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Flashcards in CACL Deck (159):
1

Utica Company’s net accounts receivable were $250,000 at December 31, year 1, and $300,000 at December 31, year 2. Net cash sales for year 2 were $100,000. The accounts receivable turnover for year 2 was 5.0. What were Utica’s total net sales for year 2?

$1,475,000

2

What is the formula for accounts receivable turnover?

Credit sales/Average AR

3

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts? Allowance for Accounts receivable uncollectible accounts a. Increase Decrease b. Increase No effect c. No effect Decrease d. No effect Increase

No effect Increase

4

Bryce Corp. signed an agreement with Casey, which requires that if Casey does not meet certain contractual obligations, Casey must forfeit land worth $100,000 to Bryce. Bryce’s accountants believe that Casey will not meet its contractual obligations, and it is probable Bryce will receive the land by the end of year 3. Bryce uses IFRS for reporting purposes. How should Bryce report the land in its December 31, year 2 financial statements?

In a footnote disclosure if the economic benefits are probable.

5

The following information pertains to a fire insurance policy in effect during the calendar year, year 1, covering Vail Co.’s inventory: Face amount of policy $800,000 Deductible clause 50,000 Amount of premium 4,000 Coinsurance clause 80% Vail’s inventory averages $1,000,000 uniformly throughout the year. Vail’s income tax rate is 40%. How much of a contingent liability should Vail accrue at December 31, year 1, to cover possible future fire losses?

$0

6

Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year’s balance sheet?

$264,000

7

Strand, Inc. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income in excess of $200,000 before income tax but after deduction of the bonus. If income before income tax and bonus is $640,000 and the tax rate is 40%, the amount of the bonus would be

$40,000

8

A returnable cash deposit should be classified by the company as a liability when the deposit is received from A customer An employee a. Yes No b. Yes Yes c. No Yes d. No No

Yes Yes

9

Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the following transactions would improve Gil’s current ratio? a. Purchasing $50,000 of merchandise inventory with a short-term account payable. b. Paying $20,000 of short-term accounts payable. c. Refinancing a $30,000 long-term mortgage with a short-term note. d. Collecting $10,000 of short-term accounts receivable.

Purchasing $50,000 of merchandise inventory with a short-term account payable.

10

The Avec Company’s account balances at December 31, year 1, for accounts receivable and the related allowance for uncollectible accounts were $800,000 and $40,000 respectively. An aging of accounts receivable indicated that $71,100 of the December 31 receivables may be uncollectible. The net realizable value of accounts receivable was

$728,900

11

Zenk Co. wrote off obsolete inventory of $100,000 during year 1. What was the effect of this write-off on Zenk’s ratio analysis?

Decrease in current ratio but not in quick ratio.

12

Which of the following is generally associated with payables classified as accounts payable? Periodic payment of interest Secured by collateral a. Yes Yes b. Yes No c. No Yes d. No No

No No

13

The following bank reconciliation is presented for the Kingston Company for the month of November year 1: Balance per bank statement, 11/30/Y1 $18,040 Add: Deposit in transit 4,150 Less: Outstanding checks $6,300 Bank credit recorded in error 20 (6,320) Balance per books, 11/30/Y1 $15,870 Data for the month of December year 1 per bank follows: December deposits $26,100 December disbursements 22,420 Balance, 12/31/Y1 21,720 All items that were outstanding as of November 30, cleared through the bank in December, including the bank credit. In addition, $2,500 in checks were outstanding as of December 31, year 1. What is the balance of cash per books at December 31, year 1?

$19,220

14

Nortex Company reports under IFRS. At December 31, 20X1, Nortex classified a note payable as a current liability. Under what conditions could Nortex reclassify the note payable from current to noncurrent?

If Nortex has executed an agreement to refinance the note before the statement of financial position date.

15

On May 1, year 2, Winston Corporation received notification of legal action against the firm. Winston’s attorneys determine that it is probable the company will lose the suit, and the loss is estimated at $5,000,000. Winston’s accountants believe this amount is material and should be disclosed. Winston prepares its financial statements in accordance with IFRS. How should the estimated loss be disclosed in Winston’s financial statements at December 31, year 2?

As a provision for loss reported in the balance sheet and a loss on the income statement.

16

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year-end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

Current liabilities of $30,000, long-term liabilities of $100,000.

17

Which of the following ratios measures short-term solvency? a. Age of receivables. b. Current ratio. c. Creditors’ equity to total assets. d. Return on investment.

Current ratio.

18

Wyatt Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

The minimum of the range.

19

On March 31, year 1, Dallas Co. received an advance payment of 60% of the sales price for special-order goods to be manufactured arid delivered within five months. At the same time, Dallas subcontracted for production of the special-order goods at a price equal to 40% of the main contract price. What liabilities should be reported in Dallas’ March 31, year 1 balance sheet? Deferred revenues Payables to subcontractor a. None None b. 60% of main contract price 40% of main contract price c. 60% of main contract price None d. None 40% of main contract price

60% of main contract price None

20

In March year 2, an explosion occurred at Nilo Co.’s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo’s management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo’s $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo’s December 31, year 2 financial statements, for which the auditor’s fieldwork was completed in April year 3, how should this casualty be reported?

As a footnote disclosing a possible liability of $300,000.

21

Zenk Co. wrote off obsolete inventory of $100,000 during year 1. What was the effect of this write-off on Zenk’s ratio analysis?

Decrease in current ratio but not in quick ratio.

22

Which of the following is generally associated with payables classified as accounts payable? Periodic payment of interest Secured by collateral a. Yes Yes b. Yes No c. No Yes d. No No

No No

23

The following bank reconciliation is presented for the Kingston Company for the month of November year 1: Balance per bank statement, 11/30/Y1 $18,040 Add: Deposit in transit 4,150 Less: Outstanding checks $6,300 Bank credit recorded in error 20 (6,320) Balance per books, 11/30/Y1 $15,870 Data for the month of December year 1 per bank follows: December deposits $26,100 December disbursements 22,420 Balance, 12/31/Y1 21,720 All items that were outstanding as of November 30, cleared through the bank in December, including the bank credit. In addition, $2,500 in checks were outstanding as of December 31, year 1. What is the balance of cash per books at December 31, year 1?

