Acctcy2010 -Exam2

Interest charges on notes payable may be based on a(n):

fixed or variable interest rate

The amount of accounts receivable that is actually expected to be collected is known as the:

net realizable value.

When the common stock account is disclosed on the balance sheet, it is reported at:

par or stated value.

The term "double taxation" refers to which of the following?

Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on the dividends they receive from the corporation.

Houff Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company's accounting equation?

Have no effect on total assets, liabilities or stockholders' equity

Which financial statement(s) is (are) affected when depreciation expense is recognized?

Income Statement and Balance Sheet

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

$1,396 Explanation Interest expense in year 1: $20,000 × 10% = $2,000; Principal reduction in year 1: $8,042 − $2,000 = $6,042; Principal balance at beginning of year 2: $20,000 − $6,042 = $13,958; Interest expense in year 2: $13,958 × 10% = $1,396.

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $173,967 and $211,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $25,500 and issued stock dividends valued at $15,500. Total expenses were $40,916. Based on this information, what was the amount of total revenue for Year 1?

$119,849 Explanation $173,967 beginning retained earnings + X revenues − $40,916 expenses − $25,500 cash dividends − $15,500 stock dividends = $211,900 ending retained earnings; X = $119,849.

At the end of the accounting period, Houston Company had $5,000 of par value common stock issued, additional paid-in capital in excess of par value − common of $5,800, retained earnings of $6,000, and $2,250 of treasury stock. The total amount of stockholders' equity is:

$14,550 Explanation $5,000 common stock + $5,800 additional paid-in capital in excess of par value + $6,000 retained earnings − $2,250 treasury stock = $14,550

On January 1, Year 1, Phillips Company made a basket purchase including land, a building and equipment for $380,000. The appraised values of the assets are $20,000 for the land, $340,000 for the building and $40,000 for equipment. Phillips uses the double-declining-balance method of depreciation for the equipment which is estimated to have a useful life of four years and a salvage value of $5,000. The depreciation expense for Year 1 for the equipment is:

$19,000. Correct Explanation $40,000 ÷ ($20,000 + $340,000 + $40,000) = 10% of total appraised value; $380,000 purchase price × 10% = $38,000 cost of equipment; $38,000 × (2 × 25% straight-line rate) = $19,000 depreciation expense in Year 1.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

$24,800 Explanation $24,000 × 8% × 5/12 = $800 interest payable; $24,000 notes payable + $800 interest payable = $24,800 total liabilities.

The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 units @ $7.80 What is the amount of gross margin assuming the FIFO cost flow method is used?

$3,000 Under FIFO, the cost of the items purchased first is reported on the income statement, and the cost of the items purchased last is reported on the balance sheet. Cost of goods sold = (100 × $4.00) + (300 × $4.40) + (500 × $4.60) = $4,020; Gross margin = $7,020 sales − $4,020 cost of goods sold = $3,000.

On January 1, Year 1, Friedman Company purchased a truck that cost $48,000. The truck had an expected useful life of 8 years and an $8,000 salvage value. The company uses the double-declining balance method. The book value of the truck at the end of Year 1 is:

$36,000. Explanation $48,000 × (2 × 12.5%) = $12,000 Depreciation expense for Year 1; $48,000 Cost − $12,000 Accumulated depreciation at end of Year 1 = $36,000 book value at the end of Year 1

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

$37,890 and $0. Explanation $36,000 × 7% × 9/12 months = $1,890 interest payable on December 31, Year 1; $36,000 note payable + $1,890 interest payable = $37,890; the note is repaid before the end of Year 2, so there is no remaining liability.

