Accounting Exam 2

The sale increases assets (accounts receivable) by $432, the amount to be collected from the credit card company, increases revenue by $450, and increases expenses (credit card expense) by $18 (4% of $450). Net income and stockholders' equity both increase by $432. The statement of cash flows is not affected.

Alberta Company accepts a credit card as payment for $450 of services provided for the customer. The credit card company charges a 4% handling charge for its collection services. Select the answer that shows how the entry to record the sale would affect Alberta's financial statements.

$2,200 ($900 beginning allowance balance − $1,500 write-offs + uncollectible accounts expense = $1,600 ending allowance balance; uncollectible accounts expense = $1,600 − $900 + $1,500 = $2,200)

Allegheny Company ended Year 1 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $23,000 and $900, respectively. During Year 2, Allegheny wrote off $1,500 of Uncollectible Accounts. After aging its receivables, Allegheny estimates that the ending Allowance for Doubtful Accounts balance should be $1,600. What will Allegheny report as Uncollectible Accounts Expense on its Year 2 income statement?

$9,600 (Under FIFO, the cost of the items purchased first is reported on the income statement, and the cost of the items purchased last is reported on the balance sheet. Cost of goods sold = (400 × $12.00) + (300 × $16.00) = $9,600)

Anton Company uses the perpetual inventory method. Anton purchased 400 units of inventory that cost $12.00 each. At a later date the company purchased an additional 600 units of inventory that cost $16.00 each. If Anton uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be:

All of these answer choices are correct $280,000 × 2% = $5,600 warranty expense is recognized in Year 1. Cash decrease by $3,600 when the warranty obligations are paid. Warranties payable increases by $5,600 when warranty expense is recognized and decreases by $3,600 when warranty obligations are paid, for a net increase of $2,000.

Benitez Company had sales of $280,000 in Year 1. The company expects to incur warranty expenses amounting to 2% of sales. There were $3,600 of warranty obligations paid in cash during Year 1. Based on this information:

long-term liabilities (Bonds will not be repaid until many accounting periods from the issue date. Therefore, they are classified as long-term liabilities.)

Bonds payable are usually classified on the balance sheet as:

$1,396 (Interest expense in year 1: $20,000 × 10% = $2,000; Principal reduction in year 1: $8,042 − $2,000 = $6,042; Principal balance at beginning of year 2: $20,000 − $6,042 = $13,958; Interest expense in year 2: $13,958 × 10% = $1,396.)

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be:

82,500 ($660,000 total par value ÷ $8 par value per share = 82,500 shares issued)

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value − common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

$86,391 ($176,225 beginning retained earnings + X revenues − $35,416 expenses − $17,800 cash dividends − $14,000 stock dividends = $195,400 ending retained earnings; X = $86,391.)

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $176,225 and $195,400 respectively. Also during Year 1, the corporation declared and paid cash dividends of $17,800 and issued stock dividends valued at $14,000. Total expenses were $35,416. Based on this information, what was the amount of total revenue for Year 1?

Increase liabilities and decrease stockholders' equity by $2,000. ($40,000 principal × 12% × 5 months ÷ 12 months = $2,000 interest expense. The accrual will increase liabilities (interest payable) and increase expenses, which will decrease net income and stockholders' equity (retained earnings).)

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will:

Choice D ($20,000 investment of Fred × 15% = $3,000; $32,000 investment of Barney × 15% = $4,800; $38,000 − ($3,000 + $4,800) = $30,200 remainder; $30,200 ÷ 2 = $15,100; $15,100 + $3,000 = $18,100 distribution to Fred; $15,100 + $4,800 = $19,900 distribution to Barney)

Fred and Barney started a partnership. Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 15% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 during an accounting period, the amount of income assigned to the two partners would be:

gross margin is $28.00 if Hoover uses the weighted average cost flow method. (If Hoover uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $33.00, not $35.00. If Hoover uses weighted average, the weighted average cost per unit is $34.00. Therefore, gross margin will be $28.00 ($62.00 Sales − $34.00 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $33.00 (earliest purchase), not $35.00.)

Hoover Company purchased two identical inventory items. The item purchased first cost $33.00. The item purchased second cost $35.00. Then Hoover sold one of the inventory items for $62.00. Based on this information, the amount of:

fixed or variable interest rate (Interest charges may be based on a fixed interest rate that remains constant during the term of the loan or may be based on a variable interest rate that fluctuates up or down during the loan period.)

Interest charges on notes payable may be based on a(n):

increase by $640,000 (Common stock will increase by $400,000, the par value, and paid-in capital in excess of par value will increase by $240,000, for a total increase in stockholders' equity of $640,000.)

Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:

$600 (($36,000 cost − $12,000 salvage value) ÷ 5 years = $4,800 annual depreciation expense; $36,000 cost − (3 years × $4,800) accumulated depreciation = $21,600 book value at the end of Year 3. $16,000 proceeds from sale − $21,600 = ($5,600) loss on sale of equipment; $30,000 revenue − $19,000 cash expenses − $4,800 depreciation expense − $5,600 loss on sale = $600 net income)

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $16,000, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:

$960 and $24,000 (($34,000 + $2,000) × (2 × 20%) = $14,400 depreciation in Year 1; Ending book value in Year 1 = $36,000 − $14,400 = $21,600; $21,600 × (2 × 20%) = $8,640 depreciation in Year 2; Ending book value in Year 2 = $21,600 − $8,640 = $12,960; $12,960 − $12,000 salvage value = $960 depreciation expense in Year 3 ($12,960 × 40% would depreciate the office equipment below its $12,000 salvage value); $14,400 + $8,640 + $960 = $24,000 accumulated depreciation at the end of Year 3.)

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Using double-declining-balance depreciation, what the amount of depreciation expense and the amount of accumulated depreciation, respectively, that would appear on the December 31, Year 3 financial statements?

$12,000 and $12,000. (At the end of Year 5, the end of the office equipment's 5-year useful life, the book value will be equal to the $12,000 salvage value, regardless of which depreciation method is used.)

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. At the end of Year 5, assuming the equipment had not been sold, the book value of the office equipment using straight-line depreciation and double-declining-balance depreciation, respectively, would be:

$80,000 (The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to building = Appraised amount for land of $100,000 ÷ Total appraised values of $1,000,000 (or $100,000 + $740,000 + $160,000) = 10%; Allocation of actual purchase price to land = Total purchase price of $800,000 purchase price × 10% = $80,000.)

Laramie Company paid $800,000 for a purchase that included land, building, and office furniture. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Land, $100,000, Building, $740,000, and Office Furniture, $160,000. Based on this information the cost that would be allocated to the land is:

A $16,000 cash inflow in the investing activities section of the cash flow statement. (This transaction increases assets (cash) by $16,000, decreases assets (the book value of asset) by $12,000 (or cost of $44,000 − accumulated depreciation of $32,000), resulting in a net increase in assets of $4,000. Because the cash proceeds of $16,000 exceed the asset's book value of $12,000, Madison also reports a gain on the sale of $4,000, which increases revenue (gain), net income, and stockholders' equity (retained earnings). The gain is not reported in the investing activities section; instead, the $16,000 cash proceeds are reported as a cash inflow for investing activities.)

Madison Company owned an asset that had cost $44,000. The company sold the asset on January 1, Year 4, for $16,000. Accumulated depreciation on the day of sale amounted to $32,000. Based on this information, the sale would result in:

55,500 (66,000 shares issued − 10,500 shares of treasury stock = 55,500 shares outstanding)

Montana Company was authorized to issue 145,000 shares of common stock. The company had issued 66,000 shares of stock when it purchased 10,500 shares of treasury stock. The number of outstanding shares of common stock was:

reduce total stockholders' equity by $4,375. (($24,000 cost − $1,000 salvage) ÷ 8 years = $2,875 original annual depreciation; $2,875 × 4 years = $11,500 accumulated depreciation at time of improvement; ($24,000 original cost − $11,500 accumulated depreciation + $6,000 improvement − $1,000 salvage) ÷ 4 remaining years = $4,375 new annual depreciation; Recognizing the Year 5 depreciation expense decreases assets (book value of the asset) and increases expenses (depreciation expense) by $4,375. Net income and stockholders' equity (retained earnings) also decrease by $4,375.)

On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

$36,000 ($48,000 × (2 × 12.5%) = $12,000 Depreciation expense for Year 1; $48,000 Cost − $12,000 Accumulated depreciation at end of Year 1 = $36,000 book value at the end of Year 1)

On January 1, Year 1, Friedman Company purchased a truck that cost $48,000. The truck had an expected useful life of 8 years and an $8,000 salvage value. The company uses the double-declining balance method. The book value of the truck at the end of Year 1 is:

$19,000 ($40,000 ÷ ($20,000 + $340,000 + $40,000) = 10% of total appraised value; $380,000 purchase price × 10% = $38,000 cost of equipment; $38,000 × (2 × 25% straight-line rate) = $19,000 depreciation expense in Year 1.)

On January 1, Year 1, Phillips Company made a basket purchase including land, a building and equipment for $380,000. The appraised values of the assets are $20,000 for the land, $340,000 for the building and $40,000 for equipment. Phillips uses the double-declining-balance method of depreciation for the equipment which is estimated to have a useful life of four years and a salvage value of $5,000. The depreciation expense for Year 1 for the equipment is:

$725 ($72,500 credit sales × 1% = $725 uncollectible accounts expense)

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. The amount of uncollectible accounts expense recognized in the Year 2 income statement will be:

$34,660 (The cost includes the purchase price (less discounts) plus any costs necessary to get the asset in the location and condition for its intended use. Maintenance costs are the costs of routine maintenance and minor repairs that are incurred to keep an asset in good working order. These costs are expensed in the period in which they are incurred. Cost of machine = $34,000 − ($34,000 × 5%) + $550 transportation + $1,360 sales tax + $450 installation = $34,660.)

