Accounting exam 3 review

A company's employees earn $5,000 per day, work 5 days per week (Monday through Friday), and get paid each Friday. If the previous payday was January 26 and the accounting period ends on January 31, what is the ending balance in the wages payable account?

$ 15,000

Secured Bonds

Backed by specific assets that have been pledged as collateral.

Record Costs of Goods Sold

COGS xx Inventory xx

Which of the following best describes the behavior over time of the components of equal mortgage payments?

Interest expense decreases and reduction in principal increases

Interest expense=

Interest paid +/- discount/premium amortized for the period

Debentures (Unsecured Bonds):

No collateral.

Not for resale life > 1 year used in normal course of operations Property, plant, and equipment (often called fixed assets or plant assets) Intangibles Natural resources

Operating assets

Amortization of intangible assets

Over the shorter of the intangible asset's remaining legal life or useful life

Depreciation:

Systematically allocate the cost of a tangible fixed asset (other than land) to expense over the asset's useful life.

Term Bond

The bond principal is due in full at a single maturity date.

Serial Bond

The bond principal is repaid in installments over the maturity period.

Interest on a construction loan is

capitalized

An unsecured bond is also known as a

debenture bond.

Depletion

depletion rate x units recovered

Land improvements

driveways, parking lots, fences, and signs.

debt to equity =

total liabilities/total equity

Failure to record a liability probably will

result in an overstated net income

types of bonds

term bond serial bond secured bonds debentures (insecure bonds)

The cost of equipment

the invoice price less cash discounts, freight, insurance, taxes, tariffs, buying expenses, installation costs, and test runs.

15. Knollwood Corporation issued $296,000 of 30-year, 8 percent bonds at 106 on one of its semiannual interest payment dates. The straight-line method of amortization is to be used. How much bond interest expense will be recorded on the next interest payment date? a. $11,840 b. $11,240 c. $11,544 d. $12,136

$11,544 (296,000 x 0.06 = 17,760 period = 296) interest paid in cash = 296,000 x 0.08 x 6/12 = 11,840 - 296 = 11,544)

On January 1, 2017, $1,000,000, 10-year, 10% bonds, were issued at 97. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is

$250

A graphics design company issued bonds in the amount of $1,000,000 with a stated interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10 years, what would be the total amount of interest paid over the life of the bonds?

$800,000

Medicare Tax

1.45%

SSN/OASDI

6.2%

example: if quote is 95

= 95% of par value

fixed asset turnover rate

= net sales / average fixed assets

record sale of bonds at premium

Cash xx (amount received) Unamortized bonds premium xx (amount of premium) (premium bonds payable) Bonds payable xx (face value)

record sale of bonds at discount

Cash xx (amount received) Unamortized bond discount xx (amount of discount) (Discount on bonds payable) Bonds payable xx (face value)

Capital expenditures:

Extend the life of the asset, expand the productive capacity, increase efficiency, or improve the quality of the product. E.g., additions & betterments, extraordinary repairs (changing oil)

Carrying value of Bond =

Selling price +/- accumulated amortization of discount/premium

21. Assume a 5% interest rate, your grandfather would like to share his fortune with you by paying you $1,200 over 4 years. Which of the following cash-flow streams has the highest present value? Year1 Year2 Year3 Year4 a. $500 $400 $200 $100 b. $100 $200 $400 $500 c. $300 $300 $300 $300 d. Any of the above, since they each sum to $1,200.

a. $500 $400 $200 $100 (starts with the biggest i think

record purchase assets with a mortgage

assets xx mortgage pay xx(principal borrowed)

. If bonds are issued at par, it means that the a. financial strength of the issuer is suspect. b. market interest rate is the same as the stated/contractual interest rate. c. market interest rate is higher than the stated/contractual interest rate. d. market interest rate is lower than the stated/contractual interest rate..

b. market interest rate is the same as the stated/contractual interest rate. LSD (lower stated is discount) LMP (lower market is premium)

The cost of intangible assets with definite useful life should be amortized over a. 40 years. b. the shorter of its legal life or its useful life. c. the longer of its legal life or its useful life. d. its useful life.

b. the shorter of its legal life or its useful life.

