D104 Intermediate Accounting II Units 4-6

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best-efforts underwriting

the type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

current liabilities are usually recorded and reported in financial statements at

their full maturity value

total paid-in capital or contributed capital

total amount received from the issuance of shares

debt to assets ratio

total liabilities/total assets

All dividends, except for stock dividends, reduce the _________

total stockholders' equity in the corporation

# of shares outstanding=

# shares issued- #treasury

A company originally sold 20-year bonds with a face value of $500,000 for a $20,000 discount. The bonds were held to maturity.How much will the gain be on the maturity date? $480,000 $20,000 $0 $500,000

$0 If a company holds the bonds to maturity, the company does not compute any gains or losses. It will have fully amortized any premium or discount at the date the bonds mature.

Companies do not declare or pay cash dividends on ______

treasury stock.

remaining coupons on hand that have yet to be processed is NOT relevant to calculating liability for coupons

true

transactions with the owners DO NOT appear on the income statement

true

you CANNOT depreciate below salvage value

true

you DON'T use salvage value in double declining balance

true

The failure to properly record an adjusting entry to accrue an expense will result in an

understatement of expenses and an understatement of liabilities

secret reserves

when a corporation undervalues the recorded assets

if the stock price does not exceed the exercise price for a stock option, the options are

worthless

A note payable is refinanced every 4 months, is it a current liability?

yes

deep-discount bonds

zero-interest bonds; sold at a deep discount since all interest is received at maturity

For a zero-interest bearing note a borrower receives in cash the

present value of the note.

the depreciation method employed must be

systematic and rational

Who does the residual interest in a corporation belong to?

The common stockholders

restoration costs part of the depletion base and the amount included in the depletion base is:

the fair value of the obligation to restore the property after extraction.

private placement

the issuing company may sell the bonds directly to a large institution, financial or otherwise, without the aid of an underwriter

A company discloses gain contingencies in _____ only when a high probability exists for realizing them.

the notes

Additional Paid in Capital (APIC)

the portion of the cash proceeds above par value

When preferred stock is cumulative IGNORE arrears and everything else that isn't contractual. True or false?

true

if preferred stock is noncumulative then you're only going to subtract the dividends in the year that's declared

true

market price of the stock DOES NOT impact the recognized compensation expense during the service period

true

registered bonds

bonds issued in the name of the owner

you do or do not prepare entries to correct prior year's depreciation?

do not

(straight line rate*2)*NBV=depreciation

double declining balance method

Inadequacy, Obsolescence, and supersession are

economic factors

companies often switch from the declining balance method to the straight line method near the end of the asset's useful life to....

ensure that they depreciate the asset only to its salvage value

With options or warrants, whenever the exercise price ____ the market price, the security is antidilutive.

exceeds

bonds payable are always recorded at their ___ value

face

If converting bonds into other securities, a company uses the

book value

total estimated warranty expense will use ____ year/s when recorded in the year of sale each individual year both

both (example 2% year 1+4% year 2=6% for each)

How do you compute the return on total assets?

Divide net income by average total assets

Times Interest Earned

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense

revised rate of depreciation

(book value-salvage)/remaining useful life

journal entry for dividends declared

DR: dividends declared or retained earnings, CR: dividends payable

Acid-test (quick) ratio

(cash + short-term investments + accounts receivable (net)) / current liabilities

what is the journal entry for a loss on a balance sheet

debit the loss

straight line depreciation

(cost - salvage value) / useful life

Basic EPS Equation

(net income - preferred dividends) / common shares outstanding

A company issues 1,000 shares of $1 par value common stock upon conversion of 1,000 shares of $5 par value preferred stock that was originally issued for a $150 premium.How much should be credited to the common stock account?

$1,000 Correct! $1,000 = (1,000 x $1). Common stock will be credited for the par value.

At December 31, 2020 the following balances existed on the books of Rentro Corporation: Bonds Payable: $7,000,000 Discount on Bonds Payable: $980,000 Interest Payable: $168,000 If the bonds are retired on January 1, 2021, at 102, what will Rentro report as a loss on redemption? $70,000 $945,000 $1,120,000 $1,288,000

$1,120,000 When a bond is redeemed, any excess of net carrying amount over the reacquisition prices is a "loss from extinguishment" The reacquisition price is $7,140,000 ($7,000,000 x 1.02). The book value of the bond is the face value less any unamortized discount. In this case, the book value is $6,020,000 ($7,000,000 - $980,000). Therefore, the loss on extinguishment is $1,120,000 ($7,140,000 - $6,020,000).

In 2016, Newton Inc. issued for $105 per share, 100,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Newton's $30 par value common stock at the option of the preferred stockholder. In August 2017, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $42 per share. What total amount should be credited to additional paid-in capital, common stock as a result of the conversion of the preferred stock into common stock? $375,000 $780,000 $1,250,000 $1,500,000

$1,500,000 In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry. In this case, the journal entry includes the following: Debit Convertible Preferred Stock: $10,000,000 (100,000 shares x $100/share par value) Debit Paid-in Capital in Excess of Par - Preferred Stock: $500,000 [100,000 x (105/share - 100/share)] Credit Common Stock: $9,000,000 (100,000 preferred shares converted to 3 shares of common stock = $300,000 common shares x $30/share par value) Credit Paid-in Capital in Excess of Par - Common Stock: $1,500,000 [($10,000,000 + $500,000) - $9,000,000]

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. What is the total interest expense reported on the 2017 income statement? $1,529,115 $1,560,000 $1,568,498 $1,600,000

$1,568,498 When a bond is purchased for less than the face value of the bond, the bond is "issued at a discount" of $395,855. The cash payment on the bond is $780,000 ($20,000,000 x 7.8% x 6/12). On 01/01/2017, the carrying amount of the bond is $19,604,145. Total interest expense on June 30, 2017 is $784,166 ($19,604,145 x 8% x 6/12). On June 30, the carrying value of the bond is increased (the discount is reduced) by $4,166 ($784,166 - $780,000) to $19,608,311 ($19,604,145 + $4,166). Total interest expense on December 31, 2017 is $784,332 ($19,608,311 x 8% x 6/12). Therefore, total interest expense for 2017 is $1,568,498 ($784,166 + $784,332

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, how much interest expense will be recognized in 2020? $975,000 $1,960,415 $1,950,000 $1,960,622

$1,960,622 When a bond is purchased for less than the face value of the bond, the bond is "issued at a discount" of $494,820 ($25,000,000 - $24,505,180). The cash payment on the bond is $975,000 ($25,000,000 x 7.8% x 6/12). On 01/01/2020, the carrying amount of the bond is $24,505,180. Total interest expense on June 30, 2020 is $980,207 ($24,505,180 x 8% x 6/12). On June 30, the carrying value of the bond is increased (the discount is reduced) by $5,207 ($980,207 - $975,000) to $24,510,387 ($24,505,180 + $5,207). Total interest expense on December 31, 2020 is $980,415 ($24,510,387 x 8% x 6/12). Therefore, total interest expense for 2017 is $1,960,622 ($980,207 + $980,415).

A company reports net income of $1,000,000. Dividends paid to preferred shareholders are $100,000. Shares outstanding at the beginning of the calendar year equal 700,000. The company purchased 200,000 treasury shares on October 1.Which amount is the earnings per share?

$1.38 $1.38 = ($1,000,000 - $100,000) / ((700,000 x 9/12) + ((700,000- 200,000) x 3/12)). Shares must be averaged on a weighted basis.

