acct. exam 3 review

Using the simplified effective-interest amortization, the debit to Interest Expense equals ______.

Bonds Payable, Net x Market Interest Rate x Time

Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet?

The Allowance for Doubtful Accounts had an unadjusted credit balance.

In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals ______.

760 Reason: Bad Debt Expense = $38,000 x 0.02=$760.

Which of the following may lead to a revision of an estimate of a company's depreciation expense?

A change in the estimated useful life Extraordinary repairs that significantly extend the asset's usefulness A change in the estimated residual value

What are the key events with notes payable?

Recording principal paid Establishing the note Recording interest paid Accruing interest incurred but not paid

Using the simplified effective-interest amortization, the credit to Cash each interest payment equals ______.

Face Value x Stated Interest Rate x Time

It is important for companies to use the services of a collection agency as soon as a customer is late in paying.

False Reason: Being forceful too soon could result in loss of future sales.

In financial statements, Sales on account will cause an increase in ______.

Sales Revenue on the income statement Accounts Receivable on the balance sheet

Which of the following is recorded with a debit to Cash and a credit to Notes Receivable?

The receipt of the principal payment

Removing an uncollectible account and its corresponding allowance from the accounting records is called

a write-off

a sale on account is recorded with a debit to __ ___ and a credit to __ ___

accounts receivable, sales revenue

Which account is credited in an adjusting entry to record depreciation on machinery?

accumulated depreciation

Tangible assets are first recorded at ______.

all costs to acquire them and prepare them for use

Accounts Receivable represent ______.

amounts owed to a business by its customers

When a company lends money to employees at a rate of 4%, the company will record ______.

an asset called Notes Receivable

If a cost is capitalized, it is recorded as a(n) ___, not an expense.

asset

Which of the following are advantages of using national credit cards?

avoid lengthy cash collection periods reduction of bad debts expense

____ is the allocation of the cost of a long-lived, tangible asset over its useful life creating an expense on the income statement that is matched against the revenue generated by using the asset.

depreciation

On which financial statement are the line items reported?

depreciation expense - income statement accumulated depreciation - balance sheet

Most companies ______

do not estimate a residual value for intangible assets because the assets typically have no value at the end of their useful lives

A high receivables turnover ratio is a sign of a company's ______.

effectiveness in granting and collecting credit

A company's Bad Debt Expense reports the ______.

estimated amount of this period's credit sales that customers will fail to pay

Recording depreciation is an application of the ______.

expense recognition (matching) principle

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.

write-off of a specific customer's account

ch. 9

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Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the adjustment, the ______.

Allowance for Doubtful Accounts will have a $90,000 credit balance Reason: The aging method specifies the desired ending balance in the Allowance account which is $90,000. The $1,000 unadjusted debit balance in the Allowance for Doubtful Accounts needs to be increased by $91,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $91,000.

On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes ______.

net income to be overstated assets to be overstated

Long-lived assets (except land) are expensed

over their useful lives.

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).

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash is recorded with a ______.

$10,000 debit to Equipment and $8,000 credit to Notes Payable and $2,000 credit to Cash

The days to collect ratio provides what kind of information? (Check all that apply.)

The average number of days from sale on account to collection That a higher number of days means a longer (worse) time for collection

On January 1, Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $200. If Ace uses straight-line depreciation, depreciation expense for the 1st year ended December 31 equals ______.

$575 Reason: Straight-line depreciation equals $575 or ($2,500 - 200) x 1/4 years.

Assuming straight-line is used, which of the following is the formula for calculating revised annual depreciation?

(Book value-new residual value) x (1/remaining Useful life)

ch. 8

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Place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually.

1.) Debit notes receivable and credit cash 2.) Debit interest receivable and credit interest revenue 3.) debit cash and credit interest receivable (or interest revenue if not previously recorded) 4.) debit cash and credit notes receivable, interest revenue and interest receivable

Select all of the items below in determining the cost of purchased equipment.

Add the delivery costs Subtract the purchase discount Add the installation costs Add the list price Add the sales tax

Which of these depreciation methods are allowed by GAAP?

Declining-balance Straight-line Units-of-production

Which of these are long-lived productive assets?

