Financial Accounting Chapter 5B

On January 6, Year 1, the 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 construction of the new factory building was completed on October 11, Year 1. Additional cost data are shown below: Construction cost of new building$1,760,000Realtor's and attorney's fees 15,400Architect's fees relating to construction of new building 138,000Cost to demolish old building 133,200 Salvage recovery from old building(11,000) Which of the following correctly states the capitalized cost of the land and the new factory building, respectively?

$1,637,600 and $1,898,000

Madison Company owned an asset that had cost $44,000. The company sold the asset on January 1, Year 4, for $16,000. Accumulated depreciation on the day of sale amounted to $32,000. Based on this information, the sale would result in a:

$16,000 cash inflow in the investing activities section of the cash flow statement.

Anton Co. uses the perpetual inventory method. Anton purchased 400 units of inventory that cost $12.00 each. At a later date the company purchased an additional 600 units of inventory that cost $16.00 each. If Anton uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be:

$9,600. Explanation: (400 x $12.00) + (300 x $16.00) = $9,600.

Which of the following statements is a reason why a company would buy treasury stock?

- Because management believes the market price of stock is undervalued. - To have stock available to issue to employees in stock option plans. - To avoid a hostile takeover. - All of these are reasons a company would buy treasury stock.

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 the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. The amount of uncollectible accounts expense recognized in the Year 2 income statement will be:

72,500 times 1 % 725

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account. During the accounting period the business borrowed $30,000 from a bank, earned $18,000 of net income, and Scott withdrew $12,000 cash from the business. Based on this information, at the end of the accounting period Scott's capital account contained a balance of:

81,000 75,000 + 18,000 - 12,000 = 81,000

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value − common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

82,500 660,000 / $8

On January 1, Year 1, Missouri Company purchased a truck that cost $57,000. The truck had an expected useful life of 10 years and a $6,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is:

9120

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. What value will be recorded for the building?

950,000

Which of the following statements best describes the term "par value?"

An amount used in determining a corporation's legal capital

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400.

Which of the following represents the impact of a taxable cash sale of $840 on the accounting equation if the sales tax rate is 5%?

An increase to cash for $882, an increase to sales tax payable for $42, and an increase to sales revenue for $840.

Laramie Company paid $800,000 for a purchase that included land, building, and office furniture. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Land, $100,000; Building, $740,000; and Office Furniture, $160,000. Based on this information, the cost that would be allocated to the land is:

Calculation of the cost that should be allocated to the land: The cost that should be allocated to the land = $800,000 * 10% = $80,000 Explanation: Percentage of cost that would be allocated to the land = $100,000 / ($100,000 + $740,000 + $160,000) = $100,000 / $1,000,000 = 10%.

Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:

Increases by 640,000

Bonds payable are usually classified on the balance sheet as:

Long-term liabilites

Which of the following is not an advantage of accepting credit cards from retail customers?

There are fees charged for the privlege of accepting credit cards

When do the effects of product warranties appear on the statement of cash flows?

When there is a settlement of a warranty claim made by a customer.

The net effect of the entries to recognize the receipt of a previously written-off account under the allowance method is to:

have no effect on stockholders' equity

The issuance of a stock dividend will:

not affect total equity

When the common stock account is disclosed on the balance sheet, it is reported at:

par or stated value

Anton Co. uses the perpetual inventory method. Anton purchased 680 units of inventory that cost $8 each. At a later date the company purchased an additional 810 units of inventory that cost $10 each. If Anton uses the FIFO cost flow method and sells 1,050 units of inventory, the amount of cost of goods sold will be:

$9,140. Explanation: (680 x $8) + (370 x $10) = $9,140.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

24,800 1620 5491

Monthly remittance of sales tax:

Reduces liabilities.

Which of the following entities would report income tax expense on its income statement?

a corporation

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

Number of shares authorized

On January 2, Year 1, Torres Corporation issued 20,000 shares of $10 par-value common stock for $11 per share. Which of the following statements is true?

The paid-in capital in excess of par value account will increase by $20,000.

The inventory records for Radford Co. reflected the following Beginning inventory @ May 1 = 400 units @ $2.40 First purchase @ May 7 = 500 units @ $2.60 Second purchase @ May 17 = 700 units @ $2.70 Third purchase @ May 23 = 300 units @ $2.80 Sales @ May 31 = 1,500 units @ $4.30 Determine the amount of gross margin assuming the weighted average cost flow method. (Round your intermediate calculations to 2 decimal places.)

$2,505. Explanation: [(400 x $2.40) + (500 x $2.60) + (700 x $2.70) + (300 x $2.80)] / 1,900 units = $2.63 per unit. (1,500 x $4.30) - (1,500 x $2.63) = $2,505.

The inventory records for Radford Co. reflected the following Beginning inventory @ May 1 = 100 units @ $4.00 First purchase @ May 7 = 300 units @ $4.40 Second purchase @ May 17 = 500 units @ $4.60 Third purchase purchase @ May 23 = 100 units @ $4.80 Sales @ May 31 = 900 units @ $7.80 Determine the amount of gross margin assuming the weighted average cost flow method.

