Accounting Exam 3
At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?
8,000 :100,000-20,000/10
In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:
Debt
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.
Which type of contingent liability would most likely be found on a balance sheet prepared under U.S. GAAP?
Probable contingent liability that can be estimated.
Which of the following are expenditures for assets subsequent to acquisition?
Repairs and maintenance Additions Improvements
value is the amount the company expects to receive for the asset at the end of its service life.
Residual
Which of the following will result in higher depreciation expense in the first year of the asset's life?
Short service life and low residual value.
A(n) ____________ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
The accumulated depreciation account is classified as a(n)
contra asset.
We normally record a long-term asset at the
cost of the asset plus all costs necessary to get the asset ready for use
The two types of financing are
debt financing. equity financing.
Financing with _________ requires borrowing, whereas financing with __________ requires issuing shares of stock.
debt, equity
The allocation of the cost of a tangible asset over its service life is referred to as __________.
depreciation
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 __________.
depreciation, amortization
In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:
equity
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
warranty
When an asset has a significant decline in value and is written down, this is called _________.
impairment
Obtaining a note payable for cash results in a(n) ______.
increase in assets and an increase in liabilities
Which of the following may be a proper balance sheet classification of contingent events?
long-term liability current liability
Which of the following may be a proper income statement classification of contingent events?
non-operating expense operating expense
Research and development costs
should be expensed
The __________ rate of interest is used to compute the cash interest paid to bondholders
stated
The rate of interest printed on the face of a bond is referred to as the __________ interest rate.
stated
Long-term assets are classified as:
tangible and intangible
Long-lived assets are typically classified in two categories: __________ and _________.
tangible, intangible
The measurement of an impairment loss in step 2 is the difference between
the asset's book value and its fair value.
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
Remote Reasonably possible Probable
Which of the following expenditures should be recorded as an expense?
Repairs and maintenance that maintain current benefits
The feature that distinguishes loss __________ from other liabilities is the uncertain outcome.
contigency
The flipside of a contingent gain is a contingent
loss.
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is
$3.00 per machine hour. Reason: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.
Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record
A loss of $10,000.
Which account is credited in a journal entry to record depreciation on machinery?
Accumulated Depreciation
Taylor Company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss?
Disclose the contingency and state that an estimate cannot be made.
What are the two steps in the two-step process of measuring impairments?
Measurement of the impairment and record the loss. Test for impairment using the future cash flows.
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
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ____________ liabilities.
contingent
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
An asset that has no physical substance is called a(n) ____________ asset.
intangible
If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a
debit to Cash of $100,000 and a credit to Bonds payable of $100,000.
Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should record a contingent liability and loss of
$250,000. Reason: When no amount within the range appears more likely than others, we record the minimum amount.
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.
Which of the following represent the correct accounting treatment for loss contingencies that do not meet the criteria for recording a liability but are at least reasonably possible?
An estimate of the potential loss should be made (if possible) and disclosed. A disclosure must describe the contingency.
Where is the account accumulated depreciation on equipment found on the financial statements?
As a contra account to equipment on the balance sheet
For a manufacturer, the most commonly reported contingent liabilities relate to product __________.
warranties
For a manufacturer, the most commonly reported contingent liabilities relate to product _____________.
warranties
On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following?
Debit cash $70,000 Debit loss on sale of equipment $20,000 Debit accumulated depreciation $60,000 Credit equipment $150,000
On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $10,000 cash. The journal entry to record the sale will include which of the following entries?
Debit to accumulated depreciation $30,000 Debit to cash $10,000 Debit to loss on sale of asset $10,000 Credit to equipment $50,000
Ming Corporation sells $100,000 goods on account to customers. Ming estimates that warranties will be 3% of sales. At the end of the year, Ming will require which of the following entries for warranties?
Debit warranty expense $3,000; Credit warranty liability $3,000
Wang Corporation sells $200,000 goods on account to customers. Wang estimates that warranties will be 2% of sales. At the end of the year, Wang will require which of the following entries for warranties?
