Financial Accounting 210 Final Review

The excess of the face value of bonds over the issue price is known as a premium. True False

FALSE

A contingent liability is recorded if it is probable and can be reasonably estimated.

TRUE

Accounts receivable are shown on the balance sheet at their net realizable value.

TRUE

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then the quick ratio would be

1.75 TO 1

The Treasury Stock account should be considered an asset account.

False

Stock dividends reduce the par value of the stock.

False

A company's weekly payroll amounts to $50,000 and payday for the week is every Friday. Employees work five days per week, Monday through Friday. The appropriate journal entry was recorded at the end of the accounting period, Monday, March 31, 2017. What amount is wages expense in April for the payday, Friday, April, 4, 2017?

$40,000

When using the allowance method, what are the effects on the accounting equation when a company writes off a bad debt? a.Assets and stockholders' equity increase. b.Assets increase and stockholders' equity decreases. c.There is no effect on overall assets or equity. d.Assets and stockholders' equity decrease.

C. There is no effect on overall assets or equity.

Which of the following statements regarding contingencies is true?

Contingencies that are probable and estimable must be recorded before the outcome of future events.

Which one of the following is an accurate description of Allowance for Doubtful Accounts? a.Liability account b.Revenue account c.Contra account d.Expense account

Contra account

Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet? a.Current liability b.Current asset c.Owners' equity d.Long-term liability

Current liability

Which of the following accounts is not classified as a current liability?

Note payable, due in three years

When a note is discounted at a bank, it is normally done with recourse.

TRUE

Norwood, Inc.Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an estimated life of eight years, or 12,500 hours of operation. The crane was purchased on January 1, 2017, and was used 2,700 hours in 2017 and 2,600 hours in 2018.Refer to the information for Norwood, Inc.If Norwood uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2018?

$15,000

On January 1, 2017, Sharpsburg, Inc. issued $400,000, ten-year, 10% bonds for $354,200. The bonds pay interest on June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds at the end of the ten years? a.$480,000 b.$354,200 c.$380,000 d.$400,000

$400,000

Question Content Area Bonds in the amount of $100,000 with a life of ten years were issued by Focus Company. If the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds? a.$120,000 b.$30,000 c.$60,000 d.$6,000

$60,000

Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to

$90,900

A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are $14,350, then the quick ratio would be

1.2 TO 1

What are the effects on the accounting equation when a company makes the adjustment to record bad debts expense using the allowance method? a.Assets and stockholders' equity decrease. b.Assets decrease and stockholders' equity increases. c.Assets and stockholders' equity increase. d.Assets increase and stockholders' equity decreases.

A. Assets and stockholders' equity decrease.

If a company uses the allowance method to account for bad debts, when will the company's owners' equity decrease? a.At the end of the accounting period when an adjustment for bad debts is recorded b.At the date a customer's account is written off c.When the accounts receivable amount becomes past due d.At the date a customer's account is determined to be uncollectible

At the end of the accounting period when an adjustment for bad debts is recorded

What is the distinguishing characteristic between accounts receivable and notes receivable? a.Accounts receivable require payment of interest if not paid within the usual credit terms. b.Notes receivable result from a written promise to pay within a specified amount of time. c.Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies. d.Accounts receivable are usually current assets, while notes receivable are usually long-term assets.

B.Notes receivable result from a written promise to pay within a specified amount of time.

If a company borrows money from its bank and the bank deducts the interest in advance, the company would record the amount of the interest deduction as

DISCOUNT

Fall Corp. uses plant assets that are subject to rapid decreases in value due to obsolescence and physical deterioration. Which of the following depreciation methods is most appropriate to measure the decline in the usefulness of the company's assets?

Double-declining-balance

A change in estimate of an asset's residual value involves restating the income statements of past periods for the estimate change.

FALSE

Asset turnover is calculated as Net Income divided by Average Total Assets.

FALSE

Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

FALSE

Bad Debts Expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.

FALSE

Compound interest is a repeated calculation of the interest only on the principal over certain periods of time.

FALSE

Discount on Bonds Payable is classified as a current liability. True False

FALSE

Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes.

FALSE

If a company is concerned about minimizing its income tax burden, it would use the straight-line depreciation method to accomplish this objective.

