ACCT 212 Chapter 10 Midterm Review

Dehesa, Inc. has 8,000 shares of 5%, $50 par, cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. No dividends were declared last year, However, the board of directors just declared a $50,000 dividend this year to be paid in 10 days. What amount of the total dividend will be paid to common stockholders?

$10,000 Before the common stockholders receive any dividends, preferred dividends should first be distributed for the dividends in arrears in the prior year and the current year. Total dividend = 8,000 × 5% × $50 = $20,000/year Preferred dividends in arrears for one year $20,000 Preferred for current year 20,000 Total dividends to preferred stockholders 40,000 Total dividends available (50,000) Dividends available to common stockholders $10,000

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Revenue at December 31? The portion of the premium not yet earned should be recognized as a liability by Sensible.

$13,500

If a corporation issues 1,000 shares of $3 par common stock for $7 a share, how much is the legal capital?

$3,000 The legal capital is the par value per share ($3) times the number of shares issued (1,000) or $3,000. This will be equal to the total reported in the stock account.

Buttner Company borrows $88,500 on September 1, 2014, from Harrington State Bank by signing an $88,500, 12%, one-year note. How much is accrued interest at December 31, 2014?

88,500x.012=10,620 / 3 = $3,540

What do liquidity ratios measure?

A company's short-term debt paying ability

If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at

A discount.

What is the cash debt coverage?

A measure of solvency

How do companies record obligations?

Accounts payable, Notes payable

In performing accounting services for small businesses, you encounter the following situations pertaining to cash sales. 1. Cerviq Company enters sales and sales taxes separately on its cash register. On April 10, the register totals are sales $22,000 and sales taxes $1,100. 2. Quartz Company does not segregate sales and sales taxes. Its register total for April 15 is $13,780, which includes a 6% sales tax.

Apr. 10 Cash 23,100 Sales Revenue 22000 Sales Taxes Payable 1100 Apr.15 Cash 13780 Sales Revenue 1300 Sales Taxes Payable 780

How are liabilities classified on the balance sheet?

As current and long-term

The carrying value of a bond is equal to the face value of the bond less the unamortized bond discount or plus the unamortized bond premium when a bond is redeemed

Before the maturity date.

On January 1, Anthony Corporation issued $1,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $1,072,096. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, how much is the debit entry to Bond Interest Expense?

Bond interest expense for the first interest date = $1,072,096 × 12% = $128,652.

What are secured bonds?

Bonds that have specific assets of the issuer pledged as collateral.

Five thousand bonds with a face value of $2000 each, are sold at 108. The entry to record the issuance is

Cash 10800000 Premium on Bonds Payable 800000 Bonds Payable 10000000 (5000 × $2000) × 1.08 = $10800000 (Num. of bonds × $2000) × 1.08

Bridle Inc. issues $300,000, 10-year, 8% bonds at 98. Prepare the journal entry to record the sale of these bonds on March 1, 2017.

Cash 294,000 (D) Discount on Bonds Payable 6,000 (D) Bonds Payable 300,000 (C)

Carolina University sold 9,000 season football tickets at $100 each for its five-game home schedule. (a) What entry should be made when the tickets are sold? (b) What entry should be made after each game?

Cash 900000 Unearned Ticket Revenue 900000 Unearned Ticket Revenue 180000 Ticket Revenue 180000

Which of the following items is reported in the operating activities section of a statement of cash flows prepared using the direct method?

Cash payments to suppliers Cash payments to suppliers are reported in the operating activities section when the direct method is used.

Bonds that may be exchanged for ________ at the option of the bondholders are called convertible bonds.

Common stock

The Discount on Bonds Payable account is a

Contra Account

Harrison, Inc. issued 4,000 shares of common stock at $12 per share. If the stock has a par value of $0.50 per share, which of the following will be part of the journal entry to record the issuance?