$19,220

24

Nortex Company reports under IFRS. At December 31, 20X1, Nortex classified a note payable as a current liability. Under what conditions could Nortex reclassify the note payable from current to noncurrent?

If Nortex has executed an agreement to refinance the note before the statement of financial position date.

25

On May 1, year 2, Winston Corporation received notification of legal action against the firm. Winston’s attorneys determine that it is probable the company will lose the suit, and the loss is estimated at $5,000,000. Winston’s accountants believe this amount is material and should be disclosed. Winston prepares its financial statements in accordance with IFRS. How should the estimated loss be disclosed in Winston’s financial statements at December 31, year 2?

As a provision for loss reported in the balance sheet and a loss on the income statement.

26

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year-end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

Current liabilities of $30,000, long-term liabilities of $100,000.

27

Which of the following ratios measures short-term solvency? a. Age of receivables. b. Current ratio. c. Creditors’ equity to total assets. d. Return on investment.

Current ratio.

28

Wyatt Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

The minimum of the range.

29

On March 31, year 1, Dallas Co. received an advance payment of 60% of the sales price for special-order goods to be manufactured arid delivered within five months. At the same time, Dallas subcontracted for production of the special-order goods at a price equal to 40% of the main contract price. What liabilities should be reported in Dallas’ March 31, year 1 balance sheet? Deferred revenues Payables to subcontractor a. None None b. 60% of main contract price 40% of main contract price c. 60% of main contract price None d. None 40% of main contract price

60% of main contract price None

30

In its December31, year 1 balance sheet Fleet Co. reported accounts receivable of $100,000 before allowance for uncollectible accounts of $1 0,000. Credit sales during year 2 were $611,000, and collections from customers, excluding recoveries, totaled $591,000. During year 2, accounts receivable of $45,000 were written off and $17,000 were recovered. Fleet estimated that $15,000 of the accounts receivable at December 31, year 2, were uncollectible. In its December 31, year 2 balance sheet what amount should Fleet report as accounts receivable before allowance for uncollectible accounts?

$75,000

31

When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts would decrease when a(n)

Specific uncollectible account is written off.

32

Marshall Company prepared an aging of its accounts receivable at December 31, year 2, and determined that the net realizable value of the receivables at that date is $50,000. Additional information is available as follows: Accounts receivable at December 31, year 1 $48,000 Accounts receivable at December 31, year 2 54,000 Allowance for doubtful accounts at December 31, year 1—credit balance 6,000 Accounts written off as uncollectible during year 2 5,000 Marshall’s bad debt expense for the year ended December 31, year 2, was

$3,000

33

A new product introduced by Maude Corporation carries a 2-year warranty against defects. The estimated warranty costs related to dollar sales are as follows: Year of sale 3% Year after sale 5% Sales and actual warranty expenditures for the years ended December 31, year 1 and year 2 are as follows: Sales Actual warranty expenditures Year 1 $400,000 $10,000 Year 2 500,000 35,000 What amount should Maude report as its estimated warranty liability as of December 31, year 2?

27.000

34

BIoy Corp.’s payroll for the pay period ended October 31, year 1, is summarized as follows:

Department    Total        Federal income     Amount of wages            payroll           wages      tax withheld           subject to payroll taxes                                                                

                                                                      FICA Unemployment

Factory      $ 60,000       $7,000              $56,000   $18,000    

Sales             22,000         3,000                  16,000       2,000    

Office            18,000         2,000                   8,000                                                  

                   $100,000       12,000                 80,000    20,000 Assume the following payroll tax rates: FICA for employer and employee 7% each Unemployment 3% What amount should BIoy accrue as its share of payroll taxes in its October 31, year 1 balance sheet?

$ 6,200

35

Gain contingencies are usually recognized in the income statement when

Realized.

36

For the week ended June 30, year 1, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30, year 1?

$21,400

37

Stark, Inc. has $1,000,000 of notes payable due June 15, year 2. At the financial statement date of December 31, year 1, Stark signed an agreement to borrow up to $1,000,000 to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Stark was providing. At the date of issue of the December 31, year 1 financial statements, the value of the collateral was $1,200,000 and was not expected to fall below this amount during year 2. On the December 31, year 1 balance sheet, Stark should classify

$40,000 of notes payable as short-term and $960,000 as long-term obligations.

38

On July 1, year 1, Cody Company obtained a $2,000,000, 180-day bank loan at an annual rate of 12%. The loan agreement requires Cody to maintain a $400,000 compensating balance in its checking account at the lending bank. Cody would otherwise maintain a balance of only $200,000 in this account. The checking account earns interest at an annual rate of 6%. Based on a 360-day year, the effective interest rate on the borrowing is

12.67%

39

A company has the following liabilities at year-end: Mortgage note payable; $16,000 due within 12 months $355,000 Short-term debt that the company is refinancing with long-term debt 175,000 Deferred tax liability arising from depreciation 25,000 What amount should the company include in the current liability section of the balance sheet?

$ 16,000

40

Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year-end: Credit sales $10,000,000 Accounts receivable 3,000,000 Allowance for uncollectible accounts 50,000 Marr uses 3% of accounts receivable to determine its allowance for uncollectible accounts at year-end. By what amount should Marr adjust its allowance for uncollectible accounts at year-end?

$ 40,000

41

The following information pertains to Rik Co.’s two employees: Number of weeks Vacation rights Name Weekly salary worked in year 2 vest or accumulate Ryan $800 52 Yes Todd 600 52 No Neither Ryan nor Todd took the usual 2-week vacation in year 2. In Rik’s December 31, year 2 financial statements, what amount of vacation expense and liability should be reported?

$1,600

42

A company’s year-end balance sheet is shown below. Liabilities and Assets shareholder equity Cash $300,000 Current liabilities $ 700,000 Account receivable 350,000 Long-term liabilities 600,000 Inventory 600,000 Common stock 800,000 Property, plant and 2,000,000 Retained earnings 1,150,000 equipment (net) $3,250,000 $3,250,000 What is the current ratio as of December 31?

1.79

43

What is the formula for the current ratio?

Current assets / current liabilities

44

A method of estimating bad debts that focuses on the income statement rather than the balance sheet is the allowance method based on

Credit sales.

