Exam 5 Practice

A contingent liability need only be disclosed in the financial statement notes when the likelihood of the contingency is a. reasonably possible. b. probable. c. remote. d. unlikely.

A

A current liability is a debt that can reasonably be expected to be paid a. within one year or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.

A

A five-year, $100,000, 4% note payable was issued on December 31, 2014. The note requires principal payments of $20,000 plus interest due each year beginning December 31, 2015. On December 31, 2016, immediately after the note payment, the balance sheet would show: A. $40,000 in Long-Term Notes Payable. B. $6,000 in Interest Payable. C. $20,000 in Current Portion of Long-Term Notes Payable and $6,000 in Interest Payable. D. $60,000 in Long-Term Notes Payable.

A

Cat Corporation's bonds payable carry a stated interest rate of 8%, and the market rate of interest is 5%. The price of the Cat's bonds will be at: A. a premium. B. a discount. C. maturity value. D. par value.

A

Cloud Company has a lawsuit pending from a customer claiming damages of $128,000. Cloud's attorney advises that the likelihood the customer will win is reasonably possible. How is this contingent liability reported? A. It should be described in the footnotes. B. It should be recorded as an asset and a liability based on estimated amounts. C. It should be recorded as an expense and a liability based on estimated amounts. D. It should not be disclosed.

A

Cloud Company has a lawsuit pending from a customer claiming damages of $128,000. Cloud's attorney advises that the likelihood the customer will win is remote. GAAP requires, at a minimum, that this contingent liability A. need not be disclosed. B. be disclosed in the footnotes, with ranges of potential loss. C. be booked, as well as disclosed in the footnotes. D. be disclosed in the footnotes.

A

Each of the following accounts is reported as long-term liabilities except a. Interest Payable. b. Bonds Payable. c. Discount on Bonds Payable. d. Premium on Bonds Payable.

A

If Merrill Company issues 9,000 shares of $5 par value common stock for $160,000, the account a. Common Stock will be credited for $45,000. b. Paid-in Capital in Excess of Par will be credited for $45,000. c. Paid-in Capital in Excess of Par will be credited for $160,000. d. Cash will be debited for $115,000.

A

Liabilities must A. sometimes be estimated. B. be for specific, known amounts. C. involve an outflow of cash. D. be obligations that are certain to be owed.

A

Lowe Company has $1,500,000 of bonds outstanding. The unamortized premium is $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $4,600 gain b. $4,600 loss c. $15,000 gain d. $15,000 loss

A

The ability of a corporation to obtain capital is a. enhanced because of limited liability and ease of share transferability. b. less than a partnership. c. restricted because of the limited life of the corporation. d. about the same as a partnership

A

The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual interest rate is less than the market interest rate. b. contractual interest rate is greater than the market interest rate. c. bond is convertible. d. contractual interest rate is equal to the market interest rate.

A

Two years ago, Terry Wilson purchased a building for $210,000. This year, Wilson gave the building, which now has a current market value of $240,000, to Bonkers Corp. in exchange for 5,000 shares of $10-par common stock. Which journal entry by Bonkers correctly records the issuance of this stock? Accounts and Explanations Debit Credit A. Building 240,000 Common Stock 50,000 Paid-In Capital in Excess of Par—Common 190,000 B. Building 210,000 Common Stock 50,000 Paid-In Capital in Excess of Par—Common 160,000 C. Building 240,000 Common Stock 240,000 D. Building 210,000 Common Stock 210,000

A

What is the effect of the purchase of treasury stock? A. Decrease the number of shares outstanding. B. Decrease the number of shares issued. C. Increase the number of shares issued. D. Both A and B are correct.

A

A cash register tape shows cash sales of $3,000 and sales taxes of $240. The journal entry to record this information is a. Cash 3,240 Sales Revenue 3,240 b. Cash 3,240 Sales Taxes Payable 240 Sales Revenue 3,000 c. Cash 3,000 Sales Tax Expense 240 Sales Revenue 3,240 d. Cash 3,240 Sales Revenue 3,000 Sales Tax Revenue 240

B

Affordable Garden Imports issued 500,000 shares of $1 par common stock at $5 per share. Which journal entry correctly records the issuance of this stock? Accounts and Explanations Debit Credit A. Common Stock 500,000 Paid-In Capital in Excess of Par—Common 2,000,000 Cash 2,500,000 B. Cash 2,500,000 Common Stock 500,000 Paid-In Capital in Excess of Par—Common 2,000,000 C. Common Stock 2,500,000 Cash 2,500,000 D. Cash 2,500,000 Common Stock 2,500,000

B

Ann's Antiques owes $20,000 on a truck purchased for use in the business. The company makes principal payments of $5,000 each year plus interest at 8%. Which of the following is true? A. After the first payment is made, the company owes $15,000 plus three years interest. B. After the first payment is made, $5,000 would be shown as the current portion due on the long-term note. C. After the first payment, $15,000 would be shown as a long-term liability. D. Just before the last payment is made, $5,000 will appear as a long-term liability on the balance sheet.

