ACCTCY 2010 Exam 2

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:

$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.

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: (Round your answer to the nearest dollar.)

$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.

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?

$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

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:

$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

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?

$82,500 $660,000 total par value / $8 par value per share = 82,500 shares issued

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $161,967 and $193,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $17,100 and issued stock dividends valued at $13,500. Total expenses were $34,916. Based on this information, what was the amount of total revenue for Year 1?

$97,449 $161,967 beginning retained earnings + X revenues − $34,916 expenses − $17,100 cash dividends − $13,500 stock dividends = $193,900 ending retained earnings; X = $97,449.

The term "Retained Earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

Which of the following statements best describes the term "par value?"

An amount used in determining a corporation's legal capital.

Which of the following represents the impact of a taxable cash sale of $1,040 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $1,092, an increase to sales tax payable for $52, and an increase to sales revenue for $1,040. The transaction is recorded as an increase to cash of $1,092, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $52, the amount owed to the state, and an increase to sales revenue of $1,040, 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%?

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 $880 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $924, an increase to sales tax payable for $44, and an increase to sales revenue for $880. The transaction is recorded as an increase to cash of $924, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $44, the amount owed to the state, and an increase to sales revenue of $880, the amount of the sale.

Which of the following correctly describes an installment note?

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

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:

$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.

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $154,900 and $205,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $22,700 and issued stock dividends valued at $17,500. Total expenses were $38,916. Based on this information, what was the amount of total revenue for Year 1?

$130,116 $154,900 beginning retained earnings + X revenues − $38,916 expenses − $22,700 cash dividends − $17,500 stock dividends = $205,900 ending retained earnings; X = $130,116.

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,000,000 units over its 5-year useful life and has salvage value of $34,000. Harding produced 265,000 units with the equipment by the end of the first year of purchase. Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year? (Do not round your intermediate calculations.)

$157,145 Percent of purchase price to be allocated to equipment = (Appraised value of equipment of $726,000 ÷ Total appraised value of $2,200,000 (or $374,000 + $1,100,000 + $726,000) = 33%; Cost of equipment = Purchase price of $1,900,000 × 33% = $627,000; Cost per unit of production = (Cost of equipment of $627,000 − Salvage value of $34,000) ÷ Productive capacity of 1,000,000 units = $0.593 per unit; Year 1 depreciation = $0.593per unit × 265,000 units = $157,145

Chico Company paid $950,000 for a basket purchase that included office furniture, a building and land. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Office furniture $190,000; Building $740,000, Land $132,000. Based on this information, the amount of cost that would be allocated to the office furniture is closest to: (Round your intermediate percentages to 2 decimal places: ie 0.054231 = 5.42%.)

$171,000. 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 office furniture = Appraised amount for office furniture of $190,000 ÷ Total appraised values of $1,062,000 (or $190,000 + $740,000 + $132,000) = 17.89%; Allocation of purchase price to office furniture = Total purchase price of $950,000 × 17.89% = $169,955.

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:

$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 2, Grande Company had a $16,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During Year 2, Grande provided $104,000 recognized service revenue on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement is:

$2,080 $104,000 sales on account × 2% = $2,080 uncollectible accounts expense

The inventory records for Radford Company reflected the following Beginning inventory on May 1: 100 units @ $4.00 First purchase on May 7: 300 units @ $4.40 second purchase on May 17: 500 units @ $4.60 Third purchase on May 23: 100 units @ $4.80 Sales on May 31: 900 units @ $7.80 What is the amount of gross margin assuming the weighted average cost flow method is used?

$2,970 Under the weighted-average method, the average cost of inventory is reported on both the income statement and the balance sheet. Weighted average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit; Gross margin = Sales of (900 × $7.80) − Cost of goods sold of (900 × $4.50) = $2,970.