On March 1, 2021, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2041. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2021, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2021 as paid-in capital from stock warrants? $73,600 $85,200 $100,000 $104,000

$104,000 When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds. The calculation of the amount allocated to the Paid-in Capital - Stock Warrants is calculated below: Proceeds = $2,000,000 x 104% = $2,080,000 Fair value of bonds = $2,000,000 x 95% = $1,900,000 Number of warrants issued = $2,000,000 / $1,000 per bond = 2,000 bonds x 25 warrants per bond = 50,000 warrants Fair value of warrants = 50,000 warrants x $2 per warrrant = $100,000 Amount of proceeds allocated to warrants = [$100,000 / ($1,900,000 + $100,000)] x $2,080,000 = $104,000

Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000. Which amount should Florence recognize as a loss on impairment? $0 $50,000 $55,000 $105,000

$105,000 An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset less the book value.

depletion cost per unit=

(total cost - salvage value) / total estimated units available

Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? $3,733,333 $6,000,000 $16,400,000 $18,000,000

$16,400,000 The loss contingency balance is calculated as: $10,400,000 + (60,000 × $300) - $12,000,000 = $16,400,000.

A company purchased a plot of land for $140,000 for the purposes of harvesting timber for resale. The company estimates that it will be able to sell the land for $40,000 after it harvests all the timber and believes it will harvest 50,000 board-feet of lumber from the land over the next 10 years. Which depletion rate should the company use? $2.00 per board-foot $2.80 per board-foot $10,000 per year $14,000 per year

$2.00 per board-foot Correct! $2.00 = ($140,000 - $40,000) / 50,000. The company should select an activity-based method. This choice reflects the $100,000 depletion base divided by the expected quantity of timber to be harvested.

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $200,000. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? $300,000 loss $505,000 gain $250,000 loss $250,000 gain

$250,000 loss When a bond is redeemed, any excess of net carrying amount over the reacquisition prices is a "loss from extinguishment" The reacquistion price is $5,050,000 ($5,000,000 x 1.01). The book value of the bond is the face value less any unamortized discount. In this case, the book value is $4,800,000 ($5,000,000 - $200,000). Therefore, the loss on extinguishment is $250,000 ($5,050,000 - $4,800,000).

On July 22, a company issues bonds at 105, bonds with a par value of $1,000,000, due in 20 years. Five years after the issue date, the company calls the entire issue at 101 and redeems it. At that time, the unamortized premium balance is $37,500. What is the effect of this transaction?

$27,500 gain

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. What value would Kimbrough report for the unamortized bond discount on December 31, 2017? $255,000 $258,050 $274,500 $285,500

$285,500 When the bond is purchased for less than the face value of the bond, the bond is "issued at a discount" of $305,000 ($5,000,000 - $4,695,000). The cash payment on the bond is $450,000 ($5,000,000 x 9% x 12/12). On 01/01/2017, the carrying amount of the bond is $4,695,000. Total interest expense on December 31, 2017 is $469,500 ($4,695,000 x 10% x 12/12). On June 30, the carrying value of the bond is increased (the discount is decreased) by $19,500 ($469,500 - $450,000) to $4,714,500 ($4,695,000 + $19,500). The original discount of $305,000 is reduced by $19,500 to $285,500.

Porter Resources Company acquired a tract of land containing an extractable natural resource. Porter is required by its purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information includes: Land at $7,500,000 and Estimated restoration costs of $1,500,000. If Porter maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material? $2.6 $3.0 $3.2 $3.6

$3.2 Depletion is calculated using the units-of-production method. If applicable, acquisition, exploration, intangible development, and restoration costs are all included in the depletion base of an asset. Porter's depletion expense per ton is calculated as: [($7,500,000 + $1,500,000 - $1,000,000)/ 2,500,000 tons] = $3.20 per ton.

A company's balance sheet displays common stock of $150,000, preferred stock of $50,000, additional paid-in capital from common stock of $100,000, and retained earnings of $80,000. Which amount represents stockholders' equity?

$380,000

A company issued a 30-year mortgage note with a face value of $425,000 to purchase a new production plant. The lender assessed 3 points to close the financing. Which amount should be recorded on the balance sheet for the Mortgage Note Payable?

$425,000 (face value)

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350. What is the amount of sales tax payable (to the nearest dollar) for May? $51,750 $49,350 $48,363 $62,286

$48,363 Referring to the above questions, total sales tax collected was $49,350. However, Posner keeps 2% of the sales tax collected. Therefore the sales tax payable is: $49,350 x (1-.02) = $48,363.

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350. What is the amount of sales tax (to the nearest dollar) for May? $49,350 $52,806 $62,286 $67,893

$49,350 Since Posner records sales tax in the Sales Revenue account. The total $754,350 includes sales tax. Posner collects 7% sales tax. Therefore: [Sales + (.07 x Sales)] = $754,350. ($754,350 / 1.07) = $705,000. $754,350 - $705,000 = $49,350 sales tax collected.

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2027. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $210,000. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? $5,940,000 $5,790000 $5,730,000 $5,640,000

$5,790000 The net carrying value of a bond used to calculate a gain or loss on the redemption of the bond is the face value less any unamortized discount. The face value of the bond is $6,000,000 and the unamortized discount is $210,000. Therefore the book value is $5,790,000 ($6,000,000 - $210,000).

A company reports a net income of $5,000,000. Shares outstanding at the beginning of the calendar year equal 1,000,000. There are 950,0000 shares outstanding on April 1. How much are earnings per share?

$5.19 (1,000,000*3/12)+(950000*9/12)=962500, 5000000/962500=5.19

A company purchases a factory and signs a 30-year mortgage with a face value of $500,000 and a fixed interest rate of 6.75% per year. The bank is requiring 4 points upon closing.How much should be recorded in the Mortgages Payable account upon closing? $480,000 $520,000 $533,750 $500,000

$500,000 Mortgages will be recorded at face value.

On October 1, 2020, Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. What is the credit side of the journal entry to record the issuance of the bonds? $5,760,000 to Bonds Payable and $480,000 to Premium on Bond Payable $6,090,000 Bond Payable and $150,000 to Interest Payable $6,000,000 Bond Payable and $240,000 to Discount on Bonds Payable $6,000,000, Credit Premium on Bond Payable $240,000. $6,000,000 Bond Payable and $240,000 to Premium on Bonds Payable

$6,000,000 Bond Payable and $240,000 to Premium on Bonds Payable The bonds are issued at a premium (at 104) of $240,000 (($6,000,000 × 1.04) - $6,000,000 = $240,000 premium). The complete journal entry at issuance is: Debit Cash $6,240,000, Credit Bond Payable $ $6,000,000, Credit Premium on Bond Payable $240,000.

Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset? $6,400 $8,000 $16,000 $7,000

$8,000 Double declining method ignores salvage value. It calculates depreciation at 200% of the straight-line rate each year and multiplies that by the book value of the asset at the beginning of the period. Since the asset in this case has a useful life of 4 years, the straight-line depreciation rate is 25% per year. The double-declining method rate, therefore is 50%. First year depreciation is $32,000 x 50% = $16,000. The book value at the beginning of the 2nd year is $16,000 ($32,000 - $16,000). The second year depreciation is $16,000 x 50% = $8,000.

