Practice exam 2
Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)
$1,396 Interest expense in year 1: $20,000 × 10% = $2,000; Principal reduction in year 1: $8,042 − $2,000 = $6,042; Principal balance at beginning of year 2: $20,000 − $6,042 = $13,958; Interest expense in year 2: $13,958 × 10% = $1,396.
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 and $12,000 At the end of Year 5, the end of the office equipment's 5-year useful life, the book value will be equal to the $12,000 salvage value, regardless of which depreciation method is used.
For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $154,900 and $205,900 respectively. Also during Year 1, the corporation declared and paid cash dividends of $22,700 and issued stock dividends valued at $17,500. Total expenses were $38,916. Based on this information, what was the amount of total revenue for Year 1?
$130,116 $154,900 beginning retained earnings + X revenues − $38,916 expenses − $22,700 cash dividends − $17,500 stock dividends = $205,900 ending retained earnings; X = $130,116.
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: (Round your intermediate percentages to 2 decimal places: ie 0.054231 = 5.42%.)
$171,000 The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to office furniture = Appraised amount for office furniture of $190,000 ÷ Total appraised values of $1,062,000 (or $190,000 + $740,000 + $132,000) = 17.89%; Allocation of purchase price to office furniture = Total purchase price of $950,000 × 17.89% = $169,955.
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 $40,000 ÷ ($20,000 + $340,000 + $40,000) = 10% of total appraised value; $380,000 purchase price × 10% = $38,000 cost of equipment; $38,000 × (2 × 25% straight-line rate) = $19,000 depreciation expense in Year 1.
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 recognized service revenue on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement is:
$2,080 $104,000 sales on account × 2% = $2,080 uncollectible accounts expense
Allegheny Company ended Year 1 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $23,000 and $900, respectively. During Year 2, Allegheny wrote off $1,500 of Uncollectible Accounts. After aging its receivables, Allegheny estimates that the ending Allowance for Doubtful Accounts balance should be $1,600. What will Allegheny report as Uncollectible Accounts Expense on its Year 2 income statement?
$2,200 $900 beginning allowance balance − $1,500 write-offs + uncollectible accounts expense = $1,600 ending allowance balance; uncollectible accounts expense = $1,600 − $900 + $1,500 = $2,200
The inventory records for Radford Company reflected the following Beginning inventory on May 1: 100 units @ $4.00 First purchase on May 7: 300 units @ $4.40 second purchase on May 17: 500 units @ $4.60 Third purchase on May 23: 100 units @ $4.80 Sales on May 31: 900 units @ $7.80 What is the amount of gross margin assuming the weighted average cost flow method is used?
$2,970 Under the weighted-average method, the average cost of inventory is reported on both the income statement and the balance sheet. Weighted average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit; Gross margin = Sales of (900 × $7.80) − Cost of goods sold of (900 × $4.50) = $2,970.
On January 1, Year 1, Friedman Company purchased a truck that cost $48,000. The truck had an expected useful life of 8 years and an $8,000 salvage value. The company uses the double-declining balance method. The book value of the truck at the end of Year 1 is:
$36,000 $48,000 × (2 × 12.5%) = $12,000 Depreciation expense for Year 1; $48,000 Cost − $12,000 Accumulated depreciation at end of Year 1 = $36,000 book value at the end of Year 1
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 ans $0 $36,000 × 7% × 9/12 months = $1,890 interest payable on December 31, Year 1; $36,000 note payable + $1,890 interest payable = $37,890; the note is repaid before the end of Year 2, so there is no remaining liability.
The inventory records for Radford Company reflected the following Beginning inventory on May 1: 100 units @ $4.00 First purchase on May 7: 300 units @ $4.40 second purchase on May 17: 500 units @ $4.60 Third purchase on May 23: 100 units @ $4.80 Sales on May 31: 900 units @ $7.80 What is the amount of ending inventory assuming the FIFO cost flow method is used?
