average number of days to collect receivables is 31. Accounts receivable turnover:$240,000 net credit sales ÷ $20,000 average accounts receivable = 12 times Average days to collect receivables: 365 days in year ÷ 12 accounts receivable turnover = 30.41 days Partial days are normally converted to whole days when reporting the average days to collect receivables. As a result, the average number of days to collect receivables in this case is 31. The inventory balance and the cost of goods sold are distractors that are not used in answering the question.

Firth Company's annual report shows an average inventory balance of $40,000 and cost of goods of $200,000. Total assets amount to $400,000 and liabilities amount to $100,000. Based on this information (treat any partial day as a whole day)

the average number of days to sell inventory is 73. Inventory turnover:$200,000 cost of goods sold ÷ $40,000 average inventory balance = 5 times Average number of days to sell inventory:365 days in year ÷ 5 inventory turnover = 73 days The amount of total assets and the amount liabilities are distractors that are not used in answering the question.

Normally companies sell stock for an amount that is

more than the par value.

The following information was drawn from the records of Milan Company. Year 2 Year 1 Revenue $120,000 $100,000 Cost of goods sold (78,000) (60,000) Gross Margin 42,000 40,000 Operating Expenses (24,000) (20,000) Net Income $18,000 $20,000 Vertical analysis suggests that the most likely explanation as to why net income decreased is

the company was unable to pass on increases in the cost of its good to its customers. *refer to picture question 14

Which of the following would not likely appear on a classified balance sheet?

Current retained earnings

Jefferson Company borrowed $6,000 on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of cash outflow from operating activities that Jefferson would report in Year 1 and Year 2, respectively would be

$0, and $360. Total annual interest = $6,000 × .06 = $360 Since the total amount of interest is paid on the maturity date in Year 2, there would be zero cash outflow in Year 1 and $360 in Year 2.

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% on the first $7,000 of salary earned. Based on this information the total amount of accrued payroll tax expense incurred by Mr. Ortega's employer is

$1,020. FICA tax exp.-SS (8,000X6%) 480 FICA tax exp.-Medicare (8,000X1.5%) 120 Fed unemploy tax exp.(7,000X.006) 42 State unemp. tax exp (7,000X.054) 378 Total payroll Tax = 1,020 Note: The employer matches the employee's FICA taxes as well as paying unemployment taxes.

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be

$270, and $90 The amount of interest expense incurred is computed as follows: Total annual interest = $6,000 × .06 = $360 Monthly interest = $360 annual interest ÷ 12 months = $30 Interest expense in Year 1 = $30 per month × 9 months = $270 Nine months of interest was accrued in Year 1. The remaining 3 months is expensed in Year 2.Interest expense in Year 2 = $30 per month × 3 months = $90

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7%. Assuming a straight-line amortization of the premium, the amount of interest expense recognized on the December 31, Year 1 income statement is

$3,400. Bond premium = $50,000 Face value × .04 Premium = $2,000 Premium amortization = $2,000 Bond premium ÷ 20 Years = $100 Per year Interest expense paid in cash = $50,000 Face value × .07 Stated interest rate = $3,500 Total interest expense = $3,500 Stated interest - $100 Premium amortization = $3,400

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Assuming a straight-line amortization of the discount, the amount of interest expense recognized on the December 31, Year 1 income statement is

$3,600. Bond discount = $50,000 Face value × .04 Discount = $2,000 Discount amortization = $2,000 Bond discount ÷ 20 Years = $100 Per year Interest expense paid in cash = $50,000 Face value × .07 Stated interest rate = $3,500 Total interest expense = $3,500 Stated interest + $100 Discount amortization = $3,600

Alpha Associates was organized on January 1, Year 1. Alpha was organized as a partnership. Alpha reported $200,000 of before tax income during Year 1 and the partners withdrew $30,000 from the company. Assuming a corporate income tax rate of 30% and a personal income tax rate of 15%, the total amount of tax collected by the government is

$30,000. The government would collect $30,000 ($200,000 × .15) from the partners who would be taxed at their personal tax rate. Partners are taxed on their share of total partnership income regardless of how much of the income is withdrawn from the partnership. There would be no corporate income tax required.

