is used in the production of income for a business
is a contra liability account
highest net income
estimated useful life
is used in the production of income for a business
is a contra liability account
highest net income
estimated useful life
By fort Company reports the following in its financial statements:
*All sales are on credit.
1. How much did the company collect in cash from debtors during 2006?
2. How much sales would have been reported by the company in 2006 if by fort would have been using cash accounting and not accrual accounting?
33. Which of the following does not represent future expected cash inflows?
A. accounts receivable
B. prepaid expenses
D. notes receivable
4. Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with higher the dividend payout ratio:
A. will have a higher inventory turnover ratio.
B. will have a lower inventory turnover ratio.
C. will have higher earnings growth.
D. will have lower earnings growth.
Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandraâ€™s adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, how much gain was recognized by Sandra and what was the character of the gain?
A. 0 gain.
B. $12,000 gain, all of which was ordinary income.
C. $20,000 gain, at least $12,000 of which was ordinary income.
D. $30,000 gain, at least $12,000 of which was ordinary income.
Fact Pattern for Questions 11 and 12: Sandra owned a rental apartment building in her sole name for four years. After her business advisors suggested that she conduct her rental activity in corporate form, she promptly transferred the apartment building to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the apartment building. At the time of the transfer of the apartment building to ABC Rental Corporation, Sandraâ€™s adjusted basis in the building was $50,000, the fair market value of the building was $150,000, the building was subject to a mortgage of $70,000 which ABC Rental Corporation assumed, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. As a result of the transaction, what is the corporationâ€™s basis in the building?
Larry formed Sleuth Corporation in order to incorporate the detective agency business that he had been operating for several years as a sole proprietorship. Larry transferred to Sleuth Corporation the detective agencyâ€™s accounts receivable with an adjusted basis to Larry of $0 and a fair market value of $6,000, and the office condominium that Larry owned outright and from which he had operated the detective agency that had an adjusted basis to Larry of $30,000, a fair market value of $62,000, and as to which there was a mortgage payable of $34,000, which was assumed by the corporation. Also transferred to the corporation were accounts payable in the amount of $3,000.
In exchange for the assets transferred, Larry received 100 percent of the stock of the corporation. Which of the following statements regarding the tax consequences of the transaction is accurate?
A. Larry recognized $4,000 of his realized gain.
B. Larry recognized $7,000 of his realized gain.
C. The corporationâ€™s basis in the condominium it received from Larry is $30,000.
D. Larry recognized $6,000 of ordinary income upon the assignment of receivables.
ABC Inc. had current earnings and profits of $50,000 when it distributed to an individual shareholder land that the corporation held as an investment. On the date the land was distributed, ABC Inc.â€™s adjusted basis in the land was $10,000, the fair market value of the land was $50,000, and the land was encumbered by a $30,000 mortgage, which liability was assumed by the shareholder. There were no other transactions that might affect ABC Inc.â€™s earnings and profits for the year. What was the amount of ABC Inc.â€™s earning and profits at the end of the year?
EFG Inc. distributed land to an individual shareholder in a nonliquidating distribution. On the date the land was distributed, EFG Inc.â€™s adjusted basis in the land was $20,000, the fair market value of the land was $75,000, and the land was encumbered by a $35,000 mortgage, which liability was assumed by the shareholder. The corporationâ€™s earnings and profits were $300,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporationâ€™s earnings and profits. As a result of the distribution, how much is the amount of dividend income to the shareholder, and what is the shareholderâ€™s basis in the distributed property?
A. Dividend income of $20,000 and basis of $20,000.
B. Dividend income of $40,000 and basis of $20,000.
C. Dividend income of $40,000 and basis of $40,000.
D. Dividend income of $40,000 and basis of $75,000.
XYZ Corporation distributed land Jim, its sole shareholder, in a liquidating distribution. At the time of the distribution, the land had a fair market value of $120,000 and XYZ Corporationâ€™s adjusted basis in the land was $100,000. The land was encumbered by a $140,000 mortgage, which mortgage was assumed by the shareholder. How much gain did XYZ Corporation recognize as a result of the distribution?
FAS Inc. had one class of stock outstanding. The one class of stock was owned 50 percent by Fred and 25 percent by each of Fredâ€™s two sons. In the current taxable year, FAS Inc. redeemed 25 percent of Fredâ€™s 50 percent, and in exchange for the stock, FAS Inc. distributed to Fred a building that had an adjusted basis to FAS Inc. of $10,000 and a fair market value of $50,000. Assume that FAS Inc.â€™s current earnings and profits were $200,000, there were no accumulated earnings and profits, and Fredâ€™s total basis in his stock before the redemption was $20,000. What is Fredâ€™s basis in his remaining stock after the redemption, and what is his basis in the building distributed to him?
A. Stock basis: $10,000; building basis: $10,000.
B. Stock basis: $10,000; building basis: $50,000.
C. Stock basis: $20,000; building basis: $10,000.
D. Stock basis: $20,000; building basis: $50,000.
A tract of land was distributed by MNO Inc. to its sole shareholder, Martha, as a dividend. At the time of the distribution, MNO Inc.â€™s adjusted basis in the land was $40,000, the fair market value of the land was $80,000, and the land was encumbered by a $55,000 mortgage. Which of the following statements is true?
A. The net adjustment to MNO Inc.â€™s earnings and profits is an increase of $15,000, (the excess of the liability over the adjusted basis in the land).
B. The net adjustment to MNO Inc.â€™s earnings and profits is an increase of $40,000, (that is, equal to the amount of gain realized by the corporation).
C. The corporationâ€™s realized gain of $40,000 is recognized to the extent of the $15,000, (the excess of the liability over adjusted basis in the land).