At the end of the accounting period, Houston Company had $8,800 of par value common stock issued, additional paid-in capital in excess of par value − common of $11,500, retained earnings of $9,000, and $7,000 of treasury stock. The total amount of stockholders' equity is:

$22,300. $8,800 common stock + $11,500 additional paid-in capital in excess of par value + $9,000 retained earnings − $7,000 treasury stock = $22,300

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

$24,800 $24,000 × 8% × 5/12 = $800 interest payable; $24,000 notes payable + $800 interest payable = $24,800 total liabilities.

The inventory records for Radford Company reflected the following Beginning inventory on May 1: 100 units @ $4.00 First purchase on May 7: 300 units @ $4.40 second purchase on May 17: 500 units @ $4.60Third purchase on May 23: 100 units @ $4.80 Sales on May 31: 900 units @ $7.80 What is the amount of gross margin assuming the FIFO cost flow method is used?

$3,000 Cost of goods sold = (100 × $4.00) + (300 × $4.40) + (500 × $4.60) = $4,020; Gross margin = $7,020 sales − $4,020 cost of goods sold = $3,000.

On January 1, Year 2, the Accounts Receivable balance was $37,000 and the balance in the Allowance for Doubtful Accounts was $2,800. On January 15, Year 2, an $800 uncollectible account was written-off. The net realizable value of accounts receivable immediately after the write-off is:

$34,200. $37,000 − $800 = $36,200 accounts receivable balance after the write-off; $2,800 − $800 = $2,000 allowance balance after the write-off; $36,200 − $2,000 = $34,200 net realizable value after the write-off.

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:

$34,660 Cost of machine = $34,000 − ($34,000 × 5%) + $550 transportation + $1,360 sales tax + $450 installation = $34,660.

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 total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

$37,890 ans $0 $36,000 × 7% × 9/12 months = $1,890 interest payable on December 31, Year 1; $36,000 note payable + $1,890 interest payable = $37,890; the note is repaid before the end of Year 2, so there is no remaining liability.

The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 units @ $7.80 What is the amount of cost of goods sold assuming the LIFO cost flow method is used?

$4,100 Under LIFO, the cost of the items purchased last is reported on the income statement, and the cost of the items purchased first is reported on the balance sheet. Cost of goods sold = (100 × $4.80) + (500 × $4.60) + (300 × $4.40) = $4,100

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 net realizable value of Miller's receivables at the end of Year 2 was:

$48,300. $0 beginning balance + $190,000 revenue on account − $136,000 collections = $54,000 ending accounts receivable balance; $0 beginning balance + $5,700 uncollectible accounts expense − $0 write-offs = $5,700 ending allowance for doubtful accounts balance; $54,000 − $5,700 = $48,300 net realizable value

The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 units @ $7.80 What is the amount of ending inventory assuming the FIFO cost flow method is used?

$480 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. Ending inventory = 1,000 units available for sale − 900 units sold = 100 units in ending inventory; Cost of ending inventory = 100 × $4.80 = $480

The inventory records for Radford Company reflected the following Beginning inventory on May 1: 100 units @ $4.00 First purchase on May 7: 300 units @ $4.40 second purchase on May 17: 500 units @ $4.60 Third purchase on May 23: 100 units @ $4.80 Sales on May 31: 900 units @ $7.80 What is the amount of ending inventory assuming the FIFO cost flow method is used?

$480 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. Ending inventory = 1,000 units available for sale − 900 units sold = 100 units in ending inventory; Cost of ending inventory = 100 × $4.80 = $480

Domino Company uses the aging of accounts receivable method to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During the year, the company wrote off $4,640 in uncollectible accounts. In preparation for the company's Year 2 estimate, Domino prepared the following aging schedule: What will Domino record as Uncollectible Accounts Expense for Year 2?