On March 1, Bartholomew Company purchased a new stamping machine with a list price of $34,000. The company paid cash for the machine; therefore, it was allowed a 5% discount. Other costs associated with the machine were: transportation costs, $550; sales tax paid, $1,360; installation costs, $450; routine maintenance during the first month of operation, $500. The cost recorded for the machine was:

$1,120 outflow ($36,000 × 7% = $2,520 cash paid for interest on the note; $1,400 inflow from revenue − $2,520 outflow for interest = $1,120 outflow for operating activities. The repayment of principal is a financing activity.)

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

$770 ($36,000 × 7% × 3/12 months = $630 interest expense; $1,400 revenue − $630 interest expense = $770 net income)

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of net income on the Year 2 income statement would be:

$720 and $240 ($16,000 × 6% × 9/12 months = $720 interest revenue in April − December, Year 1; $16,000 × 6% × 3/12 months = $240 interest revenue in January − March, Year 2)

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report during the years ending December 31, Year 1 and Year 2, respectively, would be:

$5,700 ($190,000 revenue on account * 3% = $5,700)

The Miller Company recognized $190,000 of service revenue earned on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from accounts receivable. The company estimates that it will be unable to collect 3% of its sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement was:

net realizable value

The amount of accounts receivable that is actually expected to be collected is known as the:

have no effect on total assets or stockholders' equity.

The net effect of the entries to recognize the receipt of a previously written-off account under the allowance method is to:

The outcome is probable and can be reasonably estimated. (A contingent liability should be recorded in the financial statements as a liability if the outcome is considered probable and the amount owed can be reasonably estimated. If the outcome is considered only reasonably possible, it is only disclosed in the notes to the financial statements.)

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

When there is a settlement of a warranty claim made by a customer. (Cash is usually used to settle a warranty claim made by a customer, but is never used at the time the obligation is recognized as an expense. Although cash may be collected when the sale is made, that cash is not related to the warranty.)

When do the effects of product warranties appear on the statement of cash flows?

higher income and a higher inventory valuation than will FIFO. (When prices are falling, LIFO will produce a low cost of goods sold (most recent purchases) and a high ending inventory (earliest purchases), compared to FIFO, which will produce a high cost of goods sold (earliest purchases) and low ending inventory (most recent purchases).)

When prices are falling, LIFO will result in:

Income statement and balance sheet (On the income statement, recognizing depreciation increases expenses which decreases net income. On the balance sheet, recognizing depreciation decreases assets (book value of the asset) and stockholders' equity (retained earnings). The statement of cash flows is not affected at the time depreciation expense is recognized.)

Which financial statement(s) is (are) affected when depreciation expense is recognized?

LIFO (LIFO will produce cost of goods sold that is based on the most recent purchases.)

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?

An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note.

Which of the following correctly describes an installment note?

A corporation (Only a corporation issues stock; as such, it is the only type of entity that would have a paid-in capital in excess of par (or stated) value account.)

Which of the following entities would have a paid-in capital in excess of par (or stated) value account in the equity section of the balance sheet?

A corporation (Corporations are separate legal entities and pay income taxes on their earnings. Since sole proprietorships and partnerships are not separate legal entities, company earnings are taxable to the owners rather than to the company itself.)

Which of the following entities would report income tax expense on its income statement?

Unlimited liability

Which of the following is a disadvantage of a sole proprietorship?

Treasury Stock (Treasury stock is a contra equity account that is reported as a negative number (that is, a reduction of total stockholders' equity) on the balance sheet.)

Which of the following is a negative or contra equity account?

Lack of government regulation

Which of the following is not considered an advantage of the corporate form of business organization?

The right to vote before the common stockholders at the corporation's annual meeting.

Which of the following is not normally a preference given to the holders of preferred stock?

An increase to cash for $1,176, an increase to sales tax payable for $56, and an increase to sales revenue for $1,120. (The transaction is recorded as an increase to cash of $1,176, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $56, the amount owed to the state, and an increase to sales revenue of $1,120, the amount of the sale.)

Which of the following represents the impact of a taxable cash sale of $1,120 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400. (The transaction is recorded as an increase to cash of $420, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $20, the amount owed to the state, and an increase to sales revenue of $400, the amount of the sale.)

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

The balance in the treasury stock account reduces total stockholders' equity. (Treasury stock is a contra equity account that neither affects paid-in capital nor retained earnings.)

Which of the following statements about the impact of treasury stock on the amounts reported on the balance sheet is correct?

All of these are reasons a company would buy treasury stock. (The purchase of treasury stock reduces the number of shares outstanding, which can boost market price and guard against hostile takeover. It also makes shares available for employee stock benefits.)

Which of the following statements is a reason why a company would buy treasury stock?

Number of shares authorized (When a corporation is formed, it is authorized by the state to issue a maximum number of shares. The number of shares it initially issues is much lower.)

Which of the following terms designates the maximum number of shares of stock that a corporation may issue?

Deprecation

Which of the following terms is used to identify the process of expense recognition for property, plant and equipment?

Trademark

Which of the following would be classified as a long-term operational asset?