Exam 3

On November 1, 2021, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. The company should report interest payable at December 31, 2021, in the amount of: -$0. -$1,000. -$2,000. -$3,000.

$1,000 [($100,000 × 6%) × 2/12] = $1,000.

Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2021. What amount will be recorded for interest expense for the first month's payment on January 31, 2021? -$625 -$125 -$7,500 -$1,000

$625 $125,000 × 6% × 1/12 = $625

A company acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely equipped. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment, respectively. At what amount would the company record the building? -$720,000. -$1,300,000. -$1,200,000. -None of these answer choices are correct.

$1,200,000. ($2,400,000 × [$1,300,000 / ($1,300,000 + $780,000 + $520,000)] = $1,200,000.)

Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2022 and the book value at December 31, 2022, would be: -$12,000 and $36,000. -$12,000 and $31,000. -$11,000 and $33,000. -$11,000 and $38,000.

$11,000 and $38,000. Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000.Book value = $60,000 − ($11,000 × 2 years) = $38,000.

Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the carrying value of the copyright at the end of the second year? -$10,000. -$40,000. -$50,000. -$30,000.

$30,000. $50,000 / 5 years = $10,000 amortization per year. Cost $50,000 Less: Accumulated Amortization (20,000) = Carrying Value, end of year 2 $30,000

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is: -Equal to $500,000. -More than $500,000. -Less than $500,000. -The answer cannot be determined from the information provided.

Equal to $500,000.

Accumulated Depreciation is a liability account that is increased by credits. T/F

F (Accumulated Depreciation is a contra asset account; it reduces an asset account.)

The current ratio is calculated by dividing current liabilities by current assets. T/F

F (The current ratio is calculated by dividing current assets by current liabilities.)

FICA taxes are paid only by the employee. T/F

F (The employer is required to match the amount withheld for each employee, effectively doubling the amount paid into Social Security.)

Which of the following are withheld from an employee's salary? -FICA taxes. -Federal and state unemployment taxes. -Federal and state income taxes. -Employee portion of health insurance.

FICA taxes. Federal and state income taxes. Employee portion of health insurance.

Which of the following are employer payroll costs? -FICA taxes. -Federal and state unemployment taxes. -Federal and state income taxes. -Employer contributions to a retirement plan.

FICA taxes. Federal and state unemployment taxes. Employer contributions to a retirement plan.

An exclusive 20-year right to manufacture a product or to use a process is a: -Patent. -Copyright. -Trademark. -Franchise.

Patent

Which of the following describes monthly installment payments of a note payable? -The monthly payments equal interest expense plus the reduction of the note's carrying value. -The amount of interest expense recorded each month increases over time. -The amount of the reduction in the note's carrying value recorded each month decreases over time. -All of the other answer choices are correct.

The monthly payments equal interest expense plus the reduction of the note's carrying value.

Which of the following is considered a "contra" account? -Deferred Revenue. -Goodwill. -Accumulated Depreciation. -Cost of Goods Sold.

Accumulated Depreciation.

Which of the following is not a liability? -Notes payable. -Current portion of long-term debt. -An unused line of credit. -Deferred revenue.

An unused line of credit.

Sales taxes collected by a company on behalf of the state and local governments are recorded by: -A debit to an expense account. -A credit to a revenue account. -A debit to a revenue account. -A credit to a liability account.

A credit to a liability account.

The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $23 million. The entry to record the retirement will include: -A debit of $5 million to a loss account. -A credit of $5 million to a gain account. -No gain or loss on retirement. -A credit to cash for $18 million.

A debit of $5 million to a loss account. Carrying value, $18 million, less cash paid to retire the bonds of $23 million = $5 million loss.

Debt that will be paid within one year of the balance sheet date. -Current portion of long-term debt -Recording a contingent liability -Disclosure of a contingent liability -Deferred revenues -Notes payable

Current portion of long-term debt

On December 1, 2021, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2022. Old World Deli should record which of the following adjusting entries at December 31, 2021? -Debit Interest Expense and credit Interest Payable, $7,500. -Debit Interest Expense and credit Cash, $7,500. -Debit Interest Expense and credit Interest Payable, $1,250. -Debit Interest Expense and credit Cash, $1,250.

Debit Interest Expense and credit Interest Payable, $1,250. [($300,000 × 5%) × 1/12] = $1,250.

A liability that requires the sacrifice of something other than cash. -Current portion of long-term debt -Recording a contingent liability -Disclosure of a contingent liability -Deferred revenues -Notes payable

Deferred revenues

The sale of gift cards by a company is a direct example of: -Deferred revenues. -Sales tax payable. -Current portion of long-term debt. -Contingencies.

Deferred revenues.

Which of the following statements accurately describes depreciation? -Depreciation is used to allocate the cost of the asset over periods benefited. -Depreciation is used to track the fair value of the asset. -The book value of an asset is its original cost less accumulated depreciation. -All of these statements are correct.

Depreciation is used to allocate the cost of the asset over periods benefited. The book value of an asset is its original cost less accumulated depreciation.

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be -Disclosed, but not reported as a liability. -Disclosed and reported as a liability. -Neither disclosed nor reported as a liability. -Reported as a liability, but not disclosed.

Disclosed and reported as a liability.

Loss is reasonably possible and amount is reasonably estimable. -Current portion of long-term debt -Recording a contingent liability -Disclosure of a contingent liability -Deferred revenues -Notes payable

Disclosure of a contingent liability

Which depreciation method generally will result in the greatest amount of depreciation expense in the first year of the asset's life? -Straight-line. -Double-declining balance. -Activity-based. -Capitalization.

Double-declining balance.

The exclusive right to use another company's name and to sell its products within a specified geographical area is a: -Patent. -Copyright. -Trademark. -Franchise.

Franchise

Which of the following is true concerning goodwill? -Goodwill can never be recorded. -Goodwill is recorded when a company is purchased for more than the fair value of its identifiable net assets. -Goodwill is recorded when the market value of a company exceeds the fair value of its identifiable net assets. -Goodwill is recorded as a revenue in the income statement.

Goodwill is recorded when a company is purchased for more than the fair value of its identifiable net assets.

Equipment was sold for $50,000. The equipment was originally purchased for $85,000. At the time of the sale, the equipment had accumulated depreciation of $30,000. Calculate the gain or loss to be recorded on the sale of equipment. -Gain of $20,000. -Loss of $5,000. -Loss of $35,000. -Gain of $5,000.

Loss of $5,000. Original cost ($85,000) less accumulated depreciation ($30,000) = book value ($55,000). Because the sale price ($50,000) is less than book value ($55,000), a loss for the difference ($5,000) is recorded.

A written promise to repay the amount borrowed plus interest. -Current portion of long-term debt -Recording a contingent liability -Disclosure of a contingent liability -Deferred revenues -Notes payable

Notes payable

Loss is probable and amount is reasonably estimable. -Current portion of long-term debt -Recording a contingent liability -Disclosure of a contingent liability -Deferred revenues -Notes payable

Recording a contingent liability

A basket purchase is the purchase of more than one asset at the same time for one purchase price. T/F

T

A company is said to be liquid if it has sufficient cash to pay currently maturing debts. T/F

T

A lease is a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time. T/F

T

An advantage of leasing an asset rather than buying is that leasing improves cash flows by reducing the upfront cash needed to use an asset. T/F

T

Debt financing refers to borrowing money from creditors. T/F

T

Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. T/F

T

In an activity-based depreciation method, we allocate an asset's cost based on its use. T/F

T

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. T/F

T

We record purchased intangible assets at their original cost plus all other costs necessary to get the asset ready for use. T/F

T