D. The shareholderâ€™s basis in the land distributed by the corporation to the shareholder is $80,000, (which is the fair market value of the land).
XYZ Corporation distributed to its shareholders a total of $30,000 in cash plus property that had a fair market value of $80,000 and a basis of $60,000. The corporationâ€™s earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporationâ€™s earnings and profits. How much was the total dividend income received by the shareholders as a result of the distributions made by XYZ Corporation?
MJJM Inc. has four equal shareholders who are unrelated. Each shareholder owns 300 shares of the common stock of MJJM Inc. representing all of the stock of MJJM Inc. During the taxable year, as part of a single transaction, MJJM Inc. redeemed stock from three of the shareholders. Specifically, MJJM Inc. redeemed 150 shares from Michael, 75 shares from Joseph, and 40 shares from John. The redemption was substantially disproportionate for:
A. Michael and Joseph.
B. Michael and John.
C. Joseph only.
D. Michael only.
Marcyâ€™s cumulative earnings before this pay period were $6,200, and gross for the week is$500. How much of this weekâ€™s pay is subject to taxes for SUTA and FUTA? The rates forSUTA is 5.4% and FUTA is 0.8% with a base of $7,000.
Emily has gross earnings of $300 and withholdings of $23 for FICA (Social Security and Medicare)and $40 for income taxes. The employer pays $23 for FICA (Social Security and Medicare)and $2.40 for FUTA. The total cost for employee Emily incurred by the employer is:
Jakeâ€™s earnings during the month of March were $1,500. His earnings for the year prior toMarch were $5,500. Jakeâ€™s employer is subject to state unemployment of 2.0% and federalunemployment taxes of 0.8% on the fi rst $7,000. The employerâ€™s unemployment payroll taxexpense for March is:
Company payroll for July includes the following data:
Gross salaries $40,000
Salaries subject to FICA:
6.2% Social Security 35,000
1.45% Medicare 40,000
Salaries subject to:
0.8% FUTA 2,000
2.0% SUTA 2,000
The employerâ€™s payroll tax for the period would be:
The account for Payroll Tax Expense includes all of the following except:
A) federal income tax.
B) unemployment taxes for the year to date.
C) employer payroll taxes for the year to date.
D) FICA taxes (Social Security and Medicare) paid by the employer for the latest payroll period.
The correct journal entry to record the payment of SUTA is:
A) debit SUTA Expense; credit Cash.
B) debit SUTA Payable; credit Cash.
C) debit Cash; credit SUTA Payable.
D) debit Cash; credit SUTA Expense.
I think correct answer is D
The normal balance of the Sales Returns and Allowances account is:
B) a debit.
C) a credit.
D) It does not have a normal balance.
A customer returned merchandise that had been paid for within a discount period for credit.
The entry was recorded with a debit to Sales Returns and Allowances and a credit to Accounts
Receivable for the net amount. This error will cause:
A) the net income for the period to be overstated.
B) the net income is unaffected.
C) the net income for the period to be understated.
D) None of these are correct.
Collected from a charge customer: This will be recorded with:
A) a credit to a liability account.
B) a credit to an ownerâ€™s equity account.
C) a credit to an asset account.
D) None of these are correct.
2. (TCO F) Which of the following is not true? (Points : 5)
a) Companies classify some cash transactions relating to investing or financing activities as operating activities.
b) Net income is not usually the same as net cash flow from operating activities under the accrual basis of accounting.
c) The FASB encourages the use of the indirect method over the direct method for the statement of cash flows.
d) Companies report cash flows from purchases and sales of securities as operating activities.
3. (TCO F) Glitter Girl, Inc. recognized net income of $205,000 including $60,000 in depreciation expense.
Additional changes from the balance sheet are as follows.
Accounts Receivable $2,000 decrease
Prepaid Expenses $15,500 decrease
Inventory $36,000 increase
Accrued Liabilities $10,000 decrease
Accounts Payable $40,000 increase
Compute the net cash from operating activities based on the above information. (Points : 5)
4. (TCO F) Pig Builder’s, Inc. shows the following as of December 31, 2012.
– Acquired 50% of Wolf Corp’s common stock for $160,000 cash, which was borrowed from Granny’s Bank.
– Issued 5,000 shares of its preferred stock for land having a fair value of $320,000
– Issued 500 of its 11% debenture bonds, due 2017, for $392,000 cash
– Paid $120,000 toward bank loan.
– Purchased a patent for $220,000 cash
– Sold available for sales securities for $796,000
– Recognized $88,000 net increase in returnable long term customer deposits
Pig’s net cash provided by investing activities for 2012 is (Points : 5)
5. (TCO F) Dasher Builder’s, Inc. shows the following as of December 31, 2012.
– Sold available for sales securities for $650,000
– Acquired 50% of Elven Corp’s common stock for $310000 cash which was borrowed from Peppermint’s Bank.
– Issued 2,000 shares of its preferred stock for land having a fair value of $50,000
– Purchased a patent for $170,000 cash
– Issued 1,000 of its 12% debenture bonds, due 2017, for $225,000 cash
– Paid $130,000 toward bank loan.
– Recognized $79,000 net increase in returnable long term customer deposits
Dasher’s net cash provided by financing activities for 2012 is (Points : 5)
6. (TCO F)
Cash flows from operating activities (indirect and direct methods).
Presented below is the income statement of Smiling Tiger, Inc.
Cost of goods sold 109,000
Gross profit $141,000
Operating expenses 85,000
Income before income taxes 56,000
Income taxes 22,400
Net income $33,600
In addition, the following information related to net changes in working capital is presented.