$480 Under FIFO, the cost of the items purchased first is reported on the income statement, and the cost of the items purchased last is reported on the balance sheet. Ending inventory = 1,000 units available for sale − 900 units sold = 100 units in ending inventory; Cost of ending inventory = 100 × $4.80 = $480
Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report during the years ending December 31, Year 1 and Year 2, respectively, would be:
$720 and $240 $16,000 × 6% × 9/12 months = $720 interest revenue in April − December, Year 1; $16,000 × 6% × 3/12 months = $240 interest revenue in January − March, Year 2
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:
$725 $72,500 credit sales × 1% = $725 uncollectible accounts expense
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:
$770 $36,000 × 7% × 3/12 months = $630 interest expense; $1,400 revenue − $630 interest expense = $770 net income
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 net income − $12,000 withdrawal = $81,000 ending balance in capital account
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 total par value / $8 par value per share = 82,500 shares issued
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 The total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method. Percentage allocated to building = Appraised amount for building of $1,100,000 ÷ Total appraised values of $2,200,000 (or $374,000 + $1,100,000 + $726,000) = 50%; Allocation of actual purchase price to building = Total purchase price of $1,900,000 × 50% = $950,000
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 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.
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 shares issued − 10,500 shares of treasury stock = 55,500 shares outstanding
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 This transaction increases assets (cash) by $16,000, decreases assets (the book value of asset) by $12,000 (or cost of $44,000 − accumulated depreciation of $32,000), resulting in a net increase in assets of $4,000. Because the cash proceeds of $16,000 exceed the asset's book value of $12,000, Madison also reports a gain on the sale of $4,000, which increases revenue (gain), net income, and stockholders' equity (retained earnings). The gain is not reported in the investing activities section; instead, the $16,000 cash proceeds are reported as a cash inflow for investing activities.
Which of the following entities would have a paid-in capital in excess of par (or stated) value account in the equity section of the balance sheet?
A corporation
The term "Retained Earnings" is best explained by which of the following statements?
A measure of capital generated through earnings.
Benitez Company had sales of $260,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $3,300 of warranty obligations paid in cash during Year 1. Based on this information:
All of these answer choices are correct.
Which of the following statements is a reason why a company would buy treasury stock?
All of these are reasons a company would buy treasury stock.
Which of the following represents the impact of a taxable cash sale of $880 on the accounting equation if the sales tax rate is 5%?
An increase to cash for $924, an increase to sales tax payable for $44, and an increase to sales revenue for $880. The transaction is recorded as an increase to cash of $924, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $44, the amount owed to the state, and an increase to sales revenue of $880, the amount of the sale.
Which of the following terms is used to identify the process of expense recognition for property, plant and equipment?
Depreciation
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
Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?
LIFO
Which of the following is not considered an advantage of the corporate form of business organization?
Lack of government regulation
Which of the following terms designates the maximum number of shares of stock that a corporation may issue?
Number of shares authorized
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 stockholder's equity by $4,375 ($24,000 cost − $1,000 salvage) ÷ 8 years = $2,875 original annual depreciation; $2,875 × 4 years = $11,500 accumulated depreciation at time of improvement; ($24,000 original cost − $11,500 accumulated depreciation + $6,000 improvement − $1,000 salvage) ÷ 4 remaining years = $4,375 new annual depreciation; Recognizing the Year 5 depreciation expense decreases assets (book value of the asset) and increases expenses (depreciation expense) by $4,375. Net income and stockholders' equity (retained earnings) also decrease by $4,375.
Monthly remittance of sales tax:
Reduces liabilities.
Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?
The amount can be reasonably estimated.
Which of the following statements about the impact of treasury stock on the amounts reported on the balance sheet is correct?
The balance in the treasury stock account reduces total stockholders' equity.
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 cash account will increase by $220,000 (20,000 × $11), the common stock account will increase by $200,000 (20,000 × $10 par value), and the paid-in capital in excess of par value account will increase by $20,000 (20,000 × $1).
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.
Which of the following is not an advantage of accepting credit cards from retail customers?
There are fees charged for the privilege of accepting credit cards.
Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?
To repay the interest and repay the debt
Which of the following would be classified as a long-term operational asset?
Trademark
Which of the following is a disadvantage of a sole proprietorship?
Unlimited liability
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.
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 $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. 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.
The par value of a company's stock:
has little connection to the market value of the stock.
The net effect of the entries to recognize the write-off under the allowance method is to:
have no effect on total assets or stockholder's equity
When prices are falling, LIFO will result in:
higher income and a higher inventory valuation than will FIFO.
Bonds payable are usually classified on the balance sheet as:
long-term liabilities
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 The $24,000 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.