ACTG612 Chapters 7-11 Practice

Question 1

Your business purchases a Sony TV for $800 on April 1. You decide to depreciate the asset over 5 years using the straight-line method. If the company recorded $105 in depreciation on December 31 of that 1st year what is the salvage value your company used?

a. 0
b. 100
c. 105
d. 275

Answer 1

b. 100

Depreciation Expense (per year) = (Cost - SV) / Useful Life
What is the annual Depreciation Expense: $ 140
Therefore: $140 = ($800 - X) / 5
Result is X = $100

Question 2

True or False: Ordinary repairs to long-term assets are added to the cost of the asset and depreciated.

Answer 2

False

Question 3

A machine originally cost the company $42,000 with a useful life of 8 years and $4,000 salvage value. The company uses straight-line depreciation. The company sold the machine at the end of the 4th year and recorded a loss on the sale of $2,000. How much cash did the company receive on the sale?

a. $19,000
b. $21,000
c. $23,000
d. $25,000

Answer 3

b. $21,000

Determine Book Value at point of sale.
Depreciation Expense (per year) = (Cost - SV) / Useful Life $ 4,750
Years Depreciated: 4 Therefore Accumulated Depreciation is: $ 19,000

Cost $ 42,000
Less A/D $ (19,000)
Book Value $ 23,000

Loss at Sale $ 2,000

Cash Received $ 21,000

Question 4

A decrease in Accumulated Depreciation typically means which of the following occurred:

a. The company recorded depreciation expense for the period.
b. The company wrote up the value of the assets.
c. The company disposed of the asset or sold the asset.
d. The company closed the account to Retained Earnings.

Answer 4

c. The company disposed of the asset or sold the asset.

Question 5

Which of the following is true about intangible assets?

a. The cost of marketing a trademark is capitalized (recorded as an asset).
b. The cost of purchasing a patent from another company is capitalized.
c. Goodwill is amortized over its useful life.
d. Both b and c are true.

Answer 5

b. The cost of purchasing a patent from another company is capitalized.

Question 6

One of the primary reasons for investing in equity securities includes:

a. Receiving dividend payments
b. Acquiring debt of competing companies
c. Earning interest revenue
d. All of the above

Answer 6

a. Receiving dividend payments

Question 7

Shaq Co. invests in Magic Co. by purchasing 200 shares of common stock. Magic has a total of 10,000 shares outstanding. If Magic pays dividends of $1 per share, the entry to record the receipt of the dividends on Shaq’s side would include:

a. Increase to the investment account of $200
b. Decrease to the investment account of $200
c. Increase to the dividend revenue account of $200
d. Decrease to the dividend revenue account of $200

Answer 7

c. Increase to the dividend revenue account of $200

Question 8

Shaq Co. invests in Magic Co. by purchasing 3,000 shares, which represents a 30% investment. If Magic pays dividends of $1 per share, the entry to record the receipt of the dividends on Shaq’s side would include:

a. Increase to the Investments account of $3,000
b. Decrease to the Investments account of $3,000
c. Decrease to the Dividend Revenue account of $3,000
d. Increase to the Dividend Revenue account of $3,000

Answer 8

b. Decrease to the Investments account of $3,000

Question 9

True or False: If Walter Co. buys 72% of Mabel Co. then the financial statements of Walter Co. will be referred to as consolidated the next time they are issued.

Answer 9

True

Question 9

Shaq Co. invests in Magic Co. by purchasing 3,000 shares, which represents a 30% investment. If Magic reports net income of $100,000, Shaq would record:

a. Decrease to the Investments account of $30,000
b. Increase to the Investments account of $30,000
c. Decrease to the Equity Income account of $30,000
d. Increase to the Dividend Revenue account of $30,000

Answer 9

b. Increase to the Investments account of $30,000

Question 10

When a note payable matures and you pay it back, you record which of the following?

a. Decrease to Notes Payable
b. Decrease to Interest Revenue
c. Increase to Cash
d. Increase to Notes Payable

Answer 10

a. Decrease to Notes Payable

Question 11

Circuit Village estimates and records warranty expense in the period of the sale. The transaction when Circuit Village actually incurs warranty costs includes:

a. Decrease to Estimated Warranty Liability
b. Decrease Inventory or Cash
c. Increase Warranty Expense
d. Both a. and b.