Accounts receivable 2,400
Salaries payable (operating expenses) 12,000
Accounts payable 15,000
Income taxes payable 1,400
Depreciation expense for the year was $14,700
Deferred tax liability account increased $1,800
Prepare a schedule computing the net cash flow from operating activities that would be shown on a statement of cash flows:
(a) using the indirect method
(b) using the direct method. (Points : 15)
1. Downing company issues $4,000,000 6%, 5 year bonds dated January 1,2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2. On January 1, 2014 Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in 5 years and interest is paid semiannually on June 30 and Dec 31. The bonds were sold for $ 1,077,250 to yield 10%. Using the effective interest method of amortization, interest expense for 2014 is
d) $ 120,000
3. At the beginning of 2014, Winston corporation issued 10% bonds with a face value of $ 2,000,000. These bonds mature in 5 years, and the interest is paid semiannually on June 30 and Dec 31. The bonds were sold for $ 1,852,800 to yield 12%. Winston uses a calendar year reporting period. Using the effective interest method amortization, what amount of interest expense should be reported for 2014? Round answer
a) $ 221, 667
b) $ 222, 333
c) $ 223, 006
d) $ 229, 440
4. Manning company issued 10,000 shares of its $ 5 par value common stock having a fair value of $ 25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $ 20 per share for a lump sum of $ 530,000. How much of the proceeds would be allocated to the common stock?
a) $ 250,000
b) $ 240,909
c) $ 289,091
d) $ 281,563
5. On September 1, 2014. Valdez Company reacquire 20,000 shares of its $10 par value common stock for $ 15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit
a) Treasury stock for $ 200,000
b) Common stock for $ 200,000
c) Common stock for $ 200,000 and paid in capital excess of par for $ 75,000.
d) Treasury stock for $ 300,000
6. Long co issued 100,000 shares of $ 10 par common stock for $ 1,200,000. A year later Long acquire 12,000 shares of its won common stock at $15 per share. Three months later Long Sold 6,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, to record the sale of the 6,000 treasury shares, Long should credit
a) Treasury stock for $ 114,000
b) Treasury stock for $ 60,000 and paid in capital from treasury stock for $ 54,000
c) Treasury stock for $ 90,000 and paid in capital from treasury stock for $ 24,000
d) Treasury stock for $ 90,000 and paid in capital excess of par for $ 24,ooo
7. Luther inc has 4.000 shares of 6% $ 50 par value, cummulative preferred stock and 100,000 shares of $1 par value common stock outstanding at Dec 31, 2015 and Dec 31, 2014. The board of directors declared and paid a $ 10,000 dividend in 2014. In 2015, $ 48,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2015?
a) $ 34,000
b) $ 24,000
c) $ 14,000
d) $ 12,000
8. A company issues $ 10,000,000, 7.8%, 20 year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and Dec 31, The proceeds from the bonds are $ 9,802,072. What is the interes expense for 2015, using the straight-line amortization?
a) $ 1,026,805
b) $ 780,000
c) $ 784,596
d) $ 789,896
9. At Dec 31, 2014 the following balances existed on the books of Rentro Corporation:
Bonds Payable $ 3,500,000
Discount on Bonds Payable 280,000
Interest Payable 84,000
Unamortized bond issue costs 210,000
If the bonds are retired on January 1, 2015, at 102, what will Rentro report as a loss on redemption?
a) $ 350,000
b) $ 472,500
c) $ 560,000
d) $ 644,000
Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?
Question 1 answers
net profit margin
Question 2 text Question 2 2 points Save
The corporation is a legal entity separate from it owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.
Question 2 answers
Question 3 text Question 3 2 points Save
In making financial decisions, the relevant tax rate is the:
Question 3 answers
marginal tax rate.
average (effective) tax rate.
previous year’s tax rate.
maximum allowable tax rate.
Question 4 text Question 4 2 points Save
Based on the information in the table, calculate the after tax cash flow from operations for 2002 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable):
December 2001 December 2002
Net income $1,500 $3,000
Accounts receivable 750 750
Accumulated depreciation 1,125 1,500
Common stock 4,500 5,250
Paid-in capital 7,500 8,250
Retained earnings 1,500 2,250
Accounts payable 750 750
Question 4 answers
Question 5 text Question 5 2 points Save
Which of the following are tax deductible items to a corporation:
Question 5 answers
dividends to common stockholders
dividends to preferred stockholders
None of the above are tax deductible.
Question 6 text Question 6 2 points Save
The market price of the firm’s stock reflects the value of the firm as seen by its owners.
Question 6 answers
Question 7 text Question 7 2 points Save
Corporate debt markets clearly dominate the corporate equity markets when new funds are being raised.
Question 7 answers
Question 8 text Question 8 2 points Save
You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 2.0%; the maturity risk premium is 1.5%; and, the default risk premium for AAA rated corporate bonds is 3%. What rate of interest should the U.S. Treasury bond pay?
Question 8 answers
Question 9 text Question 9 2 points Save
The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called:
Question 9 answers
Question 10 text Question 10 2 points Save
Which of the following represents an attempt to measure the net results of the firm’s operations (revenues versus expenses) over a given time period?
Question 10 answers
Statement of Cash Flows
Sources and Uses of Funds Statement
Question 11 text Question 11 2 points Save
The goal of the firm should be:
Question 11 answers
maximization of profits (net income per share)
maximization of shareholder wealth
maximization of market share
maximization of sales
Question 12 text Question 12 2 points Save
The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns.
Question 12 answers
Question 13 text Question 13 2 points Save
If a firm has unused debt capacity and the general level of equity prices is depressed, financial executives will favor the issuance of debt securities over the issuance of new common stock.
