Exam 3

how is the cash ratio calculated

(Cash + Marketable securities)/ Current liabilities

bonds are sold at premium if the

market rate of interest was less than the stated rate at the time of issue

Authorized stock represents the

maximum number of shares that can be issued

when bonds are issued at a premium, the interest expense for the period is the amount of interest payment for the period

minus the premium amortization for the period

ABC Advisors is being sued by a former customer. ABC's lawyers say that it is possible, but not probable, that the company will lose the lawsuit and the trial should last approximately 18 more months. Should ABC lose, they will most likely have to pay approximately $750,000. How should this lawsuit be reported in the financial statements?

no effect on the balance sheet or income statement, but described in the footnotes

contingent liabilities

obligation whose amount or timing is uncertain and depends on future events. Ex. a firm may be contingently liable for damages under a lawsuit that has yet to be decided by the courts

when bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period

plus the discount amortization for the period

The bond issue price is determined by calculating the

present value of the stream of interest payments and the present value of the maturity amount

What is the effect of a stock dividend on stockholders equity

total stockholders equity stays the same

when a company declares a 3 for 1 stock split, the number of shares

triples

when a credit is made to federal income taxes withholding payable account related to taxes withheld from an employee, the corresponding debit is made to

wages expense

when should a contingent liability be recognized

when a reasonable estimation can be made and when the contingent liability is probable

Bower Company sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7%, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.) Interest Expense Cash Interest Expense Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash

Interest Expense Discount on Bonds Payable Cash

In 2019, Drew Company issued $200,000 of bonds for $189,640. If the stated rate of interest was 6% and the yield was 6.73%, how would Drew calculate the interest expense for the first year on the bonds using the effective interest method? $189,640 × 8% $189,640 × 6.73% $200,000 × 8% $200,000 × 6.73%

b

Sean Corp. issued a $40,000, 10-year bond, with a stated rate of 8%, paid semiannually. How much cash will the bond investors receive at the end of the first interest period? $800 $1,600 $3,200 $4,000

b $40,000 x 0.08 = $3,200/year x 6/12 = $1,600

What best describes the discount on bonds payable account? A liability An asset A contra liability An expense

contra liability

RVR Enterprises shows net income of $100,000 for 2023 and retained earnings of $500,000 on its December 31, 2023 balance sheet. During the year, RVR declared and paid $60,000 in dividends. What was RVR's retained earnings balance at December 31, 2022? $400,000 $440,000 $460,000 $540,000

4600000

how is the current ratio calculated

Current assets/ current liabilities

Kramerica Inc. sold 350 oil drums to Thompson Manufacturing for $75 each. In addition to the $75 sale price per drum, there is a $1 per drum federal excise tax and a 7% state sales tax. What journal entry should be made to record this sale?

Debit Accounts Receivable 28,438; credit Excise Taxes Payable (Federal) 350; credit Sales Taxes Payable (State) 1,838; credit Sales Revenue 26,250.

Kinsella Seed borrowed $200,000 on October 1, 2023, at 10% interest. The interest and principal are due on October 1, 2024. What journal entry should be recorded on Dec. 31, 23?

Debit Interest Expense 5000; credit interest payable 5000

Kinsella Seed borrowed $200,000 on October 1, 2023, at 10% interest. The interest and principal are due on October 1, 2024. What journal entry should be made with respect to the interest payment on Oct. 1 24

Debit interest Expense 15000; debit interest payable 5000; credit cash 20000

When reporting liabilities on a balance sheet, in theory, what measurement should be used?

Present value of the future outflow

Which of the following is true? a. No journal entries or footnotes are necessary if the probability of a contingent liability is remote. b. A contingent liability should always be recorded in the footnotes to the financial statements. c. A contingent liability should always be recorded within the financial statements. d. A company can choose to record a contingent liability either within its financial statements or in the footnotes to the financial statements.

a

which of the following is not an example of an accrued liability a. Accounts payable b. Interest payable c. Wages payable d. Property taxes payable

a

if bonds are issued at 101.25, this means that

a $1,000 bond sold for $1,012.50 (1000 x 1.0125)

the result of using the effective interest method of amortization of the discount bonds is that

a constant interest rate is charged against the debt carrying value

f a company purchases treasury stock for $6,000 and then reissues it for $5,000, the difference of $1,000 is:

a decrease is stockholders equity

installment bonds differ from typical bonds in what way

a portion of each installment bond payment pays down the principal balance

Harvey Corporation shows the following in the stockholders' equity section of its balance sheet: The par value of its common stock is $0.25 and the total balance in the Common Stock account is $50,000. Also noted is that 15,000 shares are currently designated as treasury stock. The number of shares outstanding is: 185,000. 196,250. 200,000. 215,000.

