Quizes Flashcards

Question

Carpet Co. paid cash to purchase equipment. To record this transaction, the accountant would: Multiple Choice • debit Equipment and credit Cash. • debit Cash and credit Equipment. • debit Equipment and credit Accounts Payable. • debit Accounts Payable and credit Equipment.

Answer 1

debit Equipment and credit Cash. In this transaction Equipment (an asset) increases and Cash (an asset) decreases. Assets increase via a debit and decrease via a credit, therefore Equipment is debited and Cash is credited as a result of this transaction.

Answer 2

debit Accounts Payable and credit Cash.

Answer 3

income statement accounts The order in which accounts are listed on the chart of accounts is: balance sheet accounts; statement of owner’s equity accounts; income statement account. Note that income statement accounts (revenue and expense accounts) are temporary accounts, not permanent accounts.

Answer 4

Expenses and assets Asset, expenses, and the owner’s drawings account normally have debit balances because those accounts increase with debits. On the other hand, liabilities, revenues, and the owner’s capital account normally have credit balances because those accounts increase with credits. Note that “owner’s equity” encompasses both accounts with normal debit balances (owner’s drawings and expenses) and accounts with normal credit balances (owner’s capital and revenues).

Answer 5

Fees Income and John Smith, Capital Liabilities (such as Accounts Payable), revenues (such as Fees Income), and the owner’s capital account (such as John Smith, Capital) normally have credit balances because those accounts increase with credits. On the other hand, assets (such as Accounts Receivable and Equipment), expenses (such as Salaries Expense), and the owner’s Drawing account normally have debit balances because those accounts increase with debits.

Answer 6

The balance always appears on the side of the T account on which the account increases. When using a T account to determine an account balance a footing is often used on one side of the T account to determine the total debits or total credits. The balance within the account is always placed on the side with the larger total, and if only one amount is displayed within the T account then it becomes the balance for the account. However, while it is typical for a balance to appear on the side on which the account increase (the normal balance side), this does not always occur.

Answer 7

9. A transposition is an accounting error involving misplaced digits in a number. If the difference is evenly divisible by 9, there might be a transposition. A transposition occurs when the digits of a number are switched. For example if 357 is written or input as 375, the difference is 18, which is evenly divisible by 9.

Answer 8

net income from the income statement is used on the statement of owner’s equity and the ending balance of the capital account, computed on the statement of owner’s equity, is used on the balance sheet.

Answer 9

The withdrawal leads to a decrease in owner’s equity When cash is withdrawn by an owner the Cash account (an asset) is reduced, and the owner’s drawing account (an owner’s equity account) increases. Note that there are two owner’s equity account types (drawing and expenses) which reduce total owner’s equity. As a result, this increase in drawing leads to a decrease in owner’s equity.

Answer 10

A credit to the Accounts Payable account

Answer 11

Accounts Payable Asset accounts (such as equipment), expense accounts (such as rent expense), and withdrawal accounts (such as Andrew Martins, drawing) increase on the debit side of the T account and decrease on the credit side. Liability accounts, however, increase on the credit side of the T account and decrease on the debit side.

Answer 12

The income statement contains only temporary accounts Temporary accounts and nominal accounts are synonymous, while permanent accounts and real accounts are also synonymous. The statement of owner’s equity displays the drawing account, which is a temporary account. The balance sheet displays multiple permanent accounts, the balances for which carryover from one period to the next. The incomes statement displays revenue and expense accounts, all of which are temporary accounts.

Answer 13

The debited account(s) are indented.

Answer 14

debit to Accounts Payable and a credit to Cash.

Answer 15

debit to Advertising Expense and a credit to Cash.

Answer 16

debit to Cash and a credit to Accounts Receivable. The journal entry to record the receipt of cash from clients on account must both increase Cash (via a debit) and reduce Accounts Receivable (via a credit).

Answer 17

debit to Sue Snow, Drawing and a credit to Cash.

Answer 18

debit to Prepaid Rent and a credit to Cash.

Answer 19

analyze results

Answer 20

record the number of the ledger account to which the information is posted. The posting reference recorded in the journal is the general ledger account number that was impacted by the account listed in the journal and is used to trace the transaction to its impact on the account balances.

Answer 21

a debit to Accounts Payable and a credit to Accounts Receivable To correct this error a correcting entry must be recorded within which the Accounts Payable account is reduced (as it was erroneously credited in the original entry, it must be debited within the correcting entry to reduce its balance), and Accounts Receivable is reduced (as it should have been reduced via a credit in the original entry, it must be reduced within the correcting entry to arrive at the proper balance).

Answer 22

The total value of the debits within a compound entry must equal the total value of the credits.

Answer 23

account number

Answer 24

Depreciation

Answer 25

debit to Depreciation Expense and a credit to Accumulated Depreciation.

Answer 26

Prepaid Insurance for $575

Answer 27

will be overstated.

Answer 28

To account for the supplies that were used during the period.

Answer 29

Balance Sheet Credit column

Answer 30

would be completed by entering $40,000 in the Debit column with the words “Net Income” in the Account Name column. The totals of the Income Statement section columns are used to determine the net income or net loss. The smaller column total is subtracted from the larger one and the difference is entered on the line below the smaller total. Then, “Net Income” or “Net Loss” is entered the Account Name column. In this case the total of the Credit column of $120,000 (which represents revenue) exceeds the total of the Debit column of $80,000 (which represents expenses). The difference between the two amounts is a net income of $40,000. The $40,000 would be entered in the in the Debit column of the Income Statement section so the debit and credit columns will balance, with the words “Net Income” added to the Account Name column.

Answer 31

after the net income amount is added to the Balance Sheet Credit column.

Answer 32

$120 in the Adjusted Trial Balance Debit column

Answer 33

Debit Advertising Expense for $300, credit Prepaid Advertising for $300

Answer 34

transfer the results of operations to owner's equity. Closing entries (1) transfer the results of operations (net income or net loss) to owner’s equity, and (2) reduce revenue, expense, and drawing account balances to zero. Asset, liability, and owner’s equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. As such, the asset, liability and owner’s equity (owner’s capital) accounts are not closed (that is, their balances are not reduced to zero). Also, note that adjusting (rather than closing) entries are made to update accounts for items that were not recorded during the accounting period and, as such, help to ensure that complete and accurate figures appear in the financial statements.

Answer 35

debiting Income Summary and crediting Supplies Expense.

Answer 36

B. Fees Income $ 4,200 Income Summary $ 4,200 The entry to close the Fees Income account, a temporary account with a credit balance, includes a debit to the Fees Income account to reduce its balance to zero, and a credit to the Income Summary account to transfer the $4,200 balance from Fees Income to Income Summary. The owner’s capital account is not a component of either the closing entry for revenues or that for expenses. Instead, Income Summary is closed to the owner’s capital account in the third closing entry of the closing process.

Answer 37

the owner’s capital account The fees income account is closed within the first closing entry of the closing process, while the owner’s drawing account is closed within the fourth closing entry. These accounts do not appear within any other closing entries. The accumulated depreciation account is a permanent account, and therefore never appears within a closing entry. Only the owner’s capital account appears in two closing entries, both in the third closing entry when the balance within Income Summary is transferred to the capital account, and in the fourth closing entry when the balance within the owner’s drawing account is transferred to the capital account. Note that the Income Summary account also appears within multiple closing entries (each of the first three), and therefore also would have been a correct answer had it been one of the available choices.

Answer 38

a debit to Income Summary and a credit to the owner's capital account. After the revenue and expense accounts are closed, if revenues are greater than expenses, the Income Summary account will have a credit balance, which represents the net income. The entry to transfer net income to owner’s equity includes a debit to Income Summary and a credit to the owner’s capital account. The Cash account, an asset and permanent account, would not appear in any of the closing entries. The entry to close the owner’s drawing account, which has a debit balance, includes a debit to the owner’s capital account and a credit to the owner’s drawing account. That closing entry does not include the Income Summary account because withdrawals do not appear on the income statement and, as such, are not part of the calculation of the net income or loss.

Answer 39

The owner’s capital account will be debited within the third closing entry of the closing process. The revenue account(s) are always closed within the first closing entry, while the drawing account is always closed via a credit to owner’s drawing within the fourth closing entry. The existence of a net loss does not impact the number of closing entries that are necessary, as all four would still be required in this circumstance. Given that the firm experienced a net loss, the income summary account will have a debit balance after the second closing entry is recorded. In order to close the income summary account within the third closing entry the firm will credit income summary, and record an offsetting debit to the owner’s capital account. This results in a reduction of the owner’s capital account balance, which is a logical result of the firm experiencing a net loss for the period.