A company reported the following accounts from its year-end balance sheet:Cash: $50,000Short-term investments: $125,000Accounts receivable: $230,000Inventory: $720,000Property, plant, and equipment, net: $800,000Investments: $95,000Accounts payable: $193,000Accrued liabilities: $29,000Current portion of long-term debt: $170,000Long-term debt: $715,000Stockholder's equity: $963,000What is the company's debt-equity ratio? 0.5 1.1 0.4 0.2

1.1 Debt to Equity = Total liabilities/Stockholders' equity. Total liabilities = $193,000 + $29,000 + $170,000 + $715,000 = $1,107,000. Debt to Equity = $1,107,000/$963,000 = 1.1.

assume for your life, the straight line rate is 1/4 or 25%. use 150% declining balance

25%*1.5=37.5%

assume for your life, the straight line rate is 1/4 or 25%, what is the double declining balance?

25%*2=50%

On January 1, 2021, Jacobs Company sold property to Dains Company which originally cost Jacobs $2,660,000. There was no established exchange price for this property. Danis gave Jacobs a $4,200,000 zero-interest-bearing note payable in three equal annual installments of $1,400,000 with the first payment due December 31, 2021. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $4,200,000 note payable in three equal annual installments of $1,400,000 at a 10% rate of interest is $3,481,800. What is the amount of interest income that should be recognized by Jacobs in 2021, using the effective-interest method? $14,000 $140,000 $348,180 $420,000

348,180 When a note is issued at zero percent, the discount is amortized using the implicit interest rate calculated by evaluating the present value of future cash flows. In this case, the implicit interest rate is given as 10%. Similar to bonds, the difference of a note's face value and the present value is booked as a discount and amortized to interest expense over the life of the note. The book value of the bond is the face value less any unamortized discount. In this case, the book value is given as $3,481,800. Interest income for Jacobs for 2021 is $348,180 ($3,481,800 x .10).

The selected financial statement information for a company includes the following items: total assets of $300,000 at the end of the current year total assets of $500,000 at the end of the prior year net sales of $3,000,000 in the current year net income of $1,200,000 in the current year What is the asset turnover for the current year? 3.0 4.0 7.5 10.0

7.5 Asset turnover calculates as net sales divided by simple average of total assets. $3,000,000 / (($300,000 + $500,000)/2)

A company reports the following financial information: Current assets: $300,000 Long-term assets: $500,000 Current liabilities: $300,000 Long-term liabilities: $400,000 Stockholder's equity: $100,000 What is the company's debt-to-asset ratio, rounded to the nearest percent? 88% 50% 100% 78%

88% = (($400,000 + $300,000) / ($500,000 + $300,000)) x 100. This choice correctly divides total liabilities by total assets.

return on assets

Net Income/avg Total Assets (profit margin on sales x asset turnover)

Return on Equity (ROE)

Net Income−Preferred Dividends/ avg common stockholder's equity

A company invests $50,000,000 into a coal mine estimated to have 20 million tons of coal. The company estimates that it can sell the coal mine for $3,000,000 after it spends $1,000,000 to restore the property after extraction. In Year 1, the company extracted and sold 4,000,000 tons of coal. How much depletion expense is incurred in Year 1? 9,400,000 $9,600,000 $10,000,000 $10,200,000

9,600,000 Correct! $9,600,000 = ($50,000,000 + $1,000,000 - $3,000,000) x (4,000,000 / 20,000,000). The salvage value and restoration costs need to be considered in the calculation of depletion.

An analysis of stockholders' equity of Hahn Corporation as of January 1, 2021, is as follows: Common stock, par value $20; authorized 100,000 shares; issued and outstanding 90,000 shares: $1,800,000 Paid-in capital in excess of par: $900,000 Retained earnings: $760,000 Total: $3,460,000 Hahn uses the cost method of accounting for treasury stock and during 2021 entered into the following transactions: Acquired 2,500 shares of its stock for $75,000. Sold 2,000 treasury shares at $35 per share. Sold the remaining treasury shares at $20 per share. Assuming no other equity transactions occurred during 2021, what should Hahn report on December 31, 2021, as total additional paid-in capital? $895,000 $900,000 $905,000 $915,000

905,000 The difference in the cost of treasury stock and the subsequent sale is recorded in the Paid-in Capital account. In this case, Hahn purchased the original treasury stock at $30 per share ($75,000/2,500 shares). To record the subsequent sale of 2,000 shares, the $30 cost per share is posted to the treasury stock account and the $5 difference is posted to the paid-in capital account. The same is true when the remaining 500 shares of treasury stock are sold at a price of $10 per share lower than the original purchase price. Therefore, the balance of the paid-in capital account can be calculated by: $900,000 + (2000 shares x $5) - (500 shares x $10) = $905,000. Also, consider the journal entries for each of the transactions: Purchase of $2,500 shares of treasury stock: Debit Treasury Stock $75,000; Credit Cash $75,000; Sold 2,000 shares of treasury stock; Debit Cash $70,000; Credit Treasury Stock $60,000 (2,000 shares x $30 purchase price); Credit Paid-In Capital Excess of Par $10,000; Sold remaining 500 shares of treasury stock: Debit Cash $10,000; Debit Paid-In Capital Excess of Par $5,000; Credit Treasury Stock $15,000 (500 shares x $30 purchase price); The Balance of the Paid-In Capital Excess of Par account is: $900,000 + $10,000 - $5,000 = $905,000

A company has a complex capital structure regarding dilutive securities currently outstanding. The company is making a financial statement disclosure regarding their common stock and may include a note in their financial statements.Which note must be included, if any? Dilutive securities that will not become antidilutive in the future A description of the rights assigned to the diluted securities Individual owners and quantities of the dilutive securities No disclosure required regarding dilutive securities

A description of the rights assigned to the diluted securities A disclosure is required in the financial statements describing the rights and privileges of the dilutive securities. This disclosure provides detail useful to the financial statement user regarding the potential effects of the dilutive securities.

liquidating dividend

A dividend declared out of paid-in capital NOT profits

sinking fund

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond. Done with a trustee

A hardware retailer recently purchased $1,000,000 of lawn mowers from a local manufacturer with terms 2/10, n/30.How should this transaction be reported on the balance sheet?

Accounts payable

A corporation currently has 4% convertible preferred stock outstanding.Which computation should be used to determine the diluted earnings per share?

Add the number of common stock shares exercisable from the preferred stock to the number of outstanding common stock shares The corporation will consider the potential number of common stock shares from the convertible preferred and include them in its diluted earnings per share calculations as shares outstanding.

Where should the balance in Common Stock Dividend Distributable be reported on the Balance Sheet? Addition to capital stock Deduction from common stock issued Contra current asset Current liability

Addition to capital stock On the declaration date, a small stock dividend is recorded using the following journal entry: Debit to Retained Earnings (at fair value), Credit to Common Stock Dividend Distributable (at par), Credit Paid-in Capital in Excess of Par - Common Stock. Common Stock Dividends Payable have a credit balance and therefore are in increase (or addition to) capital stock. Stock dividends are not related to cash and therefore are not liability, nor are they a contra-asset.

Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000. To record the impairment loss, what should be included in the journal entry? An extraordinary loss of $80,000 A reduction of income from continuing operations by $205,000 An increase in the asset's Accumulated Depreciation account by $285,000 A $285,000 credit to the asset account

An increase in the asset's Accumulated Depreciation account by $285,000 The amount of the impairment is the fair value of the asset less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value.

