exam 2 practice
Which of the following is a disadvantage of a sole proprietorship?
Unlimited liability. Sole proprietors do not have the liability shield that corporations do.
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 cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:
$1,120 outflow $36,000 × 7% = $2,520 cash paid for interest on the note; $1,400 inflow from revenue − $2,520 outflow for interest = $1,120 outflow for operating activities. The repayment of principal is a financing activity.
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.
For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $188,225 and $213,400 respectively. Also during Year 1, the corporation declared and paid cash dividends of $26,200 and issued stock dividends valued at $16,000. Total expenses were $41,416. Based on this information, what was the amount of total revenue for Year 1?
$108,791 $188,225 beginning retained earnings + X revenues − $41,416 expenses − $26,200 cash dividends − $16,000 stock dividends = $213,400 ending retained earnings; X = $108,791.
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.
At the end of the accounting period, Houston Company had $5,400 of par value common stock issued, additional paid-in capital in excess of par value − common of $6,400, retained earnings of $6,500, and $2,750 of treasury stock. The total amount of stockholders' equity is:
$15,550. $5,400 common stock + $6,400 additional paid-in capital in excess of par value + $6,500 retained earnings − $2,750 treasury stock = $15,550
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.
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 statemen
$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
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. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:
$24,800 $24,000 × 8% × 5/12 = $800 interest payable; $24,000 notes payable + $800 interest payable = $24,800 total liabilities.
The inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 units @ $7.80 What is the amount of gross margin assuming the FIFO cost flow method is used?
$3,000 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. Cost of goods sold = (100 × $4.00) + (300 × $4.40) + (500 × $4.60) = $4,020; Gross margin = $7,020 sales − $4,020 cost of goods sold = $3,000.
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
he inventory records for Radford Company reflected the following Beginning inventory on May 1100 units @ $4.00First purchase on May 7300 units @ $4.40second purchase on May 17500 units @ $4.60Third purchase on May 23100 units @ $4.80Sales on May 31900 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
ing 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. Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $16,000, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:
$600. ($36,000 cost − $12,000 salvage value) ÷ 5 years = $4,800 annual depreciation expense; $36,000 cost − (3 years × $4,800) accumulated depreciation = $21,600 book value at the end of Year 3. $16,000 proceeds from sale − $21,600 = ($5,600) loss on sale of equipment; $30,000 revenue − $19,000 cash expenses − $4,800 depreciation expense − $5,600 loss on sale = $600 net income
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
Which form of business organization is established as a legal entity separate from its owners?
Corporation Corporations are owned by shareholders. Corporations file and pay income taxes on their own.
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
On January 1, Year 1, Missouri Company purchased a truck that cost $57,000. The truck had an expected useful life of 10 years and a $6,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is:
$9,120. $57,000 × (2 × 10%) = $11,400 depreciation expense in Year 1. ($57,000 − $11,400) × (2 × 10%) = $9,120 depreciation expense in Year
Benitez Company had sales of $680,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $18,300 of warranty obligations paid in cash during Year 1. Based on this information:
- Warranty expenses would decrease net earnings by $20,400 in Year 1. Incorrect - Cash would decrease by $18,300 as a result of the accounting events associated with warranties in Year 1. - The warranties payable account would increase by $2,100 in Year 1. $680,000 × 3% = $20,400 warranty expense is recognized in Year 1. Cash decrease by $18,300 when the warranty obligations are paid. Warranties payable increases by $20,400 when warranty expense is recognized and decreases by $18,300 when warranty obligations are paid, for a net increase of $2,100.
The term "double taxation" refers to which of the following?
Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on the dividends they receive from the corporation. Corporations pay income taxes on their earnings; dividends are not deductible in terms of computing those earnings. Stockholders then pay income taxes on the dividends they receive from corporations.
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. Only a corporation issues stock; as such, it is the only type of entity that would have a paid-in capital in excess of par (or stated) value account.
The term "Retained Earnings" is best explained by which of the following statements?
A measure of capital generated through earnings. As a corporation generates earnings, stockholders' equity is increased by increasing the retained earnings account. In a proprietorship or partnership, earnings increase the owner(s)'s capital account.
Which of the following statements best describes the term "par value?"
An amount used in determining a corporation's legal capital. While par value is used to determine legal capital, it has no real economic significance.
Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?
An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400. The transaction is recorded as an increase to cash of $420, the amount of the sale, plus the 5% sales tax collected, an increase to sales tax payable of $20, the amount owed to the state, and an increase to sales revenue of $400, the amount of the sale.
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.
Fred and Barney started a partnership. Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 15% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 during an accounting period, the amount of income assigned to the two partners would be: FredBarneyA.$ 20,500$ 17,500 B.$ 20,000$ 18,000 C.$ 19,000$ 19,000 D.$ 18,100$ 19,900
Choice D $20,000 investment of Fred × 15% = $3,000; $32,000 investment of Barney × 15% = $4,800; $38,000 − ($3,000 + $4,800) = $30,200 remainder; $30,200 ÷ 2 = $15,100; $15,100 + $3,000 = $18,100 distribution to Fred; $15,100 + $4,800 = $19,900 distribution to Barney
How would accountants estimate the amount of a company's uncollectible accounts expense?