Question 13 answers
Question 14 text Question 14 2 points Save
Capital market instruments include:
Question 14 answers
negotiable certificates of deposit
Question 15 text Question 15 2 points Save
“The markets are quick and the prices are right” describes a market that is:
Question 15 answers
Question 16 text Question 16 2 points Save
PDQ Corp. has sales of $3,000,000; the firm’s cost of goods sold is $1,425,000; and its total operating expenses are $700,000. The firm’s interest expense is $230,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $30,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is PDQ’s “Addition to Retained Earnings?”
Question 16 answers
Question 17 text Question 17 2 points Save
PDQ Corp. has sales of $3,000,000; the firm’s cost of goods sold is $1,425,000; and its total operating expenses are $700,000. What is PDQ’s EBIT?
Question 17 answers
Match each of the following investment terms with the appropriate definition below.
1- A corporation owning all or the majority of the voting stock of another corporation
2- A balance sheet account where the fair value adjustment for investment is reported
3- A corporation controlled by another corporation that owns all or the majority of its voting stock –
4 – The method for accounting for investments 20 -50 % in another companyâ€™s stock
5 – The market price that would be received if an investments were sold
6 – Measurement of the rate of the return to stockholders based on cash dividends
7 – Combined reporting of a corporation and other corporations it controls
8 – Recognition of changes in the fair value of short-term investment
9 – The value assigned to held-to-maturity securities
10 – Appropriate method for accounting for small stock investments
A) Equity method
B) Parent company
C) Subsidiary company
D) Consolidated financial statements
E) Fair value
F) Unrealized gain or loss on investment
G) Valuation allowance for investment
H) Dividend yield
I) Amortized cost
J) Cost method
On January 15, 2013, Talbot Corporation purchased a parcel of land as a factory site for $425,000. An old building on the property was demolished, and construction began on a new building which was completed on November 31, 2013. Salvaged materials resulting from the demolition were sold for $12,000. Costs incurred during this period included: Demolition of old building, $35,000, Architect’s fees, $15,000, Legal fees for title investigation and purchase contract, $7,000, and Construction costs, $980,000. Talbot should record the cost of the land and new building, respectively, as (Points : 7)
$425,000 and $980,000
$455,000 and $995,000
$460,000 and $995,000
$460,000 and $983,000
2. Corresponds to CLO 1(b)
Which of the following costs should be fully expensed in the period in which the expenditure is made? (Points : 7)
An outlay made to increase the efficiency of an existing plant asset.
An outlay made to maintain an existing asset in operating condition.
An outlay made to extend the useful life of an existing asset.
None of the above costs should be fully expensed immediately; all should be capitalized.
Question 3.3. Corresponds to CLO 1(c)
On January 2, 2013, Apple Valley Produce began construction of a new processing plant. The plant was expected to be finished and ready for use on September 30, 2014. Expenditures for construction during 2013 were as follows: January 2, 2013, $600,000, July 1, 2013, $800,000, and December 31, 2013, $900,000. To fund this project, on January 2, 2013, Apple Valley borrowed $1,800,000 on a construction loan at 10% interest. This loan was outstanding during the construction period. The company also had $5,000,000 in 9% bonds outstanding in 2013. The interest capitalized for 2013 should be: (Points : 7)
4. On March 1, 2004, Tucker Corporation purchased a new machine for $355,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $19,000. The company has recorded monthly depreciation using the straight-line method. On July 1, 2013, the machine was sold for $45,000. What gain should be recognized from the sale of the machine? (Points : 7)
5. Corresponds to CLO 2(a)
On July 2, 2013, Peak Power Corporation purchased machinery for $80,000. Salvage value was estimated to be $5,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, Peak Power should record depreciation expense on this machinery for 2014 of (Points : 7)
Question 6.6. Corresponds to CLO 2(b)
At the beginning of 2013, Brennan Corporation purchased a delivery truck for $80,000. The truck was estimated to have a useful life of 150,000 miles and a salvage value of $5,000. It was driven 29,000 miles in 2013 and 33,000 miles in 2014. What is the depreciation expense for 2014? (Points : 7)
Question 7.7. Corresponds to CLO 2(c)
Volmer Corporation owns machinery with a book value of $400,000. It is estimated that the machinery will generate future cash flows of $375,000. The machinery has a fair value of $325,000. Volmer should recognize a loss on impairment of (Points : 7)
8. Corresponds to CLO 2(d)
Plymouth Mining Corporation acquired, for $5,500,000, a tract of land containing an extractable natural resource. Geological surveys estimate that the recoverable reserves will be 1,000,000 tons. Plymouth is required by its purchase contract to restore the land at an estimated cost of $750,000. The land is expected to have a value of $1,250,000 after restoration. Plymouth maintains no inventories of extracted materials. What is the amount of depletion per ton? (Points : 7)
Question 9.9. Corresponds to CLO 3(a)
Titan Corporation acquired a patent on September 28, 2013. Titan paid cash of $63,000 to the seller. Legal fees of $2,000 were paid related to the acquisition. At what amount should Titan record the patent on its books? (Points : 7)
Question 10.10. Corresponds to CLO 3(b)
Hodgson Company’s December 31, 2014 balance sheet reports assets of $8,500,000 and liabilities of $4,500,000. All of Hodgson’s book values approximate their fair value, except for land, which has a fair value that is $500,000 greater than its book value. On December 31, 3014, Motley Corporation paid $10,500,000 to acquire Hodgson. What amount of goodwill should Motley record as a result of this purchase? (Points : 7)
11. Corresponds to CLO 3(c)
Innovative Technologies, Inc. incurred research and development costs of $160,000 and legal fees of $36,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Innovative Technologies record as Patent Amortization Expense in the first year? (Points : 7)
Stewart Company acquired Meyer Manufacturing on January 1, 2013 for $6,800,000 and recorded goodwill of $1,800,000 as a result of that purchase. At December 31, 2013, Meyer Manufacturing Division had a fair value of $4,600,000. The net identifiable assets of the Division, excluding goodwill, had a fair value of $3,200,000 at that time. What amount of loss on impairment of goodwill should Stewart record in 2013? (Points : 7)
13. Corresponds to CLO 4(a)
Lillian Properties leased a building to Hopping Industries for a ten year term at an annual rental of $250,000. The lease began January 1, 2013, at which time Lillian received $1,000,000 covering the first two years’ rent of $500,000 and a security deposit of $500,000. The deposit will not be returned to Hopping upon expiration of the lease, but will be applied to payment of rent for the last two years of the lease. What portion of the $1,000,000 should be shown as current and long-term liabilities, respectively, in Lillian’s December 31, 2013 balance sheet?
