Unit 3 Exam Prep

Which of the following is not deducted from an employee's salary?

Unemployment taxes.

We record interest expense on a note payable in the period in which

We incur interest.

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

$0.

If Speedy Travel, Inc. borrows $50 million on September 1 for one year at 9% interest, how much interest expense should it record by December 31 of that same year?

$1.5 million

Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest payable for the year ended December 31, 2021?

$1.5 million.

The Open Grill incurred the following costs in acquiring a new piece of land: Cost of the land$80,000 Commissions 4,800 Liability insurance for the first year 1,200 Cost of removing existing building 20,000 Sale of salvaged materials (4,000) Total costs$102,000 What is the total recorded cost of the land?

$100,800

Tasty Inn and Out incurred the following costs related to its purchase of equipment. Cost of the equipment$10,000 Sales tax (7%) 700 Annual property insurance 500 Shipping 200 Initial safety testing 1,000 Total costs$12,400 What is the recorded cost of the equipment?

$11,900

A company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. For the first month's payment, what is the amount to record for interest expense?

$129.

Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method?

$16000

A company purchased land and building from a seller for $900,000. A separate appraisal reveals the fair value of the land to be $200,000 and the fair value of the building to be $800,000. For what amount would the company record land at the time of purchase?

$180,000

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?

$2,000.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month?

$2,542.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the second month?

$2,555.

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much is the estimated warranty liability reported in the balance sheet this year?

$25,000

Sandwich Express incurred the following costs related to its purchase of a bread machine. Cost of the equipment$20,000 Sales tax (8%) 1,600 Shipping 2,200 Installation 1,400 Total costs$25,200 At what amount should Sandwich Express record the bread machine?

$25,200.

A company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. After the first month's payment, what is the balance of the note?

$29,769.

A company has the following three assets with the information provided: ($ in millions)Equipment Land Building Book value$8 $20 $12 Estimated total future cash flows 6 35 14 Fair value 5 30 10 Determine the amount of the impairment loss, if any.

$3 million

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

$30,000.

Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest expense for the year ended December 31, 2022?

$4.5 million.

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?

$400.

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

$450,000

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Calculate the issue price of the bonds, assuming a market interest rate of 5%.

$47,812.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as interest expense in the second month?

$487.

A company needs construction equipment to complete a project over the next 20 months. The equipment costs $10,000. Instead of purchasing the equipment with a 12% note, the company leases the equipment with payments of $300 due at the end of each month. For what amount would the company record the lease liability at the beginning of the lease?

$5,414.

On October 1, a franchise was purchased for $2,000,000. The franchise agreement is for 10 years. What is the amount of amortization expense by the end of the first year, December 31 (using partial year straight-line amortization)? (Do not round intermediate calculations.)

$50,000

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded for interest expense for the first full month?

$500.

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate the carrying value of the bonds after the first semiannual interest payment.

$52,091.

The Cheese Factory incurred the following costs related to acquiring a new piece of equipment: Cost of the equipment$50,000 Sales tax (8%) 4,000 Shipping 3,000 Installation 2,000 Depreciation during the first month 1,000 Total costs$60,000 What is the total recorded cost of the equipment?

$59,000

The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year?

$60,000

Bryer Co. purchases all of the assets and liabilities of Stellar Co. for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwill associated with the purchase?

$700,000.

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate interest expense as of the first semiannual interest payment.

$785.

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?

$8,000

A delivery truck was purchased for $60,000 and is expected to be used for 5 years and 100,000 miles. The truck's residual value is $10,000. By the end of the first year, the truck has been driven 16,000 miles. What is the depreciation expense in the first year using activity-based depreciation?

$8000

Equipment was purchased for $50,000. At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company changed its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000. What is depreciation expense in the third year?

$8000

A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets.

8.0%.

Accumulated depreciation is:

A contra-asset

Douglas County Fairgrounds retires a $50 million bond issue when the carrying value of the bonds is $52 million, but the market value of the bonds is only $47 million. The entry to record the retirement will include:

A credit of $5 million to gain on early extinguishment.

