Final Exam ACG 2023 Paterson

What is the periodicity assumption?

The economic life of a business can be divided into artificial time periods.

Which one of the following is not a typical current liability?

Unpaid note payable that is due after the next year

The ending balance of the retained earnings account appears on

both the retained earnings statement and the balance sheet

what order are current assets listed?

by liquidity

the sole proprietorship form of business organization generally receives...

favorable tax treatment relative to corporations

Which one of the following is not one of the five basic issues in accounting for notes receivable?

filing notes receivable 1) determining the maturity date, 2) computing interest, 3) recognizing notes receivable, 4) valuing notes receivable, and 5) disposing of notes receivable.

What is the primary accounting standard-setting body in the United States?

financial accounting standards board

the payment of dividends is an example of an

financing activity

A company sold a plant asset for $3,000. It had a cost $10,000 and its accumulated depreciation is $7,500. What gain or loss did the company experience?

gain of $500 Book value is $2,500 ($10,000 - $7,500). Since the proceeds ($3,000) exceed the book value ($2,500) by $500, there is a gain.

Rock Inc. Pebble Inc. Current Ratio: 1.8 2.1 Compared to Rock Inc., Pebble Inc. has...

higher liquidity The current ratio measures liquidity and higher current ratios means the company is more liquid.

Where is the first place every transaction is recorded?

in the journal "the book of original entry."

which of the following best describes stockholders' equity?

the claims of the owners

which of the following is the most appropriate definition of accounting information?

the information system that identifies, records, and communicates the economic events of an organization to interest users

what section of a cash flows statement shows the amount of cash spent on new equipment on the most recent accounting period

the investing section. the investing section of the statement of cash flows provides information about property, plant, and equipment accounts

A professional team sells season tickets to its fans. There are 10 home games during the season. This year's season tickets sold for a total of $12,000,000 cash. Which account will be credited by the team upon receipt of the $12,000,000?

unearned ticket revenue Since the tickets are for future performances, it should be credited to Unearned Ticket Revenue by the team.

What is the primary criterion by which accounting information can be judged?

usefulness for decision making Information provided must be useful to enable users to make decisions. Consistency, or the use of the same accounting principles from period to period by the same firm, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged. Predictive value, or the ability of information to help in predicting future results, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged. Comparability, or the use of the same accounting principles by two firms in the same period, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged.

At what value are accounts receivable reported on the balance sheet?

net realizable value

In what denomination are bonds typically issued?

$1,000 Bonds are normally issued in denominations of $1,000. The face value of the bond issue (number of bonds times the denomination of the bonds) is controlled by the issuer. For example, a company that wants to borrow $10,000,000 by issuing bonds very likely issued 10,000 bonds with each bond having a $1,000 denomination.

On December 31, but before any year-end adjustments, McCarthy Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be

$1,500 because it is recognized as the expense from the year (expired)

The following partial amortization schedule is available for Cox Company which sold $100,000, ten-year, 10% bonds on January 1, 2016 for $110,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Periods Interest to be paid Interest expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2016 $10,000 $110,000 January 1, 2017 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (i)?

$10,000 (i) Interest to be paid = Face value x bond's stated interest rate = $100,000 x 10% = $10,000 (ii) Interest expense = Interest to be paid minus premium amortization (see below) = $10,000 - 1,000 = $9,000 (iii) Premium amortization = Premium/Amortization period = $10,000/10 years = $1,000 per year (iv) Unamortized premium = $10,000 - 1,000 = $9,000

On November 1, 2016, a company issued a note payable of $100,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2017 balance sheet?

$10,000 current liability; $80,000 long-term liability

Green Tree Inc. sells 10%, 10-year bonds with a face value of $100,000 for $104,000. Using the effective-interest amortization method, how much is the interest expense for the first year if the effective interest rate is 9.72%?

$10,109 Using the effective-interest method, the bond interest expense equals the effective interest rate times the bond's carrying value: 9.72% x $104,000 = $10,108.80.

Springer Company listed outstanding checks totaling $4,500 on its September bank reconciliation. In October, the company issued checks totaling $45,700. The October bank statement shows that checks totaling $39,800 cleared the bank. In addition, a check from one of Springer's customers in the amount of $500 was returned as NSF. The outstanding checks on the October bank reconciliation should total

$10,400 Beginning outstanding checks (from September), $4,500 Add: Checks issued during October, $45,700 Less: Checks that cleared the bank during October, ($39,800) Ending outstanding check, $10,400

Jones Company collected the following information to prepare its October bank reconciliation: Cash balance per books, October 31, $9,400. Deposits in transit, $1,200. Notes receivable with interest collected by bank, $1,850. Bank service charges, $50. Outstanding checks, $700. NSF check, $550. How much is the adjusted cash balance per books on October 31?

$10,650 The book side of the cash reconciliation begins with $9,400 to which amounts collected by the bank are added (e.g., the note receivable of $1,850) and amounts the bank deducted from the account are subtracted (e.g., the bank service charges of $50 and the NSF check of $550) to arrive at the adjusted cash balance per books of $5,700. Outstanding check and deposits in transit affect the bank side of the reconciliation. Alternatively: Balance per books on October 31, $9,400 Add: Note collected by the bank, $1,850 Less: Bank service charge, ($50) Less: customer's NSF check, ($550) Adjusted cash balance per books on October 31, $10,650

On January 1, Ozone Inc. sells bonds with a face value of $1,000,000 and a contract interest rate of 9% for $800,000. The bonds will mature in 10 years. Using the straight line method of amortization of the bonds' discount, how much interest expense will be recognized in the first year?

$110,000 The annual contractual interest is 9% x $1,000,000, which is $90,000. The annual bond amortization is $800,000 less $1,000,000 divided by 10 years, which is $20,000 per year. The annual interest expense will be $90,000 plus $20,000, which is $110,000.

Parrish Company has the following inventory units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 12 Purchase, Nov. 8 5,000 13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

$113,000 [FIFO periodic ending inventory] Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory. Ending inventory = (5,000 x $13) + (4,000 x $12) = $113,000.

Lance Company has the following inventory units and costs: Units Unit Cost Inventory, Jan. 1 7,000 $11 Purchase, June 19 12,000 12 Purchase, Nov. 8 4,000 13 If 10,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic inventory system?

$113,000 [LIFO periodic ending inventory] Ending inventory under LIFO uses the oldest (i.e., earliest) costs of inventory to compute ending inventory. Ending inventory = (7,000 x $11) + (3,000 x $12) = $113,000

On April 1 of the current year, Moreno Company purchased a patent from another company for $80,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 5 years. How much is Moreno's amortization expense for the current year?

$12,000 Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 5 years. Amortization expense for the current year = $80,000/5 years x 9/12 = $12,000.

Bonita Realty Management Co. received a check for $36,000 on September 1, which represents a one year advance payment of rent on an office it rents to a client. Unearned Rent Revenue was credited for the full $36,000. Financial statements are prepared on December 31. The appropriate adjusting journal entry to make on December 31 of the first year would be a

$12,000 debit to Unearned Rent Revenue and a $12,000 credit to Rent Revenue. (Revenue earned Sep. through Dec. = 36,000x4/12 = 12,000)

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $3,200 and 4 years, respectively. How much is the accumulated depreciation under the straight-line method after two years?

$12,500 The purchase price includes all costs necessary to get the truck ready to use: $27,000 + $500 + $700 = $28,200. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($28,200 - $3,200)/4 years = $6,250. Accumulated depreciation after three years = $6,250 x 2 = $12,500.

Assume that sales revenue are $450,000, sales discounts are $10,000, net income is $35,000, and cost of goods sold is $320,000. How much are gross profit and operating expenses, respectively?

$120,000 and $85,000 Sales revenue - sales returns and allowances - cost of goods sold = gross profit $450,000 - 10,000 - 320,000 = $120,000 Gross profit - operating expenses = net income Alternatively: Gross profit minus net income = operating expenses Operating expenses = $120,000 - 35,000 = 85,000 Chapter 5, Learning objective 4, Pool 2

The following data is available for Red Carpet Corporation at December 31: Common stock, par $2 (authorized 300,000 shares) $ 250,000 Treasury stock (at cost $10 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding?

$124,880 ($250,000/$2 per share) - ($1,200/$10 per sharfe) = 125,000 - 120 = 124,880

On January 1, Anthony Corporation issued $1,000,000, 14%, 5-year bonds. The bonds sold for $1,072,096. This price resulted in an effective interest rate of 12% on the bonds. Interest is payable annually on January 1. Use the effective-interest method to determine the amount of interest expense for the first year.

$128,652 Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds carrying value. The cash paid is the contractual or stated interest rate times the face amount of the bonds. Bond interest expense for the first interest date = $1,072,096 x 12% = $128,652.

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 9 years with an estimated salvage value of $6,000. At the end of the sixth year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 7 years and to change its estimated salvage value to $4,000. How much depreciation expense should be recorded for the sixth year?

$13,000 For the first five years, the annual depreciation expense is ($60,000 - $6,000)/9 years = $6,000 per year. In the sixth year, before depreciation is recorded, the asset's book value is ($60,000 - 5 x 6,000 = $30,000), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($30,000 - $4,000)/(7 - 5) = $13,000. Note: There are two years of useful life including the sixth and seventh years.

A company has the following asset account balances: Buildings and equipment, $9,500,000; Accumulated depreciation, $1,500,000; Patents, $750,000; Land Improvements, $800,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

$13,800,000 Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $13,800,000. (i.e., 9,500,000+800,000+5,000,000-1,500,000=13,800,000).

Maker-Bot Corporation has 10,000 shares of 10%, $90 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years. If the company pays $400,000 of dividends in the third year, how much will common stockholders receive?

$130,000 Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 10% x $90 = $90,000 Preferred dividends in arrears for two years ($90,000 × 2) = $180,000 Preferred for current year = $90,000 Total dividends to preferred stockholders = $270,000 Total dividends available = $400,000 Dividends available to common stockholders = $130,000

A corporation issues $200,000, 6%, 5-year bonds on January 1 for $190,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in the year issued is

$14,000 If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. If a bond is issued at a premium, interest expense includes the interest paid in the form of cash minus the amortization of premium. If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. This bond was issued for less than its face value so it was issued at a discount. Interest paid in cash = Face value times the contractual interest rate = $200,000 x 6% = $12,000 per year Straight-line amortization per year = ($200,000 - $190,000)/5 = $2,000 per year These bonds were issued at a discount: Interest expense = $12,000 + 2,000 = $14,000

An asset purchased on January 1 for $50,000 has an estimated salvage value of $5,000. The current useful life is 9 years. How much is total accumulated depreciation using the straight-line method at the end of the third year of life?

$15,000 The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($50,000 - $5,000)/9 years = $5,000 At the end of the third year, there will be two years of accumulated depreciation for a total of $15,000.

If total liabilities decreased by $10,000 and total assets increased by $5,000 during a period of time, then total stockholders' equity must have changed by what amount and direction during that same period?

$15,000 increase

Santiago Corporation bought equipment on January 1. The equipment cost $350,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years and straight-line depreciation is used. The book value of the equipment at the end of the fourth year would be

$150,000 Depreciation per year = ($350,000 - 50,000)/6 years = $50,000 per year Accumulated depreciation after 4 years = $50,000 x 4 = $200,000 Book value = Cost minus accumulated depreciation Book value = $350,000 - 200,000 = $150,000.

Total assets are $150,000, current liabilities are $10,000, long-term liabilities are $20,000, common stock is $50,000, and retained earnings totals $70,000. How much is total stockholders' equity?

$150,000 = 10,000 + 20,000 + x SE= common stock + retained earnings A = L + SE

In the current year, Brogan Company sold equipment for $20,000. The original cost was $70,000, the estimated salvage value was $4,000, and the expected useful life was 6 years. The equipment was fully depreciated. How much is the gain or loss on the sale?

$16,000 gain The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $4,000 = $16,000 gain.

Lansing Construction Company had the following receivables: Employee advances $ 500 Notes receivable (i.e., promissory notes from customers in exchange for services performed by Lansing Construction Co. 3,500 Income taxes refundable 2,000 Accounts receivable 13,000 Notes receivable (i.e., promissory notes obtained from creditors who purchased used equipment from Lansing Construction Co. 3,000 Interest receivable 200 Loans to company officers 4,400 Based on this information, what is the company's "Trade Receivables"?

