Accounting final exam

On September 1, Year 1, West Company borrowed $56,000 from Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. West Company has a calendar year-end. What is the amount of interest expense that will be reported on West's income statement for Year 1?

$1,120 Interest expense (September 1 through December 31) = $56,000 × 6% × (4 ÷ 12) = $1,120

On September 1, Year 1, West Company borrowed $10,000 from Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. West Company has a calendar year-end. What is the amount of interest expense that will be reported on West's income statement for Year 1?

$200 Interest expense (September 1 through December 31) = $10,000 × 6% × (4 ÷ 12) = $200

On January 1, Year 1, Mahoney Company borrowed $172,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $40,825. What is the amount of principal repayment included in the payment made on December 31, Year 1?

$27,065 ear 1 Interest expense = Principal balance on January 1 of $172,000 × 8% = $13,760 Year 1 Principal repayment = Payment of $40,825 − Interest portion of $13,760 = $27,065

Madison Company issued an interest-bearing note payable with a face value of $13,200 and a stated interest rate of 8% to Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, what is the amount of cash flow from operating activities reported on Madison's Year 1 statement of cash flows?

$0 The $13,200 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.

Curtain Co. paid dividends of $7,000, $12,000, and $12,000 during Year 1, Year 2, and Year 3, respectively. The company had 2,000 shares of 5.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. What is the total amount of dividends paid to common shareholders during Year 3?

$1,000 Preferred dividend = 2,000 Outstanding shares × Par value of $100 per share × 5.0% = $10,000Dividends in arrears at end of Year 1 = Preferred dividend of $10,000 − Dividends paid in Year 1 of $7,000 = $3,000Dividends in arrears at end of Year 2 = Preferred dividend of $10,000 + Dividend in arrears from Year 1 of $3,000 − Dividends paid in Year 2 of $12,000 = $1,000Year 3 Dividends to common shareholders = Dividends paid in Year 3 of $12,000 − (Preferred dividend of $10,000 + Dividend in arrears from Year 2 of $1,000) = $1,000

Kier Company issued $540,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 5-year term to maturity. The bonds have a 6.00% stated rate of interest and interest is payable in cash on December 31 each year. Based on this information alone, what are the amounts of interest expense and cash flows from operating activities, respectively, that will be reported in the financial statements for the year ending December 31, Year 1?

$32,400 and $32,400 Payment of interest = Face value of $540,000 × .060 = $32,400 The payment of interest on December 31, Year 1, increases interest expense by $32,400 and is reported as a cash outflow for operating activities.

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. After the purchase of treasury stock, the number of outstanding shares of common stock was which of the following?

$55,500 Outstanding shares = 66,000 Issued shares - 10,500 Treasury shares = 55,500

For the year ended December 31, Year 1, Fields Company made cash payments of $54,900 for dividends, paid interest of $23,700, paid $32,900 cash to suppliers, and purchased equipment for $70,900 cash. What is the net cash used by investing activities for Year 1?

$70,900 The $70,900 paid to purchase equipment is reported as a cash outflow in the investing activities section

A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000. What is the company's current ratio?

1.44 to 1 Current ratio = $8,650 ÷ $6,000 = 1.44 to 1

Which of the following items would be classified as a cash flow from investing activities? 1) Issue common stock for cash 2) Payment on principal of note payable 3) Payment of dividends 4) Sale of equipment for cash

4 only

If cash from operating activities was $33,000, cash used for investing activities was ($53,000) and the net change in cash was $61,200, what was cash from/used for financing activities?

81,200 Net change in cash of $61,200 = Cash flow from operating activities of $33,000 − Cash used in investing activities of $53,000 + Cash flow from financing activities (the unknown) Cash flow from financing activities = $61,200 − $33,000 + $53,000 = $81,200

Which of the following entities would have a "Paid-in Capital in Excess" account in the equity section of the balance sheet?

A corporation

Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?

Bonds are issued at premium

Which of the following is not an item deducted from salary expense to arrive at net pay?

Federal unemployment

On January 1, Year 1, Strang Incorporated issued bonds with a face value of $500,000, a stated rate of interest of 8%, and a 5-year term to maturity. The effective rate of interest was 10%. Interest is payable in cash on June 30 and December 31 of each year. Which of the following statements is true?

The bond was issued at a discount, and each semiannual cash payment is $20,000 Semi-annual interest payment = Face value of $500,000 × 8% × ½ = $20,000

A discount or premium on bonds payable can be defined by which of the following statements?

The difference between the market price on the issue date and the face value

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

The outcome is probable and can be reasonably estimated

Fixit Corporation issued 42,000 shares of $10 par value common stock at its current market price of $34. How does this event affect total stockholders' equity?

it increases by $1,428,000 The event increases assets and stockholders' equity by $1,428,000 (or $34 per share × 42,000 shares). The increase in stockholders' equity is divided into two parts, $420,000 of par value (or $10 per share × 42,000 shares) and $1,008,000 ($1,428,000 − $420,000) received in excess of par value.

What is not normally a preference given to the holders of preferred stocks

the right to vote before the common stockholders at the corporation's annual meeting

Chico Company borrowed $40,000 on a four-year, 8% installment note. How will Chico record the issuance of this note?

Cash 40,000 Notes Payable 40,000

How is the cash paid to purchase land reported in the statement of cash flows?

Cash outflow from investing activities

Which form of business organization is established as a separate legal entity?

Corporation

What is another term used to describe unsecured bonds?

Debentures

Which of the following describes the effect of remitting the sales tax to the tax authority?

Decrease liabilities

A corporation must record a liability for cash dividends on the date of record. True or False

False

Lack of ease in transferability of ownership is one of the disadvantages of the corporate form of business organization. True or False

False

The class or type of stock that every corporation must have is preferred stock. True or False

False

Van Buren Corporation issued 5,000 shares of $6 par common stock for $24 per share. For this transaction, Common Stock should be credited (increased) for $120,000. True or False

False The common stock account should only be credited for $30,000 (or 5,000 shares × Par value of $6 per share)

The study of an individual financial statement item over several accounting periods is called:

Horizontal analysis

Common methods of financial statement analysis include all of the following except:

Incremental analysis

Which of the following statements is true regarding the straight-line method of amortizing discounts and premiums on bonds?

It assigns the same amount of interest to each period over the life of the bond

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default?

Mortgage bond

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

Number of shares authorized

Which of the following items would most likely not be classified as a current asset?

Office equipment

How are cash receipts from interest on a note receivable classified on a statement of cash flows prepared using the direct method?

Operating activity

Which of the following best describes how each share of par value stock issued is reported in the Common Stock account?

Par or stated value

What is true about par value?

Par value has little connection to the market value of stock

Which of the following would not be a cash flow from financing activities?

Payment of interest on bonds payable

What describes an installment note?

Requires equal payments of interest and principal in which the amount of interest decreases over the life of the note

Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?

Tax-deductibility of interest

On January 2, Year 1, Torres Corporation issued 18,000 shares of $12 par-value common stock for $20 per share. Which of the following statements is true?

The paid in-capital in Excess of par value account will increase by $144,000 (18,000 x $8).

When calculating interest expense on a 6-month note, multiply the principal by the interest rate, and then multiply by (6 ÷ 12). True or False

True

How is treasury stock reported on a corporation's balance sheet?

as a deduction in determining total stockholders equity

All of the following are considered to be measures of a company's short-term debt-paying ability except: a. Current ratio b. Earnings per share c. Inventory turnover d. Average collection period

b. earnings per share

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

reduces the amount of interest expense each year