Lincoln County retires a $50 million bond issue when the carrying value of the bonds is $48 million, but the market value of the bonds is $54 million. Lincoln County will record the retirement as

A debit of $6 million to Loss due to early extinguishment.

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

A debit to a liability and a credit to a revenue account.

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

A debit to an asset and a credit to a liability account.

Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $40,000, the company should record:

A gain of $5,000.

Equipment originally costing $65,000 has accumulated depreciation of $25,000. If the equipment is sold for $30,000, the company should record:

A loss of $10,000.

Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record

A loss of $10,000.

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at

A premium.

Which of the following is properly recorded as an intangible asset?

A purchased patent

Which of the following is not a primary source of long-term debt financing?

Accounts payable.

If equipment is retired, which of the following accounts would be debited?

Accumulated depreciation.

Which of the following typically represents an advantage of leasing over purchasing an asset with an installment note?

All of the answer choices are advantages of leasing.

A company leases an office building for 24 months. At the beginning of the lease period, the lessee (user) would:

All of the answers are correct.

Which of the following represents a characteristic of a liability?

All of these are characteristics of a liability.

Over the entire service life of an asset, which depreciation method records the highest total depreciation?

All the methods result in the same total depreciation.

Depreciation in accounting is the:

Allocation of an asset's cost to an expense over time.

Which of the following expenditures should be recorded as an asset?

An addition which increases future benefit

The market interest rate of a bond is:

An implied rate based on the price investors pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.

Which of the following expenditures should be capitalized?

An improvement to a tangible asset

Which of the following is not a current liability?

An unused line of credit.

Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

As a liability for $500,000 with disclosure of the range.

Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Western's legal counsel believes it is probable that Western will have to pay an estimated amount in the range of $75,000 to $175,000, with all amounts in the range considered equally likely. How should Western report this litigation?

As a liability for $75,000 with disclosure of the range.

The book value of an asset is equal to the

Asset's cost less accumulated depreciation.

Which of the following is true regarding a company assuming more debt?

Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds.

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds' carrying value will be

At face amount.

Serial bonds are

Bonds that mature in installments.

The asset's cost less accumulated depreciation is called:

Book Value

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will:

Both decrease.

When bonds are issued at a premium, what happens to the carrying value and interest expense each period over the life of the bonds?

Carrying value and interest expense decrease.

When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds?

Carrying value and interest expense remain unchanged.

The acid-test ratio is

Cash, current investments, and accounts receivable divided by current liabilities.

We normally record a long-term asset at the

Cost of the asset plus all costs necessary to get the asset ready for use.

A long-term asset is recorded at the:

Cost of the asset plus all costs necessary to the asset ready for use.

The current ratio is:

Current assets divided by current liabilities.

Which of the following is reported as a current liability?

Current portion of long-term debt.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit Cash, $5,000; Credit Notes Payable, $5,000.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record?

Debit Notes Receivable, $5,000; Credit Cash, $5,000.

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:

Debit interest expense and credit interest payable, $4,000.

Which of the following is not an advantage of debt financing?

Debt financing often has no maturity date.

Which of the following correctly describes the nature of depreciation?

Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:

Disclosed but not reported as a liability.

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be

Disclosed but not reported as a liability.

Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset's life?

Double declining balance method

Which of the following increases an employer's payroll costs?

Employer's FICA contribution.

Which of the following is paid by both the employee and the employer?

FICA taxes.

The cash paid for interest on bonds payable is calculated as:

Face amount times the stated interest rate.

Which of the following intangible assets are not amortized?

Goodwill

If bonds are issued at a discount, interest expense will be

Higher than cash interest paid.

The city of Summerton has a sales tax rate of 8%. A local convenience store sells merchandise, and the customer pays a total of $38.34. What effect does this transaction have on total liabilities?

