accounting exam 2

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

Answer: $1,120 outflow Explanation: $36,000 × 7% = $2,520 cash paid for interest on the note; $1,400 inflow from revenue − $2,520 outflow for interest = $1,120 outflow for operating activities. The repayment of principal is a financing activity.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3, Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the amount of uncollectible accounts expense shown on the Year 3 income statement is

Answer: $1,240.

Allegheny Company ended Year 1 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $23,000 and $900, respectively. During Year 2, Allegheny wrote off $1,500 of Uncollectible Accounts. After aging its receivables, Allegheny estimates that the ending Allowance for Doubtful Accounts balance should be $1,600. What will Allegheny report as Uncollectible Accounts Expense on its Year 2 income statement?

Answer: $1,500 Explanation: $900 beginning allowance balance − $1,500 write-offs + uncollectible accounts expense = $1,600 ending allowance balance; uncollectible accounts expense = $1,600 − $900 + $1,500 = $2,200

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3 Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. The December 31, Year 3 ending balance in the allowance for doubtful accounts account (balance after expense recognition) is

Answer: $1,640.

On December 31, Year 3, Alpha Company had an ending balance of $200,000 in its accounts receivable account and an unadjusted (current) balance in its allowance for doubtful accounts account of $300. Alpha estimates uncollectible accounts expense to be 1% of receivables. Based on this information, the amount of uncollectible accounts expense shown on the Year 3 income statement is

Answer: $1,700 Explanation: Uncollectible accounts expense = Ending balance in allowance account - unadjusted balance in allowance account

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $167,967 and $202,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $21,300 and issued stock dividends valued at $16,500. Total expenses were $37,916. Based on this information, what was the amount of total revenue for Year 1?

Answer: $110,649 Explanation: $167,967 beginning retained earnings + X revenues − $37,916 expenses − $21,300 cash dividends − $16,500 stock dividends = $202,900 ending retained earnings; X = $110,649.

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

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

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

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

Chico Company paid $950,000 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 $190,000; Building $740,000, Land $132,000. Based on this information, the amount of cost that would be allocated to the office furniture is closest to: (Round your intermediate percentages to 2 decimal places: ie 0.054231 = 5.42%.)

Answer: $171,000 Explanation: The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to office furniture = Appraised amount for office furniture of $190,000 ÷ Total appraised values of $1,062,000 (or $190,000 + $740,000 + $132,000) = 17.89%; Allocation of purchase price to office furniture = Total purchase price of $950,000 × 17.89% = $169,955.

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

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

At the end of the accounting period, Houston Company had $7,200 of par value common stock issued, additional paid-in capital in excess of par value − common of $9,100, retained earnings of $8,000, and $5,000 of treasury stock. The total amount of stockholders' equity is:

Answer: $19,300 Explanation: $7,200 common stock + $9,100 additional paid-in capital in excess of par value + $8,000 retained earnings − $5,000 treasury stock = $19,300

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

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

The inventory records for Radford Company reflected the following Beginning inventory on May 1 100 units @ $4.00 First purchase on May 7 300 units @ $4.40 second purchase on May 17 500 units @ $4.60 Third purchase on May 23 100 units @ $4.80 Sales on May 31 900 units @ $7.80 What is the amount of gross margin assuming the FIFO cost flow method is used?

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

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

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

On March 1, Bartholomew Company purchased a new stamping machine with a list price of $34,000. The company paid cash for the machine; therefore, it was allowed a 5% discount. Other costs associated with the machine were: transportation costs, $550; sales tax paid, $1,360; installation costs, $450; routine maintenance during the first month of operation, $500. The cost recorded for the machine was:

Answer: $34,660 Explanation: 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 = $34,000 − ($34,000 × 5%) + $550 transportation + $1,360 sales tax + $450 installation = $34,660.

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

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

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3 Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the amount of net realizable value of receivables shown on the Year 3 balance sheet is

Answer: $39,360.

At the end of the accounting period Anderson Company had $4,500 in accounts receivable and $500 in its allowance for doubtful accounts account. Based on this information the net realizable value of accounts receivable is

Answer: $4,000. Explanation: The net realizable value of accounts receivable is determined by subtracting the balance in the allowance for doubtful accounts from the balance in the accounts receivable account ($4,500 - $500 = $4,000). The net realizable value of receivables represents an estimate of the portion of accounts receivable that Anderson realistically expects to collect

The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00 First purchase on May 7300 units @ $4.40 second purchase on May 17 500 units @ $4.60 Third purchase on May 23 100 units @ $4.80 Sales on May 31 900 units @ $7.80 What is the amount of cost of goods sold assuming the LIFO cost flow method is used?