$2,970. Explanation: [(100 x $4.00) + (300 x $4.40) + (500 x $4.60) + (100 x $4.80)] / 1,000 units = $4.50 per unit. (900 x $7.80) - (900 x $4.50) = $2,970

The inventory records for Radford Co. reflected the following Beginning inventory @ May 1 = 400 units @ $2.40 First purchase @ May 7 = 500 units @ $2.60 Second purchase @ May 17 = 700 units @ $2.70 Third purchase @ May 23 = 300 units @ $2.80 Sales @ May 31 = 1,500 units @ $4.30 Determine the amount of cost of goods sold assuming the LIFO cost flow method.

$4,030. Explanation: (300 x $2.80) + (700 x $2.70) + (500 x $2.60) = $4,030.

The inventory records for Radford Co. reflected the following Beginning inventory @ May 1 = 1,100 units @ $3.80 First purchase @ May 7 = 1,200 units @ $4.00 Second purchase @ May 17 = 1,400 units @ $4.10 Third purchase @ May 23 = 1,000 units @ $4.20 Sales @ May 31 = 3,600 units @ $5.70 Determine the amount of ending inventory assuming the FIFO cost flow method.

$4,610. Explanation: 4,700 units available for sale - 3,600 units sold = 1,100 units in ending inventory. (1,000 x $4.20) + (100 x $4.10) = $4,610.

The inventory records for Radford Co. reflected the following Beginning inventory @ May 1 = 100 units @ $4.00 First purchase @ May 7 = 300 units @ $4.40 Second purchase @ May 17 = 500 units @ $4.60 Third purchase @ May 23 = 100 units @ $4.80 Sales @ May 31 = 900 units @ $7.80 Determine the weighted average cost per unit for May.

$4.50. Explanation: [(100 x $4.00) + (300 x $4.40) + (500 x $4.60) + (100 x $4.80)] / 1,000 units = $4.50 per unit.

The inventory records for Radford Co. reflected the following Beginning inventory @ May 1 = 1,300 units @ $4.20 First purchase @ May 7 = 1,400 units @ $4.40 Second purchase @ May 17 = 1,600 units @ $4.50 Third purchase @ May 23 = 1,200 units @ $4.60 Sales @ May 31 = 4,200 units @ $6.10 Determine the amount of gross margin assuming the FIFO cost flow method.

$7,250. Explanation: (1,300 x $4.20) + (1,400 x $4.40) + (1,500 x $4.50) = $18,370 cost of goods sold. $25,620 sales - $18,370 cost of goods sold = $7,250.

Koontz Company uses the perpetual inventory method. On January 1, Year 1, the company's first day of operations, Koontz purchased 1,150 units of inventory that cost $5.50 each. On January 10, Year 1, the company purchased an additional 1,400 units of inventory that cost $7.50 each. If Koontz uses a weighted average cost flow method and sells 1,300 units of inventory, the amount of inventory appearing on balance sheet following the sale will be approximately: (Round your intermediate calculations to one decimal place.)

$8,250. Explanation: 1,150 units + 1,400 units - 1,300 units sold = 1,250 units in ending inventory. [(1,150 x $5.50) + (1,400 x $7.50)] / 2,550 = $6.60 per unit. 1,250 units x $6.60 = $8,250.

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Using double-declining-balance depreciation, what is the amount of depreciation expense and the amount of accumulated depreciation, respectively, that would appear on the December 31, Year 3 financial statements?

$960 and $24,000 ($34,000 + $2,000) × (2 × 20%) = $14,400 depreciation in Year 1 Ending book value in Year 1 = $36,000 − $14,400 = $21,600 $21,600 × (2 × 20%) = $8,640 depreciation in Year 2 Ending book value in Year 2 = $21,600 − $8,640 = $12,960 $12,960 − $12,000 salvage value = $960 depreciation expense in Year 3 ($12,960 × 40% would depreciate the office equipment below its $12,000 salvage value) $14,400 + $8,640 + $960 = $24,000 accumulated depreciation at the end of Year 3

Benitez Company had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information:

- Warranty expenses would decrease net earnings by $24,000 in Year 1. - Cash would decrease by $13,000 as a result of the accounting events associated with warranties in Year 1. - The warranties payable account would increase by $11,000 in Year 1. All of these answer choices are correct.