The Miller Company recognized $190,000 of service revenue earned on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from accounts receivable. The company estimates that it will be unable to collect 3% of its sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement was:

$5,700. Explanation $190,000 revenue on account × 3% = $5,700

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report during the years ending December 31, Year 1 and Year 2, respectively, would be:

$720 and $240. Explanation $16,000 × 6% × 9/12 months = $720 interest revenue in April − December, Year 1; $16,000 × 6% × 3/12 months = $240 interest revenue in January − March, Year 2

Laramie Company paid $800,000 for a purchase that included land, building, and office furniture. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Land, $100,000, Building, $740,000, and Office Furniture, $160,000. Based on this information the cost that would be allocated to the land is:

$80,000 Explanation The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to building = Appraised amount for land of $100,000 ÷ Total appraised values of $1,000,000 (or $100,000 + $740,000 + $160,000) = 10%; Allocation of actual purchase price to land = Total purchase price of $800,000 purchase price × 10% = $80,000

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $158,967 and $189,400 respectively. Also during Year 1, the corporation declared and paid cash dividends of $15,000 and issued stock dividends valued at $12,000. Total expenses were $33,416. Based on this information, what was the amount of total revenue for Year 1?

$90,849 Explanation $158,967 beginning retained earnings + X revenues − $33,416 expenses − $15,000 cash dividends − $12,000 stock dividends = $189,400 ending retained earnings; X = $90,849.

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. What value will be recorded for the building?

$950,000 The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to building = Appraised amount for building of $1,100,000 ÷ Total appraised values of $2,200,000 (or $374,000 + $1,100,000 + $726,000) = 50%; Allocation of actual purchase price to building = Total purchase price of $1,900,000 × 50% = $950,000

Domino Company uses the aging of accounts receivable method to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During the year, the company wrote off $4,640 in uncollectible accounts. In preparation for the company's Year 2 estimate, Domino prepared the following aging schedule: What will Domino record as Uncollectible Accounts Expense for Year 2?

($104,000 × 1%) + ($45,000 × 5%) + ($9,920 × 10%) + ($4,440 × 25%) + ($3,800 × 50%) = $7,292 estimated ending allowance balance; $5,800 beginning allowance balance + uncollectible accounts expense − $4,640 write-offs = $7,292 ending allowance balance; uncollectible accounts expense = $7,292 − $5,800 + $4,640 = $6,132

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. At the end of Year 5, assuming the equipment had not been sold, the book value of the office equipment using straight-line depreciation and double-declining-balance depreciation, respectively, would be:

12,000 and 12,000 Explanation At the end of Year 5, the end of the office equipment's 5-year useful life, the book value will be equal to the $12,000 salvage value, regardless of which depreciation method is used.

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,000,000 units over its 5-year useful life and has salvage value of $34,000. Harding produced 265,000 units with the equipment by the end of the first year of purchase. Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year? (Do not round your intermediate calculations.)

157,145 Explanation Percent of purchase price to be allocated to equipment = (Appraised value of equipment of $726,000 ÷ Total appraised value of $2,200,000 (or $374,000 + $1,100,000 + $726,000) = 33%; Cost of equipment = Purchase price of $1,900,000 × 33% = $627,000; Cost per unit of production = (Cost of equipment of $627,000 − Salvage value of $34,000) ÷ Productive capacity of 1,000,000 units = $0.593 per unit; Year 1 depreciation = $0.593per unit × 265,000 units = $157,145

On January 1, Year 2, Grande Company had a $16,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During Year 2, Grande provided $104,000 recognized service revenue on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account.

2080 Explanation $104,000 sales on account × 2% = $2,080 uncollectible accounts expense

What is the amount of gross margin assuming the weighted average cost flow method is used? $3,015 $2,412 $1,314 $2,970 Explanation Under the weighted-average method, the average cost of inventory is reported on both the income statement and the balance sheet. Weighted average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit; Gross margin = Sales of (900 × $7.80) − Cost of goods sold of (900 × $4.50) =

2970

Montana Company was authorized to issue 100,000 shares of common stock. The company had issued 39,000 shares of stock when it purchased 6,000 shares of treasury stock. The number of outstanding shares of common stock was:

33,000 Explanation 39,000 shares issued − 6,000 shares of treasury stock = 33,000 shares outstanding

On January 1, Year 2, the Accounts Receivable balance was $37,000 and the balance in the Allowance for Doubtful Accounts was $2,800. On January 15, Year 2, an $800 uncollectible account was written-off. The net realizable value of accounts receivable immediately after the write-off is

34,200 Explanation $37,000 − $800 = $36,200 accounts receivable balance after the write-off; $2,800 − $800 = $2,000 allowance balance after the write-off; $36,200 − $2,000 = $34,200 net realizable value after the write-off.