45

BIoy Company pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. BIoy accrues salaries expense only at its December 31 year-end. Data relating to salaries earned in December year 1 are as follows: . Last payroll was paid on 12/26/Y1, for the 2-week period ended 12/26/Y1. . Overtime pay earned if the 2-week period ended 12/26/Y1 was $4,200 . Remaining work days in year 1 were December 29, 30, and 31, on which days there was no overtime. . The recurring biweekly salaries total $75,000. Assuming a 5-day work week, BIoy should record a liability at December 31, year 1, for accrued salaries of

$26,700

46

Bronson Apparel, Inc. operates a retail store and must determine the proper December 31, year 1 year-end accrual for the following expenses: . The store lease calls for fixed rent of $1,000 per month, payable at the beginning of the month, and additional rent equal to 6% of net sales over $200,000 per calendar year, payable on January 31 of the following year. Net sales for year 1 are $800,000. . Bronson has personal property subject to a city property tax. The city’s fiscal year runs from July 1 to June 30 and the tax, assessed at 3% of personal property on hand at April 30, is payable on June 30. Bronson estimates that its personal property tax will amount to $6,000 for the city’s fiscal year ending June 30, year 2. In its December 31, year 1 balance sheet, Bronson should report accrued expenses of

$39,000

47

Foster Co. adjusted its allowance for uncollectible accounts at year-end. The general ledger balances for the accounts receivable and the related allowance account were $1,000,000 and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate its allowance for uncollectible accounts. Accounts receivable were estimated to be 5% uncollectible. What amount should Foster record as an adjustment to its allowance for uncollectible accounts at year-end?

$10,000 increase.

48

When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of a small account previously written off would

Increase the allowance for doubtful accounts.

49

Office supplies were ordered by Dwyer Company from Orcutt Company on December 15, year 1. The terms of sale were FOB destination. Orcutt shipped the office supplies on December 28, year 1, and Dwyer received them on January 3, year 2. When should Dwyer record the account payable?

January 3, year 2.

50

Marmol Corporation uses the allowance method for bad debts. During year 1, Marmol charged $30,000 to bad debt expense, and wrote off $25,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of

$30,000

51

All but one of the following are required before a transfer of receivables can be recorded as a sale. a. The transferred receivables are beyond the reach of the transferor and its creditors. a. The transferor has not kept effective control over the transferred receivables through a repurchase agreement. b. The transferee can pledge or sell the transferred receivables. d. The transferor maintains continuing involvement.

The transferor maintains continuing involvement.

52

The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January 2, year 1. If the company has a 6-month operating cycle, then on December 31, year 1, the prepaid insurance reported as a current asset would be for

12 months.

53

An expropriation of assets which is imminent and for which the amount of loss can be reasonably estimated should be Accrued Disclosed a. No No b. No Yes c. Yes Yes d. Yes No

Yes Yes

54

On March 31, year 2, vale Co. had an unadjusted credit balance of $1,000 in its allowance for uncollectible accounts. An analysis of vale’s trade accounts receivable at that date revealed the following: Age Amount Estimated uncollectible 0—30 days $60,000 5% 31—60 days 4,000 10% Over 60 days 2,000 $1,400 What amount should vale report as allowance for uncollectible accounts in its March 31, year 2 balance sheet?

$4,800

55

At June 30, Almond Co.’s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond’s general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50. What was Almond’s adjusted cash balance at June 30?

$9,961

56

The following are held by Smite Co.: Cash in checking account $20,000 Cash in bond sinking fund account 30,000 Postdated check from customer dated one month from balance sheet date 250 Petty cash 200 Commercial paper (matures in to months) 7,000 Certificate of deposit (matures in six months 5,000 What amount should be reported as cash and cash equivalents on Smite’s balance sheet?

$27 200

57

On November 1, year 1, Beni Corp. was awarded a judgment of $1,500,000 in connection with a lawsuit. The decision is being appealed by the defendant, and it is expected that the appeal process will be completed by the end of year 2. Beni’s attorney feels that it is highly probable that an award will be upheld on appeal, but that the judgment may be reduced by an estimated 40%. In addition to footnote disclosure, what amount should be reported as a receivable in Beni’s balance sheet at December 31, year 1?

$0

58

Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31, year 1, the bank reconciliations for Smith are as follows: Big Bank Bank balance $150,000 Deposit in transit 5,000 Book balance 155,000 Small Bank Bank balance $ 1,500 Outstanding checks (8,500) Book balance (7,000) What amount should be classified as cash on Smiths balance sheet at December 31, year 1?

$155,000

59

Steven Corporation began operations in year 1. For the year ended December 31, year 1, Steven made available the following information: Total merchandise purchases for the year $350,000 Merchandise inventory at December 31, year 1 70,000 Collections from customers 200,000 All merchandise was marked to sell at 40% above cost Assuming that all sales are on a credit basis and all receivables are collectible, what should be the balance in accounts receivable at December 31, year 1?

$192,000

60

Marmol Corporation uses the allowance method for bad debts. During year 1, Marmol charged $30,000 to bad debt expense, and wrote off $25,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of

$30,000

61

Abbot Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Abbot’s lawyer states that it is probable that Abbot will lose the suit and be found liable for a judgment costing Abbot anywhere from $500,000 to $2,500,000. However, the lawyer states that the most probable cost is $1,000,000. As a result of the above facts, Abbot should accrue

A loss contingency of $1,000,000 and disclose an additional contingency of up to $1,500,000.

62

Bold Company estimates its annual warranty expense at 2% of annual net sales. The following data are available: Net sales for year 2 $4000,000 Warranty liability account: December 31 year 1$ 60,000 credit Warranty payments during year 2 50,000 debit After recording the year 2 estimated warranty expense, the warranty liability account would show a December 31, year 2 balance of

$90,000

63

Willem Co. reported the following liabilities at December 31, year 1: Accounts payable—trade $ 750,000 Short-term borrowings 400,000 Mortgage payable, current portion $100,000 3,500,000 Other bank loan, matures June 30, year 2 1,000,000 The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, year 2, with the first principal payment due January 15, year 3. Willem’s audited financial statements were issued February 28, year 2. What amount should Willem report as current liabilities at December 31, year 1?