(Answers shown with Current Liabilities listed first, Long-term Liabilities listed second. ) (Points : 7)
$ -0- $1,000,000
Question 14.14. Corresponds to CLO 4(b)
Which of the following is the proper way to report a gain contingency? (Points : 7)
As deferred revenue.
As an accrued amount.
As an account receivable with additional disclosure explaining the nature of the contingency.
As a disclosure only.
Question 15.15. Corresponds to CLO 4(c)
On January 1, 2014, Huntington Corporation issued eight year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
What is the issue price of the bonds?
16. Corresponds to CLO 4(d)
On December 31, 2013, the 11% bonds payable of Goodly Corporationhad a carrying amount of $2,040,000. The bonds, which had a face value of $2,000,000 were issued at a premium to yield 10%. Goodly uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On July 1, 2014, several years before their maturity, Goodly retired the bonds at 103. The interest payment on June 30, 2014 was made as scheduled. The loss on retirement, ignoring taxes, is (Points : 7)
Question 17.17. Corresponds to CLO 5(a)
The current FASB viewpoint on accounting for leases is best described as: (Points : 7)
All leases should be capitalized.
Leases should never be capitalized.
All long-term leases should be capitalized.
Leases similar to installment purchases should be capitalized.
18. Corresponds to CLO 5(b)
On January 1, 2013, Martin Corporation signed a ten-year noncancelable lease for machinery. The terms of the lease called for Martin to make annual payments of $350,000 at the end of each year for ten years with title to pass to Martin at the end of this period. The machinery has an estimated useful life of 20 years and no salvage value. Martin uses the straight-line method of depreciation for all of its fixed assets. Martin accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,977,577 at an effective interest rate of 12%. With respect to this capitalized lease, Martin should record for 2013: (Points : 7)
Depreciation expense of $197,758 and interest expense of $420,000.
Depreciation expense of $197,758 and interest expense of $237,309.
Depreciation expense of 98,879 and interest expense of $237,309.
Lease expense of $350,000.
19. Corresponds to CLO 5(c)
On December 31, 2014, Pacific Rail Corporation leased a train car from Southern Transportation Company for a ten year period expiring December 30, 2024. Equal annual payments of $120,000 are due on December 31 of each year, beginning with December 31, 2014. The lease is properly classified as a capital lease on Pacific Rail’s books. The present value at December 31, 2013 of the ten lease payments over the lease term discounted at 8% is $869,627. Assuming the first payment is made on time, the amount that should be reported by Pacific Rail Corporation as the lease liability on its December 31, 2014 balance sheet is (Points : 7)
20. Corresponds to CLO 5(d)
Colfax Corporation enters into an agreement with Reynolds Rentals on January 1, 2014 for the purpose of leasing a machine to be used in its manufacturing operations. The term of the noncancelable lease is 5 years with no renewal option. Payments of $200,000 are due on December 31 of each year. The fair value of the machine on January 1, 2014, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon termination of the lease. Colfax Corporation’s incremental borrowing rate is 10% per year. Colfax does not have knowledge of the 8% implicit rate used by Reynolds. The factor for the present value of an ordinary annuity of 1, for 5 periods at 10% is 3. 79079. The factor for the present value of an ordinary annuity of 1, for 5 periods at 8% is 3. 99271. What type of lease is this from Colfax Corporation’s point of view? (Points : 7)
Question 21. 21. Corresponds to CLO 6(a)
Roberts Corporation has 100,000 shares of $10 par common stock authorized. The following transactions took place during 2013, the first year of the corporation’s existence:
Sold 10,000 shares of common stock for $14 per share
Issued 20,000 shares of common stock in exchange for legal services valued at $300,000
At the end of Roberts’ first year, total paid-in capital amounted to (Points : 7)
22. Corresponds to CLO 6(b)
On June 15, Handel Corporation reacquired 10,000 shares of its $10 par value common stock for $19 per share. Handel uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit (Points : 7)
Common Stock for $100,000
Common Stock for $100,000 and Paid-in Capital in Excess of Par for $90,000
Treasury Stock for $190,000
Treasury Stock for $100,000
Question 23.23. Corresponds to CLO 6(c)
The fair value of Willow Company’s common stock was $57 per share at December 31, 2013 and $63 per share at December 31, 2014. Willow acquired 7,000 shares of its own common stock at $60 per share on March 10, 2014, and sold 5,000 of these shares at $65 per share on September 25, 2014. Willow Company uses the cost method to account for treasury stock. The journal entry to record the sale of the treasury stock should credit (Points : 7)
Treasury Stock for $300,000 and Retained Earnings for $25,000
Treasury Stock for $285,000 and Retained Earnings for $40,000
Treasury Stock for $300,000and Paid-in Capital from Treasury Stock for $25,000
Treasury Stock for $325,000
Question 24. 24. Corresponds to CLO 6(d)
Under GAAP, preferred stock with which of the following features should be reported as a liability on the balance sheet: (Points : 7)
Question 25.25. Corresponds to CLO 7(a)
Farnsworth Inc. declared a $450,000 cash dividend. It currently has 10,000 shares of 8%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Farnsworth distribute to the common stockholders? (Points : 7)
26. Corresponds to CLO 7(b)
Weston Corporation owned 80,000 shares of Brandt Corporation, purchased in 2008 for $320,000. On December 20, 2013, Weston declared a property dividend of all of its Brandt Corporation shares on the basis of one share of Brandt for every 10 shares of Weston common stock held by its shareholders. The property dividend was distributed on January 10, 2014. On the declaration date, the aggregate market price of the Brandt Corporation shares held by Weston was $610,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings (property dividends declared) of (Points : 7)
27. Corresponds to CLO 7(c)
Harping Corporation declared an $800,000 dividend, $200,000 of which was liquidating. How would this distribution affect Retained Earnings and Additional Paid-in Capital, respectively?