Increase of $2.84.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the borrowing of cash to be paid back in five years affect each ratio?

Increase the current ratio and increase the acid-test ratio.

If bonds are issued at a discount, over the life of the bonds, interest expense will:

Increase.

If bonds are issued at a discount, over the life of the bonds, the carrying value will:

Increase.

Which of the following expenditures should be recorded as an asset?

Interest costs during the construction period of a new building

Which of the following is not included in calculating the acid-test ratio?

Inventory.

Bonds issued at a premium are:

Issued above face value.

Bonds issued at a discount are:

Issued below face value.

Which of the following is not a characteristic of a liability?

It must be payable in cash.

A company's capital structure refers to:

Its mixture of liabilities and stockholders' equity.

An advantage of leasing an asset rather than purchasing the asset is:

Leases typically require less cash upfront to begin using the asset.

Which of the following statements regarding liabilities is true?

Liabilities represent probable future sacrifices of benefits.

Which of the following statements regarding liabilities is not true?

Liabilities result from future transactions.

Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):

Liability.

Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life?

Long service life, high residual value, and straight-line depreciation.

Animal World issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Animal World decides to call the bonds. The company estimates that over the next eight years, they will save $16 million of cash interest. The journal entry to retire the bonds will include a:

Loss of $2 million.

Which of the following definitions describes a serial bond?

Matures in installments.

Current liabilities

May include contingent liabilities.

Return on assets is equal to:

Net income divided by average total assets.

Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Smith's legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation?

No asset or gain is reported.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?

No change to the current ratio and decrease the acid-test ratio.

Assuming a current ratio of 1.00 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio?

No change to the current ratio and decrease the acid-test ratio.

Which of the following expenditures should be recorded as an expense?

Ordinary repairs and maintenance

An exclusive 20-year right to manufacture a product or to use a process is a:

Patent

Return on assets is equal to:

Profit margin times asset turnover.

Convertible bonds

Provide potential benefits to both the issuer and the investor.

Convertible bonds:

Provide potential benefits to both the lender and the borrower.

Callable bonds:

Provide potential benefits to the issuer.

Assume that Airline Accessories' current ratio is greater than 1. Which of the following will decrease its current ratio?

Purchasing inventory on account.

Which of the following is not a primary source of corporate debt financing?

Receivables.

A contingent liability that is probable and can be reasonably estimated must be

Recorded.

Which of the following expenditures should be recorded as an expense?

Repairs and maintenance that maintain current benefits.

Which of the following is not recorded as an intangible asset in the balance sheet?

Research and development

The company's profitability on each dollar invested in assets is represented by which of the following ratios:

Return on assets.

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Sales tax payable.

Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is less common?

Secured and serial.

Which of the following will result in higher depreciation expense in the first year of the asset's life?

Short service life and low residual value.

Research and development costs

Should be expensed.

The balance in the Accumulated Depreciation account represents

The amount charged to depreciation expense since the acquisition of the plant asset.

In each succeeding payment on an installment note:

The amount that goes to interest expense decreases.

Which of the following is true in comparing the current ratio with the acid-test ratio?

The current ratio will always be at least as large as the acid-test ratio.

Financial leverage is best measured by which of the following ratios?

The debt to equity ratio.

Which of the following ratios measures financial leverage?

The debt to equity ratio.

Which of the following statements is true regarding the amortization of intangible assets?

The expected residual value of most intangible assets is zero.

Interest expense is recorded in the period in which:

The interest is incurred.

Which of the following is true for bonds issued at a discount?

The market interest rate is greater than the stated interest rate.

The issue price of a bond is calculated as:

The present value of the bond's face amount plus the present value of its periodic interest payments.

The price of a bond is equal to

The present value of the face amount plus the present value of the stated interest payments.

The amount of the gain on the sale of equipment equals:

The selling price minus the book value of the equipment.

Which of the following statements is false regarding the amortization of intangible assets?

The service life of an intangible asset is always equal to its legal life.

In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.

one; one