Answer 40

the owner’s drawing account

Answer 41

The owner's capital account Asset, liability, and owner’s equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. The owner’s capital account, an owner’s equity and permanent account, is not closed. Note that the owner’s capital account appears in the third closing entry because this entry transfers net income (or net loss) to owner’s equity by crediting (or increasing) the owner’s capital account for the amount of the net income (or debiting the owner’s capital account for the amount of the net loss). Likewise, the fourth closing entry includes the owner’s capital account because this entry transfers the owner’s withdrawals to owner’s equity by debiting (or decreasing) the owner’s capital account for the amount of the withdrawals. (Remember that you don’t want to eliminate the owner’s equity by closing the capital account!) Revenue and expense accounts appear on the income statement. The drawing account appears on the statement of owner’s equity. These accounts classify and summarize changes in owner’s equity during the period. They are called temporary accounts or nominal accounts because the balances in these accounts are transferred to the capital account at the end of the accounting period. In the next period, these accounts start with zero balances. The owner’s drawing account, Fees Income, and Rent Expense are temporary accounts that must be closed at the end of the period. As such, since they then have zero balances, these accounts would not be listed on the postclosing trial balance.

Answer 42

Interpreting the financial statements can only be performed by auditors.

Answer 43

The postclosing trial balance must include all accounts that appeared on the adjusted trial balance, and may include additional accounts as well. The postclosing trial balance will include only permanent accounts, as the temporary accounts are closed prior to its completion. Therefore, it will display fewer accounts than did the adjusted trial balance. Also, as the closing entries will likely change the balance within the owner’s capital account, this account will ordinarily have a different balance on the adjusted trial balance and the postclosing trial balance. The postclosing trial balance, like all other trial balances, should be in balance (total debits should equal total credit). If this is not the case then there are errors in the accounting records, and the audit trail can be used to trace data through the accounting records to find and correct these errors.

Answer 44

record closing entries; prepare a postclosing trial balance; interpret the financial information The final three steps of the accounting cycle, in order, are to record closing entries, prepare the postclosing trial balance, and interpret the financial results. The closing entries must first be recorded, so that the associated account balances are updated prior to preparing the postclosing trial balance. Similarly, the postclosing trial balance must be prepared next so that the financial records are complete prior to interpreting this financial information.

Answer 45

The income summary account is an owner’s equity account. The income summary account is a temporary owner’s equity account that is used only in the closing process to summarize results of operations. It is not used prior to the closing process (and therefore does not appear within the adjusted trial balance) and has a zero balance after the completion of the closing process. During the closing process it is used within each of the first three closing entries, first to close the revenue account(s), second to close the expense account(s), and third to transfer its balance to the capital account (and to close the income summary account in the process of doing so).

Answer 46

merchandising business.

Answer 47

a contra revenue account. The Sales Returns and Allowances account has the effect of reducing revenue and is, therefore, a contra revenue account. It has a debit balance, which is contrary, or opposite to the normal balance for a revenue account.

Answer 48

debit to Accounts Receivable, a credit to Sales Tax Payable, and a credit to Sales.

Answer 49

the accounts receivable subsidiary ledger.

Answer 50

an abbreviation indicating the journal and page number from which the transaction was posted

Answer 51

the balance of the Accounts Receivable account in the general ledger. The accounts receivable account serves as the link between the subsidiary ledger and the general ledger. The balance is a summary of the balances in the related individual customers’ accounts. At the end of each month the balances in the accounts receivable ledger are proved against the balance of the accounts receivable general ledger account through the completion of the schedule of accounts receivable.

Answer 52

debit sales returns and allowances, debit sales tax payable, credit accounts receivable When goods are returned the company must increase the contra-revenue account sales returns and allowances (via a debit), reduce the sales tax payable that was associated with the sale (via a debit), and reduce the accounts receivable (via a credit) as the amount is no longer owed.

Answer 53

$240; $1,360 The amount of the discount is $240 ($1,600 × 15%) and the net price to be shown on the invoice and recorded in the sales journal is $1,360 ($1,600 − $240).

Answer 54

$1,836. The correct entry includes a debit to accounts receivable for $1,836 (8% × $1,700 = $136 sales tax; $1,700 + $136 = $1,836 accounts receivable).

Answer 55

Cash sales plus Credit sales less Sales returns and allowances.

Answer 56

Both the customer’s account in the accounts receivable ledger and the appropriate accounts in the general ledger.

Answer 57

$420. The credit memorandum will be for $420 (5% × $400 = $20 sales tax; $400 + $20 = $420.)

Answer 58

$96,000. Net sales are $96,000 ($98,000 − $2,000 = $96,000).

Answer 59

$1,500. The invoice price is $1,500, computed as follows: List price $ 2,500.00 Less first discount (25% × $2,500) 625.00 Difference 1,875.00 Less second discount (20% × $1,875) 375.00 Invoice price $ 1,500.00

Answer 60

Both sales on credit and sales for cash.

Answer 61

a debit to Accounts Payable and a credit to Purchases Returns and Allowances.

Answer 62

The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days.

Answer 63

temporary account.

Answer 64

purchases returns and allowances credit

Answer 65

the accounts payable subsidiary ledger.

Answer 66

general journal. Purchases returns and allowances are usually recorded in the general journal or, in certain circumstances, may be recorded in a special purchases returns and allowances journal.

Answer 67

enter the amount of the return or allowance in the credit column. When posting a purchases return or allowance to the supplier’s account, the amount of the return or allowance is entered in the debit column, not the credit column.

Answer 68

Purchases plus Freight In less Purchases Returns and Allowances.

Answer 69

To create written proof that purchases and payments are authorized.

Answer 70

Cash payments journal.

Answer 71

Contra cost of goods sold account with a normal credit balance.

Answer 72

the balance of the Accounts Payable account in the general ledger.

Answer 73

The same individual who ordered the goods should also sign the check to pay for them.

Answer 74

cash receipts journal with a credit to the sales account.

Answer 75

credit Interest Income.

Answer 76

Log-in information, such as user identification and passwords, should be changed frequently

Answer 77

The entry to record a cash purchase of merchandise would include a debit to Purchases and a credit to Cash.

Answer 78

debit accounts payable $500; credit purchases discounts $10; credit cash $490

Answer 79

debit to Accounts Payable, a credit to Purchases Discounts and a credit to Cash. In addition, amounts in the “Other Accounts Debit Amount” column would also be posted as debits to those accounts.

Answer 80

a debit to supplies for $70, a debit to freight in for $42, and a credit to cash for $112.

Answer 81

added to the book balance.

Answer 82

consider this check as outstanding when preparing the bank reconciliation.

Answer 83

If it has a debit balance, it is treated as expense.

Answer 84

Posting to the general ledger accounts should be performed daily.

Answer 85

The employee who records cash receipts should also make the bank deposit.

Answer 86

the individual who signs the check instructing the bank to pay a specific sum of money to a designated person or business.

Answer 87

debits Accounts Receivable and credits Cash.

Answer 88

The amount of social security tax withheld depends on an employee's gross earnings, marital status, and number of withholding allowances.

Answer 89

Disability benefits for the worker and the worker's dependents are provided by the Federal Insurance Contributions Act.

Answer 90

The FUTA tax is both withheld from employees’ earnings and paid by the employer. Neither the FUTA tax nor the SUTA tax is withheld from employee earnings. Both of these taxes are paid solely by the employer.

Answer 91

$54. This employee worked 3 overtime hours (43 total hours − 40 regular hours) during the pay period. The overtime hourly rate is $18 ($12 regular hourly rate × 1.5). Therefore, the overtime earnings are $54 (3 overtime hours × $18 overtime hourly rate).

Answer 92

$62 The portion of current period earnings that are subject to social security tax is $1,000 ($132,900 maximum earnings threshold for social security tax − $131,900 current payroll period earnings). Therefore, the social security tax for the period is $62 ($1,000 current payroll period earnings subject to social security tax × 6.2% social security tax rate).

Answer 93

To compute the Medicare tax to withhold from the employee’s paycheck, multiply the net take-home wages by the Medicare tax rate of 1.45%. The amount of Medicare tax to withhold from the employee’s paycheck is determined by multiplying the gross wages by the Medicare tax rate of 1.45%. Note that for Medicare tax there is no maximum earnings threshold over which taxes are not withheld, as is the case with FICA tax.

Answer 94

prior period earnings for the current year

Answer 95

The deductions are added to the gross earnings to compute Net Amount, which is the amount paid to each employee.

Answer 96

A credit to salaries and wages expense

Answer 97

the individual earnings record.

