Exam 2 (Chapter 5-8)
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.
current-year activity or production
Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are
paid by the supplier
If a company uses the perpetual inventory system, how many entries are made when a sale occurs?
two
Which depreciation methods allocate the cost of long-term assets based on time?
1. straight-line 2. declining-balance
Which of the following are commonly used depreciation methods?
1. straight-line 2. declining-balance 3. activity based
Which of the following represent reasons why managers closely monitor inventory levels?
1. to ensure that sufficient units are available 2. to minimize costs of inventory write-downs due to obsolete inventory
Which of the following levels of profitability in a multiple-step income statement represents revenues from the sale of inventory less the cost of that inventory?
Gross profit.
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should
credit notes payable $5,000.
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?
$450,000
The allowance for uncollectible accounts is a contra account to
accounts recievable
Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?
as a noncurrent asset
Accounts receivable should be classified as a(n)
asset
Meller purchases inventory on account. As a results, Meller's
assets will increase
he cost of estimated accounts receivable that will not be collected is referred to as ________ ________ expense
bad debts
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to
be more accurate
The original cost of an asset minus accumulated depreciation is
book value
The formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to _________ liabilities
contingency
For the year, Sealy Incorporated reports net sales of $50,000, cost of goods sold of $40,000, and an average inventory balance of $5,000. What is Sealy's gross profit ratio?
20%
Notes payable is classified as a liability that has which of the following effects?
Creates interest expense on the income statement
Which of the following correctly describes the nature of depreciation?
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.
Which of the following are employer payroll costs?
Federal and state unemployment taxes Employer portion of Medicare tax
Which of the following may be classified as contingent liabilities?
Future litigation losses Product warranties Frequent flyer program awards
The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the
LIFO reserve
Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):
Liability
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called _____________ benefits
fringe
Purchasing inventory on account:
increases assets and increases liabilities
Amortization refers to the allocation of the cost of ________________ assets to expense.
intangible
______________ refers to a company's cash position and overall ability to obtain cash in the normal course of business.
liquidity
The term referring to a company having a sufficient amount of cash to pay its current debts is
liquidity.
The flipside of a contingent gain is a contingent
loss
What type of company purchases raw materials and makes goods to sell?
manufacturers
The term used to describe the amount the company expects to receive for an asset at the end of its service life is
residual value
Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?
sales discount
An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a
trademark
The direct write-off method is used when
uncollectible accounts are not anticipated or are immaterial.
For a manufacturer, the most commonly reported contingent liabilities relate to product ___________
warranty
When the direct write-off method is used, an entry for bad debt expense is required
when the account receivable is determined to be uncollectible.
Taxes subtracted from employees' pay and remitted to the government on their behalf are called
withholding taxes.
Which of the following expenditures should be recorded as an asset?
An addition which increases future benefit.
Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?
As a liability for $500,000 with disclosure of the range.
Identify a primary reason why financial statement users assess a company's liquidity.
Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.
Using the allowance method, the entry to record a write-off of accounts receivable will include
a debit to allowance for uncollectible accounts
The effect of writing off a specific account receivable is:
a reduction in the allowance for uncollectible accounts
Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be
a separate freight-in account
Which account is credited in a journal entry to record depreciation on machinery?
accumulated depreciation
The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the _____ method of accounts receivable.
aging
Depreciation is a process of cost _________ , and not a process of valuation.
allocation
A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales
allowance
Inventory is classified as
current asset
Under the direct write-off method, uncollectible accounts are recorded:
in the period the account is determined actually uncollectible
A(n) _________ is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events. (Enter one word per blank)
liability
Deferred revenue is classified as
liability
Deferred revenue should be classified as a(n) __________ on the balance sheet.
liability
Use of MACRS for tax purposes usually results in _____________ income tax in the earlier years of an asset's life.
lower
The ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide.
lower of cost and net realizable value; greater
The mathematical formula for working capital is current assets ______ current liabilities.
minus
Receivables not expected to be collected should
not be counted in assets of the company.
A formal credit arrangement between a creditor and debtor is called a(n)
note receivable
If a company uses the periodic inventory system, how many entries are made when a sale occurs?
one; the cost of goods sold entry is made at the end of the period
Purchase returns are recorded in a separate contra purchase account in a ____________ inventory system
periodic
Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a __________ inventory system.
perpetual
Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?
perpetual inventory system
Freight-in costs are debited to Inventory in this inventory system:
perpetual only
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2400
In a periodic inventory system, freight-in costs are
recognized in a temporary freight-in account
The depreciable cost of an asset is the asset's cost minus its estimated __________ value.
residual
___________ value is the amount the company expects to receive for the asset at the end of its service life. (Enter one word per blank)
residual
An asset ________ occurs when an asset is no longer useful, but cannot be sold.
retirement
A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as a(n) _______ discount.
sale
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year
The depreciable cost is
the cost of a plant asset minus its estimated residual value
Payroll withholdings are
the items subtracted from an employee's gross pay to arrive at take-home pay.