What does a company record if the loss is both probable and estimable?

a loss contingency and a liability

On January 1, a company uses the fair value method of reporting stock options. It grants its employees 1,000 shares of $1 par value common stock options, which can be exercised anytime within the next five years. Under an acceptable option-pricing model, the total compensation expense is $30,000. The employees exercise all 1,000 options for $15,000. Which part of the journal entry should be recorded for the exercise of the options?

Debit Paid-in Capital - Stock Options for $30,000

When a company issued 100 shares of preferred stock with a par value of $1 per share, it recorded a $50 premium. The company recently converted this preferred stock into 100 shares of common stock with a par value of $5 per share. Which information should be included in the journal entry at the time of conversion?

Debit Paid-in Capital in Excess of Par-Preferred Stock for $50

Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, what is the correct treatment of Wooten's contingent obligation? As a contingency of $1,800,000 to $9,000,000 with no loss contingency As a loss contingency of $5,400,000 but not disclose any additional contingency As a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000 As a loss contingency of $1,800,000 and disclose an additional contingency of up to $7,200,000

As a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000 Loss contingencies, if probable and reasonably estimated, must be accrued and reported on the balance sheet. In this case, the attorney as made an estimate that is probable and reasonably estimated of $5,400,000. This amount must be accrued and reported on the financial statement. The additional $3,600,000, since it is not probable (but possible), must be disclosed in the notes to the financial statements.

How should long-term debt that matures within one year and is to be converted into stock be reported?

As noncurrent and accompanied with a note explaining the method to be used in its liquidation Long-term debt that matures within one year should be reported as a current liability, unless using noncurrent assets to accomplish redemption. If the company plans to refinance debt, convert it into stock, or retire it from a bond retirement fund, it should continue to report the debt as noncurrent. However, the company should disclose the method it will use in its liquidation.

commodity-backed bonds

Bonds that are redeemable in measures of a commodity (e.g., barrels of oil, tons of coal, or ounces of rare metal). Also called asset-linked bonds. The accounting problem for such bonds is to project their maturity value in markets where commodity prices fluctuate.

debenture bonds

Bonds that are unsecured (i.e., not backed by any collateral such as equipment).

How are accrued liabilities disclosed in the financial statements?

By appropriately classifying them as regular liabilities in the balance sheet Accrued liabilities are treated as if the expense occurred in the reporting period and are included on the balance sheet as regular liabilities.

payout ratio

Cash Dividends/Net Income (less preferred dividends)

A pizza delivery chain buys several assets with varying useful lives at the start of the year and is trying to determine which special depreciation method to use. The following assets were purchased: 12 delivery trucks 4 pizza ovens 6 point-of-sale systems 20 sets of tables and chairs Which depreciation method allows the pizza delivery chain to use one rate to depreciate all the assets? Group Hybrid Composite Per unit

Composite Correct! The company can create an average rate and average estimated useful life to depreciate all the assets using one rate. This method can be used for dissimilar assets with varying useful lives. Group is for assets that are similar and have the same estimated lives

Correct $1,568,498 When a bond is purchased for less than the face value of the bond, the bond is "issued at a discount" of $395,855. The cash payment on the bond is $780,000 ($20,000,000 x 7.8% x 6/12). On 01/01/2017, the carrying amount of the bond is $19,604,145. Total interest expense on June 30, 2017 is $784,166 ($19,604,145 x 8% x 6/12). On June 30, the carrying value of the bond is increased (the discount is reduced) by $4,166 ($784,166 - $780,000) to $19,608,311 ($19,604,145 + $4,166). Total interest expense on December 31, 2017 is $784,332 ($19,608,311 x 8% x 6/12). Therefore, total interest expense for 2017 is $1,568,498 ($784,166 + $784,332).

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. What does the entry to record the redemption include? Credit of $18,750 to Loss on Bond Redemption Debit of $10,000 to Premium on Bonds Payable Credit of $18,750 to Discount on Bonds Payable Debit of $28,750 to Gain on Bond Redemption

Credit of $18,750 to Discount on Bonds Payable The unamortized discount is $18,750 ($500,000 - $481,250). In order to zero out the bond on redemption, the debit balance of $18,750 must be cleared by recording a credit to the account.

Which type of preferred stock generates a dividend in arrears?

Cumulative preferred stock Only cumulative preferred stock requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders. If the directors fail to declare a dividend at the normal date for dividend action, the dividend is said to have been "passed." Any passed dividend on cumulative preferred stock constitutes a dividend in arrears.

double declining balance method

Depreciation is recorded at twice the straight-line rate, but the balance is reduced each period.

The par value per share and total stockholders' equity ___ with a stock dividend, and all stockholders retain their same proportionate share of ownership.

DONT change

A local restaurant has taken a $40,000 loan from their bank to perform needed renovations. The restaurant must repay the borrowed funds in eight months with 3% interest. How should the restaurant record the loan?

Debit Cash for $40,000; Credit Notes Payable for $40,000

On May 1, a company took out a $60,000, 8%, five-year loan from a bank to purchase new equipment. Payments on the principal and interest are due January 1 of each year. Principal is to be repaid in five even installments.Which entry should be used to record the note? Debit Cash for $60,000, credit Current Maturities of Long-Term Debt for 12,000, credit Long-Term Debt of $48,000 Debit Cash for $60,000, debit Interest Expense of $4,800, credit Current Maturities of Long-Term Debt for 12,000, credit Long-Term Debt of $48,000, credit Interest Payable of $4,800 Debit Cash for $60,000, credit Current Maturities of Long-Term Debt for 8,000, credit Long-Term Debt of $52,000 Debit Cash for $60,000, debit Interest Expense of $3,200, credit Current Maturities of Long-Term Debt for 8,000, credit Long-Term Debt of $52,000, credit Interest Payable of $3,200

Debit Cash for $60,000, credit Current Maturities of Long-Term Debt for 12,000, credit Long-Term Debt of $48,000 Long-term debt is broken into two parts: current maturities of long-term debt with the remaining portion posted to long-term debt. Current maturities is anything due within the next twelve months. $60,000/5 = $12,000 per year. Debit Cash $60,000 (Credit) Current Maturities of Long-Term Debt $12,000 (Credit) Long-term Debt $48,000

A company issues bonds with a face value of $1,000,000 with a 10-year term at 95 on January 1 of Year 1. The bonds bear interest at an annual rate of 5% payable semiannually on January 1 and July 1. Which journal entry should be recorded on January 1 of Year 1?

Debit Cash for $950,000; Debit Discount on Bonds Payable for $50,000; Credit Bonds Payable for $1,000,000

A company issued a 5-year note payable in the amount of $15,000. The note bears the market interest rate of 5%. At Year 3, the market rate of interest is 3%.Which journal entry is appropriate for recording interest at the end of the third year? Debit Interest Expense for $750; credit Cash for $750 Debit Interest Expense for $750; credit Discount on Note Payable for $300; credit Cash for $450 Debit Interest Expense for $450; credit Cash for $450 Debit Interest Expense for $450; debit Premium on Note Payable for $300; credit Cash for $750

Debit Interest Expense for $750; credit Cash for $750 $750 = $15,000 x 0.50. When the stated and effective interest rates are the same, annual interest is calculated by multiplying the face of the note times the interest rate. Interest rates do not change in subsequent years if the market rate changes.

A company exchanges 10,000 shares of stock for land, which has been advertised for sale at a price of $180,000. At the time of the transaction, the company's $5 par shares are actively traded for $15 per share.What is the journal entry for this transaction?

