Accounting Ch 7-9

Curtain Co. paid dividends of $1,500; $2,000; and $3,500 during Year 1, Year 2, and Year 3, respectively. The company had 600 shares of 3.0%, $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:

$1,600 The annual preferred dividends each year = $100 × 600 shares × 3.0% = $1,800. In Year 1, there were $300 of dividends in arrears ($1,800 preferred dividends − $1,500 paid). In Year 2, there were $100 in arrears ($300 beginning + $1,800 preferred dividends − $2,000 paid). In Year 3, the preferred dividends was $1,800 + $100 in arrears = $1,900. The remaining $1,600 was paid to common shareholders.

Milton Company has total current assets of $55,000, including inventory of $15,000, and current liabilities of $31,000. The company's current ratio is:

1.77 $55,000/$31,000

Darden Company has cash of $20,000, accounts receivable of $30,000, inventory of $16,000, and equipment of $50,000. Assuming current liabilities of $24,000, this company's working capital is:

42,000 working capital = current assets - current liabilities Current Assets: -cash -accounts receivable -inventory

The following balance sheet information is provided for Santana Company for Year 2: Assets Cash $7,800 Accounts Receivable 13,950 Inventory 15,900 Prepaid expenses 2,700 Plant and equipment, net of depreciation 20,600 Land 14,500 Total assets $75,450 Liabilities and Stockholders' Equity Accounts payable $3,450 Salaries payable 7,130 Bonds payable (Due in ten years) 17,500 Common stock, no par 11,000 Retained earnings 36,370 Total liabilities and stockholders' equity$75,450 What is the company's debt to equity ratio?

59.28% Debt to equity = Total liabilities ÷ Total stockholders' equity Debt to equity = ($3,450 + $7,130 + $17,500) ÷ ($11,000 + $36,370) = $28,080 ÷ $47,370 = 59.28%

The Miller Company reported gross sales of $750,000, sales returns and allowances of $7,000 and sales discounts of $7,000. The company has average total assets of $400,000, of which $200,000 is property, plant, and equipment. What is the company's asset turnover ratio?

Asset turnover = Net sales ÷ Average assets Asset turnover = ($750,000 − $7,000 − $7,000) ÷ $400,000 = $736,000 ÷ $400,000 = 1.84 times

Which form of business organization is established as a legal entity separate from its owners?

Corporation

The Abel Company provided the following information from its financial records: Net income $250,000 Common shares outstanding 1/1 335,000 Common stock dividends $20,000 Common shares outstanding 12/31 400,000 Preferred stock dividends $25,000 Preferred shares outstanding 1/1 20,000 Sales $900,000 Preferred shares outstanding 12/31 16,000

Earnings per share = (Net income − Preferred stock dividends) ÷ Average shares outstanding Earnings per share = (Net income − Preferred stock dividends) ÷ [(Beginning shares outstanding + ending shares outstanding) ÷ 2]Earnings per share = ($250,000 − $25,000) ÷ [(335,000 shares outstanding + 400,000 shares outstanding) ÷ 2] = $225,000 ÷ 367,500 shares = $0.61 per share

Which of the following is not considered an advantage of the corporate form of business organization?

Lack of government regulation

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 outcome is probable and can be reasonably estimated.

On January 2, Year 1, Torres Corporation issued 19,000 shares of $12 par-value common stock for $22 per share. Which of the following statements is true?

The paid-in capital in excess of par value account will increase by $190,000 The cash account will increase by $418,000 (19,000 × $22), the common stock account will increase by $228,000 (19,000 × $12 par value), and the paid-in capital in excess of par value account will increase by $190,000 (19,000 × $10).

Ix Company issued 16,000 shares of $10 par value common stock at a market price of $21. As a result of this accounting event, the amount of stockholders' equity would:

increase by $336,000 $16,000 x $21 = $336,000 Common stock will increase by $160,000, the par value, and paid-in capital in excess of par value will increase by $176,000, for a total increase in stockholders' equity of $336,000.

in accounting for a contingent liability if the likelihood of the obligation is reasonably possible a company must.

provide disclosure in the footnotes to the financial statements.

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 $5,121. Based on this information, the amount of the interest expense associated with the second payment would be:

$1,599 Interest expense in year 1: $21,000 × 9% = $1,890; Principal reduction in year 1: $5,121 − $1,890 = $3,231; Principal balance at beginning of year 2: $21,000 − $3,231 = $17,769; Interest expense in year 2: $17,769 × 9% = $1,599.

The following balance sheet information is provided for Greene Company for Year 2: Assets Cash $5,200 Accounts Receivable 11,350 Inventory 14,600 Prepaid expenses 1,400 Plant and equipment, net of depreciation 19,300 Land 13,200 Total assets $65,050 Liabilities and Stockholders' Equity Accounts payable $2,670 Salaries payable 8,430 Bonds payable (Due in ten years) 11,000 Common stock, no par 17,500 Retained earnings 25,450 Total liabilities and stockholders' equity$65,050 What is the company's quick (acid-test) ratio?

1.49 Quick ratio = Quick assets ÷ Current liabilities Quick ratio = (Cash + Receivables + Current marketable securities) ÷ Current liabilities Quick ratio = ($5,200 + $11,350 + $0) ÷ ($2,670 + $8,430 ) = $16,550 ÷ $11,100 = 1.49

The following balance sheet information was provided by Western Company: Assets Year 2 Year 1 Cash $3,800 $3,300 A. R. $24,000 $22,000 Inventory $42,000 $48,000 Assuming Year 2 net credit sales totaled $138,000, what was the company's average days to collect receivables?

