Accounting Exam 2 Practice Questions
The CEO of Herald Corporation has asked you to help him describe the effects of different depreciation methods. Herald recently purchased a new machine with an installed cost of $500,000. The machine hasan expected life of 5 years and zero residual value. Select the best response from those below regarding depreciation for this asset:
if we choose double declining balance depreciation rather than straight-line, net income for the first two years of this asset's life will be lower
Charging the cost of ordinary repairs to the equipment account during the current year would:
overstate stockholders' equity at the end of the current year ***Capitalizing these expenses understates expenses which overstates net income which, in turn, overstates stockholders' equity***
Ten To One Gaming Corporation purchases poker chips from wholesalers and sells them to casinos in LasVegas and Atlantic City. The company gets all of its merchandise from a supplier in Minnesota and always buys on credit with credit terms of 2/10, n/30. Which statement below best explains the credit terms of 2/10,n/30:
the buyer will receive a 2% discount if they pay within ten days of the sale
Henner Corporation made a basket purchase of three pieces of machinery for $24,000. The fair market values of the machinery were determined to be as follows: Machine A: $4,500 Machine B: 9,000 Machine C: 13,500 Total: $27,000 What cost should Henner Corporation record for Machine C?
(13,500 / 27,000) x 24,000 = $12,000
On July 1, 2022, ABC Company purchased a new machine for $70,000. The machine was assigned an estimated life of ten years with an expected salvage value of $3,100. The machine is expected to be used to produce a total of 100,000 units over its life. Assuming ABC Company employs the units-of-production depreciation method and the machine was used to produce 10,000 units during 2022, the book value of the machine at December 31, 2022 would be equal to:
2022 Depreciation = (70,000 - 3,100) x (10,000/100,000) = 6,690 Book Value at 12/31 = 70,000 - 6,690 = $63,310
On July 1, 2022, ABC Company purchased a new machine for $70,000. The machine was assigned an estimated life of ten years with an expected salvage value of $3,100. The machine is expected to be used to produce a total of 100,000 units over its life. Assuming ABC Company employs the straight-line depreciation method, the balance in the accumulated depreciation account at December 31, 2023would be equal to:
2023 Depreciation = [(70,000 - 3,100) / 10] = 6,690 2022 Depreciation = 3,345 (Previous Question) Accumulated Depreciation = 3,345 + 6,690 = $10,035 ***None of the Above***
Fletcher Company purchased and began depreciating a new truck on January 1, 2026. The truck cost $27,000,had a five-year life, and a $4,500 salvage value. If Fletcher Company employs the double-declining balance depreciation method, 2027depreciation expense would amount to:
2026 Depreciation Expense = (27,000 - 0) x 2/5 = 10,800 2027 Depreciation Expense = (27,000 - 10,800) x 2/5 = $6,480
ZZ, Inc. reported accounts receivable of $60,000 at January 1, 2022 and accounts receivable of $80,000 at December 31, 2022. During 2022, ZZ, Inc. reported sales revenue of $400,000 and net income of $100,000. The accounts receivable turnover for 2022 was equal to:
400,000 / [(60,000 + 80,000)/2] = 5.71
Baxter Company reported the following information at December 10, 2028: Accounts Receivable: $ 34,600 Allowance for Bad Debts: 3,100 On December 11, 2028, Baxter Company wrote-off an account receivable of $2,000 that had been determined to be uncollectible The net realizable value after the write-off is equal to:
Accounts Receivable - Allowance for Bad Debts Net Realizable Value = 34,600 - 3100 = $31,500
Mason Company purchased a new machine on January 1, 2021, for $25,000. At the time of acquisition,the machine was estimated to have a service life of 10 years and an estimated salvage value of $1,000.The company has recorded yearly depreciation by using the straight-line method. On January 1, 2029,the machine was sold for $800 This transaction resulted in:
Accumulated Depreciation: [(25,000 - 1,000) / 10] x 8 years = $19,200 Cost of Machine (25,000) - Accumulated Depreciation (19,200) = 5,800 5,800 + Selling Price (800) = 5,000 Loss of $5,000
Depreciation can best be described as a method of:
Allocate the cost of assets to the income statement over their useful lives
Alpha Company and Beta Company purchased identical pieces of equipment having expected lives of ten years. Alpha Company uses the straight-line method of depreciation while Beta Company uses the sum-of-the-years'-digits depreciation method. Assuming the companies are identical in all other respects, choose the correct statement below.