Debit Land for $150,000; Credit Common Stock for $50,000; Credit Paid-in Capital in Excess of Par $100,000 Correct! $150,000 = $15 x 10,000. $50,000 = $5 x 10,000. The land should be recorded at the actively traded share price of $15 per share.

What is the journal entry to record the impairment?

Debit Loss on Impairment; Credit Accumulated Depreciation.

A company grants 10,000 stock options to an executive on January 1 of Year 1 when the market price of the option is $30 and the exercise price is $20 for $1 par stock. The company believes the stock option will be exercised in two years and that the compensation is valued at $220,000. The options are valid for five years, and the executive continues to work for the company, but the options expire on December 31 of Year 5 without exercise.Which entry should the company record on December 31 of Year 5?

Debit Paid-in Capital - Stock Options for $220,000; Credit Paid-in Capital - Expired Stock Options for $220,000 The options are worthless if expired, so debiting the Paid-in-Capital - Stock Options reverses the original entry to record the stock options which credited that account and debited Compensation Expense.

composite depreciation rate

Depreciation per year divided by the total cost of the assets.

A company is buying a patent in exchange for 1,000 shares of common stock in the company at $10 a share. The fair market value of the stock is $10, and the market value of the patent is unknown.Which journal entry should the company use to account for the purchase of the patent? Debit Common Stock for $10,000; Credit Patents for $5,000; Credit Paid-in Capital for $5,000 Debit Patents for $10,000: Debit Paid-in Capital for $5,000; Credit Common Stock for $15,000 Debit Patents for $10,000; Credit Common Stock for $5,000; Credit Paid-in Capital for $5,000 Debit Common Stock for $5,000; Debit Paid-in Capital for $5,000; Credit Patents for $10,000

Debit Patents for $10,000; Credit Common Stock for $5,000; Credit Paid-in Capital for $5,000 The entry is made for the exchange of the patent for the value of the common stock.

A company's board of directors declares a $0.75 per share cash dividend. The company has 375,000 shares of common stock issued and 50,000 shares of treasury stock on the date of record. What is the journal entry to record this event?

Debit Retained Earnings for $243,750; Credit Dividends Payable for $243,750 $243,750 = (375,000 - 50,000) x 0.75. Retained Earnings are debited on the date of declaration of a stock dividend. Simultaneously a liability of Dividends Payable is established.

A company does not segregate sales tax and the amount of sale at the time of sale. At quarter end, the company must record the sales tax. The Sales Revenue account shows a balance of $200,000, which includes 6% sales tax.Which entry should be used to record the amount due to the taxing unit? Debit Sales Tax Expense for $12,000; credit Sales Taxes Payable for $12,000 Debit Sales Revenue for $11,321; credit Sales Taxes Payable for $11,321 Debit Sales Revenue for $12,000; credit Sales Taxes Payable for $12,000 Debit Sales Tax Expense for $11,321; credit Sales Taxes Payable for $11,321

Debit Sales Revenue for $11,321; credit Sales Taxes Payable for $11,321 $11,321 = $200,000 - ($200,000/1.06). This is the correct calculation and accounts to record this transaction.

A company issues 15,000 shares of $1 par value common stock in exchange for a trademark with a fair market value of $20,000. Additionally, the company paid underwriting costs of $5,000.Which journal entry should be used to record this common stock issuance? Debit Trademark for $20,000; Credit Common Stock for $15,000; Credit Paid-in Capital in Excess of Par-Common Stock for $5,000 Debit Trademark for $20,000; Credit Common Stock for $15,000; Credit Cash for $5,000 Debit Trademark for $20,000; Debit Paid-in Capital in Excess of Par-Common Stock for $5,000; Credit Common Stock for $20,000; Credit Cash for $5,000 Debit Trademark for $15,000; Debit Paid-in Capital in Excess of Par-Common Stock for $5,000; Credit Common Stock for $15,000; Credit Cash for $5,000

Debit Trademark for $20,000; Credit Common Stock for $15,000; Credit Cash for $5,000 The trademark should be valued at the fair market value, and common stock should be recorded at the par value.

A company using the composite approach to depreciation sells equipment for $10,000. The equipment was purchased five years earlier for $15,000, and the company has already recorded $5,000 in accumulated depreciation. What is included in the journal entry for the sale of the equipment?

Debit accumulated depreciation-equipment for $5,000

On February 1, a company borrowed $24,600 from a bank. The terms of the loan require five equal annual installments beginning January 31. The company has a calendar year-end. Which entry should the company use to record the loan?

Debit cash $24,600, credit current maturities of long-term debt $4,920, credit note payable $19,680`

A company spends $180,000,000 to purchase and prepare a quarry to mine granite and expects to mine 400,000 tons of granite. The salvage value of the property is $15,000,000, and the expected useful life of the property is 15 years. What is the proper journal entry to record depletion if the company extracts 80,000 tons in the first year? Debit inventory for $33,000,000; credit granite quarry for $33,000,000 Debit depreciation expense for $33,000,000; credit accumulated depreciation for $33,000,000 Debit inventory for $36,000,000; credit granite quarry for $36,000,000 Debit depreciation expense for $36,000,000; credit accumulated depreciation for $36,000,000

Debit inventory for $33,000,000; credit granite quarry for $33,000,000 Correct! $33,000,000 = (($180,000,000 - $15,000,000)/400,000) x 80,000. The journal entry to record depletion expense would include a debit to inventory and a credit to Granite Quarry.

A company issues $500,000 of bonds at 98.How should the premium or discount be recorded upon bond issuance? Credit to Premium on Bonds Payable for $10,000 Credit to Discount on Bonds Payable for $10,000 Debit to Discount on Bonds Payable for $10,000 Debit to Premium on Bonds Payable for $10,000

Debit to Discount on Bonds Payable for $10,000 Discount is debited when the bonds are sold for less than par value. When bonds are sold for less than 100 (par value), then they are sold for a discount, which will be recorded as a debit in the debt issuance journal entry. In this instance, bonds are sold for 98% of par value, or a 2% of $500,000 discount (calculating to $10,000).

At the date of declaration of a large common stock dividend, what should the entry include?

Debit to Retained Earnings (at par), Credit to Common Stock Dividend Distributable (at par).

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? Decrease in stockholder's equity and increase in earnings per share

Decrease in stockholder's equity and increase in earnings per share When a corporation purchases treasury stock, stockholders' equity decreases. Additionally, earnings per share is calculated by dividing net income by the number of shares outstanding. With fewer shares outstanding, the earnings per share will increase. Increase in stockholder's equity and no effect on earnings per share Decrease in stockholder's equity and no effect on earnings per share Increase in stockholder's equity and decrease in earnings per share

A company declares a cash dividend on May 1, the date of record is May 15, and the date of payment is June 11. The dividend is $3.00 per share. The company only has common stock, and there are 10,000 shares authorized, 8,000 shares issued, and 5,000 shares outstanding.Which account should be debited on June 11?

Dividends payable for $15,000 Correct! $15,000 = 5,000 x $3. Dividends Payable is debited when the dividend is paid. The dividend per share is multiplied by the number of shares outstanding.

An asset impairment occurs when the asset's carrying amount exceeds what amount?

Expected future net cash flows An impairment is recorded when an asset fails the... recoverability... test. If the expected future cash flows are less than the carrying amount, the asset is impaired.

