Accounting Chapter 5&6 Quiz

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 recognized $104,000 of service revenue earned on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account. Based on this information, the amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows is: $95,060. $97,000. $89,520. $104,000.

$97,000 $97,000 cash collected from accounts receivable is a cash inflow for operating activities.

On January 1, Year 1, Marino Moving Company paid $120,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $20,000 salvage value. If Marino uses the double-declining-balance method, the amount of accumulated depreciation shown on the Year 3 balance sheet is: $90,000. $105,000. $60,000. $100,000.

$100,000. Depreciation expense = Book value at beginning of year × (2 × Straight-line rate)

Chase Company uses the perpetual inventory method. The inventory records for Chase reflected the following: January 1 Beginning inventory 300 units @ $2.30 January 12 Purchase 400 units @ $2.10 January 18 Sales 500 units @ $3.80 January 21 Purchase 300 units @ $2.40 January 25 Purchase 100 units @ $2.20 January 31 Sales 450 units @ $3.80 Assuming Chase uses a FIFO cost flow method, the cost of goods sold for the sales transaction on January 31 is: $1,005. $1,020. $1,045. $340.

$1020 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 = (200 × $2.10) + (250 × $2.40) = $1,020.

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. The net realizable value of receivables appearing on Kincaid's Year 2 balance sheet will amount to: Multiple Choice $29,075. $28,400. $27,725. $28,950.

$27,725 $31,000 beginning balance + $72,500 credit sales − $74,550 collections − $550 write-offs = $28,400 ending accounts receivable balance; $500 beginning allowance balance + $725 uncollectible account expense − $550 write-offs = $675 ending allowance balance; $28,400 accounts receivable − $675 allowance = $27,725 net realizable value

On January 1, Year 1, Marino Moving Company paid $92,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $30,000 salvage value. If Marino uses the straight-line method, the amount of accumulated depreciation shown on the Year 2 balance sheet is: Multiple Choice $15,500. $31,000. $23,000. $46,000.

$31,000 Depreciation expense per year = (Cost of the asset − Salvage value) ÷ Useful life Depreciation expense per year = ($92,000 Cost − $30,000 Salvage) ÷ 4 Years = $15,500 The accumulated depreciation account is a permanent contra asset account. As its name implies, the balance accumulates each year. In this case the after-closing (ending) balance in the accumulated depreciation account will be $15,500 in Year 1, $31,000 in Year 2, $46,500 in Year 3, and $62,000 in Year 4.

On January 1, Year 2, Ballard Company spent $23,000 on an asset to improve its quality. The asset had been purchased on January 1, Year 1, for $60,000. The asset had a $15,600 salvage value and a 6-year life. Ballard uses straight-line depreciation. What would be the book value of the asset on January 1, Year 5? $39,600 $12,000 $24,000 $22,200

$39,600 ($60,000 cost − $15,600 salvage value) ÷ 6 years = $7,400 original annual depreciation; $60,000 − ($7,400 × 1 year) = $52,600 book value at the time of capital expenditure; ($52,600 book value + $23,000 capital expenditure − $15,600 salvage value) ÷ 5 years of remaining useful life = $12,000 new annual depreciation; $83,000 total cost of asset − $7,400 depreciation in Year 1 − $12,000 depreciation in Year 2 − $12,000 depreciation in Year 3 − $12,000 depreciation in Year 4 = $39,600 book value on January 1, Year 5.

The inventory records for Radford Company reflected the following Beginning inventory on May 12,100 units @ $5.80 First purchase on May 7 2,200 units @ $6.00 Second purchase on May 17 2,400 units @ $6.10 Third purchase on May 23 2,000 units @ $6.20 Sales on May 31 6,600 units @ $7.70 What is the amount of cost of goods sold assuming the LIFO cost flow method is used? $39,600 $40,920 $38,280 $40,240

$40,240 Under LIFO, the cost of the items purchased last is reported on the income statement, and the cost of the items purchased first is reported on the balance sheet. Cost of goods sold = (2,000 × $6.20) + (2,400 × $6.10) + (2,200 × $6.00) = $40,240

Rosewood Company made a loan of $9,000 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: $0 and $540. $540 and $0. $405 and $135. $135 and $405.