a. total stock issued (50000/.25) 200000 shares Less: Treasury Stock (15000) shares Total stock outstanding 185000 shares

Willow Corporation's balance sheet showed the following amounts: current liabilities, $5,000; bonds payable, $1,500; lease obligations, $2,300. Total stockholders' equity was $6,000. The debt to equity ratio is 1.47. 1.42. 0.83. 0.63.

a. Debt to equity = total liabilities/ total equity

Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds? $120,000 $60,000 $30,000 $6,000

b $100,000 x 0.06 = $6,000/year x 10 = $60,000

the premium on bonds payable account is shown on the balance sheet as

am addition to a long-term liability

Serenity Company issued $100,000 of 6%, 10-year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,732. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually. Amortization of the premium for the first interest period will be $1,464. Amortization of the premium for the first interest period will be $613. Interest payments to bondholders each period will be $5,000. Interest payments to bondholders each period will be $6,464.

b Interest payments = $100,000 x 0.06 = $6,000First period interest expense = $107,732 x 0.05 = $5,387First period premium amortization = $6,000 - $5,387 = $613

McKean Corporation authorized 500,000 shares of common stock in its articles of incorporation. On May 1, 100,000 shares were sold to the company's founders. However, on October 15, McKean repurchased 20,000 shares to settle a dispute among the founders. At this date, how many shares were issued and outstanding, respectively? 80,000 and 100,000 100,000 and 80,000 100,000 and 100,000 500,000 and 100,000

b. 100000 and 80000

DAE Parts Shop began business on January 1. The corporate charter authorized issuance of 20,000 shares of $5 par value common stock and 5,000 shares of $10 par value, 5% cumulative preferred stock. DAE issued 12,000 shares of common stock at $25 per share on January 2. What effect does the entry to record the issuance of stock have on total stockholders' equity? increase of $340,000 increase of $300,000 increase of $150,000 increase of $120,000

b. 12,000 shares x $25/share = $300,000 increase to stockholders' equity

Which of the following statements regarding the new accounting rules, which take effect in 2019, for leases is false? a. If the lease term is one year or longer, a liability must be recognized. b. If the lease term is less than one year, an asset must be recognized. c. The new lease accounting rules will result in more assets and liabilities being recognized on the balance sheet. d. Leasing will likely remain popular under the new lease accounting rules because leases do not require a large initial outlay of cash.

b. If the lease term is less than one year, an asset must be recognized.

Which of the following statements is true? a. The outstanding number of shares is the maximum number of shares that can be issued by a corporation. b. The shares that are in the hands of the stockholders are said to be outstanding. c. It is very unlikely that corporations will have more than one class of stock outstanding. d. Preferred stock is stock that has been retired.

b. The shares that are in the hands of the stockholders are said to be outstanding.

Bonds are a popular source of financing because

bond interest expense is deductible for tax purposes, while dividends paid on stock are not

Liabilities are recognized in exchange for

borrowing money, services, goods

Thornwood Partners began business on January 1. The corporate charter authorized issuance of 75,000 shares of $1 par value common stock and 8,000 shares of $3 par value, 10% cumulative preferred stock. On July 1, Thornwood issued 20,000 shares of common stock in exchange for 2 years' rent on a retail location. The cash rental price is $3,000 per month, and the rental period begins on July 1. What is the correct entry to record the July 1 transaction? Debit to Cash, $72,000; credit to Prepaid Rent, $57,600 Debit to Prepaid Rent, $72,000; credit to Common Stock, $72,000 Debit to Prepaid Rent, $72,000; credit to Common Stock, $20,000; credit to Additional Paid-In Capital—Common Stock, $52,000 Debit to Prepaid Rent, $72,000; credit to Common Stock, $60,000; credit to Additional Paid-In Capital—Common Stock, $12,000

c

When a company purchases treasury stock, which of the following statements is true? Dividends continue to be paid on the treasury stock. It is no longer considered to be issued. The cost of the treasury stock reduces stockholders' equity. Treasury stock is considered to be an asset because cash is paid for the stock.