Answer 98

$332 Gross earnings for this employee can be calculated as regular earnings + overtime earnings. This employee earned regular earnings of $320 (40 regular hours × $8 regular hourly rate). The employee’s overtime hourly rate is $12 per hour ($8 regular hourly rate × 1.5). Therefore, this employee earned overtime earnings of $12 (1 overtime hour × $12). This results in gross earnings of $332 ($320 regular earnings + $12 overtime earnings) for the weekly pay period.

Answer 99

$601.92 Net pay for the current pay period is $601.92 ($720 gross pay − $45 federal withholding tax − $18 state withholding tax − $44.64 social security tax − $10.44 Medicare tax). Note that FUTA tax and SUTA tax are employer taxes that are paid solely by the employer, and therefore are not subtracted from gross pay when calculating net pay.

Answer 100

deposited in a government-authorized financial institution. Employees' payments for federal income taxes withheld and social security and Medicare taxes are periodically deposited in a Federal Reserve Bank or other government-authorized financial institution.

Answer 101

total taxes reported during the lookback period exceed $50,000 If the total taxes reported in the lookback period was more than $50,000, the employer is subject to the semiweekly deposit schedule rule. Note that the 250 threshold relates to the number of Forms W-2 being issued. If a firm issues 250 or more Forms W-2, the returns must be filed electronically.

Answer 102

social security and Medicare taxes. Only the employer is responsible for paying FUTA and SUTA taxes. Both the employee and the employer are responsible for paying social security and Medicare taxes.

Answer 103

debit to one or more liability accounts and credit to an asset account. The entry to record a deposit of federal income taxes withheld and social security and Medicare taxes owed would include a debit to Social Security Tax Payable, a debit to Medicare Tax Payable, a debit to Employee Income Tax Payable, and a credit to Cash. As such, this entry includes debits to various liability accounts (Social Security Tax Payable, Medicare Tax Payable, and Employee Income Tax Payable) and a credit to an asset account (Cash).

Answer 104

Form 941 Form 941 is filed on a quarterly basis to provide the Internal Revenue Service with information about employee earnings, the tax liability for each month in the quarter, and the deposits made.

Answer 105

Federal income tax Form 941 reports federal income tax, social security tax, and Medicare tax. Of these taxes, only federal income tax is solely withheld from employee earnings and not paid by the employer, as both social security tax and Medicare tax are matched by the employer. Federal unemployment tax is neither reported on Form 941 nor withheld from employee earnings.

Answer 106

the workers’ compensation insurance provider Multiple copies of Form W-2 are prepared for each employee so that they may be provided to the Social Security Administration, the state tax department (if necessary), and the employee. There is no requirement that individual Forms W-2 be sent to the worker’s compensation insurance provider.

Answer 107

Payroll Taxes Expense If an employer does not deduct enough taxes from an employee’s earnings, and therefore must pay the difference when filing Form 941, it has incurred an additional payroll tax expense. Therefore, the journal entry that is recorded when payment is made includes a debit to increase the balance within the Payroll Taxes Expense account.

Answer 108

The normal federal unemployment tax rate of 0.6% (or 6.0% less the state unemployment tax credit of 5.4%) changes if favorable experience ratings change the state unemployment tax rate. The federal unemployment tax rate is 6.0 percent less a state unemployment tax credit of 5.4 percent; thus the federal tax rate is reduced to 0.6 percent (6.0% - 5.4%). The reduction of state unemployment taxes because of favorable experience ratings does not affect the credit allowable against the federal tax.

Answer 109

assign new employees to work in payroll operations. To maintain proper internal control, employers should assign only highly responsible, well-trained employees to work in payroll operations.

Answer 110

The estimated payment for worker’s compensation insurance that is made at the beginning of the year is a prepayment for the insurance coverage that will be received during the upcoming year. Therefore, when this payment is made an asset account, Prepaid Workers’ Compensation Insurance, is debited to increase the balance within the account.

Answer 111

the last day of the month following the end of each calendar quarter The due date for Form 941 (when being filed with a payment) is the last day of the month following the end of each calendar quarter. Note that, if the taxes for the quarter were deposited when due, the due date is extended by ten days.

Answer 112

debit to the Merchandise Inventory account and a credit to the Income Summary account. When placing the ending inventory on the books the Merchandise Inventory account is increased via a debit, and the Income Summary account is used as the offsetting credit.

Answer 113

subtracted from Accounts Receivable in the Assets section of the balance sheet. Allowance for Doubtful Accounts is a contra-asset account that is subtracted from Accounts Receivable to arrive at Net Accounts Receivable. This calculation is presented within the asset section of the Balance Sheet.

Answer 114

used in the current period but are not yet paid and are not yet recorded in the accounting records. Accrued expenses are those expenses, such as salaries, payroll taxes, and interest on notes payable, that are used or incurred in one period, but which are not yet recorded and not paid until a subsequent period.

Answer 115

$750. Depreciation expense for the six months of the year during which the company held the asset is calculated as follows: ($9,300 cost − $300 salvage value) / 6-year useful life = $1,500 annual depreciation expense $1,500 annual depreciation expense / 12 months = $125 monthly depreciation expense $125 monthly depreciation expense × 6 months = $750 current year depreciation expense

Answer 116

Revenue is recognized when earned, while expenses are recognized when incurred The accrual basis of accounting requires that revenues and expenses are recognized when they are earned and incurred respectively. This recognition is not dependent on whether cash has been paid.

Answer 117

debit to the Depreciation Expense - Equipment account and a credit to the Accumulated Depreciation – Equipment account. When recording depreciation expense the adjusting journal entry would increase the Depreciation Expense – Equipment account via a debit and would increase the Accumulated Depreciation – Equipment account via a credit.

Answer 118

$2,000. Monthly rent expense is calculated as: $3,000 annual rent expense / 12 months = $250 monthly rent expense As this firm used the facility for eight months during the year (May through December), the rent expense incurred for the year is calculated as: $250 monthly rent expense × 8 months = $2,000 current year rent expense

Answer 119

$37.50. Interest Receivable within the adjusting entry would be calculated as follows: $1,000 notes receivable × 15% interest rate = $150 annual interest $150 annual interest / 12 months = $12.50 monthly interest $12.50 monthly interest × 3 months = $37.50 interest receivable

Answer 120

credit balance of $50,000. Unearned subscription revenue is a liability account and therefore has a normal credit balance. When the adjusting entry is recorded to account for the $100,000 of revenue earned during the year, the unearned subscription revenue account will be reduced via a debit. When the beginning credit balance of $150,000 is combined with the $100,000 debit in the adjusting entry the ending balance of unearned subscription revenue is a credit balance of $50,000 ($150,000 − $100,000).

Answer 121

Income Statement Debit column Merchandise inventory is an asset account, which therefore appears on the Balance Sheet. It is not included on the Income Statement, and therefore no balance would be displayed for Merchandise Inventory on the worksheet in the Income Statement Debit column.

Answer 122

2 Within the worksheet a net loss can be calculated either by subtracting the total of the Income Statement Credit column from the total of the Income Statement Debit column, or by subtracting the total of the Balance Sheet Debit column from the total of the Balance Sheet Credit column. Once the net loss has been determined it is then entered both within the Income Statement Credit column and the Balance Sheet debit column. As such, it appears within two locations on the worksheet.

Answer 123

merchandise inventory The two-step process for adjusting Merchandise Inventory at the end of the period involves both the Merchandise Inventory account and the Income Summary account within each of the two necessary journal entries. The first journal entry (which removes the beginning inventory balance from the books) includes a debit to Income Summary and a credit to Merchandise Inventory. The second journal entry (which places the ending inventory balance onto the books) includes a debit to Merchandise Inventory and a credit to Income Summary.

Answer 124

cost of goods sold from net sales. Gross profit on sales is calculated by subtracting cost of goods sold from net sales.

Answer 125

Gross profit on sales minus total operating expenses. Net income from operations is determined by subtracting total operating expenses from gross profit on sales. Keep in mind that if this calculation yields a negative result, then we refer to it as a net loss from operations.

Answer 126

single-step income statement. A single step income statement lists all revenues in one section and all expenses in another section. The term multiple-step (rather than single-step) income statement is sometimes used to describe a classified income statement, within which several subtotals are computed before net income is calculated.

Answer 127

$89,000. Beginning capital balance of $72,000 plus net income of $21,000 less withdrawals of $4,000 equals an ending capital balance of $89,000.

Answer 128

on the statement of owner's equity.

Answer 129

Long-Term Liabilities Long-Term Liabilities is a section within a classified balance sheet. Operating Expenses, Cost of Goods Sold, and Other Income are all sections within a multiple-step income statement.