FALSE

On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the plant asset.

FALSE

Research and development costs should be presented as intangible assets.

FALSE

The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for Doubtful Accounts.

FALSE

The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period.

FALSE

The cumulative feature of stock allows the firm to eliminate a class of stock by paying the stockholders a specified amount.

False

Deferred income taxes are a balance sheet item for Iowa Products Company. How would it most likely be classified on the balance sheet? a.Expense b.Owners' equity c.Liability d.Contra liability

LIABILITY

Which of the following would appear on the balance sheet as a current liability?

Premium offers in cereal boxes

Cash interest is computed annually when a bond is issued for other than its face value. For a bond issued at a premium, how will this component change under the effective interest method as the bond approaches maturity? a.Increase b.Remain constant c.Decrease d.Not enough information given to decide

REMAIN CONSTANT

Which of the following costs related to the purchase of production equipment incurred by Newark Company during 2017 would be considered a revenue expenditure?

Repair and maintenance costs during the equipment's first year of service

A remotely possible loss from a lawsuit is not reported on the balance sheet as a current liability.

TRUE

Acquisition cost should not include expenditures unrelated to the acquisition, like repair costs for damages incurred during installation, or costs incurred after the asset was installed and use begun.

TRUE

All operating assets, except land, are subject to depreciation, amortization, or depletion.

TRUE

An amount that has been incurred as an expense, but has not yet been paid should be considered an accrued liability.

TRUE

Bonds are generally issued in denominations of $1,000. True False

TRUE

Depreciation does not describe the increase or decrease in the market value of the asset.

TRUE

Most investors would prefer to see equity rather than debt on the balance sheet. True False

TRUE

The accounts receivable turnover ratio is a measure of how well a company manages its receivables.

TRUE

The current maturity of long-term debt is a current liability.

TRUE

The face rate is also called the nominal or stated rate. True False

TRUE

The most obvious risk to bond investors is that a company will fail and be unable to pay its debts. True False

TRUE

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

TRUE

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

TRUE

Warranty expenses are the result of the selling company's estimate of the number of units sold during the current year that may become defective and need repair or replacement during the warranty period.

TRUE

When land and building are acquired for a lump sum, the purchase amount should be allocated on the basis of the market values of the two assets.

TRUE

Shuttle Master Airlines has leased an aircraft from Streamline Aircraft Company. The annual payments are $1,000,000, and the life of the lease is 18 years. It is estimated that the useful life of the aircraft is 20 years. How would Shuttle Master Airlines record the acquisition of the aircraft? The effective rate of interest is 9%. a.The company would not record the aircraft as an asset but would record rent expense of $900,000 per year for 20 years. b.The company would not record the aircraft as an asset but would record rent expense of $1,000,000 per year for 18 years. c.The aircraft would be recorded as an asset with a cost of $9,129,000. d.The aircraft would be recorded as an asset with a cost of $8,756,000.

The aircraft would be recorded as an asset with a cost of $8,756,000.

Which of the following statements is true regarding the two allowance methods used to account for bad debts? a.The direct write-off method does a better job of matching revenues and expenses. b.The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account. c.The percentage of net credit sales approach takes into account the existing balance in the Allowance for Doubtful Accounts account. d.The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account.

The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.

A balance sheet of a sole proprietorship includes only the business assets and liabilities, not the personal assets of the owner.

True

A company may prepare a statement of retained earnings instead of a statement of stockholders' equity if the only changes in the stockholders' equity accounts that occurred during the year are earnings and dividends.

True

None of the Stockholders' Equity accounts are affected by the stock split.

True

Weather Corp. issued ten-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium. Which one of the following statements is true? a.Weather's annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year. b.Weather's annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. c.Weather will receive $94,800 as the issue price. d.The cash paid to bondholders will be $520 each interest period.

Weather's annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.

Question Content Area If bonds are issued at 101.25, this means that a.the bond rate of interest is 10.13% of the market rate of interest. b.a $1,000 bond sold for $1,012.50. c.the bonds sold at a discount. d.a $1,000 bond sold for $101.25.

a $1,000 bond sold for $1,012.50.