Perry Corporation was established on January 1, Year 1 when it issued 20,000 shares of $50 par, 5 percent, cumulative preferred stock and 30,000 shares of $10 par common stock. The company's earnings history is as follows: Year 1 $40,000 Net loss Year 2 $110,000 Net income Year 3 $120,000 Net income The corporation paid the maximum amount of dividends possible in each year of operation. The dividend paid to common stockholders at the end of Year 3 is

$40,000. Preferred shareholders are entitled to a $50,000 ($50 par value × .05 dividend × 20,000 shares) per year dividend resulting in a total of $150,000 ($50,000 dividend × 3 years) for the three year period. The balance in the retained earnings account after the preferred dividends have been paid is $40,000 [($40,000 Year 1 net loss + $110,000 Year 2 net income + $120,000 Year 3 net income) - $150,000 of preferred dividends]. The $40,000 remaining balance in retained earnings would be available for dividends paid to the common stockholders.

Crowe Company began operations on January 1, Year 1. The company was organized as a sole proprietorship. During Year 1, Crowe acquired $40,000 of capital from John Crowe, the owner. Also, during Year 1 the company earned net income of $20,000 and John Crowe withdrew $15,000 from the business. Based on this information, the Company would show

$45,000 in its capital account on the Year 1 balance sheet. The ending balance in the capital account is $45,000 (Zero Beginning capital balance + $40,000 Owner investment + $20,000 Net income - $15,000 Withdrawal).

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Based on this information, the carrying value of the bond liability on January 1, Year 1 is

$48,000. The carrying value of the bond liability is the face value of the bonds minus the discount. In this case, the carrying value is $48,000 [($50,000 - ($50,000 × .04)]. The January 1, Year 1 carrying value can also be determined by multiplying the face value of the bond times the bond price. The bond price is normally expressed as a percentage of face value. For example a bond priced at 96 means that the bonds will sell for 96% of face value. To confirm, $50,000 × .96 = $48,000.

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Based on this information, the carrying value of the bond liability on January 1, Year 6 is

$48,500. The carrying value of the bond liability is the face value of the bonds minus the discount. The discount is amortized (expensed) each year by $100 ($2,000 discount ÷ 20 years). Amortizing the discount decreases the balance of the discount account. As of January 1, Year 6 the discount has be amortized 5 times for a total amount of $500 ($100 annual amortization × 5 years). As a result, the balance in the discount account as of January 1, Year 6 is $1,500 ($2,000 original balance - $500 amortized). This means the carrying value of the bond liability is $48,500 ($50,000 face value - $1,500 discount).

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7%. Based on this information, the carrying value of the bond liability on January 1, Year 6 is

$51,500. The carrying value of the bond liability is the face value of the bonds plus the premium. The premium is amortized each year by $100 ($2,000 premium ÷ 20 years). Amortizing the premium decreases the balance of the premium account. As of January 1, Year 6 the premium has be amortized 5 times for a total amount of $500 ($100 annual amortization x 5 years). As a result, the balance in the premium account as of January 1, Year 6 is $1,500 ($2,000 original balance - $500 amortized). This means the carrying value of the bond liability is $51,500 ($50,000 face value + $1,500 premium).

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7%.Based on this information the carrying value of the bond liability on January 1, Year 1 is

$52,000. The carrying value of the bond liability is the face value of the bonds plus the premium. In this case, the carrying value is $52,000 [($50,000 + ($50,000 × .04)]. The carrying value can also be determined by multiplying the face value of the bond times the bond price. The bond price is normally expressed as a percentage of face value. For example, a bond priced at 104 means that the bonds will sell for 104% of face value. To confirm, $50,000 × 1.04 = $52,000.

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an Unemployment tax rate of 6% on the first $7,000 of income. Based on this information, Mr.Ortega's net pay for January 31, Year 1 is

$6,090. $8,000 Gross Pay - $900 Income Tax - $480 FICA Tax - $120 Medicare Tax - $380 Medical Insurance - $30 Humane Society = $6,090 Net Pay.Note: only the employer pays unemployment tax.

