Acct Chapters 7 & 8

On January 6, Year 1, Mount Jackson Corporation purchased a tract of land for a factory site for $1,500,000. An existing building on the site was demolished and the new factory was completed on October 11, Year 1. Additional cost data are shown below: -Construction cost of new building: $ 1,760,000 -Real estate and attorney fees: 15,400 -Architect fees: 138,000 Cost to demolish old building: 133,200 -Salvage recovery from old building: (11,000) Which of the following are the capitalized costs of the land and the new building, respectively? $1,637,600 and $1,898,000 $1,515,400 and $2,020,200 $1,648,600 and $1,887,000 $1,500,000 and $2,035,600

$1,637,600 and $1,898,000 Explanation Cost of land = Purchase price of $1,500,000 + Realtor's and attorney's fees of $15,400 fees + Cost to demolish old building of $133,200 − Salvage recovery from old building of $11,000 = $1,637,600 Cost of building = Construction cost of $1,760,000 + Architect's fees of $138,000 = $1,898,000

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 of service on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account. What is the amount of uncollectible accounts expense recognized on the Year 2 income statement? $320 $1,000 $2,080 $1,940

$2,080 Uncollectible accounts expense = Sales on account of $104,000 × 2% = $2,080

Anchor Company purchased a manufacturing machine with a list price of $160,000 and received a 2% cash discount on the purchase. The machine was delivered under terms free on board (FOB) shipping point, and transportation costs amounted to $2,400. Anchor paid $3,000 to have the machine installed and tested. Insurance costs to protect the asset from fire and theft amounted to $3,600 for the first year of operations. What is the cost of the machine? $156,800 $159,200 $165,800 $162,200

$162,200 Explanation: Cost of machine = List price of $160,000 − Cash discount of $3,200 ($160,000 × 2% discount) + Freight costs of $2,400 + Installation and testing costs of $3,000 = $162,200 The insurance cost is not included in the cost of the machine; it is expensed.

Emir Company purchased equipment that cost $110,000 cash on January 1, Year 1. The equipment had an expected useful life of six years and an estimated salvage value of $8,000. Emir depreciates its assets under the straight-line method. What are the amounts of depreciation expense during Year 3 and the accumulated depreciation at December 31, Year 3, respectively? $17,000 and $17,000 $17,000 and $68,000 $68,000 and $17,000 $17,000 and $51,000

$17,000 and $68,000 Explanation: Annual depreciation expense = (Cost of $110,000 − Salvage value of $8,000) ÷ 6 years = $17,000 Accumulate deprecation at end of Year 3 = Depreciation expense of $17,000 per year × 3 years = $51,000

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 Year 2, Kincaid reported $72,500 of credit sales, wrote off $550 of receivables as uncollectible, and collected cash from receivables amounting to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.What is the net realizable value of receivables that will be reported on Kincaid's Year 2 balance sheet? $29,075 $27,725 $28,950 $28,400

$27,725 Explanation: Ending accounts receivable = Beginning accounts receivable of $31,000 + Credit sales of $72,500 − Collections on account of $74,550 − Write-offs of $550 = $28,400 Ending allowance for doubtful accounts = Beginning allowance for doubtful accounts of $500 + Uncollectible accounts expense of $725 − Write-offs of $550 = $675 Net realizable value = Accounts receivable of $28,400 − Allowance for doubtful accounts of $675 = $27,725

On January 1, Year 1, Parker Company purchased an asset costing $20,000. The asset had an expected five-year life and a $2,000 salvage value. The company uses the straight-line method. What are the amounts of depreciation expense and accumulated depreciation, respectively, that will be reported in the Year 2 financial statements? $3,600 and $3,600 $3,600 and $7,200 $4,000 and $12,800 $4,000 and $7,200

$3,600 and $7,200 Explanation: Annual depreciation expense = (Cost of $20,000 − Salvage value of $2,000) ÷ 5 years = $3,600 Accumulated depreciation at end of Year 2 = Depreciation expense of $3,600 per year × 2 Years = $7,200

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 Year 2, Kincaid reported $72,500 of credit sales, wrote off $550 of receivables as uncollectible, and collected cash from receivables amounting to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.What is the amount of uncollectible accounts expense that will be reported on the Year 2 income statement? $310 $725 $745.50 $550

$725 Uncollectible accounts expense = Credit sales of $72,500 credit sales × 1% = $725

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

$97,000 The cash collected from accounts receivable in the amount of $97,000 will be reported as a cash inflow from operating activities.

