This is Financial Accounting & Business Administration Exam 3

The Discount on Bonds Payable account is:

A contra expense

A liability

A contra equity

A contra liabilityCorrect

An expense

A company purchased equipment valued at \$200,000 on January 1. The equipment has an estimated useful life of six years or five million units. The equipment is estimated to have a salvage value of \$13,400. Assuming the double declining balance method of depreciation, what is the annual depreciation for the second year if 1.5 million units were produced?

\$44,422,20Correct

\$62,137.80

\$41,445.91

\$31,100.00

\$55,980,.00

Which of the following is true regarding the effective interest amortization method?

Is not allowed by the FASB

Allocates bond interest expense using a changing interest rate

Allocates bond interest expense using a constant interest rateCorrect

Allocates a decreasing amount of interest over the life of a discounted bond

Allocates bond interest expense using the current market rate for each period

When a bond sells at a premium:

The bond pays no interest

The contract rate is below the market rate

The contract rate is above the market rateCorrect

The contract rate is equal to the market rate

It means that the bond is a zero coupon bond

Gardea Inc. has an annual accounting period which ends on December 31. During the current year a depreciable asset which cost \$42,000 was purchased on September 2. The asset has a \$4,000 estimated salvage value. The company uses straight-line depreciation and expects the asset to have a 5 year life. What is the total depreciation expense for the current year?

\$3,166.67

\$2,533.33Correct

\$2,800.00

\$1,900.00

\$7,600.00

Bonds owned by investors whose names and addresses are recorded by the issuing company and for which interest payments are made with checks to the bondholders, are called:

Serial bonds

Coupon bonds

Callable bonds

Registered bondsCorrect

Bearer bonds

A method that charges the same amount of expense over each period of the asset’s useful life is called:

Straight line depreciationCorrect

Declining-balance depreciation

Modified accelerated cost recovery system (MACRS) depreciation

Accelerated depreciation

Units-of-production depreciation

A company purchased a delivery van for \$23,000 with a salvage value of \$3,000 on September 1, 2019. It has an estimated useful life of 5 years. Using the straight-line method, how much depreciation expense should the company recognize on December 31, 2019?

\$1,333Correct

\$4,600

\$1,000

\$1,533

\$4,000

The formula for computing annual straight-line depreciation is:

Cost plus salvage value divided by the useful life in years

Cost less salvage value divided by the useful life in yearsCorrect

Cost divided by useful life in years

Cost divided by useful life in units

Depreciable cost divided by useful life in units

Another name for a capital expenditure is:

Asset expenditure

Contribitute capital expenditure

Revenue expenditure

Long term expenditureCorrect

Balance sheet expenditure

A company purchased a POS cash register on January 1 for \$5,400. This register has a useful life of 10 years and a salvage value of \$400. What would be the depreciation expense for the second-year of its useful life using the double-declining-balance method?

\$1,000

\$800

\$864Correct

\$500

\$1,080

When the maker of a note honors a note this indicates that the note is:

Notarized

Cosigned

Guaranteed

Signed

Paid in fullCorrect

Temper Company has credit sales of \$3.10 million for year 2019. Temper estimates that .9% of the credit sales will not be collected. On December 31, 2019, the company’s Allowance for Doubtful Accounts has an unadjusted credit balance of \$2,222. Temper prepares a schedule of its December 31, 2019, accounts receivable by age. Based on past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here:

Assuming the company uses the percent of sales method, what is the amount that Temper will enter as the Bad Debt Expense in the December 31 adjusting journal entry?

\$27,900.00Correct

\$25,246.40

\$24,420.40

\$27,468.40

\$23,024.40

A company receives a 6.2%, 60-day note for \$9,650. The total amount of cash due on the maturity date is:

\$10,248.30

\$9,749.72Correct

\$9,650.00

\$99.72

\$598.30

Installment notes payable that require periodic payments of accrued interest plus equal amounts of principal result in:

Increasing amounts of interest each period

Increasing amounts of principal each period

Periodic total payments that are equal

Periodic total payments that gradually increase in amount

Periodic total payments that gradually decrease in amountCorrect

A company received cash proceeds of \$206,948 on a bond issue with a par value of \$200,000. The difference between par value and issue price for this bond is recorded as a:

Credit to Discount on Bonds Payable

Debit to Premium on Bonds Payable

Credit to Premium on Bonds PayableCorrect

Debit to Discount on Bonds Payable

Credit to Interest Income

What is the debt to equity ratio for a company who has \$700 in total liabilities and \$3,500 in total equity?