Answer 11

a. Decrease to Estimated Warranty Liability

Question 12

Which of the following would normally NOT be classified as a current liability on an annual financial statement?

a. Note payable due in 9 months
b. Federal Income Tax Payable
c. Warranty liabilities for a 6-month warranty
d. Note payable due in 18 months

Answer 12

d. Note payable due in 18 months

Question 13

If Toyota forgot to estimate and record warranty expense for the year, what effect would this have on the financial statements?

a. Assets are understated and net income is overstated
b. Liabilities are overstated and net income is understated
c. Liabilities are understated and net income is overstated
d. No effect on liabilities and net income is overstated

Answer 13

c. Liabilities are understated and net income is overstated

Question 14

A company borrowed $850,000 at 5% annual interest, and will pay back the loan in 6 annual installments of $167,465. What amount will Notes Payable decrease by for the second year payment?

a. $36,251
b. $124,965
c. $131,214
d. $167,465

Answer 14

c. $131,214

Beg Balance	Interest	Principal	Payment	End Balance Year 1	$	850,000	$	42,500	$	124,965	$	167,465	$	725,035 Year 2	$	725,035	$	36,252	$	131,214	$	167,466	$	593,821

Question 15

At the fiscal year end, a company has two loans. One loan is an installment loan, with a total principal balance of $784,000 and installment payments going to principal in the next year of $29,000. The second loan is a $1.2 million 10 year note payable that is due in September of the coming year. How much should the company report as Current Portion of Long-term Liabilities on the Balance Sheet?

a. $0
b. $1,200,000
c. $29,000
d. $1,229,000

Answer 15

d. $1,229,000

Loan 1: $ 29,000
Loan 2: $ 1,200,000
Total Due in next 12 months: $ 1,229,000

Question 16

True or False: Bond and equity financing are similar in that both interest and dividends are tax deductible.

Answer 16

False

Question 17

A company issued 8%, 15-year bonds at par for $550,000 on March 1. The bond pays interest semiannually (on September 1 and March 1 each year). The company’s fiscal year ends on December 31 and the year-end adjustment to accrue interest was properly recorded. The transaction to record the first semiannual interest payment (on Sep 1) is?

a. Increase Interest Expense $22,000; Increase Interest Payable $22,000
b. Increase Interest Expense $11,000; Decrease Interest Payable $11,000 and Cash $22,000
c. Increase Interest Expense $22,000; Decrease Cash $22,000
d. Increase Interest Expense $44,000; Decrease Interest Payable $22,000

Answer 17

c. Increase Interest Expense $22,000; Decrease Cash $22,000

Principal: $ 550,000
Rate: 8%
Annual Interest: $ 44,000
Semiannual Payment: $ 22,000

Question 18

A company has the following balances in these specific accounts at the end of the fiscal year. What is the company’s total stockholders’ equity?

Common Stock – par 970,000
Paid in Capital in Excess of Par, Common 14,732,000
Retained Earnings 4,699,000
Treasury Stock 583,000
Paid in Capital, Treasury Stock 25,000
Dividends Payable 92,000

a. 19,751,000
b. 21,009,000
c. 19,843,000
d. 20,401,000

Answer 18

c. 19,843,000

Common Stock $ 970,000
Paid in Capital, Common Stock $ 14,732,000
Retained Earnings $ 4,699,000
Treasury Stock $ (583,000)
Paid in Capital, Treasury Stock $ 25,000
Total $ 19,843,000

Question 19

Madoff Company issues 10,000 common shares of no-par (and no stated) common stock to one of his friends in exchange for cash of $27,000. Record the transaction (accounts and amounts):

Answer 19

Increase Cash $ 27,000
Increase Common Stock $ 27,000

Question 20

Samurai company reissues 20,000 shares of treasury stock. It paid $23 per share for the treasury stock and is now selling it for $21 per share. Record the sale of the treasury stock.

Answer 20

Increase Cash 420,000 = $21 * 20,000
Decrease Treasury Stock 460,000 = $23 * 20,000
Decrease Retained Earnings 40,000 = $2 * 20,000 (loss on sale comes out of RE)

Question 21

True or False: Preferred shares of stock typically get priority over common shareholders for dividends, distributions as a result of termination, and voting rights.

Answer 21

False

Question 22

18. A company has Net Income of $120,000, Depreciation Expense of $21,000 and Gain on Sale of Equipment of $2,000. It has an increase in Accounts Receivable of $4,000, a decrease in Inventory of $7,000, an increase in A/P of $1,000 and a decrease in Notes Payable of $13,000. What is the company’s Operating Cash Flow for the year?

Answer 22

Net Income $ 120,000
Add Depreciation Expense 21,000
Less Gain (2,000)
Increase in A/R (4,000)
Decrease in Inventory 7,000
Increase in A/P 1,000
Operating Cash Flows $ 143,000

Question 23

Financing cash flows would NOT include which of the following:
a. Issuing bonds
b. Paying cash dividends
c. Paying interest on a note payable
d. Repurchasing shares

Answer 23

c. Paying interest on a note payable

Question 24

The sum of Operating Cash Flow, Investing Cash Flow, and Financing Cash Flow should be equal to:

a. The total cash received by the company during the year
b. The change in cash during the period
c. Net Income +/- the change in current assets and liabilities
d. The cash balance at the end of the period

Answer 24

b. The change in cash during the period

Question 25

Categorize each item as its proper type of cash flow:

Answer 25

Question 26

Prepare the companies Operating Cash Flows

Question 27

Determine the companies cash flows from Investing Activities

Answer 27

Question 28

Determine the companies cash flows from Financing Activities

Answer 28