B

Devon signed a 20-year note payable on January 1, 2016. The note requires annual principal payments plus interest. The entry to record the annual payment on December 31, 2016 includes: A. a credit to Interest Expense. B. a debit to Interest Expense. C. a credit to Long-Term Notes Payable. D. a debit to Cash.

B

Dwayne Health Snacks has outstanding 6,000 shares of $3 par common stock, which was issued at $15 per share, and 2,000 shares of $10 par cumulative preferred stock, which was issued at par. Dwayne Health Snacks also has a deficit balance in Retained Earnings of $26,000. How much is Dwayne's total stockholders' equity? A. $66,000 B. $84,000 C. $110,000 D. $136,000

B

Ellis Corporation had net income of $500,000 and paid dividends of $100,000 to common stockholders and $20,000 to preferred stockholders in 2014. Ellis Corporation's common stockholders' equity at the beginning and end of 2014 was $1,740,000 and $2,260,000, respectively. There are 400,000 weighted-average shares of common stock outstanding. Ellis Corporation's earnings per share for 2014 was a. $6.20. b. $1.20. c. $1.25. d. $5.00.

B

Harris Company borrowed $800,000 from Liber Bank on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2014 income statement? a. $68,000 b. $56,070 c. $43,127 d. $49,659

B

If a contingent liability is reasonably estimable and it is reasonably possible that the contingency will occur, the contingent liability a. should be recorded in the accounts. b. should be disclosed in the notes accompanying the financial statements. c. should not be recorded or disclosed in the notes until the contingency actually happens. d. must be paid for the amount estimated.

B

Ink Corporation has 10,000 shares of 5%, $20 par noncumulative preferred stock, and 37,000 shares of common stock outstanding. Ink declared no dividends in 2013. In 2014, Ink declares a total dividend of $54,000. How much of the dividends go to the common stockholders? A. $54,000 B. $44,000 C. $34,000 D. None; it all goes to preferred stockholders.

B

Jana's Fitness Drinks has $850,000 of 20-year bonds payable outstanding. These bonds had a discount of $42,000 at issuance, which was 8 years ago. The company uses the straightline amortization method. The carrying amount of these bonds payable today is: A. $808,000. B. $824,800. C. $833,200. D. $892,000.

B

Kagan Corporation was organized on January 2, 2014. During 2014, Kagan issued 40,000 shares at $24 per share, purchased 6,000 shares of treasury stock at $26 per share, and had net income of $600,000. What is the total amount of stockholders' equity at December 31, 2014? a. $1,280,000 b. $1,404,000 c. $1,416,000 d. $1,440,000

B

Landfall Navigation began operations in 2014 and provides a one year warranty on the products it sells. They estimate that 20,000 of the 400,000 units sold in 2014 will be returned for repairs and that these repairs will cost $8 per unit. The cost of repairing 16,000 units presented for service in 2014 was $128,000. Landfall should report a. warranty expense of $32,000 for 2014. b. warranty expense of $160,000 for 2014. c. warranty liability of $160,000 on December 31, 2014. d. no warranty obligation on December 31, 2014, since this is only a contingent liability.

B

Presented here is a partial amortization schedule for Graceland Company who sold $100,000, five year 10% bonds on January 1, 2014 for $108,000 and uses annual straightline amortization. BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2014 $8,000 $108,000 January 1, 2015 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (ii)? a. $11,600 b. $8,400 c. $10,800 d. $9,200

B

Rudy's Fitness Gym has Unearned Revenue of $15,000, Salaries Payable of $28,000, and Allowance for Uncollectible Accounts of $4,200. What amount would Rudy's Gym report as total current liabilities? A. $47,200 B. $43,000 C. $32,200 D. $28,000

B

Southern Foodie Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $30 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable 2,400,000 Subscription Revenue 2,400,000 b. Cash 2,400,000 Unearned Subscription Revenue 2,400,000 c. Subscriptions Receivable 400,000 Unearned Subscription Revenue 400,000 d. Prepaid Subscriptions 2,400,000 Cash 2,400,000

B

Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a.Increase No change b.No change Decrease c.Decrease Decrease d.No change No change

B

The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense a. when the product is brought in for repairs. b. in the period in which the product was sold. c. at the end of the warranty period. d. only if the repairs are expected to be made within one year.