Credit to Common Stock for $2,000 (Answer) The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 4,000 × $12 = $48,000 Credit to Common stock = 4,000 × $0.50 = $2,000 Credit to Paid-in capital in excess of par value = 4,000 × ($12 - $0.50) = $46,000

________ incurred from day-to-day operations are usually paid with current assets.

Current liabilities

Which of the following is most commonly listed first in the liabilities section of the balance sheet?

Current notes payable

Which of the following is a measure of liquidity?

Current ratio

At January 1, 2019, when the carrying value of the bonds was $5,120,000, the company redeemed the bonds at 104. Record the redemption of the bonds assuming that interest for the year had already been paid.

Dec. 31 Bonds Payable 5,000,000 (D) Premium on Bonds Payable 120,000 (D) Loss on Bond Redemption 80,000 (D) Cash 5,200,000 (C)

When amortizing the premium of a bond, the interest expense reported each period will

Decrease

Q 12.7: When preparing the statement of cash flows, the FASB prefers that companies use the ________ method.

Direct

When a bondholder sells their bond investment to another investor, the issuing corporation

Does not journalize the transaction.

At maturity, the book value of bonds should be ________ their face value.

Equal to

If bonds have a contractual interest rate that is equal to the market interest rate at the time of issuance, they are said to be sold at

Face Value

When a bond is redeemed before maturity, the carrying value of the bonds is equal to the

Face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.

If the contractual rate of interest is lower than the market rate of interest, bonds will sell at a premium.

False, If the contractual rate of interest is lower than the market rate of interest, bonds will sell at a discount.

Sales taxes are an expense to the retailer.

False, Sales tax is an expense borne by the buyer and collected by the retailer who records the tax as a liability.

The stockholders of a corporation have unlimited liability.

False, The liability of a stockholder is normally limited to their investment in the corporation.

When stock dividends are declared and issued, total stockholders' equity increases.

False, When stock dividends are declared and issued, total stockholders' equity remains the same.

Current notes payable is usually listed ________ in the liabilities section of the balance sheet.

First

Under the indirect method of preparing the statement of cash flows, which of the following is deducted from net income in the operating activities section?

Gain on sale of land A gain on the sale of land should be deducted from net income in the operating activities section because gains are added in determining net income and the goal is to remove all non-cash amounts from net income.

An unsecured bond is one that is issued against the

General credit of the borrower.

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

Government Regulation: Because a corporation is a separate legal entity and because of the government's desire to protect stockholders, corporations are heavily regulated

Hernando purchased a $5,000 bond issued by Jamison Holdings on March 6, 2017. The bond is due in three years and has an annual rate of 6.4 percent. How much interest should Hernando expect to collect each year that he holds the bond?

Hernando will receive annual interest payments of $5,000 x 0.064 = $320.

Q 12.11: ________ is added to net income in order to determine cash provided by operations when using the indirect method.

Increase in accounts payable

On October 1, Sam's Painting Service borrows $146000 from National Bank on a 3-month, $146000, 4% note. What entry must Sam's Painting Service make on December 31 before financial statements are prepared?

Interest Expense 1460 Interest Payable 1460 $146000 × 0.04 × 3/12 = $1460 (Amount bor. × 4% × 3/12)

Times Interest Earned

Is a measure of solvency that indicates if a company can meet interest payments as they come due.

Crescent Electric sold $5,000,000, 9%, 10-year bonds on January 1, 2017. The bonds were dated January 1 and pay interest on January 1. The bonds were sold at 103.

Jan..1 Cash 5150000 (D) Bonds Payable 5000000 (C) Premium on Bonds Payable 150000 (C)

On June 1, Shamrock, Inc. issues 2,600 shares of no-par common stock at a cash price of $8 per share. Journalize the issuance of the shares.

Jun. 1 Cash 20,800 (D) Common Stock 20,800 (C)

The most common way to present current liabilities on the balance sheet is by

Listing notes payable first.

At December 31, 2017, $15,000 of the bond premium had been amortized. Show the long-term liability balance sheet presentation of the bond liability at December 31, 2017.