20%Correct

\$2,100

5

2%

.5

A bond sells at a discount when the:

Bond has a short term life

Contract rate is equal to the market rate

Bond pays interest only once a year

Contract rate is below the market rateCorrect

Contract rate is above the market rate

If the credit balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt being written off, the entry to record the write-off against the allowance account results in:

A reduction in equity

A reduction in current liabilities

An increase in the expenses of the current period

A reduction in current assets

No effect on the expenses of the current periodCorrect

The following information is from the annual financial statements of Nancy Company.

What is the accounts receivable turnover ratio for 2018?

4.97

5.40Correct

6.72

6.41

5.20

Cobb Corn Company purchases a large lot on which a building is located. The negotiated purchase price is \$2,500,000 for the lot and the building. The company pays \$71,500 in commissions  and taxes. The appraisal values of each items is as follows: Land \$650,000, Building \$1,750,000, Land Improvements \$120,000. What is the appropriate amount to be entered into the general journal for the building?

\$1,730,000

\$1,685,379

\$1,784,621Correct

\$1,750,000

\$1,735,000

Vine Company began operations on January 1, 2019. During its first year, the company completed a number of transactions involving sales on credit, accounts receivable collections, and bad debts. These transactions are summarized  as follows:

1. Sold \$1,348,300 of merchandise (that had cost \$983,600)  on credit, terms n/30
2. Wrote off \$19,400 of uncollectible accounts receivable.
3.  Received \$666,100 cash payments of accounts receivable.
4.  ln adjusting the accounts  on December  31,  the company estimated  that 2.90%, of accounts receivable will be uncollectible.

What is the amount required for the adjusting journal entry to record bad debt expense?

\$18,644.90

\$19,400.20

\$39,100.70

\$19,221,20Correct

\$19,783.80

The accounts receivable turnover is calculated by

Dividing average accounts receivable by net sales

Dividing average accounts receivable by net sales and multiplying by 365

Dividing net sales by average accounts receivable and multiplying by 365

Dividing net income by average accounts receivable

Dividing net sales by average accounts receivableCorrect

Failure by a promissory note’s maker to pay the amount due at maturity is known as:

Protesting a note

Ignoring a note

Closing a note

Discounting a note

Dishonoring a noteCorrect

An accounting procedure that (1) estimates and reports bad debts expense from credit sales during the period of the sales and (2) reports accounts receivable at the amount of cash to be collected is the:

Cash basis method of accounting for bad debts

Adjustment method for uncollectible debts

Adjustment method for uncollectible debts

Aging of notes receivable

Allowance method of accounting for bad debtsCorrect

On October 1, a \$30,000, 6%, 3-year installment note payable is issued by a company. The note requires that \$10,000 of principal plus accrued interest be paid at the end of each year on September 30. The issuer’s journal entry to record the second annual interest payment would include:

A credit to Cash for \$10,000

A debit to Notes Payable for \$1,200

A debit to Interest Expense for \$1,800

A credit to Cash for \$11,800

A debit to Interest Expense for \$1,200Correct

A company receives a 7.5%, six-month note for \$8,900. The total interest due on the maturity date is:

\$4,005.00

\$2,002.50

\$667.50

\$6,750.00

\$333.75 – correct

Wallah Company agreed to accept \$5,000 in cash along with an \$8,000, 90-day, 13.5% note from customer Judith Klemper to settle her \$13,000 past-due account. How should Wallah record this transaction?