Answer 130

All of the statements are correct. All adjustments are shown on the worksheet. After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. Adjustments are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

Answer 131

The Income Summary account has a debit balance within the postclosing trial balance. When a firm experiences net income the income summary account will have a credit balance, and therefore must be debited to be closed in the third step of the closing process. The income summary account is both credited within the first step of the closing process and debited within the second step of the closing process, therefore it is a component of three of the four closing entries. Prior to the closing process the income summary account is used within the adjusting journal entries for merchandise inventory. As a result, the income summary account often has a balance prior to the recording of the closing entries. However, the income summary account is closed during the closing entry process and therefore does not appear within the postclosing trial balance.

Answer 132

dividing current assets by current liabilities.

Answer 133

After the reversing entry is posted for the adjustment made to recognize the salaries expense at the end of the accounting period, the Salaries Expense account will have a zero balance and the Salaries Payable account will have a credit balance. The adjustment for accrued salaries expense at the end of the period includes a debit to the Salaries Expense account and a credit to the Salaries Payable account. The reversing entry at the beginning of the next accounting period will be just the opposite; a debit to Salaries Payable and a credit to Salaries Expense. As a result, after the reversing entry is posted for the adjustment made to recognize the salaries expense at the end of the accounting period, the Salaries Payable account will have a zero balance (rather than a credit balance) and the Salaries Expense account will have a credit balance (rather than a zero balance). This is unusual because the normal balance of an expense account is a debit.

Answer 134

Purchases plus freight in minus purchases returns and allowances minus purchases discounts Net delivered cost of purchases is calculated as purchases plus freight in minus purchases returns and allowances minus purchases discounts.

Answer 135

Step 4 The owner’s drawing account, which has a normal debit balance, is closed within the fourth step of the closing process. Within this journal entry the owner’s capital account is debited and the owner’s drawing account is credited.

Answer 136

2 to 1 $72,000 current assets / $36,000 current liabilities = 2 to 1 current ratio

Answer 137

9.0 times $270,000 net credit sales / (($26,000 beginning accounts receivable + $34,000 ending accounts receivable) / 2) = 9.0 times

Answer 138

7.0 times $315,000 cost of goods sold / (($49,000 beginning inventory + $41,000 ending inventory) / 2) = 7.0 times

Answer 139

Develop measurement standards for non-financial elements that do not appear in the financial statements. The seven steps taken by the FASB are as follows: Define the goals and objectives of accounting; Identify users of financial reports and the uses made of the reports; Examine the qualitative characteristics that make accounting information useful; Identify and define the financial elements such as assets, liabilities, revenues, and expenses, whose inclusion and classification make financial statements meaningful and useful; Establish the form and content of financial statements; Set forth fundamental recognition criteria; Develop measurement standards for financial elements that appear in the financial statements. Note that the final step relates to “financial elements that appear in the financial statements”, not “non-financial elements that do not appear in the financial statements.”

Answer 140

An act of law gave the Securities and Exchange Commission the authority to determine the form and content of accounting reports filed by companies under its jurisdiction. The Financial Accounting Standards Board (FASB) (rather than the Securities and Exchange Commission (SEC)) issues the Statements of Financial Accounting Concepts. Statements issued by the Financial Accounting Standards Board are binding on the American Institute of Certified Public Accountants. Accounting principles in the United States are developed through a cooperative effort between the private sector and government.

Answer 141

an internally-consistent and complete framework. Section 108 of the 2002 Sarbanes-Oxley Act requires the Securities and Exchange Commission (SEC) to “conduct a study on the adoption by the United States financial reporting system of a principles-based accounting system.” The FASB itself conducted a study and issued a report in October 2002. In July 2003, the SEC completed its study and made its report to Congress. The result is an intention for the FASB to issue “objectives-oriented standards” and to “address deficiencies in the conceptual framework.” The goal is to arrive at an “internally consistent” and “complete” framework.

Answer 142

Potential investors In its conceptual framework project, the Financial Accounting Standards Board (FASB) concluded that financial reporting rules should concentrate on providing information that is helpful to current and potential investors and creditors in making investment and credit decisions. The focus is not on providing information to management, tax authorities, or regulatory agencies because they have access to specific information from the firm’s records not available to the public and often the information they need is not the same as that needed by investors and creditors.

Answer 143

Information that will help the statement user in making predictions or forecasts about the meaning and ultimate outcome of events giving rise to the information. Information with predictive value will help the statement user in making predictions or forecasts about the meaning and ultimate outcome of events giving rise to the information. Information with confirmatory value helps the statement user verify fulfillment or non-fulfillment of prior expectations or decisions. Information that is a faithful representation of business activities is complete, neutral, and free from error. Information that possesses comparability is presented in such a manner that it can be meaningfully compared with the same data for other companies.

Answer 144

allows companies to assume that business activities can be separated into discrete units of time. While the final results of a business can be known only when the business ceases to operate, the Periodicity of Income Assumption enables the business to assume that activities can be separated into time periods and to assign revenues and expenses to those time periods.

Answer 145

going concern assumption. The going concern assumption permits businesses to record property and equipment as assets at their cost without having to be concerned about what they are worth in case of liquidation in the near future. The periodicity of income assumption assumes that the activities of the business can be separated into time periods with revenues and expenses being assigned on a logical basis to those periods. There are two aspects to the monetary unit assumption. The first is the idea that expressing financial facts and events are meaningful only when they can be expressed in monetary terms. The second aspect of the monetary unit assumption is that the value of money is stable. The separate entity assumption assumes that the business is separate from its owners.

Answer 146

Separate economic entity principle Explanation The four general principles that serve as guides to preparing financial statements are presented in the FASB’s basic concepts and are as follows: Historical cost basis principle, revenue recognition principle, matching principle, and full disclosure principle. The separate economic entity assumption is an underlying assumption that financial statement users should be able to assume was followed by the preparers of the statements.

Answer 147

The cost of a building is recorded as an asset. Depreciation expense is recognized over the periods in which the asset is expected to help earn revenues for the business. The matching principle states that revenue must be matched against expired costs incurred in earning the revenue to properly measure income. Depreciation matches the cost of a long-term asset to the time periods when that asset is expected to help earn revenues for the business.

Answer 148

Industry Practice Historically, existing industry practices in certain industries have sometimes become acceptable as GAAP. Typically, this situation exists in an industry where there are unusual tax laws or regulatory requirements, an industry that has unusually high risks, or one that has activities or transactions to which it is difficult to apply GAAP.

Answer 149

Verifiability Verifiability is indicated when independent measures obtain similar results. Comparability means that the financial data is presented in such a manner that is can be meaningfully compared with the same data for other companies. Timeliness dictates that firms must disclose accounting information in a timely manner. Understandability means that users of accounting information must be able to comprehend the information within the context of the decisions that they are making.

Answer 150

Matching principle The matching principle dictates that to properly measure income, revenue must be matched against expired costs incurred in earning the revenue. This principle is used by accountants to determine when to charge expenses against associated revenues in a wide variety of circumstances.

Answer 151

The direct charge-off method of recording losses from uncollectible accounts is the method required by Federal income tax laws.

Answer 152

The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to the Accounts Receivable account. The adjusting entry to record the estimated loss from uncollectible accounts includes a debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account (rather than the Accounts Receivable account).

Answer 153

debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account. The adjusting entry to record the estimated loss from uncollectible accounts includes a debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account.

Answer 154

$2,000. Recall that the expense charge is the focal point when sales is used as the basis for the estimate. The balance in the allowance account before the adjustment is ignored in determining how much will be charged to expense and credited to the allowance account. This is why the method is referred to as an “income statement approach.” As such, the adjusting entry to record the estimated loss from uncollectible accounts includes a debit to the Uncollectible Expense account and a credit to the Allowance for Doubtful Accounts account for $2,000 (or $200,000 x .01).

Answer 155

debit to uncollectible accounts expense for $8,500. When an aging of accounts receivable is used to estimate uncollectible accounts, the adjustment is used to bring the credit balance in the allowance for doubtful accounts to the estimated uncollectible accounts ($8,500 cr adjustment − $400 dr beginning balance = $8,100 cr adjusted balance).

Answer 156

credit balance of $10,900. The entry to record the write off of a customer’s account would include a debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable account. The $1,200 debit to the Allowance for Doubtful Accounts account reduces that credit balance to $10,900 ($12,100 cr − $1,200 dr = $10,900 cr).

Answer 157

debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account. The entry to record the collection of an account that has been previously written off would include a debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account. An entry in the cash receipts journal would then be made in the usual way to record the collection; that entry would include a debit to the Cash account and a credit to the Accounts Receivable account.

Answer 158

a debit to the Uncollectible Accounts Expense account to increase its balance. When the direct charge-off method is used, the entry to record the write off of a customer’s account would include a debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable account. This entry serves to increase the balance of the Uncollectible Accounts Expense account and decrease the balance of the Accounts Receivable account.