$16,500 Trade receivables derive from transactions with a company's customers. Virtually all accounts receivable are trade receivables. If a note receivable results from a sale on account with a customer, it is considered to be a trade receivable. However, other notes receivable and other receivables are not trade receivables. Trade receivables = $13,000 + 3,500 = $16,500

Lorek Company acquires land for $160,000 cash. Additional costs are as follows: Removal of shed, $500; Filling and grading, $2,000; Salvage value of lumber of shed, $120; Broker commission, $6,000; Paving of parking lot, $15,500; Closing costs, $1,000. Lorek Company Should record the acquisition cost of the land as

$169,380 Solution: Purchase price, 160,000 Add: Removal of shed less salvages (i.e., 500 - 120), 380 Add: Filling and grading, 2,000 Add: Broker's commission, 6,000 Add: Closing costs, 1,000 Acquisition costs of land, 169,380

Jeremiah Company recorded the following cash transactions for the year: collected $350,000 from customers collected $40,000 from lenders paid $20,000 to purchase office equipment paid $100,000 for salaries paid $10,000 in dividends paid $80,000 of goods and services what was the company's net cash provided by operating activities for the year?

$170,000 Operating activites include -cash from customers -salaries paid for salaries -cash paid for goods and services 350-100-80=170,000

At the start of the month, Hawaii Inc. reported retained earnings of $163,000. During the month, Hawaii generated revenues of $44,000, incurred expenses of $21,000, borrowed $10,000 by signing a note payable, and paid dividends of $2,000. What is the balance in retained earnings at the end of the month?

$184,000 credit Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $163,000 + $44,000 - 21,000 − 2,000 = $184,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: signing a note increased notes payable (i.e., liabilities) and increased cash (i.e., assets); borrowing money did not affect net income or retained earnings.

A business bought a new truck for $40,000 for its auto parts delivery service. It estimated that the truck would last 200,000 miles with a salvage value of $8,000. What would be the depreciation expense for the first year assuming it is driven 11,500 miles in the first year?

$1840 The truck's depreciation rate per mile is $0.16, which is computed as ($40,000 - $8,000) divided by 200,000 miles. Depreciation expense in the first year = $0.16 X 11,500 miles = $1,840.

On January 1, 2015, Jamaica Company purchased equipment for $15,000. The estimated salvage value is $3,000 and the estimated useful life is 4 years. On December 31, 2017, before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment one year giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for 2017?

$2,000 The annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($15,000 - $3,000)/4 years = $3,000 per year. The depreciable cost that remains is $15,000 - $3,000 - (2 years x $3,000) = $6,000. This amount is allocated over the remaining useful life, and the remaining life is 3 years (i.e., 5 total years minus 2 expired years). Depreciation in the third year is $2,000 (i.e., $6,000/3 years).

On April 1 of the current year, La Presa Company sells some equipment for $18,000. The original cost was $50,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $28,000. How much is the gain or loss on the sale?

$2,250 loss First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $42,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 8,000) and a life of 6 years, the depreciation is $7,000 per year. In the current year, depreciation expense is $1,750 (i.e., $7,000 per year x 3/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $29,750 (i.e., $28,000 + $1,750). Book value equals cost minus accumulated depreciation. Book value is $20,250 (i.e., $50,000 - $29,750). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $18,000 - 20,250 = ($2,250) (i.e., loss).

At the end of the year, Green Company had retained earnings of $2,640,000. During the year, the company issued stock for $120,000 and paid dividends of $25,000. Net income for the year was $412,000. How much was the retained earnings balance at the beginning of the same year?

$2,253,000 Ending retained earnings equals beginning retained earnings plus net income minus dividends. $2,640,000 = X + $412,000 - $25,000 Solve for X: Beginning retained earnings = $2,253,000.

In the first month of operations, a company's cash account has total debit entries amounting to $27,500 and total credit entries amounting to $24,900. At the end of the month, the cash account has a

$2,600 debit balance When a company begins, all of its accounts have a zero balance. This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances. The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).

Stonebrook Corporation reported net income of $24,000, net sales of $400,000, and average shares outstanding of 6,000. There were $8,000 of preferred stock dividends. How much was its earnings per share?

$2.67 Earnings per share equals net income earned on each share of common stock. Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends. Earnings per share = ($24,000 - 8,000)/6,000 shares = $2.67/share.

On January 1, $2,000,000, 10-year, 5% bonds, were issued for $1,800,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the annual amortization amount is

$20,000 Straight-line amortization of bond premiums and/or bond discounts allocate the initial premium or discount over a period of time. This bond was issued (or sold) for less than its face value so it was issued at a discount of $200,000 (i.e., $2,000,000 - $1,800,000). Compared to issuing a bond at its face value, issuing a bond at a discount increases the issuer's cost. Straight-line amortization spreads this cost equally over the life of the bond. Annual amortization of bond discount equals the discount divided by the life of the bond ($200,000/10 years = $20,000 per year). By the time the bond reaches maturity in 20 years, the discount will have been fully amortized (i.e., it will have been reduced to zero) and the bond's carrying value will equal its face value.

Clarence Trucking Inc. purchased a new truck on January 1, 2017 for $360,000. Its useful life is expected to be 8 years and its salvage value is estimated at $60,000. The company uses the declining-balance method at double the straight-line rate (i.e., the double-declining balance method). What is the truck's book value at the end of December 31, 2018?

$202,500 The depreciation expense for the first year would be ($360,000 - 0) x (2 x 1/8) = $90,000 which produces a book value of $270,000 at the end of the first year (i.e., $360,000 - 90,000). The depreciation expense for the second year would be based on the book value at the start of the second year: $270,000 x (2 x 1/8) = $67,500. The book value at the end of the second year equals the asset's cost minus its accumulated depreciation = $360,000 - 90,000 - 67,500 = $202,500.

Kent Enterprises purchased a truck for $60,000 on January 1 of its first year. The company uses the units-of-activity method and it estimates that the truck's useful life will be 100,000 miles. The truck will have an estimated salvage value of $10,000. The company drives the truck 25,000 miles in the first year and drives it 20,000 miles in the second year. How much accumulated depreciation will be reported on the company's balance sheet as of the end of the second year?

$22,500 The depreciation rate to use for units-of-activity is calculated as: (Cost - Salvage value)/Total activity expected. To compute accumulated depreciation at the end of two years, the depreciation rate (i.e., per mile) should then be multiplied by the units of activity (i.e., miles driven) for both years. Depreciation rate = ($60,000 - 10,000)/100,000 miles = $0.50 per mile Accumulated depreciation = (25,000 + 20,000) x $0.50 per mile = $22,500

Ramona, Inc. has 3,000 shares of 6%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid a $12,000 dividend. This year the dividend declared and paid was $25,000. What amount of this dividend will be paid to the preferred stockholders?

$24,000 Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the prior year and the current year. Total dividend = 3,000 x 6% x $100 = $18,000 Preferred dividends in arrears for prior year ($18,000 - $12,000) = $6,000 Preferred dividends for current year = 18,000 Total dividends to preferred stockholders = $24,000

Bombay Corporation had $48,000 at the beginning of the year and it had cash disbursements of $21,000 during the year. At the end of the year, Bombay Company had $51,000. What was Bombay Corporation's cash receipts for the year?

$24,000 The ending balance equals beginning cash minus cash disbursements plus cash receipts $51,000 = $48,000 + X - $21,000 Solve for X: Cash disbusements = $24,000.

ABC Corporation has cumulative preferred stock on which it pays dividends of $10,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $55,000 as dividends in the current year, how much will the common stockholders receive?

$25,000 Stockholders who own cumulative preferred stock receive an allocation for each of the past two years (i.e., the preferred stock is in arrears for two years meaning dividends were not paid in those years) and an allocation for the current year. The remaining balance, if there is any, is allocated to the common stockholders. Preferred dividends in arrears for two years ($10,000 × 2) = $20,000 Preferred for current year = 10,000 Total dividends to preferred stockholders = $30,000 Total dividends available = $55,000 Dividends available to common stockholders = $25,000

Ben's Razor Company purchased a machine for $90,000 on January 1, 2016 and depreciated it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $24,000 on June 30, 2020, what would be the company's gain or loss from the sale?

$25,500 loss The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $90,000 - [($90,000/10 years) x 4.5 years] = $49,500. The gain (loss) on the sale = sales price minus book vale = $24,000 - $49,500 = ($25,500).

Corian Company purchased equipment and incurred these costs: Cash price, $25,000; Sales taxes, $1,400; Insurance during transit, $300; Annual maintenance costs, $300. What amount should be recorded as the cost of the equipment?

$26,700 All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($25,000 + $1,400 + $300 = $26,700). The $300 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.

Caruso Company purchased equipment on January 1 at a total invoice cost of $400,000. The equipment has an estimated salvage value of $50,000 and an estimated useful life of 4 years. What is the amount of accumulated depreciation at December 31 of the third year if the straight-line method of depreciation is used?

$262,500 Since the asset has been in use for three full years, the accumulated depreciation at December 31 of the third year is equal to three times the annual depreciation expense: (i.e., $400,000 - $50,000)/4 = $87,500 per year.

A company lends $18,000 at 9% interest for 3 months on June 1. If adjusting entries are recorded on July 30, how much will be credited to Interest Revenue?

$270 The formula is Principal x Rate x Time or $18,000 x 9% x (2/12) since interest is stated in an annual rate yielding a value of $270.

If sales revenues totals $420,000, gross profits are $150,000, and operating expenses are $80,000, nonoperating expenses are $30,000, how much is cost of goods sold?

$270,000 Cost of goods sold would be equal to sales revenue ($420,000) less gross profits ($150,000) for a total of ($270,000). Solution: Net sales revenue = Sales - Sales returns and allowances - Sales discounts Net sales revenue = $420,000 - 0 - 0 = $420,000 Gross profit = Net sales revenue - cost of goods sold Alternatively: Cost of goods sold = Net sales revenue - gross profit Cost of goods sold = $420,000 - 150,000 = $270,000

In a recent year, Ley Corporation had $1,500,000, cost of goods sold of $500,000, net income of $150,000, interest expense of $25,000, and a times interest earned ratio of 12.00. What was Ley Corporation's income before taxes for the year?

$275,000 Times interest earned = Income before interest and taxes divided by interest expense 12.00 = Income before interest and taxes/$25,000 Income before interest and taxes = $300,000 Income before interest and taxes - interest expense = Income before taxes Income before taxes = $300,000 - 25,000 = $275,000

On January 1, Putnam Wholesale Company's Allowance for Doubtful Accounts had a credit balance of $21,000. During the year, it had net credit sales of $800,000 and it had $25,000 of uncollectible accounts receivable that were written off. Past experience indicates that the allowance should be 8% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 is $300,000, what is the required credit adjustment to the Allowance for Doubtful Accounts at December 31?

$28,000 After the write-offs are recorded (but before the year-end adjusting entry), Allowance for Doubtful Accounts will have a debit balance of $4,000 ($21,000 credit beginning balance combined with a $25,000 debit for the write-offs). Using the percentage of receivables basis, the balance in the allowance account needs to be a credit balance of $24,000 (i.e., $300,000 x 8%). In order to have an ending balance of $24,000, a credit entry of $28,000 must be made to Allowance for Doubtful Accounts. Thus, the amount of the adjusting entry must be $28,000.

If a corporation issues 800 shares of $4 par common stock for $7 a share, how much is the legal capital?

$3,200 The legal capital is the par value per share ($4 per share) times the number of shares issued (800) or $3,200. This will be equal to the total reported in the stock account.

On June 1, Long Corporation signed a $36,000, 16%, 2-year note to help finance renovations being made to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry for the first year would be a

$3,360 debit to Interest Expense and a $3,360 credit to Interest Payable. This entry correctly adjusts the accounts and interest incurred for a seven month period. ($36,000 x 0.16 x 7/12 = $3,360)

On January 1, $1,000,000, 20-year, 8% bonds, were issued for $1,070,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the annualy amortization amount is

$3,500 Straight-line amortization of bond premiums and/or bond discounts allocate the initial premium or discount over a period of time. This bond was issued (or sold) for more than its face value so it was issued at a premium of $70,000 (i.e., $1,070,000 - $1,000,000). Compared to issuing a bond at its face value, issuing a bond at a premium decreases the issuer's cost. Straight-line amortization of premium spreads this cost savings equally over the life of the bond. Annual amortization pf bond premium equals the premium divided by the life of the bond ($70,000/20 years = $3,500 per year). By the time the bond reaches maturity in 20 years, the discount will have been fully amortized (i.e., it will have been reduced to zero) and the bond's carrying value will equal its face value. Learning objective 5: Prepare the entries for

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense?

