Financial Accounting Final Review
When a company declares a 2-for-1 stock split,
there is no effect on total stockholders' equity.
All of the following are reasons for a company to repurchase its previously issued stock, except
to increase the shares outstanding.
Darrin Brown bought a pub. The purchase price was $695,000. An appraiser provided the following appraisal values: land, $320,000; building, $370,000; and equipment, $60,000. What cost should be allocated to the building?
$342,867
When using the direct method, how is the purchase of equipment for cash shown on the statement of cash flows?
As an investing activity
One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching principle.
False
Matching Proceeds from the sale of a building
Investing
Matching Depreciation expense
Operating
Matching Payment of research and development costs
Operating
Which of the following statements about bonds is correct?
The cash interest paid is calculated as the bond face value × the face rate of interest.
A decreasing long-term liability account is presented on the statement of cash flows as
a decrease in cash in the Financing Activities category.
If a company borrows money from its bank and the bank deducts the interest in advance, the company would record the amount of the interest deduction as
a discount.
A mortgage incurred in exchange for an office building would be reported in the statement of cash flows in
a separate schedule.
With regard to preferred stock,
its stockholders may have the right to participate, along with common stockholders, if an extra dividend is declared.
Mendes Charters reported the following information at December 31, 2017: Preferred stock, $100 par, 500 shares authorized, and outstanding; cumulative; nonparticipating; callable at par value$ 50,000Common stock, $12 par, 50,000 shares authorized and outstanding600,000Additional paid-in capital—common25,000Retained earnings 825,000 Mendes' total contributed capital is
$675,000.
Pocono Co. purchased a patent at the beginning of 2017 for $490,000. Economic benefits were expected for seven years, but the patent's legal life was 20 years. Also, during 2017, the company incurred research and development costs of $150,000. Patent amortization expense for 2017 is
$70,000.
Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to
$90,900.
Washington Corp. reported the following information for 2017 and 2018: 20172018Accounts receivable$101,000$93,000Prepaid expenses5,0006,000Accounts payable71,00076,000Salaries payable5,0004,000Net income 80,000Depreciation expense 9,000Gain on sale of equipment 5,000 If Washington uses the indirect method to prepare the Operating Activities section of the statement of cash flows, what amount will be reported as net cash inflow from operating activities for 2018?
$95,000
A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are $14,350, then the quick ratio would be
1.2 to 1.
Chambersburg Corp. The following information is for Chambersburg Corp. for 2018 and 2017. Chambersburg uses the straight-line depreciation method. Property, plant, and equipment $ 250,000 -- $190,000 Accumulated depreciation 100,000 -- 85,000 Depreciation expense 62,500 -- 47,500 Net sales 1,000,000-- 900,000 Average total assets 625,000 -- 475,000 Refer to the information for Chambersburg Corp. Using the 2018 data, what is the average age of Chambersburg's property, plant, and equipment (rounded to two decimal places)?
1.60 years
A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then the quick ratio would be
1.75 to 1.
Dali Company has 15,000 shares of stock authorized at January 1. Dali issues 4,500 shares to the stockholders during the year and then the company repurchases 1,500 shares as treasury stock. Based on this information, how many shares are outstanding at December 31?
18,000
Frank Crawford Corporation's balance sheet showed the following amounts: Current Liabilities, $15,000; Bonds Payable, $8,000; Lease Obligations, $9,000; and Notes Payable, $5,600. Total stockholders' equity was $17,000. The debt-to-equity ratio is
2.21.
If you must calculate the present value of an amount at 12% compounded quarterly for two years, then the interest factor used in the calculation is
3% for eight periods.
Which of the following items is not a cash equivalent?
A corporate bond investment that has five years until maturity when it is purchased
A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first month of business. The lawyer's normal fee is $15,000 for similar work. Which of the following would be the impact on the accounting equation if the stock is not currently trading?
An increase to Additional Paid-In Capital—Common Stock of $5,000
When using the indirect method, how would the retirement of bonds payable at their maturity date be shown on the statement of cash flows?
As a financing activity
When using the direct method, how is the sale of long-term investments for cash reported on the statement of cash flows?