Debit Sales 13,000; Credit Note Receivable 8,000, Credit Cash 5,000

Debit Cash 5,000, Debit Notes Receivable 8,000; Credit Sales 13,000

Debit Notes Receivable 8,000; Credit Sales 8,000

Debit Accounts Receivable – J Kemper 13,000; Credit Note Receivable 8,000, Credit Cash 5,000

Debit Cash 5,000, Debit Notes Receivable 8,000; Credit Accounts Receivablee – J Klemper 13,000 – correct

Smitty Museum purchased the copyright to a piece of artwork for \$922,000. Smitty plans to reproduce 1.8 million posters of the artwork over a period of 12 years. Calculate the amortization for the year assuming the Museum plans to reproduce and sell 130,000 posters the first year year.

\$78,633

\$66,589

\$76,833 – correct

\$0, copyrights are not amortized

\$74,125

A method that allocates an equal portion of the total depreciable cost for a plant asset to each unit produced is called:

Modified accelerated cost recovery system (MACRS) depreciation

Units-of-production depreciation – correct

Declining-balance depreciation

Straight-line depreciation

Accelerated depreciation

Plant assets are:

Long term investments

Natural resources

Intangible

Used in operations – correct

Current assets

Chiller Company has credit sales of \$5.60 million for year 2019. Chiller estimates that 1.32% of the credit sales will not be collected. Historically, 4% of outstanding accounts receivable is uncollectible. On December 31, 2019, the company’s Allowance for Doubtful Accounts has an unadjusted credit balance of \$3561. Chiller prepares a schedule of its December 31, 2019, accounts receivable by age. Based on past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized  here:

\$48,317.41

\$59,045.80

\$51,878.41

\$70,359.00

\$66,167.80 – correct

A promissory note received from a customer in exchange for an account receivable:

Is a note receivable for the recipient – correct

Is a short-term investment for the recipient

Is an account receivable for the recipient

Is a note payable for the recipient

Is a cash equivalent for the recipient

A company’s annual accounting period ends on September 30. During the current year a depreciable asset which cost \$16,000 was purchased on January 1. The asset has a \$2,000 estimated salvage value. The company uses straight-line depreciation and expects the asset to have a 4-year life. What is the total depreciation expense for the current year?

\$3,500

\$3,000

\$875

\$2,625 – correct

\$4,000

The person who signs a note receivable and promises to pay the principal and interest is the:

Holder

Owner

Payee

Maker – correct

A company had an accounts receivable turnover ratio of 8 and net sales of \$600,000 for a given period. What was the average accounts receivable amount for this period?

\$4,800,000

\$75,000 – correct

\$205.48

\$2,919.99

Average accounts receivable cannot be determined from this information

Dell had net sales of \$35,404 million. Its average total assets for the period were \$14,502 million. Dell’s total asset turnover is equal to:

2.44 – correct

3.50

.40

.35

1.45

On December 31, 2020, Stable Company sells a piece of equipment that was purchased on January 1,  2016. The equipment originally cost \$820,000 and has an estimated useful life of eight years. Stable uses the double declining balance method of depreciation. What is the gain/loss on the sale of equipment that Stable will recognize if the equipment was sold for \$230,000?

\$35,409 Gain – correct

\$25,000 Gain

\$25,000 Loss

\$35,408 Loss

\$0; no gain or loss

On December 31 of the current year, a company’s unadjusted trial balance included the following: Accounts Receivable, debit balance of \$97,250; Allowance for Doubtful Accounts, credit balance of \$951. What amount should be debited to Bad Debts Expense, assuming 6% of outstanding accounts receivable at the end of the current year will be uncollectible?

\$6,786

\$4,884 – correct

\$5,835

\$3,992

\$951

Plant assets are:

Intangible assets used in the operations of a business that have a useful life of more than one accounting period

Held for sale

Tangible assets used in the operation of a business that have a useful life of more than one accounting period – correct

Current assets

Tangible assets used in the operation of business that have a useful life of less than one accounting period

Ace Credit Card Company agrees to transfer cash to Seller Company immediately upon deposit of that company’s credit card sales receipts. Ace charges a 2% fee for all credit card sales. If Seller Company deposits \$57,300 credit card sales receipts, which of the following statements is true?

Ace will pay Seller Company a \$1,146 credit card fee

Ace will receive \$56,154 cash from Seller Company

Ace will receive \$57,300 cash from Seller Company

Seller Company will receive \$57,300 cash from Ace

Seller Company will receive cash \$56,154 from Ace – correct

On December 31, 2020, Stable Company will sell a piece of equipment that was purchased on January 1, 2015. The equipment originally cost \$820,000 and has an estimated useful life of eight years. Stable uses the straight-line method of depreciation. What is the gain/loss on the sale of equipment that Stable will recognize if the equipment was sold for \$230,000?