$3,600 The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $3,000)/5 = $3,600 per year.

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $50,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

$300,000 Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $350,000 - 50,000 = $300,000.

Bubba's Trucking Company purchased a new semi-truck on January 1, 2017 for $180,000. Its useful life is expected to be 6 years and its salvage value is estimated at $35,000. What is the depreciation expense for 2018 using the declining-balance method at double the straight-line rate (i.e., the double-declining balance method)?

$40,000 The depreciation expense for the first year would be ($180,000 - 0) x (2 x 1/6) = $60,000. This produces a book value of $120,000 (i.e., $180,000 - 60,000) at the end of the first year. The depreciation expense for the second year would be based on the book value at the start of the second year: $120,000 x (2 x 1/6) = $40,000.

On January 1, Forever Ceramics issued $1,000,000, 9% bonds for $960,000. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable annually on January 1. The company uses the effective-interest method of amortizing bond discount. At the end of the first year, how much should Forever Ceramics report as unamortized bond discount?

$34,000 Using the effective-interest method, the bond interest expense equals the effective interest rate times the bonds' carrying value. The cash paid is the coupon or stated interest rate times the face amount of the bonds. The difference is the amount amortized for one year. The original discount is $40,000 ($1,000,000 - $960,000). The amortization for the first year is equal to the difference between the cash interest to be paid ($1,000,000 x 9% = $90,000) and interest expense ($960,000 x 10% = $96,000), or $6,000. The amortization of $6,000 is subtracted from the original discount of $40,000 to arrive at the unamortized bond discount at the end of the first year of $34,000.

Ending inventory is $10,000, beginning inventory is $20,000, and the cost of goods purchased is $25,000. How much is cost of goods sold?

$35,000 Cost of goods sold = Beginning inventory + purchases - ending inventory. Solve for ending inventory. Beginning balance ($20,000) plus purchases ($25,000) equals $45,000 in merchandise available, less ending inventory ($10,000) equals cost of goods sold of $35,000.

In the current year, Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It also spent $20,000 in legal fees for a patent on that new product. Later i the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

$35,000 Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following:

$356,000 Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $23,000) --FOB shipping point goods sold and shipped (i.e., $8,000) --Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000

A corporation is authorized to sell 1,200,000 shares of common stock. Today there are 450,000 shares outstanding, and the board of directors declares a 8% stock dividend. How many shares will be issued as a stock dividend?

$36,000 This number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. 450,000 shares outstanding x 8% = 36,000 new shares to be issued.

On September 1 the Petite-Sizes Store paid $12,000 to the Mega-Mall Co. for 3 months' rent beginning September 1. Prepaid Rent was debited for the payment. If Petite-Sizes Store prepares financial statements on September 30, the appropriate adjusting journal entry to make on September 30 would be a...

$4,000 debit to rent expense and a $4,000 credit to prepaid rent

Bittner Company borrows $86,500 on August 1 from Harrington State Bank by signing an $86,500, 12%, 18-month note. How much interest expense should Bittner Company record on December 31 if the company uses a calendar year-end and records adjusting entries only at year-end?

$4,325 Interest is calculated by multiplying the principal times the annual interest rate times the time period the note is outstanding. Remember—all interest rates are annual interest rates unless designated otherwise. This note generates 12% interest if it were outstanding the entire year. At December 31, two months of interest has accrued and should be recognized as interest expense and interest payable. December 31: $86,500 x 12% x 5/12 = $4,325.

A company has the following asset account balances: Buildings and equipment, $6,200,000; Accumulated depreciation, $1,800,000; Patents, $950,000; Inventory, $1,000,000; and Goodwill, $4,000,000. How much will be reported on the balance sheet under property, plant & equipment?

$4,400,000 Buildings and equipment less accumulated depreciation are the only amounts included under Plant & Equipment: $6,200,000 - $1,800,000 = $4,400,000.

Vernon Corporation reported income before taxes of $1,000. It paid $150 in corporate income taxes so its net income is $850. The corporation paid its shareholder, an individual named Ernest, a $200 dividend. The shareholder is in the 20% tax bracket. How much in personal income taxes will the shareholder need to pay?

$40 One of the disadvantages of a corporate structure is the corporation pays its own tax burden on net income and then the stockholders pay income tax on the dividends they receive. Ernest must pay an additional $40 (i.e., $200 x 20%).

On October 1, Year 1, Best Buy purchased an asset for $10,000, with a $2,000 estimated salvage value, and a 5-year useful life. How much is the year 1 depreciation expense using the straight-line method?

$400 The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($10,000 - $2,000)/5 x 3/12 = $400.

Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchased 50 units at $6.60 per unit December 12 Sold 45 units December 20 Purchased 30 units at $7.50 per unit December 29 Sold 15 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

$409.50 using perpetual, and $423 using periodic When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. On Dec. 12, the company sold 45 units from the Dec. 7 layer of inventory. On Dec. 29, the company sold 15 units from the Dec. 20 layer of inventory. Cost of goods sold = (45 x $6.60) + (15 x $7.50) 297 + 112.50 = $409.50 When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. On Dec. 12, the company sold 45 units. On Dec. 29, the company sold 15 units. Cost of goods sold is based on the last 60 units of inventory acquired = (30 x $7.50) + (30 x $6.60) 225 + 198 = $423

Suarez Corporation issued 10-year bonds with a face value of $600,000 and a contractual rate of interest of 7% at 98 on July 1. What is the total cost of borrowing for Suarez Corporation?

$432,000 The total cost is the sum of the interest payments and the difference between the cash received from bondholders and the maturity value of the bonds. Principal at maturity = $600,000 Interest payments = $600,000 × 7% × 10 years = $420,000 Total cash paid to bondholders = $1,020,000 Cash received from bondholders (99% × $600,000) = $588,000 Total cost of borrowing = $1,020,000 - 588,000 = $432,000

Glass Company received proceeds of $455,000 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 101. Glass uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2019?

$438,500 Amortization per year = ($455,000 - 400,000)/10 years = $5,500 per year Remaining premium after three years = $55,000 - (5,500 x 3) = $38,500 Carrying value of bonds = Face value of bonds + premium on bonds - discount on bonds Carrying value after three years = $400,000 + 38,500 = $438,500

Danielle Inc. has 10,000 shares of 6%, $50 par, non-cumulative preferred stock and 75,000 shares of $4 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $75,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$45,000 Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 10,000 x 6% x $50 = $30,000 Total dividends available = $75,000 Dividends available to common stockholders = $45,000

If beginning inventory is $100,000, cost of goods purchased is $500,000, sales revenue is $1,000,000 and ending inventory is $130,000, how much is cost of goods sold under a periodic system?

$470,000 Cost of goods sold is computed by adding beginning inventory and cost of goods purchased and then subtracting ending inventory, or $100,000 + $500,000 - $130,000 = $470,000.

How much accrued interest should be reported on the payee's December 31 balance sheet on a $8,000, 9%, 9-month note receivable issued on May 1?

$480 Interest earned is calculated by multiplying the face value (i.e., principal) times the interest rate times the portion of the year that has passed since the note was issued. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. Interest = Principal x interest rate x time = $8,000 x 9% x 8/12 = $480

On January 1, Pierce Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on January 1. What is the carrying value of the bonds at the end of the third interest period if amortization is $4,000 per year using the straight-line amortization method?

$492,000 After three interest periods, the carrying value of the bonds will have increased by three times the annual discount amortization of $4,000, or a total of $12,000. The original carrying value of $480,000 plus the three years of discount amortization amounts to $492,000 as the carrying value at the end of the third interest period.

A $500,000 bond is redeemed at 98 when the carrying value of the bond is $485,000. Which of the following is one effect of recording the redemption?

$5,000 The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were redemption for $490,000 ($500,000 x 98%) and the carrying value is $485,000, the company should record a loss of $5,000.

A corporation issues $100,000, 6%, 10-year bonds on January 1 for $108,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in the year issued is

$5,200 If a bond is issued at a discount, interest expense includes the interest paid in the form of cash plus the amortization of discount. If a bond is issued at a premium, interest expense includes the interest paid in the form of cash minus the amortization of premium. Interest paid in cash = Face value times the contractual interest rate = $100,000 x 6% = $6,000 per year Straight-line amortization per year = ($108,000 - $100,000)/10 = $800 per year These bonds were issued at a premium: Interest expense = $6,000 - $800 = $5,200

On May 1, Mesa Verde, Inc. purchased a 2-year insurance policy for $15,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be a

$5,200 debit to Insurance Expense and a $5,200 credit to Prepaid Insurance. This entry correctly adjusts the accounts to recognize that six months of the 36 month policy have expired and are recorded as expense. Monthly rate = $15,600/24 = $650 per month. Expense the amount for May. 1 through Dec. 31: $650 x 8 = $5,200

Arbol Corporation reports the following: Sales revenue $181,000; ending inventory $12,600; beginning inventory $15,000; purchases $65,600; purchases discounts $2,500; purchase returns and allowances $1,500; freight-in $600; freight-out $800. Calculate the cost of goods sold.

$64,600 Cost of goods available for sale equal the beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory. Cost of goods sold = 15,000 + 65,600 - 2,500 - 1,500 + 600 - 12,600 = 64,600.

At the beginning of the year, a company purchased a piece of machinery for $50,000. It has a salvage value of $6,000, an estimated useful life of 8 years, and estimated units of output of 90,000 units. Actual units produced during the first year were 11,000. How much is depreciation expense for the first year under the straight-line method?

$5,500 The annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($6,000) divided by the useful life (8 years) resulting in an annual depreciation value of $5,500. Depreciation expense per year = (50,000 - 6,000)/8 = 5,500 per year.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Copyrights, $200,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Patents, $1,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; and Goodwill, $3,500,000. The company also paid $1,500,000 for research & development during the current year.

$5,900,000 The intangibles are copyrights of $200,000, trademarks of $1,200,000, patents of $1,000,000, and goodwill of $3,500,000 totaling $5,900,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights.

A corporation shows the following account balances: Retained earnings, $280,000 Treasury stock, $10,000 Dividends payable, $30,000 Paid-in capital in excess of par value, $60,000 Common stock, $175,000 How much is total stockholders' equity?

$505,000 Total stockholders' equity = Retained earnings - treasury stock + paid-in capital in excess of par value + common stock Total stockholders' equity = $280,000 - $10,000 + $60,000 + $175,000 = $505,000 Note: Dividends Payable is a liability.

Intuitive Design Company started business this year and it purchased $7,000 of office supplies and debited Supplies for the full cost. Supplies on hand at the end of the accounting period were $800. The company's appropriate adjusting journal entry to be made would be a

$6,200 debit to supplies expense and a $6,200 credit to supplies Supplies expense can be computed as beginning supplies plus the cost of supplies purchased in the current period minus the cost of supplies on hand at the end of the period. Since this company started business this year (and no beginning supplies were mentioned), beginning supplies should be determined to be zero. Thus, supplies expense = $0 + $7,000 - $800 = $6,200. The year-end adjusting journal entry to record Supplies Expense (and to decrease Supplies to the correct ending balance) would be a debit to Supplies Expense for $6,200 and a credit to Supplies for $6,200.

Employees at the Waco Waffle House were paid on Friday, December 28 for the five days ending on December 28. The next payday is Friday, January 4. Employees work 5 days a week. The weekly payroll amounts to $3,150. The appropriate adjusting journal entry on December 31 would be to credit Salaries and Wages Payable for

$630.

At December 31, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: (1) $112,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2, (2) $74,000 of inventory sold and shipped by Sunrise on December 27 under the terms FOB destination, and this inventory was received by the buyer on January 6. (3) $6,000 of inventory held by Sunrise on consignment from another company. What is Sunrise's correct ending inventory balance at December 31?

$634,000 The inventory balance of $752,000 should not include the $112,000 since ownership passes at destination on January 2. It should include the $74,000 because ownership does not pass at the shipping point on December 27. It should not include the $6,000 on consignment because these goods are not owned by Sunrise. The corrected inventory balance = $752,000 - $112,000 - $6,000 = $634,000.