$ 1,250,000

64

A loss contingency for which the amount of loss can be reasonably estimated should be accrued when the occurrence of the loss is Reasonably possible Remote a. Yes No b. Yes Yes c. No No d. No Yes

No No

65

Which of the following is a method to generate cash from accounts receivable? Assignment Factoring a. Yes No b. Yes Yes c. No Yes d. No No

Yes Yes

66

In accordance with ASC Topic 860, Transfers and Servicing, all of the following would be disclosed except for a. Amounts of servicing assets and liabilities recognized and amortized during the period. b. The policy for requiring collateral or other security related to repurchase agreements or securities lending transactions. c. Carrying amount and classification of pledged assets as collateral that are reclassified and separately reported on the balance sheet. d. Accounting policies for measuring the retained interest in securitized financial assets.

Carrying amount and classification of pledged assets as collateral that are reclassified and separately reported on the balance sheet.

67

Alfisol, Inc. offers sales discounts of 2% on all credit sales paid within 15 days. For year 1, gross credit sales totaled $150,000 and 75% of Alfisol’s customers took advantage of the discount. Under the net method

For cash receipts after the discount period, discounts not taken must be credited for $750.

68

In preparing its bank reconciliation for the month of March year 2, Derby Company has available the following information: Balance per bank statement, 3/31/Y2 $36,050 Deposit in transit, 3131/Y2 6,250 Outstanding checks, 3131/Y2 5,750 Credit erroneously recorded by bank in Derby’s account, 3/121Y2 250 Bank service charges for March 50 What should be the correct balance of cash at March 31, year 2?

$36,300

69

At December 31, year 2, Curry Co. had the following balances in selected asset accounts: year 2 Increase over year 1 Cash $ 300 $100 Accounts receivable, net 1,200 400 Inventory 500 200 Prepaid expenses 100 40 Other assets 400 150 Total assets $2,500 $890 Curry also had current liabilities of $1,000 at December 31, year 2, and net credit sales of $7,200 for the year then ended. What is Curry’s acid-test ratio at December 31, year 2?

1.5

70

Effective with the year ended December 31, year 1, Grimm Company adopted a new accounting method for estimating the allowance for doubtFul accounts at the amount indicated by the year-end aging of accounts receivable. The following data are available: Allowance for doubtful accounts 1/1/Y $24,000 Provision for doubtful accounts during 20,000 year 1 (2% on credit sales of $1,000,000) Bad debts written off, 11/30/Y1 19,500 Estimated uncollectible accounts per aging 21,000 After year-end adjustment, the bad debt expense for year 1 would be

$16,500

71

Abbot Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Abbot’s lawyer states that it is probable that Abbot will lose the suit and be found liable for a judgment costing Abbot anywhere from $500,000 to $2,500,000. However, the lawyer states that the most probable cost is $1,000,000. As a result of the above facts, Abbot should accrue

A loss contingency of $1,000,000 and disclose an additional contingency of up to $1,500,000.

72

On October 1, year 1, a company borrowed cash and signed a 3-year interest-bearing note on which both the principal and interest are payable on October 1, year 4. The company did not elect to use the fair value option for reporting financial liabilities. At December 31, year 3, accrued interest should

Be reported on the balance sheet as a current liability.

73

Flax Company’s working capital at December 31, year 1, was $1,700,000. Data pertaining to year 2 are as follows: Working capital provided by operations $900,000 Purchases of plant assets for cash 600,000 Short-term borrowings 950,000 Payments on short-term borrowings 500,000 Cash dividends paid on common stock 250,000 Flax’s working capital at December 31, year 2, was

$1,750,000

74

The following information is available from Timber Corp’s financial records for year 1: Sales Net credit sales $500,000 Net cash sales 250,000 $750,000 Accounts Receivable Balance, January 1, year 1 $ 75,000 Balance, December 31, year 1 50,000 How many times did Timber’s accounts receivable turn over in year 1?

8

75

Gar Co. factored its receivables with recourse with Ross Bank. Assume Gar surrenders control of the receivables. Gar received cash as a result of this transaction, which is best described as a

Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar.

76

Morgan Company determined that: (1) it has a material obligation relating to employees’ rights to receive compensation for future absences attributable to employees’ services already rendered, (2) the obligation relates to rights that vest, and (3) payment of the compensation is probable. The amount of Morgan’s obligation as of December 31, year 1, is reasonably estimated for the following employee benefits: Vacation pay $100,000 Holiday pay 25,000 What total amount should Morgan report as its liability for compensated absences in its December 31, year 1 balance sheet?

$125,000

77

On September 30, World Co. borrowed $1,000,000 on a g% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?

$758,300

78

Conlon Co. is the plaintiff in a patent-infringement case. Conlon has a high probability of a favorable outcome, and can reasonably estimate the amount of the settlement. What is the proper accounting treatment of the patent infringement case?

Disclosure in the notes only.

79

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

$100,000

80

Agee Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of the sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of April year 2 for the three salespersons in sales region 330 are as follows: Salesperson Fixed salary Net sales Commission rate A $ 5,000 $100,000 4% B 7,000 200,000 6% C 9,000 300,000 6% Totals $21,000 $600,000 For sales region 330, what total amount should Agee accrue for sales commissions payable at April 30, year 2?

14,000

81

Forder Co. had the following balances at December 31, year 2: Cash in checking account $ 45,000 Cash in money market account 65,000 US Treasury bill, purchased 11/1/year 2, 350 000 maturing 1/31/year 3 US Treasury bill, purchased 12/1/year 2, 400 000 maturing 3/31/year 3 Forder’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Forder report as cash and cash equivalents in its December 31, year 2 balance sheet?

$460,000

82

In accordance with ASC Topic 860, Transfers and Servicing, how should a servicing asset be amortized?

In proportion to and over the period of estimated net servicing income or net servicing loss.

83

A company receives an advance payment for special-order goods that are to be manufactured and delivered within 6 months. The advance payment should be reported in the company’s balance sheet as a

Current liability.

84

The controller of Peabody, Inc. has been asked to present an analysis of accounts receivable collections at the upcoming staff meeting. The following information is used: 12/31, year2 12/31, year 1 Accounts receivable $100,000 $130,000 Allowance, doubtful accounts (20,000) (40,000) Sales 400,000 200,000 Cost of goods sold 350,000 170,000 What is the receivables turnover ratio as of December 31, year 2?