Consider new circumstances that are anticipated to be experienced in the future. Compute as a percentage of credit sales. Consult with trade association and business associates. Accountants use a variety of methods to estimate uncollectible accounts expense. There is no requirement that they use a particular approach.
The recognition of depreciation expense acts to:
Decrease assets and stockholders' equity, and does not affect cash flow. Depreciation expense decreases assets (by increasing the contra asset account called accumulated depreciation, which decreases the book value of the asset) and stockholders' equity (retained earnings). The statement of cash flows is not affected at the time depreciation expense is recognized.
Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?
Ending inventory will be lower if Blake uses the weighted average cost flow method than if the FIFO cost flow method was used. If Blake uses weighted average, ending inventory will be $17.00. The weighted average method calculates an average cost of inventory ($16 + $18 = $34; $34/2 units = $17 average cost per unit). If the company uses FIFO, ending inventory will be $18.00. The FIFO method assumes that inventory purchased first is sold first. Therefore, the item purchased first costing $16 will be sold first and the item costing $18 will remain in ending inventory.
If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?
FIFO When prices are rising, FIFO will produce the lowest cost of goods sold compared with other methods because it is based on the earliest, lowest priced, purchases.
Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:
Ignore the lawsuit in its financial statements. Because the obligation is considered remote, it is neither recognized nor disclosed in Burger Barn's financial statements.
When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?
LIFO. When prices are rising, LIFO will result in the highest cost of goods sold (most recent purchases), and therefore will result in the lowest income tax expense. Income tax expense is the only cash flow affected by the choice of a cost flow method.
AWARDED QUESTION
Percent of purchase price to be allocated to equipment = (Appraised value of equipment of $726,000 ÷ Total appraised value of $2,200,000 (or $374,000 + $1,100,000 + $726,000) = 33%; Cost of equipment = Purchase price of $1,900,000 × 33% = $627,000; Cost per unit of production = (Cost of equipment of $627,000 − Salvage value of $34,000) ÷ Productive capacity of 1,000,000 units = $0.593 per unit; Year 1 depreciation = $0.593per unit × 265,000 units = $157,145
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. Preferred stockholders do not have voting rights.
hen 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. Cash is usually used to settle a warranty claim made by a customer, but is never used at the time the obligation is recognized as an expense. Although cash may be collected when the sale is made, that cash is not related to the warranty.
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 also 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. Kincaid's entry required to recognize the uncollectible accounts expense for Year 2 will:
decrease total assets and net income. Recognizing uncollectible accounts expense decreases assets by increasing the contra asset allowance for doubtful accounts and increases expenses, which decreases net income and retained earnings.
Interest charges on notes payable may be based on a(n):
fixed or variable interest rate. Interest charges may be based on a fixed interest rate that remains constant during the term of the loan or may be based on a variable interest rate that fluctuates up or down during the loan period.
The par value of a company's stock:
has little connection to the market value of the stock. Par value is an arbitrary number, but is typically lower than market value.
The net effect of the entries to recognize the receipt of a previously written-off account under the allowance method is to:
have no effect on total assets or stockholders' equity. When a company receives payment on a previously written-off account, it must first reinstate the written-off account. The reinstatement increases assets (accounts receivable) and decreases assets (increases the contra asset allowance for doubtful accounts), with no overall effect on the financial statements. Next, the company records collection of the receivable, which increases assets (cash) and decreases assets (accounts receivable), again with no overall effect on assets. The event is reported as a cash inflow for operating activities on the statement of cash flows.
Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:
increase by $640,000. Common stock will increase by $400,000, the par value, and paid-in capital in excess of par value will increase by $240,000, for a total increase in stockholders' equity of $640,000.
The primary reason for a business to allow customers to purchase goods or services on account is to:
increase sales. The primary benefit of offering credit to customers is to encourage sales that may not be made if customers are required to pay cash.
Which of the following is not subject to depreciation?
land Land is not subject to depreciation. Land has an infinite life. It is not worn out or consumed as it is used.
Which of the following would be classified as a tangible asset?
land Copyright, goodwill, and trademark are all examples of intangible assets, as they do not have physical existence. Land is an example of property, plant, and equipment, and is a tangible asset.
Bonds payable are usually classified on the balance sheet as:
long-term liabilities. Bonds will not be repaid until many accounting periods from the issue date. Therefore, they are classified as long-term liabilities.
Which of the following terms designates the maximum number of shares of stock that a corporation may issue?
number of shares authorized When a corporation is formed, it is authorized by the state to issue a maximum number of shares. The number of shares it initially issues is much lower.
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 stockholders' 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.
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 When a company issues debt, whether notes or bonds, the company is normally expected to repay the debt, as well as to pay interest to the lender.