Steve Company purchases $7,400 of merchandise on April 11, with credit terms of 2/15, n/30. If Steve pays on April 27, what is the cost of this purchase?

$7,400 The terms 2/15, n/30 indicate that the discount is 2% if payment is made within 15 days of the invoice date. This would permit Steve Company to take a discount of $148 (2% x $7,400) on the invoice price, but April 27 is more than 15 days after April 11. Steve Company must pay the entire invoice price of $7,400.

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on June 1. What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?

$7,500 The portion of the premiums not yet earned should be recognized as a liability by Sensible. Since there are 5 months remaining on the insurance policy, the remaining liability is 5/12 of $18,000 or $7,500.

On January 1, $5,000,000, 10-year, 8% bonds were issued at $5,150,000. Interest is paid semi-annually each January 1 and July 1. The straight-line method of amortization is used to amortize the premium. How much is the first semi-annual amortization?

$7,500 The premium is amortized or is divided equally over the 10-year term of the bonds. The issue price of the bonds less the face amount of the bonds is the amount of the premium. When the premium of $150,000 is divided by the total semiannual interest payment periods, the result is amortization of $7,500 per interest payment period.

Double Company collected the following information to prepare its September bank reconciliation: Cash balance per bank, September 30, $72,700. Note receivable of $1,700 plus $200 of interest collected, $1,900. Outstanding checks, $4,600. Deposits in transit, $2,150. Double Company erroneously recorded a $1,000 cash outflow as a $100 cash outflow. The bank erroneously deducted $300 from Double Company's checking account. The bank should have taken the money from a different customer's account. Bank service charges, $50. NSF check, $450. How much is the adjusted cash balance per bank on September 30?

$70,550 Balance per bank on Sep. 30, $72,700 Add: Deposits in transit, $2,150 Less: Outstanding checks, ($4,600) Add: Bank error (see note below), $300 Adjusted cash balance per bank, $70,550

On August 1 the Darius Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a

$700 debit to Depreciation Expense and a $700 credit to Accumulated Depreciation. This entry correctly adjusts the accounts and amount to be charged for the 5 months between August 1 and December 31 (i.e., $1,680 per year x 5/12 = $700).

Schneider Trucking Inc. purchased a new truck on January 1 of the current year for $180,000. Its expected useful life is 5 years and its salvage value is estimated at $25,000. What is the depreciation expense for the current year using the declining-balance method at a double the straight-line rate (i.e., the double-declining balance method)?

$72,000 The depreciation expense for 20X1 would be the truck's cost times 2 divided by the life in years = $180,000 x (2 x 1/5) = $72,000.

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal the following data before year-end adjusting entries: Accounts receivable, $800,000; Allowance for doubtful accounts balance before adjustment (credit balance), $12,000; Amounts expected to become uncollectible, $65,000. How much is the cash realizable value (i.e., net realizable value) of the accounts receivable at December 31, after adjusting entries?

$735,000 The net realizable value of the accounts receivable is accounts receivable less the ending balance in the Allowance for Doubtful Accounts. In this case, accounts receivable is $800,000 and the ending balance in Allowance for Doubtful Accounts will be $65,000 after the year-end adjusting entry has been recorded. This will result in cash realizable value (i.e., net realizable value) of $800,000 less $65,000, or $735,000.

On January 1, Blick Corp. issues $200,000 of 5-year, 7% bonds at 97. Assume interest is paid annually each January 1. What is the total cost of borrowing associated with this bond?

$76,000 The total cost of borrowing for a given bond issuance includes the interest payments plus any discount associated with issuing the bonds minus any premium associated with issuing the bonds. When interest is paid annually, each interest payment equal the bonds' face value multiplied by the contractual interest rate (i.e., $200,000 x 7% = $14,000). These five-year bonds pay $14,000 in each of the five years (i.e., $14,000 x 5 years = $70,000). These bonds were issued at 98 meaning they were issued for 97% of their face value. So, the discount is $6,000 (i.e., $200,000 x [100% - 97%] = $6,000). The discount increases the total cost of borrowing. Over the course of five years, these bonds have a total cost of $76,000 (i.e., $70,000 + 6,000 = $76,000); the issuer will incur $76,000 of interest expense.

Spiral Corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $200,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding, $2,600,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $52,000,000 Retained earnings, $23,500,000 Treasury stock (40,000 shares), $1,020,000 The company's total stockholders' equity is

$77,460,000 Total stockholders' equity = Preferred stock + Common stock + Paid-in capital in excess of par (for preferred stock & common stock) + Retained earnings - Treasury stock Total stockholders' equity = $200,000 + 2,600,000 + 180,000 + 52,000,000 + 23,500,000 - 1,020,000 = $77,460,000

A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The customer returns $20 of merchandise for credit on account. What journal entry will the retailer record when payment is received within the discount period under a perpetual inventory system?

$78.40 debit to Cash, $1.60 debit to Sales Discounts, and $80.00 credit to Accounts Receivable The original sale is reduced from $100 by the $20 return to a $80 balance due. The 2% discount is based on the $80 balance due, which is $80 times 2%, or $1.60. The retailer collects $78.40 (i.e., $80 - $1.60). The retailer also reduces its Accounts Receivable by $80 because the customer is paying and owes nothing more to the retailer. Finally, the retailer also records this discount as a debit to Sales Discounts.

Wilson Company showed the following balances at the end of its first year: Accounts receivable, $7,000 Accounts payable, $1,000 Cash, $8,000 Common stock, ? Dividends, $1,000 Expenses, $17,000 Notes payable, $4,000 Prepaid insurance, $2,000 Revenues, $22,000 What did Wilson Company show as the balance of its common stock account?

$8,000 Certain accounts normally have debit balances: Assets, expenses, and dividends. Wilson Company's accounts with debit balances: $7,000 + 8,000 + 2,000 + 1,000 + 17,000 = $35,000 At all times, the total debit balance must equal the total credit balance. Certain accounts have credit balances: Liabilities, Stockholders' equity, and revenues. Wilson Company's accounts with credit balances = $1,000 + 4,000 + X + 22,000 = $27,000 + X. Since debits of $35,000 must equal credits of $27,000 + X, X must be $8,000.

Brazen Inc. sells bonds with a face value of $1,000,000 and a contract interest rate of 10% for $1,200,000. The bonds will mature in 10 years. Using the straight line method of amortization of the bonds' premium, how much interest expense will be recognized in year 1?

$80,000 The contractual interest rate is 10% x $1,000,000, which is $100,000. The annual bond amortization is $1,200,000 less $1,000,000 divided by 10 years, which is $20,000. The annual interest expense will be $100,000 less $20,000, which results in a debit of $80,000.

A corporation shows the following account balances: Retained earnings, $350,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $75,000 Treasury stock—preferred, $30,000 Common stock, $200,000 Preferred stock, $175,000 Paid-in capital in excess of par value—preferred, $55,000 How much is total stockholders' equity?

$805,000 Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $350,000 - $20,000 + $75,000 - $30,000 + $200,000 + $175,000 + $55,000 = $805,000

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 6,000 $ 8 Purchase, April 2 18,000 10 Purchase, Aug. 28 16,000 12 If the company has 8,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$84,000 Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average cost per unit = [(6,000 x $8) + (18,000 x $10) + (16,000 x $12)] ÷ (6,000 + 18,000 + 16,000) = $420,000 ÷ 40,000 units = $10.5 per unit. Ending inventory = $10.5 x 8,000 units = $84,000.

The following is information is taken from Clark Corporation's financial records for the current fiscal year. i. Cash received from customers, $230,000 ii. Revenue earned, $255,000 iii. Cash paid for wages, $110,000 iv. Wage expense incurred, $115,000 v. Cash paid during the current year for computers that will be used for 3 years, $30,000 vi. Depreciation expense, $10,000 vii. Proceeds from issuing debt, $30,000 viii. Interest incurred on debt, $3,000 ix. Interest paid on debt, $0 x. Cash paid for supplies, $4,000 xi. Supplies expense incurred, $2,000 What is the company's net income for the current year using the cash-basis of accounting?

$86,000 Net income using the cash-basis = Cash collected from customers - cash paid for expenses incurred including prepaid expenses Net income using the cash-basis = $230,000 - 110,000 - 30,000 - 4,000 = $86,000

If 1,000 shares of $5 par common stock are reacquired by a corporation for $9 a share, by how much will total stockholders' equity be reduced?

$9,000 Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $9 = $9,000.

The following is information is taken from Clark Corporation's financial records for the current fiscal year. i. Cash received from customers, $150,000 ii. Revenue earned, $195,000 iii. Cash paid for wages, $85,000 iv. Wage expense incurred, $90,000 v. Cash paid during the current year for computers that will be used for 3 years, $24,000 vi. Depreciation expense, $8,000 vii. Proceeds from issuing debt, $50,000 viii. Interest incurred on debt, $5,000 ix. Interest paid on debt, $0 x. Cash paid for supplies, $3,000 xi. Supplies expense incurred, $2,000 What is the company's net income for the current year using the accrual basis of accounting?

$90,000 Net income using the accrual basis = Revenue earned - expenses incurred including prepaids Net income using the accrual basis = $195,000 - 90,000 - 8,000 - 5,000 - 2,000 = $90,000

The net cash inflow from operating activities is $200,000; cash received from issuing stock is $150,000; cash paid for capital expenditures is $90,000; cash paid for bonds held as an investment is $50,000; and cash paid for dividends is $20,000. How much is free cash flow?

$90,000 free cash flow is cash provided by operating activities minus the cash paid for capital expenditures and dividends paid. Free cash flow = $200,000 - 90,000 - 20,000 = 90,000

Brown Box Inc. issues a $1,000,000, 11%, 20-year mortgage note. The terms provide for annual installment payments of $125,576. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

$967,135 Since interest accrues annually, the first year's interest would be $110,000 (i.e., 11% x $1,000,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $125,576 payment and the interest component ($110,000), resulting in a principal reduction of $15,576. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $15,576 from $1,000,000 to $984,424. The second annual payment's interest is 11% of the outstanding mortgage principal of $984,424, or $108,287. The second annual payment of $125,576 is allocated as $108,287 paid towards interest and the remaining $17,289 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second annual payment is $967,135 (i.e., $984,424 - $17,289 = $967,135).

Brown Box Inc. issues a $1,000,000, 12%, 20-year mortgage note. The terms provide for annual installment payments of $133,879. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

$968,121 Since interest accrues annually, the first year's interest would be $120,000 (i.e., 12% x $1,000,000) which equals the annual interest rate times outstanding mortgage principal as of the beginning of the first annual period. The mortgage principal is reduced by the difference between the $133,879 payment and the interest component ($120,000), resulting in a principal reduction of $13,879. Thus, the first annual mortgage payment reduces the outstanding mortgage principal balance by $13,879 from $1,000,000 to $986,121.

Black Tires Inc. issues a $1,000,000, 12%, 20-year mortgage note. The terms provide for semiannual installment payments of $66,462. What is the remaining unpaid principal balance of the mortgage payable account after the second semiannual payment?

$968,688 The first semiannual interest would be 6% (i.e., 12% ÷ 2) times $1,000,000 (i.e., the outstanding mortgage principal as of the beginning of the semiannual period (6% x $1,000,000 = $60,000). The mortgage principal is reduced by the difference between the $66,462 payment and the interest component ($60,000), resulting in a principal reduction of $6,462 ($66,462 - $60,000 = $6,462). Thus, the first semiannual mortgage payment reduces the outstanding mortgage principal balance by $6,462 from $1,000,000 to $993,538. The second semiannual payment's interest is 6% of the outstanding mortgage principal of $993,538, or $59,612. The second semiannual payment of $66,462 is allocated as $59,612 paid towards interest and the remaining $6,850 allocated towards the payment of outstanding mortgage principal. Thus, the outstanding mortgage principal after the second semiannual payment is $986,688 (i.e., $993,538 - $6,850 = $986,688).

A check correctly written by Speedy Delivery Company for $1,304 was incorrectly recorded on its books as $1,403. As a result, the company's next monthly bank reconciliation should include

$99 added to the cash balance per books. The company deducted too much (i.e., $1,403 - $1,304 = $99) from its cash balance. Correcting the error requires adding back the $99.