As an investing activity
Select the financial statement on which the user would most likely find the answer to the question given. (Select all that apply.) How much depreciation expense did the company report during the year?
Balance sheet & Income statement
Which of the following is not an operating activity?
Cash payments for dividends to stockholders
Which of the following statements regarding contingencies is true?
Contingencies that are probable and estimable must be recorded before the outcome of future events.
Matching The general ledger account that is supported by a subsidiary ledger.
Control account
Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet?
Current liability
Matching The recognition of bad debts expense at the point an account is written off as uncollectible.
Direct write-off method
Wexford Co. Wexford Co. purchased a new delivery truck at the beginning of 2017. The truck has a cost of $37,000, an estimated life of five years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2017. The truck was driven 20,000 miles during 2017 and 24,000 miles during 2018. The number of expected miles over five years is 100,000. Refer to the information about Wexford Co.Wexford Co. wants to use the depreciation method that will result in the highest depreciation expense for 2017. Which method should be used?
Double-declining-balance
A change in estimate of an asset's residual value involves restating the income statements of past periods for the estimate change.
False
If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the amount of the sale in case of nonpayment from a cardholder.
False
Interest is never a part of the cost of property, plant, and equipment or intangible assets.
False
Lewisburg Corp. had sales during the year of $15,000,000 and an average accounts receivable of $5,000,000. Its accounts receivable turnover ratio is 0.33 times.
False
Research and development costs should be presented as intangible assets.
False
The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.
False
The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period.
False
Which of the following statements is true?
If a company uses the accrual basis of accounting, its cash balance can increase even if it reports a net loss.
When are consolidated financial statements prepared?
If one company owns more than 50% of another company
Use the equation presented below to answer the question that follows: Cash = CL + LTL + CS + RE - NCCA - LTA where:CL = Current liabilities LTL = Long-term liabilities CS = Common stock RE = Retained earnings NCCA = Noncash current assets LTA = Long-term assets Which of the following activities results in a cash inflow?
Increases in common stock (CS)
Matching The difference between the principal amount of the note and its maturity value.
Interest
Matching Cost incurred to acquire a patent
Investing
The comparative balance sheets of Midnite Corp. for 2018 and 2017 indicate that short-term trade notes receivable increased from $5,000 in 2016 to $75,000 in 2018. How will this change be reported on Midnite's statement of cash flows, if Midnite uses the indirect method?
It will be reported as a deduction from net income in the Operating Activities section.
Deferred income taxes is a balance sheet item for Iowa Products Company. How would it most likely be classified on the balance sheet?
Liability
Matching The date the promissory note is due.
Maturity date
Matching The amount of cash the maker is to pay the payee on the maturity date of the note.
Maturity value
How should intangible assets be disclosed on the balance sheet?
Net of the costs already amortized
Matching Write-off of a customer's account receivable under the allowance method
Not reported separately on the cash flow statement
Which of the following accounts is not classified as a current liability?
Note payable, due in three years
Matching Decrease in accounts receivable
Operating activity
Matching Increase in short-term notes receivable
Operating activity
Which statement is true concerning operating assets?
Operating assets are used over two or more periods to generate revenues.
Which of the following is reported as a financing activity on the statement of cash flows?
Payment of cash dividends
Which of the following would appear on the balance sheet as a current liability?
Premium offers in cereal boxes
Matching The amount of cash received, or the fair value of the products or services received, by the maker when a promissory note is issued.
Principle
Cash interest is computed annually when a bond is issued for other than its face value. For a bond issued at a premium, how will this component change under the effective interest method as the bond approaches maturity?
Remain constant
When a company declares a stock dividend, which of the following occurs?
Retained earnings is reduced.
Matching The detail for a number of individual items that collectively make up a single general ledger account.
Subsidiary ledger
Matching The length of time a note is outstanding, that is, the period of time between the date it is issued and the date it matures.
Term
Shuttle Master Airlines has leased an aircraft from Streamline Aircraft Company. The annual payments are $1,000,000, and the life of the lease is 18 years. It is estimated that the useful life of the aircraft is 20 years. How would Shuttle Master Airlines record the acquisition of the aircraft? The effective rate of interest is 9%.
