exam 3

Question 1

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

Answer 1

within one year or the operating cycle, whichever is longer.

Question 2

The following totals were taken from the payroll records of a certain company:

Wages, $100,000
FICA taxes withheld, $7,650
Federal income taxes withheld, $18,000
State income tax withheld, $2,500
Federal unemployment taxes, $450
State unemployment taxes, $4,500

The entry to record accrual of employer’s payroll taxes would include a debit to payroll tax expense in the amount of

Answer 2

Employer’s payroll taxes = FICA taxes + Federal unemployment taxes + State unemployment taxes

Question 3

In its first year, a company made sales of $100,000 on account. All of the customers paid their accounts before year-end. The merchandise sold is subject to product warranties. The company assumes that warranty costs will be 4% of sales. During the same year, the company replaced $3,000 of defective warranted products. It expects to replace $1,000 of the merchandise sold in the first year during the second year. The company uses the accrual-method of accounting. Which of the following is true?

Answer 3

The company’s warranty payable at the end of the first year is $1,000.

Question 4

A company reports the following selected accounts and balances after posting adjusting entries:

Accounts payable, $14,000
6-month, 8%, note payable, $44,000
Income tax payable, $5,000
Salaries and wages expense, $23,000
3-year, 10% note payable, $200,000
Salaries and wages payable, $8,000
Mortgage payable ($20,000 due next year), $1,000,000
Rent payable, $6,000

Its current assets are $256,000 at year-end. How much is its current ratio at year-end?

Answer 4

Current liabilities = $14,000 + 44,000 + 5,000 + 8,000 + 20,000 + 6,000 = $97,000
Current ratio = current assets divided by current liabilities = $256,000/$97000 = 2.64

Question 5

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

Answer 5

The company has $6,417 of interest payable that is a long-term liability.

Interest payable = $700,000 x .11 x 1/12 = $6,417

Question 6

A company issues a $300,000, 6%, 9-month note on July 1. It has a December 31 year-end. The entry made by the company on July 1 to record the issuance of the note is

Answer 6

Debit cash for $300,000 and credit notes payable for $300,000.

Question 7

The cash register tape indicates sales are $1,500 and sales taxes are $100. What journal entry is needed to record this information?

Answer 7

Debit: Cash for $1,600
Credit: Sales account $1,500
Credit: Sales Taxes Payable for $100

Question 8

At the start of the current year, a company issued a $500,000 note to a bank. The company must pay the bank $100,000 plus interest each January 1 for the next five years starting at the beginning of next year. The company will report the note payable on its current year’s balance sheet as

Answer 8

Current liabilities, $100,000; Long-term Debt, $400,000.

Question 9

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

Answer 9

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

Question 10

In the current year, a corporation had net income of $200,000, interest expense of $20,000, and tax expense of $50,000. Its net sales were $1,000,000 and its cost of goods sold was $400,000. What was its times interest earned for the year?

Answer 10

($200,000 + $20,000 + $50,000) / $20,000 = 13.50

Question 11

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

Answer 11

Convertible bonds

Question 12

A corporation issues $7,000,000 of 10-year, 5% bonds dated January 1 at 98. The journal entry to record the issuance will include

Answer 12

$7,000,000 x 98% = $6,860,000
$140,000 = $7,000,000 - $6,860,000
a debit to Discount on Bonds Payable for $140,000.

Question 13

Bonds with a face value of $500,000 and a quoted price of 95 have a selling price of

Answer 13

quivalently, $500,000 x 95% = $475,000.

Question 14

Handel Enterprises issued 2,000 bonds with a face value of $1,000 each at 102. The journal entry to record the issuance includes

Answer 14

2,000 X 1,000= 2,000,000
2,000 bonds X 102% = $2,040,000
$2,040,000 - $2,000,000 = $40,000
a credit to Premiums on Bonds Payable for $40,000.

Question 15

Which of the following statements regarding the amortization of discounts and premiums on bonds is false?

Answer 15

When the straight-line and effective interest methods of amortization result in interest that is materially different, GAAP requires use of the straight-line method.

Question 16

A corporation issued 10-year bonds with a face value of $300,000 and a contractual rate of interest of 6% at 99. What is its total cost of borrowing?

Answer 16

= $300,000 × 6% × 10 years = $180,000

$300,000 x 1% = $3,000
$180,000 + 3,000 = $183,000

Question 17

On January 1, a corporation issued $5,000,000, 20-year, 7% bonds for $4,910,000. Interest is to be paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the amount of bond interest expense to be recognized in the year issued is

Answer 17

$5,000,000 x 7% = $350,000.
$5,000,000 - $4,910,000=90,000
$90,000/20 years = $4,500 per year.
$350,000 + $4,500 = $354,500

Question 18

Which of the following is true for bonds that have been issued at a premium?

Answer 18

The carrying value of the bonds will decrease over the life of the bonds.

Question 19

A company has bonds with a principal value of $500,000 outstanding. The unamortized premium on the bonds is $12,600. If the bonds are retired at 105, what would be the amount the company would pay its bondholders?

Answer 19

$500,000 x 1.05 = $525,000

Question 20

A company has bonds with a principal value of $1,000,000 outstanding. The unamortized discount on the bonds is $14,400. The company redeemed the bonds at 101. What is the company’s gain or loss on the redemption?