Coronado Company purchased land for $80,000. The company also assumes $15,000 of accrued taxes on the property, incurred $8,000 to remove an old building, and received $4,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$99,000 All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. Coronado should include the purchase price of $80,000, the assumption of accrued taxes of $15,000 (i.e., Coronado agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $8,000 less the payment received for the salvaged materials in the amount of $4,000. This results in an acquisition cost of $99,000.

Black Tires Inc. issues a $1,000,000, 12%, 20-year mortgage note. The terms provide for semiannual installment payments of $66,462. What is the remaining unpaid principal balance of the mortgage payable account after the first semiannual payment?

$993,538 The semiannual interest accrues each six months. The first semiannual interest payment would be 6% (i.e., 12% annual interest rate divided by 2) times the outstanding mortgage principal as of the start of that semiannual period (i.e., $1,000,000), or $60,000 (i.e., 6% x $1,000,000). Therefore, the $66,462 semiannual mortgage payment includes $60,000 of interest and $6,462 (i.e., the remainder of the mortgage payment) to be allocated towards paying principal. Thus, the principal balance of $1,000,000 declines by $6,462 leaving an outstanding mortgage balance of $993,538.

What are some true statements about the adjusted trial balance?

- ATB provides primary basis for the preparation of financial statements. -the company prepares the adjusted trial balance after it has journalized adjusting entries -an adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.

Which of the following is an acceptable way to express the useful life of a depreciable asset?

-Expected number of miles a depreciable vehicle will be driven -Expected number of units to be produced by the depreciable asset -Expected number of hours the depreciable asset will remain productive -Expected life in years of the depreciable asset

Adjusting entries are made to ensure that

-balance sheet and income statement accounts have correct balances at the end of an accounting period. -expenses are recognized in the period in which they are incurred. -revenues are recorded in the period in which the performance obligation is satisfied.

What are some of the results from the Sarbanes-Oxley Act?

-increased penalties for fraudulent activity increased -top management must now certify the accuracy of financial information -auditors cannot provide non-audit service to the same client

In periods of rising prices, what will LIFO produce?

-lower retained earnings that FIFO -Lower total assets than FIFO -Lower net income than FIFO

For what purpose might a company use free cash flow?

-pay off debts -acquire property plant and equipment -pay additional dividends

A company's average total assets are $250,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,200,000. Net sales total $300,000. What is the asset turnover?

1.2 times The asset turnover is net sales divided by the average total assets: $300,000/$250,000 = 1.2 times.

Clawson Corporation has current assets of $3,010,000 and current liabilities of 2,150,000. If Clawson Corporation pays $200,000 of its accounts payable what will its new current ratio be?

1.44 Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,010,000 − $200,000) ÷ ($2,150,000 − $200,000) Current ratio = 1.44 (i.e., 1.44 to 1 or 1.44:1)

Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques?

1.8 (highest) Since this ratio is significantly greater than 1, it suggests the use of the most conservative accounting techniques.

Helix Company purchased merchandise with an invoice price of $1,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

18% The company saves $10 (i.e., $1,000 x 1%) if it pays no later than 10 days after the sale. Also, the company must pay no later than 30 days after the sale. Thus, the company saves $10 if it pays 20 days before the final due date. Use the formula for interest: Interest = Principal x Interest rate x Time $10 = $1,000 x Interest rate x (30-10)/360 Solving for the interest rate: Interest rate = [360/(30-10)] x $10/$1,000 = 0.18 (i.e., 18%)

Net income, $800,000 Preferred stock dividends, $50,000 Market price per share of stock, $25 Average common stockholders' equity, $4,000,000 Cash dividends declared on common stock, $20,000 What is the return on common stockholders' equity?

18.75% Return on common stockholders' equity = Net income less preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = ($800,000 - $50,000)/$4,000,000 = 18.75%.

Among Pima Company's records, it has the following selected accounts after posting adjusting entries: Accounts payable, $14,000 6-month, 8%, note payable, $24,000 Income tax payable, $5,000 Accumulated depreciation-building, $23,000 3-year, 10% note payable, $200,000 Salaries and wages payable, $28,000 Mortgage payable ($20,000 due next year), $1,000,000 Rent payable, $6,000 Current assets are $256,000 at year-end. How much is Pima's current ratio at year-end?

2.64 Liabilities are classified as current if they will be paid with current assets within one year or the current operating cycle, whichever is longer. Examples of current liabilities include accounts payable, notes payable due in 12 months or less, income tax payable, salaries and wages payable, the portion of mortgage payable due next year, and rent payable. Current liabilities = $14,000 + 24,000 + 5,000 + 20,000 + 6,000 = $97000 Current ratio = current assets divided by current liabilities = $256,000/$97000 = 2.64

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $800,000, its gross margin is $2,000,000, and its net sales are $10,000,000. What is Oahu's return on assets?

20% Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $800,000 divided by $4,000,000 = 20%.

Vista, Inc. has 225,000 shares of common stock outstanding. A 40% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?

315,000 The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. The new shares plus the original shares outstanding are then added together: 225,000 + (225,000 x 40%) = 315,000 shares.

Jose Inc. reports the following balances and amounts. The following information is presented in random order. Accounts payable, $ 125,000 Accounts receivable, 140,000 Accumulated depreciation—Equipment, $60,000 Cash, $100,000 Equipment, $400,000 Intangible assets, $20,000 Inventory, $200,000 Long-term investments, $80,000 Long-term liabilities, $200,000 Notes payable (short-term), $56,000 Prepaid insurance, $2,000 Salaries and wages payable, 8,000 Short-term investments, $80,000 Stockholders' equity, 493,000 How much is working capital?

333,000 Working capital is current assets minus current liabilities. Current assets = $140,000 + 100,000 + 200,000 + 2,000 + 80,000 = $522,000 Current liabilities = $125,000 + 56,000 + 8,000 = $189,000 Working capital = $522,000 - $189,000 = $333,000

State Street Corporation had the following results: Sales revenue $267,000; cost of goods sold $107,000; net income $92,400; operating expenses $55,400; net cash provided by operating activities $108,900. How much is the company's profit margin?

34.6% Profit margin = net income divided by net sales = $92,400/$267,000 = 34.6%.

Lake Coffee Company reported net income of $64,000 and net sales of $600,000. The company's asset turnover ratio is 3.5 (or 3.5 times). What was the company's return on assets?

37.33% Return on assets = Asset turnover x Profit margin = 3.5 x ($64,000/$600,000) = 37.33%.

A plant asset was purchased on January 1 for $48,000 with an estimated salvage value of $3,000 at the end of its useful life. The current year's depreciation expense is $5,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after adjusting-entries is $25,000. The remaining useful life of the plant asset is

4 years Depreciation per year = (Cost - salvage value)/Useful life Solving for useful life: Useful life = ($48,000 - 3,000)/$5,000 = 9 years Years expired = Accumulated depreciation/Depreciation per year = $25,000/$5,000 = 5 years Remaining life = Useful life - Years expired = (8 - 5) = 4 years. Chapter 9, Learning objective 3: Compute periodic depreciation usi

Net income is $10,000, operating expenses are $25,000, and net sales total $75,000. How much is the gross profit rate?

46.7% Gross profit - operating expenses = net income. Alternatively: Net income + operating expenses = gross profit. $10,000 + 25,000 = $35,000 Net sales - cost of goods sold = gross profit Gross profit ratio = Gross profit divided by cost of goods sold = $35,000/$75,000 = 46.7%

Star Corporation sells its goods on terms of 2/10, n/30. It has a receivables turnover ratio of 7.50. What is its average collection period (also known as the days in receivable ratio)?

48.67 days The accounts receivable turnover is net credit sales divided by average net accounts receivable; it is 7.5. The average collection period is computed by dividing the number of days in the year by the accounts receivable turnover, or 365/7.5 = 48.67 days.

An asset was purchased on January 1 for $48,000. It has an estimated salvage value of $3,000. The depreciation expense in the fourth year is $5,000 and the balance of the Accumulated Depreciation account after the adjusting entries are recorded in the fourth year is $20,000. If the company uses the straight-line method, what is the asset's remaining useful life?

5 years Since the depreciable cost is $45,000 (i.e., $48,000 purchase price less the salvage value of $3,000) and the annual depreciation is $5,000, it must have a 9-year life. The balance in Accumulated Depreciation indicates that 4 years of life have been consumed (i.e., $20,000/$5,000 per year = 4 years). Of the total 9 years of life, 5 years remain.

the financial statements for Joanna Corporation contained the following account information: accounts receivable: $15,000 sales revenue: $90,000 Cash: $25,000 Salaries and wages expense: $30,000 Supplies expense: $10,000 How much was the corporations net income?

50,000 net income = revenues - expenses 90,000-30,000-10,000=50,000

The following information came from the income statement of the Watson Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. Inventory turnover is 7 times per year. What is Watson's days in inventory?

52.1 Dividing 365 days of the year by the inventory turnover of 7 results in an average of 52.1 days in inventory.

A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $4,000. The truck's monthly depreciation expense is $500. What is the truck's useful life?

6 years The depreciable cost equals the cost minus the salvage value; it is the $40,000 purchase price less $4,000 salvage value, which is $36,000. The annual depreciation cost is $500 per month or $6,000 per year. Since $36,000 will be depreciated by $6,000 per year, the useful life is 6 years (i.e., $36,000/$6,000 per year = 6 years).

In a recent year, Sherwood Day Corporation had sales of $500,000, net income of $200,000, interest expense of $40,000, and tax expense of $30,000. What was Day Corporation's times interest earned for the year?

6.75 Times interest earned is computed by dividing income before interest and taxes by interest expense. Times interest earned = ($200,000 + $40,000 + $30,000)/$40,000, or 6.75.

Ortiz Inc. reports the following balances and amounts. The following information is presented in random order. Accounts payable, $35,000 Cash provided by operations, 90,000 Accounts receivable, 37,500 Net income, 36,000 Average common shares, 20,000 Salaries and wages payable, 8,000 Average current liabilities, 110,000 Stockholders' equity, 240,000 Total assets, 600,000 Total current assets, 300,000 Average total liabilities, 320,000 Total current liabilities, 120,000 Cash, 100,000 How much is the debt to assets ratio?

60% The debt to asset ratio is total liabilities divided by total assets. It is a measure of solvency. Total liabilities = $360,000 (i.e., total assets of $600,000 less stockholders' equity of $240,000). Debt to assets = $360,000/$600,000 = 60%

Net credit sales are $900,000, average net receivables total $150,000, average inventory totals $200,000, and the allowance for doubtful accounts totals $8,000. How much is the average collection period (also known as the days in receivable ratio)?

60.83 days The accounts receivable turnover is net credit sales divided by average net accounts receivable. The accounts receivable turnover is net credit sales ($900,000) divided by average net accounts receivable ($150,000), or 6.000 times. The average collection period is 365 divided by the accounts receivable turnover, which is 365/6.0 = 60.83 days.

Massey Corporation purchased a piece of land for $50,000. Massey paid attorney's fees of $5,000 and brokers' commissions of $4,000 in connection with the purchase. An old building on the land was torn down at a cost of $2,000, and proceeds from the scrap were $500. Massey also assumes $5,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land?

65,500 All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The total to be debited to the land account is the cost of the land of $50,000 plus the attorney's fees of $5,000, the brokers' commissions of $4,000, plus the cost of tearing down the old building, $2,000. The proceeds from the scrap sale totaling $500 should be subtracted and the assumption of $5,000 of accrued taxes added results in a total cost of the land of $65,500. Chapter 9, Learning objective 1: Describe how the cos

Edward Corporation had net credit sales during the year of $750,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $75,000 and at the end of the year was $110,000. The balance of total assets at the beginning of the year was $1,200,000 and at the end of the year was $1,500,000. How much is the accounts receivables turnover?

8.11 The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its accounts receivable's average balance. The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. Accounts receivable turnover = $750,000/[($75,000 + $110,000)/2] = 8.11 The company's average accounts receivable for the year is $92,500. Its net credit sales are 8.11 times its average balance suggesting the company collected the equivalent of its average accounts receivable 8.11 times during the year.

Chris's maid service began the year with total assets of $120,000 and stockholders' equity of $40,000. During the year the company earned $120,000 in net income and paid $15,000 in dividends. Total assets at the end of the year were $225,000. How much are the total liabilities at the end of the year?

