Accounting Exam 2

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

$0

Clarendon Corporation has a $5 million liability at December 31, Year 1, of which $1 million is payable in Year 2. In its December 31, Year 1 balance sheet, the company will report the $5 million debt as a:

$1 million current liability and $4 million long-term liability.

Bryer Company purchases all of the assets and liabilities of Stellar Company for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwill associated with the purchase?

$700,000

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate interest expense as of the first semiannual interest payment.

$785

At the end of a reporting period, Gaston Corporation determines that its ending inventory has a cost of $6,500 and a net realizable value of $5,800. The adjusting entry to write down inventory to net realizable value would include:

A credit to inventory for $700.

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

Accumulated depreciation.

Beta Corporation wrote off $100,000 due from a specific client in March. However, this client was able to make a partial payment of $15,000 in June. Recording this cash collection will involve all of the following accounts:

Allowance for Uncollectible Accounts Cash Accounts Receivable

Which of the following expenditures should be capitalized?

An improvement to a tangible asset.

The asset's cost less accumulated depreciation is called:

Book value.

How are trade discounts recognized?

By recording the sale at a discounted price

Travel Planners, Incorporated borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit Cash, $5,000; Credit Notes Payable, $5,000.

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

FIFO

Animal World issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Animal World decides to call the bonds. The company estimates that over the next eight years, they will save $16 million of cash interest. The journal entry to retire the bonds will include a:

Loss of $2 million.

In each succeeding payment on an installment note:

The amount of interest expense decreases.

According to the allowance method, writing off an account receivable will include a:

credit to Accounts Receivable

Sales taxes collected from customers by the seller are recorded as _____.

current liabilities

Banner Corporation receives $30,000 in May, Year 1 to manufacture and deliver its product in September, Year 1. At the time the product is delivered, Banner will _____.

debit Deferred Revenue credit Sales Revenue

Operating income is defined as:

gross profit minus operating expenses

When a company collects sales taxes

it debits Cash, and credits both Sales Revenue and Sales Tax Payable.

Gross profit is defined as:

sales revenue minus cost of goods sold

A company has total payments for the month of March for its 20 employees of $100,000. The FICA tax rate (Social Security and Medicare) is 7.65%. What is the total amount due to the government for FICA taxes?

$15300

On January 1, Year 1, Alpha Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. How much interest will be collected at the maturity date of the note?

$225

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month?

$2542

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?

$400

Barnes Corporation introduces a new e-book reader that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 10 percent of sales. By the end of the first year of selling the product, total sales are $5 million, and actual warranty expenditures are $100,000. What amount should Barnes report as a liability at the end of the year?

$400,000

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded for interest expense for the first full month?

$500

During its first year of operations, Ellison, Incorporated bills customers $18,000 for the services it provided. At the end of the year, $6,000 remains due from customers. The company's credit manager estimates that 10% of the total year-end accounts receivable will not be collected. The company's estimate of uncollectible accounts is:

$600

Suppose a company issues $500,000 of 4% bonds, due in 5 years, with interest payable semiannually. The bonds are issued at face amount. What is the total amount of cash paid to the bond investor over the life of the bond?

$600000

Express Jet borrows $100 million on October 1 for one year at 6% interest. For what amount does Express Jet report interest payable for the year ended December 31 of the current year (three months later)?

1.5 Million

Star Appliance sells previously owned appliances. Each appliance carries a one-year warranty against defects. Suppose that appliance sales for the entire month of December are $50,000. The company expects future warranty costs to be 3% of sales. What amount should Star Appliance report as a liability on December 31?

1500

At the beginning of the year, Bennett Supply has inventory of $3,500. During the year, the company purchases an additional $12,000 of inventory. Cost of goods sold for the year is $11,500. What amount will Bennett report for inventory?

4000

Susan, a recent college graduate, makes a base salary of $70,000 per year. Susan has federal income tax withholding of $12,000, and state tax withholding of $4,000. Employers are required to withhold a 6.2% Social Security tax and a 1.45% Medicare tax. What is Susan's take-home pay?

48645

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

A debit to a liability and a credit to a revenue account.

Smith Company filed suit against Western, Incorporated, seeking damages for patent infringement. Western's legal counsel believes it is probable that Western will have to pay an estimated amount in the range of $75,000 to $175,000, with all amounts in the range considered equally likely. How should Western report this litigation?

As a liability for $75,000 with disclosure of the range.

A bond is a formal debt instrument that promises to pay:

Both a principal amount at the maturity date and periodic interest payments.