Alpha Company's net income will be lower for the ninth year than Beta Company's
At the beginning of the year, Jones Company had a $50,000 balance in accounts receivable. During the year, total credit sales amounted to $210,000 and total cash collections from credit customers were $199,000. In addition, $3,000 in uncollectible accounts receivable were written-off. The balance in accounts receivable at the end of the year was equal to:
Beginning Accounts Receivable + Credit Sales - Collections - Write-Offs = Ending Accounts Receivable 50,000 + 210,000 - 199,000 - 3,000 = Ending Accounts Receivable Ending Accounts Receivable = $58,000
The Red River Company had credit sales of $800,000 during 2021. The accounts receivable balance at the beginning and end of 2021 were $40,000 and $140,000 respectively What was the amount of cash collected from customers during the year?
Beginning Accounts Receivable + Sales Revenue - Cash Collected = Ending Accounts Receivable 40,000 + 800,000 - X = 140,000 Cash Collected = $700,000
The cost of goods sold during the year was $90,000. Additional information is provided below: January 1: Accounts payable - 15,000 Inventory - 20,000 December 31: Accounts Payable - 10,000 Inventory - 60,000 What was the amount of cash paid to suppliers for purchases of inventory?
Beginning inventory + purchases - ending inventory = cost of goods sold 20,000 + purchases - 60,000 = 90,000 purchases = $130,000 Beginning accounts payable + purchases - cash paid to suppliers = ending accounts payable 15,000 + 130,000 - cash paid to suppliers = 10,000 Cash paid to suppliers = $135,000
On December 31, 2029, Raughly Co. sold a piece of equipment for $40,000 cash. The equipment had been purchased by Raughly on January 1, 2027 at a total cost of $80,000. Raughly had assigned the equipment a five-year life, a $6,500 salvage value, and was depreciating the equipment using the straight-line method of depreciation. The journal entry to record the sale of the equipment at December 31, 2029 is:
Cash = 40,000 Accumulated Depreciation = 44,100 (80,000 - 6,500)/ 5 year-life = 14,700 per year 14,700 x 3 years = 44,100 Gain on Sale of Equipment = 4,100 (???) Equipment = 80,000
During 2021, ABC Company reported ending inventory of $20,000; sales revenue of $90,000; and a gross profit of $40,000. The cost of goods available for sale during 2021 totaled:
Sales Revenue - Cost of Goods Sold = Gross Profit 90,000 - Cost of Goods Sold = 40,000 Cost of goods sold = 50,000 The Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold X - 20,000 = 50,000 The Cost of Goods Available = $70,000
The consistency principle states that a company's inventory valuation method:
Should be the same from period to period
XYZ Company wrote off as uncollectible an account receivable from a bankrupt customer. This action will:
Have no effect on total current assets
Jamestown Manufacturing produces farm machinery. Its 2022 statement of cash flows included the following items, among others: Dividends paid: $23,000 Purchases of stock of other companies: 14,500 Purchases of equipment: 75,000 Depreciation on equipment: 22,500 Sale of common stock: 124,250 Paid off long term note payable: 45,000 Net income: 36,234 What is the amount of net cash flows from financing activities for 2022?
Sale of Common Stock - Dividends Paid - Payment of Note Payable 124,250 - 23,000 - 45,000 = $56,250
On January 1, 2022, ABC Company purchased a new machine for $70,000. The machine was assigned an estimated life of ten years with an expected salvage value of $4,000. Assume ABC Company has been using the straight-line depreciation method for the machine. ABC Company revised the life of the machine on January 1, 2024 from ten years to eighteen years. The book value of the machine at December 31, 2026 would be equal to:
Depreciation for 2022-2023: (70,000 - 4,000) / 10 = 6,600 x 2 years = 13,200 Depreciation for 2024-2026: (70,000 - 13,200 - 4,000) / 16 years left = 3,300 x 3 years = 9,900 Book Value at 12/31/2026: 70,000 - 13,200 - 9,900 = 46,900
On January 1, 2022, ABC Company purchased a new machine for $70,000. The machine was assigned an estimated life of ten years with an expected salvage value of $4,000. Ignore your calculations from question 39 and refer to the original data. What amount of depreciation expense would be recorded on the machine for 2024 if, on January 1, 2024, ABC Company revised the life of the machine from 10 years to 8 years? Assume ABC Company has been using the sum-of-the-years'-digits depreciation method for the truck.