$405 and $135. $9,000 × 6% × 9/12 months = $405 interest revenue in April − December, Year 1; $9,000 × 6% × 3/12 months = $135 interest revenue in January − March, Year 2

On January 1, Year 1, Phillips Company made a basket purchase including land, a building and equipment for $800,000. The appraised values of the assets are $48,000 for the land, $760,000 for the building and $112,000 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 $10,000. The depreciation expense for Year 1 for the equipment is: $56,000. $28,000. $24,340. $48,680.

$48680 $112,000 ÷ ($48,000 + $760,000 + $112,000) = 12.17% of total appraised value; $800,000 purchase price × 12.17% = $97,360 cost of equipment; $97,360 × (2 × 25% straight-line rate) = $48,680 depreciation expense in Year 1.

The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1) 440 units @ $5 each Purchases made in Year 2 1,040 units @ $8 each Units sold 1,140 units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a weighted average cost flow method? $1,040 $1,100 $5,575 $8,105

$5,575 The amount of sales revenue is $13,680 (1,140 units × $12 per unit). The cost of goods sold is $8,105. Determine the weighted average cost per unit as follows: Beginning inventory (purchased in Year 1) 440 units @ $5 each= $ 2,200 Purchases made in Year 2 1,040 units @ $8 each= 8,320 Cost of goods available for sale $ 10,520 Weighted average cost per unit is $7.11 ($10,520 Cost of goods available for sale ÷ 1,480 units). Cost of goods sold is $8,105 ($7.11 per unit × 1,140 units sold). The gross margin is $5,575 ($13,680 Sales revenue − $8,105 Cost of goods sold).

On April 1, Year 1, Fossil Energy Company purchased an oil-producing well at a cash cost of $12,000,000. It is estimated that the oil well contains 600,000 barrels of oil, of which only 500,000 can be profitably extracted. By December 31, Year 1, 25,000 barrels of oil were produced and sold. The amount of depletion for Year 1 on this well would be: Multiple Choice $600,000. $480,000. $800,000. $500,000.

$600,000. $12,000,000 ÷ 500,000 barrels = $24 ÷ per barrel; $24 × 25,000 barrels = $600,000 depletion. Natural resources such as oil reserves are inventories. When sold, the cost of these assets is frequently expensed as cost of goods sold.

Weiss Company purchased two identical inventory items. The first purchase cost $68 and the second cost $70. The company sold one of the items for $135. If the company uses the weighted average cost flow method, the amount of gross margin shown on the income statement will be: $66. $65. $69. $67.

$66 The weighted average cost flow method applies the weighted average cost of inventory to both cost of goods sold and ending inventory. In this case the weighted average cost of inventory is $69 per unit [($68 + $70) ÷ 2]. Based on this computation, $69 would be recognized as cost of goods sold and $69 would be left in inventory after the sales transaction. Recall that the amount of gross margin is equal to the amount of sales revenue minus the cost of goods sold. Therefore, the amount of gross margin is $66 ($135 sales revenue − $69 cost of goods sold).

On March 1, Bartholomew Company purchased a new stamping machine with a list price of $82,000. The company paid cash for the machine; therefore, it was allowed a 5% discount. Other costs associated with the machine were: transportation costs, $2,500; sales tax paid, $5,520; installation costs, $1,600; routine maintenance during the first month of operation, $2,400. The cost recorded for the machine was: Multiple Choice $77,900. $87,520. $85,920. $89,920.

$87,520 The cost includes the purchase price (less discounts) plus any costs necessary to get the asset in the location and condition for its intended use. Maintenance costs are the costs of routine maintenance and minor repairs that are incurred to keep an asset in good working order. These costs are expensed in the period in which they are incurred. Cost of machine = $82,000 − ($82,000 × 5%) + $2,500 transportation + $5,520 sales tax + $1,600 installation = $87,520.