The aircraft would be recorded as an asset with a cost of $8,756,000.
Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long?
The company may need to borrow to acquire operating cash
Presented below is the Operating Activities section of the statement of cash flows for Feline Friends Corp. for 2017: Operating activities: Cash collected from customers$165,000 Cash payments for merchandise(83,000) Cash payments for operating expenses (58,000) Net cash inflow from operating activities$ 24,000 Which method of preparing the Operating Activities section has Feline used?
The direct method
During 2017, the accounts payable balance of Andreas Corp. decreased. Which of the following statements is true?
This decrease is deducted from net income in the Operating Activities section of a statement of cash flows prepared under the indirect method.
A subsidiary is a separate legal entity that is owned or controlled by another entity.
True
When land and building are acquired for a lump sum, the purchase amount should be allocated on the basis of the market values of the two assets.
True
Weather Corp. issued ten-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium. Which one of the following statements is true?
Weather's annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.
If a company issues $5 par value common stock,
a.$5 per share is presented in the Common Stock account on the balance sheet.
The Premium on Bonds Payable account is shown on the balance sheet as a(n)
addition to a long-term liability.
Capitalizing an expenditure rather than recording it as a revenue expenditure
affects the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period.
Comprehensive income is
an all-inclusive approach to income that includes transactions that affect stockholders' equity with the exception of those transactions that affect owners.
Depreciation is
an effort to achieve proper matching of the cost of operating assets.
Matching Costs incurred after putting the asset into service that would extend the asset's useful life
capital expenditure
Matching Costs incurred prior to using the asset, such as costs to prepare the asset for use, installation costs
capital expenditure
Matching Costs related to acquiring an asset, such as sales or excise taxes, transportation, insurance during shipment
capital expenditure
If bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will
decrease as the bonds approach their maturity date.
Amortization of a bond discount results in a(n)
decrease in stockholders' equity.
Comfort Shoes received a promissory note from a customer on April 1, 2017. The face amount of the note is $2,000; the terms are 12 months and 8% annual interest. At the maturity date, the customer pays for the note and interest. Comfort Shoes made the proper adjustment at the end of December for interest. The effect of recognizing the transaction on the maturity date is a(n)
decrease to Notes Receivable.
When the owner of a sole proprietorship withdraws assets from the business for personal use,
it is recorded as a reduction of owner's equity.
Arco Corporation declared a cash dividend on June 2 of $6 per common share. The company has 2,000 shares of common stock authorized, 1,000 shares issued, and 200 in the treasury. The entry to record the declaration of the cash dividend increases a(n)
liability.
There are some liabilities, such as income tax payable, for which the amounts must be estimated. Failure to estimate these amounts and record them would be a violation of the
matching principle.
The equity method of accounting for an investment is used when a company purchases
more than 20% of the equity securities of a second company.
Assuming a company uses the allowance method, the entry to recognize the write-off of the specific uncollectible accounts will
not affect total assets or total equity.
Matching Costs incurred after putting the asset into service that keep the asset in normal operating condition
revenue expenditure
The primary purpose of the statement of cash flows is to provide information about
the cash inflows and outflows of the company.
Depreciation is a process by which
the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset.
All of the following statements are true except
the criteria to determine whether a lease contract should be considered a capital lease are applied in a more rigid way under IFRS than U.S. GAAP.
Using different depreciation methods for book purposes versus tax purposes for the same asset is
the direct result of the differing goals of financial and tax accounting.
If a company's bonds are callable,
the issuing company is likely to retire the bonds before maturity if, for example, the bonds are paying 9% interest while the market rate of interest is 6%.
The accounting life of intangible assets is determined by
their legal lives or useful lives, whichever is shorter.
Carson City Saloon purchased a $25,000 truck for catering from its restaurant. It made a down payment of one-fourth of the price. What combination of amounts would affect the income statement and statement of cash flows for the purchase of the truck?