4.7

85

A company has a current ratio of 2 to 1. This ratio will decrease if the company

Borrows cash on a 6-month note.

86

Jackson Corporation provides an incentive compensation plan under which its president is to receive a bonus equal to 10% of Jackson’s income in excess of $100,000 before deducting income tax but after deducting the bonus. If income before income tax and the bonus is $320,000, the amount of the bonus should be

$20,000

87

On December 31, year 1, Northpark Co. collected a receivable due from a major customer. Which of the following ratios would be increased by this transaction? a. Receivable turnover ratio. b. Quick ratio. c. Inventory turnover ratio. d. Current ratio.

Receivable turnover ratio.

88

Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of

Matching.

89

Snelling Co. did not record an accrual for a contingent loss, but disclosed the nature of the contingency and the range of the possible loss. How likely is the loss?

Reasonably possible.

90

Royal Corporation’s liabilities at 12/311Y1 were as follows: Trade accounts payable $100,000 16% notes payable issued 11/1/Yl, maturing 7/1/Y2 30,000 14% debentures payable issued 2/1/Yl; final installment due 2/1/Y5; 300 000 balance at 12/31/Yl, including annual installment of $50,000 due 2/1/Y2 $430,000 Royal’s 12/31/Yl, financial statements were issued on 3/31/Y2. On 1/5/Y2 the entire $300,000 balance of the 14% debentures was refinanced by issuance of a long-term obligation. In addition, on 3/1/Y2, Royal consummated a noncancelable agreement with the lender to refinance the 16% note payable on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of any of the agreement’s provisions. The total amount of Royal’s short-term obligations that may properly be excluded from current liabilities at 12/3 1/Yl is

$80,000

91

A retail store sells gift certificates that are redeemable in merchandise. When the gift certificate was sold for cash, a

Deferred revenue account should be increased. Revenue account should be increased.

92

The following financial ratios and calculations were based on information from Kohl Co.’s financial statements for the current year: Accounts receivable turnover Ten times during the year Total assets turnover Two times during the year Average receivables during the year $200,000 What was Kohl’s average total assets for the year?

$1,000,000

93

Wren Company had the following account balances at December 31, year 1: Accounts receivable $ 900,000 Allowance for doubtful accounts before any provision for year 1 doubtful accounts expense) 16,000 Credit sales for year 1 1,750,000 Wren is considering the following method of estimating doubtful accounts expense for year 1: . Based on credit sales at 2% . Based on accounts receivable at 5% What amount should Wren charge to doubtful accounts expense under each method? Percentage of credit sales Percentage of accounts receivable a. $51,000 $45,000 b. $51,000 $29,000 c. $35,000 $45,000 d. $35,000 $29,000

$35,000 $29,000

94

When the accounts receivable of a company are sold outright to a company which normally buys accounts receivable of other companies without recourse the accounts receivable have been

Factored.

95

MilI Co.’s allowance for uncollectible accounts was $100,000 at the end of year 2 and $90,000 at the end of year 1. For the year ended December 31. year 2 Mill reported bad debt expense of $1 6,000 in its income statement What amount did MilI debit to the appropriate account in year 2 to write off actual bad debts?

$ 6,000

96

Dell Company sells its products in reusable, expensive containers. The customer is charged a depositfor each container delivered and receives a refund for each container returned within two years after the year of delivery. Dell accounts for the containers not returned within the time limit as being retired by sale at the deposit amount Information for year 3 concerning the containers is as follows: Held by customers at 12/31/Y2 from deliveries in Year 1 $ 50,000 Year 2 145,000 195,000 Delivered in year 3 260,000 Returned in year 3 from deliveries in: Year 1 30,000 Year 2 85,000 Year 3 95,000 210,000 Total What amount should Dell report as a liability for returnable containers at December 31,year 3?

$225,000

97

Which of the following contingencies should generally be accrued on the balance sheet as a liability when the occurrence of the contingent event is reasonably possible and its amount can be reasonably estimated? Expropriation of assets Product warranty obligation a. No No b. No Yes c. Yes Yes d. Yes No

No No

98

Amo Corp.’s liability account balances at June 30, year 2, included a 10% note payable in the amount of $1,800,000. The note is dated October 1, year 1, and is payable in three equal annual payments of $600,000 plus interest. Amo does not elect the fair value option for reporting this financial liability. The first interest and principal payment was made on October 1, year 2. In Arno’s June 30, year 3 balance sheet, what amount should be reported as accrued interest payable for this note?

90,000

99

On the December 31, year 1 balance sheet of the Stat Company, the current assets were comprised of the following items: Cash $ 70,000 Accounts receivable 120,000 Inventories 60,000 An examination of the accounts revealed that the accounts receivable were composed of the following items: Trade accounts $ 93,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (11/Yl) 3,000 Selling price of unsold goods sent by Stat on consignment at 130% of cost (and not included 26,000 in Stat’s ending inventory) $120,000 What is the correct amount of current assets as of 12/31/Yl?

$244,000

100

Taylored Corp. factors $200,000 of accounts receivable in a transaction in which control is surrendered and without recourse to Rich Corp. on July 1, year 1. Rich assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of 41 days. Taylored’s cost of factoring the receivables would be

$ 9,370

101

Rogo Corp.’s trial balance reflected the following account balances at December 31, year 1: Accounts receivable (net) $16,000 Short-term investments 5,000 Accumulated depreciation on equipment and furniture 15,000 Cash 11,000 Inventory of merchandise 30,000 Equipment and furniture 25,000 Patent 4,000 Prepaid expenses 1,000 Land held for future business site 18,000 In Rogo Corp.’s December 31, year 1 balance sheet, the current assets total is

$63,000

102

How should a servicing asset be disclosed on the statement of financial position? I. As a separate line items for amounts valued at fair value and amounts measured by the amortization method II. In the aggregate for all servicing assets III. In the aggregate for all servicing assets and parenthetical disclosure for the amount measured at fair value

I and III.

103

On September 1, year 1, a company borrowed cash and signed a 2-year interest-bearing note on which both the principal and interest are payable on September 1, year 3. The company did not elect the fair value option for reporting this note. At December 31, year 2, the liability for accrued interest should be

For 16 months of interest.