Chico Company paid $500,000 for a basket purchase that included office furniture, a building and land. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Office furniture $110,000; Building $400,000, Land $80,000. Based on this information, the amount of cost that would be allocated to the office furniture is closest to: Multiple Choice $110,000. $166,667. $93,200. $55,000.

$93,200 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 office furniture = Appraised amount for office furniture of $110,000 ÷ Total appraised values of $590,000 (or $110,000 + $400,000 + $80,000) = 18.64%; Allocation of purchase price to office furniture = Total purchase price of $500,000 × 18.64% = $93,200.

What term is used to describe the situation where there is a permanent decline in the value of an intangible asset? Depreciation Depletion Impairment Amortization

Impairment Intangible assets with indefinite useful lives must be tested for impairment annually. The impairment test consists of comparing the fair value of the intangible asset to its carrying value (book value). If the fair value is less than the book value, an impairment loss must be recognized.

At a time of declining prices, which cost flow method will result in the highest ending inventory? Weighted average LIFO FIFO Either weighted average or FIFO

LIFO In a period of declining prices, LIFO will result in the lowest cost of goods sold (most recent purchases) and the highest ending inventory (earliest purchases).

Which of the following would be classified as a tangible asset? Multiple Choice Land Goodwill Trademark Copyright

Land Copyright, goodwill, and trademark are all examples of intangible assets, as they do not have physical existence. Land is an example of property, plant, and equipment, and is a tangible asset.

The Grant Company acquired the Lee Company for $600,000 cash. The fair value of Lee's assets was $520,000, and the company had $40,000 in liabilities. Which of the following choices would reflect the acquisition on Grant's financial statements? Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityCash+Lee's Assets+Goodwill=Accounts Payable+Common Stock+Retained EarningsRevenue−Expenses=Net Income A.(600,000)+520,000+120,000=40,000+NA+NANA−NA=NA(600,000)OA B.(600,000)+480,000+120,000=NA+NA+NANA−NA=NA(600,000)OA C.(600,000)+520,000+80,000=NA+NA+NANA−NA=NA(600,000)IA D.(600,000)+520,000+120,000=40,000+NA+NANA−NA=NA(600,000)IA

Option A The acquisition will decrease cash by $600,000, increase "Lee's Assets" by $520,000 (the assets' fair value), record goodwill for $120,000 (the difference between the acquisition price and the fair value of Lee's net assets), and increase liabilities by $40,000. The acquisition is reported as a cash outflow for investing activities.

The Yankee Corporation has recently begun to accept credit cards. On July 7, Yankee made a credit card sale of $600. The credit card company charges a fee of 3%. Which of the following answers correctly describes the effect of the collection of cash from the credit card company on the financial statements of Yankee Corporation? Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities+Stockholders' Equity Revenue−Expense=Net Income A. 582 (582) NA NA NA - NA = NA 582OA B. 582 582 NA NA 582 - NA = 582 582OA C. 582 (582) NA NA NA - NA = NA NA D. (582) 582 NA NA NA - NA = NA 582OA Multiple Choice Option C Option B Option D Option A

Option A This is an asset exchange transaction. Collecting the amount due ($582) from the credit card company increases assets (cash) and decreases assets (accounts receivable), resulting in no net effect on assets. It is reported as a cash inflow for operating activities.

The Dalen Company purchased office equipment that cost $3,000 cash on January 1. In addition, the Company paid $500 cash for installation fees to get the equipment ready for use. The equipment had an estimated five-year useful life and an estimated salvage value of $750. The company uses the straight-line method. The amount of accumulated depreciation shown on the balance sheet and the amount of cash flow from investing activities shown of the statement of cash flows at the end of the first year, respectively, would be: Balance Sheet Statement of Cash Flows A. $3,500 $(3,500) B. $ 550 $(3,500) C. $ 450 $(3,000) D. $ 0 $ (550)

Option B $3,000 list price + $500 installation = $3,500 cost of machine; ($3,500 − $750 salvage value) ÷ 5 = $550 depreciation expense per year. At the end of the first year the accumulated depreciation shown on the balance sheet would be $550. On the statement of cash flows, there would be a cash outflow of $3,500 based on the $3,000 cash outflow to purchase the office equipment plus $500 cash outflow for installation fees.