Amortization
the process of allocating to expense the cost of an intangible asset
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
Accounts receivable are typically classified as current assets because
they will be converted to cash within 1 year
A contingent liability is an existing _________ situation that might result in a loss depending on the outcome of a future event.
uncertain
A customer account that is not expected to be collected is referred to as a bad debt or ______ account.
uncollectible
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a(n) _____________________.
warranty
FOB shipping point means title to the goods passes
when they are shipped.
FOB destination means title to the goods passes
when they arrive at the destination.
Current assets minus current liabilities equals ______________ ______________
working capital
The allowance method is required by ______
GAAP
Fan Company purchases inventory on account. The entry to record this purchase using a perpetual inventory system would include a debit to:
Inventory
MACRS
Modified Accelerated Cost Recovery System - a type of depreciation method, typically used by the IRS.
Return on assets is equal to:
Net income divided by average total assets.
Which of the following levels of profitability in a multiple-step income statement represents all revenues less all expenses?
Net income.
Where is the account accumulated depreciation on equipment found on the financial statements?
as a contra account to equipment on the balance sheet
The lower of cost and net realizable value method was developed to
avoid reporting inventory at an amount that exceeds the benefits it provides
A customer account that is not expected to be collected is referred to as a(n) ______ debt
bad
The estimated expense for accounts that may not be collected is referred to as
bad debt expense
Where is inventory reported in the financial statements?
balance sheet as a current asset
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.
book
The original cost of the asset less the accumulated depreciation is the _________ ______________ of the asset
book value
Long-term tangible assets include
buildings, land, equipment
Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______.
cash; accounts recievable
The feature that distinguishes loss ____________ from other liabilities is the uncertain outcome. (Enter one word per blank)
contingencies
A transaction or event in which the outcome is uncertain is referred to as a(n) __________.
contingency
A(n) _________ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingency
A(n) __________ gain is an existing uncertainty that might result in a gain.
contingency
Lark Corporation believes it is probable the company will lose a lawsuit for $10,000. The journal entry to record the contingent loss will include a
credit to contingent liability for lawsuit $10,000.
Deferred revenues and sales tax payable typically are reported as ___________ liabilities
current
The ________ portion of long-term debt is the amount that will be paid within the next year. (Enter only one word.)
current
Liabilities are classified as
current and long term
What are the two classifications for liabilities?
current and long term
Taxes collected for taxing authorities are recognized as
current liabilities.
The portion of a long-term liability that will be paid within the next year is referred to and reported as the:
current portion of long-term debt
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?
debit inventory
Straight-line, declining-balance, and activity-based refer to methods commonly used to ___________ property, plant, and equipment.
depreciate
The Accounts Receivable account is reduced when the seller:
determines that a specific customer account will not be collectible
A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:
inventory
Items held for sale in the normal course of business are referred to as
inventory
When a business provides services to a customer, and the customer promises to pay later, this is referred to as
credit sales
Companies that produce the inventory they sell are referred to as _______
Manufacturing
Which of the following expenditures should be recorded as an expense?
Ordinary repairs and maintenance.
An exclusive 20-year right to manufacture a product or to use a process is a:
Patent.
Is an unused line of credit a current liability?
No
Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Smith's legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation?
No asset or gain is reported.
Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?
The current ratio will remain the same.
Which of the following is an important criteria used to determine the reporting of a contingent liability?
The likelihood of future payment or loss
What are the two criteria used to determine whether a contingent liability is reported in the financial statements?
The likelihood of payment The ability to estimate the amount of payment
A company's inventory turnover ratio measures:
The number of times the company sells its average inventory balance during the year.
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides ______________ .
benefit
Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)
annual, 12 month rate.
In a periodic inventory system, purchase returns
are recorded in a separate contra purchases account.