Debit warranty expense $4,000; Credit warranty liability $4,000
Definition of depreciation, depletion, amortization
Depreciation: Allocation of the cost of a tangible fixed asset Depletion: Allocation of the cost of natural resources Amortization: Allocation of the cost of an intangible asset
A company can manipulate income by overstating an impairment loss. The financial statement effects of this are
current-year income is low. future depreciation, depletion, or amortization is unrealistically low. future income is unrealistically high.
Smith Company enters into a lease agreement with Rent-All Corp. The present value of the lease payments is equal to $25,000. Smith records:
debit lease asset $25,000 credit lease payable $25,000
Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records:
debit lease asset $50,000; credit lease payable $50,000
Rauch Corporation estimated warranty expense in Year 1 of $10,000. In Year 2, Rauch performed warranty work of $8,000. The journal entry to record the performance of warranty work would include a
debit to warranty liability.
__________ financing refers to obtaining investment from stockholders
equity
A long-lived asset is assumed to be impaired if its estimated future cash flows are _______ than its book value.
less
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.
liability
On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to
notes payable for $1,120. interest expense for $4,000.
The term used to describe the amount the company expects to receive for an asset at the end of its service life is
residual life
An asset ________ occurs when an asset is no longer useful, but cannot be sold.
retirement
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides ___________ .
revenue
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the __________ life of the asset.
service
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
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
Accumulated depreciation is:
a contra asset
A(n) ____________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.
lease
A(n) __________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
accounts
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
Bonds and leases are normally classified as ______ liabilities. Multiple choice question.
long term
A company's capital structure refers to
the mixture of debt and equity used to finance the company.
A contingent liability is an existing __________ situation that might result in a loss depending on the outcome of a future event. Listen to the complete question
uncertainty
______________ financing refers to borrowing money from creditors.
Debt
Jones Corporation's long-term asset has a book value of $100,000 and an estimated fair value of $101,000. Jones estimates that the future cash flows associated with the asset are $95,000. To determine whether the asset may be impaired, Jones should compare the asset's book value to its
estimated future cash flows.
Ling Corporation's long-term asset has a book value of $200,000 and an estimated fair value of $195,000. Ling estimates that the future cash flows associated with the asset are $198,000. To determine whether the asset may be impaired, Ling should compare the asset's book value to its
estimated future cash flows.
An asset that has no physical substance is referred to as a(n)
intangible asset
Which of the following are methods of long-term financing with debt?
Bonds Leases Notes payable
The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.
Cash; Bonds Payable
The mixture of debt financing and equity financing a company uses is referred to as the company's ___________ structure.
capital
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
A transaction or event in which the outcome is uncertain is referred to as a(n) .
contingency
A(n) __________ gain is an existing uncertainty that might result in a gain.
contingent
Notes payable is classified as a liability that has which of the following effects?
Creates interest expense on the income statement
During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet?
$0 Reason: No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).
On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$10,000 Reason: $200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.
On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:
$13,000 Reason: $4,000 + $9,000
Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method?
$16,000.
On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2? Multiple choice question.
$5,000 Reason: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.
Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2018 income statement?
$50,000 Reason: $10,000 + $25,000 + $15,000
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
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
Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?
-Interest expense based on the beginning period carrying value and the effective rate of the loan -The decrease in the carrying value of the note -The cash paid each payment period -The carrying value of the note at the end of the period
Current liability vs. long term liability
-Normally payable within one year -Normally payable more than one year from now
A retirement or abandonment of an asset is different from a sale of an asset because
-a loss must be recognized for the remaining book value. -no cash is received.
The types of expenditures that can occur subsequent to an asset's acquisition are:
-repairs and maintenance -additions -improvements
Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:
A loss of $10,000.
On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?
Credit gain on sale of equipment $50,000 Debit accumulated depreciation $70,000 Debit cash $80,000 Credit equipment $100,000
The journal entry to recognize the signing of an installment notes payable includes:
Debit Cash Credit Notes Payable
True or false: Current liabilities are always payable within one year.
False
Which of the following may be classified as contingent liabilities?