Answer 20

($1,000,000 - $14,400) - ($1,000,000 x 1.01) = ($24,400)

Question 20

On January 1, a company issued $750,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, what is the amount of the amortization for the first year?

Answer 20

750,000×1.06=795,000
795,000−750,000=45,000
45,000/5 =9,000

Question 21

A company received proceeds of $460,000 on 10-year, 10% bonds issued on January 1, 20X1. The bonds had a face value of $400,000, pay interest annually on December 31, and have a call price of 101. The company uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 20X4?

Answer 21

460,000−400,000=60,000
60,000 divided by 10=6,000
6,000×3(since it was 3 years )=18,000
60,000−18,000=42,000
400,000+42,000=442,000

Question 22

A corporation issues a $250,000, 8%, 30-year mortgage note. The terms provide for annual installment payments of $22,207. What is the remaining unpaid principal balance of the mortgage payable account after the first annual payment?

Answer 22

250,000×0.08=20,000
22,207−20,000=2,207
250,000−2,207=247,793

Question 23

A corporation issues a $750,000, 11%, 15-year mortgage note. The terms provide for annual installment payments of $89,025. What is the remaining unpaid principal balance of the mortgage payable account after the second annual payment?

Answer 23

750,000×0.11=82,500
89,025−82,500=6,525
750,000−6,525=743,475
calculate the interest for the second year:
743,475×0.11=81,782.25
89,025−81,782.25=7,242.75

743,475−7,242.75=736,232.25

Question 24

A corporation issues a $1,000,000, 11%, 20-year mortgage note. The terms provide for semiannual installment payments of $62,320. What is the remaining unpaid principal balance of the mortgage payable account after the second semiannual payment?

Answer 24

Semiannual Interest Rate= 11% divided by 2=5.5%=0.055 1,000,000×0.055=55,000 62,320−55,000=7,320 1,000,000−7,320=992,680 Second semiannual payment 992,680×0.055=54,597.40 62,320−54,597.40=7,722.60 992,680−7,722.60=984,957.40

Question 25

Which of the following are advantages of partnerships relative to corporations?

Answer 25

The ease of creating the business and low taxes.

Question 26

Which one of the following is not an advantage of corporations?

Answer 26

Additional taxes

Question 27

Which of the following is a stockholder's right?

Answer 27

The right to share in assets upon liquidation in proportion

Question 28

Preferred stock has preference or priority over common stock in

Answer 28

both the claim on dividends and the claim on corporate assets when corporations liquidate.

Question 29

Which one of the following is true with regard to a corporation's stock?

Answer 29

The number of authorized shares equals or exceeds the number of outstanding shares.

Question 30

The following data is available for a certain corporation: Common stock, par $10 (authorized 30,000 shares), $250,000 Treasury stock (at cost $15 per share), $1,200 Based on the data, how many shares of common stock are issued?

Answer 30

$250,000/$10 per share = 25,000 shares

Question 31

A corporation issued 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $12.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?

Answer 31

100×12=1,200 Treasury Stock for $1,200

Question 32

Which one of the following statements is incorrect?

Answer 32

Dividends may be paid on common stock while dividends are in arrears on preferred stock.

Question 33

At the start of its first year, a corporation issued 10,000 shares of 7%, $100 par value, cumulative preferred stock and 40,000 shares of $1 par value common stock. There were no dividends declared in the first year. In its second year, the corporation declared and paid dividends of $150,000. What is the amount of dividends received by the common stockholders in the second year?

Answer 33

7%×100=7 10,000×7=70,000 70,000×2(2nd year)=140,000 150,000−140,000=10,000

Question 34

A corporation’s year-end balance sheet showed the following: 6% preferred stock, $50 par value, cumulative, 30,000 shares authorized; 12,000 shares issued $ 600,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value--Preferred stock 60,000 Paid-in capital in excess of par value--Common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 During the year, the corporation declared and paid a $100,000 cash dividend. If the company’s dividends in arrears prior to the current year were $12,000, the corporation’s common stockholders would receive

Answer 34

12,000 x $50 x 6% = $36,000 $12,000 + 36,000 = $48,000 $100,000 - 48,000 = $52,000

Question 35

A corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of payment of May 15 is:

Answer 35

Debit the Dividends Payable account and credit the Cash account.

Question 36

A corporation declared a cash dividend of $1.75 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of declaration on January 15?

Answer 36

It decreases stockholders’ equity and increases liabilities.

Question 37

What is the total stockholders’ equity based on the following account balances? Common Stock has a $1,300,000 balance. Paid-In Capital in Excess of Par has a $100,000 balance. Retained Earnings has a $360,000 credit balance. Treasury Stock has a $60,000 balance.

Answer 37

1,300,000+100,000+360,000−60,000= Total Stockholders’ Equity Total Stockholders’ Equity=1,700,000

Question 38

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

Answer 38

$350,000 - $20,000 + $75,000 - $30,000 + $200,000 + $175,000 + $55,000 = $805,000

Question 39

The following information is available for a certain corporation: (in millions) Year 2022 2021 Common dividends 0 0 Preferred dividends 25 10 Net income 500 480 Shares outstanding at the end of the year 200 180 Shares outstanding at the beginning of the year 180 170

Answer 39

180 shares + 200 shares)/2 = 190 shares ($500 – $25)/190 shares = $2.50 per share