ACT 205 Exam 3 Study Guide

Sony introduces a new compact music player to compete with Apple's iPod that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 3% of sales. By the end of the first year of selling the product, total sales are $31 million and actual warranty expenditures are $300,000. What amount (if any) should Sony report as a liability at the end of the year?

$930,000 estimated warranty costs, $300,000 actual warranty costs. $630,000 reported as Warranty Liability on the Balance Sheet.

The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 1,000 shares held as treasury stock. What is the entry for the dividend declaration?

Dividends 11,400 Dividends Payable 11,400

The Fusia Company acquired a building and the two acres of land on which it is located. The total purchase price was $2,000,000. For valuation purposes, the company contacted Earl Blue, a local commercial real estate agent, who estimated the value of the Land at $600,000 and the Building at $2,400,000. Assuming the the company paid cash for the land and building, what journal entry would Fusia make to record the purchase?

Land 400,000 Building 1,600,000 Cash 2,000,000

For a bond issue that sells for less than the bond face amount, the stated interest rate is: a) Less than the market rate b) More than the market rate c) The actual yield rate d) The prime rate

a) Less than the market rate

Which of the following statements is true regarding the amortization of intangible assets? a) The expected residual value of most intangible assets is zero. b) Intangible assets with a limited useful life are not amortized. c) In recording amortization, an accumulated amortization account is always used. d) The service life of an intangible asset is always equal to its legal life.

a) The expected residual value of most intangible assets is zero.

Diamond Company borrowed $500,00 from BankTwo on January 1, 2016 in order to expand its mining capability. The five-year not required annual payments of $130,218 and carried an annual interest rate of 9.5%. What is the amount of expense Diamond must recognize on its 2017 income statement? a) $47,500 b) $39,642 c) $35,129 d) $31,037

b) $39,642

Beth's Gluten-free Bakery purchases an industrial mixing machine for $35,00. In addition to the purchase price, the company makes the following expenditures: freight, $1,500; installation, $3,000; testing, $1,000; and property tax on the machine for the first year, $500. What is the initial cost of the mixing machine? a) $39,000 b) $40,500 c) $41,000 d) $35,000

b) $40,500

RanchHand Corp. estimated warranty expense in Year 1 of $10,000. In Year 2, Ranch performed warranty work of $8,000. The journal entry to record the performance of warranty work would include a: a) Credit to Warranty Expense b) Debit to Warranty Liability c) Credit to Estimated Liability for Warranty d) Debit to Cash

b) Debit to Warranty Liability

A company's capital structure refers to: a) the amount of short term and long term debt that the company has on the balance sheet b) the mixture of debt and equity used to finance the company c) the amount of cash a company maintains for future construction d) the percentage of assets to total liabilities the company maintains

b) the mixture of debt and equity used to finance the company

Which of the following is NOT a current liability on December 31, 2012? a) An Accounts Payable due January 31, 2013 b) Accrued salaries payable from 2012 c) A lawsuit judgment to be decided on January 10, 2013 d) A Note Payable due December 31, 2013

c) A lawsuit judgment to be decided on January 10, 2013

Kevin sells $100 of goods to a customer on account. The sales tax is 8%. The journal entry for this sale will include which of the following entries? a) Credit Accounts Payable $108 b) Debit Sales Tax Payable $8 c) Debit Accounts Receivable $108 d) Credit Revenue $108

c) Debit Accounts Receivable $108

In a basket purchase of assets, the cost must be allocated to the individual assets because: a) intangible assets must be identified and expensed as they are purchased b) goodwill must be expensed immediately c) the assets have different useful lives for depreciation purposes d) some assets must be expensed upon acquisition

c) the assets have different useful lives for depreciation purposes

Ima Rich purchased 100 shared of Stocket, Inc.'s $1 par value common stock for $5 per share on the date of their IPO. Which of Stocket's financial statements is affected by this transaction? a) Both the Income Statement and Balance Sheet b) Neither the Income Statement or Balance Sheet c) Income Statement d) Balance Sheet

d) Balance Sheet

On December 18, Intel receives $250,000 from a customer toward a cash sale of $2.5 million for computer chips to be completed on January 23. The journal entry made on December 18 by Intel would include: a) Debit Deferred Revenue $250,000 b) Credit Revenue $250,000 c) Credit Cash $250,000 d) Credit Deferred Revenue $250,000

d) Credit Deferred Revenue $250,000 Includes a Debit to Cash for $250,000

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as: a) Sales tax expense b) Sales tax revenue c) Sales tax receivable d) Sales tax payable

d) Sales tax payable

Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale?

$1,000 loss

Bricker Enterprises purchases a machine for $100,000 on November 1, 2012. The estimated service life is 10 years with a $10,000 residual value. Bricker records partial-year depreciation based on the number of months in service. Depreciation expense for 2012, using straight-line, is what?

$1,500

On July 1, 2012 LaPorte Company purchased the copyright to Norman Computer Tutorials for $120,000. The copyright has a legal life of 50 years and an estimated useful life of 5 years. What would the amount of Amortization Expense recognized for the year 2012 be?

$12,000

Kansas Enterprises purchased equipment for $60,000 on January 1, 2012. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. 5. Using the straight-line method, what would the book value at December 31, 2012 be?

$49,000

Smooter Company purchases a new delivery van for $50,000. The sales taxes are $2,000. The logo of the company is painted on the side of the van for $1,200. The van's annual license is $120. The van undergoes a one-time safety testing for $220. What does Smooter record as the cost of the new van?

$53,420

Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) Salaries for the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. Which items would Western capitalize?

2, 4, and 5

The Common Stock account on a company's balance sheet is measured as: A. The number of common shares issued x the stock's par value per share. B. The number of common shares issued x the stock's current market value per share. C. The number of common shares outstanding x the stock's par value per share. D. The number of common shares outstanding x the stock's current market value per share.

A. The number of common shares issued x the stock's par value per share.

The relationship between current assets and current liabilities is: A. useful in evaluating a company's liquidity. B. called the matching principle. C. useful in determining income. D. useful in determining the amount of a company's long-term debt.

A. useful in evaluating a company's liquidity

Two sisters operate a bed and breakfast on the coast of Maine. As customers make reservations, they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made?

Cash Unearned Revenue

Gain contingencies usually are recognized in a company's income statement when: A. The amount can be reasonably estimated. B. The gain is probable and the amount can be reasonably estimated. C. The gain is reasonably possible and the amount can be reasonable estimated. D. The gain is certain.

D. The gain is certain.

Stockholders of a company may be reluctant to finance expansion through issuing more equity because: A. dividends must be paid on a periodic basis. B. the price of the stock will automatically decrease. C. leveraging with debt is always a better idea. D. their earnings per share may decrease.

D. their earnings per share may decrease

On July 1, Alaskan Adventures issues a $100,000, eight-month, 6% note. Interest is payable at maturity. If the company publishes financial statements at December 31, what is the amount of interest expense that the company would record in a year-end adjustment on December 31? a) $3,000 b) $4,000 c) $6,000 d) $3,500

a) $3,000

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be: a) Disclosed but not reported as a liability b) Disclosed and reported as a liability c) Neither disclosed nor reported as a liability d) Reported as a liability but not disclosed

a) Disclosed but not reported as a liability

Research and development costs should be: a) Expensed in the period incurred b) Deferred pending determination of success c) Expensed in the period they are determined to be unsuccessful d) Expensed if unsuccessful, capitalized if successful

a) Expensed in the period incurred