B

The acquisition of treasury stock by a corporation a. increases its total assets and total stockholders' equity. b. decreases its total assets and total stockholders' equity. c. has no effect on total assets and total stockholders' equity. d. requires that a gain or loss be recognized on the income statement.

B

Tots Toy's owed estimated warranty payable of $2,200 at the end of 2013. During 2014, Tots Toy's made sales of $280,000 and expects product warranties to cost the company 3% of the sales. During 2014, Tots Toy's paid $5,000 for warranties. What is Tots Toy's estimated warranty payable at the end of 2014? A. $10,600 B. $ 5,600 C. $ 5,000 D. $ 3,600

B

Which one of the following is not an ownership right of a stockholder in a corporation? a. To vote in the election of directors b. To declare dividends on the common stock c. To share in assets upon liquidation d. To share in corporate earnings

B

Which one of the following payroll taxes does not result in a payroll tax expense for the employer? a. FICA tax b. Federal income tax c. Federal unemployment tax d. State unemployment tax

B

A contingent liability is recorded when the likelihood of the contingency is a. remote. b. reasonably possible. c. probable. d. nil or zero.

C

As of January 1, 2015, Darnell's Deliveries owes $60,000 on a truck purchased for use by the business. The company makes principal payments of $1,000 each month plus interest at 8%. At the end of 2015, after the first 12 months' payments of principal and interest, which of the following would be included on the balance sheet for December 31, 2015? A. Long-Term Liabilities $48,000 and Interest Payable for four years' interest. B. Long-Term Liabilities $36,000; Current Liabilities $12,000; and Interest Payable for four years' interest. C. Long-Term Liabilities $36,000; Current Liabilities $12,000; and no Interest Payable D. Long-Term Liabilities $48,000 and no Interest Payable

C

Bond interest paid is a. higher when bonds sell at a discount. b. lower when bonds sell at a premium. c. the same whether bonds sell at a discount or a premium. d. higher when bonds sell at a discount and lower when bonds sell at a premium.

C

Dawson Company issued $400,000 of 8% serial bonds at face value on December 31, 2014. Half of the bonds mature January 1, 2017, while the other half of the bonds mature January 1, 2025. On December 31, 2016, the balance sheet will show which of the following? A. Bonds payable of $400,000 will be listed as a long-term liability. B. Bonds payable of $400,000 will be listed as a current liability C. Bonds payable of $200,000 will be listed as a long-term liability. Bonds payable of $200,000 will be listed as a current liability. D. Bonds payable of $408,000 will be listed as a long-term liability.

C

Disclosure of a contingent liability is usually made a. parenthetically, in the body of the balance sheet. b. parenthetically, in the body of the income statement. c. in a note to the financial statements. d. in the management discussion section of the financial statement.

C

If Baylor Company issues 8,000 shares of $5 par value common stock for $280,000, a. Common Stock will be credited for $280,000. b. Paid-In Capital in Excess of Par will be credited for $40,000. c. Paid-In Capital in Excess of Par will be credited for $240,000. d. Cash will be debited for $240,000.

C

If the market interest rate is 5%, a $10,000, 6%, 10-year bond, that pays interest semiannually would sell at an amount a. less than face value. b. equal to face value. c. greater than face value. d. that cannot be determined.

C

If the market interest rate is greater than the contractual interest rate, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated interest rate is increased.

C

Known liabilities of estimated amounts are: A. ignored. (Record them when paid.) B. contingent liabilities. C. reported on the balance sheet. D. reported only in the notes to the financial statements.

C

On August 1, 2014, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2015. How will the note payable and the related interest be classified in the December 31, 2014, balance sheet? Note Payable Interest Payable a. Current liability Noncurrent liability b. Noncurrent liability Current liability c. Current liability Current liability d. Noncurrent liability Not shown

C

On July 1, 2015, you borrowed $20,000 on a four-year, 6% note payable. At December 31, 2015, a journal entry should be made to record A. a note payable of $20,000. B. interest payable of $1,200. C. interest payable of $600. D. cash payment of $1,200.