104

Selected information for Cain Corp. for the year ended December 31, year 1, follows: Average days’ sales in inventories 124 Average days’ sales in accounts receivable 48 The average number of days in the operating cycle for year 1 was

172

105

Under IFRS, a provision is

An event which is probable and measurable.

106

Reserves for contingencies for general or unspecified business risks should

Not be accrued in the financial statements and need not be disclosed in the notes thereto.

107

Fulton Cereal Company inaugurated a new sales promotional program. For every 10 cereal box tops returned to the company, customers receive an attractive prize. Fulton estimates that only 30% of the cereal box tops reaching the consumer market will be redeemed. Additional information is as follows Units Amounts Sales of cereal boxes 2,000,000 $1,400,000 Purchase of prizes 36,000 18,000 Prizes distributed to customers 28,000 At the end of its year, Fulton recognized a liability equal to the estimated cost of potential prizes outstanding. What is the amount of this estimated liability?

$16,000

108

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is corred? a. Good Neighbor Financing will take title to the receivables and will return title to Milton after the loan is paid. b. Milton will retain control of the receivables. c. Good Neighbor Financing will assume the responsibility of collecting the receivables. d. Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.

Milton will retain control of the receivables.

109

Under what circumstances may the obligation for warranties be recorded at fair value?

If the warranty obligation can be settled by contracting with a third party.

110

Tallent Corporation had the following account balances at December 31, year 1: Cash on hand and in banks $975,000 Cash legally restricted for additions to plant (expected to be disbursed in year 3) 600,000 Bank certificates of deposit (due February 1, year 2, purchased September 1, year 1) 250,000 In the current assets section of Tallent’s December 31, year 1 balance sheet, what total amount should be reported under the caption “cash and cash equivalents?”

$ 975,000

111

Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red’s cash flows for the $3 million in receivables already recorded on its books? a. Discount the receivables outstanding. b. Change the due date of the invoice. c. Factor the receivables outstanding. d. Demand payment from customers before the due date.

Factor the receivables outstanding.

112

Lee Corporation’s checkbook balance on December 31, year 1, was $4,000. In addition, Lee held the following items in its safe on December 31: Check payable to Lee Corporation, dated 1/2/Y2, not included in 12/31 checkbook balance $1,000 Check payable to Lee Corporation, deposited 12/20, and included in 12/31 checkbook balance,but returned by bank on 12/30, stamped ‘NSF.” The check was redeposited 1/2/Y2, and cleared 1/7. 200 Postage stamps received from mail-order customers 75 Check drawn on Lee Corporation’s account, payable to vendor, dated and recorded 12/31, but not mailed until 1/15/Y2 500 The proper amount to be shown as Cash on Lee’s balance sheet at December 31, year 1, is

$4,300

113

Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2.00. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?

$5,000

114

Pak Co.’s professional fees expense account had a balance of $82,000 at December 31, year 1, before considering year-end adjustments relating to the following: . Consultants were hired for a special project at a total fee not to exceed $65,000. Pak has recorded $55,000 of this fee based on billings for work performed in year 1. . The attorney’s letter requested by the auditors dated January 28, year 2, indicated that legal fees of $6,000 were billed on January 15, year 2, for work performed in November year 1, and unbilled fees for December year 1 were $7,000. What amount should Pak report for professional fees expense for the year ended December 31, year 1?

$ 95,000

115

An estimated loss from a loss contingency that is probable and for which the amount of the loss can be reasonably estimated should

Be accrued by debiting an expense account and crediting a liability account or an asset account.

116

Gar, Inc.’s trial balance reflected the following liability account balances at December 31, year 1: Accounts payable $19,000 Bonds payable, due year 2 34,000 Deferred income tax liability 4,000 Discount on bonds payable 2,000 Dividends payable on 2/15/Y2 5,000 Income tax payable 9,000 Notes payable, due 1/19/Y3 6,000 The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes. In Gar’s December 31, year 1 balance sheet, the current liabilities total was

$65,000

117

Lind Corp. declared a cash dividend of $50,000 on March 10, year 2, to stockholders of record March 25, year 2, payable on April 5, year 2. As a result of this cash dividend, working capital

Decreased on March 10 by $50,000.

118

Cook Co. had the following balances at December 31, year 1: Cash ¡n checking account $350,000 Cash ¡n money-market account 250,000 US Treasury bill, purchased 12/1/Yl, maturing 2/28/Y2 800,000 US Treasury bond, purchased 3/1/Yl, maturing 2/28/Y2 500,000 Cook’s policy is to treat as cash equivalents all highly-liquid investments with a maturity of 3 months or less when purchased. What amount should Cook report as cash and cash equivalents in its December 31, year 1 balance sheet?

$1,400,000

119

TGR Enterprises provided the following information from its statement of financial position for the year ended December 31, year 1: January 1 December 31 Cash $ 10,000 $ 50,000 Accounts receivable 1 20,000 100,000 Inventories 200,000 160,000 Prepaid expenses 20,000 10,000 Accounts payable 175,000 120,000 Accrued liabilities 25,000 30,000 TGR’s sales and cost of sales for year 1 were $1,400,000 and $840,000, respectively. What is the accounts receivable turnover in days?

28.7

120

Which of the following is used to account for probable uncollectible accounts? Due from factor Recourse liability a. Yes No b. Yes Yes c. No Yes d. No No

No Yes

121

Bake Co.’s trial balance included the following at December 31, year 1: Accounts payable $80,000 Bonds payable, due year 2 300,000 Discount on bonds payable 15,000 Deferred income tax liability 25,000 The deferred income tax liability is not related to an asset for financial accounting purposes and is expeded to reverse in year 2. What amount should be included in the current liability sedion of Bake’s December 31, year 1 balance sheet?

$390,000

122

On March 1, year 1, a suit was filed against Dean Company for patent infringement. Dean’s legal counsel believes an unfavorable outcome is probable, and estimates that Dean will have to pay between $500,000 and $900,000 in damages. However, Dean’s legal counsel is of the opinion that $600,000 is a better estimate than any other amount in the range. The situation was unchanged when the December 31, year 1 financial statements were released on February 24, year 2. How much of a liability should Dean report on its balance sheet at December 31, year 1 in connection with this suit?

