ACCT 250 Exam Chapter 9&10

On December 1, 2015, Crawley Corporation incurs a 15-year $600,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $7,200, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2015. The portion of the second monthly payment made on January 31,2016, which represents repayment of principal is:

$1,212 (600,000 * 0.01) = 6000 (600,000 - (7200-6000) = 598,800 (598,800*0.01) = 5,988 (7,200 - 5,988) = 1,212

If a fully depreciated plant asset is still used by a company, the

asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.

Additions to plant assets are:

capital expenditures

Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as:

capital expenditures

Maggie Sharrer Company expects to extract 20 million tons of coal from a mine that cost $12 million. If no salvage value is expected and 2 million tons are mined in the first year, the entry to record depletion will include a:

debit to Inventory of $1,200,000.

Bonds issued against the general credit of the borrower are called

debenture bonds

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a :

debit of $2,040 to Loss on Bond Redemption (800,000 * 1.04) = 832,000 (832,000 - 829,960) = $2,040

Gester Corporation redeems its $100,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a:

debit of $3,745 to Premium on Bonds Payable

Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2016, at 98. The journal entry to record the issuance will show a

debit to Cash for $1,960,000 2,000 * $1,000 * 0.98

A company receives $371, of which $21 is for sales tax. The journal entry to record the sale would include a

debit to Cash for $371

A company purchased factory equipment on April 1, 2016 for $160,000. It is estimated that the equipment will have a $20,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2016 is:

$10,500 $160,000 - $20,000 = $140,000/10 * 9/12 = $10,500

On October 1, 2016, Holt Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2016, balance sheet assuming that Holt Company uses the double-declining-balancing method of depreciation?

$108,000 $120,000 - $30,000 = $90,000 ($90,000/5) = $18,000 $18,000 + $90,000 = $108,000

Jefferson Company purchased a piece of equipment on January 1, 2019. The equipment cost $60,000 and has an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2020 under the double-declining-balance method?

$11,250 the depreciation rate would be 25% or (1/8 × 2). For 2019, annual depreciation expense is $15,000 ($60,000 book value × 25%); for 2020, annual depreciation expense is $11,250 [($60,000 − $15,000) × 25%]

Able Towing Company purchased a tow truck for $60,000 on January 1, 2017. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2019, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2019) and the salvage value to $2,000. What was the depreciation expense for 2019?

$12,100 First, calculate accumulated depreciation from January 1, 2017, through December 31, 2018, which is $9,600 {[($60,000 − $12,000)/10 years] × 2 years}. Next, calculate the revised depreciable cost, which is $48,400 ($60,000 − $9,600 − $2,000). Thus, the depreciation expense for 2019 is $12,100 ($48,400/4)

Henson Company incurred $600,000 of research and development costs in its laboratory to develop a new product. It spent $90,000 in legal fees for a patent granted on January 2, 2016. On July 31,2016 Henson paid $60,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2016?

$150,000 $90,000 + $60,000

A machine with a cost of $480,000 has an estimated salvage value of $30,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?

$150,000 ($480,000 - $30,000)/ 15,000 = 30 30 * 5000 = $150,000

Micah Bartlett Company purchased equipment on January 1, 2018, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The amount of accumulated depreciation at December 31, 2019, if the straight-line method of depreciation is used, is:

$156,000 ($400,000 − $10,000)/5 = $78,000. The sum of 2 years' depreciation is therefore $156,000 ($78,000 + $78,000)

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2019. The machine was purchased for $80,000 on January 1, 2015, and was depreciated on a straight-line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or loss recorded at the time of the sale?

$18,000 First, the book value needs to be determined. The accumulated depreciation as of June 30, 2019, is $36,000 [($80,000/10) × 4.5 years]. Thus, the cost of the machine less accumulated depreciation equals $44,000 ($80,000 − $36,000). The loss recorded at the time of sale is $18,000

An asset was purchased for $250,000. It had an estimated salvage value of $50,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $40,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be:

$22,000 ($250,000 - $50,000) * 5/10 = $100,000 ($250,000 - $40,000 - $100,000)/ (10-5) = $22,000

On July 4, 2016, Wyoming Mining Company purchased the mineral rights to a granite deposit for $1,600,000. It is estimated that the recoverable granite will be 400,000 tons. During 2016, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2016 would be :

$240,000 400000 - (100,000 + 60,000)

Erin Danielle Company purchased equipment and incurred the following costs. Cash price -$24,000 Sales taxes - $1,200 Insurance during transit - $200 Installation and testing - $400 Total costs - $25,800 What amount should be recorded as the cost of the equipment?