80,000 Ending Stockholders Equity = beginning stockholders equity + net income - dividends A = L + SE (225-145=80)

In its first year, Raydine Inc. reported sales revenue of $1,300,000, net income of $200,000, and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,800,000 at the end of the year. How much is the company's return on common stockholders' equity in its first year?

9.33% The return on common stockholders' equity is calculated by dividing the net income less the preferred stockholders' dividends by the average common stockholders' equity: [$200,000 - (10,000 shares x $100/share x 6%)] ÷ [($1,200,000 + $1,800,000) ÷ 2] = 9.33%.

Kant Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $103,745. Which of the following is part of the entry to record the bond redemption?

A debit of $1,255 to Loss on Bond Redemption Solution: Redeeming an outstanding bond (1) removes the face amount of the bonds from the Bonds Payable account, (2) removes the remaining Premium on Bonds Payable, (3) records the cash payment paid in exchange for redeeming the bonds, and (4) recognizes a gain or loss on redemption for the difference (which make sure debits equal credits). The entry to record this transaction will have debits to Bonds Payable for $100,000, Premium on Bonds Payable for $3,745 and Loss on Retirement for $1,255. The credit will be to cash for $105,000.

When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain?

A debit to Cash, a credit to Notes Receivable, and a credit to Interest Revenue.

On January 1, Pierce Corporation issues $500,000, 5-year, 8% bonds at 102 with interest payable on January 1. Which of the following is one part of the entry on December 31 to record accrued bond interest and the amortization of the bond discount using the straight-line method?

A debit to Interest Expense for $38,000 When a discount is amortized, the debit to interest expense is the sum of the cash to be paid ($500,000 x 8% = $40,000) minus the amount of premium amortization [($500,000 + ($500,000 x 102%))/5 = $2,000]. In this case, the debit to interest expense should be for $40,000 minus $2,000, or a total of $38,000. The entry to record accrued bond interest and the premium amortization includes a debit to interest expense for $38,000, a debit to premium on bond payable for $2,000 and a credit to interest payable for $40,000. Payment occurs the next day on January 1. Learning objective 8: Straight-line method of amortizing bond discount and bond premium.

Jackson Company uses a perpetual inventory system and on November 30 purchased merchandise for which it must pay the shipping charges. Which of the following is part of the required journal entry when Jackson pays the shipping charges of $200?

A debit to Inventory for $200 In a perpetual inventory system, all of the cost of acquiring merchandise (including the cost of having the inventory delivered to the purchaser) is part of the cost of the inventory and should be debited to the inventory account. In a periodic inventory system, these shipping charges would be debited to Freight-in and included in the computation of net purchases at the end of the accounting period.

Jay John Inc. recently paid the latest installment on its 20-year mortgage. Out of the $30,000 total payment, $3,000 went towards reducing the principal, and the balance went towards interest. Which of the following is one part of the entry to account for the principal payment?

A debit to Mortgage Payable for $3,000. When an installment payment is made on a mortgage note, the interest is a debit to Interest Expense and the reduction in principal is a debit to Mortgage Payable. Out of the $30,000 total payment, $3,000 reduces the mortgage payable for principal paid and the balance of $30,000 (i.e., $27,000) was for interest expense. Credit cash for the $30,000 total payment.

On May 2, Cartwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What journal entry will Cartwright Company record on May 2?w

A debit to Notes Receivable for $3,000 and a credit to Accounts Receivable for $3,000 Settling an account receivable by replacing it with a note receivable suggests that Notes Receivable will be debited for $3,000 and Accounts Receivable will be credited for $3,000.

FastAct Company pays its employees their wages each Friday. The most recent payment occurred on Friday, December 28. The next payroll will be paid on January 4. There is one more work day in December after December 28th. Employees work 5 days a week and the company pays $2,000 per day in wages. What will the adjusting entry to accrue wages expense at the end of December include?

A debit to Salaries and Wages Expense for $2,000 One day's wage needs to be recorded for the current year even though the employer will not pay its employees for that day until Jan. 4 of next year. One day's wage = $2,000 per day x 1 day = $2,000

Which one of the following will maximize a company's reported net income in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation Maximizing reported net income requires minimizing expenses, including depreciation expense. Minimizing depreciation expense in the first year of an asset's useful life is achieved by a long estimated life to spread the cost over a longer period of time resulting in a smaller depreciation expense each year. A high salvage value decreases to the cost to be depreciated and reduces depreciation expense in each year the asset is depreciated. Straight-line yields a smaller depreciation charge in the first year than accelerated depreciation methods, such as the declining-balance method.

Which one of the following account pairs are both permanent accounts?

Accounts Receivable; Allowance for Doubtful Accounts

Which of these statements about national credit card (e.g., Visa) sales is correct?

A retailer's acceptance of a national credit card is a form of factoring the receivable by the retailer.

Which of the following is the correct sequence to report receivables on the balance sheet?

Accounts receivable, a 6-month note receivable, other receivables

In a perpetual inventory system, which accounts will the seller credit when merchandise is returned by a customer?

Accounts Receivable and Cost of Goods Sold

What does a general ledger of a company contain?

All the asset, liability, stockholders' equity, revenue, expense, and dividend accounts A general ledger lists all of the accounts of a company. These are the asset, liability, stockholders' equity, revenue, expense, and dividend accounts.

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method?

Allowance for Doubtful Accounts is debited.

Which of the following would affect the gross profit rate if sales remain constant?

An increase in cost of goods sold Gross profit rate is computed by dividing gross profit by net sales and any change in sales, sales returns in allowances, sales discounts, or the cost of goods sold will affect the ratio.

Where is common stock listed in the stockholders' equity section of the balance sheet?

As part of paid-in capital Paid-in capital includes all stock accounts (i.e., common stock and preferred stock) and it also includes all additional paid-in capital accounts. Common stock is listed after preferred stock, if there is any preferred stock. Common stock is listed before retained earnings. Treasury stock is subtracted from stockholders' equity.

Which of the following measures provides an indication of how efficient a company is in employing its assets?

Asset turnover ratio The asset turnover rate is an indicator of how efficiently a company is employing its assets. The current ratio is an indicator of liquidity and the company's ability to pay its obligations when they come due. The profit margin ratio is an indicator of how profitable a company is. The debt to total assets ratio indicates the proportion of assets to debt held by a company.

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end. The total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $200 before the year-end adjusting entry for Bad Debt Expense?

Bad Debts Expense 2,000 Allowance for Doubtful Accounts 2,000 The Allowance for Doubtful Accounts needs an ending credit balance of 3% of $60,000 or $1,800. Since the pre-adjusted debit balance is $200, a credit of $2,000 is necessary to increase it to $1,800. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $2,000.

In August, Oliver Company sold merchandise on account to Mr. Reed for $300 with terms 1/15, n/30. Oliver Company uses the percentage of receivables basis for estimating uncollectible accounts on December 31. On March 25, Oliver Company determines that it will not collect the amount due from Mr. Reed. Prepare the journal entry to record the write-off on March 25.

Bad Debts Expense 300 Accounts Receivable 300 Accrual accounting requires the allowance method of accounting for bad debts which involves estimating uncollectible accounts at the end of each period. This method provide a better matching of revenues and expenses than the direct write-off method of accounting for uncollectible accounts. Several alternative procedures exist for estimating uncollectible accounts. Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Under the allowance method, Bad Debts Expense is estimated and recorded at the end of the period as an adjusting entry. Simultaneously, the Allowance for Doubtful Accounts balance is adjusted to reflect the estimated portion of Accounts Receivable not expected to be collected. Writing-off a specific customer's account receivable requires a reduction in the Accounts Receivable. Writing-off an account under the allowance method requires a decrease in the amount set aside in the Allowance for Doubtful Accounts. The adjusting journal entry includes a debit to the Allowance for Doubtful Accounts and a credit to Accounts Receivable for the amount written-off. Since the customer did not pay within the discount period, the customer's opportunity for a discount had been forfeited. Thus, the full invoice price was the amount due, and it is the amount written-off by the company.

In the table below the information for four companies is provided. Company Accounts Receivable turnover Alpha 16.0 Beta 18.1 Gamma 15.5 Delta 11.9 Industry Average 13.0 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?

Beta The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. It is a measure of liquidity. The higher the accounts receivable turnover, the higher the likelihood of being able to pay its own liabilities as they come due. The highest accounts receivable turnover and the lowest average collection period: Beta Company.

When an uncollectible account is recovered after it has been written off, two journal entries are recorded. Which of the following accounts will be credited in these two journal entries?

Both Allowance for Doubtful Accounts and Accounts Receivable When an uncollectible account is recovered after it has been written off, two journal entries are recorded. The first journal entry is Accounts Receivable will be debited and Allowance for Doubtful Accounts will be credited (i.e., this reverses the journal entry that wrote-off the account). The second journal entry requires and a debit to Cash and a credit to Accounts Receivable (i.e., this records the customer's payment).

Which of the following is not a component of the operating cycle of a service company?

Buy inventory to be resold to customers

What type of accounts are Sales Returns and Allowances and Sales Discounts?

Contra revenue accounts

Good Stuff Retailers accepted $50,000 of Wells Fargo Visa credit card charges for merchandise sold on July 1. Wells Fargo charges 5% for its credit card use. What should Good Stuff Retailers debit as a result of this transaction?

Cash for $47,500 and Service Charge Expense for $2,500

Dynatech issues 1,000 shares of $10 par value common stock at par. When the transaction is recorded, which accounts are credited?

Common Stock $10,000 The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 1,000 x $10 = $10,000 Credit to Common stock = 1,000 x $10 = $10,000 Credit to Paid-in capital in excess of par value = 1,000 x ($10 - $10) = $0

What method is normally used to account for treasury stock?

Cost method

Indicate which one of the following would likely appear on both a multi-step income statement and a single-step income statement.

Cost of goods sold Two formats for the income statement include: (1) single-step income statement and (2) multi-step income statement. Gross profit is reported exclusively on the multi-step income statement; gross profit is sales minus cost of goods sold. Many companies.that sell inventory use the multi-step income statement to highlight gross profit. Some companies that sell inventory continue to rely on the single-step income statement, so some companies that have cost of goods sold report cost of goods sold.

Net credit sales for the month are $5,000,000 for Karl Clothiers. Its accounts receivable balance is $180,000. The allowance is calculated as 8.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $6,000 before adjustment. How much is the balance of the allowance account after adjustment?

Credit balance of $15,300 The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be a credit balance equal to 8.5% times $180,000, or $15,300.

Harrison, Inc. issued 3,000 shares of $10 par value preferred stock at $15 per share. Which of the following will be part of the journal entry to record the issuance?

Credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $15,000 Debit to Cash = 3,000 x $15 = $45,000 Credit to Preferred Stock = 3,000 x $10 = $30,000 Credit to Paid-in capital in excess of par value = 3,000 x ($15 - $10) = $15,000 Learning objective 2: Record the issuance of common stock.

Which one of the following is not one of the principles of managing accounts receivable?

Cross-indexing journal-entries with the postings to the ledger Managing accounts receivable involves five steps. These include (1) determining to whom to extend credit, (2) establish a payment period, (3) monitor collections, (4) evaluate the liquidity of receivables, and (5) accelerate cash receipts from receivables when necessary. The one that is considered the most critical is deciding on who gets credit and who doesn't. Cross-indexing journal-entries with postings to the ledger is merely a reference to two sequential steps of the accounting cycle.

Schmidt Co. holds Murphy Inc.'s $10,000, 120-day, 6% note. What is the entry to be made by Schmidt Co. when the note is collected, assuming no interest has previously been accrued?

Debit Cash for $10,200, credit Notes Receivable for $10,000, and credit Interest Revenue for $200 When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $10,000 × 6% × 120/360 = $200. Total cash received = $20,000 + 400 = $10,200.

Laurel Company factors $300,000 of receivables to Hardy Factors. Hardy Factors assesses a 3% fee on the amount of receivables sold. Laurel Co. factors its receivables to Hardy Factors regularly. What journal entry does Laurel Co. make when the factoring occurs?

Debit Cash for $291,000, debit Service Charge Expense for $9,000, and credit Accounts Receivable for $300,000 This entry records the receipt of cash as a debit for $291,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $9,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $300,000.

Baker Co. loaned $30,000 to Idaho Co. on April 1, at 12% interest for 4 months. What adjusting entry should Baker Co. record on June 30 before preparing the financial statements on June 30?