Curtain Company 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. The amount of dividends received by the common shareholders during Year 3 would be:

1,000

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

1,120 1,400 - (7% - 36,000)

Currie Company borrowed $21,000 from the Sierra Bank by issuing a 9% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,296. Based on this information, the amount of the interest expense associated with the second payment would be:

1,313 21,000 x .09 = 1890 8,296-1890 = 6406 21,000 -6,406 = 14,594 14,594 x .09 = 1,313 1210 3291

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. At the end of Year 5, assuming the equipment had not been sold, the book value of the office equipment using straight-line depreciation and double-declining-balance depreciation, respectively, would be:

12,000 & 12,000

At the end of the accounting period, Houston Company had $5,400 of par value common stock issued, additional paid-in capital in excess of par value − common of $6,400, retained earnings of $6,500, and $2,750 of treasury stock. The total amount of stockholders' equity is:

15,550 5,400 + 6,400 + 6,500 - 2,750 = 15,550

Chico Company paid $950,000 for a basket purchase that included office furniture, a building and land. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Office furniture $190,000; Building $740,000, Land $132,000. Based on this information, the amount of cost that would be allocated to the office furniture is closest to:

171,000

On January 1, Year 1, Phillips Company made a basket purchase including land, a building and equipment for $380,000. The appraised values of the assets are $20,000 for the land, $340,000 for the building and $40,000 for equipment. Phillips uses the double-declining-balance method of depreciation for the equipment which is estimated to have a useful life of four years and a salvage value of $5,000. The depreciation expense for Year 1 for the equipment is:

19,000

The Miller Company recognized $190,000 of service revenue earned on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from accounts receivable. The company estimates that it will be unable to collect 3% of its sales on account. The net realizable value of Miller's receivables at the end of Year 2 was:

190,000 - 136,000 = 54,000 190 times 3% = 5,700 54,000 - 5,700

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

37,890 and 0

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. The number of outstanding shares of common stock was:

55,500 66,000 - 10,500

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $16,000, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:

600.

The term "Retained Earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

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

As a deduction from total stockholders' equity, following retained earnings

The term "double taxation" refers to which of the following?

Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on the dividends they receive from the corporation.

Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?

Ending inventory will be lower if Blake uses the weighted average cost flow method than if the FIFO cost flow method was used.

Blake Company purchased two identical inventory items. The item purchased first cost $30.00, and the item purchased second cost $31.00. Blake sold one of the items for $56.00. Which of the following statements is true?

Ending inventory will be lower if Blake uses weighted average than if FIFO were used. Explanation: If Blake uses weighted average, ending inventory will be $30.50. If the company uses FIFO, ending inventory will be $31.00.

Houff Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company's accounting equation?

Have no effect on total assets, liabilities or stockholders' equity

Which financial statement(s) is (are) affected when depreciation expense is recognized?

Income statement and Balance Sheet

Ogilvie Corporation issued 12,000 shares of no-par stock for $40 per share. Ogilvie was authorized to issue 35,000 shares. What effect will this event have on the company's financial statements?

Increase assets by $480,000, increase stockholders' equity by $480,000.

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of net income on the Year 2 income statement would be:

Interest expense on note issued = 36,000 * 7% * 3 months /12 months = 630 Net income = Cash revenue earned - interest expense = 1400 - 630 = 770

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

At the end of the current accounting period, Ringgold Company recorded depreciation of $15,000 on its equipment. The effect of this entry on the company's balance sheet is to decrease:

Stockholders' equity and decrease assets.

Which of the following is not normally a preference given to the holders of preferred stock?

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

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

Zero Nore payable is not a cash flow from operating activities it will come under cash flow from financing activities. Cash flow that are used to finance company and repay those financial obligation is called Cash flow from financial activities. Therefore., amount of cash flow from operating activities = $0.

At the time that Kirby Company issued a 2-for-1 stock split, the company had 5,000 shares of $6 par value common stock outstanding. Stockholders' equity also contained $15,000 of additional paid-in capital and $22,000 of retained earnings. Immediately after the stock split the:

balance in the common stock account would amount to $30,000.

Interest charges on notes payable may be based on a(n)

fixed or variable interest rate

Hoover Company purchased two identical inventory items. The item purchased first cost $35.00. The item purchased second cost $38.50. Then Hoover sold one of the inventory items for $60. Based on this information, the amount of:

gross margin is $23.25 if Hoover uses the weighted average cost flow method. Explanation: If Hoover uses LIFO, cost of goods sold will be $38.50 (most recent purchase) and ending inventory will be $35.00, not $38.50. If Hoover uses weighted average, the weighted average cost per unit is $36.75. Therefore, gross margin will be $23.25 ($60 Sales - $36.75 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $35.00 (earliest purchase), not $38.50.

Hoover Company purchased two identical inventory items. The item purchased first cost $33.00. The item purchased second cost $35.00. Then Hoover sold one of the inventory items for $62.00. Based on this information, the amount of:

gross margin is $28.00 if Hoover uses the weighted average cost flow method. Explanation: If Hoover uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $33.00, not $35.00. If Hoover uses weighted average, the weighted average cost per unit is $34.00. Therefore, gross margin will be $28.00 ($62.00 Sales - $34.00 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $33.00 (earliest purchase), not $35.00.

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will

increase liabilities and decrease stockholders' equity by $2,000.

On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

reduce total stockholders' equity by $4,375.

Barker Company paid cash to purchase two identical inventory items. The first purchase cost $18.00, and the second cost $20.00. Barker sold one inventory item for $30.00 cash. Based on this information alone, without considering the effect of income tax:

the amount of cash flow from operating activities is not affected by the cost flow method. Explanation: Regardless of the cost flow assumption, Barker reported outflow of $38.00 for the purchases of the two items and inflow of $30.00 for the sale of one item.