Accounting Exam 3

Land, a building and equipment are acquired for a lump sum of $9,000,000. The market values of the land, building and equipment are $500,000, $700,000, and $100,000, respectively. What is the cost assigned to the equipment?

$692,308 100000/1300000(all equipment added) =.0769 ANS*9000000

Potential liabilities that depend on the future events arising out of past events are called:

Contingent liabilities

Minor company purchased some land and is preparing the land for a new building. Which of the following costs should be included in the cost of the land by minor company?

Cost of removing an old building and cost of clearing and grading the land

At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction:

Current liabilities increase and stockholders equity decreases

Notes payable due in six months are reported as:

Current liabilities on the balance sheet

If the market interest rate is greater than the stated interest rate on bonds, bonds will sell:

At a discount

A lump-sum purchase of multiple, long-term assets:

Requires the company to divide the total cost among the various assets according to their market values

The current ratio is current assets:

Divided by current liabilities

The market interest rate is also referred to as the:

Effective rate

Which is the preferred method to use when amortizing a bond discount or premium?

Effective-interest method of amortization

The depreciation process follows the ______ principle.

Expense recognition

The accounting principle that requires a company to record warranty expense in the same period that it records sales revenue is the:

Expense recognition principle

Costs that do not extend a plant asset's capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as:

Expenses

If a company capitalizes a plant asset that should have been expensed:

Expenses will be understated and net income will be over stated in the year of the error

Capital expenditures are not immediately expensed because these items:

Extend the useful life of a plant asset

Under the effective-interest method of amortization, the bond cash payment on each interest date is calculated by multiplying the:

Face value of the bonds times the stated interest rate for the appropriate time period

The disposal of a plant asset will be reported on the statement of cash flows as a financing activity

False

The financing option that has the lowest risk to a company is financing by:

Retained earnings

Following the DuPont analysis model, the higher the leverage ratio, the higher the:

Return on stockholders equity

Land improvements include:

Fences, lights in the parking lot, and neon signs on property

Major company purchased a piece of equipment. All of the following costs should be included in the cost of the equipment EXCEPT for:

Insurance costs after the equipment is up and running

Amortization expense is recorded for:

Intangible asset with a finite life

A disadvantage of using bonds instead of stock as a method of long-term financing is that with bonds:

Interest must be paid regardless of the level of earnings

The financing option that creates no liabilities or interest expense is financing by:

Issuing stock

The long-term asset that does not depreciate or amortize is:

Land

Barbarino corporation purchased land and a building for $800,000. An appraisal indicates that the land's market value is $400,000 and the building's market value is $600,000. When recording this transition barbarino should debit:

Land for $320,000 (400,000/1000000=.4 ANS*800,000)

The cost of installing lights in a company's parking lot should be recorded as a cost of:

Land improvements

Bonds with a 6% interest rate were issued when the market rate of interest was 7%. The quoted bond price will be:

Less than 100

According to DuPont analysis, the impact of debt on a company's profitability is measured by the:

Leverage ratio

Franco company sold office furniture for $2,500 cash. The furniture cost $70,000 and had accumulated depreciation through the date of sale totaling $30,000. The company will recognize:

Loss of $37,500

All of the following are needed to measure depreciation, EXCEPT for:

Market value

The interest rate that investors require for loaning their money is referred to as:

The market rate of interest

Which of the following costs associated with a delivery van should NOT be capitalized?

The van is repainted

A company purchased a machine for $100,000 many years earlier. The accumulated depreciation on the machine is $100,000. Which of the following statements is TRUE regarding the disposal of the machine for not cash proceeds?

There will be no gain or loss on the disposal

What is the accounts payable turnover?

Purchases on account from suppliers divided by average accounts payable, a measure of the number of times a year a company is able to pay off its accounts payable, and a measure of liquidity

A bond with a face value of $100,000 and a quoted price of 103 has a selling price of:

$103,000

A company incurred the following cost for a new vehicle: purchase price of delivery truck $120,000 Sales tax on delivery truck 6200 delivery charge on delivery truck 1,600 special racks for storage put on delivery truck 3,000 normal repairs to truck before it is used for the first time 1,100 signs painted on the truck 2,000 insurance on truck before used in business 3,000 What is the cost of the delivery truck?