A decreasing long-term liability account is presented on the statement of cash flows as a.a decrease in cash in the Financing Activities category. b.a decrease in cash in the Investing Activities category. c.an increase in cash in the Operating Activities category. d.an increase in cash in the Financing Activities category.

a decrease in cash in the Financing Activities category.

When a company declares a stock dividend, which of the following occurs? a.Retained earnings is reduced. b.The Financing section of the statement of cash flows is decreased. c.A liability is created. d.Stockholders' equity is decreased.

a.Retained earnings is reduced.

With regard to preferred stock, a.its stockholders may have the right to participate, along with common stockholders, if an extra dividend is declared. b.there is a legal requirement for a corporation to declare a dividend on preferred stock. c.no dividends are expected by the stockholders. d.its issuance provides no flexibility to the issuing company because its terms always require mandatory dividend payments.

a.its stockholders may have the right to participate, along with common stockholders, if an extra dividend is declared.

The Stockholders' Equity section of Deer Lakes Manor's balance sheet on January 1, 2017, appeared as follows:Common stock, $30 par, 20,000 shares issued and outstanding$ 600,000Additional paid-in capital—common240,000Retained earnings 700,000Total stockholders' equity$1,540,000On March 1, 2017, Deer Lakes reacquired 4,000 shares of common stock at $50 per share. All common shares were originally sold for $42 each. How much should be reported in the Treasury Stock account on the March 31, 2017, balance sheet? a.$128,000 b.$200,000 c.$168,000 d.$32,000

b.$200,000

Anole Company was incorporated as a new business on January 1, 2017. The company is authorized to issue 20,000 shares of $5 par value common stock and 10,000 shares of 6%, $10 par value, cumulative, participating preferred stock. On January 1, 2017, the company issued 8,000 shares of common stock for $15 per share and 2,000 shares of preferred stock for $30 per share. Net income for the year ended December 31, 2017, was $375,000.Refer to the information about Anole Company.Anole's total stockholders' equity reported on the balance sheet at December 31, 2017, is a.$60,000. b.$555,000. c.$120,000. d.$180,000.

b.$555,000.

Question Content Area A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first month of business. The lawyer's normal fee is $15,000 for similar work. Which of the following would be the impact on the accounting equation if the stock is not currently trading? a.An increase to Common Stock for $15,000 b.An increase to Additional Paid-In Capital—Common Stock of $5,000 c.A decrease to Additional Paid-In Capital—Common Stock of $5,000 d.A decrease to Common Stock for $10,000

b.An increase to Additional Paid-In Capital—Common Stock of $5,000

Comprehensive income is a.reporting all items that are not under management's control on the statement of retained earnings. b.the result of all events and transactions that affect income during the accounting period that are reported on the income statement. c.an all-inclusive approach to income that includes transactions that affect stockholders' equity with the exception of those transactions that affect owners. d.considered an appropriation of retained earnings when reported in the Stockholders' Equity section of the balance sheet.

c.an all-inclusive approach to income that includes transactions that affect stockholders' equity with the exception of those transactions that affect owners.

If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during construction on the borrowed money is

capitalized as part of the cost of the plant asset.

Which of the following is reported as a financing activity on the statement of cash flows? a.Declaration of cash dividends b.Stock split c.Stock dividend d.Payment of cash dividends

d. Payment of cash dividends

Mendes Charters reported the following information at December 31, 2017:Preferred stock, $100 par, 500 shares authorized, and outstanding; cumulative; nonparticipating; callable at par value$ 50,000Common stock, $12 par, 50,000 shares authorized and outstanding600,000Additional paid-in capital—common25,000Retained earnings 825,000Mendes' total contributed capital is a.$1,500,000. b.$625,000. c.$650,000. d.$675,000.

d.$675,000.

A company purchased machinery by issuing 2,000 shares of $3 par value common stock. Since the company is new, there is no established market price for its stock. How would the company record the transaction? a.At the cost recorded by the previous owner of the machine b.In terms of the par value of the stock issued c.Recording the transaction would be postponed until a market price for the stock could be determined. d.At the fair market value of the machine

d.At the fair market value of the machine

There are some liabilities, such as income tax payable, for which the amounts must be estimated. Failure to estimate these amounts and record them would be a violation of the

matching principle.

When constructing assets, capitalized interest is based on

the average accumulated expenditures.