Accounting Exam 3

If bonds are issued at a discount, over the life of the bonds, the carrying value and interest expense will:

increase

issuing a note payable for cash results in an

increase in assets and an increase in liabilities

When treasury stock is resold, total stockholders' equity:

increases

Which is not a primary source of corporate debt financing?

receivables

When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds?

the carrying value and interest expense remain unchanged

The statement of stockholders' equity

Summarizes the changes in the balance in each stockholders' equity account over a period of time

Treasury stock is what kind of account?

contra equity account

Which of the following shows activity over a period of time?

statement of stockholders' equity

The term treasury stock refers to

stock that is repurchased by the issuing corporation

Which of the following is true for bonds issued at a discount?

the market interest rate is greater than the stated interest rate

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably LIKELY, a contingent liability should be:

Disclosed but not reported as a liability

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably POSSIBLE, a contingent liability should be:

Disclosed but not reported as a liability

The disadvantages of a corporation compared to a sole proprietorship or partnership include:

Double taxation

Abbott Corp's attorney estimates that the company will ultimately have to pay $400,000 related to a current litigation. Abbott's journal entry should include

a credit to contingent liability and a debit to loss

If bonds are issued at a discount, interest expense will be

higher than cash interest paid

Improved cash flows are a common advantage of acquiring equipment through

leasing

A ______ is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events.

liability

the two criteria used to determine whether a contingent liability is reported in financial statements are

the likelihood of payment and the ability to estimate the amount of payment

Retained earnings represent:

All net income, less all dividends, since the company began operations

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

A debit to a liability and a credit to a revenue account

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

A debit to an asset and a credit to a liability account

Treasury stock is recorded as:

A decrease in stockholders' equity

Declaring a cash dividend has what effect on total stockholders' equity?

A decrease in total stockholders' equity

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at

A premium

Which is not a primary source of long-term debt financing?

Accounts payable

Cash dividends are initially recorded on which date?

Date of declaration

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit cash, $5,000; credit Notes Payable, $5,000

On the date of the dividend declaration, which of the following entries is recorded?

Debit dividends; credit dividends payable

An advantage of leasing an asset rather than purchasing the asset is:

Leases typically require less cash up front to begin using the asset

The advantages of a corporation compared to a sole proprietorship or partnership include:

Limited liability

What is classified as debt financing?

Notes, leases and bonds

_____, _______ and _____ _______ are used to categorize the likelihood of the occurrence of a future loss.

Probable, remote and reasonably possible

Convertible bonds:

Provide potential benefits to both the lender and the borrower

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Sales tax payable

Interest expense is recorded in the period in which:

The interest is incurred

Common shareholders usually have all of the following rights except:

To participate in the day-to-day operations

_________ tend to be the source of the most commonly reported contingent liability

Warranties

For a specific corporation, the total number of shares available to sell are referred to as

authorized

Serial bonds are

bonds that mature in installments

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will:

both decrease

What is not a current liability?

An unused line of credit

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record?

Debit notes receivable, $5,000; credit cash, $5,000

If a company issues par-value stock, the amount credited to common stock will be:

The par value per share times the number of shares issued

The number of shares authorized is set forth in the company's

articles of incorporation

a transaction or event in which the outcome is uncertain is referred to as a

contingency

product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to

contingent liabilities

A contingent event for which the likelihood of payment is properly judged to be remote

is not required to be disclosed in the financial statement notes.

Bonds issued at a discount are:

issued below face value

A ______ is a contractual agreement in which an owner provides a user the right.

lease

Bonds and leases are normally classified as _____-______ liabilties

long-term

_______ may be a proper income statement classification of contingent events.

non-operating or operating expenses

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?

$2,000

An accumulated deficit is:

A debit balance in retained earnings

The correct order from the largest number of shares to the smallest number of shares is:

Authorized, issued, and outstanding

Cash dividends are based on the number of shares:

Outstanding

liabilities that are payable within one year commonly are classified as ______ liabilities while those payable more than one year from now commonly are classified as __________ liabilities.

current; long-term

In order to expand its business, Mueller is borrowing $1 million from its bank. Mueller is utilizing

debt financing

Dividends are only paid on

outstanding shares

_______ _______ are the number of shares issued less treasury shares repurchased by the corporation

outstanding shares

Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is less common?

secured and serial

A contingent liability is recorded if

the amount of the loss can be reasonably estimated and it is probable that a future loss will occur.

A company's capital structure refers to

the mixture of debt and equity used to finance the company.

Which of the following stages of equity financing would come last for most public companies?

Initial public offering

a company purchases inventory or supplies and promises to pay within 30 to 45 days. no formal agreement is signed. this transaction is recorded as an

account payable

______ _________ is a short term liability that occurs when a company purchases goods and does not immediately pay cash.

accounts payable

When treasury shares are reissued for a greater amount than the cost, the amount over the cost increases

additional paid-in capital

notes payable is classified as a liability that

creates interest expense on the income statement

When treasury stock is purchased, what is the effect on total shareholders' equity?

decrease

contingent liabilities examples are

future litigation losses, product warranties and frequent flier program awards

Loans requiring periodic payments of interest and principle are referred to as

installment notes

On November 1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1. The company should report the following adjusting entry at December 31?

Debit interest expense and credit interest payable, $4,000

Bonds issued at a premium are:

Issued above face value

Which of the following is not an advantage of debt financing?

Debt financing often has no maturity debt

The two types of financing are

debt financing and equity financing.

In order to expand its business, Mueller is selling $10 million in common stock. Mueller is utilizing

equity financing

The cash paid for interest on bonds payable is calculated as:

face amount times the stated interest rate

Which of the following is a characteristic of a liability?

A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events.

The market interest rate of a bond is:

An implied rate based on the price investors pays to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.

When a contingent event that may give rise to a future loss is likely to occur, it is said to be

probable

a loss that is judged to be probable and for which the amount is reasonably estimable should be

recorded

common current liabilities include

sales tax payable, the current portion of a long-term debt and deferred revenues

Which describes a serial bond?

Matures in installments

Current liabilities

May include contingent liabilities

Callable bonds:

Provide potential benefits to the issuer

A company leases an office building for 24 months. At the beginning of the lease period, the lessee (user) would:

Record a lease asset Record a lease liability Record a lease for the present value of the 24 lease payments

A contingent liability that is probable and can be reasonably estimated must be

Recorded

In each succeeding payment on an installment note:

The amount that goes to interest expense decreases