$25,800. All of the costs ($1,200 + $200 + $400) in addition to the cash price ($24,000)

Sargent Corporation bought equipment on January 1, 2016. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. Assuming straight-line depreciation, the book value of the equipment at the beginning of the third year would be:

$260,000 ($360,000-$60,000)/6 = $50,000 $50,000 * 2 = $100,000 $360,000 - $100,000 = $260,000

Maggie Sharrer Company borrows $88,500 on September 1, 2019, from Sandwich State Bank by signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2019?

$3,540 ($88,500 * 12% * (4/12))

A factory machine was purchased for $375,000 on January 1, 2016. It was estimated that it would have a $75,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2016. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2016 would be

$30,000 40,000/4,000 = 10 ($375,000-$75,000)/10 = $30,000

Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2019. On July 31, 2019, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2019, should be:

$35,000

Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, the amount to be credited to Sales Revenue is:

$4,300 ($4,515 ÷ 1.05)

Nicholson Company purchased equipment on January 1, 2014 for $80,000 with an estimated salvage value of $20,000 and estimated useful life of 8 years. On January 1, 2016, Nicholson decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $20,000. Using the straight-line method the new annual depreciation will be:

$4,500 ($80,000 - $20,000) * 2/8 = $15,000 ($80,000 - $20,000 - $15,000) = $45,000/ (12-2) = $4,500

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 Service Revenue at December 31?

$4,500 (3 months × $1,500)

Bargain Company has $1,500,000 of bonds outstanding. The unamortized premium is $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

$4,600 gain (1,500,000 + 19,600) - (1,500,000 * 1.01) 1519600 - 1515000 = $4600

A plant asset cost $288,000 and is estimated to have a $36,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be

$40,500 2/8= 0.25 * $288,000 = $72,000 ($288,000-$72,000) * 0.25 = $54,000 ($288,000-$72,000-$54,000) * 0.25 = $40,500

Schopenhauer Company exchanged an old machine, with a book value of $39,000 and a fair value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial substance. At what amount should the machine acquired in the exchange be recorded on Schopenhauer's books?

$45,000 $35,000 + $10,000

On May 1, 2016, Pinkley Company sells office furniture for $300,000 cash. The office furniture originally cost $750,000 when purchased on January 1, 2009. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $75,000. What gain should be recognized on the sale?

$45,000 ($300,000 - $75,000) * 8/10 = $180,000/4 = $45,000

Equipment was purchased for $300,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $60,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

$58,800 $300,000 + $14,000 + $40,000 = ($354.000 - $60,000)/5 = $58,800

Engler Company purchases a new delivery truck for $55,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck?

$60,890 $55,000 + $4,000 + $1,600 + $290

Hull Company acquires land for $86,000 cash. Additional costs are as follows: Removal of Shed - $ 300 Filling and grading - $ 1,500 Salvage value of lumber of shed - $ 120 Broker commission - $ 1,130 Paving of parking lot - $ 10,000 Closing costs - $ 560 Hull will record the acquisition cost of the land as:

$89, 370 $86,000-$120= $85,880 + $300 + $1,500 + $1,130 + $560

A company sells a plant asset which originally cost $360,000 for $120,000 on December 31, 2016. The Accumulated Depreciation account had a balance of $144,000 after the current year's depreciation of $36,000 had been recorded. The company should recognize a :

$96,000 loss on disposal ($360,000 - $120,000 - 144,000)

Ann Torbert purchased a truck for $11,000 on January 1, 2018. The truck will have an estimated salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in accumulated depreciation at December 31, 2019, can be computed by the following formula:

($10,000 ÷ Total estimated activity) × Units of activity for 2018 and 2019.

Indicate which of the following statements is true. (a) Since intangible assets lack physical substance, they need be disclosed only in the notes to the financial statements. (b) Goodwill should be reported as a contra account in the stockholders' equity section. (c) Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements. (d) Intangible assets are typically combined with plant assets and natural resources, and shown in the property, plant, and equipment section.

(c) Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the notes to the financial statements.

Hardy Company has current assets of $95,000, current liabilities of $100,000, long-term assets of $180,000, and long-term liabilities of $80,000. Hardy Company's working capital and its current ratio are :

-$5,000 and .95:1

Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets of $200,000, and ending total assets of $300,000. What was the company's asset turnover?

0.72 times Asset turnover = Net sales ($180,000)/Average total assets [($200,000 + $300,000)/2] = 0.72

Mehring Company reported net sales of $540,000, net income of $72,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company's asset turnover?