$600,000

123

In accordance with ASC Topic 860, Transfers and Servicing, which financial assets should be measured like investments in debt securities classified as available-for- sale or trading?

Financial assets subject to prepayment

124

If current assets exceed current liabilities, payments to creditors made on the last day of the month will

Increase current ratio.

125

When a specific customers account receivable is written off as uncollectible, what will be the effect on net income under each of the following methods of recognizing bad debt expense? Allowance Direct Write-Off a. None Decreased b. Decreased None c. Decreased Decreased d. None None

None Decreased

126

If the payment of compensation is probable, the amount can be reasonably estimated, and the obligation relates to rights that vest, employees’ compensation for future absences should be

Accrued if attributable to employees’ services already rendered.

127

In determining whether to accrue employees’ compensation for future absences, one of the conditions that must be met is that the employer has an obligation to make payment even if an employee terminates. This an example of a

Vested right.

128

On December 31, year 1, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key’s December 31, year 1 balance sheet? Alpha Omega a. $ 9,440 $ 8,570 b. $10,000 $ 8,570 c. $ 9,440 $10,000 d. $10,000 $10,000

$10,000 $ 8,570

129

A company is in its first year of operations and has never written off any accounts receivable as uncollectible. When the allowance method of recognizing bad debt expense is used, the entry to recognize that expense

Decreases current assets.

130

Which of the following is used to account for probable uncollectible accounts? Due from factor Recourse liability a. Yes No b. Yes Yes c. No Yes d. No No

No Yes

131

Rue Co.’s allowance for uncollectible accounts had a credit balance of $12,000 at December 31, year 1. During year 2, Rue wrote off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for uncollectible accounts was required at December 31, year 2. What amount of uncollectible accounts expense should Rue report for year 2?

$86,000

132

Redwood Co.’s financial statements had the following information at year-end: Cash $60,000 Accounts receivable 180,000 Allowance for uncollectible accounts 8,000 Inventory 240,000 Short-term marketable securities 90,000 Prepaid rent 18,000 Current liabilities 400,000 Long-term debt 220,000 What was Redwood’s quick ratio?

0.81 to 1

133

How do you calculate the quick ratio?

Quick assets / current liabilities

134

During year 2, a former employee of Dane Co. began a suit against Dane for wrongful termination in November year 1. After considering all of the facts, Dane’s legal counsel believes that the former employee will prevail and will probably receive damages of between $1,000,000 and $1,500,000, with $1,300,000 being the most likely amount Dane’s financial statements for the year ended December 31, year 1, will not be issued until February year 2. In its December 31, year 1 balance sheet, what amount should Dane report as a liability with respect to the suit?

$1,300,000

135

On December 1, year 1, Paxton Co. had a note payable due on August 1, year 2. On January 20, year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, year 2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, year 2. How should Paxton classify the note on its balance sheet at December 31, year 1?

As a current liability because the lender is not expected to be financially capable of honoring the agreement.

136

Which of the following is classified as an accrued liability? Liability for federal Liability for employer’s unemployment taxes share of FICAtaxes a. Yes Yes b. Yes No c. No No d. No Yes

Yes Yes

137

Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward’s credit sales for year I were $1,000,000. During year 1, Ward wrote off $18,000 of uncollectible accounts. Ward’s allowance for uncollectible accounts had a $15,000 balance on January 1, year 1. In its December 31, year 1 income statement what amount should Ward report as uncollectible accounts expense?

$20,000

138

Landau Corporation elects to use the fair value method to account for its servicing assets. Which of the following statements is true? a. The assets are amortized in proportion to and over the period of estimated net servicing income or net servicing loss. b. Changes in fair value are reported in other comprehensive income. c. The assets are measured for impairment at the end of each reporting period. d. Changes in fair value are reported in earnings of the period.

Changes in fair value are reported in earnings of the period.

139

On September 1, year 1, a company borrowed cash and signed a 1-year interest-bearing note on which both the principal and interest are payable on September 1, year 2. How will the note payable and the related interest be classified in the December 31, year 1 balance sheet? Note payable Accrued interest a. Current liability Noncurrent liability b. Noncurrent liability Current liability c. Current liability Current liability d. Noncurrent liability No entry

Current liability Current liability

140

At the end of its first year of operations, December 31, year 1, Wonder Company had a net realizable value of accounts receivable of $500,000. During year 1 Wonder recorded charges to bad debt expense of $80,000 and wrote off as uncollectible accounts receivable of $20,000. What should Wonder report on its balance sheet at December 31, year 1, as accounts receivable before the allowance for doubtful accounts?

$560,000

141

In determining whether to accrue employees’ compensation for future absences, among the conditions that must be met are that the obligation relates to rights that Accumulate Vest a. No No b. No Yes c. Yes No d. Yes Yes

Yes Yes

142

Fell, Inc. operates a retail grocerystorethatis required bylawto collectrefundable deposits of $.05 on soda cans. lnformationforyear2follows: Liability for returnable deposits—12/31/Y1 $150,000 Cans of soda sold in year 2 10,000,000 Soda cans returned in year 2 11,000,000 On February 1, year 2, Fell subleased space and received a $25,000 deposit to be applied toward rent at the expiration of the lease in year 6. In Fell’s December 31, year 2 balance sheet, the current and noncurrent liabilities for deposits were Current Noncurrent a. $125,000 $0 b. $100,000 $ 25,000 c. $100,000 $0 d. $ 25,000 $100,000

$100,000 $ 25,000

143

Grim Corporation operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant. The contingency should be reported

In the notes to the financial statements.

144

Taylored Corp. factors $200,000 of accounts receivable in a transaction in which control is surrendered and without recourse to Rich Corp. on July 1, year 1. Rich assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of 41 days. Taylored will receive and record cash of

$180,630

145

Blake Foods Corporation mails coupons to consumers which may be presented by a stated expiration date at retail food stores to obtain discounts on certain Blake products. Retailers are reimbursed for the face value of coupons redeemed, plus 10% of coupon value as compensation for handling costs. Blake honors requests for coupon redemption by retailers received up to 3 months after the consumer expiration date. In Blake’s experience, 60% of the coupons issued ultimately are redeemed. Information with respect to the two separate series of coupons issued by Blake during year 1 is as follows: Series A Series B Consumer expiration date June 30, year 1 December 31, year 1 Total face value of coupons issued $100,000 $200,000 Total payments to retailers as of December 31, year 1 $ 60,500 $ 40,500 What amount should Blake report as a liability for unredeemed coupons at December 31, year 1?