Delivery equipment Machinery

The entry to record annual straight-line depreciation will decrease a company's ______.

Net Income Total Assets asset book value

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's income statement?

Net income was too high. Expenses were too low.

Which of the following are current liabilities?

Note Payable due in 3 months Salaries and Wages Payable Accounts Payable

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______.

Standard & Poor's Moody's

What information is provided by the receivables turnover ratio?

That a higher ratio means faster (better) turnover The number of times the average receivables balance is collected during the period

Which of the following is recorded with a debit to Interest Receivable and a credit to Interest Revenue?

The adjusting entry to record interest earned but not yet received

Which of the following is recorded with a debit to Notes Receivable and a credit to Cash?

The establishment of a note

Why would a company factor its receivables?

To get cash before the customers pay

The entry to record annual straight-line depreciation will increase a company's ______ and ______.

Total Expenses Accumulated Depreciation

Which of the following financial statement totals are reduced by the adjusting entry to record amortization?

Total assets on the balance sheet Total stockholders' equity on the balance sheet Net income on the income statement

Which method should be used to calculate depletion for a natural resource company?

Units-of-production

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?

Write off the uncollectible account and its corresponding allowance from the accounting records.

Given the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the amount of receivables written off was ______ than the amount estimated in the prior period. Thus, bad debt expense will be ______ in the current period than had the unadjusted balance been a credit balance.

greater; greater Reason: A debit balance remaining in the Allowance account indicates that more was written off than was allowed for in the prior period. Thus, in the current period more will need to be expensed in order to compensate for not expensing enough in the prior period.

Trademarks ______.

have an unlimited life and hence are not amortized

A(n) ______ fixed asset turnover ratio suggests a better than average use of fixed assets.

higher

For long-lived assets that have been in use for more than one accounting period, Depreciation Expense on the ______ Accumulated Depreciation on the ______.

income statement will be less than; balance sheet

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash causes total assets to ______.

increase by $8,000 Reason: The entry is recorded with a $10,000 debit to Equipment (+A) and $2,000 credit to Cash (-A) and $8,000 credit to Notes Payable (+L). Total assets increase by $8,000 (=$10,000 debit to Equipment - $2,000 credit to Cash).

`A higher residual value will result in a(n) ___ depreciation expense per year and a(n) ___ net income.

lower, higher

Which of these are natural resources that are depleted over time?

natural gas wells timber **natural resources

In the case of a basket purchase, the cost of the land and building is ______.

split among the assets purchased in proportion to the market value of the assets as a whole Reason: If the building's and the land's fair market values were $800,000 and $200,000 respectively but were bought together for $900,000, the $900,000 cost would be split based on the proportion to the market value of the assets as a whole. Thus, $720,000 (=$900,000 x 80% (=$800,000/$1,000,000)) would be allocated to the Building account and $180,000 (=$900,000 x 20% (=$200,000/$1,000,000)) to the Land account.

(Cost - residual value) x (1/useful life) is the formula for calculating the ___ - ___ method of depreciation. (Enter only one word per blank.)

straight-line

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on estimates, financial statements are ______.

susceptible to management manipulation.

If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-of-period adjusting entry for bad debts, then it must mean that ______.

$1,000 more accounts receivables were written off than were estimated back when the prior period's adjusting entry for bad debts was recorded Reason: The write-offs, which debit the Allowance (-xA,+A) and credit Accounts Receivable (-A), were greater than the amount in the Allowance account. This means the amount allowed and expensed last period was not enough.

The list price of a computer was $100,000. The sales tax on the computer was 5%. The delivery cost was $1,000. The cost to assemble the computer was $500. The Equipment account should be debited for a total of ______.

$106,500

On January 1, XYZ Corporation issued $200,000 of 8%, 5-year bonds when the market rate of interest was 6%. The bonds were issued for $216,849 and interest will be paid annually on December 31. How much premium amortization will XYZ record on the first interest payment date using the effective-interest method of amortization?

$2,989 Reason: Interest Expense: $216,849 x 6%=$13,011 Cash payment: $200,000 x 8%=$16,000; Amortization: $16,000 - $13,011=$2,989.

ch. 10

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Which of the following are contra-asset accounts?