16. Suffolk Corporation issued $90,000 of 20-year, 6 percent bonds at 98 on one of its semiannual interest payment dates. The straight-line method of amortization is to be used. How much bond interest expense will be recorded on the next interest payment date? a. $5,400 b. $2,700 c. $2,745 d. $5,445

c. $2,745 (90,000 - 90,000 x .98 = 1,800 /40 = 45 interest paid in cash = 90,000 x .06/2 =2,700 2,700 +45 = 2745

Bonds payable with face value of $500,000 and term of 20 years were issued on January 1, 2017, for $510,000. On the maturity date, what amount will the company pay to bondholders? a. $25,000 b. $510,000 c. $500,000 d. $2,550

c. $500,000 (pay face value)

13. The amortization of premium on bonds payable a. will increase bond interest expense. b. should take place over a period not to exceed 40 years. c. will decrease bond interest expense. d. will increase bond interest revenue.

c. will decrease bond interest expense.

record sale of bonds at face value (par)

cash xx(amount received) bonds payable xx(face value)

The exclusive right to reproduce and sell a literary, artistic, or musical work is called a

copyright

Current Ratio

current assets/current liabilities

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a a. debit to the Mortgage Payable account for $600,000. b. credit to the Cash account for $600,000. c. debit to the Cash account for $600,000. d. credit to the Mortgage Payable account for $600,000.

d. credit to the Mortgage Payable account for $600,000. (monthly payment x .10) = 550... 550+5,500) (debit to building account)

An asset that costs $7,000 and has accumulated depreciation of $5,200 is sold for $1,000. The ensuing journal entry would include a

debit to Loss on Sale of Asset for $800

Salaries expense - $12,000 Social security and Medicare taxes withheld - 550 Income taxes withheld - 2,500 Medical insurance deductions - 250 Life insurance deductions - 200 Salaries subject to federal and state unemployment taxes of 6.2 percent - 4,000 The entry to record the payment of net payroll would include a a. debit to Salaries Payable for $12,000. b. debit to Salaries Payable for $8,500. c. debit to Salaries Payable for $7,950. d. credit to Cash for $9,050.

debit to Salaries Payable for $8,500. (subtract everything except employment because employer pays that)

A corporation issues bonds that pay interest each April 1 and October 1. The corporation's December 31 adjusting entry could include a

debit to Unamortized Bond Premium.

Interest on a loan to purchase an asset is

expensed

record depletion

inventory xx accumulated depletion xx

Current Liabilities

liabilities due within a short time, usually within a year or operating cycle

The cost of an asset constructed

materials, labor, overhead, architects' and lawyers' fees, insurance during construction, and interest on a construction loan.

maturity $ =

principal +interest

when are liabilities recognized

when goods or services are received, or money is borrowed.

The Relationships between Stated Interest Rate and Yield

yield<stated(premium) yield=stated(par) yield>stated(discount)

A company purchases a coal mine for $1,000,000. It estimates that the mine contains 5,000,000 tons of coal and has a five-year life with no salvage value. If the company extracts and sells 800,000 tons during the first year, how much accumulated depletion should be recorded?

$160,000

Focal Point Engineering purchased a trademark at the beginning of 2017 for $200,000. Although the trademark's legal life is 20 years, economic benefits were expected for only 10 years. Also, during 2017, the company incurred research and development costs of $200,000. The book value of the trademarks at December 31, 2017, is

$180,000

Assume the tax rate in your state is 8%. Your cash register does not have a key for sales tax. However, the total amount of cash received for sales and sales tax during the month of June was $27,000. Sales for the month of June totaled

$25,000

On January 1, a company vehicle with a useful life of eight years and a residual value of $1,000 was purchased for $25,000. What is the depreciation expense in year 3 under straight-line depreciation?

$3,000

During July, Audio City sold 200 radios for $50 each. Each radio had cost Audio City $32 to purchase and carried a two-year warranty. If 5 percent typically need to be replaced over the warranty period and one actually is replaced during July, for what amount in July should Audio City debit Product Warranty Expense?

$320

When the market rate of interest was 9%, Kennesaw Van Lines leased several transfer trucks. The annual payments are $1,000,000 and the life of the lease is 8 years. It is estimated that the useful life of the trucks is 10 years. The present value interest factors for 9% are provided below: n PV($1) PV(annuity) 8 0.502 $5.535 9 0.46 $5.995 10 0.422 $6.418 The company should record the acquisition of the trucks (rounded to nearest thousand) as an asset with a cost of:

$5,535,000.

A company issues $200,000 of 20-year, 6 percent bonds at 95. If interest is paid semiannually, what is the amount of bond interest expense recorded (assuming straight-line amortization) on any interest date?

$6,250

Equipment was purchased for $17,000. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

((17,000+700+2,000)-3,000)/5= ($3,340)

Straight-Line Method

((cost - residual life)/expected useful life)

depletion rate

(cost - residual value) / recoverable units

Selling price of bonds =

(interest paid X present value ) + (principal paid X present value)

Elway Company purchases land for $85,000 cash. Elway assumes $2,500 in property taxes due on the land. The title and attorney fees totaled $1,000. Elway has the land graded for $2,200. They paid $10,000 for paving of a parking lot. What amount does Elway record as the cost for the land?