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

DEBIT Accounts Receivable CREDIT Sales Revenue.

company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. Which of the following is the current journal entry to record for the first month's payment?

Debit Interest Expense $129; debit Notes Payable $1,231; credit Cash $1,360.

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should record the following adjusting entry at December 31, 20X1:

Debit Interest Expense and credit Interest Payable, $4,000.

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

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

When a company determines that the net realizable value of its ending inventory is lower than its cost, what would be the effect(s) of the adjusting entry to write down inventory to net realizable value?

Decrease Total Assets Decrease Net Income Decreased Retained Earnings

Which of the following correctly describes the nature of depreciation?

Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.

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

Double-declining-balance method.

Which of the following increases an employer's payroll costs?

Employer's FICA contribution.

Collecting cash on an account previously written off increases total assets but has no effect on net income.

FALSE

Which of the following is paid by both the employee and the employer?

FICA taxes.

A company makes a credit sale for $500. Future collection from the customer is probable. The company will not record revenue from the transaction until it collects cash from the customer. T/F

False

Which of the following intangible assets is not amortized?

Goodwill

Which of the following statements is true regarding the amortization of intangible assets?

Goodwill is the most common intangible asset with an indefinite useful life. Intangible assets with a limited useful life are amortized. The expected residual value of most intangible assets is zero.

Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on December 31, Year 1?

Interest payable is credited for $20,000 Interest payable is credited for $20,000 ($1 million × 6% × 4/12).

Delta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Delta required the customer to sign a six-month, 11 percent promissory note on February 1, Year 2. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?

No impact on the accounting equation

Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on June 1, Year 2?

Notes Payable will be debited for $1 million, Interest Expense will be debited for $25,000 (for 5 months' interest incurred), and Interest Payable will be debited for $20,000. Cash will be credited for $1,045,000.

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at

Premium

Which of the following is not a primary source of corporate debt financing?

Receivables.

Dexter Tours is a defendant in litigation involving an accident that occurred during a cruise. The company is sued for $5 million in damages. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $2 to $3 million. No amount within the range appears more likely than others. Which of the following is the company required to do in this scenario?

Record a $2 million liability and disclose the potential additional loss.

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

Research and development.

In the percentage-of-receivables method, a higher percentage uncollectible is generally used for "old" accounts than for "new" accounts.

TRUE

The direct write-off method is used for tax purposes but is generally not permitted for financial reporting.

TRUE

The balance in the Accumulated Depreciation account represents

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

Which of the following statements is true regarding the amortization of intangible assets?

The expected residual value of most intangible assets is zero.

The issue price of a bond is calculated as:

The present value of the bond's face amount plus the present value of its periodic interest payments.

Which of the following statements is false regarding the amortization of intangible assets?

The service life of an intangible asset is always equal to its legal life.

The allowance method requires managers to estimate future uncollectible accounts and to record that estimate in the current year.

True

If a company understates its ending inventory in the current period, what effect will this have on cost of goods sold in the following period?

Understate cost of goods sold.

Suppose Ajax Corporation overstates its ending inventory amount. What effect will this have on the reported amount of cost of goods sold in the year of the error?

Understate cost of goods sold.

At the end of Year 1, Swanson Corporation has $650,000 in current assets and $500,000 in current liabilities. During Year 2, the company realizes a $100,000 increase in each amount, such that at the end of Year 2, the company has $750,000 in current assets and $600,000 in current liabilities. Calculate the current ratio for Year 1 and for Year 2.

Year 1 = 1.30; Year 2 = 1.25

On May 1, Arden Wholesale sells $800 worth of goods on account to an out-of-state customer. Upon receiving the order on May 7, the customer notifies Arden that approximately 5% of the goods arrived damaged. As a result, Arden reduces the amount owed by the customer by $50. The journal entry by Arden Wholesale on May 7 will include a:

credit to Accounts Receivable

During its first year of operations, Kimbrough Corporation sold $14 million worth of goods on account. At the end of the year, $5 million remains due from customers. If the company estimates that 20% of the total year-end accounts receivable will not be collected, it will record a:

credit to Allowance for Uncollectible Accounts for $1 million

On September 1, Year 1, Sigma Corporation accepts a $100,000 six-month, nine percent promissory note from one of its clients. The transaction recorded by the company on March 1, Year 2, the maturity date, will involve all of the following except a _____.

credit to Interest Revenue for $4,500 The entry will include a debit to Cash for $104,500, a credit to Notes Receivable for $100,000, a credit to Interest Receivable for $3,000 ($100,000 × 9% × [4/12]), and a credit to Interest Revenue for $1,500 ($100,000 × 9% × [2/12]).