The accumulated depreciation account is classified as a(n)
contra asset
A sales discount is recorded by the seller as a(n):
contra revenue
A(n) ________ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time. (Enter one word per blank)
franchise
When the allowance method is used, the write-off of an uncollectible account:
has no effect on the net income
In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be _________ than cost of goods sold determined using the FIFO inventory assumption.
higher
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are
included in gerald's inventory
An asset that has no physical substance is called a(n) __________ asset.
intangible
An asset that has no physical substance is referred to as a(n)
intangible asset
The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.
multiple step
Total revenues less discounts, returns, and allowances are referred to as ____________ revenues.
net
If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account:
net accounts receivable do not change
The profit margin ratio is defined as ___________ __________ divided by net sales.(Enter one word per blank)
net income
What is the formula for the profit margin ratio?
net income divided by net sales
A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.
note receivable
In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.
one; one
When a sale occurs under the periodic inventory system, we record:
only the sale, but not the related cost of goods sold
True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.
true
Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.)
1. Social security 2. medicare
The allocation of the cost of a tangible fixed asset is referred to as ______________ , whereas the allocation of the cost of an intangible asset is referred to as ______________.
1. depreciation 2. amortization
Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay?
1. health insurance paid by the employee 2. federal income taxes 3. employee contributions to retirement plans
Recording Bad Debt Expense: (increases and decreases what?)
1. increases expenses 2. decreases assets 3. decreases net income
Two entries are required when a previously written off account is collected. These two entries include:
1. reinstate the account receivable 2. record the collection on the account receivable
Where is a note receivable reported in the balance sheet?
in either current or noncurrent assets, as appropriate
A loss that is judged to be probable and for which the amount is reasonably estimable should be
recorded.
The service life or useful life of an asset is
the estimated use that the company expects to obtain from the asset before disposing of it.
A(n) __________ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.
trademark
In a perpetual inventory system, when inventory is purchased, the __________ account is debited, whereas in a periodic system, the ___________ account is debited.
inventory; purchases
What are the financial statement effects of recording bad debt expense using the allowance method?
1. decrease assets 2. increase expenses
Payroll withholdings ______.
1. decrease the amount of cash an employee receives 2. are amounts subtracted from employees' gross earning to determine their net pay
Other terms used for an activity-based depreciation method are:
1. units of output method 2. units of production method
Which of following best describes a merchandising company?
A company that purchases products that are primarily in finished form for resale to customers.
Accumulated depreciation is:
A contra-asset.
When a company provides services on account, which of the following accounts is debited?
Accounts Receivable
Using a periodic inventory system, the purchase of inventory on account would be recorded as
Debit Purchases; credit Accounts Payable.
Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset's life?
Double declining balance method.
Which of the following inventory systems requires a physical count in order to determine cost of goods sold?
Periodic inventory system
Which of the following payroll-related taxes must the employer pay by law?
Unemployment taxes Federal Insurance Contributions Act amounts
Which of the following is not deducted from an employee's salary?
Unemployment taxes.
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
Warranty
The entry to record the estimate for uncollectible accounts includes:
a Debit to bad debt expense
The account "Allowance for Uncollectible Accounts" is classified as
a contra asset to accounts receivable
The account "Allowance for Uncollectible Accounts" normally has a _____ balance
credit
When a customer returns a product for a refund, in which account is the entry recorded?
sales return
When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) _______ ________ .
sales return
Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should record the following credit amounts.
sales taxes payable of $100. sales revenue of $1,000.
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _______ life of the asset. (Enter one word per blank)
service
The receivables turnover ratio and the average collection period provide information about a company's
effectiveness in managing receivables
Straight-line deprecation is calculated as the depreciable cost divided by
estimated service life
True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.
false
A multiple-step income statement reports multiple levels of
income
Obtaining a note payable for cash results in a(n) ______.
increase in assets and an increase in liabilities
In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs
incurred several years earlier
Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will _____ net income.
not affect
Amounts that are subtracted from an employee's gross pay are referred to as
payroll withholdings.
Which of these are parts of the journal entry to record depreciation?
1. Debit Depreciation Expense 2. Credit Accumulated Depreciation
In a perpetual inventory system, purchase discounts and purchase returns
directly reduce the Inventory account balance.
Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest payable for the year ended December 31, 2021?
$1.5 million.
True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.
False; Reason: Receivables not expected to be collected are not included in assets
The allowance method estimates
uncollectible accounts
Which of the following intangible assets are not amortized?
Goodwill.
For accounting purposes, depreciation is
an allocation of a cost of an asset.
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?
$0.
Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?
$18,000
A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck's residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation?
$8,000.
Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?
$93,000
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.
Krasel Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?
Debit equipment $50,000 Credit gain on exchange of asset $30,000 Debit accumulated depreciation $70,000 Credit equipment $90,000
Which of the following is paid by both the employee and the employer?
FICA taxes.
For internal record keeping, most companies carry their inventory using the _____ basis.
