exam 2 practice 2

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

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

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. The cost includes the purchase price (less discounts) plus any costs necessary to get the asset in the location and condition for its intended use. Maintenance costs are the costs of routine maintenance and minor repairs that are incurred to keep an asset in good working order. These costs are expensed in the period in which they are incurred. Cost of machine = $34,000 − ($34,000 × 5%) + $550 transportation + $1,360 sales tax + $450 installation = $34,660.

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

The inventory records for Radford Company reflected the following Beginning inventory on May 1 100 units @ $4.00First purchase on May 7 300 units @ $4.40second purchase on May 17 500 units @ $4.60Third purchase on May 23 100 units @ $4.80Sales on May 31 900 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

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $148,900 and $196,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $18,500 and issued stock dividends valued at $14,500. Total expenses were $35,916. Based on this information, what was the amount of total revenue for Year 1?

$116,916 $148,900 beginning retained earnings + X revenues − $35,916 expenses − $18,500 cash dividends − $14,500 stock dividends = $196,900 ending retained earnings; X = $116,916.

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.

At the end of the accounting period, Houston Company had $5,200 of par value common stock issued, additional paid-in capital in excess of par value − common of $6,100, retained earnings of $6,000, and $2,500 of treasury stock. The total amount of stockholders' equity is:

$14,800. $5,200 common stock + $6,100 additional paid-in capital in excess of par value + $6,000 retained earnings − $2,500 treasury stock = $14,800

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

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

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. 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

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.

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:

0 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.

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

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.

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

A measure of capital generated through earnings.

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 4%?

An increase to cash for $416, an increase to sales tax payable for $16, and an increase to sales revenue for $400. The transaction is recorded as an increase to cash of $416, the amount of the sale, plus the 4% sales tax collected, an increase to sales tax payable of $16, the amount owed to the state, and an increase to sales revenue of $400, 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. As the principal balance of the note decreases over time the portion of the payment that is applied to interest expense decreases. However, the amount of the payment remains constant.

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

As a deduction from total stockholders' equity, following retained earnings Treasury stock is a contra equity account that reduces total stockholders' equity. It is listed after the retained earnings section. It does not affect paid-in capital or retained earnings.

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

Both Maker and Issuer. The party who borrows money is the issuer or the maker of the note.

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

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

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

FIFO When prices are rising, FIFO will produce the lowest cost of goods sold compared with other methods because it is based on the earliest, lowest priced, purchases.

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

Number of shares authorized When a corporation is formed, it is authorized by the state to issue a maximum number of shares. The number of shares it initially issues is much lower.

Monthly remittance of sales tax:

Reduces liabilities. remittance of sales tax reduces assets (cash) and reduces liabilities (sales tax payable).

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. Treasury stock is a contra equity account that neither affects paid-in capital nor retained earnings.

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. A contingent liability should be recorded in the financial statements as a liability if the outcome is considered probable and the amount owed can be reasonably estimated. If the outcome is considered only reasonably possible, it is only disclosed in the notes to the financial statements.

Benitez Company had sales of $280,000 in Year 1. The company expects to incur warranty expenses amounting to 2% of sales. There were $3,600 of warranty obligations paid in cash during Year 1. Based on this information:

Warranty expenses would decrease net earnings by $5,600 in Year 1. Cash would decrease by $3,600 as a result of the accounting events associated with warranties in Year 1. Incorrect The warranties payable account would increase by $2,000 in Year 1. $280,000 × 2% = $5,600 warranty expense is recognized in Year 1. Cash decrease by $3,600 when the warranty obligations are paid. Warranties payable increases by $5,600 when warranty expense is recognized and decreases by $3,600 when warranty obligations are paid, for a net increase of $2,000.

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. Cash is usually used to settle a warranty claim made by a customer, but is never used at the time the obligation is recognized as an expense. Although cash may be collected when the sale is made, that cash is not related to the warranty.

In an inflationary environment:

a company's assets will be lower if it uses LIFO as opposed to FIFO cost flow. In an inflationary environment, prices are rising. LIFO will produce the lowest ending inventory (earliest purchases) compared with FIFO.

Which of the following would not be classified as a tangible long-term asset?

copyright

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

corp

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?

corporation

The year-end adjusting entry to recognize uncollectible accounts expense will:

decrease assets and decrease stockholders' equity. The adjusting entry will decrease assets by increasing the contra asset allowance for doubtful accounts and will increase uncollectible accounts expense, which decreases stockholders' equity.

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.

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.

The primary reason for a business to allow customers to purchase goods or services on account is to:

increase sales.

Which of the following is not subject to depreciation?

land

Bonds payable are usually classified on the balance sheet as:

long-term liabilities. Bonds will not be repaid until many accounting periods from the issue date. Therefore, they are classified as long-term liabilities.

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

par or stated value. The par value of the stock is recorded in the common stock account and any additional amount received is recorded in the paid-in capital in excess of par value account.

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 stockholders' 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.

A company that uses the allowance method to account for uncollectible accounts:

reports the net realizable value of its accounts receivable on the balance sheet. A company that uses the allowance method estimates uncollectible accounts expense before they actually become uncollectible, using a contra asset account known as allowance for doubtful accounts, and reports the net realizable value of accounts receivable on the balance sheet.

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. Depreciation decreases assets by increasing the contra asset account, accumulated depreciation, which decreases the book value of the asset and increases expenses, which decreases stockholders' equity.

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

voting