$6,132 ($104,000 × 1%) + ($45,000 × 5%) + ($9,920 × 10%) + ($4,440 × 25%) + ($3,800 × 50%) = $7,292 estimated ending allowance balance; $5,800 beginning allowance balance + uncollectible accounts expense − $4,640 write-offs = $7,292 ending allowance balance; uncollectible accounts expense = $7,292 − $5,800 + $4,640 = $6,132

ing 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:

$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

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:

$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

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:

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

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:

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

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account. During the accounting period the business borrowed $30,000 from a bank, earned $18,000 of net income, and Scott withdrew $12,000 cash from the business. Based on this information, at the end of the accounting period Scott's capital account contained a balance of:

$81,000 $75,000 + $18,000 net income − $12,000 withdrawal = $81,000 ending balance in capital account

On January 1, Year 1, Missouri Company purchased a truck that cost $57,000. The truck had an expected useful life of 10 years and a $6,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is:

$9,120. $57,000 × (2 × 10%) = $11,400 depreciation expense in Year 1. ($57,000 − $11,400) × (2 × 10%) = $9,120 depreciation expense in Year 2.

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:

$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

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. What value will be recorded for the building?

$950,000 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 building of $1,100,000 ÷ Total appraised values of $2,200,000 (or $374,000 + $1,100,000 + $726,000) = 50%; Allocation of actual purchase price to building = Total purchase price of $1,900,000 × 50% = $950,000

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?

$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.

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $161,967 and $193,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $17,100 and issued stock dividends valued at $13,500. Total expenses were $34,916. Based on this information, what was the amount of total revenue for Year 1?

$97,449 $161,967 beginning retained earnings + X revenues − $34,916 expenses − $17,100 cash dividends − $13,500 stock dividends = $193,900 ending retained earnings; X = $97,449.

Montana Company was authorized to issue 140,000 shares of common stock. The company had issued 63,000 shares of stock when it purchased 10,000 shares of treasury stock. The number of outstanding shares of common stock was:

53,000. 63,000 shares issued − 10,000 shares of treasury stock = 53,000 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:

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

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:

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.

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.

Benitez Company had sales of $260,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $3,300 of warranty obligations paid in cash during Year 1. Based on this information:

All of these answer choices are correct.

Benitez Company had sales of $620,000 in Year 1. The company expects to incur warranty expenses amounting to 2% of sales. There were $8,400 of warranty obligations paid in cash during Year 1. Based on this information:

All of these answer choices are correct. $620,000 × 2% = $12,400 warranty expense is recognized in Year 1. Cash decrease by $8,400 when the warranty obligations are paid. Warranties payable increases by $12,400 when warranty expense is recognized and decreases by $8,400 when warranty obligations are paid, for a net increase of $4,000.

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

All of these are reasons a company would buy treasury stock.

Which of the following is a reason why a corporation may choose not to pay dividends?

All of these are valid reasons to not pay dividends.

Which of the following represents the impact of a taxable cash sale of $1,250 on the accounting equation if the sales tax rate is 4%?

An increase to cash for $1,300, an increase to sales tax payable for $50, and an increase to sales revenue for $1,250. The transaction is recorded as an increase to cash of $1,300, the amount of the sale, plus the 4% sales tax collected, an increase to sales tax payable of $50, the amount owed to the state, and an increase to sales revenue of $1,250, the amount of the sale.

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 $38,000 during an accounting period, the amount of income assigned to the two partners would be: FredBarneyA.$ 20,500$ 17,500B.$ 20,000$ 18,000C.$ 19,000$ 19,000D.$ 18,100$ 19,900

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

The term "double taxation" refers to which of the following?

Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on the dividends they receive from the corporation.

Houff Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company's accounting equation?

Have no effect on total assets, liabilities, or stockholders' equity

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

Income statement and balance sheet

Ogilvie Corporation issued 12,000 shares of no-par stock for $40 per share. Ogilvie was authorized to issue 35,000 shares. What effect will this event have on the company's financial statements?

Increase assets by $480,000, increase stockholders' equity by $480,000. Assets (cash) and stockholders' equity (common stock) both increase by $480,000 (12,000 shares × $40). The cash inflow is a financing activity, not an investing activity.

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:

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.

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:

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).

At a time of declining prices, which cost flow method will result in the highest ending inventory?

LIFO

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?