On September 1, Year 1 Western Company borrowed $36,000 cash. The one-year note carried a 5% rate of interest. The amount of interest expense on the income statement and the amount of cash flow from operating activities shown on Western's December 31, Year 1 financial statements would be

$600 interest expense and zero cash outflow from operating activities. The amount of interest expense is computed as follows: Total annual interest = $36,000 × .05 = $1,800 Monthly interest = $1,800 annual interest ÷ 12 months = $150 Interest expense in Year 1 = $150 per month × 4 months = $600 Since the total amount of interest will be paid on the maturity date in Year 2, the cash flow associated with interest expense in Year 1 is zero.

Alpha Associates was organized on January 1, Year 1. Alpha was organized as a corporation. Alpha reported $200,000 of before tax income during Year 1 and paid a $30,000 cash dividend to its stockholders. Assuming a corporate income tax rate of 30% and a personal income tax rate of 15%, the total amount of tax collected by the government is

$64,500. The government would collect $60,000 ($200,000 × .30) from the corporation and $4,500 ($30,000 × .15) from the stockholders. Therefore, the total tax collected by the government is $64,500 ($60,000 + $4,500). The corporate form of business structure results in double taxation. The income is taxed first at the corporate level and then again at the personal level when dividends are paid to the owners.

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 payments of $14,903 at the end of each year. The amount of interest expense shown on the Year 2 income statement is (round your answer to two decimal places)

$7,448 Interest expense for Year 1 = $100,000 × .08 = $8,000 Principal reduction for Year 1= $14,903 - $8,000 = $6,903 Principal balance end of Year 1 or beginning of Year 2 = $100,000 - $6,903 = $93,097 Interest expense for Year 2 = $93,097 × .08 = $7,448

Crowe Company began operations on January 1, Year 1. The company was organized as a sole proprietorship. During Year 1, Crowe acquired $50,000 of capital from John Crowe, the owner. Also, during Year 1 the company earned net income of $20,000. Based on this information, Crowe can withdraw (assume all transactions are cash transactions)

$70,000 from the business.

Perry Corporation was established on January 1, Year 1 when it issued 20,000 shares of $50 par, 5 percent, cumulative preferred stock and 30,000 shares of $10 par value common stock. The company's earnings history is as follows: Year 1 $40,000 Net loss Year 2 $110,000 Net income Year 3 $120,000 Net income The corporation paid the maximum amount of dividends possible in each year of operation. The dividend paid to preferred stockholders at the end of Year 2 is

$70,000. Preferred stockholders are entitled to $50,000 ($50 par value × 20,000 shares × .05 dividend rate) of dividends per year. Since the dividends are cumulative, the preferred stockholders are entitled to $100,000 of dividend at the end of Year 2 ($50,000 in arrears from Year 1 + $50,000 due for Year 2). Even so there is only a $70,000 ($40,000 Net loss + $110,000 Net income) balance in retained earnings at the end of Year 2. Accordingly, the preferred shareholders would receive a $70,000 dividend at the end of Year 2 and would carry forward $30,000 of dividends in arrears to Year 3.

Limiting the amount of funds that a bond issuer can borrow to a specified percentage of total assets is an example of

A restrictive covenant.

American Enterprise Company's total current assets were $12,000 and its total current liabilities were $4,000. If American Enterprise issues a short-term note to a bank for $2,000 cash

American Enterprise's total working capital will remain constant while its current ratio will decrease Working capital before: $12,000 current assets - $4,000 current liabilities = $8,000 working capital Working capital after: $14,000 current assets - $6,000 current liabilities = $8,000 working capital Current ratio before: $12,000 current assets ÷ $4,000 current liabilities = 3 to 1 ratio Current ratio after: $14,000 current assets ÷ $6,000 current liabilities = 2.33 to 1 ratio

Cash paid for interest is shown on the statement of cash flows as

An operating activity.

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 payments of $14,903 at the end of each year. Which of the following shows how the first payment on December 31, Year 1 will affect Barnes financial statements? Note: all amounts shown in the model are rounded to the nearest whole dollar.

