ACT Exam 3

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain? $2.0 million. $1.8 million. $1.5 million. $0.

$0.

A company issues 100,000 shares of $1 par value common stock for $17 per share. To record this transaction, the company would credit Additional Paid-in Capital for: $100,000. $1,600,000. $1,700,000. $1,800,000.

$1,600,000.

In its first three years of operations, a company has net income of $2,000; $5,000; and $8,000. It also pays dividends of $1,000 in the second year, and $3,000 in the third year. What is the balance of Retained Earnings at the end of the third year? $5,000. $11,000. $15,000. $4,000.

$11,000.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month? $500. $6,000. $3,042. $2,542

$2,542

Suppose a company declares a dividend of $0.50 per share. At the time of declaration, the company has 100,000 shares issued and 90,000 shares outstanding. On the declaration date, Dividends would be recorded for $0. $50,000. $45,000. $95,000.

$45,000.

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1? $300,000 $450,000 $150,000 $600,000

$450,000

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as: A debit to an asset and a credit to a liability account. A debit to a revenue and a credit to an asset account. A debit to an asset and a credit to a revenue account. A debit to a liability and a credit to a revenue account.

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

Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record: Multiple Choice A loss of $5,000. A gain of $5,000. A loss of $70,000. A gain of $70,000.

A gain of $5,000.

Which of the following represents a characteristic of a liability? A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events. All of these are characteristics of a liability.

All of these are characteristics of a liability.

Depreciation in accounting is the: Decrease in fair value of an asset. Decrease in selling price of an asset. Allocation of an asset's cost to an expense over time. Change in fair value of an asset.

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

Which of the following is not a current liability? Notes payable due in six months. Current portion of long-term debt. An unused line of credit. Deferred revenue to be earned in nine months.

An unused line of credit.

Power Drive Corporation designs and produces a line of golf equipment and golf apparel. Power Drive has 100,000 shares of common stock outstanding as of the beginning of 2021. Power Drive has the following transactions affecting stockholders' equity in 2021. March 1 Issues 64,000 additional shares of $1 par value common stock for $61 per share.

Cash $250K Common Stock $100k APIC $150k

The current ratio is: Current assets divided by current liabilities. Current liabilities divided by current assets. Cash, short-term investments, and accounts receivable divided by current liabilities. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Current assets divided by current liabilities.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record? Debit Cash, $5,000; Credit Notes Receivable, $5,000. Debit Notes Receivable, $5,000; Credit Cash, $5,000. Debit Cash, $5,000; Credit Notes Payable, $5,000. Debit Notes Payable, $5,000; Credit Cash, $5,000.

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

On the date of dividend declaration, which of the following entries is recorded? Debit Dividends; Credit Cash. Debit Dividends; Credit Dividends Payable. Debit Dividends Payable; Credit Cash. No entry is recorded.

Debit Dividends; Credit Dividends Payable.

Which of the following correctly describes the nature of depreciation? Depreciation represents the valuation of property, plant, and equipment over its service life. Depreciation represents the valuation of an intangible asset over its service life. Depreciation represents the allocation of the cost of property, plant, and equipment over its service life. Depreciation represents the allocation of the cost of an intangible asset over its service life.

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

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be: Disclosed but not reported as a liability. Disclosed and reported as a liability. Neither disclosed or reported as a liability. Reported as a liability but not disclosed.

Disclosed but not reported as a liability.

The disadvantages of a corporation compared to a sole proprietorship or partnership include: Double taxation. The ability to raise capital. Limited liability. The ability to transfer ownership.

Double taxation.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the borrowing of cash to be paid back in five years affect each ratio? Increase the current ratio and increase the acid-test ratio. No change to the current ratio and decrease the acid-test ratio. Decrease the current ratio and decrease the acid-test ratio. Increase the current ratio and decrease the acid-test ratio.

Increase the current ratio and increase the acid-test ratio.

Which of the following stages of equity financing would come last for most public companies? Investment by the founders of the business. Initial public offering. Outside investment by "angel" investors and venture capital firms. Investment by friends and family.

Initial public offering.

Which of the following statements regarding liabilities is true? Liabilities are always payable in cash. Liabilities are all reported as current in the balance sheet. Liabilities result from future transactions. Liabilities represent probable future sacrifices of benefits.

Liabilities represent probable future sacrifices of benefits.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio? Increase the current ratio and increase the acid-test ratio. No change to the current ratio and decrease the acid-test ratio. Decrease the current ratio and decrease the acid-test ratio. Increase the current ratio and decrease the acid-test ratio.

No change to the current ratio and decrease the acid-test ratio.

Which of the following expenditures should be recorded as an expense? An addition which increases future benefit. An improvement. Ordinary repairs and maintenance. Successful legal defense of an intangible asset.

Ordinary repairs and maintenance.

Company A acquired all the outstanding common stock of Company B for $41,000,000 in cash. The book values and fair values of Company B assets and liabilities were as follows:

See Pic 3

A company provides cost-effective solutions for managing regulatory requirements and the company needs specific to the airline industry. Assume that on July 1 the company issues a one-year note for the amount of $5.3 million. Interest is payable at maturity.

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The statement of stockholders' equity: Lists the balance of each revenue and each expense, and reports the difference as net income. Summarizes the changes in the balance in each stockholders' equity account over a period of time. Lists the balances of each asset and each liability, and reports the difference as stockholders' equity. All of the other answers are correct.