FIFO
The balance in the Accumulated Depreciation account represents
The amount charged to depreciation expense since the acquisition of the plant asset.
A contingent liability is recorded if which conditions are met?
The amount of the loss can be reasonably estimated. It is probable that a future loss will occur.
Which of the following is true in comparing the current ratio with the acid-test ratio?
The current ratio will always be at least as large as the acid-test ratio.
Interest expense is recorded in the period in which:
The interest is incurred.
Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a:
debit to loss credit to contingent liability
Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):
decrease in accounts recievable
A sales allowance ____ the amount owed by the customer for merchandise that is _____ by the customer.
decreases; retained
True or false: Under the perpetual inventory system, an adjusting entry is needed to close temporary inventory-related accounts, record cost of goods sold, and adjust the inventory account balance.
false; under perpetual system, the inventory account is continually updates and cost of goods sold recognized at the time of sale
A contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time is called a
franchise
The ________ inventory system records all inventory-related transactions in the Inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The ________ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.
perpetual; periodic
When a contingent event that may give rise to a future loss is likely to occur, it is said to be _________ .
probable
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
provides benefits to the company
The exclusive legal right to manufacture a product or to use a process is called a(n)
patent
On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?
$8,000
Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?
1. Debit to allowance for uncollectible accounts 2. credit to accounts receivable
Which of the following are not required to be deducted from an employee's paycheck?
1. Federal unemployment tax (FUTA) 2. state unemployment tax (SUTA) 3. charitable donations
Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for
1. Inventory 2. cost of goods sold
Which of the following methods are NOT used for inventory costing?
1. NIFO 2. Simple-average
The asset's cost less accumulated depreciation is called:
Book value.
Using a periodic inventory system, recording the sale of inventory on account would include:
Debit Accounts Receivable; credit Sales Revenue.
Using a perpetual inventory system, the purchase of inventory on account would be recorded as
Debit Inventory; credit Accounts Payable.
The entry to write down inventory from cost to net realizable value at the end of the year includes a:
Debit to Cost of Goods Sold.
At the end of the year, Marline Corporation determines that its ending inventory has a cost of $2,000 and a net realizable value of $1,900. What would be the effect of the adjustment to write down inventory to net realizable value?
Decrease in net income.
Withholding taxes for federal and state income tax are based upon which items?
Amounts earned by employees Number of exemptions claimed
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?
No change to the current ratio and decrease the acid-test ratio.
Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:
understated assets, retained earnings, and net income
Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?
$400.
Common current liabilities include:
- Deferred Revenues - Sales Tax Payable - Current portion of long-term debt
By law, an employer is required to pay which of the following amounts as payroll taxes?
Federal unemployment tax Social Security contributions Medicare contributions
Which of the following represents the balance of Cost of Goods Sold at the end of the year?
Inventory sold that year
In a perpetual inventory system, freight costs on purchases are
added to the inventory account
To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to
allowance for uncollectible accounts.
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the
allowance method
Allocating the cost of intangible assets to expense is referred to as
amortization
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
An interest rate, unless otherwise specified, is typically a(n) __________ rate.
annual
A company purchased land and building from a seller for $900,000. A separate appraisal reveals the fair value of the land to be $200,000 and the fair value of the building to be $800,000. For what amount would the company record land at the time of purchase?
$180,000.
A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?
$2,000.
At the beginning of the year, Johnson Supply has inventory of $5,200. During the year, the company purchases an additional $20,000 of inventory. An inventory count at the end of the year reveals remaining inventory of $3,000. What amount will Bennett report for cost of goods sold?
$22,200
On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?
$26,000
Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?
$30,000.
On October 1, a franchise was purchased for $2,000,000. The franchise agreement is for 10 years. What is the amount of amortization expense by the end of the first year, December 31 (using partial year straight-line amortization)? (Do not round intermediate calculations.)
$50,000.
The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year?
$60,000.
Which of these payroll taxes are paid only by the employer? (Check all that apply.)
1. FUTA 2. SUTA
Which of the following methods are available for costing inventory?
1. Specific Identification 2. FIFO 3. LIFO 4. Weighted-average
A retirement or abandonment of an asset is different from a sale of an asset because
1. a loss must be recognized for the remaining book value 2. no cash is received
Which of the following items are initially recorded as an expense on the income statement?
1. advertising costs 2. research and development costs
Using the perpetual inventory system, what is the effect of a sale of inventory on assets?
1. assets decrease by the cost of the inventory 2. assets increase by the sales price of the inventory
The definition of inventory includes which of the following items?