Assets = (14,903) Liabilities = (6,903) Equity = (8000) Revenue = NA Expenses = 8000 Net Income = (8000) Statement of Cash Flows = (8000) OA (6,903) FA Annual cash payment = $14,903 Interest expense for Year 1 = $100,000 × .08 = $8,000 Principal reduction for Year 1= $14,903 - $8,000 = $6,903

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. Which of the following shows how the purchase of the treasury stock will affect Dixon's financial statements on November 1, Year 1?

Assets = (20,000) Liabilities = NA Treasury Stock = 20,000 Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = (20,000) FA

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7%.The company amortizes the premium on a straight-line basis. Which of the following shows how the recognition of interest expense will affect Residence's financial statements on December 31, Year 1?

Assets = (3,500) Liabilities = (100) Equity = (3,400) Revenue = NA Expenses = 3,400 Net Income = (3,400) Statement of Cash Flows = (3,500) OA *look at phone question 38

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%.The company amortizes the discount on a straight-line basis. Which of the following shows how the recognition of interest expense will affect Residence's financial statements on December 31, Year 1?

Assets = (3,500) Liabilities = 100 Equity = (3,600) Revenue = NA Expenses = 3,000 Net Income = (3,000) Statement of Cash Flows = (3,500) OA Refer to image on phone for question 29

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7% payable in cash on December 31 of each year. Which of the following shows the journal entry required to recognize the bond issue on January 1, Year 1?

Assets = (3,500) Liabilities = NA Equity = (3,500) Revenue = NA Expenses = 3,500 Net Income = (3,500) Statement of Cash Flows = (3,500) OA Total annual interest = $50,000 face value x .07 stated rate of interest = $3,500

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7%. Which of the following shows how the payoff of the bond liability will affect Residence's financial statements on December 31, Year 20 (the maturity date)?

Assets = (50,000) Liabilities = (50,000) Equity = NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = (50,000) FA

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows how Allison's financial statements will be affected on December 15?

Assets = (70,000) Dividends Payable = (70,000) Common Stock = NA Retained Earnings= NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = (70,000) FA

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Which of the following shows how the bond issue will affect Residence's financial statements on January 1, Year 1?

Assets = 48,000 Liabilities = 48,000 Equity = NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 48,000 FA Cash received from the bond issue = $50,000 face value x .96 bond price = $48,000 cash inflow. The bond issue is an asset source event. The asset account (cash) increases and the liability (bonds payable) increases. In other words, liabilities would be identified as the source of the cash. Since no interest has been incurred, there is no impact on the income statement. The cash inflow is a financing activity.

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7%. Which of the following shows how the bond issue will affect Residence's financial statements on January 1, Year 1?

Assets = 50,000 Liabilities = 50,000 Equity = NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 50,000 FA

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7%. Which of the following shows how the bond issue will affect Residence's financial statements on January 1, Year 1?

Assets = 52,000 Liabilities = 52,000 Equity = NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 52,00 FA Cash received from bond issue = $50,000 Face value × 1.04 Bond price = $52,000 Cash inflow The bond issue is an asset source event. The asset account (cash) increases and the liability (bonds payable) increases. In other words, liabilities would be identified as the source of the cash. Since no interest has been incurred, there is no impact on the income statement. The cash inflow is a financing activity.

On November 1, Year 1 Cove Company borrowed $7,000 cash from Shelter Company. The one-year note carried a 7% rate of interest. Which of the following shows how borrowing the money will affect Cove's financial statements on November 1, Year 1?

Assets = 7,000 = Liabilities = 7,000 + Equity = NA - Revenue = NA - Expense = NA = Net Income = NA - Statement of CF = 7,000 FA

On January 1, Year 1 Graham Corporation issued 200 shares of $5 par value common stock for $40 per share. Which of the following shows how the stock issue will affect Graham's financial statements on January 1, Year 1?

Assets = 8,000 Liabilities = 1,000 Equity = 7,000 Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 8,000 FA Issuing par value common stock is an asset source transaction. Assets (cash) increase and stockholders' equity increases. In this case, the increase to stockholders' equity is divided into two components. The $1,000 ($5 par value per share × 200 shares issued) par value (legal capital) is shown in the common stock account; and the $7,000 [($40 - $5) × 200 shares issued] portion is shown in a separate stockholders' equity account titled "additional paid-in capital in excess of par value". As with other stock issues, issuing common stock in excess of par value does not affect the income statement. The total cash inflow is a financing activity.