$136,900

Equipment is acquired by issuing a note payable for $53,000 and a down payment of $25,000. The statement of cash flows will report a:

$25,000 cash outflow in the investing activities section

A company incurred the following costs: purchase price of land $240,000 Survey fees 1,000 payment for demolition of old building on land 40,000 back property taxes on land 3,000 paving costs for parking lot 60,000 fence around perimeter of land 15,000 lights in parking lot 90,000 signs for new business 5,000 What is the cost of the land?

$284000

Equipment with a book value of $12,000 is sold for $3,000 cash. The statement of cash flows will report a:

$3,000 cash inflow in the investing activities section

Equipment acquired on January 1, 2014, is sold on june 30, 2018, for $11,200. The equipment cost $46,200, had an estimated residual value of $6,300, and an estimated useful life of 5 years. The company prepared financial statements on December 31, and the equipment has been depreciated using the straight-line method. On june 30, 2018, the company should record depreciation expense of:

$3,990

Land is purchased for $500,000. Back taxes paid by the purchaser were $8,400; total costs to demolish an existing building were $15,000 and the cost to clear the land was $22,000. The cost of paving the parking lot was $940,000. What is the cost of the land and land improvements?

$545,400; $940,000

A machine is purchased for $50,000. The transportation costs were $4,000, installation costs were $2,000 and taxes on the purchases price were $400. Testing runs of the new machine cost $3,000. What is the cost of the machine?

$59,400

Koloas, inc., sold equipment for $5,200 cash. The equipment cost $7,700 and had accumulated depreciation through the date to sale of $72,000. At the end of sale, the journal entry to record the sale will have:

A gain on sale of equipment for $3,500

Bonds with a 7% state interest rate were issued when the market rate of interest was 6%. This bond was issued at:

Premium

As a depreciable plant asset is used in operation:

Accumulated depreciation increases and the book value of the asset decreases

Under the effective-interest method, the amount of bond discount amortized each interest period is equal to the:

Amount of interest expense less the cash paid for interest

If a company wants to maximize earnings per share it would issue:

Bonds instead of stock

On june 1, roadway's trucking company paid $2,000 to overhaul the engine on a delivery truck to allow it to be used for two additional years. It also paid $7,500 changing the storage capacity of the truck so that it could haul more merchandise. which of the following statements is TURE?

Both items are capital expenditures

Under the effective-interest method of amortization, interest expense for each interest period can be calculated by multiplying the:

Carrying value of the bonds times the effective-interest rate for the appropriate time period

Under the effective-interest method, if bonds are issued at a discount, the amount of interest expense:

Increases each period as the bonds move towards maturity

Pat's pets recently paid to have the engine in its delivery van overhauled. The estimated useful life of the van was originally estimated to be 4 years. The overhaul is expected to extend the useful life of the van to 10 years. The overhaul is regarded as a:

Capital expenditure

U.S. generally accepted accounting principles differ from IFRS in the accounting treatment of:

Capitalization of internally generated intangible assets, R and D costs, and reversals of write-downs due to the impairment of plant assets

Bonds which are backed only by the good faith of the borrower are referred to as:

Debenture bonds

The journal entry to record salaries earned by 10 employees will:

Debi salary expense for the gross pay, credit FICA tax payable, credit employee income tax payable and credit salary payable for the net pay

Smiley corporation sold equipment costing $72,000 with $65,000 of accumulated depreciation for $11,000 cash. Which of the following journal entries should be prepared?

Debit cash for $11,000, debit accumulated depreciation for $65,000, credit equipment for $70,000 and credit gain on sale of equipment for $6,000

Equipment costing $50,000 with a book value of $16,000 is sold for $29,000. Which journal entry is used to record the sale?

Debit cash for $29,000, debit accumulated depreciation for $34,000, credit equipment for $50,000 and credit gain on sale of equipment for $13,000

The journal entry to record depreciation expense is:

Debit depreciation expense, credit accumulated depreciation

A company has a lawsuit pending with regard to patent infringement. The amount of the loss can be estimated and has probable change of occurrence. What journal entry is required?

Debit estimated lawsuit loss and credit estimated lawsuit liability

The journal entry to record a semiannual interest payment on a bond payable issued at par:

Debit interest expense and credit cash

A company purchased a machine for $200,000 many years earlier. The accumulated depreciation of the machine is $100,000. The machine is scrapped. Which journal entry is prepared to record the disposal?