Answer 159

debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Recovered account. When the direct charge-off method is used and payment is received in a period subsequent to that in which an account was charged off, the entry would include a debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Recovered account. If the amount recovered in a period subsequent to the write-off is credited to the Uncollectible Accounts Expense account, the expense for the period of recovery will be understated.

Answer 160

ensuring that the same employee who authorizes credit sales mails out the associated bills or statements. Common internal controls for accounts receivable involve separating a variety of duties including: authorizing credit sales, recording the accounts receivable transactions, preparing bills or statements for customers, mailing the bills or statements, and processing payments received from customers. No single employee should perform more than one of these duties.

Answer 161

It appears as a contra account within the asset section of the Balance Sheet. The Allowance for Doubtful Accounts account is a contra account because it is subtracted from as asset account (Accounts Receivable) on the balance sheet. When Allowance for Doubtful Accounts is subtracted from Accounts Receivable the result is referred to as the net realizable value of accounts receivable.

Answer 162

Accounts Receivable When collecting an account that has been previously written off, for a firm using the allowance method, the first journal entry reinstates the accounts receivable by debiting accounts receivable and crediting allowance for doubtful accounts. The second journal entry records the receipt of cash by debiting cash and crediting accounts receivable. Both of these entries include the accounts receivable account.

Answer 163

The amount shown on a note is called the face value. The amount shown on a note is called the face value. The Uniform Commercial Code (UCC) requirements specify that to be negotiable an instrument must be in writing and must be signed by the maker or drawer, contain an unconditional promise or order to pay a definite amount of money, be payable either on demand or at a future time that is fixed or that can be determined, be payable to the order of a specific person or to the bearer, and clearly name or identify the drawee if addressed to a drawee. A promissory note does not need to specify an interest rate. Since it is due within one year of the balance sheet date, a company that issued a 6-month note payable would report its face value on the balance sheet as a current (rather than long-term) liability.

Answer 164

$320. Note that a 360-day period, called a banker’s year, is used for simplicity to calculate interest on a note. The amount of interest that will accrue on a $24,000 face value, 60-day note that bears interest at 8 percent a year is $320 (or $24,000 x 0.08 x 60/360).

Answer 165

discounting a note. The practice of deducting the interest in advance from the principal on a note payable is called discounting a note. A dishonored note is one that is not paid at maturity, and for which there are no arrangements for renewal. Issuance of a note occurs when the maker of a note provides a written promise to pay (in the form of a note payable) to the creditor. Collecting a note takes place when cash is paid by the debtor to the creditor to satisfy the note payable.

Answer 166

18. The steps for determining the due date are as follows. Step 1: Determine the number of days remaining in the month in which the note is issued. Do not count the issue date. April has 30 days; as such, there are 11 days (or the number of days in the month, 30, minus the issue date, 19) left in April. Step 2: Determine the number of days remaining after the first month. To do this, first determine that there are 31 days in May. Then determine the days calculated in Step 1 (11) plus the days in the subsequent month (31) and subtract the total (42) from the term of the note (60). There are 18 days (or the term of the note, 60, minus 42, the number of days calculated in Step 2) remaining after the first month. Step 3: Since there are only 18 days remaining, the due date is 18 days into the next month (June). As such, since this is a 60-day note, it would be due on June 18.

Answer 167

2. Sometimes the term of a note is described in months instead of days. In this case the maturity date is determined by counting ahead to the same date of the following month or months. As such, a one-month note dated November 2 would be due on December 2.

Answer 168

The entry to record the issuance of a promissory note includes a credit to Interest Payable for the amount of interest that will accrue on the note until it is paid at maturity. The entry to record the issuance of a promissory note does not include any provision for interest until that interest is accrued.

Answer 169

debit to the Cash account for $11,600, a debit to the Interest Expense account for $400, and a credit to the Notes Payable—Bank for $12,000. The bank deducted the $400 ($12,000 face value × 0.12 interest rate × 120/360 period of time) interest from the face amount of the note, and the company received $11,600 ($12,000 − $400). The entry to record this transaction would include a debit to the Cash account for $11,600, a debit to the Interest Expense account for $400, and a credit to the Notes Payable—Bank for $12,000.

Answer 170

$4,100. The maturity value equals the principal, $4,000, plus the accrued interest of $100 ($4,000 face value × 0.10 interest rate × 90/360 period of time).

Answer 171

$99,000. Step 1 – Determine the maturity value of the note. Since the note from Houghton is noninterest-bearing, its maturity value and face amount are the same, $100,000. Step 2 – Calculate the number of days in the discount period. The discount period is the number of days from the discount date to the maturity date. There are zero days remaining in July, therefore the discount period is 30 days (the number of days in August until the maturity date of August 30). Step 3 – Compute the discount charged by the bank. The discount formula is similar to the interest formula. The time is the number of days in the discount period. The discount is $1,000 ($100,000 maturity value × 0.12 discount rate × 30/360 discount period). Step 4 – Calculate the proceeds, which is the amount received from the bank. The proceeds are $99,000 ($100,000 maturity value - $1,000 discount).

Answer 172

A commercial draft is payable on presentation. A commercial draft is a note issued by one party that orders another party to pay a specified amount on a specified date. A sight draft is a commercial draft that is payable on presentation.

Answer 173

Ensure that a wide variety of employees are authorized to sign notes for the firm, so that an authorized individual can be located quickly when necessary. The number of people who can sign notes for the firm should be limited in order to maintain strong internal controls for notes payable, notes receivable, and drafts.

Answer 174

Interest Expense is debited within the journal entry. The journal entry to record the payment of a discounted note payable includes a debit to Notes Payable – Bank and a credit to Cash, both for the face value of the note. Interest Expense is not a component of the journal entry, as interest expense was paid and recorded when the note was issued.

Answer 175

$24,000. Using the FIFO method of inventory valuation, the value of the ending inventory is $24,000 (or 3,000 units × $8 per unit).

Answer 176

$6,600. Using the LIFO method of inventory valuation, the value of the ending inventory is $6,600 (or 600 units × $11 per unit).

Answer 177

actual cost of each item of merchandise. The specific identification method of inventory valuation is based on the actual cost of each item of merchandise.

Answer 178

cost of goods available for sale by the number of units available during the period. The weighted average cost of an inventory item is calculated by dividing the cost of goods available for sale by the number of units available during the period.

Answer 179

FIFO FIFO focuses on the balance sheet, as the most current costs are in ending inventory.

Answer 180

When prices are falling, it results in higher net income than does the FIFO method. When prices are falling, cost of goods sold is lower and net income is higher under LIFO. When prices are rising, cost of goods sold is highest and net income is lowest under LIFO. LIFO is not generally accepted in a number of countries, and it is considered the most conservative costing method in a period of rising prices.

Answer 181

either cost or net realizable value, whichever is lower. According to the historical cost principle, assets are reported on the balance sheet at their historical cost. The conservatism convention, however, states that assets should not be overstated. Net realizable value is the estimated selling price of an inventory item in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. To determine net realizable value, businesses contact their sellers and suppliers, read trade publications, or review recent selling trends. If the net realizable value is lower than the original cost, the business uses the lower of cost or net realizable value. That is, inventory is reported at its original cost or its net realizable value, whichever is lower.

Answer 182

cost of goods sold / net sales The cost of goods sold to net sales ratio, which is required when using the gross profit method, is calculated as cost of goods sold / net sales.

Answer 183

$104,000. Step 1: Estimate the cost of goods sold. Sales were $160,000 up to the date of the fire. Using the 60% (or 100% − 40%) ratio for cost of goods sold to net sales, the estimated cost of goods sold is $96,000 ($160,000 × 0.60). Step 2: Determine the cost of goods available for sale. Cost of goods available for sale was $200,000 (given). Step 3: Compute the ending (destroyed) inventory. Subtract the estimated cost of goods sold from the cost of goods available for sale. Cost of goods available for sale (Step 2) of $200,000 – Estimated cost of goods sold (Step 1) of $96,000 = Estimated cost of ending inventory of $104,000.

Answer 184

$32,400. Steps 1 and 2 have already been completed. Step 3: Compute merchandise available for sale at cost of $90,000 (given) and at retail of $125,000 (given). Step 4: Determine net sales at retail of $80,000 (given). Step 5: Subtract retail sales from the retail merchandise available for sale. The difference is the ending inventory at retail of $45,000 (or $125,000 − $80,000). Step 6: Compute the cost ratio. Merchandise Available for Sale at Cost of $90,000 divided by Merchandise Available for Sale at Retail of $125,000 = 0.72 Step 7: Multiply the ending inventory at retail by the cost ratio. Ending inventory at retail of $45,000 × 0.72 = ending inventory cost of $32,400.