Answer: $4,100 Explanation: 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 = (100 × $4.80) + (500 × $4.60) + (300 × $4.40) = $4,100

The inventory records for Radford Company reflected the following Beginning inventory on May 1 100 units @ $4.00 First purchase on May 7300 units @ $4.40 second purchase on May 17 500 units @ $4.60 Third purchase on May 23 100 units @ $4.80 Sales on May 31 900 units @ $7.80 What is the weighted average cost per unit for May?

Answer: $4.50 Explanation: Weighted average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3 Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. The December 31, Year 3 unadjusted (current) balancein the allowance for doubtful accounts account (balance before expense recognition) is

Answer: $400.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3, Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the December 31, Year 3 balance in the accounts receivable account is

Answer: $41,000.

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

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

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $16,000, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:

Answer: $600. Explanation: ($36,000 cost − $12,000 salvage value) ÷ 5 years = $4,800 annual depreciation expense; $36,000 cost − (3 years × $4,800) accumulated depreciation = $21,600 book value at the end of Year 3. $16,000 proceeds from sale − $21,600 = ($5,600) loss on sale of equipment; $30,000 revenue − $19,000 cash expenses − $4,800 depreciation expense − $5,600 loss on sale = $600 net income

ing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $16,000, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:

Answer: $600. Explanation: ($36,000 cost − $12,000 salvage value) ÷ 5 years = $4,800 annual depreciation expense; $36,000 cost − (3 years × $4,800) accumulated depreciation = $21,600 book value at the end of Year 3. $16,000 proceeds from sale − $21,600 = ($5,600) loss on sale of equipment; $30,000 revenue − $19,000 cash expenses − $4,800 depreciation expense − $5,600 loss on sale = $600 net income

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

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

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 amount of uncollectible accounts expense recognized in the Year 2 income statement will be:

Answer: $725. Explanation: $72,500 credit sales × 1% = $725 uncollectible accounts expense

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of net income on the Year 2 income statement would be:

Answer: $770. Explanation: $36,000 × 7% × 3/12 months = $630 interest expense; $1,400 revenue − $630 interest expense = $770 net income

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

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

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account. During the accounting period the business borrowed $30,000 from a bank, earned $18,000 of net income, and Scott withdrew $12,000 cash from the business. Based on this information, at the end of the accounting period Scott's capital account contained a balance of:

Answer: $81,000. Explanation: $75,000 + $18,000 net income − $12,000 withdrawal = $81,000 ending balance in capital account

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

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

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

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

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Using double-declining-balance depreciation, what the amount of depreciation expense and the amount of accumulated depreciation, respectively, that would appear on the December 31, Year 3 financial statements?

Answer: $960 and $24,000 Explanation: ($34,000 + $2,000) × (2 × 20%) = $14,400 depreciation in Year 1; Ending book value in Year 1 = $36,000 − $14,400 = $21,600; $21,600 × (2 × 20%) = $8,640 depreciation in Year 2; Ending book value in Year 2 = $21,600 − $8,640 = $12,960; $12,960 − $12,000 salvage value = $960 depreciation expense in Year 3 ($12,960 × 40% would depreciate the office equipment below its $12,000 salvage value); $14,400 + $8,640 + $960 = $24,000 accumulated depreciation at the end of Year 3.

ing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Using double-declining-balance depreciation, what the amount of depreciation expense and the amount of accumulated depreciation, respectively, that would appear on the December 31, Year 3 financial statements?

Answer: $960 and $24,000 Explanation: ($34,000 + $2,000) × (2 × 20%) = $14,400 depreciation in Year 1; Ending book value in Year 1 = $36,000 − $14,400 = $21,600; $21,600 × (2 × 20%) = $8,640 depreciation in Year 2; Ending book value in Year 2 = $21,600 − $8,640 = $12,960; $12,960 − $12,000 salvage value = $960 depreciation expense in Year 3 ($12,960 × 40% would depreciate the office equipment below its $12,000 salvage value); $14,400 + $8,640 + $960 = $24,000 accumulated depreciation at the end of Year 3.