Using the aging method, Carlton Company calculates the estimated ending balance in the Allowance for Uncollectible Accounts to be $12,000. Prior to adjusting entries, the Allowance for Uncollectible Accounts has a credit balance of $3,000. The year-end adjustment would include a:

debit to Bad Debt Expense for $9,000 The adjusting entry would include a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts for $9,000.

On January 1, Year 1, Boyd Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. To record acceptance of the note, the company will record a:

debit to Notes Receivable for $10,000

On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:

debit to Sales Returns

Under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year. Estimated uncollectible accounts:

decrease total assets and decrease net income.

Under the allowance method, the write-off of accounts receivable:

has no effect on total assets or net income.

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

$450,000

If bonds are issued at a discount, interest expense will be

Higher than cash interest paid.

Research and development costs

Should be expensed.

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

The cost of inventory sold during the year.

On September 1, Year 1, a company collects a $5,000 six-month, five percent promissory note. The entry to record the collection at maturity date will include a:

credit to Interest Revenue for $125

Over the entire service life of an asset, which depreciation method records the highest total depreciation?

All the methods result in the same total depreciation.

Account(s) with a normal credit balance include:

Bad Debit Expense; Cash

The balances in sales returns, allowances, and discounts are subtracted from total revenues when calculating net revenues.

TRUE

Sales Returns is an example of a(n) ____________ account, which is used to keep a record of reductions from revenue due to sales returns separate from total revenue itself.

contra revenue

At the beginning of the year, Johnson Supply has inventory of $5,200. During the year, the company purchases an additional $20,000 of inventory. An inventory count at the end of the year reveals remaining inventory of $3,000. What amount will Bennett report for cost of goods sold?

$22,000

Trivia Company reports a gross profit of $100, income tax expense of $15, selling, general, and administrative expenses of $35, nonoperating revenues of $10, and nonoperating expenses of $15. What is the company's operating income?

$65 Operating income equals gross profit minus selling, general, and administrative expenses ($65 = $100 − $35).

A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck's residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation?

$8000

Douglas County Fairgrounds retires a $50 million bond issue when the carrying value of the bonds is $52 million, but the market value of the bonds is only $47 million. The entry to record the retirement will include:

A credit of $5 million to gain on early extinguishment.

Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:

A loss of $10,000.

A company will debit ___________ when recording a credit sale.

Accounts Receivable

Depreciation in accounting is the:

Allocation of an asset's cost to an expense over time.

Under a perpetual inventory system:

Cost of goods sold is recorded with each sale.

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

Credit to Sales Revenue.

Which of the following is reported as a current liability?

Current portion of long-term debt.

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

Debit Inventory; credit Accounts Payable.

Travel Planners, Incorporated borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record when the note is repaid?

Debit Notes Payable, $5,000; Credit Cash, $5,000.

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

Debit Purchases; credit Accounts Payable.

Not a measure of Liquidity

Gross Profit Ratio

Which of the following levels of profitability in a multiple-step income statement best represents profitability directly related to the sale of inventory?

Gross profit.

If bonds are issued at a discount, over the life of the bonds, interest expense will:

Increase

Which of the following is a necessary characteristic of a liability?

It arises from present obligations to other entities. It results from past transactions or events. It represents a probable, future sacrifice of economic benefits.

An advantage of leasing an asset rather than purchasing the asset is:

Leases typically require less cash upfront to begin using the asset.

If a company fails to accrue interest on notes payable, which of the following will occur?

Liabilities are understated.

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is remote, a contingent liability should be

Neither disclosed nor reported as a liability.

If a company understates its ending inventory in the current period, what effect will this have on the balance of Retained Earnings at the end of the following period?

No effect on retained earnings

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

Ordinary repairs and maintenance.

A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:

Sales Discounts for $24

At the end of Year 1, Fulton Corporation estimates uncollectible accounts to be $10,000. Actual bad debts during Year 2 totaled $12,000. This indicates that management's estimate of uncollectible accounts in Year 1 was:

TOO LOW

A debit balance in the Allowance for Uncollectible Accounts before year-end adjustment indicates that the company wrote off more bad debts in the current year than it had estimated.

TRUE

The journal entry to reestablish an account receivable previously written off has no effect on net accounts receivable.

True

We record interest expense on a note payable in the period in which

We incur interest.

Trade discounts represent:

a reduction in the listed price of a good or service.

A contingent liability is an existing:

uncertain situation that might result in a future loss.