Answer 185

Ensure that only employees of the company observe the physical inventory count A typical internal control over inventory is to have an independent auditor observe the physical inventory count.

Answer 186

$23,200 The cost of this asset for financial accounting purposes is $23,200 ($22,000 purchase price + $900 delivery + $300 installation).

Answer 187

MACRS Federal income tax rules replace the depreciation rules of generally accepted accounting principles with the Modified Accelerated Cost Recovery System (MACRS).

Answer 188

$1,480. Step 1. Calculate the straight-line rate as 100% divided by useful life of 5 years = 20%. Step 2. Calculate the double-declining rate as the straight-line rate of 20% multiplied by 2 or 40%. Step 3. Compute depreciation for the period by multiplying the book value by the double-declining rate. Repeat this step each year during the asset’s useful life until the year in which the net book value (NBV) would be less than salvage value. NBV at beginning of year 1 of $50,000 (cost) × 40% = $20,000. NBV at beginning of year 2 of $30,000 (or $50,000 − $20,000) × 40% = $12,000. NBV at beginning of year 3 of $18,000 (or $50,000 − $20,000 − $12,000) × 40% = $7,200. NBV at beginning of year 4 of $10,800 (or $50,000 − $20,000 − $12,000 − $7,200) × 40% = $4,320. NBV at beginning of year 5 of $6,480 (or $50,000 − $20,000 − $12,000 − $7,200 − $4,320) × 40% = $2,592. Step 4. In the final year of depreciation take only the amount of depreciation that will reduce the asset’s net book value to its salvage value. Depreciation for the fifth year is limited to $1,480 (or $6,480 − $5,000).

Answer 189

$20,000. Annual depreciation expense using the straight-line method is $10,000 (($80,000 cost − $10,000 salvage value) / 7-year useful life). Two years' depreciation would be included in the balance in accumulated depreciation. ($10,000 × 2 = $20,000).

Answer 190

When using the double-declining-balance method to calculated depreciation, the half-year convention is applied. The Modified Accelerated Cost Recovery System (MACRS) uses the half-year convention

Answer 191

a gain of $3,000. The gain equals the cash received from the sale of $12,000 minus the book value of the asset of $9,000 ($47,000 cost − $38,000 accumulated depreciation). The entry to record this transaction would include a debit to the Cash account for $12,000, a debit to the Accumulated Depreciation account for $38,000, a credit to the Gain on Sale of Equipment account for $3,000 and a credit to the Equipment account for $47,000.

Answer 192

the cost of the new asset is recorded as the book value of the old asset plus the cash amount paid or to be paid. The federal income tax rules for trade-in transactions are easier than those for financial accounting because neither gain nor loss is recognized for tax purposes. The steps in applying the tax rules are: Step 1 – Remove the cost of the old asset. Step 2 – Remove the accumulated depreciation for the old asset. Step 3 – Record the cash payment. Step 4 – Record the new asset at the sum of the book value of the old asset and the cash paid.

Answer 193

immediately charged to expense if the cost was incurred to develop the intangible asset. Intangible assets are assets that lack a physical substance. The major types of intangible assets are patents, copyrights, franchises, trademarks, brand names, organizational costs, computer software, and goodwill. There are two ways to acquire intangible assets: (1) produce or develop them or (2) purchase them. The general rule is that an intangible asset is recorded in the books of the firm only if it is purchased from another party. Costs to develop intangible assets internally (other than computer software) are expensed in the year incurred to the Research and Development Expense account.

Answer 194

an assessment must be made each year to estimate the value of the intangible. When intangibles that do not have estimable lives have been purchased, an assessment must be made each year to estimate the value of the intangible. If the estimate is less than the existing book value, impairment must be recorded in the same way that impairment of property, plant, and equipment is recorded.

Answer 195

cost of natural resource / estimated units of the resource

Answer 196

Authorize and justify the purchase of a sample of long-lived assets. Standard internal control procedures for fixed assets include authorizing and justifying the purchase of all long-lived assets, not only a sample of them.

Answer 197

Record depreciation to the date of disposition. When disposing of an asset via a sale a five-step process is undertaken to record the transaction. These steps are as follows: Step 1: Record depreciation to the date of disposition. Step 2: Remove the cost of the asset. Step 3: Remove the accumulated depreciation. Step 4: Record the proceeds. Step 5: Determine and record the gain or loss, if any.

Answer 198

the partners for their individual shares of the reported partnership income A partnership does not pay income tax. The partners report their shares of the partnership’s income or loss on their individual income tax returns.

Answer 199

customer list

Answer 200

$44,000 and $0, respectively. This equipment should be recorded at its agreed upon value of $44,000. No accumulated depreciation is transferred. Depreciation on plant and equipment that was recorded by the previous owner is irrelevant. Depreciation will be recorded by the partnership based on the asset’s value at the date of transfer.

Answer 201

may be adjusted to reflect current values upon transfer to the partnership. When noncash assets are transferred to a partnership, they are recorded at their fair market value, as agreed to by the partners, on the transfer date. Liabilities are stated at their correct balances on the transfer date.

Answer 202

Income Summary and a credit to the partner's capital account. Salary allowances are withdrawals, allocations of the partnership’s income, and not expenses.

Answer 203

beginning capital balances The statement of partners’ equities lists the beginning capital balances first, followed by the investment during year, net income (loss) for year, withdrawals during year, and ending capital balances.

Answer 204

both a dissolution of the old partnership occurs and the accounting records are closed and the net income or net loss on the date of dissolution is recorded and transferred to the partners’ capital accounts and then the assets and liabilities are revalued at fair market value. Explanation Whenever a partner dies or withdraws, or when a new partner is admitted, a dissolution of the old partnership occurs. The accounting records are closed and the net income or net loss on the date of dissolution is recorded and transferred to the partners’ capital accounts. Then the assets and liabilities are revalued at fair market value.

Answer 205

credit of $800 to Partner A’s capital account and a credit of $1,200 to Partner B’s capital account. The total capital after partner C’s investment is $80,000 ($20,000 + $26,000 + $34,000). The amount that will be credited to C’s capital account will be 40% of this total or $32,000. The difference between what C has invested and the amount credited to his account is $2,000 ($34,000 − $32,000). If the two partners share profits and losses in a ratio of 2:3, this means that 2/5 or 40% will go to Partner A and 3/5 or 60% will go to Partner B. As such, the $2,000, will be allocated as follows: $800 (40% × $2,000) to Partner A and $1,200 (60% × $2,000) Partner B. Because a positive amount is being allocated as a bonus, the partners’ accounts must be credited.

Answer 206

A = $44,000; B = $54,000; C = $0; and D = $84,000. Since the partnership is only willing to pay Partner C $18,000, which is $12,000 less than his capital account, the $12,000 lower payment is considered a bonus from the retiring partner to the continuing partners. Since profits and losses are shared equally, the $12,000 is divided equally between A, B, and D, which increases their capital accounts by $4,000 each. The new balances are A of $44,000 ($40,000 + $4,000), B of $54,000 ($50,000 + $4,000), and D of $84,000 ($80,000 + $4,000).

Answer 207

debit to the Jeannie Folk, Capital account for $90,000. The entry to record the withdrawal will include a debit to the Jeannie Folk, Capital account for $90,000 and a credit to the Cash account for $90,000

Answer 208

debit to merchandise inventory The journal entry to record the revaluation of merchandise inventory to a higher amount would include a debit to Merchandise Inventory and a credit to each partner's capital account.

Answer 209

The amount of net income or net loss allocated to each partner Distributive share is the amount of net income or net loss allocated to each partner. Distributive share refers solely to the division of net income or net loss among partners, not to cash distributions.

Answer 210

double taxation Disadvantages of the corporate form include governmental regulation, which is typically more extensive than that imposed on sole proprietorships and partnerships, and the existence of double taxation, i.e. the business is taxed at both the corporate level and at the shareholder level.

Answer 211

are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax. Subchapter S corporations are entities formed as corporations which meet the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership so the corporation pays no income tax. Instead, shareholders include their share of corporate profits, and any items that require special tax treatment, on their individual income tax returns. Otherwise S corporations have all the characteristics of regular corporations. The advantage of S corporations is that the owners have limited liability and avoid double taxation.

Answer 212

The issuing corporation may retain the right to repurchase shares of preferred stock from the stockholders at a specific price. Callable preferred stock gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price. The call price is usually substantially greater than the original issue price. The rights are effective after some specified date. Callable stock gives the corporation flexibility in controlling its capital structure. The owners of common (rather than preferred) stock are the only stockholders who have the right to vote. Stockholders are not guaranteed the right to receive annual dividends; they can only receive dividends as declared by the board of directors.