(Answer is shown with Retained Earning listed first, Additional Paid-in Capital listed second. ) (Points : 7)
No effect $800,000 Decrease
$800,000 Decrease No effect
$600,000 Decrease $200,000 Decrease
Noeffect No effect
Question 28.28. Corresponds to CLO 7(d)
After several profitable years, Pear Corporation’s stock price had increased by 10-fold. Management prefers the stock price to be within range of the majority of potential investors, and on June 30, 2013, split its stock 2-for-1. Prior to the split, Pear’s stockholders’ equity section showed: Common Stock, 2,000 shares at $100 par. After the split, Pear’s stockholders’ equity section showed: (Points : 7)
Common stock, 4,000 shares at $50 par
Common stock, 2,000 shares at $200 par
Common stock, 1,000 shares at $200 par
Common stock, 4,000 shares at $100 par
cost of an asset less accumulated depreciation equals:
If the balance of supplies at the start of
the month was $900 and at the end of the month you had $450 on hand, the
adjustment for Supplies would be:
Depreciation Expense would be found on
which of the following financial statements?
Statement of Owner’s Equity
Which of the following accounts would
appear on the balance sheet?
None of these are correct.
A form used to organize and check data
before preparing financial reports is known as a(n):
Which of the following is most likely to
result in an adjusting entry at the end of the period?
Payment for routine maintenance on the company van
Payment of two months’ insurance in advance
Payment of one month’s rent
When historical cost is used to record
equipment, it would appear as the:
original cost on the income statement.
original cost on the balance sheet.
residual value on the balance sheet.
residual value on the income statement.
Bringing account balances up to date before
preparing financial reports is called:
Not recording the Prepaid Rent used causes:
assets to be too low.
expenses to be too high.
revenue to be too high.
assets to be too high.
A contra-asset is:
in reality a liability.
an account with an opposite balance of a normal asset.
an asset with a debit balance.
an account that increases the asset.
Equipment with a cost of $150,000 has an
accumulated depreciation of $100,000. What is the historical cost of the
The estimated value of an item at the end
of its useful life is:
None of these answers are correct.
Evans Golf Academy estimated depreciation
on its building at $300. The adjusting entry for depreciation of the building
debit to Depreciation Expense for $300.
a credit to Depreciation Expense for $300.
a credit to Building for $300.
a debit to Accumulated Depreciation for $300.
Equipment with a cost of $200,000 has an
accumulated depreciation of $100,000. What is the book value of the equipment?
$150,000 D. $50,000
Which of the following accounts would most
likely not need to be adjusted at the end of the year?
Question 16 of 30
income statement credit column of the worksheet showed the following revenues:
journal entry to close the revenue accounts is:
A. is a temporary account.
is a permanent account.
summarizes revenue and expenses and transfers the balance to Capital.
D. Both A and C are correct.
Which of the following columns of the
worksheet are referred to when preparing closing entries to the Income Summary?
Adjusted trial balance columns
Balance sheet columns
Income statement columns
Adjusting journal entries:
need not be journalized since they appear on the worksheet.
are not needed if closing entries are prepared.
need not be posted if the financial statements are prepared from the
must be journalized and posted.
When the balance in the Income Summary
account is a credit, the company has:
made an error in their closing entries.
incurred a net loss.
incurred a net income.
had more expenses than revenue.
How do you close the expense accounts?
Debit Capital; credit the expense accounts
Credit Income Summary; debit the expense accounts
Debit Income Summary; credit the expense accounts
Credit Capital; debit the expense accounts
How do you close a revenue account?
Credit Income Summary; debit Revenue
Credit Capital; debit Revenue
Debit Income Summary; credit Revenue
Debit Capital; credit Revenue
The adjusting entry to record the expired
rent would be to:
debit Prepaid Rent; credit Cash.
debit Cash; credit Prepaid Rent.
debit Prepaid Rent; credit Rent Expense.
debit Rent Expense; credit Prepaid Rent.
need not be posted if the financial statements are prepared from the
must be journalized and posted.
are not needed if adjusting entries are prepared.
need not be journalized since they appear on the worksheet.
Which of the following accounts would
appear on the post-closing trial balance?
D. Rent Expense
M. Smuts showed a net income of $6,000. The
entry to close the Income Summary account would include a:
debit to M. Smuts Capital, $6,000.
credit to M. Smuts Capital, $6,000.
debit to Income Summary, $6,000.
Both B and C are correct.
Which of the following accounts will be
directly closed to Capital at the end of the fiscal year?
Which of the following accounts would not
be considered a permanent account?
Which of the following sequence of actions
describes the proper order in the accounting cycle?