On January 1, Year 1 Graham Corporation issued 200 shares of no-par common stock for $40 per share. Which of the following shows how the stock issue will affect Graham's financial statements on January 1, Year 1?

Assets = 8,000 Liabilities = 8,000 Equity = NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 8,000 FA There is no paid-in excess account associated with no-par common stock. Instead, the total amount of the stock issue is placed in the common stock account. In this case, assets (cash) increase and stockholders' equity (common stock) increases by $8,000 ($40 per share × 200 shares). As with other stock issues, issuing no-par common stock does not affect the income statement. The total cash inflow is a financing activity.

On January 1, Year 1 Graham Corporation issued 200 shares of $5 stated value preferred stock for $40 per share. Which of the following shows how the stock issue will affect Graham's financial statements on January 1, Year 1?

Assets = 8,000 Preferred Stock = 1,000 Equity = 7,000 Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 8,000 FA Issuing stated value preferred stock has the same financial statement effects as issuing par value common stock. The only change is in the account titles. Assets (cash) increase and stockholders' equity increases. The increase to stockholders' equity is divided into two components. The $1,000 ($5 per share × 200 shares issued) stated value is shown in the preferred stock account and the $7,000 [($40 - $5) × 200 shares issued] portion is shown in a separate stockholders' equity account titled "paid-in capital in excess of stated value". As with other stock issues, issuing preferred stock in excess of stated value does not affect the income statement. The total cash inflow is a financing activity.

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. On December 15, Year 1 Dixon sold 400 shares of the treasury stock at $24 per share. Which of the following shows how the sale of the treasury stock will affect Dixon's financial statements on December 15, Year 1?

Assets = 9,600 Liabilities = NA Treasury Stock = (8,000) Paid in excess treasury stock = 1,600 Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = 9,600 FA Selling treasury stock is an asset source transaction. Assets (cash) increase and treasury stock decreases. Note that treasury stock is a contra equity account. As a result, decreasing the treasury stock account increases total stockholders' equity. Since the treasury stock was sold for $4 ($24 sales price - $20 acquisition price) more than it cost, the company must recognize $1,600 ($4 x 400 shares) of additional paid-in capital from treasury stock transactions. Selling treasury stock does not affect the income statement. Treasury stock transactions are transactions between a corporation and its investors and therefore, are financing activities.

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% on the first $7,000 of salary earned. Which of the following shows how recognizing the accrued payroll tax expense would affect the employer's financial statement?

Assets = NA = Liabilities = + + Equity = - - Revenue = NA - Expense = + = Net Income = - - Statement of CF = NA

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will effect Gomez's financial statements?

Assets = NA = Liabilities = 1,000 + Equity = (1,000) - Revenue = NA - Expense = 1,000 = Net Income = (1,000) - Statement of CF = NA The amount of interest expense is computed as follows: Total annual interest = $48,000 × .05 = $2,400Monthly interest = $2,400 annual interest ÷ 12 months = $200 Interest expense in Year 1 = $200 per month × 5 months = $1,000 Recognizing the accrued interest expense increases expenses and liabilities (interest payable). The increase in expense decreases net income and ultimately equity (retained earnings). Accrued interest means that the company has incurred the interest expense but has not paid cash. Since no cash was paid, cash flow is not affected.

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest expense in Year 2 will effect Gomez's financial statements?

Assets = NA = Liabilities = 1,400 + Equity = (1,400) - Revenue = NA - Expense = 1,400 = Net Income = (1,400) - Statement of CF = NA The amount of interest expense is computed as follows: Total annual interest = $48,000 × .05 = $2,400 Monthly interest = $2,400 annual interest ÷ 12 months = $200 Five months of interest was accrued in Year 1. The remaining 7 months is earned in Year 2.Interest expense in Year 2 = $200 per month × 7 months = $1,400 Recognizing the accrued interest expense increases expenses and liabilities (interest payable). The increase in expense decreases net income and ultimately equity (retained earnings). Accrued interest means that the company has incurred the interest expense but has not paid cash. Since no cash was paid, cash flow is not affected.