$91,500

146

Based upon its past collection experience, Alden Company provides for bad debt expense at the rate of 2% of credit sales. On January 1, year 1, the allowance for doubtful accounts balance was $10,000. During year I Alden wrote oIT $18,000 of uncollectible receivables and recovered $5,000 of bad debts written off in prior years. If credit sales for year I totaled $1,000,000, the allowance for doubtful accounts balance at December 31, year 1, should be

$17,000

147

Tone Company is the defendant in a lawsuit filed by Witt in year 1 disputing the validity of a copyright held by Tone. At December 31, year 1, Tone determined that Witt would probably be successful against Tone for an estimated amount of $400,000. Appropriately, a $400,000 loss was accrued by a charge to income for the year ended December 31, year 1. On December 15, year 2, Tone and Witt agreed to a settlement providing for cash payment of $250,000 by Tone to Witt, and transfer of Tone’s copyright to Witt. The carrying amount of the copyright on Tone’s accounting records was $60,000 at December 15, year 2. What would be the effect of the settlement on Tone’s income before income tax in year 2?

$ 90,000 increase.

148

On April 1, Aloe, Inc. factored $80,000 of its accounts receivable without recourse. The factor retained 10% of the accounts receivable as an allowance for sales returns and charged a 5% commission on the gross amount of the factored receivables. What amount of cash did Aloe receive from the factored receivables?

$68,000

149

In December year 1, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31, year 1 balance sheet, what amount should Mill report as estimated liability for coupons?

$ 3,960

150

Hope Corporation prepares its financial statements in accordance with IFRS. Hope intends to refinance a $500,000 note payable due on March 1, year 2. The company expects the note to be refinanced for a period of five years. Under what circumstances can Hope report the note payable as a noncurrent liability on its December 31, year 1 statement of financial position?

If Hope has executed an agreement to refinance by December 31, year 1.

151

A state requires quarterly sales tax returns to be filed with the sales tax bureau by the 20th day following the end of the calendar quarter. However, the state further requires that sales taxes collected be remitted to the sales tax bureau by the 20th day of the month following any month such collections exceed $500. These payments can be taken as credits on the quarterly sales tax return. Taft Corp. operates a retail hardware store. All items are sold subject to a 6% state sales tax, which Taft collects and records as sales revenue. The sales taxes paid by Taft are charged against sales revenue. Taft pays the sales taxes when they are due. Following is a monthly summary appearing in Taft’s first quarter year 2 sales revenue account: Debit Credit January $10,600 February $600 7,420 March 9,540 $600 $27,560 In its financial statements for the quarter ended March 31, year 2, Taft’s sales revenue and sales taxes payable would be Sales revenue Sales tax payable a. $27,560 $1,560 b. $26,960 $ 600 c. $26,000 $1,560 d. $26,000 $ 960

$26,000 $ 960

152

At December 31, year 2, Curry Co. had the following balances in selected asset accounts: year 2 Increase over year 1 Cash $300 $100 Accounts receivable, net 1,200 400 Inventory 500 200 Prepaid expenses 100 40 Other assets 400 150 Total assets $2,500 $890 Curry also had current liabilities of $1,000 at December 31, year 2, and net credit sales of $7,200 for the year then ended. What was the average number of days to collect Curry’s accounts receivable during year 2?

50.7

153

On December 31, year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, year 2, the note was refinanced. How should Taylor report the note payable in its December 31, year 1 balance sheet?

A long-term liability.

154

Yang Corporation acquired a servicing asset. How should the servicing asset be initially recorded?

Fair value.

155

Klick, Inc. had the following bank reconciliation at March 31, year 2: Balance per bank statement, 3/31/Y2 $56,500 Add deposit in transit 10,300 66,800 Less outstanding checks 12,600 Balance per books, 3/31/Y2 $54,200 Data per bank for the month of April year 2 follow: Deposits $58,400 Disbursements 49,700 All reconciling items at March 31, year 2, cleared the bank in April. Outstanding checks at April 30, year 2, totaled $7,000. There were no deposits in transit at April 30, year 2. What is the cash balance per books at April 30, year 2?

$58,200

156

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For the year, year 1, income for Cone’s branch was $160,000 before income taxes and Cone’s bonus. Cone’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone’s bonus for the year, year 1

$12,000

157

Bixby Company is in its first year of operations. Bixby estimates its annual warranty expense at 2% of net annual sales. Bixby provides its customers with a three-year warranty plan. Expected warranty expense is shown below: Year Expected warranty Present value expense discounted at 8% year 1 $40,000 $37,037 year 2 10,000 8,573 year 3 10,000 7,938 Total $60,000 $53,548 The current borrowing rate for Bixby is 8%. Bixby can contract with a third party to provide the warranty work. The cost for a contract to settle the warranties is $57,000. If Bixby elects the fair value option to report warranty obligations, at what amount will the warranty liability be recorded on the balance sheet?

$57,000

158

Bell Co. is a defendant in a lawsuit that could result in a large payment to the plaintiff. Bell’s attorney believes that there is a 90% chance that Bell will lose the suit, and estimates that the loss will be anywhere from $5,000,000 to $20,000,000 and possibly as much as $30,000,000. None of the estimates are better than the others. What amount of liability should Bell report on its balance sheet related to the lawsuit?

5,000,000

159

Taylored Corp. factors $200,000 of accounts receivable in a transaction in which control is surrendered and without recourse to Rich Corp. on July 1, year 1. Rich assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of 41 days. Which of the following statements is correct? a. Taylored should remove the receivables without any holdback from the books by crediting AR by $190,000. b. Taylored should remove all of the receivables from the books by crediting AR by $200,000 c. Taylored should record a liability of $10,000 related to the holdback. d. Taylored should record a liability on factoring of AR of $200,000.

Taylored should remove all of the receivables from the books by crediting AR by $200,000