\$230,000 Gain

\$25,000 Loss

\$0; no gain or loss

\$25,000 gain – correct

\$73,750 Gain

Land improvements are:

Also called basket purchases

Assets that increase the usefulness of land and like land, are not depreciated

Expensed in the period incurred

Assets that increase the usefulness of land, but that have a limited useful life and are subject to depreciation – correct

Included in the cost of the land account

Installment notes payable that require periodic payments of accrued interest plus equal amounts of principal result in:

Increasing amounts of principal each period

Periodic total payments that gradually decrease in amount – correct

Periodic total payments that are equal

Periodic total payments that gradually increase in amount

Increasing amounts of interest each period

The materiality principle:

States that an amount can be ignored if its effect on financial statements is unimportant to the user’s business decisions – correct

Requires that expenses be reported in the same period as the sales they helped produce

Requires use of the direct write-off method

States that bad debts not be written off

Requires use of the allowance method for bad debts

On August 1,  Ace Corporation accepted a note receivable in place of an outstanding accounts receivable in the amount of \$123,965. The note is due in 90 days and has an interest rate of 8%. What would be the appropriate journal entry to record the receipt of cash at the maturity date?

Debit Notes Receivable 123,965.00, Debit Interest Revenue 2,479.30; Credit Cash 123,444.30

Debit Notes Receivable 123,965.00; Credit Accounts Receivable

Debit Cash 126.444.30 ; Credit Interest Revenue 2479, Credit Note Receivable 123.965.00 – correct

Debit Cash 123,965.00 ; Credit Interest Receivable 2479.30, Credit Note Receivable 126,444.30

Debit Cash 123,965.00; Credit Notes Receivable 123,965.00

A bond traded at 1021/2 % means that:

The market rate of interest is 2 1/2% above the interest rate

The bonds were retired at \$1,025 each

The market rate of interest is 2.5%

The bond pays 2.5% interest

The bond traded at \$1,025 per \$1,000 bond – correct

A company sold a machine that originally cost \$100,000 for \$60,000 cash. The accumulated depreciation on the machine was \$40,000. The company should recognize a:

\$40,000 loss

\$60,000 gain

\$0 gain or loss – correct

\$20,000 loss

\$20,000 gain

Bonds that have interest coupons attached to their certificates, which the bondholders detach during each interest period and present to a bank for collection, are called:

Serial bonds

Convertable bonds

Coupon bonds – correct

Registered bonds

Callable bonds

A company received cash proceeds of \$206,948 on a bond issue with a par value of \$200,000. The difference between par value and issue price for this bond is recorded as a:

Credit to Interest Income

Debit to Discount on Bonds

Credit to Premium on Bonds Payable – correct

Credit to Discount on Bonds Payable

Debit to Premium on Bonds

Assume Sambazon.com sold an acai processing machine for \$172,000 cash. If accumulated depreciation on the sale date was \$58,311 and a gain of \$6,721 was recognized on the sale, what was the original cost of the asset?

\$216,869

\$223,590 – correct

\$113,689

\$65,032

\$165,279

A company issued 18-year, 6% bonds with a par value of \$750,000. The company received \$761,736 cash for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

\$22,500

\$22,826

\$22,174 – correct

\$21,848

\$23,152

When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle cost \$23,000 and its estimated salvage value is \$1,500. After 4 years of straight-line depreciation, the asset’s total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. The depreciation expense in year 5 equals:

\$5,375.00 – correct

\$5,543.75

\$10,750.00

\$2,687.5

\$2,856.25

A company purchased a machine valued at \$66,000. It traded in an old (similar) machine for a \$9,000 trade-in allowance, meaning the company paid \$57,000 cash with the trade-in. The old machine cost\$44,000 and had accumulated depreciation of \$36,000. What is the recorded value of the new machine?

\$66,000

\$9,000

\$8,000

\$65,000 – correct

\$57,000