Allowance for Doubtful Accounts Accumulated Depreciation

When a company receives the interest payment for a note that was issued in mid-November of the prior accounting period, the entry includes a debit to ______.

Cash and credit to Interest Receivable and Interest Revenue

Depreciation allocates the cost of a long-lived asset to _____.

Depreciation Expense over the periods the asset is used to generate revenue

The adjusting entry to record interest accrued on a note payable is debit ______.

Interest Expense and credit Interest Payable

On November 1, 2020, Lendem, Inc., loaned an employee $100,000 at 6% with both the interest and principal due in 1 year. The adjusting entry to record the interest generated but not received as of December 31, 2020 includes a debit to ______.

Interest Receivable of $1,000

Miss Hap, the bookkeeper, forgot to record the depreciation for the year. This error will cause ______.

assets to be overstated stockholders' equity to be overstated

___ Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated.

contingent

The journal entry to record $5.6 million in sales on account includes a ______.

debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million

If the Allowance for Doubtful Accounts has a credit balance prior to recording the adjusting entry for the current period's uncollectible accounts, then the ______.

estimated amount of uncollectibles was greater than the amounts actually written off

A productive asset ______.

is used to produce goods or services that will be sold to customers

Assume ABC Company issues a bond with a stated interest rate above the market rate. Using the simplified effective-interest amortization, interest expense is ______ the cash interest payment.

less than

Collection of a previously written-off account is called a

recovery or reinstatement

Which of the following statements is true about Sea the World Cruises' $1,000 bond price? bond price = 93.14

they sold for $931.40 each reason: the bond price is a percent, thus the bond price equals $931.40 (=$1,000 x 93.14%).

X Circle Company purchased a computer system Black Box, Inc. with a list price of $100,000 plus 5% sales tax. The cost to deliver and install the computer was $10,000. The debit to Equipment equals

$115,000

On January 1, Whittle, Inc. purchased timber rights for $2,000,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in the 1st year and 280,000 in the 2nd year. Depletion for the 1st year equals ______.

$150,000 Reason: Depletion equals $150,000 or (($2,000,000 - 500,000) x (200,000 cords/2,000,000 cords)).

Based on an aging of accounts receivables, management assigned 1% to the $100,000 of receivables 0-30 days outstanding, 5% to the $10,000 receivables 31-60 days and 20% to the $1,000 of receivables over 60 days. After making the adjusting entry the balance in the Allowance for Doubtful Accounts will equal

$1700

ABC, Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging of accounts receivable method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report ______.

Allowance for Doubtful Accounts of $8,000 on the balance sheet Bad Debt Expense of $7,250 on the income statement

ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy?

Credit card companies charge fees that reduce profits.

Which of the following are advantages to extending credit to customers? (Check all that apply.)

Increased sales Increased demand

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation?

Total assets increase $315,000. Total liabilities increase $315,000. Machinery, an asset, increases $320,750.

To ensure bad debt expense and the allowance for doubtful accounts do not become materially misstated over time, management will revise overestimates of prior period by lowering estimates in the current period.

True Reason: If the Allowance for Doubtful Accounts has an exceeding large credit balance because more was estimated to be uncollectible than was actually written off, management will lower its estimates in the current period.

if an adjusting entry is required for interest owed, then the ______ will report ______.

balance sheet; Notes Payable income statement; Interest Expense balance sheet; Interest Payable

Under US GAAP, a contingent liability should ______.

be reported on the balance sheet if the loss will probably occur and can be reasonably estimated be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated not be reported if the loss is remote and unable to be estimated

The entry to record the collection of a previously written-off account needs to be reversed because a customer paid $9,600 after its accounts receivable had been written off. This entry includes a ______.

credit to Bad Debt Expense of $9,600 Reason: When the account was written off, the Allowance account was debited and Accounts Receivable was credited. Since the amount turned out to be collectible, this entry needs to be reversed by debiting Accounts Receivable and crediting Allowance. The collection is then recorded as any other, debit Cash and credit Accounts Receivable.