1.8 times $540,000 ($240,000 + $360,000)/2 = $300,000 ($540,000/$300,000) = 1.8

The 2016 financial statements of Marker Co. contain the following selected data (in millions) Current Assets - $ 75 Total Assets - $ 140 Current Liabilities - $ 40 Total Liabilities - $ 90 Cash - $ 8 The debt to assets ratio is :

64.3% (90/140) * 100

The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable :

Add - premium on bonds payable Deduct - discount on bonds payable

On January 1, 2016, Howard Company, a calendar-year company, issued $900,000 of notes payable, of which $225,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2016 is

Current Liabilities - $225,000 Long-term Debt - $675,000

Which of the following payroll taxes does NOT result in a payroll tax expense for the employer?

Federal income tax

Identify the item below where the items are not related

Franchise - depreciation

Which one of the following is shown first under current liabilities by many companies as a matter of custom?

Notes payable

The entry to record patent amortization usually includes a credit to

Patents

Depreciation is the process of allocating the cost of a plant asset over its service life in

a systematic and rational manner

In the balance sheet, mortgage notes payable are reported as

both a current and a long-term liability

In exchanges of assets in which the exchange has commercial substance:

both gains and losses are recognized immediately

JD Company borrowed $70,000 on December 1 on a 6-month, 12% note. At December 31:

both the note payable and the interest payable are current liabilities

Depreciation is a process of:

cost allocation

On January 1, 2019, Kelly Corp. issues $200,000, 5-year, 7% bonds at face value. The entry to record the issuance of the bonds would include a:

credit to Bonds Payable for $200,000

On December 31, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on December 31, 2019. The entry on December 31, 2020, to record payment of bond interest and the amortization of bond discount using the straight-line method will include a:

credit to Discount on Bonds Payable $4,000.

Prescher Corporation issued bonds that pay interest every July 1 and January 1. The entry to accrue bond interest at December 31 includes a:

credit to Interest Payable

On the date of issue, Chudzick Corporation sells $5 million of 5-year bonds at 97. The entry to record the sale will include the following debits and credits:

credit: Bonds Payable - $5,000,000 debit: Discount on Bonds Payable - $150,000

When there is a change in estimated depreciation:

current and future years' depreciation should be revised

Which of the following statements is false? (a) If an intangible asset has a finite life, it should be amortized. (b) The amortization period of an intangible asset can exceed 20 years. (c) Goodwill is recorded only when a business is purchased. (d) Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.

d) Research and development costs are expensed when incurred, except when the research and development expenditures result in a successful patent.

Notson Textile purchased machinery for $60,000 eight years ago. It was expected to have a useful life of ten years, no salvage value, and was depreciated using the straight-line method. At the end of its eighth year of use, it was retired from service and given to a junk dealer. The entry to record the retirement includes a:

debit to Loss on Disposal of Plant Assets for $12,000 $60,000/10 = $6,000 $6,000 * 2 = $12,000

Thirty $1,000 bonds with a carrying value of $39,600 are converted into 4,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is

debit: Bonds Payable - $30,000 debit: Premium on Bonds Payable - $9,600 credit: Common Stock - $20,000 credit: Paid-in Capital in Excess of Par - $19,600

Four thousand bonds with a face value of $1,000 each, are sold at 105. The entry to record the issuance is :

debit: Cash - $4,200,000 credit: Premium on Bonds Payable - $200,000 credit: Bonds Payable - $4,000,000

On January 1, 2016, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 102. Interest is payable semi-annually on January 1 and July 1. The journal entry to record this transaction on January 1, 2016 is :

debit: Cash - $5,100,000 credit: Bonds Payable - $5,00,000 credit: Premium on Bonds Payable - $100,000

Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is

debit: Cash - $600,000 credit: Notes Payable - $600,000

Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30?

debit: Interest Expense - $24,000 credit: Interest Payable - $24,000

Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

debit: Notes Payable - $600,000 debit: Interest Payable - $36,000 credit: Cash - $636,000

Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim's Pharmacy make to show the March remittance?

debit: Sales Taxes Payable - $600 credit: Cash - $600

Employee payroll deductions include each of the following except

federal unemployment taxes

If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semi-annually would sell at an amount

greater than face value

A loss on disposal of a plant asset is reported in the financial statements

in the Other Expenses and Losses section of the income statement

From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that

interest must be paid on a periodic basis regardless of earnings

Accumulated Depreciation

is a contra-asset account

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

longer

If bonds are issued at a discount, it means that the

market interest rate is higher than the contractual interest rate

To be classified as a current liability, a debt must be expected to be paid within:

one year or the operating cycle - whichever is longer

When recording payroll:

payroll deductions are recorded as liabilities

Intangible assets

should be reported as a separate classification on the balance sheet