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows how Allison's financial statements will be affected on October 1?

Assets = NA Dividends Payable = 70,000 Common Stock = NA Retained Earnings= (70,000) Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = NA

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows how Allison's financial statements will be affected on November 1?

Assets = NA Dividends Payable = NA Common Stock = NA Retained Earnings= NA Revenue = NA Expenses = NA Net Income = NA Statement of Cash Flows = NA

Accounts payable will appear on which of the following financial statements?

Balance Sheet

Accounts receivable will appear on which of the following financial statements?

Balance Sheet

Mary Company collected cash from an account receivable. The recognition of the cash collection will affect which of the following financial statements?

Balance sheet and the statement of cash flows

A convertible provision in a bond certificate normally allows the

Bondholder to convert the bond investment into a common stock investment.

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7%. Which of the following journal entries is necessary to recognize the payoff of the bond liability on December 31, Year 20 (the maturity date)?

Bonds Payable= 50,000 -debit- Cash= 50,000 -credit-

Which of the following would not likely appear in the current liabilities section of a classified balance sheet?

Bonds payable

Which of the following is responsible for paying social security (FICA) tax?

Both employee and employer The federal government collects the tax. The employer and employee pay the tax to the government.

On November 1, Year 1 Cove Company borrowed $7,000 cash from Shelter Company. Cove issued a one-year note that carried a 7% annual rate of interest. Which of the following journal entries would be necessary to record the issue of the note on November 1, Year 1?

Cash 7,000 (debit side) Notes Payable 7,000 (credit side)

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. On December 15, Year 1 Dixon sold 400 shares of the treasury stock at $24 per share. Which of the following journal entries is necessary to record the sale of the treasury stock on December 15, Year 1?

Cash 9,600 (debit) Treasury Stock 8,000 (credit) Paid-in Capital from Treasury Stock Transactions 1,600 (credit) Selling treasury stock is an asset source transaction. Assets (cash) increase and treasury stock decreases. Note that treasury stock is a contra equity account. As a result, decreasing the treasury stock account increases total stockholders' equity. Since the treasury stock was sold for $4 ($24 sales price - $20 acquisition price) more than it cost, the company must recognize $1,600 ($4 × 400 shares) of additional paid-in capital from treasury stock transactions. Debit entries increase asset accounts and credit entries increase equity accounts. In this case, the asset account (cash) is debited and the stockholders' equity accounts (treasury stock and paid-in capital from treasury stock transactions) are credited.

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7%. Which of the following journal entries is necessary to recognize the bond issue on January 1, Year 1?

Cash= 48,000 -debit- Discount on Bonds Payable= 2,000 - debit- Bonds Payable= 50,000 -credit- Cash received from the bond issue = $50,000 face value × .96 bond price = $48,000 cash inflow. The bond issue is an asset source event. Assets and liabilities increase by $48,000. Debit entries increase asset accounts. In this case, the asset account (cash) is debited. The increase in liabilities is recorded by a debit to the contra liability account (discount on bonds payable) for $2,000 and a credit to the liability account (bonds payable) for $50,000. This results in an overall $48,000 increase in liabilities ($50,000 bonds payable - $2,000 discount on bonds payable). In conclusion, the journal entry recognizes a $48,000 increase in assets (cash) and liabilities (carrying value of the bond liability).

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7%. Which of the following journal entries is necessary to recognize the bond issue on January 1, Year 1?

Cash= 52,000 -debit- Premium on Bonds Payable= 2,000 -credit- Bonds Payable= 50,000 -credit- Cash received from the bond issue = $50,000 face value × 1.04 bond price = $52,000 cash inflow. The bond issue is an asset source event. Assets and liabilities increase by $52,000. Debit entries increase asset accounts. In this case, the asset account (cash) is debited. The increase in liabilities is recorded by a credit to the adjunct liability account (premium on bonds payable) for $2,000 and a credit to the liability account (bonds payable) for $50,000. This results in an overall $52,000 increase in liabilities ($50,000 bonds payable + $2,000 premium on bonds payable). In conclusion, the journal entry recognizes a $52,000 increase in assets (cash) and liabilities (bond payable + premium).