On January 1, Year 1, Friedman Company purchased a truck that cost $48,000. The truck had an expected useful life of 8 years and an $8,000 salvage value. The company uses the double-declining balance method. The book value of the truck at the end of Year 1 is:

36,000 Explanation $48,000 × (2 × 12.5%) = $12,000 Depreciation expense for Year 1; $48,000 Cost − $12,000 Accumulated depreciation at end of Year 1 = $36,000 book value at the end of Year 1

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value − common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

82,500 Explanation $660,000 total par value ÷ $8 par value per share = 82,500 shares issued

On January 1, Year 1, Missouri Company purchased a truck that cost $57,000. The truck had an expected useful life of 10 years and a $6,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is:

9,120 Explanation $57,000 × (2 × 10%) = $11,400 depreciation expense in Year 1. ($57,000 − $11,400) × (2 × 10%) = $9,120 depreciation expense in Year 2.

Madison Company owned an asset that had cost $44,000. The company sold the asset on January 1, Year 4, for $16,000. Accumulated depreciation on the day of sale amounted to $32,000. Based on this information, the sale would result in:

A $16,000 cash inflow in the investing activities section of the cash flow statement.

Which of the following entities would report income tax expense on its income statement?

A Corporation

Which of the following entities would have a paid-in capital in excess of par (or stated) value account in the equity section of the balance sheet?

A Corporation Explanation Only a corporation issues stock; as such, it is the only type of entity that would have a paid-in capital in excess of par (or stated) value account.

The term "Retained Earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

How would accountants estimate the amount of a company's uncollectible accounts expense?

All of these answer choices are correct. (Correct) Consider new circumstances that are anticipated to be experiences in the future. Compute as a percentage of credit sales consult with trade association and business associates

Which of the following is a reason why a corporation may choose not to pay dividends?

All of these are valid reasons to not pay dividends. Correct Explanation Nonpayment of dividends is not necessarily a negative indication of a company's financial health.

Which of the following correctly describes an installment note?

An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note.

Which of the following statements best describes the term "par value?"

An amount used in determining a corporation's legal capital.

Which of the following represents the impact of a taxable cash sale of $1,160 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $1,218, an increase to sales tax payable for $58, and an increase to sales revenue for $1,160.

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400. The transaction is recorded as an increase to cash of $420, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $20, the amount owed to the state, and an increase to sales revenue of $400, the amount of the sale.

Where is treasury stock reported on a corporation's balance sheet?

As a deduction from total stockholders' equity, following retained earnings

The party who borrows money in a note payable is known as the:

Both Maker and Issuer

Which of the following would not be classified as a tangible long-term asset?

Copyright

The recognition of depreciation expense acts to:

Decrease assets and stockholders' equity, and does not affect cash flow.

Which of the following terms is used to identify the process of expense recognition for property, plant and equipment?

Depreciation

Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?

Ending inventory will be lower if Blake uses the weighted average cost flow method than if the FIFO cost flow method was used.

Fred and Barney started a partnership. Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 15% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 during an accounting period, the amount of income assigned to the two partners would be:

Fred: 18,100 Barney: 19,900

Ogilvie Corporation issued 12,000 shares of no-par stock for $40 per share. Ogilvie was authorized to issue 35,000 shares. What effect will this event have on the company's financial statements?

Increase assets by $480,000, increase stockholders' equity by $480,000.