A machine with a book value of $38,000 is sold for $32,000. Which of the following answers would accurately represent the effects of the sale on the financial statements?

(6,000) Not affected (6,000)Not affected 6,000 (6,000)32,000 Investing activity Explanation: The sale increases assets (cash) by $32,000, decreases assets (machine less its accumulated depreciation) by $38,000, for a net decrease in assets of $6,000. Because the machine is sold for $6,000 less than its book value, 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.

Anton Company paid cash to extend the life of one of its assets. Which of the following choices accurately reflects how this event would affect the financial statements?

+/− Not affected Not affectedNot affected Not affected Not affected−Investing activity Explanation: The expenditure decreases assets (cash) and increases assets (by decreasing accumulated depreciation, a contra asset account). It is reported as a cash outflow from investing activities.

Which of the following would most likely not be expensed using the straight-line method? A copyright A building A timber reserve A patent

A timber reserve Explanation: Depletion of natural resources, such as a timber reserve, is recognized in a similar fashion to the units-of-production method

Which of the following is the term commonly used to describe the practice of reporting the net realizable value of receivables in the financial statements? Cash flow method. Allowance method. Direct write-off method. Accrual method.

Allowance method Explanation Reporting accounts receivable in the financial statements at net realizable value is commonly called the allowance method of accounting for uncollectible accounts.

Which of the following terms is used to identify the expense recognition associated with intangible assets? Allocation Depletion Depreciation Amortization

Amortization Explanation: The costs of intangible assets with identifiable useful lives are normally expensed on a straight-line basis using a process called amortization.

On January 1, Year 1, Vanguard Company purchased a copyright for $12,000. Vanguard estimated the remaining useful life of the copyright to be 6 years. Which of the following correctly shows the effect of Vanguard's purchase of the copyright on the financial statements?

Assets: +/- Cash Flow: - Investing Activity Explanation: Purchasing the copyright decreases assets (Cash) and increases assets (Copyright), resulting in no net effect on assets. It is reported as a cash outflow from investing activities.

Which financial statement reports the amount of accumulated depreciation? Income statement Balance sheet Statement of cash flows Statement of stockholders' equity

Balance Sheet Explanation: Accumulated depreciation is a contra-asset account that is reported on the balance sheet.

Which of the following best describes the percent of receivables method? Income statement approach Direct write-off approach Credit sales approach Balance sheet approach

Balance Sheet Approach Explanation The percent of receivables method to estimate uncollectible accounts expense is frequently called the balance sheet approach because it uses a percentage of one balance sheet account (accounts receivable) to estimate another balance sheet account (allowance for doubtful accounts).

On January 1, Year 2, Ruiz Company spent $850 on a plant asset to improve its quality. Which of the following correctly shows the effects of the Year 2 expenditure on the financial statements?

Cash: (850) Equipment: 850 Cash Flow:(850) Investing activity Explanation: The expenditure, which improves an asset's quality, decreases assets (cash) by $850 and increases assets (Book Value of Equipment) by $850. It is reported as a cash outflow from investing activities.

Which of the following reflects the effect of the year-end adjustment to record estimated uncollectible accounts expense using the allowance method?

D. Assest: - Liabilities: N/A Equity: − Revenues: N/A Expense: + Net Income: − Cash Flow: N/A Recording uncollectible accounts expense decreases assets (increases allowance for doubtful accounts) and stockholders' equity (retained earnings). It increases expenses, which decreases net income. It does not affect the statement of cash flows.

At the end of the current accounting period, Ringgold Company recorded depreciation of $15,000 on its equipment. What is the effect of this event on the company's balance sheet? Decrease assets and increase liabilities Decrease stockholders' equity and decrease assets Decrease assets and increase stockholders' equity Decrease stockholders' equity and increase liabilities

Decrease stockholders' equity and decrease assets Explanation: Depreciation decreases assets (by increasing accumulated depreciation, a contra asset account) and stockholders' equity (retained earnings). It increases expenses, which decreases net income.