C

On October 1, Eli's Carpet Service borrows $125,000 from First District Bank on a 3-month, $125,000, 8% note. What entry must Eli's Carpet Service make on December 31 before financial statements are prepared? a.Interest Payable 2,500 Interest Expense 2,500 b.Interest Expense 10,000 Interest Payable 10,000 c. Interest Expense 2,500 Interest Payable 2,500 d.Interest Expense 2,500 Notes Payable 2,500

C

On September 1, Bud's Painting Service borrows $150,000 from Highlands Bank on a 4- month, $150,000, 6% note. What entry must Bud's Painting Service make on December 31 before financial statements are prepared? a. Interest Payable 3,000 Interest Expense 3,000 b. Interest Expense 9,000 Interest Payable 9,000 c. Interest Expense 3,000 Interest Payable 3,000 d. Interest Expense 3,000 Notes Payable 3,000

C

Pan Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2013. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Pan uses the straight-line method of amortization. What is the amount of interest expense Pan will show with relation to these bonds for the year ended December 31, 2014? a. $12,000 b. $11,200 c. $13,200 d. $10,800

C

Presented here is a partial amortization schedule for Graceland Company who sold $100,000, five year 10% bonds on January 1, 2014 for $108,000 and uses annual straightline amortization. BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2014 $8,000 $108,000 January 1, 2015 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (i)? a. $10,800 b. $11,600 c. $10,000 d. $2,000

C

Presented here is a partial amortization schedule for Graceland Company who sold $100,000, five year 10% bonds on January 1, 2014 for $108,000 and uses annual straightline amortization. BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2014 $8,000 $108,000 January 1, 2015 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (v)? a. $109,600 b. $108,800 c. $106,400 d. $107,200

C

Sales taxes collected by a retailer are recorded by a. crediting Sales Tax Revenue. b. debiting Sales Tax Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.

C

Stock splits: A. increase the number of shares of stock issued. B. decrease par value per share. C. both A and B. D. neither A nor B.

C

The effect of the declaration of a cash dividend by the board of directors is to Increase Decrease a. Stockholders' equity Assets b. Assets Liabilities c. Liabilities Stockholders' equity d. Liabilities Assets

C

Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.

C

Wendy Company issued $600,000 of 8%, 5-year bonds at 105. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $48,000 b. $54,000 c. $42,000 d. $6,000

C

Which of the following is not a characteristic of a corporation? A. Double taxation B. Mutual agency C. Unlimited liability D. One or more owners

C

Which of the following is the correct journal entry to record the issuance of a $250,000 face value bond at 95? Accounts Debit Credit A. Bonds Payable 237,500 Cash 237,500 B. Cash 250,000 Discount on Bonds Payable 12,500 Bonds Payable 237,500 C. Cash 237,500 Discount on Bonds Payable 12,500 Bonds Payable 250,000 D. Bonds Payable 237,500 Cash 237,500

C

Which of the following transactions result in a decrease in stockholders' equity? A. Sale of treasury stock B. Small stock dividend C. Cash dividend D. All of the above

C

Your company sells $180,000 of goods and you collect sales tax of 8%. What current liability does the sale create? A. Unearned revenue of $20,000 B. Sales revenue of $270,000 C. Sales tax payable of $14,400 D. None; you collected cash up front.

C

A $400,000 bond priced at 102 can be bought or sold for: A. $102,000. B. $392,000. C. $402,000. D. $408,000.

D

A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000. The entry to record the retirement would include a a. gain on bond redemption of $10,000. b. loss on bond redemption of $10,000. c. loss on bond redemption of $2,000. d. gain on bond redemption of $2,000.

D

A company receives $696, of which $56 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Tax Expense for $56. b. debit to Sales Taxes Payable for $56. c. debit to Sales Revenue for $696. d. debit to Cash for $696.

D

A stock dividend: A. decreases Common Stock. B. increases Total Equity. C. decreases Total Equity. D. decreases Retained Earnings.

D

At December 31, your company owes employees for four days of the five-day workweek. The total payroll for the week is $51,000. What journal entry should you make at December 31? A. Nothing because you will pay the employees on Friday. B. Salaries and wages expense 51,000 Salaries and wages payable 51,000 C. Salaries and wages payable 40,800 Salaries and wages expense 40,800 D. Salaries and wages expense 40, 800 Salaries and wages payable 40,800

D

Bellezone Corporation's December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 20,000 shares authorized; 17,000 shares issued $ 340,000 Common stock, $10 par value, 2,000,000 shares authorized; 1,900,000 shares issued, 1,880,000 shares outstanding 19,000,000 Paid-in capital in excess of par—preferred stock 68,000 Paid-in capital in excess of par—common stock 27,000,000 Retained earnings 7,500,000 Treasury stock (20,000 shares) 630,000 Bellezone's total stockholders' equity was a. $53,338,000. b. $93,380,000. c. $54,538,000. d. $53,278,000.