Debit Interest Receivable for $900 and credit Interest Revenue for $900

The cash register tape indicates sales are $1,000 and sales taxes are $75. What journal entry is needed to record this information?

Debit the Cash account for $1,075, credit the Sales account for $1,000, and credit the Sales Taxes Payable for $75. The sales taxes obligation must be recognized separately as sales taxes payable because they are paid by the buyer of the product or service (i.e., the customer) and they must be submitted by the retailer to the governmental agency imposing them. Sales taxes are not additional revenues earned by the retailer. Here's a summary of the journal entry. Debit: Cash for $1,075 Credit: Sales account $1,000 Credit: Sales Taxes Payable for $75

On January 1, Slick Corp. issues $1,000,000 of 10-year, 6% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?

Debit to Cash for $1,000,000 The journal entry for the issuance of bonds issued at face value includes a debit to cash for the proceeds collected (i.e., $1,000,000) and a credit to obligation associated with the bonds (i.e., Bonds Payable for $1,000,000). Since the bonds were issued at face value, neither a premium nor a discount would be recorded. No interest is recognized or due on the bonds at the issue date.

Windham, Inc. issued 1,500 shares of common stock at $10 per share. If the stock has a par value of $6 per share, which of the following will be part of the journal entry to record the issuance?

Debit to Cash for $15,000 The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 1,500 x $10 = $15,000 Credit to Common stock = 1,500 x $6 = $9,000 Credit to Paid-in capital in excess of par value = 1,500 x ($10 - $6) = $6,000

Kensington Company sold $7,000 of merchandise to customers who charged their purchases with a bank credit card. Kensington's bank charges it a 5% fee. Which one of the following is part of the journal entry to record this transaction?

Debit to Cash for $6,650 The fee is 5% times $7,000, or $350. Kensington will receive the difference between the face amount of the receivables and the fee, or $6,650. The journal entry includes a debit to cash for $6,650, a debit to Service Charge Expense for $350, and credit to sales for $7,000.

Which one of the following statements is incorrect?

Dividends may be paid on common stock while dividends are in arrears on preferred stock. Dividends may not be paid on common stock if preferred dividends are in arrears.

Sam works for a sports franchise which pays wages and salaries earned on a monthly basis. A new accountant was hired by the sports franchise in late May. Due to inexperience, the new accountant failed to accrue Sam's salary for May. What is the impact on the May 31 financial statements of the sports franchise?

Expenses are understated; net income is overstated. The failure to accrue salaries and wages expense and a liability for salaries and wages payable results in understating expenses and liabilities and overstating net income and retained earnings; there is no impact on assets.

On the date a 90-day note is honored, how much cash will the payee receive?

Face value plus 90 days of interest

When using a periodic inventory system and the purchaser directly incurs the freight costs, which account is debited?

Freight-In When the purchaser directly incurs the freight costs and is using a periodic inventory system, Freight-in is debited.

What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U. S.?

GAAP

Which of the following should not be included in the physical inventory of a company?

Goods held on consignment from another company

Companies can either lease or purchase assets that they need to operate their business. For example, many companies lease vehicles instead of buying them. Which of the following is not an advantage of leasing using an operating lease relative to purchasing an asset? a. the lessee does not report the item as an asset on its balance sheet b. little or no down payment by the lessee c. higher risk of obsolescence by the lessee d. all of these are advantages of operating leases e. sharing of tax advantages between the lessor and lessee

Higher risk of obsolescence by the lessee

When a merchandiser sells goods, it increases Accounts Receivable by debiting it and it _________ Sales Revenue by __________ it.

Increases; crediting

Which of the following is classified in an income statement as a non-operating activity?

Interest expense operating activities on income statement would be: COGS, ADV exp, Freight-out

Which one of the following is not true concerning a retained earnings restriction?

It is reported as a loss on the income statement.

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?

It will have the reverse effect on the net income during the next accounting period.

Although steps are missing, which of the following lists steps of the accounting cycle in their correct order?

Journalize the transactions, journalize the adjusting entries, journalize the post-closing entries.

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?

LIFO reserve When LIFO inventory valuation is used, the disclosure of LIFO Reserve allows comparisons of companies using LIFO and FIFO. There is no FIFO reserve; there is only a LIFO reserve. Inventory turnover will not provide valuation differences for inventory methods. Current replacement costs may assist in lower-of-cost-or-market decisions but they are not financial statement values.

A 120-day note dated January 2, 2015, would mature on:

May 2, 2015

Which of the following is the correct adjusting journal entry for the bank account holder when notified of a bank debit memorandum for a monthly service charge of $30?

Miscellaneous Expense 30 Cash 30

Which is true if the ending inventory is overstated?

Net income will be overstated and the stockholders' equity will be overstated.

Which of the following costs should not be included in the cost of a building? a. remodeling prior to use b. closing costs c. purchase price d. parking lot repaving e. real estate broker's commission

Parking lot repaving

Which of the following items does not result in an entry to the Inventory account under a perpetual system?

Payment of freight costs for goods shipped to a customer

Under what inventory system is cost of goods sold determined at the end of an accounting period?

Periodic inventory system

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do?

Provide the customer a lengthy payment period Longer payment period will increase the chances the company will not pay. Companies might require risky customers to provide letters of credit or bank guarantees, require them to pay cash in advance, or ask for references from banks and suppliers to determine their payment history.

A company's closing entries can be describes as follows: The first closing entry closes revenues and credits the Income Summary account for $12,125. The second closing entry closes expenses and debits the Income Summary account for $5,775. The third closing entry closes the Income Summary account. Prior to the fourth closing entry, the Dividends account has a $1,325 balance. The fourth closing entry closes the Dividends account. What was the company's net change in Retained Earnings for the current period? What was the company's net change in Retained Earnings for the current period?

Retained Earnings increased by $5,025 during this period. Retained Earnings is increased by revenues, $12,125, and decreased by expenses and dividends, $5,775 and $1,325, so the increase in Retained Earnings is $5,025.

Black Raptor Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 120,000 shares of $8 par value common stock outstanding, which is currently selling for $25 per share. What will occur is Raptor declares a 10% stock dividend on its common stock?

Retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000. A 10% stock dividend will increase the number of shares issued by 12,000 shares (120,000 shares x 10%). At a market price of $25 per share, total paid-in capital will increase by $300,000 (12,000 shares x $25/share) and retained earnings will decrease by that same amount.

Which of the following accounts is debited when a company factors its accounts receivable?

Service Charge Expense Service Charge Expense and Cash are the two accounts debited when accounts receivable are factored.

Russ Company borrowed $700,000 on December 1 by issuing a 24-month, 11% note. Both the note and the interest will be paid when the note matures. Which statement is true at December 31?

The company has $6,417 of interest payable that is a long-term liability. A current liability is a debt the company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within the next year or the operating cycle, whichever is longer. Since both the interest payable and the note payable are expected to be paid in 23 months (i.e., 24-month note issued one month before year-end), they will be considered long-term liabilities. Interest payable = $700,000 x .11 x 1/12 = $6,417

If a company properly reports goodwill as an intangible asset on its books, which of the following must be true?

The company purchased another company.

The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $4,000 = $16,000 gain.

The market interest rate exceeds the contractual interest rate. Issuing bonds for less than their face value (i.e., $198,000 issue price is lower than $200,000 face value or principal) indicates that the bonds were issued for a discount. When bonds have a contractual interest rate that is lower than the market interest rate, investors are not willing to pay face value—they need to be induced with a discount because the bond's relatively low contractual rate promises less interest in the form of periodic cash payments than current market rates otherwise require.

Why should a bank reconciliation be prepared?

To explain any difference between the depositor's balance per books and the balance per bank

Which one of the following is not a method used by companies to accelerate cash receipts?

Which one of the following is not a method used by companies to accelerate cash receipts?

The 13th Street Grill issued 10,000 of $3 par value common stock for $7 per share. Which of the following will be part of the journal entry to record the issuance?

a credit to $30,000 to common stock The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 10,000 x $7 = $70,000 Credit to Common stock = 10,000 x $3 = $30,000 Credit to Paid-in capital in excess of par value = 10,000 x ($7 - $3) = $40,000

Handel Enterprises issued 2,500 bonds with a face value of $1,000 each at 103. The journal entry to record the issuance includes

a credit to Bonds Payable for $2,500,000. The company issuing bonds is borrowing money and it is issuing bonds as evidence of the loan. The company that issues the bonds will debit Cash for the amount of cash received in exchange for issuing the bonds (i.e., 2,500 bonds x $1,000 face value per bond x 103% = $2,575,000). The issuing company will also credit Bonds Payable for the face value of the bonds issued (i.e., 2,500 bonds with a face value of $1,000 per bond equals $2,500,000). Note that the company issued $2,000,000 face value of bonds but it received more cash than this amount when it issued the bonds. The company issued these bonds at a premium, so the issuing company will need to credit the Premium on Bonds Payable account for the difference between the face value of the bonds issued and the cash collected from issuing them (i.e., Premium = $2,575,000 - $2,500,000 = $75,000). Increase the Premium on Bonds Payable account by crediting it. The issuer credits Premium on Bonds Payable by $75,000.

Nashville Rail Co. issued $100,000 in 10-year bonds at 103. It is 10 years later and the final interest payment is being made and recorded. The journal entry that Nashville records for the redemption of its bonds at maturity includes

a debit to Bonds Payable for $100,000. When these bonds mature, the $100,000 principal is paid and the $100,000 obligation removed from the Bonds Payable account. Any discount or premium will have already been completely amortized before journalizing the entry to record redemption at maturity.

Handel Enterprises issued 2,000 bonds with a face value of $1,000 each at 97. The journal entry to record the issuance includes

a debit to Discount on Bonds Payable for $60,000. The company issuing bonds is borrowing money and it is issuing bonds as evidence of the loan. The company that issues the bonds will debit Cash for the amount of cash received in exchange for issuing the bonds (i.e., 2,000 bonds x $1,000 face value per bond x 97% = $1,940,000). The issuing company will also credit Bonds Payable for the face value of the bonds issued (i.e., 2,000 bonds with a face value of $1,000 per bond equals $2,000,000). Note that the company issued $2,000,000 face value of bonds but it received less cash than this amount when it issued the bonds. The company issued these bonds at a discount, so the issuing company will need to debit the Discount on Bonds Payable account for the difference between the face value of the bonds issued and the cash collected from issuing them (i.e., Discount = $2,000,000 - $1,940,000 = $60,000). Increase the Discount on Bonds Payable account by debiting it. The issuer debits Discount on Bonds Payable by $60,000 when issuing these bonds.

Michael Co. accepts a $4,000, 3-month, 8% promissory note in settlement of an account with Tony Co. The entry to record this transaction includes

a debit to Notes Receivable for $4,000 and a credit to Accounts Receivable for $4,000. On the date Michael Co. accepts the note, Notes Receivable is debited for $4,000 and Accounts Receivable is credited for $4,000. Interest is accrued only with the passage of time.

On October 1, Banner Company borrowed $50,000 from the City Bank for four months at 8%. Interest was properly accrued on December 31. The journal entry needed to record the payment of the note and interest on the due date includes

a debit to interest payable or $1,000 Interest is calculated by multiplying the loan's principal multiplied by the annual interest rate multiplied by the time period during which interest accrued. Remember—all interest rates are annual interest rates unless designated otherwise. This note generates 8% interest only if it is outstanding the entire year. On December 31, three months of interest was properly accrued; an adjusting entry was recorded for (i) Interest Expense and (ii) Interest Payable for accrued interest: $50,000 x 8% x 3/12 = $1,000. On the due date (i.e., one month after the start of the next year), an additional one month of interest expense would need to be recognized and paid: $50,000 x 8% x 1/12 = $333. Both the interest payable that was accrued on December 31 and the interest expense that accrued during the first month of the second calendar year need to be paid when the note is due. Likewise, the note's principal must also be paid. Here's a summary of the journal-entry for the date of payment: Debit: Notes Payable for $50,000 Debit: Interest Payable for $1,000 Debit: Interest Expense for $333 Credit: Cash for $51,333

The following totals for the month of June were taken from the payroll records of Seminole Company: Salaries, $100,000 FICA taxes withheld, $5,650 Income taxes withheld, $18,000 Medical insurance deductions, $5,500 Federal unemployment taxes, $450 State unemployment taxes, $2,500 The entry to record accrual of employer's payroll taxes would include a

a debit to payroll tax expense for $8,600 When recording payroll for employees' salaries and wages, the company records the employee's FICA taxes payable, the employee's federal income taxes payable, the employee's state income taxes payable, and any other employee payroll deductions in addition to the amount owed to the employee for the employee's salaries and wages after reductions for the payroll withholdings mentioned above. However, this question asks for the employer's payroll taxes. The employer's payroll tax deduction includes the employer's portion of FICA taxes payable, federal unemployment taxes payable, and state unemployment taxes payable. The employer's payroll taxes = FICA taxes + Federal unemployment taxes + State unemployment taxes The employer's payroll taxes = $5,650 + 450 + 2,500 = $8,600.