Long-Term Liabilities Bonds Payable 5,000,000 (D) Add Premium on Bonds Payable 135,000 (D) TOT 5,135,000

What is included in current maturities of long-term debt as recorded on the balance sheet?

Long-term debt due within one year

he time period for classifying a liability as current is one year or the operating cycle, whichever is

Longer

During which phase of the corporate life cycle are cash from operations and net income approximately equal?

Maturity In the maturity stage, net income and cash from operations are approximately the same.

The book value of bonds should always be equal to their face value on which date?

Maturity date

On May 10, Flounder Corp. issues 1,500 shares of $4 par value common stock for cash at $15 per share. Journalize the issuance of the stock.

May.10 Cash 22,500 (D) Common Stock 6,000 (C) Paid-in Capital in Excess of Par Value-Common Stock 16,500 (C)

Mortgages are long-term liabilities as they are typically paid over 15 to 30 years. Which one of the following is not a typical current liability?

Mortgages payable

Which one of the following is not a typical current liability?

Mortgages payable

Bramble Corp. has 9,500 shares of common stock outstanding. It declares a $2 per share cash dividend on November 1 to stockholders of record on December 1. The dividend is paid on December 31. Prepare the entries on the appropriate dates to record the declaration and payment of the cash dividend.

Nov. 1 Cash Dividends 19,000 (D) Dividends 19,000 (C) Dec. 31 Dividends Payable 19,000 (D) Cash 19,000 (C)

Which of the following increases when a corporation purchases treasury stock?

Number of treasury shares

Where is the amount of interest expense reported on the income statement?

Other Expenses and Losses

Which of the following is an operating activity?

Payment of interest

Q 11.5: The cumulative feature of gives these shareholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends.

Preferred Stock

A bond sold for more than face value is said to be sold at a

Premium

The current market value of a bond is equal to the ________ value of all future cash payments promised by the bond.

Present

Which one of the following is not a right of preferred stockholders?

Priority voting rights

Which is an example of a cash flow from an investing activity?

Receipt of cash from the sale of equipment Investing activities include acquiring and disposing of investments and property, plant, and equipment, and lending money and collecting loans.

The corporate charter of Gagne Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first 2 years of operation, Gagne sold 70,000 shares to shareholders and reacquired 4,000 of these shares. After these transactions, how many shares are authorized, issued, and outstanding?

Shares Authorized 100,000 Shares Issued 70,000 Shares Outstanding 66,000

________ ratios measure the ability of a company to survive over a long period of time.

Solvency

Ayayai Corp. has these accounts at December 31: Common Stock, $10 par, 4,500 shares issued, $45,000; Paid-in Capital in Excess of Par Value $18,000; Retained Earnings $43,000; and Treasury Stock, 400 shares, $8,800.

Stockholder's Equity Paid-in Capital Capital Stock Common Stock 45,000 Additional Paid-in Capital Paid-in Capital in Excess of Par Value-Common Stock 18,000 Total Paid-in Capital 63,000 Retained Earnings 43,000 Total Paid-in Capital and Retained Earnings 106,000 Less Treasury Stock 8,800 Total Stockholders' Equity 97,200

Solvency ratios measure the ability of a company to

Survive over a long period of time.

What is the effect of amortizing a bond discount?

The amortization of a bond discount increases the carrying value of the bond issue because as the discount is reduced, the net amount, or carrying value increases.

Andre Company collected $4,515 from cash sales to customers, which includes both sales revenue and 5% sales taxes. How much should be recognized as sales revenue?

The amount of sales can be computed by dividing total cash received by one plus the sales tax rate of 5%. The computation is as follows: $4,515/1.05 = $4,300

Which of the following statements is true?

The current portion of long-term debt should be reclassified as a current liability.

Which of the following is true about the preparing the statement of cash flows?