An asset impairment occurs when the asset's carrying amount exceeds what amount? Present value of expected future net cash flows Expected future net cash flows Asset's book value Asset's fair value

Expected future net cash flows An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows are less than the carrying amount, the asset is impaired.

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, how is the sweetener accounted for?

Expense To eliminate required principal and interest payments on debt, it is in the interest of the corporation to induce its convertible bond holders to exercise the conversion option. This inducement is most commonly in the form of cash or additional common stock. This inducement is an expense of the current period, with an amount equal to the fair value of the additional securities or other consideration given.

Of what will the numerator of the diluted EPS calculation consist when convertible preferred stock is being included? Net income - Preferred dividends Net income + Preferred dividends (Net of tax effect) Net income Net income + Preferred dividends

Net income When considering earnings per share where convertible securities are present, companies measure the dilutive effects using the if-converted method, assuming that the dilutive security has been converted to common stock. Therefore, the preferred dividend normally included in the numerator of the earnings per share calculation is eliminated. Therefore, the numerator will only consist of Net Income.

A company purchases an asset on April 5 of the current year. The company would like to use the depreciation policy that will result in the highest deprecation expense in the last year of its useful life. Which depreciation policy should be used? Nearest full month Full year in acquisition period Nearest fraction of the year

Half-year convention Half-year convention will depreciate the asset for six months in the year of acquisition and six months in the final year of the useful life. This policy results in the highest depreciation expense in the last year of the useful life. NOT Nearest full month Using the nearest full month, the asset will be depreciated for 8 months in the first year and only 4 months in the final year, which is about 33% of the year. This policy does not give the highest depreciation expense in the last year of the useful life.

Impairment loss= CV-FV less cost to sell No depreciation Reversal permitted

Impairment for sale

Impairment loss= CV-FV Depreciate new basis No reversal of loss

Impairment for use

Sara credits _____ when it sells the inventory and debits______ (from depletion of natural resources)

Inventory, Cost of Goods Sold.

A share of stock has a preemptive right. From which event is the stockholder protected?

Involuntary dilution of ownership interest

On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, what happened to the company's total stockholders' equity? It decreased by $5,058,500. It increased by $302,000. It decreased by $5,058,198. It did not change.

It did not change. Stock dividends simply reflect a reclassification of stockholder's equity. The total of stockholder's equity does not change.

What is true about depletion expense? It is usually part of cost of goods sold. It excludes intangible development costs from the depletion base. It includes tangible equipment costs in the depletion base. It excludes restoration costs from the depletion base.

It is usually part of cost of goods sold. The depletion cost is posted to inventory as the natural resource is extracted. When the inventory is sold, this depletion expense is included in cost of goods sold.

During the conversion of preferred stock into common, how should any excess of the par value of the common shares issued over the carrying amount of the preferred being converted be treated? It should be reflected currently in income as an extraordinary item It should be treated as a direct reduction of retained earnings It should be treated as a prior period adjustment It should be reflected currently in income, but not as an extraordinary item

It should be treated as a direct reduction of retained earnings In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry.

On Year 1, a company issued 10,000 shares of $2 par stock at $12 per share. On Year 3, the company reacquired 1,000 shares of its stock for $15 per share. How will this transaction in Year 3 affect Additional Paid-in Capital, if at all?

It will not affect Additional Paid-in Capital.

What, if any, is the relationship between current liabilities and a company's operating cycle? The length of the operating cycle is not relevant to the reported current liabilities. Liquidation of current liabilities is reasonably expected within the company's operating cycle or one year, if less. Current liabilities are the result of operating transactions over the company's operating cycle. Current liabilities are the result of operating transactions over the company's operating cycle.

Liquidation of current liabilities is reasonably expected within the company's operating cycle or one year, if less. In order be classified as current, liability obligations must be due and payable within one year or the operating cycle of the company, whichever is less.

Do companies include securities that are antidilutive?

tangible equipment costs are ___ included in the depreciation base

NOT

Contingent liabilities are

NOT certain on the balance sheet

Declaration of dividends reduces

OE and total net assets (A-L)

When is the restoration of an impairment loss permitted? On assets held for use On assets that have already been disposed On assets being held for disposal On all tangible assets whether held for use of disposal

On assets being held for disposal

"Gains" on sales of treasury stock (using the cost method) should be credited to which account?

Paid-in capital from treasury stock Sales of treasury stock above and below cost of treasury stock are only recorded in the Paid-in Capital from Treasury Stock account. The capital stock account, the price at which shares are originally issued, is not affected. Gains & Losses occur when selling assets, however, treasury stock is not an asset.

"Gains" on sales of treasury stock (using the cost method) should be credited to which account? Capital stock Other income Income from operations Paid-in capital from treasury stock

The company charges the cost of premium offers to _____. It credits the outstanding obligations to an account titled _____

Premium Expense, Premium Liability

company redeemed bonds before the maturity date with a reacquisition price that was less than the current net carrying value. The original bond issuance was recorded at 103.Which account should be debited in the journal entry to record this transaction? Premium on Bonds Payable Loss on Redemption of Bonds Discount on Bonds Payable Gain on Redemption of Bonds

Premium on Bonds Payable Since the reacquisition price was less than the current net carrying value, the extinguishment of debt will be recorded as a gain. Additionally, since the original bond issuance was recorded at a premium of 103 and the bonds were redeemed before the maturity date, there is still a balance in the Premium account. Premiums are originally credited, so the account needs to be debited at the redemption date.

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair value of the warrants, to which account should the excess be credited?

Premium on bonds payable When bonds with detachable warrants are issued, two securities are created. However, until the warrants are exercised, they are reported on the balance sheet in the stockholders' equity section at the value of the cash attributed to the warrants. Therefore, any difference in proceeds and the face value of the bond will be reported as either a premium or discount on the bond payable and amortized over the life of the bond.

When an asset being depreciated under the group method is disposed of, how is any resulting gain or loss recorded?

Recorded in the Accumulated Depreciation account

When an asset being depreciated under the group method is disposed of, how is any resulting gain or loss recorded? Recorded in the Depreciation Expense account Recorded in the Accumulated Depreciation account Recorded as an extraordinary gain or loss Recorded as an ordinary gain or loss

Recorded in the Accumulated Depreciation account Gains and losses are not reported during the group or composite methods. When an asset is disposed of using either the group or composite method, the gain or loss is recorded in the accumulated depreciation account.

When declaring a common stock dividend (small stock dividend), a company debits ______ at the fair value of the stock it distributes. The entry includes a credit to _____ at par value times the number of shares, with any excess credited to _____

Retained Earnings , Common Stock Dividend Distributable, Paid-in Capital in Excess of Par—Common Stock.

If the number of shares issued exceeds 20-25 percent of the shares outstanding (large stock dividend), it debits ______ at par value and credits ______ —there is no additional paid-in capital.

Retained Earnings, Common Stock Distributable

An accountant is explaining to a client that each share of common stock comes with rights and privileges for the owner and that a specific right protects existing stockholders from having their interest diluted. Which right is the accountant referencing to this client?

Right to share in new issues of common stock

What does the current ratio inform you about a company? The efficient use of assets The company's liquidity The extent of slow-moving inventories The company's profitability

The company's liquidity The current ratio is calculated as current assets divided by current liabilities. This ratio informs you about the liquidity of the company or the ability of the company to pay off it's current liability obligations.