$0 $(6,250)
Lynx Corp. The data presented below for Lynx Corp. are for the year ended December 31, 2017: Sales (100% on credit) $1,000,000 Sales returns 30,000 Accounts receivable (December 31, 2017) 170,000 Allowance for doubtful accounts (credit balance) (before adjustment at December 31, 2017) 1,300 Estimated amount of uncollectible accounts based on aging analysis 14,000 See the data for Lynx Corp. If Lynx Corp. uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debts expense for 2017?
$12,700
Pilot Company reported the following information for 2017 and 2018: Prepaid insurance, December 31, 2017$ 2,400Prepaid insurance, December 31, 20181,500Insurance expense—201814,200 How much cash was paid for insurance during 2018?
$13,300
Use the information below for Flora Inc. for 2017 and 2018 to answer the following question: Equipment, December 31, 2017$65,000Equipment, December 31, 201872,000Accumulated depreciation, December 31, 201739,000Accumulated depreciation, December 31, 201830,000 During 2018, Flora Inc. sold equipment with a cost of $30,000 and accumulated depreciation of $25,000. A gain of $3,000 was recognized on the sale of the equipment. This was the only equipment sale during the year.What was depreciation expense for 2018?
$16,000
The Stockholders' Equity section of Deer Lakes Manor's balance sheet on January 1, 2017, appeared as follows: Common stock, $30 par, 20,000 shares issued and outstanding$ 600,000Additional paid-in capital—common240,000Retained earnings 700,000Total stockholders' equity$1,540,000 On March 1, 2017, Deer Lakes reacquired 4,000 shares of common stock at $50 per share. All common shares were originally sold for $42 each. How much should be reported in the Treasury Stock account on the March 31, 2017, balance sheet?
$200,000
Below are several transactions for Louisville Company: Proceeds from issuance of bonds payable$635,000Payment to purchase equipment275,000Payment of wages115,000Payment of dividends155,000Payment to pay off notes payable195,000 Based on these transactions, what is the net cash flow from financing activities?
$285,000 net cash provided by financing activities
Gaulle Company began the year with a balance of $6,000 in Accounts Receivable and ended the year with $9,000 in the account. Revenues for the period amounted to $38,000. Under the direct method, Gaulle will report cash collected from customers of
$35,000.
Kingston inherited $140,000 from an aunt. If Kingston decides not to spend his inheritance but to leave the money in his savings account until he retires in 15 years, how much money will he have assuming an annual interest rate of 8%, compounded semiannually?
$454,076
Anole Company was incorporated as a new business on January 1, 2017. The company is authorized to issue 20,000 shares of $5 par value common stock and 10,000 shares of 6%, $10 par value, cumulative, participating preferred stock. On January 1, 2017, the company issued 8,000 shares of common stock for $15 per share and 2,000 shares of preferred stock for $30 per share. Net income for the year ended December 31, 2017, was $375,000. Refer to the information about Anole Company.Anole's total stockholders' equity reported on the balance sheet at December 31, 2017, is
$555,000.
On January 15, 2017, the accounts receivable balance was $7,000 and the balance in Allowance for Doubtful Accounts was $700. On January 16, 2017, a $200 uncollectible account was written off. The net realizable value of accounts receivable on January 16 immediately after the write-off is
$6,300
If Rope Inc. receives $23,825 from credit card collections and has an average rate of 4.7% charged by the credit card company, its credit card sales during the period were
$25,000.
Bonds in the amount of $100,000 with a life of ten years were issued by Focus Company. If the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
$60,000
Both stock and bond investments have maturity dates.
False
If bonds are issued at 101.25, this means that
a $1,000 bond sold for $1,012.50.
The book value per share for a corporation is
based on the excess of total assets over total liabilities.
Utah Co. sold merchandise to Big Sky Corp. on December 1, 2017, for $9,000 and accepted a promissory note for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah's accounting period ends on December 31. What amount should Utah recognize as interest revenue on the maturity date of the note?
$120
Benton Corporation The data below are for Benton Corporation for 2017: Accounts Receivable—January 1, 2017 $334,000 Credit sales during 2017 850,000 Collections from credit customers during 2017 725,000 Customer accounts written off as uncollectible during 2017 12,000 Allowance for doubtful accounts (credit balance) (after write-off of uncollectible accounts) 1,700 Estimated uncollectible accounts based on an aging analysis 13,200 Refer to the data for Benton Corporation. If the aging approach is used to estimate bad debts, what should the balance in Allowance for Doubtful Accounts be after the bad debts adjustment?