Flagler Company purchased equipment that cost $90,000. The equipment had a useful life of 5 years and a $10,000 salvage value. Flagler used the double-declining-balance method to depreciate its assets. Which of the following choices accurately reflects how the recognition of the first year's depreciation would affect the company's financial statements? Balance Sheet Income Statement Statement of Cash Flows Assets=Liabilities+Stockholders' Equity Revenue Expense=Net Income A.(32,000) = NA + (32,000) NA - 32,000 = (32,000) (32,000)O/A B.(16,000) = NA + (16,000) NA - 16,000 = (16,000) NA C.(36,000) = NA + (36,000) NA - 36,000 = (36,000) (36,000)OA D.(36,000) = NA+ (36,000) NA - 36,000= (36,000) NA

Option D $90,000 cost × (2 × 20%) = $36,000 depreciation expense. Depreciation expense decreases assets by increasing the contra asset account, accumulated depreciation, which decreases the book value of the asset. Recognizing depreciation increases expenses, which decreases net income and stockholders' equity (retained earnings). It does not affect cash flows.

Which of the following reflects the effect of the year-end adjusting entry to record estimated uncollectible accounts expense using the allowance method? Balance SheetIncome StatementStatement of Cash Flows Assets=Liabilities+Stockholders' EquityRevenueExpense=Net Income A.−=NA −NA− −− OA B.NA=− −NA+ −NA C.NA=− −NA+ −− OA D.−=NA −NA+ −NA

Option D Recording uncollectible accounts expense decreases assets (by reducing the net realizable value of receivables) and decreases stockholders' equity (retained earnings). On the income statement, it increases expenses, which decreases net income. It does not affect the statement of cash flows.

On August 1, Year 1, Hernandez Company loaned $55,200 cash to Acosta Company. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1, recognition of accrued interest will affect Hernandez's financial statements? Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Equity Revenues − Expenses = Net Income Flows A. $ 1,610 = NA + $ 1,610 $ 1,610 − NA = $ 1,610 $1,610 OA B. $ 1,610 = NA + $ 1,610 $ 1,610 − NA = $ 1,610 NA C. $ 1,150 = NA + $ 1,150 $ 1,150 − NA = $ 1,150 $ 1,150 OA D. $ 1,150 = NA + $ 1,150 $ 1,150 − NA = $ 1,150 NA

Option D The amount of interest earned is computed as follows: Total annual interest = $55,200 × 0.05 = $2,760 Monthly interest = $2,760 annual interest ÷ 12 months = $230 Interest earned in Year 1 = $230 per month × 5 months = $1,150 Recognizing the accrued interest revenue increases assets (interest receivable) and revenue. The increase in revenue increases net income and ultimately stockholder's equity. Accrued interest means that the company has earned the interest but has not yet collected cash. Since no cash was collected, cash flow is not affected.

A machine with a book value of $38,000 is sold for $32,000 cash. Which of the following answers would accurately represent the effects of the sale on the financial statements? Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityRevenue/GainExpense/Loss=Net Income A.38,000=NA+38,00038,000NA=38,00038,000I/A B.(6,000)=NA+(6,000)NA6,000=(6,000)6,000OA C.(6,000)=NA+(6,000)NA6,000=(6,000)6,000IA D.(6,000)=NA+(6,000)NA6,000=(6,000)32,000IA

Option D This transaction increases assets (cash) by $32,000, decrease assets (book value of machine) by $38,000, for a net decrease in assets of $6,000. Because the machine is sold for $32,000, which is less than its book value of $28,000, the company records a loss on the sale of $6,000, which decreases net income and stockholders' equity (retained earnings). The $32,000 cash received is reported as a cash inflow from investing activities.