Tanner, Inc. issued a 10%, 5-year, $100,000 bond when the market rate of interest was 12%. The bond will sell at

a discount

monetary unit assumption...

accounting assumption requires that only those things that can be expressed in a dollar values are included in the accounting records

An account is a part of the financial information system and is described by all except which one of the following?

an account is a source document. An account has three basic parts: (1) a title (such as "Cash" or Accounts Payable"), (2) a debit side (i.e., left-side column for recording account balance changes), and (3) a credit side (i.e., a right-side column for recording account balance changes). Source documents are the information sources used to record changes to account balances (e.g., invoices are source documents). Accounts are not source document.

the cost of assets consumed or services used is also known as...

an expense

A permanent decline in the market value of an asset is called

an impairment

Cash received before services are performed which is recorded as a debit to a Cash account and a credit to a liability account is called

an unearned revenue. Cash received before the performance obligation is satisfied is an unearned revenue. Accrued revenue is revenue for services performed but not yet received in cash or recorded. Unrecorded revenue is not recorded; unrecorded revenue would violate numerous principles and concepts—revenue should be recorded.

After an event takes place, what is the correct sequence that takes place?

analyze the transaction; record it in the journal; post it to the ledger

resources owned by a business are referred to as

assets

When is a physical inventory usually taken?

at the end of the company's fiscal year

the segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the

auditor's opinion

Which of the following does not properly reflect financial ratio? a. 7:1 b. $7,200 c. $0.60 per dollar d. 18.4%

b. $7,200 An amount such as $7,200 is likely an account balance, which can be used to calculate a ratio. However, it is not a way to express a ratio. Ratios can be stated in the form of a percentage (such as 50%), a rate (such as 1.5 times greater than a reference), or a simple proportion (like 1:2).

Which of the following is not based on accrual accounting? a. total assets b. net cash provided by operating activities c. retained earnings d. net incom

b. net cash provided by activites

Short-term notes receivable are reported in the current assets section of the balance sheet at

cash realizable value.

Which of the following are not considered to be external users of accounting information?

company officers such as management

Different companies using the same accounting principles is an example of _________________. For instance, this occurs when two different companies both use the accrual accounting rather than cash-basis accounting or when both companies use the same method to compute depreciation rather than using two different methods.

comparability Comparability results when different companies use the same accounting principles.

What accounting concept is employed when using the lower-of-cost-or-market valuation?

conservatism Conservatism dictates the lower-of-cost-or-market inventory valuation. Inventory that has not yet sold has not reached revenue recognition. In simple terms, conservatism means that accounting rules are designed to report assets, income, etc. on a conservative basis—that financial reports should not overstate a company assets, profits, etc. The lower-of-cost-or-market principle avoids overstating ending inventory on a company's balance sheet.

Which of the following is an advantage of the corporate business form?

continuous life

A corporation issues $1,000,000 of 8%, 5-year bonds when bonds of similar risk are paying 9%. The 8% rate of interest is called the __________ rate.

contractual

What term is used for bonds that give the bondholder an option to exchange the bond for shares of the company's common stock?

convertible bonds

Easy transfer of ownership is a characteristic of which form of business organization?

corporation

Desert Towers Inc. issued 3,000 shares of $6 par value common stock for $7 per share. Which of the following is included in the journal entry to record the issuance?

credit to common stock for $18,000 The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 3,000 x $7 = $21,000 Credit to Common stock = 3,000 x $6 = $18,000 Credit to Paid-in capital in excess of par value = 3,000 x ($7 - $6) = $3,000

Bright Electronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $150,000 at year-end and the total credit sales were $700,000. Management estimates that 5% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment?

debit bad debts expense 6,700 credit allowance for doubtful accounts 6,700 Allowance for Doubtful Accounts needs an ending credit balance of 5% of $150,000 or $7,500. To increase the current credit balance of $800 to the required amount of $7,500, the account requires a credit of $6,700. The entry to estimate bad debts is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $6,700.

what journal entry is recorded as a result of issuing stock to investors for cash?

debit to cash and credit to common stock

On which dates are entries for cash dividends required?

declaration date and the payment date date, but not on the record date. Learning objective 5: Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

payment of a dividend

decrease cash and decrease retained earnings

When a bond is issued at a discount, at what value is it reported on the balance sheet?

face value minus any unamortized discount

When a bond is sold at a premium, at what value is it reported on the balance sheet?

face value plus any unamortized premium

accounting information should be neutral in order to enhance

faithful representation To be useful for decision-making, accounting information needs to possess certain fundamental qualities: (i) relevance and (ii) faithful representation. Information is considered to be relevant if it provides information that has predictive value, that is, it helps provide accurate expectations about he future, and has confirmatory value (i.e., it confirms or corrects prior expectations). Materiality is another aspect of relevance. An item of information is material if its size makes it likely to influence decision-making. Faithful representation means information accurately depicts what actually happened. To provide a faithful representation, information must be complete (i.e., nothing important omitted), neutral (i.e., the information s not biased toward one position of another), and free from error. In addition to qualities of useful information, there are several enhancing qualities of useful information. These include comparability, consistency, verifiability, timeliness, and understandability.

The effects on the basic accounting equation of a purchase of office equipment for cash are to

increase assets and decrease assets by equal amounts A purchase of equipment for cash is recorded as an increase in equipment (which is an asset) and a decrease in cash (which is an asset). Thus, an asset exchange occurs with one asset increasing and another decreasing.

In the closing process total revenues are determined to be $5,750 while total expenses are determined to be $3,875 and total dividends are $1,350. The retained earnings account will

increase by $525. Retained earnings will increase by revenues of $5,750, decrease by expenses of $3,875 and decrease by dividends or $1,350; retained earnings increases by $525.

Fred's Foods recorded the following events involving a recent purchase of inventory: Received goods for $25,000, terms 2/10, n/30. Returned $800 of the shipment for credit. Paid $200 freight on the shipment. Paid the invoice within the discount period. The company uses the perpetual inventory system. As a result of these events, the company's inventory

increased by $23,916. Solution: Learning objective 2 [($25,000 - $800) x 0.98] + $200 = $23,916.

Forming a corporation does not necessarily involve

incurring debt

Which of the following is not an accounting assumption?

integrity. To develop accounting standards, the FASB relies on some key assumptions. These include the monetary unit assumption, economic entity assumption, periodicity assumption, and the going concern assumption.

Which of the following should be classified as an other receivable?

interest receivable Accounts receivable (also called trade receivables) and notes receivables (sometimes considered to be a trade receivable) are both financial instruments typically accepted from customers for the value of a transaction. Notes receivable involve a formal instrument of credit and almost always have interest charges. Interest receivable occurs from loans and results because of the time value of money; interest receivable is one of the receivables in the other receivable category. Others examples of other receivables include receivables due to loans to company officers, advances to employees, income taxes refundable.

Which type of user wants to know the answers to the following questions? -is cash sufficient to pay dividends to stockholders? -what selling price for our product will maximize the company's net income? -which product line is most profitable?

internal

a trial balance...

is a list of accounts with their balances at a given time

which of the following does not affect retained earnings?

issuance of common stock Net income causes an increase in retained earnings, while a net losses and dividends cause decreases. Issuance of common stock has no impact on retained earnings.

which of the following is an example of a financing activity

issuing shares of common stock... IT IS NOT buying delivery equipment selling goods on account buying inventory

During the adjusting process two transactions were neglected or omitted. The first is for unearned rent revenue of which $475 was earned during the period, the second was for accrued interest payable of which $315 is owed for the period. As a result of these omissions

liabilities are overstated by $160. The omission associated with unearned rent revenues increases net income by $475 while the omission of accrued expenses, interest expense and interest payable, increases expenses and liabilities by $315. As a result, revenues are understated by $475 while expenses are understated by $315 so net income is understated by $160. Assets are not affected by these errors but liabilities are overstated by $160.

A company purchased a tract of land on which it expects to build a production plant in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?

long-term investment Land or a building which is currently not used in operation is considered to be a long-term investment.

Bonds payable with a face value of $200,000 and a carrying value of $197,000 are redeemed prior to maturity at 99. Which of the following will result?

loss on redemption of $1,000 The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. The company had to pay $198,000 ($200,000 x 99%) for bonds with a carrying value of $197,000. The difference between the $198,000 and $197,000 is a loss on redemption.

Which section of the annual report presents highlights of favorable or unfavorable trends and identifies significant events and uncertainties affecting a company's ability to pay near-term obligations, and a company's ability to fund operations and expansion?

management discussion and analysis

Paying interest expense and receiving interest revenue are both examples of...

operating expense

Which types of accounts will appear in the post-closing trial balance?

permanant accounts

When a plant asset is retired, the difference between original cost of the asset and the book value of the asset is

recognized on the income statement as a loss on disposal of plant asset.

What are some qualities of useful information or enhancing qualities of useful information...

relevance, usefulness for decision making, faithful representation, understandability, consistency, timeliness comparability.

The balance sheet...

reports the assets, liabilities, and stockholders' equity at a SPECIFIC date

With the adjusted trial balance in hand you see that the debit totals of the real accounts is $19,250 and the credit totals of the real accounts is $15,250. The debit total of the nominal or temporary accounts is $2,275 while the credit total of the nominal or temporary accounts is $7,275. From this you know that

retained earnings will increase by $5,000 through the closing process. The difference of nominal or temporary account debits and credits of a debit of $5,000 indicates growth in the company for the fiscal period - an increase in retained earnings, not net income or loss since you do not know revenue and expense or dividend issues.

In Year 1, Costello Company performed work for a customer and billed the customer $10,000; it also paid wage expenses of $3,000. In Year 2, the customer pays Costello for the services it received in Year 1. If Costello uses the accrual-basis of accounting, then Costello will report

revenue of $10,000 and expense of $3,000 in Year 1. The accrual-basis of accounting records revenues when the performance obligation is satisfied and expenses when incurred. The services were performed in Year 1 so the company should recognize the revenue in Year 1 even though the customer did not pay the company until Year 2. The expenses were incurred in Year 1 so the company should recognized the expense in Year 1 regardless of when the company paid the expenses.

accounts are listed on the trial balance in...

the oder that they appear in the ledger Accounts will appear in the trial balance in the same order that they appear in the ledger. While the journals are in chronological order, the trial balance is in the order of the accounts as they appear in the ledger. Alphabetical order is seldom justified in financial presentations. The journal entries are posted to the ledger sequentially.

For what reason might a company acquire treasury stock?

to reissue the shares to officers and employees under bonus and stock compensation plans This is one of the reasons why treasury stock is purchased, but it's not the only reason. A signal may be sent to the stock market that management believes the stock is underpriced, not overpriced. Whiles earnings per share is increased by reducing the number of shares outstanding, there is no effect on profit when treasury shares are acquired. Acquiring treasury shares reduces, not increases, the number of shares outstanding.

which of the following is an example of an intangible asset?

trademarks

posting...

transfers journal entry amounts to ledger accounts. Posting occurs after journalizing. The process of posting transfers the information contained in journal entries to the ledger. Posting is a required step in the recording process. If it is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions and the ledger would report incorrect account balances.

A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 50 of those shares for $9.00 per share. Which of the following will be debited to record the repurchase of the shares?

treasury stock for $450 The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 50 shares x $9/share = $450.

Which of the following is not a typical example of a prepaid expense?

wages

A promissory note will likely be used in all of the following settings except

when the party making the note is a high risk creditor.

The time period for classifying a liability as a current liability rather than as a long-term liability can be determined by whether it is expected to be paid

within one year or the operating cycle, whichever is longer. Liabilities are classified as current if they are expected to be paid (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.

what is measured by current assets minus current liabilities?

working capital By definition, working capital is the difference between current assets and current liabilities.