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% on the first $7,000 of salary earned. Which of the following is the journal entry required to recognize the salary expense for Mr. Ortega?

Debit: Salary Expense 8,000 Credit: Employee Income Tax Payable 900 FICA Tax-SS Payable 480 FICA Tax-Medicare payable 120 Medical Ins. premiums pay 380 Humane Society-payable 30 Cash 6,090

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows the journal entry necessary on October 1?

Dividends 70,000 (debit) Dividends Payable 70,000 (credit)

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows the journal entry necessary on December 15?

Dividends Payable 70,000 (debit) Cash 70,000 (credit)

The following information is drawn from the income statements of East Company and West Company. EastWest Income before interest and taxes (EBIT) East: $60,000 West: $40,000 Interest expense East: (12,000) West: (10,000) Income before taxes East: 48,000 West: 40,000 Income tax expense for East $48,000 × .30 (14,400) Income tax expense for West $40,000 × .30 12,000 Net Income 33,600 $28,000 All other things being equal,

East Company is more likely to be able to make its legally required interest payments than West Company. Times interest earned for East: $60,000 EBIT ÷ $12,000 = 5 times Times interest earned for West: $40,000 EBIT ÷ $10,000 = 4 times East has enough EBIT to pay its interest expense five times while West has only enough EBIT to pay its interest expense four times. Therefore the ratios suggest that East Company is more likely to be able make future interest payments than West Company.

Which of the following industries is likely to have the highest debt to assets ratio?

Electric utilities

Which of the following is responsible for paying unemployment tax?

Employer only

A callable bond provides an option

For the issuer to repay the bond liability before the maturity date.

Which of the following statements is true?

Higher current ratios suggest greater liquidity.

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. Which of the following journal entries would be required to recognize accrued interest on December 31, Year 1?

Interest Expense = 270 (debit) Interest Payable = 270 (credit)

Yang Company recognized accrued salary expense. The recognition will affect which of the following financial statements?

Income statement and the Balance Sheet

Garcia Company recognized revenue on account. The recognition will affect which of the following financial statements?

Income statement and the balance sheet

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 payments of $14,903 at the end of each year. Which of the following shows the journal entry necessary to recognize the cash payment on December 31, Year 1? Note: the amounts shown in the journal entries are rounded to the nearest whole dollar.

Interest Expense 8000 -debit- Notes Payable 6903 -debit- Cash (14903) -credit- Annual cash payment = $14,903 Interest expense for Year 1 = $100,000 x .08 = $8,000 Principal reduction for Year 1= $14,903 - $8,000 = $6,903

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104 resulting in a 4% premium. They had a 20 year term and a stated rate of interest of 7% payable in cash on December 31 of each year. The company amortizes the premium on a straight-line basis. Assuming a straight-line amortization of the premium, the journal entry necessary to recognize interest expense on the December 31, Year 1 is

Interest Expense= 3,400 -debit- Premium on Bonds Payable= 100 -debit- Cash= 3,500 -credit- Premium = $50,000 Face value × .04 Premium = $2,000 Premium amortization = $2,000 Bond premium ÷ 20 Years = $100 Per year Cash payment for interest = $50,000 Face value x .07 Stated interest rate = $3,500 Total interest expense = $3,500 Stated interest - $100 Premium amortization = $3,400

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7% payable in cash on December 31 of each year. Which of the following shows how the journal entry necessary to recognize the interest payment on December31, Year 14?