A corporation has been sued by a customer, and legal counsel believes it is probable that the corporation will lose the lawsuit. The loss is estimated to be $500,000. What is the proper presentation and disclosure for this lawsuit?

The corporation will record a $500,000 loss contingency and related liability. The corporation also will disclose the nature of the contingency.

refunding

The replacement of an existing issuance with a new one

A company allows all full-time employees--but no part-time employees--to participate in its employee stock purchase plan. The employees have the option to purchase common stock discounted by 25%, and the plan offers no substantive option feature.What is one of the three required features that causes the plan to be considered compensatory? There is no substantive option feature. Part-time employees are excluded from the stock option plan. The stock is discounted by 25%. The company only includes common stock as part of the plan.

The stock is discounted by 25%. Non-compensatory plans can only be discounted for 5% or less.

The term "depreciable base," or "depreciation base," as it is used in accounting, refers to which of the following? The estimated market value of the asset at the end of its useful life The cost of the asset less the related depreciation recorded to date The acquisition cost of the asset regardless of its useful life The total amount to be charged to expense over an asset's useful life

The total amount to be charged to expense over an asset's useful life The depreciable base of an asset is the amount of the asset's cost that will be deducted as depreciation expense over the life of the asset.

A bookkeeper is reviewing transactions for a company that acquired 12,000 shares of its $1 par value common stock at $10 per share using the cost method. The shares were originally issued at $1 over par value.The first sale of the treasury stock was for 1,000 shares at $10, the second sale was for 5,000 shares at $2 above cost, and the third sale was for 5,000 shares at $4 below cost. The company retired the remaining 1,000 shares of treasury stock on the last day of the year.Which transaction includes a debit to Paid-on Capital from Treasury stock for $10,000? First sale of 1,000 shares Third sale of 5,000 shares Second sale of 5,000 shares The retirement of 1,000 shares

Third sale of 5,000 shares $50,000 = 5,000 x $10; $30,000 = 5,000 x ($10 - $4); $10,000 = 5,000 x ($4 - $2); $10,000 = $50,000 - $30,000 - $2,000. The journal entry for the third sale is as follows: Debit Cash for $30,000; Debit Paid-in Capital from Treasury Stock for $10,000; Debit Retained Earnings for $10,000; Credit Treasury Stock for $50,000.

For what purpose is the current liability section of the balance sheet of primary importance to bankers? 1 / 1 To better understand sources of repayment To evaluate the entity's credit quality To assist in understanding the entity's liquidity To evaluate operating efficiency

To assist in understanding the entity's liquidity

preemptive right

To share proportionately in any new issues of stock of the same class

Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. A year later Long acquired 16,000 shares of its own common stock at $15 per share. Three months later Long sold 8,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, what is the credit side of the journal entry to record the sale of the 8,000 treasury shares? Treasury Stock for $152,000 Treasury Stock for $80,000 and Paid-in Capital from Treasury Stock for $72,000 Treasury Stock for $120,000 and Paid-in Capital from Treasury Stock for $32,000 Treasury Stock for $120,000 and Paid-in Capital in Excess of Par for $32,000

Treasury Stock for $120,000 and Paid-in Capital from Treasury Stock for $32,000 Sales of treasury stock above and below cost of treasury stock are only recorded in the Paid-in Capital from Treasury Stock account. The treasury stock balance for the 16,000 shares purchased is $240,000 (16,000 shares x $15/share). The cost of 8,000 shares, therefore is $120,000. The credit to treasury stock is limited to that cost. The journal entry to record the sale of 8,000 shares of treasury stock is: Debit Cash $152,000 (8,000 shares x $19/share); Credit Treasury Stock $120,000, Credit Paid-in Capital from Treasury Stock $32,000.

A company has acquired 15,000 shares of its treasury stock at $10 per share using the cost method. The company now decides to sell 2,000 of its treasury stock for $12 per share. The journal entry to record the sale of treasury stock includes a debit to Cash for $24,000. What is the correct credit entry?

Treasury Stock for $20,000 and Paid-in Capital Treasury Stock for $4,000

On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock. What is the debit side of the journal entry to record the reacquisition of the stock?

Treasury Stock for $480,000 Under the cost method, when a company purchases treasury stock, it records the transaction at the price it paid in the Treasury Stock account. The journal entry for this transaction is: Debit: Treasury Stock $480,000, Credit Cash $480,000.

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?

Treasury stock for the purchase price Under the cost method, when a company purchases treasury stock, it records the transaction at the price it paid for the stock in the Treasury Stock account. The journal entry for this transaction is: Debit: Treasury Stock at the purchase price, Credit Cash.

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value Treasury stock for the purchase price Paid-in capital in excess of par for the purchase price Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value

The sale of the service-type warranty is usually recorded in what account?

Unearned Warranty Revenue account

firm underwriting

When investment banks underwrite the entire issue by guaranteeing a certain sum to the company, thus taking the risk of selling the bonds for whatever price they can get

When is the compensation expense resulting from a compensatory stock option plan generally reported? When it is recognized in the period of the grant When it is allocated to the periods benefited by the employee's required service When it is allocated over the periods of the employee's service life to retirement When it is recognized in the period of exercise

When it is allocated to the periods benefited by the employee's required service In general, a company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees' services.

A company currently has stock warrants outstanding. The company needs to determine when these warrants impact its earnings per share.When should they be included in the calculation? When the warrants have a dilutive effect on earnings per share When the warrants have an antidilutive effect on earnings per share When the warrants are exercisable When the warrants will expire within the current period

When the warrants have a dilutive effect on earnings per share The warrants that have a dilutive effect on earnings per share are included in the diluted earnings per share calculation.

sum-of-the-years'-digits

[#years remaining*(cost-salvage)]/sum of the years

Service Hours Method

[(cost-salvage)/total service hours]*hours used

units-of-output method

[(cost-salvage)/total units]*units produced

stated rate of interest that is less than the effective rate is a bond that is sold at par, at a discount, or at a premium?

a discount stated<effective effective>stated

revenue bonds

a municipal bond whose interest and principal payments are backed by the revenues generated from the project being built by the proceeds of the bonds. Toll roads for example, are usually built with revenue bonds backed by the tolls collected.

1 percent of the face of the note.

a point

The expiration of intangible assets, such as patents or copyrights, is called

amortization

Companies that desire low depreciation during periods of low productivity, and high depreciation during high productivity, either adopt or switch to

an activity method

Inadequacy results when

an asset ceases to be useful to a company because the demands of the firm have changed

Corporation A issues convertible bonds. If the bonds where converted, the net savings from retiring the bonds is greater than the impact on earnings per share. What is the effect on earnings per share?

antidilutive

Intangible development costs ______ considered part of the depletion base

are

Anyone who wishes to establish a corporation must submit ________ to the state in which incorporation is desired.

articles of incorporation

During the conversion of preferred stock into common, how should any excess of the par value of the common shares issued over the carrying amount of the preferred being converted be treated?

as a direct reduction of retained earnings In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry.

how efficiently a company uses its assets to generate sales

asset turnover

Definite liabilities exist

at the balance sheet date

entry for called or redeemed stock

debit: dividends (face*dividend rate)/Retained earnings, credit: cash then DR: Preferred stock (remove) DR: APIC- preferred stock (remove) DR: Retained earnings CR: APIC- common stock CR: cash (price paid)

An asset held for use is impaired and you suffer a loss, what is the journal entry?

debit: impairment loss, credit: accumulated depreciation by the amount of the loss

non-cash stock transaction should be valued at

the fair value

Coupon or Bearer Bonds

bonds are not recorded in the name of the owner and may be transferred from one owner to another by mere delivery.