$13,200
Norwood, Inc. Norwood, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an estimated life of eight years, or 12,500 hours of operation. The crane was purchased on January 1, 2017, and was used 2,700 hours in 2017 and 2,600 hours in 2018. Refer to the information for Norwood, Inc. If Norwood uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2018?
$15,000
On January 1, 2017, Sharpsburg, Inc. issued $400,000, ten-year, 10% bonds for $354,200. The bonds pay interest on June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds at the end of the ten years?
$400,000
Sweetson Enterprises' comparative balance sheets included accounts receivable of $220,300 at December 31, 2017, and $200,900 at December 31, 2018. Sales reported on Sweetson's 2018 income statement amounted to $2,350,000. What is the amount of cash collections that Sweetson will report in the Operating Activities category of its 2018 statement of cash flows assuming that the direct method is used?
$2,369,400
Cory and Ginger want to buy an airplane. They find one that will cost $200,000. They must pay 10% down and can get the balance financed with a ten year loan at 7% interest and annual payments. What is their annual payment?
$25,626
A company's weekly payroll amounts to $50,000 and payday for the week is every Friday. Employees work five days per week, Monday through Friday. The appropriate journal entry was recorded at the end of the accounting period, Monday, March 31, 2017. What amount is wages expense in April for the payday, Friday, April, 4, 2017?
$40,000
Grove City Corp. On January 1, 2017, Grove City Corp. purchased a ship for $2,000,000. It has a ten-year useful life and a residual value of $50,000. The company uses the double-declining-balance method. What was the depreciation expense for Grove City Corp. for the year ended December 31, 2017?
$400,000
Matching A receivable arising from the sale of goods or services with a verbal promise to pay.
Account receivable
One example of a temporary difference between financial and tax reporting results from
depreciation of long-term assets.
For a given single sum invested at 8% for four years, how will the future value be affected if the compounding period is changed from quarterly to annually?
The future value will decrease.
Which of the following is an example of a contingent liability?
The liability for future warranty repairs on computers sold during the current period
You are interested in accumulating $10,000 so that you can take a cruise in three years. If you try to solve for the amount that you need to invest each year, earning 6% interest compounded annually, the $10,000 represents
a future value.
Greer Company purchased land for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land?
$282,200
Mayflower Company had a machine with a cost of $123,000 and accumulated depreciation of $87,000 that was sold at for a gain of $5,000. What amount of cash was received from the sale?
$41,000
Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000. The truck had an estimated life of six years and an estimated residual value of $24,000. On January 1, 2016, the company made major repairs of $20,000 to the truck that extended the life one year. Thus, starting with 2017, the truck has a remaining life of five years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. What is the book value of the truck to be reported on the balance sheet at December 31, 2017?
$56,000
How will the payee of the promissory note record the note on its books?
The promissory note will be recorded as an asset.
Matching The company purchased a three-year liability insurance policy to cover possible damage caused by the new equipment at a cost of $6,000.
This item should be considered a revenue expenditure.
Matching It was necessary for an architect to redesign the work space to accommodate the new equipment. A fee of $6,000 was paid.
This item should be included as part of the cost of the equipment.
Where can the amounts needed to compute the accounts receivable turnover ratio be found?
Both the income statement and balance sheet
Yellow Dog Transit sold an old truck on December 31, 2017, for $18,400 cash. The following data were available when the truck sold: Acquisition cost $75,000 Estimated residual value at time of acquisition 8,000 Accumulated depreciation on December 31, 2017, after adjustment 53,600 When this transaction is recorded, it should include a(n)
Loss on Disposal account for $3,000.
When using the allowance method, what are the effects on the accounting equation when a company writes off a bad debt?
There is no effect on overall assets or equity
Matching The company financed the equipment purchase with a bank loan. Interest of $3,000 was paid on the loan during 2019.
This item should be considered a revenue expenditure.