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

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

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

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

Montana Company was authorized to issue 145,000 shares of common stock. The company had issued 66,000 shares of stock when it purchased 10,500 shares of treasury stock. The number of outstanding shares of common stock was:

Answer: 55,500. Explanation: 66,000 shares issued − 10,500 shares of treasury stock = 55,500 shares outstanding

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

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

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

Answer: A $16,000 cash inflow in the investing activities section of the cash flow statement. Explanation: This transaction increases assets (cash) by $16,000, decreases assets (the book value of asset) by $12,000 (or cost of $44,000 − accumulated depreciation of $32,000), resulting in a net increase in assets of $4,000. Because the cash proceeds of $16,000 exceed the asset's book value of $12,000, Madison also reports a gain on the sale of $4,000, which increases revenue (gain), net income, and stockholders' equity (retained earnings). The gain is not reported in the investing activities section; instead, the $16,000 cash proceeds are reported as a cash inflow for investing activities.

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

Answer: A corporation. Explanation: Corporations are separate legal entities and pay income taxes on their earnings. Since sole proprietorships and partnerships are not separate legal entities, company earnings are taxable to the owners rather than to the company itself.

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

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

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

Answer: A measure of capital generated through earnings. Explanation: As a corporation generates earnings, stockholders' equity is increased by increasing the retained earnings account. In a proprietorship or partnership, earnings increase the owner(s)'s capital account.

Benitez Company had sales of $500,000 in Year 1. The company expects to incur warranty expenses amounting to 4% of sales. There were $12,000 of warranty obligations paid in cash during Year 1. Based on this information:

Answer: All of these answer choices are correct. Explanation: $500,000 × 4% = $20,000 warranty expense is recognized in Year 1. Cash decrease by $12,000 when the warranty obligations are paid. Warranties payable increases by $20,000 when warranty expense is recognized and decreases by $12,000 when warranty obligations are paid, for a net increase of $8,000.

Benitez Company had sales of $600,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $15,700 of warranty obligations paid in cash during Year 1. Based on this information:

Answer: All of these answer choices are correct. Explanation: $600,000 × 3% = $18,000 warranty expense is recognized in Year 1. Cash decrease by $15,700 when the warranty obligations are paid. Warranties payable increases by $18,000 when warranty expense is recognized and decreases by $15,700 when warranty obligations are paid, for a net increase of $2,300.

Which of the following represents the impact of a taxable cash sale of $1,120 on the accounting equation if the sales tax rate is 5%?

Answer: An increase to cash for $1,176, an increase to sales tax payable for $56, and an increase to sales revenue for $1,120. Explanation: The transaction is recorded as an increase to cash of $1,176, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $56, the amount owed to the state, and an increase to sales revenue of $1,120, the amount of the sale.

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

Answer: An increase to cash for $1,218, an increase to sales tax payable for $58, and an increase to sales revenue for $1,160. Explanation: The transaction is recorded as an increase to cash of $1,218, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $58, the amount owed to the state, and an increase to sales revenue of $1,160, the amount of the sale.

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

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

Fred and Barney started a partnership. Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 15% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 during an accounting period, the amount of income assigned to the two partners would be: first Fred second barney A.$ 20,500$ 17,500 B.$ 20,000$ 18,000 C.$ 19,000$ 19,000 D.$ 18,100$ 19,900

Answer: Choice D Explanation: $20,000 investment of Fred × 15% = $3,000; $32,000 investment of Barney × 15% = $4,800; $38,000 − ($3,000 + $4,800) = $30,200 remainder; $30,200 ÷ 2 = $15,100; $15,100 + $3,000 = $18,100 distribution to Fred; $15,100 + $4,800 = $19,900 distribution to Barney

The recognition of depreciation expense acts to:

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

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

Answer: Depreciation Explanation: Depreciation is the process of expense recognition for property, plant and equipment. Amortization is used for intangible assets and depletion is used for natural resources. The term, revision, is not used to describe a process of expense recognition.

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

Answer: Ignore the lawsuit in its financial statements. Explanation: Because the obligation is considered remote, it is neither recognized nor disclosed in Burger Barn's financial statements.

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

Answer: Income statement and balance sheet Explanation: On the income statement, recognizing depreciation increases expenses which decreases net income. On the balance sheet, recognizing depreciation decreases assets (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.

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

Answer: Increase assets by $480,000, increase stockholders' equity by $480,000. Explanation: Assets (cash) and stockholders' equity (common stock) both increase by $480,000 (12,000 shares × $40). The cash inflow is a financing activity, not an investing activity.

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

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

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

Answer: Lack of government regulation. Explanation: The large amount of government regulation is a disadvantage of the corporate form of business.

Which of the following terms designates the maximum number of shares of stock that a corporation may issue?