If Sara extracts 25,000 ounces of gold in the first year, then the depletion for the year is $250,000 (25,000 ounces × $10). She records the depletion as:

debit: inventory (gold) 250000, credit: gold mine 250000

interest expense=

carrying value x effective (market) rate

legal capital=

common and preferred stock

phase 1: authorized and unissued phase 2: issued and outstanding phase 3: issued and in treasury phase 4: retired describes what?

common stock

the most basic form of ownership, including voting rights on major issues, in a company

common stock

book value per share

common stockholder's equity / shares outstanding

What approach recognizes the expense in the periods expected to benefit from the use of the asset?

cost allocation

are stock debited or credited when issued?

credited

premium on bonds is ____ when bond is issued

credited

with par value method, if treasury stock price is < original issue price, difference is ____ to APIC- Treasury Stock

credited

current ratio (working capital ratio)

current assets/current liabilities

companies should report differences between the cash acquisition price of debt and its carrying amount in

current income as a gain or loss

Accounts payable. Notes payable. Dividends payable. Customer advances and deposits. Unearned revenues. Sales taxes payable. Current maturities of long-term debt. Are all examples of what?

current liabilities

any liability that is due on demand (callable by the creditor) or will be due on demand within a year (or operating cycle, if longer) is a

current liability

discount on bonds is a contra account and is ____ when bond is issued

debited

with par value method, if treasury stock price is > original issue price, difference is ____ to APIC- Treasury Stock until exhausted, excess is _____ to retained earnings

debited

cost method of accounting for treasury stock

debits the treasury stock account at cost

What is the journal entry when a company receives an advance payment and when a company recognizes the revenue

debit cash, credit current liabilities (unearned revenue) debits the unearned revenue account, and credits a revenue account.

journal entry for payment of dividends

debit dividends payable credit cash

when purchasing treaury stock with par value method you DR or CR APIC-Common

debit to remove it

par method: treasury stock

debits the treasury stock account at par

the reduction in the cost of natural resources (such as timber, gravel, oil, and coal) over a period of time describes

depletion

When companies write off the cost of long-lived assets over a number of periods, they are referring to

depreciation

If there is no stated rate of interest, the amount of interest is the

difference between the face amount of the note and the fair value of the property.

f the loss is either probable or estimable but not both, and if there is at least a reasonable possibility that a company may have incurred a liability, it must ____

disclose the following in the notes: The nature of the contingency. An estimate of the possible loss or range of loss or a statement that an estimate cannot be made.

mandatory redeemable bond

dividends-interest, classified as debt

preferred stockholders do or do not have the option to vote for board members

do not

Yo Skaters agrees to pay the holders of its convertible debentures an additional $80,000 if they will convert their convertible debt. Yo Skaters will record the 80000 as a/n

expense, debt conversion expense

bond issue costs reduce the _____ of the note and is amortized as an expense over the bond term

face value

carrying value=

face value - unamortized discount

The present value equals the

face value of the note at maturity minus the interest or discount charged by the lender for the term of the note

impairment loss uses carrying value and ____ value

fair

how do you find year 2 depreciation for double declining balance?

find the net book value (cost minus accumulated depreciation (year 1 depreciation))*ddb rate

unless otherwise stipulated, companies normally compute depreciation on the basis of the nearest ______

full month

call feature of a bond

gives the company the ability to retire a bond issue prior to its stated maturity date

The date you receive the stock options is referred to as the

grant date

When a note is issued at zero percent, the discount is amortized using the ____ calculated by evaluating the present value of future cash flows.

implicit interest rate, and book value

Following the principle of conservativeness, companies disclose the gain contingencies ____

in the notes, but they do not report these contingencies on the financial statements.

When the earnings of a period include discontinued operations, a company should show per share amounts (where applicable) for:

income from continuing operations, discontinued operations, and net income.

In the straight line method, the rate of return _____given constant revenue flows, because the asset's book value _______.

increases, decreases

This approach measures compensation cost by the excess of the market price of the stock over its exercise price at the grant date

intrinsic-value method

par or stated value of common or preferred stock

legal capital

assets=

liabilities + stockholders equity

Convertible bonds are considered ______, whereas convertible preferreds (unless mandatory redemption exists) are considered part of _____

liabilities, stockholders equity

A declared cash dividend is a ______

liability

discount on notes payable is a contra ____ account

liability

the turnover ratios for receivables and inventory (current and acid-test ratios) assess

liquidity

assets held for disposal are like inventory; company should report them at the ____ value

lower of cost or net realizable value

For a range of values with none more likely than other you should choose the ___ amount to be accrued

lowest

Full cost method

matching all costs incurred to obtain the asset

Earnings Per Share (EPS)

measures the net income earned on each share of common stock, required

profit margin

net income/net sales

Asset Turnover

net sales/average total assets

a balance sheet to report long lived assets at ______ the carrying amounts that are recoverable

no more than

preferred dividends generally are or are not taxable?

not taxable

the catchall for situations not involving inadequacy and supersession

obsolescence

Regardless of the number of states in which a corporation has operating divisions, it is incorporated in

only one state

successful efforts method

only the costs of successful exploration efforts are capitalized and unsuccessful efforts are expensed Reflects capitalization of cost once asset is located

depreciation base

original cost - salvage value

impairment losses are a part of income from continuing operations and are reported in the ____ section

other expenses and losses

reissuing shares of treasury stock is in the issued or outstanding calculation?

outstanding

stock purchase-compensatory, you will credit common stock at ____

par value

income bonds

pay no interest unless the issuing company is profitable

the purpose of this disclosure is to inform investors of the magnitude of a company's CEO pay package in relationship to the overall pay package of its employees

pay-ratio disclosure rule

wear and tear, decay, and casualties that make it difficult for the asset to perform indefinitely are

physical factors

stock issue costs ____ debit to cash

reduce

A stock dividend is a capitalization of retained earnings that ____ retained earnings and increases certain contributed capital accounts.

reduces

Supersession is the

replacement of one asset with another more efficient and economical asset

the cause for litigation must have occurred on or before the date of the financial statements in order to

report a loss and a liability in the financial statements,

watered stock

shares of a company that is issued at a much greater value than its underlying assets

Discount on Notes Payable is a contra account to Notes Payable, and therefore is _____ from Notes Payable on the balance sheet

subtracted, debited

which method has the balance remaining at the end of the assets useful life equal the salvage value?

sum of the years digits method

Depreciation is the accounting process of allocating the cost of ______to ________ to those periods expected to benefit from the use of the asset.

tangible assets, expense in a systematic and rational manner

reacquisition price

the amount paid on extinguishment or redemption before maturity, including any call premium and expense of reacquisition

Contributed (paid-in) capital

the amount provided by stockholders to the corporation for use in the business

book value per share describes

the amount that shareholders would receive if the company were to be liquidated

Companies use the composite approach when

the assets are dissimilar and have different lives.

Companies frequently use the group method when

the assets are similar in nature and have approximately the same useful lives.

Acquisition Cost

the cost to obtain the property right to search and find an undiscovered natural resource. It also can be the price paid for an already-discovered resource. A third type of acquisition cost can be lease payments for property containing a productive natural resource

D104 Intermediate Accounting II Units 4-6

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