Interest Expense= 3,500 -debit- Cash= 3,500 -credit- Total annual interest = $50,000 face value x .07 stated rate of interest = $3,500

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 resulting in a 4% discount. They had a 20 year term and a stated rate of interest of 7% payable in cash on December 31 of each year. Assuming a straight-line amortization of the discount, the journal entry necessary to recognize interest expense on the December 31, Year 1 is

Interest Expense= 3,600 -debit- Discount on Bonds Payable= 100 -credit- Cash= 3,500 -credit- Bond discount = $50,000 Face value × .04 Discount = $2,000 Discount amortization = $2,000 Bond discount ÷ 20 Years = $100 Per year Cash payment for interest = $50,000 Face value × .07 Stated interest rate = $3,500 Total interest expense = $3,500 Stated interest + $100 Discount amortization = $3,600

Highlands Company finances its operations with equity. Lowlands Company finances its operations with debt. The income statements of both companies show income before interest and taxes of $50,000. Highlands pays a $10,000 dividend while Lowlands pays $10,000 of interest expense. Assuming a 30% tax rate

Lowlands will incur $12,000 of tax expense. *look at phone question 46

Crowe Company began operations on January 1, Year 1. The company was organized as a sole proprietorship. During Year 1, Crowe acquired $40,000 of capital from John Crowe, the owner. Also, during Year 1 the company earned net income of $20,000 and John Crowe withdrew $15,000 from the business. Based on this information, the Company would show

None of the answers is correct. -Proprietorship's do not have a retain earnings account instead the retained earnings are included in the capital account

Forest Beach Company experienced an event that had the following effects on its financial statements. Assets = - = Liabilities = - + Equity = NA - Revenue = NA - Expense = NA = Net Income = NA - Statement of CF = - FA Which of the following events could have caused these effects?

Paid cash to settle the principal balance of note payable. Explanation: The effects shown in the statements model are consistent with paying cash to settle the principal balance of a note payable. Specifically, paying off the principal balance of a note payable will decrease assets (cash) and liabilities (notes payable). The income statement is not affected. The cash outflow from the payoff of the note payable would be classified as a financing activity. Also, the other answers describe events with effects that are not shown in the model. For example, the cash outflow associated with the settlement of accrued interest payable would be classified as an operating activity. Likewise, cash paid directly for interest expense would be an operating activity. Finally, cash paid to acquire a long-term assets would be an investing activity. Since none of these effects are shown in the statements model, these answers cannot be correct.

Mr. Ortega earns a monthly salary of $8,000. Based on Mr. Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr. Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% (5.4% state tax plus 0.6% federal tax) on the first $7,000 of salary earned. Which of the following is the journal entry required to recognize the accrued payroll tax expense incurred by Mr. Ortega's employer?

Refer to picture in phone referring to question 22

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. Which of the following shows the journal entry necessary to recognize the purchase of the treasury stock on November 1, Year 1?

Treasury Stock 20,000 (debit) Cash 20,000 (credit)

Aero Company is able to earn a 12% return on assets. The Company can issue bonds that have an 8% interest rate. On January 1, Year 3 the company had assets and stockholders' equity of $20,000. Also, on January 1, Year 3 the company issued $10,000 of bonds and invested the proceeds. As a result of financial leverage, the return on equity at the end of Year 3 will

increase from 12% to 18%. Since assets and equity were the same ($20,000) on January 1, the return on assets and the return on equity would be the same (12%) Assets invested in Year 3 = $20,000 assets before debt issue + $10,000 assets acquire from debt issue = $30,000 assets invested during Year 3 Return on assets = $30,000 total assets × 12% = $3,600 Return on equity = $3,600 ÷ $20,000 = 18%

The following data were drawn from the accounting records of Fox Company. Year 2 Year 1 Revenue $120,000 $100,000 Operating Expenses 78,000 60,000 Net Income 42,000 40,000 If the year to year trends shown in these data continue

revenue for Year 3 will be $144,000. operating expenses for Year 3 will be $101,400. net income for Year 3 will be $42,600. Revenue increased by 20% from Year 1 to Year 2 [($120,000 - $100,000) ÷ $100,000].If this trend continues Revenue for Year 3 will be $144,000 (120,000 × 1.2).Operating expense increased by 30% from Year 1 to Year 2 [($78,000 - $60,000) ÷ $60,000].If this trend continues operating expenses for Year 3 will be $101,400 ($78,000 × 1.3).Therefore, net income for Year 3 will be $42,600 (Revenue $144,000 - Operating Expenses $101,400).