c

Which of the following statements regarding bonds payable is true? a. Generally, bonds are issued in denominations of $100. b. When an issuing company's bonds are traded in the ''secondary'' market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser. c. The entire principal amount of most bonds mature on a single date. d. A debenture bond is backed by specific assets of the issuing company.

c

all of the following represent taxes commonly collected by business from customers except a. City sales taxes b. Federal excise taxes c. Unemployment taxes d. State sales taxes

c

The balance of the $2.50 par value Common Stock account for Patriot Company was $240,000,000 before its recent 2-for-1 stock split. The market price of the stock was $50 per share before the stock split. What occurred as a result of the stock split? The balance in the common stock account was increase to $480,000. The balance in the retained earnings account decreased. The market price of the stock dropped to approximately $25 per share. The market price of the stock was not affected.

c $50 market price/2 = $25 per new share

Shea Company has 100,000 shares of 6%, $50 par value, cumulative preferred stock. In the prior year, no dividends were declared on preferred stock. This year, Shea was profitable and decided to pay dividends to stockholders of both preferred and common stock. If they have $750,000 available for dividends this year, how much could it pay to the common stockholders? $750,000 $450,000 $150,000 $0

c Preferred dividends: In arrears: (100,000 x $50) x 6% = $300,000 Current Year: (100,000 x $50) x 6% = $300,000 $750,000 - $600,000 = $150,000 left over for dividends to common shareholders

Kinsella Corporation's balance sheet showed the following amounts: current liabilities, $75,000; total liabilities, $100,000; total assets, $200,000. What is the long-term debt to equity ratio? 0.75 0.375 0.25 0.125

c. Long-Term debt to equity= long term debt/ total equity

Ames Corporation repurchases 10,000 shares of its common stock for $12 per share. The shares were originally issued at an average price of $10 per share. Later it resells 6,000 of the shares for $15 per share and the remaining 4,000 shares for $17 per share. How much gain or loss should Ames report on its income statement as a result of these transactions? $38,000 gain $20,000 loss and $38,000 gain $0 $20,000 loss

c. no gains or losses are recognized for treasury stock transactions

Which of the following is not a current liability a. Accounts payable b. Unearned revenue c. Sales taxes payable d. Bonds payable due in 5 years

d

Which of the following transactions would cause the current ratio to increase (assuming the current ratio is currently greater than 1)? Purchased inventory on credit Purchased property, plant, and equipment for cash Received money from a customer related to an accounts receivable Paid off a payable

d

Garner Corporation issued $50,000 in common stock dividends. Its net income for the year was $250,000. What is Garner's dividend payout ratio? 5 2.5 0.5 0.2

d $50,000/$250,000 = 0.2

McLaughlin Corporation's balance sheet showed the following amounts: current liabilities, $75,000; total liabilities, $100,000; total assets, $200,000. What is the debt to total assets ratio? 2 1 0.875 0.50

d. Debt to total assets = total liabilities/ total assets

When a company retires its own common stock, the company must:

decrease the common stock account balances by the original issue price

Which of the following is not a component of stockholders' equity? retained earnings net income loss on sale of equipment dividends payable

dividends payable

FASB's concept of comprehensive income

excludes the payment of dividends

Payroll taxes typically include all of the following except Social Security taxes Federal excise taxes Medicare taxes Federal unemployment taxes

federal excise taxes

Comprehensive Income:

includes transactions that affect stockholders equity with the exception of those transactions that involve owners

when bonds are issued by a company, the accounting entry typically shows an

increase in assets an an increase in liabilities

A company would repurchase its own stock for all of the following reasons except: it wishes to prevent unwanted takeover attempts. it wishes to increase the earnings per share. it believes the stock is overvalued. it needs the stock for employee bonuses.

it believes the stock is overvalued

with regard to preferred stock

its stockholders may have the right to participate, along with common stockholders, if an extra dividend is declared.

When a company declares a cash dividend, which of the following is true? Assets are decreased. Assets are increased. Stockholders' equity is increased. Liabilities are increased.

liabilities are increased

accrued liabilities

liabilities that usually represent the completed portion of activities that are in process at the end of the period

warranty expense is

recorded in the period of sale

Which of the following should be considered when a company decides to declare a cash dividend on common stock? the retained earnings balance only the cash available and the retained earnings balance the amount of authorized shares of common stock the book value of the company's stock

the cash available and the retained earnings balance

as a result of a stock split

the par value of the stock is changed in the reverse proportion as the stock split

to record warranties, the AJE would be

to debit warranty expense and a credit to warranty liability