D

Crystal, Inc.'s trial balance shows $800,000 face value of bonds with a discount balance of $12,000. The bonds mature in 20 years. How will the bonds be presented on the balance sheet? A. Bonds payable $800,000 will be listed as a long-term liability. A $12,000 discount on bonds payable will be listed as a current liability. B. Bonds payable $800,000 will be listed as a long-term liability. A $12,000 discount on bonds payable will be listed as a contra-current liability. C. Bonds payable $800,000 will be listed as a long-term liability. D. Bonds payable $788,000 (net of $12,000 discount) will be listed as a long-term liability.

D

During 2014, Crystal Glassware reported net income of $123,000, income tax expense of $25,000, and interest expense of $11,000. What is Crystal Glassware's times-interest earned ratio for 2014? (Round to one decimal place.) A. 7.9 B. 11.2 C. 13.5 D. 14.5

D

Jessica's Antiques issued its 4%, 20-year bonds payable at a price of $288,500 (face value is $300,000). The company uses the straight-line amortization method for the bonds. Interest expense for each year is: A. $12,000. B. $11,540. C. $15,000. D. $12,575.

D

Jordan Inc. has total assets of $500,000. Current liabilities are $10,000, and long-term liabilities are $90,000. What is the debt to equity ratio? A. 0.180 B. 0.200 C. 0.225 D. 0.250

D

Koppernaes Company has total proceeds (before segregation of sales taxes) from sales of $9,540. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is: a. $9,540. b. $8,968. c. $10,112. d. $9,000.

D

Mountain View, Inc. has 50,000 shares of 8%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2014. There were no dividends declared in 2013. The board of directors declares and pays a $500,000 dividend in 2014. What is the amount of dividends received by the common stockholders in 2014? a. $0 b. $400,000 c. $500,000 d. $100,000

D

On January 1, 2014, Mazzeo Company, a calendar-year company, issued $1,600,000 of notes payable, of which $400,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2014, is a. Current Liabilities, $1,600,000. b. Long-term Debt, $1,600,000. c. Current Liabilities, $800,000; Long-term Debt, $800,000. d. Current Liabilities, $400,000; Long-term Debt, $1,200,000.

D

On January 1, 2014, Meeks Corporation issued $5,000,000, 10-year, 4% bonds at 102. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2014 is a. Cash 5,000,000 Bonds Payable 5,000,000 b. Cash 5,100,000 Bonds Payable 5,100,000 c. Premium on Bonds Payable 100,000 Cash 5,000,000 Bonds Payable 5,100,000 d. Cash 5,100,000 Bonds Payable 5,000,000 Premium on Bonds Payable 100,000

D

Red October Company has 2,000 shares of 6%, $100 par cumulative preferred stock outstanding at December 31, 2014. No dividends have been paid on this stock for 2013 or 2012. Dividends in arrears at December 31, 2014 total a. $0. b. $1,200. c. $12,000. d. $24,000.

D

Retained Earnings: A. is decreased by a stock split. B. represents an amount of cash available to pay shareholders. C. represents the total amount of net income earned by the company during its existence. D. can be subject to appropriation by a corporation's directors to limit dividends.

D

Which of the following represents the largest number of common shares? a. Treasury shares b. Issued shares c. Outstanding shares d. Authorized shares

D

Which one of the following would not be considered an advantage of the corporate form of organization? a. Limited liability of owners b. Separate legal existence c. Continuous life d. Government regulation

D

Your company sells $50,000 of goods, and you collect sales tax of 7%. What is the journal entry to record the transaction? A. Cash 50,000 Sales Tax Expense 3,500 Sales Revenue 53,500 B. Cash 50,000 Sales Tax Expense 3,500 Sales Tax Payable 3,500 Sales Revenue 50,000 C. Cash 50,000 Sales Tax Payable 3,500 Sales Revenue 53,500 D. Cash 53,500 Sales Tax Payable 3,500 Sales Revenue 50,000

D

sales taxes collected by a retailer are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.

D