Depreciation for 2022: (70,000 - 4,000) x 10/55 = 12,000 (???) Depreciation for 2023: (70,000 - 4,000) x 9/55 = 10,800 (???) As of January 1, 2024, there are 6 years left. So use a fraction of 6/(6 + 5 + 4 + 3 + 2 + 1) = 6/21 Depreciation for 2024: (70,000 - 22,800 - 4,000) x 6/21 = $12,343
XYZ Company purchased inventory for $3,450 on account. The credit terms were 4/15, n/30. XYZ returned merchandise in the amount of $600 and paid the balance due within the discount period. How much cash did XYZ Company pay?
Discount = (3,450 - 600) x .04 = $114 Cash Paid = (3,450 - 600) - 114 = $2,736
During a deflationary period, which inventory costing alternative will result in a firm paying the lowest income taxes?
FIFO
In a statement of cash flows, payments of dividends to stockholders are classified as:
Financing Activities
During 2024, ABC Company had cost of goods sold of $720,000 and an inventory turnover ratio of 2.5. ABC had inventory of $260,000 at January 1, 2024. The inventory at December 31, 2024 was equal to:
Inventory Turnover = Cost of Goods Sold / Average Inventory 2.5 = 720,000 / Average Inventory Average Inventory = 288,000 Average Inventory = (Beginning + End Inventory) / 2 288,000 = (260,000 + X) / 2 Ending Inventory = $316,000
During an inflationary period, which inventory costing alternative will result in the lowest ending inventory balance?
LIFO
During an inflationary period, which inventory costing alternative will result in the lowest net income?
LIFO
An adjustment at the end of an accounting period for uncollectible accounts receivable is necessary under GAAP to comply with the:
Matching Concept
Based on an aging of its accounts receivable at December 31, XYZ Company determined that the net realizable value of the receivables at December 31 was $304,000. Additional information is as follows: Accounts receivable at December 3: 384,000 Allowance for Bad Debts at Jan 1: 51,200 Credit Balance Accounts written-off as uncollectible during the year: 35,200 Based on the above information, XYZ Company's bad debt expense for the year is:
Net Realizable Value = Accounts Receivable - Allowance for Bad Debts 304,000 = 384,000 - Allowance for Bad Debts Allowance for Bad Debts at 12/31 = 80,000 51,200 + Bad Debt Expense - 35,200 = 80,000 Bad Debt Expense = $64,000
If a company fails to record the adjusting entry for bad debt expense, then:
Net income will be overstated
A negative net cash flow from operating activities indicates that:
The company had a net loss using the cash basis of accounting
Prices have been rising during recent years. Companies Able and Baker are identical in operations except that Able accounts for its inventory using FIFO and Baker accounts for its inventory using LIFO. Regarding only the effects of this difference in inventory choice, which of the following statements is true?
The total assets on Able's balance sheet are more than Baker's total assets
On July 1, 2022, ABC Company purchased a new machine for $70,000. The machine was assigned an estimated life of ten years with an expected salvage value of $3,100. The machine is expected to be used to produce a total of 100,000 units over its life. Assuming ABC Company employs the straight-line depreciation method, the depreciation expense for 2022 would be equal to:
[(70,000 - 3,100) / 10] x 6/12 (only half the year) Depreciation Expense = $3,345
During May, XYZ Company paid its employees $36,000 cash as salaries. The salaries payable account at May 1 had a balance of $4,000 while the salaries payable account at May 31 had a balance of $8,000. The Amount of salaries expense shown on the income statement for May was equal to:
beginning salaries payable + salaries expenses - salaries paid in cash = ending salaries payable 4,000 + salaries expense - 36,000 = 8,000 Salaries Expense = $40,000
A statement of cash flows is intended to provide information about the:
cash receipts and cash payments during the current year