The indirect method is easier and less costly to prepare than the direct method. It takes the same information to construct the statement of cash flows. The two major reasons companies favor the indirect method are 1) it is easier to prepare and 2) it focuses on the differences between net income and cash flows from operating activities.

If everything else is held constant, what will cause earnings per share to increase?

The purchase of treasury stock The purchase of treasury stock reduces the number of shares outstanding, which is the denominator of EPS. With a smaller denominator, earnings per share is larger.

For what reason might a company acquire treasury stock?

To reissue the shares to officers and employees under bonus and stock compensation plans

Unearned revenue is a type of current liability.

True, Unearned revenue indicates that a service or product needs to be provided in the future.

Which of the following statements is true about convertible bonds?

Until conversion, convertible bonds pay interest.

How can a company pay its current liabilities?

With existing current assets, through creation of other current liabilities.

The amount of sales tax collected by a retail store when making sales is

a current liability.

Bonds are

a form of interest-bearing notes payable.

Q 12.6: Due to the disparity between ________ and ________, cash-based ratios are increasing in popularity.

accrual accounting; cash flows

Q 12.9: A company has a loss on the sale of equipment. If the company uses the indirect method, what process will it use to figure out cash provided by operations?

add the loss to net income

In the balance sheet, the account Discount on Bonds Payable is

added to bonds payable.

The current portion of long-term debt should

be reclassified as a current liability.

Q 12.4: Free cash flow is calculated by subtracting ________ from net cash provided by operating activities.

both cash dividends and capital expenditures

Q 12.13: What is the definition of free cash flow?

cash provided by operating activities less capital expenditures and cash dividends

The following totals for the month of April were taken from the payroll records of Windsor, Inc.. Salaries $103200 FICA taxes withheld 7890 Income taxes withheld 21500 Medical insurance deductions 3900 Federal unemployment taxes 280 State unemployment taxes 1860 The entry to record accrual of employer's payroll taxes would include a

credit to Payroll Tax Expense for $2140. $7890 + $280 + $1860 = $10030 (FICA tax. + fed. unemp. tax. + st. unemp. tax.)

Sheffield Corp. issues 5600, 10-year, 8%, $1000 bonds dated January 1, 2017, at 98. The journal entry to record the issuance will show a

debit to Discount on Bonds Payable for $112000. (5600 × $1000) × (1 - 0.98) = $112000 (Num. of bonds × $1000) × (1 - 0.98)

A contingency is a(n)

event with an uncertain outcome that may represent a potential liability.

The statement of cash flows classifies cash receipts and payments into four activity categories.

false. The statement of cash flows classifies cash receipts and payments into three activity categories: operating, investing, and financing.

Q 12.16: The measure that describes cash from operating activities after adjusting for capital expenditures and cash dividends is called

free cash flow

Q 12.8: What is the measure that describes cash from operating activities less capital expenditures and cash dividends?

free cash flow

Q 12.15: Capital expenditures and cash dividends must be taken into account when calculating

free cash flows.

Q 12.5: Under the indirect method, which of the following would be included in the cash flows from operating activities section on the statement of cash flows?

gains and losses from the sale of equipment used in operations

Q 12.12: Which of the following adjustments must be made when converting net income to net cash provided by operating activities using the indirect method?

increases in inventory and prepaid expenses must be deducted

Q 12.10: The first phase of the corporate life cycle is the ________ phase.

introductory

Q 12.17: Purchasing fixed assets is often a key focus of which step in the corporate life cycle?

introductory phase

Liabilities are classified on the balance sheet as current or..

long-term.

A bond sold at a discount is

sold for less than the face value.

Q 12.14: Which of the following must be prepared along with an income statement, balance sheet, and retained earnings statement?

statement of cash flows

Current liabilities are expected to be paid within one year or

the operating cycle, whichever is longer.

Significant noncash activities are a part of the statement of cash flows.

true. Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows, or in a separate note or supplementary schedule to the financial statements. This satisfies the full disclosure principle.