ABC Corp. received a 3-month, at 8% per year, $1,500 note receivable on November 1. The adjusting entry on December 31 will include a ______.

credit to Interest Revenue of $20 Reason: Two months, November and December, of interest have been earned. Interest Revenue equals $20 (=$1,500 x 0.08/year x (2/12 year)). The time is 2/12 of the annual rate of 8%, not 2/3 of the 8% (12-month rate).

The journal entry to record the payment of salaries and wages to employees includes a ______.

credit to Withheld Income Tax Payable credit to Cash debit to Salaries and Wages Expense credit to FICA Payable

If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-of-period adjusting entry for bad debts using the aging of accounts receivable method, then it must mean that the ______.

debit to Bad Debt Expense will be $1,000 more than the desired ending balance in the Allowance for Doubtful Accounts

ABC purchased $500 of merchandise on account. ABC's journal entry to record this transaction includes a ______.

debit to Inventory of $500 credit to Accounts Payable of $500

Assuming the effective-interest method of amortization is used, the 2nd annual interest payment on 5%, $100,000, 2-year bonds that were issued at $102,070 when the market rate of interest was 4.25% will result in a ______ to Premium on Bonds Payable in an amount ______ than the 1st payment.

debit; greater

Company A and Company B both purchased a $100,000 machine with an estimated useful life of 10 years. Company A uses straight-line and Company B uses double-declining balance. At the end of the 3rd year, both sell the machines for the exact same amount. Since different depreciation methods were used, the entry to record the disposal will result in different amounts of ______.

debits to the Accumulated Depreciation accounts gains or losses

True or false: Both installment notes and interest-only notes require periodic payments of interest and repayment of a portion of the principal. True false question.

false Reason: Installment notes require periodic payments that include interest and repayment of a portion of the principal. Interest-only notes require periodic interest payments and a single "balloon" payment of the principal at maturity.

If a company sold equipment after using it for only 2 of the estimated 4 years, the amount of the Loss of Disposal on the income statement would be ______.

greater if straight-line was used instead of declining-balance

Lox, Stock and Bagel, Inc. buys Cream Cheesery, Inc. for $1,000,000 cash. Cream Cheesery's net assets are valued at $800,000 at the time of the sale. Lox, Stock and Bagel, Inc. should record a(n) ______.

increase to Goodwill of $200,000 decrease to Cash of $1,000,000

The Discount on Bonds Payable account ______.

is a contra account to Bonds Payable

Intangible assets with unlimited or indefinite lives are ______.

not amortized, but instead are reviewed for impairment

When the times interest earned ratio is less than 1.0, a company is ______.

not generating enough income to cover its interest expense

ABC Company issued bonds payable at a premium and uses the effective-interest method of amortization. On ABC's financial statements, ______.

bonds, including premiums, on the balance sheet will decrease with each interest payment cash paid for interest will be a constant percentage of the face value of the bonds bond interest expense will be less than the cash paid for interest

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

less than Reason: The aging method specifies the desired ending balance in the Allowance account. The amount of the entry will depend on what the unadjusted balance in the Allowance is. The aging method specifies the desired ending balance in the Allowance account needs to be $90,000. The $1,000 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $89,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $89,000.The expense will only be $89,000 because there is a $1,000 credit balance remaining in the Allowance account before adjustment.

Murphy's Paw, Inc. has credit sales of $100,000 for the month ended May 31. The Accounts Receivable balance is $8,000. Management estimates that 1% of its credit sales will be uncollectible. This adjusting entry includes a debit to ______.

Bad Debt Expense and credit to Allowance for Doubtful Accounts for $1,000

the following statements are true

Depreciation Expense on the income statement reports only the current period's usefulness used. Accumulated Depreciation on the balance sheet reports the amount of usefulness used since the long-lived asset was first put into use Depreciation Expense is an operating expense on the income statement Accumulated Depreciation is netted against the related long-lived asset on the balance sheet

The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the ______.

expense recognition (matching) principle

If a company is debiting Interest Receivable and crediting Interest Revenue, what must be the case?

It is the end of the of the accounting period and it is adjusting entry for interest generated but not yet collected.

Sunny Sky paid $30,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation?

One asset increases, while another asset decreases.

The formula for the fixed asset turnover ratio equals ______.

net revenue/average net fixed assets

The receivables turnover ratio is computed as ______.

net sales revenue divided by average net accounts receivable