How does the year-end adjustment to recognize uncollectible accounts expense affect the elements of the financial statements? Decrease total assets and decrease stockholders' equity. Increase total assets and decrease stockholders' equity. Increase total liabilities and increase stockholders' equity. Decrease total liabilities and increase stockholders' equity.

Decrease total assets and decrease stockholders' equity. The adjustment will decrease assets (by increasing the allowance for doubtful accounts, a contra asset account) and stockholders' equity. It will increase expenses (uncollectible accounts expense), which decreases net income.

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 Year 2, Kincaid reported $72,500 of credit sales, wrote off $550 of receivables as uncollectible, and collected cash from receivables amounting to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.What effect will recognizing the uncollectible accounts expense for Year 2 have on the elements of the financial statements? Increase total assets and retained earnings Decrease total assets and increase retained earnings Decrease total assets and net income Increase total assets and decrease net income

Decrease total assets and net income Recognizing uncollectible accounts expense decreases assets (by increasing the allowance for doubtful accounts, a contra asset account) and stockholders' equity (retained earnings). It increases expenses, which decreases net income.

Which of the following terms is used to describe the process of expense recognition for property, plant and equipment? Amortization Depreciation Depletion Revision

Depreciation Explanation Depreciation is the process of expense recognition for property, plant and equipment. Amortization relates to intangible assets and depletion relates to natural resources. Although estimates may be revised, revision is not the name of a process of expense allocation.

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 Year 2, Kincaid reported $72,500 of credit sales, wrote off $550 of receivables as uncollectible, and collected cash from receivables amounting to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.Which of the following describes the effects of writing off the uncollectible accounts? Increase assets and stockholders' equity Increase assets and decrease stockholders' equity Decrease assets and stockholders' equity Does not affect assets or stockholders' equity

Does not affect assets or stockholders' equity The write-off decreases assets (accounts receivable) and increases assets (by decreasing the allowance for doubtful accounts, a contra asset account. Therefore, there is no effect on total assets or stockholders' equity.

What does the accounts receivable turnover ratio measure? How quickly accounts receivable turn into cash How quickly the accounts receivable balance increases Average balance of accounts receivables How quickly inventory turns into accounts receivable

How quickly accounts receivable turn into cash Explanation Dividing a company's sales by its net accounts receivable tells how many times the net accounts receivable balance is "turned over" (converted into cash) each year. The higher the turnover, the shorter the collection period.

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

Land Explanation Tangible assets, such as land, have a physical presence; they can be seen and touched. The other answer choices are examples of intangible assets. Although they may be represented by physical documents, intangible assets are, in fact, rights or privileges. They cannot be seen or touched. Copyright, goodwill, and trademark are all examples of intangible assets, as they do not have physical existence.

Which of the following is an asset that has an identifiable useful life? Goodwill Patents Renewable franchises Trademarks

Patents Explanation: Intangible assets with identifiable useful lives include patents and copyrights.

How is the accounts receivable turnover ratio computed? Sales ÷ Net accounts receivable Net accounts receivable ÷ Sales Cost of goods sold ÷ Inventory 365 days ÷ Net accounts receivable

Sales ÷ Net accounts receivable Explanation Accounts receivable turnover ratio = Sales ÷ Net accounts receivable

Which of the following is not an accurate description of the Allowance for Doubtful Accounts? The account is a contra account. The account is a liability. The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company's receivables. The account is increased by an estimate of uncollectible accounts expense.

The account is a liability Allowance for doubtful accounts is a contra asset account and decreases the net realizable value of receivables. In addition, the account is increased by an estimate of uncollectible accounts expense.

Which of the following is a true statement about a company that uses the allowance method? Uncollectible Accounts Expense is recorded when a receivable is written off. Uncollectible accounts are not recorded until the amount becomes significant. The net realizable value of its accounts receivable is shown on the balance sheet. None of these answer choices are correct.

The net realizable value of its accounts receivable is shown 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.

Which of the following is a cost of extending credit to customers? Uncollectible accounts expense Lost sales Fees paid to credit card companies Explicit interest

Uncollectible account expense Explanation Two costs of extending credit to customers are uncollectible accounts expense and clerical costs such as background checks and maintaining customer records. Additionally, there is an implicit cost associated with extending credit because the company forgoes the opportunity to invest the amount the customer owes.