Analyze transactions, journalize, post, adjust, prepare financial statements,
Journalize, post, close, prepare financial statements, adjust, and analyze
Prepare financial statements, journalize, post, adjust, analyze transactions,
Post, close, prepare financial statements, adjust, analyze transactions, and
The adjusting entry for accrued salaries is
debit Salaries Payable; credit Salaries Expense.
debit Salaries Expense; credit Cash.
debit Salaries Expense; credit Salaries Payable. D. debit Cash; credit Salaries
Week 6 – Chapter 7 Pre- Quiz Study 15 QUESTIONS
Which of the following stages of the management decision-making process is improperly sequenced?
Evaluate possible courses of action ? Make decision.
Assign responsibility for the decision ? Identify the problem.
Identify the problem ? Determine possible courses of action.
Assign responsibility for decision ? Determine possible courses of action.
A segment has the following data:
Variable expenses 300,000
Fixed expenses 550,000
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?
cannot be determined from the data provided
New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.
Face cream must be processed further because its profit is $9 each.
Face cream must not be processed further because costs increase more than revenue.
Face cream must not be processed further because it decreases profit by $1 each.
Face cream must be processed further because it increases profit by $3 each.
A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?
The book value of the old equipment
Depreciation expense of the old equipment
The current disposal price of the old equipment
The loss on disposal of the old equipment
Incremental analysis would not be appropriate for:
analysis of manufacturing variances.
elimination of an unprofitable segment.
an allocation of limited resource decision.
a make or buy decision.
Sandusky Inc. has the following costs when producing 100,000 units:
Variable costs $600,000
Fixed costs 900,000
An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $150,000 of net income. At what unit price would Sandusky accept the outside supplierâ€™s offer if Sandusky wanted to increase net income by $120,000?
Book value of old equipment is considered to be a
cost that can be changed by a present or future decision.
Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:
Sales Value Additional Sales Value After
Product at Split-off Variable Costs Further Processing
Green lumber $159,600 $24,000 $178,000
Rough lumber 124,000 28,200 173,600
Sawdust 102,000 19,600 130,000
What is the increase in profit if the appropriate products are processed further?
All of the following are relevant to the sell or process further decision except:
revenues at the split-off point.
costs incurred before the split-off point.
revenues beyond the split-off point.
costs incurred beyond the split-off point.
A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?
Cost of the new equipment
Annual depreciation charge on the old equipment
Book value of the old equipment
Estimated annual depreciation of the new equipment
A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customerâ€™s name on the product. Which of the following is likely?
Only variable costs will be relevant.
Both variable and fixed costs will be relevant.
Only fixed costs will be relevant.
Total variable costs will be irrelevant.
A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis?
Book value of the old equipment
Annual operating cost of the new equipment
Annual operating cost of the old equipment
Net cost of the new equipment
In the analysis concerning the acceptance or rejection of a special order, which items are relevant?
Variable costs only
Fixed costs only
Variable costs and fixed costs
Variable costs and unavoidable costs
In incremental analysis:
only costs are analyzed.
both costs and revenues may be analyzed.
only revenues are analyzed.
both costs and revenues that stay the same between alternate courses of action will be analyzed.
If a company anticipates that other sales will be affected by the acceptance of a special order, then:
lost sales should not be considered in the incremental analysis.
lost sales should be considered in the incremental analysis.
the order should not be accepted.
the order will only be accepted if the plant is below capacity.
1. Labor costs that are clearly associated with specific units or batches of product because the labor is used to convert raw materials into finished products called are:
A. Sunk labor.
B. Direct labor.
C. Indirect labor.
D. Finished labor.
E. Supervisory labor.
2. Flexibility of practice when applied to managerial accounting means that:
A. The information must be presented in electronic format so that it is easily changed.
B. Managers must be willing to accept the information as the accountants present it to them, rather than in the format they ask for.
C. The managerial accountants need to be on call twenty-four hours a day.
D. The design of a company’s managerial accounting system largely depends on the nature of the business and the arrangement of the internal operations of the company.
E. Managers must be flexible with information provided in varying forms and using inconsistent measures.
3. Which of the following items is a management concept that was not created to improve companies’ performances?
A. Just-in-time manufacturing.
B. Customer orientation.
C. Total quality management.
D. Continuous improvement.
E. Theory of Constraints.
4. Which of the following items appears only in a manufacturing company’s financial statements?
A. Cost of goods sold.
B. Cost of goods manufactured.
C. Goods available for sale.
D. Gross profit.
E. Net income.
5. Which of the following items does not represent a difference between financial and managerial accounting?
A. Users of the information.
B. Flexibility of practices.
C. Timeliness and time dimension of the information reported.
D. Nature of the information.
E. Purpose of accounting.
6. Dell Builders manufactures each house to customer specifications. It most likely would use:
A. Capital process costing.
B. A periodic inventory system.
C. Unique costing.
D. Job order costing.
E. Activity-based costing.
7. Concept Company’s manufacturing accounting system uses direct labor costs to apply overhead to goods in process and finished goods inventories. Canoe Company’s manufacturing costs for the year were: direct labor, $30,000; direct materials, $50,000; and factory overhead applied, $6,000. The overhead application rate was:
8. A job cost sheet shows information about each of the following items except:
A. The direct labor costs assigned to the job.
B. The name of the customer.
C. The costs incurred by the marketing department in selling the job.
D. The overhead costs assigned to the job.
E. The direct materials costs assigned to the job.
9. The ending inventory of finished goods has a total cost of $9,000 and consists of 600 units. If the overhead applied to these goods is $3,000, and the overhead rate is 75% of direct labor, how much direct materials cost was incurred in producing these units?
10. Job order costing systems normally use:
A. Periodic inventory systems.
B. Perpetual inventory systems.
C. Real inventory systems.
D. General inventory systems.
E. All of the above.
11. Over applied or under applied overhead should be removed from the Factory Overhead account at the end of each accounting period.