. $90,700

Keystone Corporation's balance sheet showed the following liability and stockholders' equity amounts: Current Liabilities, $100,000; Bonds Payable, $150,000; Capital Lease Obligations, $20,000; Deferred Income Tax Liability, $5,000; and total stockholders' equity, $500,000. The debt-to-equity ratio is

0.55

2 entries for disposal of fixed assets

1) An entry to record depreciation expense up to the date of disposal. 2)An entry to: a - Remove the asset's book value (the cost of the asset and the related accumulated depreciation) b- Record a gain or loss on disposition of the asset, which is computed as the difference between the proceeds from the sale and the book value of the asset.

Three basic cash flows the issuing corporation must account for:

1) Cash received when the bonds are issued (the issue or selling price) 2) Interest payments = principal x interest rate x period (fraction of a year) 3) Repayment of the principal (or face value)

3 Factors in Depreciation

Cost of the fixed asset residual value (salvage value) and useful life.

Which of the following statements is not true about goodwill?

It should be expensed in the year acquired

Which of the following assets is not subject to depreciation, depletion, or amortization? a.Gas fields b.Patents c.Land improvements, such as parking lots and fences d.Land

Land

Revenue expenditures:

Not increase the future economic benefits of the asset.

Contingent Liabilities

Not recognized unless the occurrence of the event is probable AND the loss could be reasonably estimated. E.g., pending lawsuits, tax disputes. (Contingent liabilities ≠ commitment)

Gainesville Truck Center has a weekly payroll of $100,000 for its employees. Federal and state income taxes are withheld in the amounts of $17,000 and $4,000, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. Which of the following statements is true regarding the entry to record wages and the related liabilities?

Social security tax payable will be credited in the amount of $6,200.

example of interest rate relationships

Yield = 8% ($80 return) state interest rate = 10% ($100 return) (premium) We would rather use the state interest rate (higher return)

Liquidity

a company's ability to meet its short-term obligations

Gunder Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $18,900. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $900 b. $945 c. $45 d. It cannot be determined.

a. $900 (18,900/ 1.05) = 18,000......18,900-18,000 = 900

Current liabilities include

accounts payable sales tax unearned revenue short term notes payable current portion of long term NP Payroll

intangible assets

assets that do not have physical substance: Examples: Patents, copyrights, trademarks, leaseholds, franchises, and goodwill. Intangible assets are recorded at cost. The cost of an intangible asset is any expenditure necessary to acquire the asset and to prepare the asset for use. Research and development (R&D) expense: Not intangible assets. Expensed.

12. Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage at the end of the first month will be a. $595,000. b. $599,500. c. $600,000. d. $594,500.

b. $599,500. ((10%/12)x 600,000 = 5000 monthly interest) (5,500 - 5000 = 500(reduction amount) then (600,000 - 500 = 599,500)

When the yield/market rate of interest is greater than the contractual/stated rate of interest

bonds will be issued at a discount

The following costs were incurred to acquire and prepare land for a new parking lot: purchase price of land, $900,000; cost to clear the land, $40,000; cost of paving, $35,000; and cost of lighting for the parking lot, $20,000. How much should be recorded in the Land Improvements account? a. $20,000 b. $35,000 c. $55,000 d. $40,000

c. $55,000 (paving + lighting) other two are cost of land not improvement (land improvement has limited life)

14. Fast Corporation borrowed $150,000 on March 1, 2017, signing a one-year, 7% note payable to City Bank. The adjusting entry required on December 31, 2017, includes a a. debit to Interest Expense of $10,500. b. debit to Cash of $180,000. c. credit to Interest Payable of $8,750. d. credit to Interest Revenue of $8,750.

c. credit to Interest Payable of $8,750. ((150,000 x .07 x (10/12)) (not interest revenue because you borrowed money so you need to pay interest)

Westot's Retail Store regularly makes payments to a state government for the sales taxes resulting from its sales to customers. These sales taxes a. should appear on Westot's income statement as an expense. b. are based upon a company's gross profit in most states. c. are long-term liabilities when they have been paid. d. are collected by Westot's as an agent for the state's taxing authority

d. are collected by Westot's as an agent for the state's taxing authority because its the state tax so the employers are responsible

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

debit to the Interest Expense account for $5,000

The cost of tearing down a building situated on land just purchased should be

debited to the Land account

On October 1st, a company borrowed $60,000 from Eighth National Bank on a 1-year, 7% note. If the company's fiscal year ends on December 31st, a year-end adjusting entry is required to increase

interest payable by $1,050

record monthly mortgage payment

mortgage payable xx(decrease principal) mortgage interest expense xx (interest cash xx(monthly payment)

types of intangible assets

patents, copyrights, trademarks, franchises, goodwill

interest =

principal x annual interest rate x fraction of 1 year

The cost of buildings purchased

purchase price and repairs to make the building usable.

Cost of Land

real estate commissions, lawyers' fees, accrued taxes paid by the buyer, razing a building, draining, clearing, grading, assessments, and landscaping.

Which of the following is not an intangible asset: a. Research and development costs b. Copyrights c. Franchise and licenses d. Goodwill

research and development costs