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will:

Increase liabilities and decrease stockholders' equity by $2,000. Explanation $40,000 principal × 12% × 5 months ÷ 12 months = $2,000 interest expense. The accrual will increase liabilities (interest payable) and increase expenses, which will decrease net income and stockholders' equity (retained earnings).

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?

LIFO

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?

LIFO LIFO will produce cost of goods sold that is based on the most recent purchases.

Which of the following is not considered an advantage of the corporate form of business organization?

Lack of government regulation.

The balance in Accounts Receivable at the beginning of the period amounted to $16,000. During the period $64,000 of credit sales were made to customers. If the ending balance in Accounts Receivable amounted to $10,000, and uncollectible accounts expense amounted to $4,000, then the amount of cash inflow from customers that would appear in the operating activities section of the cash flow statement would be:

None of these answers are correct Explanation $16,000 beginning accounts receivable balance + $64,000 credit sales − $10,000 ending accounts receivable balance = $70,000 cash collected from customers; The $4,000 in uncollectible accounts expense does not affect accounts receivable, and does not affect cash flows.

When the common stock account is disclosed on the balance sheet, it is reported at:

Par or stated value

Monthly remittance of sales tax:

Reduces Liabilities

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

Reduces the amount of interest expense each year

Which of the following statements about the impact of treasury stock on the amounts reported on the balance sheet is correct?

The balance in the treasury stock account reduces total stockholders' equity.

Which of the following would be classified as a long-term operational asset?

Trademark

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

The outcome is probable and can be reasonably estimated.

On January 2, Year 1, Torres Corporation issued 20,000 shares of $10 par-value common stock for $11 per share. Which of the following statements is true?

The paid-in capital in excess of par value account will increase by $20,000.

Which of the following is not an advantage of accepting credit cards from retail customers?

There are fees charged for the privilege of accepting credit cards.

Which of the following is a negative or contra equity account?

Treasury stock

Benitez Company had sales of $560,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $7,500 of warranty obligations paid in cash during Year 1. Based on this information:

Warranty expenses would decrease net earnings by $16,800 in Year 1. Cash would decrease by $7,500 as a result of the accounting events associated with warranties in Year 1. The warranties payable account would increase by $9,300 in Year 1. All of these answer choices are correct. (CORRECT)

When do the effects of product warranties appear on the statement of cash flows?

When there is a settlement of a warranty claim made by a customer.

In an inflationary environment:

a company's assets will be lower if it uses LIFO as opposed to FIFO cost flow.

Hoover Company purchased two identical inventory items. The item purchased first cost $33.00. The item purchased second cost $35.00. Then Hoover sold one of the inventory items for $62.00. Based on this information, the amount of:

gross margin is $28.00 if Hoover uses the weighted average cost flow method.

The par value of a company's stock:

has little connection to the market value of the stock.

The net effect of the entries to recognize the receipt of a previously written-off account under the allowance method is to:

have no effect on total assets or stockholders' equity.

When prices are falling, LIFO... When prices are falling, LIFO will result in:

higher income and a higher inventory valuation than will FIFO.

Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:

increase by $640,000. Explanation Common stock will increase by $400,000, the par value, and paid-in capital in excess of par value will increase by $240,000, for a total increase in stockholders' equity of $640,000.

Bonds payable are usually classified on the balance sheet as:

long-term liabilities.

On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

reduce total stockholders' equity by $4,375. Explanation ($24,000 cost − $1,000 salvage) ÷ 8 years = $2,875 original annual depreciation; $2,875 × 4 years = $11,500 accumulated depreciation at time of improvement; ($24,000 original cost − $11,500 accumulated depreciation + $6,000 improvement − $1,000 salvage) ÷ 4 remaining years = $4,375 new annual depreciation; Recognizing the Year 5 depreciation expense decreases assets (book value of the asset) and increases expenses (depreciation expense) by $4,375. Net income and stockholders' equity (retained earnings) also decrease by $4375

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

zero Explanation The $24,000 borrowed is classified as a financing activity, not an operating activity. No interest was paid in Year 1, so there is no cash flow related to the interest.