Debit loss on disposal of machine for $100,000, then debit accumulated depreciation for $100,000 and credit machine for $200,000

The journal entry to record an addition to an office building would include:

Debit to office building

Morgan oaks company replaced the windshields and painted several of its vehicles during the year. These cost should be:

Debited to repair expense

How does the journal entry to amortize a copyright affect the accounting equation?

Decreases assets and stockholders' equity

A disadvantage of issuing stock instead of debt is that stock:

Generally results in lower earnings per share

Which intangible asset is NOT amortized?

Goodwill

The total earned wages of an employee for the payroll period is the ________. The amount of earned wages the employee takes home is ________.

Gross pay; Net pay

When compared to the other methods of depreciation, the double-declining balance method of depreciation gives depreciation expense that is:

Higher in the earlier periods

The book value of a plant asset is defined as:

Historical cost minus accumulated deprecation

The depreciable cost of a plant asset equal the:

Historical cost of the asset minus the estimated residual value

U.S generally accepted accounting principles require the reporting of plant assets at _______ on the balance sheet. International financial reporting standards allow the reporting of plant assets at _____ on the balance sheet.

Historical cost; fair market value

Return on assets measures:

How much the entity earned for each dollar of assets invested

Which of the following is a CORRECT statement about asset impairment?

If and asset is impaired, the impairment loss is the difference between the net book value and the fair value

The amount of impairment loss is:

Net book value - Fair value

Impaired if:

Net book value > estimated future cash flow

Net profit margin ratio:

Net income/Net sales

Total asset turnover:

Net sales/average total assets

A company has days' payable outstanding of 70 days. If credit terms of purchase are 2/10, net 30, is the company paying accounts payable on a timely basis?

No, days' payable outstanding exceeds the discount period of 10 days and the net period of 30 days

A company has a pending lawsuit that has a remote possibility of being settled in favor of the plaintiff who is a former employee. What should the company do?

Nothing

A conservative policy with regard to capitalizing or expensing costs associated with plant assets avoids ________.

Overstating profits and assets

The exclusive right to produce and sell an invention like the smart phone requires a:

Patent

Which of the following should be included in the cost of equipment?

Platform for the equipment, employee training cots for the use of the new equipment, and testing cost to see if the equipment is working properly

The expected cash value of a plant asset at the end of its useful life is known as:

Scrap value, salvage value, residual value

Bonds in particular issue which mature in installments over a period of time are called:

Serial bonds

Which of the following should be included in the cost of land improvement?

Sprinkler system for bushes and lawn, fencing, lighted signs

Which cost is NOT included in the cost of land improvements

Sprinkler systems for landscaping, and lights on exterior of new building

A depreciation method in which an equal amount of depreciation expense is assigned to each year of the asset's use is the:

Straight-line method

Cost minus residual value divided by useful life in years is the:

Straight-line method

Bonds that are secured by the real estate are called

Term bonds, and secured bonds

When determining the rate of return on assets:

The DuPont model calculates the rate of return on assets as the net profit margin ratio times total asset turnover ratio

A bond will sell at a premium when:

The coupon rate is greater than the effective rate

The leverage ratio is equal to:

Total assets divided by total stockholders equity

The debt ratio is computed by dividing:

Total debt by total assets

When a company uses borrowed money to earn a higher profit than the cost of the interest, this is called:

Trading on the equity

A loss on sale of equipment will result when the book value of the equipment exceeds the cash received from the sale of the equipment.

True

A purchaser is willing to pay for goodwill when they feel the company they are buying has abnormal earning power.

True

Corporations borrow large amounts of money by issuing (selling) bonds to the public.

True

Gains on the sale of equipment increases net income while losses on the sale of equipment decrease net income.

True

If a long-term plant asset is impaired, the owner is required to adjust the carrying value downward to its fair value.

True

Intangible assets can have finite or infinite lives.

True

Return on assets measures how profitably management has used its assets.

True

Some intangible assets are not amortized.

True

The loss on disposal of equipment account is reported as other losses and expenses on the income statement.

True

To account for the disposal of a plant asset, the cost of the asset and its related accumulated depreciation removed from the books:

True

Treating a capital expenditure as an immediate expense:

Understates assets and stockholders' equity in the year of the error

When a business receives cash from a customer before earning the revenue, they credit:

Unearned Revenue

All of the following are reported as current liabilities EXCEPT:

Unearned revenues for services to be provided in 16 months

The computation of depletion expense is most closely related to which method for computing depreciation?

Units-of-produtions