LIFO

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

Lack of government regulation

The balance in Accounts Receivable at the beginning of the period amounted to $16,000. During the period $64,000 of credit sales were made to customers. If the ending balance in Accounts Receivable amounted to $10,000, and uncollectible accounts expense amounted to $4,000, then the amount of cash inflow from customers that would appear in the operating activities section of the cash flow statement would be:

None of these answers are correct

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:

Reduce total stockholder's 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.

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

The balance in the treasury stock account reduces total stockholders' equity.

On January 2, Year 1, Torres Corporation issued 20,000 shares of $10 par-value common stock for $11 per share. Which of the following statements is true?

The paid-in capital in excess of par value account will increase by $20,000. The cash account will increase by $220,000 (20,000 × $11), the common stock account will increase by $200,000 (20,000 × $10 par value), and the paid-in capital in excess of par value account will increase by $20,000 (20,000 × $1).

Which of the following is not an advantage of accepting credit cards from retail customers?

There are fees charged for the privilege of accepting credit cards.

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

To repay the interest and repay the debt

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

Treasury Stock

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

When there is a settlement of a warranty claim made by a customer.

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:

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.

The net effect of the entries to recognize the write-off under the allowance method is to:

have no effect on total assets or stockholder's equity

Bonds payable are usually classified on the balance sheet as:

long-term liabilities.

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

net realizable value.

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. Kincaid's entry to recognize the write-off of the uncollectible accounts will:

not affect total assets or stockholders' equity.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

zero. The $24,000 borrowed is classified as a financing activity, not an operating activity. No interest was paid in Year 1, so there is no cash flow related to the interest.

Where is treasury stock reported on a corporation's balance sheet?

As a deduction from total stockholders' equity, following retained earnings

The party who borrows money in a note payable is known as the:

Both Maker and Issuer.

Which form of business organization is established as a legal entity separate from its owners?

Corporation

The recognition of depreciation expense acts to:

Decrease assets and stockholders' equity, and does not affect cash flow.

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

Depreciation

Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?

Ending inventory will be lower if Blake uses the weighted average cost flow method than if the FIFO cost flow method was used.

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

Ignore the lawsuit in its financial statements.

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

LIFO

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

Number of shares authorized

Which of the following statements about types of business entities is true?

One advantage of a corporation is ability to raise capital.

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.

Option C: assets: 432 Liabilities: n/a stock: 432 Rev: 450 Expense: 18 Net inc: 432

Monthly remittance of sales tax:

Reduces liabilities.

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts?

The account is a liability.

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

The outcome is probable and can be reasonably estimated.

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

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

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

Trademark

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

Unlimited liability

In an inflationary environment:

a company's assets will be lower if it uses LIFO as opposed to FIFO cost flow.

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 also 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. Kincaid's entry required to recognize the uncollectible accounts expense for Year 2 will:

decrease total assets and net income.

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

fixed or variable interest rate.

The par value of a company's stock:

has little connection to the market value of the stock.

When prices are falling, LIFO will result in:

higher income and a higher inventory valuation than will FIFO.

When the common stock account is disclosed on the balance sheet, it is reported at:

par or stated value

At the end of the current accounting period, Ringgold Company recorded depreciation of $15,000 on its equipment. The effect of this entry on the company's balance sheet is to decrease:

stockholders' equity and decrease assets.

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:

$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.

On January 6, Year 1, the Mount Jackson Corporation purchased a tract of land for a factory site for $1,500,000. An existing building on the site was demolished and the construction of the new factory building was completed on October 11, Year 1. Additional cost data are shown below: Construction cost of new building$1,760,000Realtor's and attorney's fees15,400Architect's fees relating to construction of new building138,000Cost to demolish old building133,200Salvage recovery from old building(11,000) Which of the following correctly states the capitalized cost of the land and the new factory building, respectively?

$1,637,600 and $1,898,000 $1,500,000 purchase price + $15,400 realtor's and attorney's fees + $133,200 cost to demolish old building − $11,000 salvage from old building = $1,637,600 cost of land; $1,760,000 construction cost + $138,000 architect's fees = $1,898,000 cost of new factory building