Answer 213

participating preferred stock Convertible preferred stock conveys the right to convert that stock to common stock after a specified date or during a period of time. Callable preferred stock gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price. Cumulative preferred stock conveys to its owners the right to receive the preference dividend for the current year and any prior years in which the preference dividend was not paid before common shareholders receive any dividends.

Answer 214

$0.55 a share. The annual dividends on the preferred stock are $64,000 ($40 par value × 8% × 20,000 shares). The preferred stock is one year in arrears plus the current year for a total of two years. A total of $128,000 (2 years × $64,000 per year) will be allocated to the preferred stockholders and $22,000 ($150,000 − $128,000) will be allocated to the common stockholders. Each common shareholder will receive $0.55 per share ($22,000/40,000 shares).

Answer 215

credit to the Common Stock account for $240,000. The entry to record the issuance of stock would include a debit to the Cash account for $240,000 (20,000 × $12) and a credit to the Common Stock account for $240,000 (20,000 × $12).

Answer 216

expense account when they are incurred. Since organization costs have no fixed legal life, these costs would, if capitalized, be an intangible that would have to be tested for impairment. But it is even more difficult to estimate the value of organization costs than to estimate the value of goodwill. Because of this fact, and the additional fact that the amount spent for organization costs is typically immaterial, the usual practice today is to charge organization costs to expense during the first financial reporting period after the corporation begins activities.

Answer 217

credit to the Common Stock account for $40,000. The entry to record the issuance of stock would include a debit to the Cash account for $100,000 (10,000 × $10), a credit to the Common Stock account for $40,000 (10,000 × $4) and a credit to the Paid-in Capital in Excess of Par Value–Common Stock account for $60,000 ($100,000 − $40,000) or (10,000 × ($10 − $4)).

Answer 218

Subscriptions Receivable—Preferred. The entry to record the subscription would include a debit to the Subscriptions Receivable–Preferred account and a credit to the Preferred Stock Subscribed account. When payment is received, cash is debited and the credit is recorded to the Subscriptions Receivable—Preferred account.

Answer 219

minute book The minute book keeps accurate and complete records of all meetings of stockholders and directors. The minute book formally reports actions taken, directives issued, directors elected, officers elected, and other matters. The capital stock ledger is established for each class of stock issued, and includes a sheet for each stockholder that displays stockholder’s name and address, dates of transactions affecting stock holdings, certificate numbers, and number of shares for each transaction. The capital stock transfer journal is a record of stock transfers used for posting to the stockholders’ ledger. The subscription book is a listing of the stock subscriptions received.

Answer 220

bylaws The bylaws are the guidelines for conducting the corporation’s business affairs. The corporate charter is issued by a state government to create a corporate entity. The subscription book is a listing of the stock subscriptions received. A stock certificate is physical evidence of capital stock issued by a corporation.

Answer 221

directors Duties of the directors include making policies and appointing officers. Stockholders are tasked with electing the directors, officers carry out policies and hire managers, and managers oversee and supervise daily operations.

Answer 222

Tax Expense account and a credit to Deferred Income Tax Liability account. Each year the accountant estimates the amount of future taxes that will be paid as a result of the MACRS depreciation deduction taken in this and prior years. An adjustment for the future taxes is made with a debit to the Tax Expense account and a credit to Deferred Income Tax Liability account.

Answer 223

Extend the adjusted balances of the asset, liability, and stockholders’ equity accounts to the Balance Sheet columns. Seven steps must be taken to complete the corporate worksheet. They are as follows: 1. Enter the trial balance in the Trial Balance section. 2. Enter the adjustments in the Adjustments section of the worksheet. 3. Extend the balances of all income and expense amounts to the Income Statement section of the worksheet. 4. Compute income tax based on income before tax. 5. Total the columns in the Adjustments section. 6. Total the Debit and Credit columns of the Income Statement section. 7. Extend the adjusted balances of the asset, liability, and stockholders' equity accounts to the Balance Sheet columns.

Answer 224

The corporation has too little cash. Corporations often purchase treasury stock because they have extra cash, and the board of directors thinks that the corporation’s own stock is a better investment than other potential investments, not because the corporation has too little cash.

Answer 225

debit to the Dividends Payable account and a credit to the Cash account. The entry to record the payment of a cash dividend includes a debit to the Dividends Payable account and a credit to the Cash account.

Answer 226

Common Stock Dividend Distributable When a common stock dividend is issued the Retained Earnings account is debited and the Common Stock Dividend Distributable account is credited.

Answer 227

Decrease the par value of the stock. A stock split involves the calling in of outstanding shares and the distribution of more than one share for each share called in, with each new share having a proportionate reduction in the par or the stated value. This will cause the par value of each share to decrease.

Answer 228

retained earnings Appropriated retained earnings are added to unappropriated retained earnings to arrive at total retained earnings in the Retained Earnings section of the balance sheet.

Answer 229

credit to the Donated Capital account for $120,000. Donated capital is capital resulting from the receipt of gifts by a corporation. An asset received as a gift is recorded in the accounting records at the asset’s fair market value. Crowning Corporation will record this transaction with a debit to the Land account for $120,000 and a credit to the Donated Capital account for $120,000.

Answer 230

The Treasury Stock account has a normal credit balance. The entry to record the purchase of treasury stock includes a debit to the Treasury Stock account and a credit to Cash. As such, the Treasury Stock account has a normal debit (rather than credit) balance.

Answer 231

All of the statements are correct. The statement of retained earnings shows the beginning balance, the changes, and the ending balance for the unappropriated and appropriated Retained Earnings accounts. Some corporations combine the statement of retained earnings with the income statement. A statement of stockholders’ equity provides an analysis reconciling the beginning and ending balance of each of the stockholders’ equity accounts.

Answer 232

Income Tax Refund Receivable If the tax deposits made by a corporation during the year exceed the tentative tax expense calculated at year-end, then the corporation would have overpaid its taxes during the year. As such, the corporation would debit Income Tax Refund Receivable and credit Income Tax Expense in the resulting journal entry.

Answer 233

On the date of declaration of a stock split A stock split does not result in a standard journal entry within the general journal, as no account balances change after the stock split is undertaken. However, a memorandum entry is recorded when a stock split is declared to note the details of the split, including the new par or stated value, and the new number of shares outstanding.

Answer 234

All of the answers are correct. Bonds are classified by the following characteristics: Bonds can be secured by collateral, or they can be unsecured. Bonds can be registered or unregistered. Bonds can all mature on the same date, or portions can mature over a period of several years.

Answer 235

a deferred charge in the long-term asset category of the balance sheet that would be allocated over the life of the bonds. Bond issue costs reduce the proceeds of borrowing. These costs are a deferred charge in the long-term asset category of the balance sheet that would be allocated over the life of the bonds.

Answer 236

the face amount of the bonds. The face amount of the bonds, the principal, is the amount that the corporation owes to the bond holders. At maturity, when the bonds are retired, the bonds payable account is debited for the face amount of the bonds.

Answer 237

debit to the Bond Interest Expense account for $4,800. Interest on each bond is $9,600 per year (or 100 × $1,200 x 0.08). Because interest is paid semiannually, each interest payment is $4,800 ($9,600 / 2). The entry to record the first interest payment on October 1, 20X1, would include a debit to the Bond Interest Expense account for $4,800 and a credit to the Cash account for $4,800.

Answer 238

debit to the Discount on Bonds Payable account. The entry to record the issuance of a bond at a discount includes a debit to the Cash account, a debit to the Discount on Bonds Payable account, and a credit to the Bonds Payable account.

Answer 239

increases the amount of interest expense over the life of the bonds. When bonds are issued at a discount, the bond discount increases the amount of interest expense over the life of the bonds.

Answer 240

$33,600. Interest expense is the sum of the cash interest payment plus the amount of the amortization of the discount. The cash payment is $33,000, or $300,000 × 11 percent. The amount of the discount is $6,000, or $300,000 – ($300,000 × 0.98). One year’s amortization of the discount is $600, or $6,000/10 years. The interest expense calculated is $33,600 ($33,000 + $600).

Answer 241

debit to the Bonds Payable account for $1,000,000. The entry to record the retirement of the bonds will include a debit to the Bonds Payable account for $1,000,000 and a credit to the Bond Sinking Fund Investment account for $1,000,000.

Answer 242

debit to the Retained Earnings Appropriated for Bond Retirement account for $500,000. When the bonds are retired, the entries to record the retirement will include a debit to the Retained Earnings Appropriated for Bond Retirement account for $500,000 (or 5 x $100,000) and a credit to the Retained Earning account for $500,000.