60.8 Accounts receivable turnover = Net credit sales ÷ [(Beginning accounts receivable + ending accounts receivable) ÷ 2]Accounts receivable turnover = $138,000 ÷ [($22,000 + $24,000) ÷ 2] = $138,000 ÷ $23,000 = 6 times Average days to collect receivables = 365 days ÷ 6 = 60.8 days

Which of the following represents the impact of a taxable cash sale of $1,250 on the accounting equation if the sales tax rate is 4%?

An increase to cash for $1,300, an increase to sales tax payable for $50, and an increase to sales revenue for $1,250. The transaction is recorded as an increase to cash of $1,300, the amount of the sale, plus the 4% sales tax collected, an increase to sales tax payable of $50, the amount owed to the state, and an increase to sales revenue of $1,250, the amount of the sale.

On January 12, Year 1, Gilliam Corporation issued 550 shares of $12 par-value common stock for $15 per share. The number of shares authorized is 5,000, and the number of shares outstanding prior to this transaction is 1,200. Which of the following answers describes the effect of the January 12, Year 1 transaction?

Assets = 8,250 Liab. = NA Com. Stk. = 6,600 Pd-in Excess = 1,650 Rev. = NA Exp. = NA Net Inc. = NA Cash Flow = 8,250 FA Explanation: Assets (cash) increase by $8,250 (550 x $15), common stock increases by $6,600 (= 550 shares x $12 par value), and paid-in excess of par value - common increases by $1,650 (= $8,250 - $6,600). The cash inflow is a financing activity.

Madison Company issued an interest-bearing note payable with a face amount of $25,200 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 $25,200 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.

The following balance sheet information is provided for Apex Company for Year 2: Assets Cash $5,800 Accounts Receivable 11,950 Inventory 14,900 Prepaid expenses 1,700 Plant and equipment, net of depreciation 19,600 Land 13,500 Total assets $67,450 Liabilities and Stockholders' Equity Accounts payable $2,850 Salaries payable 8,130 Bonds payable (Due in ten years) 12,500 Common stock, no par 16,000 Retained earnings 27,970 Total liabilities and stockholders' equity$67,450 What is the company's working capital?

$23,370 Working capital = Current assets − Current liabilities Working capital = ($5,800 + $11,950 + $14,900 + $1,700) − ($2,850 + $8,130) = $34,350 − $10,980 = $23,370

On January 1, Year 1, the Mahoney Company borrowed $174,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $40,875. The amount of principal repayment included in the December 31, Year 1 payment is:

$26,955 $174,000 x 8% = 13920 $40,875 - $13,920 = $26,955

Flagler Corporation shows a total of $460,000 in its common stock account and $1,060,000 in its paid-in capital in excess of par value - common stock account. The par value of Flagler's common stock is $4. How many shares of Flagler stock have been issued?

115,000 $460,000 total par value ÷ $4 par value per share = 115,000 shares issued

The following balance sheet information was provided by O'Connor Company: Assets Year 2 Year 1 Cash $2,200 $1,200 A. R. $7,200 $5,200 Inventory $22,000 $23,000 Assuming that net credit sales for Year 2 totaled $147,000, what is the company's most recent accounts receivable turnover?

23.71 times Accounts receivable turnover = Net credit sales ÷ [(Beginning accounts receivable + ending accounts receivable) ÷ 2] Accounts receivable turnover = $147,000 ÷ [($5,200 + $7,200) ÷ 2] = $147,000 ÷ $6,200 = 23.71 times

The following balance sheet information is provided for Gaynor Company: Assets Year 2 Year 1 Cash $2,650 $1,900 A. R. $15,400 $13,400 Inventory $28,500 $36,000 Assuming Year 2 cost of goods sold is $114,000, what is the company's inventory turnover?

3.53 Inventory turnover = Cost of goods sold ÷ [(Beginning inventory + ending inventory) ÷ 2] Inventory turnover = $114,000 ÷ [($36,000 + $28,500) ÷ 2] = $114,000 ÷ $32,250 = 3.53 times

The following balance sheet information is provided for Patton Company: Assets Year 2 Year 1 Cash $4,500 $4,100 A. R. $14,000 $16,000 Inventory $41,500 $48,500 Assuming Year 2 cost of goods sold is $385,000, what are the company's average days to sell inventory?

42.66 Inventory turnover = Cost of goods sold ÷ [(Beginning inventory + ending inventory) ÷ 2]Inventory turnover = $385,000 ÷ [($48,500 + $41,500) ÷ 2] = 385,000 ÷ $45,000 = 8.5555 times Average days to sell inventory = 365 days ÷ Inventory turnover Average days to sell inventory = 365 days ÷ 8.5555 times = 42.66 days

Montana Company was authorized to issue 135,000 shares of common stock. The company had issued 60,000 shares of stock when it purchased 9,500 shares of treasury stock. The number of outstanding shares of common stock was:

50,500 60,000 - 9,500 = 50,500

Kier Company issued $740,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 3-year term to maturity. They had a 5.50% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the December 31, Year 1 income statement and the cash flow from operating activities shown on the December 31, Year 1 statement of cash flows would be: Interest Expense Cash Outflow A. $40,700 zero B. zero $40,700 C. $40,700 $40,700 D. zero $zero

Choice C $740,000 × 0.055 = $40,700; Payment of interest on December 31, Year 1 increases interest expense by $40,700 and is reported as a cash outflow for operating activities.