Summarizes the changes in the balance in each stockholders' equity account over a period of time.

In each succeeding payment on an installment note: The amount that goes to interest expense increases. The amount that goes to interest expense decreases. The amount that goes to interest expense is unchanged. The amounts paid for both interest and principal increase proportionately.

The amount that goes to interest expense decreases.

If a company issues par-value stock, the amount credited to common stock will be: The total market value of all the shares issued. The par value per share times the number of shares issued. The difference between the market and the par value per share times the total number of shares issued. The amount the board of directors chooses to assign to the shares.

The par value per share times the number of shares issued.

A company acquired a delivery truck on October 1, Year 1, for $18,500. The company estimates a residual value of $1,700 and a six-year service life. It expects to drive the truck 140,000 miles. Actual mileage was 4,400 miles in Year 1 and 17,800 miles in Year 2. Required: Calculate depreciation expense using the activity-based method for Year 1 and Year 2, assuming a December 31 year-end.

Year 1:528 Year 2: 2136

Bryer Co. purchases all of the assets and liabilities of Stellar Co. for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwill associated with the purchase? $800,000. $500,000. $700,000. $0.

$700,000.

Dinoco Petroleum faces three potential contingency situations, described below. Dinoco's fiscal year ends December 31, 2021, and it issues its 2021 financial statements on March 15, 2022. In the initial trial, Dinoco lost a $110 million lawsuit resulting from a dispute with a supplier. The case is under appeal. Although Dinoco is unable to predict the outcome, it does not expect the case to have a material adverse effect on the company. Assume that the loss is probable. In November 2020, the state of Texas filed suit against Dinoco, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2022, Dinoco reached a settlement with state authorities. Based upon discussions with legal counsel, it is probable that Dinoco will require $130 million to cover the cost of violations. Dinoco is the plaintiff in a $100 million lawsuit filed against a customer for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal, and legal counsel advises that it is probable Dinoco will prevail and be awarded $50 million. 1)Record the contingent liability if needed. 2)Record the contingent liability if needed. 3)Record the contingent gain if needed.

1) Loss $110million Contingent Liability $110million 2)Loss $130million Contingent Liability $130million 3)No J/E

The ink-jet printing division of Environmental Printing has grown tremendously in recent years. Assume the following transactions related to the ink-jet division occur during the year ended December 31, 2021. Environmental Printing is being sued for $10.2 million by Addamax. Plaintiff alleges that the defendants formed an unlawful joint venture and drove it out of business. The case is expected to go to trial later this year. The likelihood of payment is reasonably possible. Environmental Printing is the plaintiff in an $8.2 million lawsuit filed against a competitor in the high-end color-printer market. Environmental Printing expects to win the case and be awarded between $5.7 and $8.2 million. Environmental Printing recently became aware of a design flaw in one of its ink-jet printers. A product recall appears probable. Such an action would likely cost the company between $420,000 and $820,000. 1)Record the contingent liability if needed. 2)Record the contingent gain if needed. 3)Record the contingent liability if needed.

1) No J/E 2) No J/E 3) Loss $420,000 Contingent Liability $420,000

Abbott Landscaping purchased a tractor at a cost of $32,000 and sold it three years later for $16,000. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $2,000 residual value. Tractors are included in the Equipment account. Assume the tractor was sold for $10,000 instead of $16,000. Record the sale.

Cash $16k Accumulated Dep $18k Equipment $32K Gain 2k Cash $10k Accumulated Dep $18k Loss $4K Equipment $32K

The acid-test ratio is Current assets divided by current liabilities. Cash and current investments divided by current liabilities. Cash, current investments, and accounts receivable divided by current liabilities. Cash, current investments, accounts receivable, and inventory divided by current liabilities.

Cash, current investments, and accounts receivable divided by current liabilities.

A long-term asset is recorded at the: Cost of the asset. Additional costs to get the asset ready for use. Cost of the asset plus all costs necessary to the asset ready for use. Cost of the asset less all costs necessary to the asset ready for use.

Cost of the asset plus all costs necessary to the asset ready for use.

Suppose a company purchases 2,000 shares of its own $1 par value common stock for $16 per share. Which of the following is recorded at the time of the purchase? Debit Treasury Stock for $32,000. Debit Common Stock for $30,000. Debit Common Stock for $32,000. Debit Treasury Stock for $2,000.

Debit Treasury Stock for $32,000.

On March 15, American Eagle declares a quarterly cash dividend of $0.065 per share payable on April 13 to all stockholders of record on March 30. Required:Record American Eagle's declaration and payment of cash dividends for its 222 million shares. 1)Record the declaration of cash dividends. 2)Record the entry on the date of record. 3)Record the payment of cash dividends.

Div $14,430,000 Div Payable $14,430,000 No J/E Div Payable $14,430,000 Cash $14,430,000

The advantages of a corporation compared to a sole proprietorship or partnership include: Lower total taxes. The ability of stockholders to make operating decisions for their company. Limited liability. Less paper work.

Limited liability.

A company, is trying to decide between the following two alternatives to finance its new $31 million gaming center: Issue $31 million, 6% note. Issue 1 million shares of common stock for $31 per share. Which alternative results in the highest earnings per share?

See picture Issue Note