Frequent flyer program awards Product warranties Future litigation losses
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
Which of the following are possible benefits of leasing an asset rather than purchasing an asset?
Lower periodic payments on the asset Improvement in cash flows Protection against declining asset value
Which of the following are typically shown in an amortization schedule related to an installment notes payable?
The cash paid each payment period The carrying value of the note at the end of the period The carrying value of the note at the beginning of the period
Common current liabilities include:
The current portion of long-term debt Sales tax payable Deferred revenues
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
The amount of the gain on the sale of equipment equals:
The selling price minus the book value of the equipment.
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
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.
a credit to Cash of $6,000 a debit to Interest expense of $6,000
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.
a credit to Interest payable of $500 a debit to Interest expense of $500
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
Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
a lease asset a lease payable
At the beginning of a lease period, the lease records
a lease asset and lease payable for the present value of the lease payments.
At the beginning of a lease period, the lessee records
a lease asset and lease payable for the present value of the lease payments.
Periodic payments on installment notes typically include
a portion that reduces the outstanding loan balance. a portion that reflects interest.
A(n) _________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
accounts
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)
accounts payable.
Depreciation in accounting is the:
allocation of an asset's cost to an expense over time
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
For accounting purposes, depreciation is
an allocation of a cost of an asset.
In accounting, the term impairment refers to
an asset's significant decline in value.
The book value of an asset is equal to the
asset's cost less accumulated depreciation
Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:
credit to Notes Payable for $24,000
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:
credit to contingent liability debit to loss
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
Deferred revenues and sales tax payable typically are reported as ___________ liabilities.
current
__________ financing refers to borrowing money from creditors.
debt
A contingent event for which the likelihood of payment is properly judged to be remote:
is not required to be disclosed in the financial statement notes
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)
lease
Improved cash flows is a common advantage of acquiring equipment through _________.
leasing
Improved cash flows is a common advantage of acquiring equipment through __________.
leasing
When a contingent event that may give rise to a future loss is likely to occur, it is said to be __________.
probable
When a contingent event that may give rise to a future loss is likely to occur, it is said to be ___________.
probale
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.
A loss that is judged to be probable and for which the amount is reasonably estimable should be
recorded
Disclosure related to a contingent event usually is not required if the likelihood of payment is _________.
remote
Disclosure related to a contingent event usually is not required if the likelihood of payment is ___________.
remote
Loans requiring periodic payments of interest and principle are referred to as _________ notes.
installment
Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. What is the amount of the estimated warranty liability that Supreme should recognize on its 2018 balance sheet?
warranty liability for $10,000
Impairment losses can be used to manipulate earnings by
writing off impairments in the current year and taking losses to decrease future depreciation and increase future earnings.
Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is Multiple choice question.
$2.00 per machine hour Reason: ($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.
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
If equipment is retired, which of the following accounts would be debited?
Accumulated depreciation.
Which of these are parts of the journal entry to record depreciation?
Credit Accumulated Depreciation Debit Depreciation Expense
On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries?
Debit to accumulated depreciation $30,000 Credit to equipment $50,000 Debit to cash $45,000 Credit to gain on sale of asset $25,000
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.
The asset's cost less accumulated depreciation is called:
book value
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?
$4,500 Reason: The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.
Supreme Inc. sells its products with a 3-year warranty. The company estimates that warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. The journal entry to recognize the warranty work performed in 2018 includes a debit to:
$40,000 Reason: $25,000 + $15,000 = $40,000
Abbott Corp.'s attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott Corporation should record a contingent liability and loss of
$400,000.
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$5,000 Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.
Equipment was purchased for $50,000. At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company changed its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000. What is depreciation expense in the third year?
$8,000.
At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:
$8,600 Reason: $10,000 - $(2,000 - (10,000 x .06) = $8,600
The balance in the Accumulated Depreciation account represents
The amount charged to depreciation expense since the acquisition of the plant asset.
During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?
The balance is $48,880. Reason: $50,000 - (5,120 - 4,000 interest)
The first step in determining whether an impairment loss should be recorded is to determine if the sum of estimated future cash flows from an asset is less than the asset's
book value