Answer 243

$3,000. The entry to record the early retirement of the bonds will include a debit to the Bonds Payable account for $100,000, a debit to the Premium on Bonds Payable account for $2,000, a debit to the Loss on Early Retirement of Bonds account for $3,000, and a credit to the Cash account for $105,000.

Answer 244

convertible bonds Convertible bonds give the owner the right to convert the bonds into common stock under specified conditions. Callable bonds allow the issuing corporation to require the holders to surrender the bonds for payment before the maturity date. Coupon bonds are bonds that do not require that the names of the owners be registered. Collateral trust bonds involve the pledge of securities, such as stocks or bonds of other companies.

Answer 245

Interest from bonds is deducted in arriving at taxable income. Interest from bonds is deducted in arriving at taxable income. Capital stock is permanent capital, and is classified as stockholder’s equity. Preference dividends on preferred stock are usually slightly higher than interest rates on bonds.

Answer 246

20.0% $65,000 current assets / $325,000 total assets = 20%

Answer 247

amount for the same balance sheet item on a previous date. A horizontal analysis of balance sheet data involves a comparison of a balance sheet amount on a given date with amount for the same balance sheet item on a previous date.

Answer 248

All of the statements are correct. Comparing ratio and percentage relationships of the current year with those of the immediately preceding year is a normal and helpful procedure. However, comparisons between only two years could be misleading and might not be adequate to indicate long-term trends. A better technique is trend analysis, which compares selected ratios and percentages over a period of time. Trend analysis makes it possible to ask questions about all aspects of operations of the company.

Answer 249

liquidity ratios Liquidity ratios measure the ability of a business to pay its debts when due. Financial strength ratios measure how well-positioned a business is to pay its bond interest payments and debts, as well as the protection afforded creditors against possible losses, and the amount that each share would receive in case of liquidation if the assets were sold for book value. Profitability, operating results, and efficiency ratios examine the earnings and overall operations of a business in various contexts. This is accomplished by examining relationships between key figures such as net income, net sales, total assets, common stockholders’ equity, number of shares of common stock, and market price per share of common stock.

Answer 250

$3.00. Earnings per share of common stock equals $3.00 [($60,000 net income before income tax − $10,000 income tax − $20,000 dividend requirements for preferred stock) divided by 10,000 shares].

Answer 251

net sales / total assets Asset Turnover is computed as net sales divided by total assets.

Answer 252

Income before bond interest and income taxes divided by Bond interest cash requirement. Number of times bond interest earned is calculated as Income before bond interest and income taxes divided by Bond interest cash requirement.

Answer 253

2.2 to 1. The current ratio is computed as current assets divided by current liabilities. $110,000 current assets / $50,000 current liabilities = 2.2 to 1.

Answer 254

all of the answers are correct. Inventory turnover measures how quickly a merchandiser sells inventory, calculated by dividing cost of goods sold by average merchandise inventory. Obsolete goods and poor purchasing procedures may result in slow sales. Excess inventory increases the denominator in the ratio, reducing the inventory turnover measure.

Answer 255

All of the statements describe shortcomings in financial statement analysis. There are limits to the benefits of financial statement analysis. Financial statements use book values. Book value depends on accounting procedures and policies. Different accounting policies and procedures make it difficult to compare financial results across companies. Another limitation of financial statement analysis is that financial statements are prepared assuming that the dollar is a stable monetary unit; this is far from correct. The amounts reported do not necessarily represent dollars with today’s purchasing power. Finally, it is difficult to compare financial results of businesses that use different financing methods, classify expenses differently, have different policies for paying owner-employees, and operate as different types of business entities.

Answer 256

A high current ratio could be caused by an inventory level lower than required to conduct normal operations. A higher current ratio is preferable, as the higher the current ratio, the greater the amount of protection afforded. A high current ratio could be caused by a variety of factors including large sums of money being tied up in accounts receivable that might be uncollectible, obsolete inventory, and an inventory level higher (not lower) than required to conduct normal operations.

Answer 257

earnings per share of common stock Earnings per share of common stock is calculated as income available to common stockholders divided by average number of shares of common stock outstanding during the year. Earnings per share is a profitability ratio. The acid-test ratio is a liquidity ratio, while the number of times bond interest earned and the book value per share of common stock are both financial strength ratios.

Answer 258

currency, bank accounts and short-term, highly liquid investments. Cash consists of coin, currency, and bank accounts. Cash equivalents are easily convertible into known amounts of cash. They include certificates of deposit (CDs), U.S. Treasury bills, and money market funds. A short-term investment is a cash equivalent if it matures within three months from the date the business acquired it.

Answer 259

proceeds from sale of equipment Investing activities involve the acquisition (cash outflow) or disposal (cash inflow) of long-term assets, including land, buildings, equipment, and investments in bonds and other securities. Proceeds from the sale of equipment is a source of cash that would appear within the investing activities section. Proceeds from the issuance of common stock would be a source of cash in the financing activities section, depreciation expense would be added to net income in the operating activities section (when using the indirect method), and the purchase of office equipment would be a use of cash (not a source of cash) in the investing activities section.

Answer 260

gain on sale of equipment Financing activities involve transactions that provide cash to the business to carry on its activities. Cash inflows from financing activities include issuing bonds and capital stock for cash, borrowing cash by signing notes payable, and reselling treasury stock. Cash outflows from financing activities include paying notes or bonds payable, purchasing treasury stock, and paying cash dividends. A gain on the sale of equipment would be subtracted from net income in the operating activities section (when using the indirect method) and would also be included as a source of cash within the investing activities section.

Answer 261

added to net income in the computation of the net cash provided by (used in) operating activities. The acquisition of property, plant, and equipment is reported in the Cash Flows from Investing Activities section of the statement of cash flows in the year acquired. Depreciation, depletion, and amortization of assets do not involve a cash outlay in the year the expense is recorded. Since depreciation has been subtracted on the income statement in the determination of net income, it must be added back to net income in the computation of the net cash provided by operating activities.

Answer 262

ending cash and cash equivalents The statement of cash flows displays the sources and uses of cash throughout the period. These are added together to arrive at the net increase (decrease) in cash and cash equivalents which, when added to the beginning cash and cash equivalents balance, provides the ending cash and cash equivalents balance, the final figure displayed on the statement of cash flows.

Answer 263

added to the net income when determining the net cash provided by operating activities. An increase in accounts payable means less cash was paid on account than purchases were recorded on account. To obtain cash flows from operating activities, the increase in accounts payable is added to net income.

Answer 264

subtracted from the net income when determining the net cash provided by operating activities. An increase in accounts receivable means that more sales on account were recorded than collected. The sales were included in net income, but the cash has not been received. To obtain cash flows from operating activities, the increase in accounts receivable is subtracted from net income.

Answer 265

$40,000 as the net cash used in investing activities. Investing activities involve the acquisition (cash outflow) or disposal (cash inflow) of long-term assets, including land, buildings, equipment, and investments in bonds and other securities. The proceeds from the sale of the building of $50,000, which is the cash flow arising from this transaction, will be reported as a cash inflow in the investing activities section of the statement of cash flows. The cash payment for the purchase of the new machinery will be reported as a cash outflow in the investing activities section. The net amount, a decrease of $40,000 will be reported as the net cash used in investing activities.

Answer 266

$110,000 as a cash inflow in the financing activities section. Financing activities involve transactions that provide cash to the business to carry on its activities. Cash inflows from financing activities include issuing bonds and capital stock for cash, borrowing cash by signing notes payable, and reselling treasury stock. Cash outflows from financing activities include paying notes or bonds payable, purchasing treasury stock, and paying cash dividends. The proceeds of the stock issuance of $110,000 ($80,000 + $30,000) would be reported as cash inflow in the financing activities section of the statement of cash flows.

Answer 267

Most corporations use the direct method to prepare the statement of cash flows. The Financial Accounting Standards Board allows the indirect or direct method. Under the direct method, all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction. Under the direct method, a corporation reports cash flows from operating activities in two major classes: gross cash receipts and gross cash payments. The direct method is not used by most corporations because many businesses do not have easy access to the records of cash payments for each type of expenditure.

Answer 268

purchase of treasury stock The purchase of treasury stock requires a cash outlay, and therefore is a use of cash in the financing activities section of the statement of cash flows. Dividend income is a source of cash that would appear in the operating activities section, while the issuance of bonds payable and the issuance of common stock are sources of cash that would appear in the financing activities section.

Answer 269

selling and general and administrative expense The schedule of operating expenses is a supplemental schedule showing the selling and general and administrative expenses in greater detail.