On January 1, Year 1, Marino Moving Company paid $56,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $11,200 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino's accounting records contained the following balances: Truck $56,000 Accumulated Depreciation $28,000 Also, on January 1, Year 3 the company paid $18,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Which of the following shows the account balances after the engine replacement on January 1, Year 3? Multiple Choice Truck $74,000, Accumulated Depreciation $28,000 Truck $56,000, Accumulated Depreciation $18,000 Truck $74,000, Accumulated Depreciation $46,000 Truck $56,000, Accumulated Depreciation $46,000

Truck $74,000, Accumulated Depreciation $28,000 The engine replacement made the truck a better asset. Recording a quality improvement is an asset exchange event. One asset (cash) decreases and another asset (truck) increases. Total assets are not affected. An asset exchange does not affect revenue or expense.

The recognition of depreciation expense acts to: increase cash flow from operating activities, and does not affect the amount of total assets. increase assets, stockholders' equity, and cash flow from operating activities. decrease assets, stockholders' equity, and cash flow from operating activities. decrease assets and stockholders' equity, and does not affect cash flow.

decrease assets and stockholders' equity, and does not affect cash flow. Depreciation expense decreases assets (by increasing the contra asset account called accumulated depreciation, which decreases the book value of the asset) and stockholders' equity (retained earnings). The statement of cash flows is not affected at the time depreciation expense is recognized.

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $73,200 and $3,400, respectively. During the year, Kincaid reported $201,000 of credit sales. Kincaid also wrote off $1,900 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $246,700. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Kincaid's entry required to recognize the uncollectible accounts expense for Year 2 will: Multiple Choice decrease total assets and net income. increase total assets and retained earnings. decrease total assets and increase retained earnings. increase total assets and decrease net income.

decrease total assets and net income. Recognizing uncollectible accounts expense decreases assets by increasing the contra asset allowance for doubtful accounts and increases expenses, which decreases net income and retained earnings.

Hoover Company purchased two identical inventory items. The item purchased first cost $46.00. The item purchased second cost $51.75. Then Hoover sold one of the inventory items for $75. Based on this information, the amount of: Multiple Choice - ending inventory is $51.75 if Hoover uses the LIFO cost flow method. - gross margin is $26.12 if Hoover uses the weighted average cost flow method. - cost of goods sold is $51.75 if Hoover uses the FIFO cost flow method. - cost of goods sold is $46.00 if Hoover uses the LIFO cost flow method.

gross margin is $26.12 if Hoover uses the weighted average cost flow method. If Hoover uses LIFO, cost of goods sold will be $51.75 (most recent purchase) and ending inventory will be $46.00, not 51.75. If Hoover uses weighted average, the weighted average cost per unit is $48.88. Therefore, gross margin will be $26.12 ($75 Sales − $48.88 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $46.00 (earliest purchase), not $51.75.

The net effect of the entries to recognize the write-off under the allowance method is to: increase total stockholders' equity only. decrease total assets. have no effect on total assets or stockholders' equity. increase total assets and stockholders' equity.

have no effect on total assets or stockholders' equity. This is an asset exchange transaction. The amount of the uncollectible accounts is removed from the asset accounts receivable and from the contra asset allowance for doubtful accounts. The net realizable value of receivables remains unchanged. There is no effect on total assets or stockholders' equity.

When prices are falling, LIFO will result in: - lower income and a higher inventory valuation than will FIFO. - higher income and a higher inventory valuation than will FIFO. - lower income and a lower inventory valuation than will FIFO. - higher income and a lower inventory valuation than will FIFO.

higher income and a higher inventory valuation than will FIFO. When prices are falling, LIFO will produce a low cost of goods sold (most recent purchases) and a high ending inventory (earliest purchases), compared to FIFO, which will produce a high cost of goods sold (earliest purchases) and low ending inventory (most recent purchases).