Answer: Number of shares authorized Explanation: When a corporation is formed, it is authorized by the state to issue a maximum number of shares. The number of shares it initially issues is much lower.

Which of the following statements about types of business entities is true?

Answer: One advantage of a corporation is ability to raise capital. Explanation: Corporations are more able to raise capital because they can issue common stock to a large number of potential investors.

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

Answer: Reduces the amount of interest expense each year Explanation: As the principal balance declines each year, the interest expense becomes smaller, and the amount of principal reduction becomes larger with each subsequent payment.

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

Answer: The balance in the treasury stock account reduces total stockholders' equity. Explanation: Treasury stock is a contra equity account that neither affects paid-in capital nor retained earnings.

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

Answer: The paid-in capital in excess of par value account will increase by $20,000. Explanation: The cash account will increase by $220,000 (20,000 × $11), the common stock account will increase by $200,000 (20,000 × $10 par value), and the paid-in capital in excess of par value account will increase by $20,000 (20,000 × $1).

Which of the following is not normally a preference given to the holders of preferred stock?

Answer: The right to vote before the common stockholders at the corporation's annual meeting. Explanation: Preferred stockholders do not have voting right

Which of the following is not normally a preference given to the holders of preferred stock?

Answer: The right to vote before the common stockholders at the corporation's annual meeting. Explanation: Preferred stockholders do not have voting rights

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

Answer: There are fees charged for the privilege of accepting credit cards. Explanation: The fees associated with credit card sales are a disadvantage, not an advantage, of accepting credit cards.

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

Answer: Treasury stock Explanation: Treasury stock is a contra equity account that is reported as a negative number (that is, a reduction of total stockholders' equity) on the balance sheet.

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

Answer: When there is a settlement of a warranty claim made by a customer. Explanation: Cash is usually used to settle a warranty claim made by a customer, but is never used at the time the obligation is recognized as an expense. Although cash may be collected when the sale is made, that cash is not related to the warranty.

In an inflationary environment:

Answer: a company's assets will be lower if it uses LIFO as opposed to FIFO cost flow. Explanation: In an inflationary environment, prices are rising. LIFO will produce the lowest ending inventory (earliest purchases) compared with FIFO.

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 also 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. Kincaid's entry required to recognize the uncollectible accounts expense for Year 2 will:

Answer: decrease total assets and net income. Explanation: 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.

uncollectible accounts expense is

Answer: estimated and recognized at the end of the accounting period. Explanation: To promote the matching of revenue and expense, the allowance method recognizes an estimated amount of uncollectible account expense in an adjusting entry at the end of each accounting period. The estimated amount of expense appears on the income statement and reduces the amount of net income as would any other expense.

An aging schedule is used to improve the estimate used in the percent of revenue method of determining the uncollectible accounts expense. This statement is

Answer: false Explanation: An aging schedule is used to improve the estimate used in the percent of receivables method not the percent of revenue method

Most companies expect to collect the full balance of all of their accounts receivable. This statement is

Answer: false Explanation: Most companies recognize that they will be unable to collect some portion of their accounts receivable. For example, some of their customers may go bankrupt. You cannot collect from someone who does not have the money to pay.

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

Answer: fixed or variable interest rate. Explanation: Interest charges may be based on a fixed interest rate that remains constant during the term of the loan or may be based on a variable interest rate that fluctuates up or down during the loan period.

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

Answer: fixed or variable interest rate. Explanation: Interest charges may be based on a fixed interest rate that remains constant during the term of the loan or may be based on a variable interest rate that fluctuates up or down during the loan period.

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

Answer: gross margin is $28.00 if Hoover uses the weighted average cost flow method. Explanation: If Hoover uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $33.00, not $35.00. If Hoover uses weighted average, the weighted average cost per unit is $34.00. Therefore, gross margin will be $28.00 ($62.00 Sales − $34.00 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $33.00 (earliest purchase), not $35.00.

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

Answer: have no effect on total assets or stockholders' equity. Explanation:When a company receives payment on a previously written-off account, it must first reinstate the written-off account. The reinstatement increases assets (accounts receivable) and decreases assets (increases the contra asset allowance for doubtful accounts), with no overall effect on the financial statements. Next, the company records collection of the receivable, which increases assets (cash) and decreases assets (accounts receivable), again with no overall effect on assets. The event is reported as a cash inflow for operating activities on the statement of cash flows.

When prices are falling, LIFO will result in:

Answer: higher income and a higher inventory valuation than will FIFO. Explanation: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).