1. items currently in production for future sale 2. items held for resale 3. materials used currently in the production of goods to be sold
What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)
1. net income increases 2. total assets increase 3. stockholder's equity increases
A(n) _____________ ___________ is the legal right to receive cash from a credit sale and represents an asset of the company
Account Recievable
If equipment is retired, which of the following accounts would be debited?
Accumulated depreciation.
What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.
Acid-test ratio will increase Current ratio will increase
Fan Company sells inventory on account. The entry or entries to record this sale using a perpetual inventory system would include a:
All of the these are included to record the sale.
Over the entire service life of an asset, which depreciation method records the highest total depreciation?
All the methods result in the same total depreciation.
depletion
Allocation of the cost of a natural resource over its service life
On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25?
Debit Sales Discount for $10
On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:
Debit interest expense and credit interest payable, $4,000.
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?
FIFO
Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?
FIFO
Which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs?
FIFO.
Which of the following must employers by law withhold from their employees' pay?
Federal income taxes
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?
LIFO
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?
LIFO
When prices increase, the _________ inventory method provides the best matching of revenue and expenses.
LIFO
Which cost flow assumption must be used for financial reporting if it is also used for tax reporting?
LIFO
The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the
LIFO reserve
A contingent liability that is probable and can be reasonably estimated must be
Recorded.
Which of the following is not recorded as an intangible asset in the balance sheet?
Research and development.
Net revenues is calculated as total revenues minus which of the following items?
Sales Returns/discounts/allowances
The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as
Sales tax payable.
A multiple-step income statement provides the advantage of:
Separating revenues and expenses based on their different types of activities.
Suppose Windell Corporation understates its ending inventory amount. What effect will this have on the reported amount of net income in the year of the error?
Understate net income.
A trade discount is
a percentage reduction from list price
A(n) __________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)
account
A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)
account payable
An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)
account recievable
The amount of cash owed to a company by its customers from the sale of goods or services is referred to as
account recievable
Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year will be:
overstated net income
A(n) _________ is the exclusive right to manufacture a product or use a process granted for a period of ___________ years.
patent, 20
Period-end adjustments are necessary for the:
periodic inventory system
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the
straight-line method
Which of the following does not differ among the different depreciation methods?
total depreciation recognized over the asset's service life
On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?
$70,000
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?
$700,000.
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
Formula for straight line depreciation
(cost-residual value) / useful life
Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life?
Long service life, high residual value, and straight-line depreciation.
Two important ratios that help in understanding a company's effectiveness in managing receivables are the:
1. average collection period 2. receivable turnover ratio
A trade discount is a reduction from the list price, which is used to:
1. change prices without publishing a new catalog 2. disguise real prices from competitors 3. give quantity discounts to customers
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.
1. cost of goods sold 2. inventory
On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?
1. cred to note payable $100,000 2. debit to cash $100,000
Sales to customers in which the customers pay within 30 to 60 days are referred to as
1. credit sales 2. sales on account
The journal entry to retire old equipment that is not fully depreciated includes a:
1. credit to equipment 2. debit to accumulated depreciation 3. debit to loss
A long-term asset is recorded at the:
Cost of the asset plus all costs necessary to the asset ready for use.
Shannon Corp. uses the aging method to account for bad debt expense. Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include
debit allowance for uncollectible accounts
True or false: Depreciation is a valuation method for property and equipment.
false; depreciation is a process of cost allocation, not valuation
Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.
future; current
In a perpetual inventory system, when a company sells inventory on account, how many entries are required?
two; one entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory
The journal entry to record bad debt expense includes: (credit and debit to what)
1. debit to bad debt expense 2. credit to allowance for uncollectible accounts
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:
1. decrease an asset and increase an expense 2. increase an asset and increase revenue
The types of expenditures that can occur subsequent to an asset's acquisition are
1. repairs and maintenance 2. improvements 3. additions
A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets.
8.0%.
Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record:
A gain of $5,000.
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
Probable Remote Reasonably possible
Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.
contra-asset
Which of the following are examples of fringe benefits provided by employers to their employees?
contributions to retirement and other savings accounts reduced or no-cost company-provided services payment of insurance premiums on employees behalf
A(n) _______ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.
copyright
A(n) ___________ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.
copyright
Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:
inventory
Which statement is true about the straight-line method of depreciation?
it allocates an equal amount of depreciation to each year the asset is used
A probable future sacrifice of economic benefits arising from present obligations of an entity to transfer assets or provide services as a result of past transactions or events is a(n)
liability
In times of rising prices, ending inventory determined using the LIFO inventory assumption will be _______ than ending inventory determined using the FIFO inventory assumption.
lower
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming
outdated; old; expired; aged (any of these)