12. If actual overhead incurred during a period exceeds applied overhead, the difference will be a credit balance in the Factory Overhead account at the end of the period.
1. Nelson Company’s activity for the first six months of 2004 is as follows:
January 4,000 $3,120
February 6,000 4,460
March 4,800 3,500
April 3,800 3,040
May 3,600 2,900
June 4,200 3,200
Using the high-low method, the variable rate per machine hour would be (Points : 5) $.40
2. In the decision to replace an old machine with a new machine, which of the following would be considered a relevant cost? (Points : 5)
The current disposal price of the old equipment
The loss on the disposal of the old equipment
Depreciation expense on the old equipment
The book value of the old equipment
3. Clarkson Industries produces an electronic calculator that sells for $75 per unit. Variable costs are $45 per unit and fixed costs are $150,000 annually. The company has been averaging an annual income of $100,000 over the past five years. The break-even point for Clarkson Industries would be: (Points : 5)
4. Contribution margin is the amount remaining after (Points : 5)
variable expenses have been deducted from sales revenue.
fixed expenses have been deducted from sales revenue.
fixed expenses have been deducted from variable expenses.
cost of goods sold has been deducted from sales revenues.
5. The Pohl Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of machine hours. For June, the company’s manufacturing overhead flexible budget showed the following total budgeted costs at a denominator activity level of 20,000 machine hours:
Variable overhead $26,000
Fixed overhead 30,000
During June, 17,000 machine hours were used to complete 13,000 units of product, and the following actual total overhead costs were incurred:
Variable overhead $25,330
Fixed overhead 28,820
At standard, each unit of finished product requires 1.4 hours of machine time.
The fixed overhead budget variance for June was: (Points : 5)
6. Newmax Co. is a manufacturing business. When it pays the workers who assemble its products, the cash account should be decreased and what account should be increased? (Points : 5)
Cost of goods sold
Finished goods inventory
7. The Talbot Company produces wheels that are used in the production of bicycles. Talbot’s costs to produce 100,000 wheels annually are:
Direct materials $ 30,000
Direct labor 50,000
Variable overhead 20,000
Fixed overhead 70,000
An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels were purchased from the outside supplier, $15,000 of annual fixed factory overhead could be avoided.
What is the highest price that Talbot could pay the outside supplier for the wheel and still be economically indifferent between making or buying the wheels? (Points : 5)
8. The cost of goods sold in a merchandising firm typically would be classified as a (Points : 5)
9. Questions 9 and 10 refer to the following:
Jones Co. is considering buying a machine that cost $100,000. If purchased, Jones believes the new machine will reduce its operating cost by $20,000 per year for the next 10 years. At the end of 10 years the machine will have $0 salvage value. If acquired, Jones will depreciate the machine using the straight-line method.
Jonesâ€™ cost of capital is 12%. From present value tables, Jones had identified that the present value factor for an amount of 1, discounted at 12%, is .322, while the present value of a 10 year annuity of 1, discounted at 12%, is 5.65.
Ignoring income taxes, what is the payback period of this project? (Points : 5)
10. Ignoring income taxes, what is the net present value of this project? (Points : 5)
11. The individual generally responsible for explaining the direct-labor efficiency variance is the: (Points : 5)
the purchasing agent.
the sales manager.
the production manager. LINDA
the industrial engineering department.
12. Allen Company collects 25% of a month’s sales in the month of sale, 70% in the month following sale, and 4% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next three months are:
April May June
Budgeted sales $100,000 $120,000 $110,000
Cash collections in June are budgeted would be: (Points : 5)
13. Young Enterprises has budgeted sales in units for the next four months as follows:
June 10,000 units
July 8,000 units
August 12,000 units
September 14,800 units
Past experience has shown that the ending inventory for each month should be equal to 20% of the next month’s sales in units. Budgeted production for July should be: (Points : 5)
14. The Collins Company applies overhead to production orders on the basis of machine hours. At the beginning of 2002, the company made the following estimates:
Direct labor cost $100,000
Indirect labor cost 25,000
Advertising expense 30,000
Direct materials 50,000
Indirect materials 10,000
Depreciation on factory equipment 40,000
Machine hours to be worked 10,000
What predetermined overhead rate should Collins Co. use? (Points : 5)
15. The purpose of a flexible budget is to: (Points : 5)
reduce the total time in preparing the annual budget.
compare actual and budgeted results at virtually any level of production.
eliminate cyclical fluctuations in production reports by ignoring variable costs.
allow management some latitude in meeting goals.
16. Following is information relating to Kew Co.’s Vale Division for 2001:
Variable expenses 300,000
Fixed expenses 50,000
Average operating assets 1,000,000
Minimum desired return 12%
What was Vale’s residual income? (Points : 5)
17. The labor time required to assemble a product is an example of a: (Points : 5)
18. Anola Company has two products: A and B. The company uses activity- based costing to determine product costs. The estimated overhead costs and expected activity for each of the company’s three overhead activity centers are as follows:
Total Product A Product B
Activity 1 $18,000 500 300 200
Activity 2 $16,000 600 500 100
Activity 3 $27,000 900 600 300
The predetermined overhead rate under the activity-based costing system for Activity 3 is closest to: (Points : 5)
19. A standard is: (Points : 5)
unrelated to budgeting since standards are used for control purposes only.
normally set at the ideal rather than the practical level of cost, efficiency, or quantity.
normally not applied to the variable portion of overhead.
the budgeted cost for one unit of product.
20. Which of the following would be most appropriate for evaluating a cost center? (Points : 5)
Return on investment
Contribution margin percentage
A static budget
A standard costing system