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

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

Bonds payable are usually classified on the balance sheet as:

Answer: long-term liabilities. Explanation: Bonds will not be repaid until many accounting periods from the issue date. Therefore, they are classified as long-term liabilities.

The recovery and collection of an account receivable that had previously been written off will

Answer: not affect total assets. Explanation: Recognizing the recovery of the account receivable will increase the allowance for doubtful accounts and the accounts receivable accounts. As a result, the amount of total assets is not affected by the recovery. Recognizing the cash collection will cause one asset account (cash) to increase and another asset account (accounts receivable) to decrease. This is an asset exchange transaction that does not affect the amount of total assets. Accordingly, the amount of total assets is not affected by either the recovery or the collection of the account receivable. The cash inflow from the collection of the accounts receivable is classified as an operating activity.

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

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

A company that uses the allowance method to account for uncollectible accounts:

Answer: reports the net realizable value of its accounts receivable on the balance sheet. Explanation: A company that uses the allowance method estimates uncollectible accounts expense before they actually become uncollectible, using a contra asset account known as allowance for doubtful accounts, and reports the net realizable value of accounts receivable on the balance sheet.

The net realizable value of accounts receivable represents an estimate of the amount of the accounts receivable that a company realistically expects to collect. This statement is

Answer: true Explanation: The net realizable value of accounts receivable is determined by subtracting the balance in the allowance for doubtful accounts from the balance in the accounts receivable. The balance in the allowance account represents the estimated amount of accounts receivable that are not collectible. Therefore, the balance in accounts receivable minus the balance in the allowance account results in the amount of receivables that the company realistically expects to collect

The balance in the allowance for doubtful accounts provides an estimate of the amount of accounts receivable that is expected to be uncollectible. This statement is

Answer: true. Explanation: When a company recognizes the estimated amount of uncollectible accounts expense, the total amount of assets and equity decreases. However, the balance in the accounts receivable account is not affected. Instead, the company records an increase in a contra asset account called allowance for doubtful accounts. The balance in the contra asset account represents an estimate of the amount of accounts receivable that the company expects to be uncollectible, and is subtracted from the amount of accounts receivable when shown on the balance sheet. Therefore increasing the balance in the allowance for doubtful accounts account decreases the total amount of assets.

recognizing the write-off of an uncollectible account receivable will

Answer: will not affect the total amount of the net realizable value of receivables. Explanation: The write-off of an uncollectible account decreases the balance of the allowance for doubtful accounts account and the balance of accounts receivable. The decrease in the allowance account increases the net realizable value of receivables. The decrease in the accounts receivable account decreases the net realizable value of receivables. The increase in the net realizable value is offset by the decrease in the net realizable value. The total amount of the net realizable value of receivables is not affected. The write-off is an asset exchange transaction.

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

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

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

Answer: All of these answer choices are correct. Explanation: Accountants use a variety of methods to estimate uncollectible accounts expense. There is no requirement that they use a particular approach.

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

Answer: Copyright Explanation: A copyright is considered an intangible long-term asset. Delivery truck, land, and timber stand are all tangible long-term assets.

Which of the following is not subject to depreciation?

Answer: Land Explanation: Land is not subject to depreciation. Land has an infinite life. It is not worn out or consumed as it is used.

Buttercup Florist uses the allowance method to account for uncollectible accounts. Unable to collect a $150 account from a customer, Buttercup determined it was uncollectible. How would the write-off of this account affect the company's total assets?

Answer: The net realizable value of receivables and total assets remains unchanged. Explanation: 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 and therefore total assets remains unchanged.

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

Answer: The outcome is probable and can be reasonably estimated. Explanation: A contingent liability should be recorded in the financial statements as a liability if the outcome is considered probable and the amount owed can be reasonably estimated. If the outcome is considered only reasonably possible, it is only disclosed in the notes to the financial statements.

The par value of a company's stock:

Answer: has little connection to the market value of the stock. Explanation: Par value is an arbitrary number, but is typically lower than market value.

The par value of a company's stock:

Answer: has little connection to the market value of the stock. Explanation: Par value is an arbitrary number, but is typically lower than market value.

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

Answer: par or stated value. Explanation: The par value of the stock is recorded in the common stock account and any additional amount received is recorded in the paid-in capital in excess of par value account.

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

Answer: to repay the interest and repay the debt Explanation: When a company issues debt, whether notes or bonds, the company is normally expected to repay the debt, as well as to pay interest to the lender.