Section 2G - Payables/Accrued Exp Flashcards

Question 1

Q

The following costs were incurred by Griff Co. a manufacturer, during 20X1:

Accounting and legal fees $ 25,000
Freight-in 175,000
Freight-out 160,000
Officers salaries 150,000
Insurance 85,000
Sales representatives salaries 215,000

What amount of these costs should be reported as general and administrative expenses for 20X1?

$810,000

$635,000

$260,000

$550,000

Answer

A

$260,000

Griff Co.’s general and administrative expenses for 20X1 would include:

Accounting and legal fees $ 25,000
Officer salaries 150,000
Insurance 85,000

Tota $260,000

(Freight-in would be part of cost of goods sold and/or inventory. Freight-out and sales representative salaries are part of selling expenses.)

Question 2

Q

On October 31, Year 1, a company with a calendar year-end paid $90,000 for services that will be performed evenly over a 6-month period from November 1, Year 1, through April 30, Year 2. The company expensed the $90,000 cash payment in October, Year 1, to its services expense general ledger account. The company did not record any additional journal entries in Year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its Year 1 financial statements?

Debit prepaid services and credit services expense for $30,000

Debit prepaid services and credit services expense for $60,000

Debit services expense and credit prepaid services for $30,000

Debit services expense and credit prepaid services for $60,000

Answer

A

Debit prepaid services and credit services expense for $60,000

The $90,000 payment covers six months’ work, of which only two months are in this year. Thus, this year’s expenses should be only 2/6 of $90,000, or $30,000. The other 4/6 of the payment is a prepaid expense of $60,000 for next year, so the prepaid expenses need to be increased with a debit of $60,000, and they must come out of the services expenses of this year with a credit of $60,000, lowering this year’s expense down to where it should be.

Question 3

Q

Rabb Co. records its purchases at gross amounts but wishes to change to recording purchases net of purchase discounts. Discounts available on purchases recorded from last October 1 to this September 30 totaled $2,000. Of this amount, $200 is still available in the accounts payable balance. The balances in Rabb’s accounts as of and for the current year ended September 30 before conversion are:

Purchases $100,000
Purchase discounts taken 800
Accounts payable 30,000

What is Rabb’s current-year accounts payable balance as of September 30 after the conversion?

$28,800

$28,200

$29,200

$29,800

Answer

A

$29,800

The difference between gross and net reporting is that at gross reporting, the discounts are not recognized in the carrying values of the accounts until payment is made. Thus, the accounts in question will be carried at their full gross amounts due (not less the discount available).

The account that will be affected by the change is the accounts payable account that keeps track of the payments still due, at their full gross amount due of $30,000. The purchases already paid for have been adjusted for any available discount and do not require adjustment now. Any expired discounts are also no longer available and any purchases they relate to should stay at gross amounts due. The unexpired discounts that are still available to take, the $200, should be adjusted into the carrying value of accounts payable now still outstanding, and that is the only adjustment to make.

Thus, what needs to be done is to restate accounts payable down by the $200 unexpired discounts, from $30,000 to $29,800.

Question 4

Q

A second critical event may be necessary in some cases for a liability to be recognized.

For example, in the case of product warranties, the first critical event is the issuance of the ___at the time of sale. The benefit received in the past (as of the time of sale) is the excess of sales over what they would have been without the warranty.

The second critical event is the product proving to be___

Answer

A

product warranty

defective

Question 5

Q

A company completes construction of a $400 million offshore oil platform and places it into service on January 1. State law requires that the platform be dismantled and removed at the end of its useful life, which is estimated to be 10 years. The company estimates that the cost of dismantling the platform will be $20 million. The discounted value of the liability is $9 million using the company’s credit-adjusted, risk-free rate. The company has already capitalized the $400 million construction cost of the platform. What amounts should the company record as liability and expense when the asset is placed into service?

Liability, $9,000,000; Expense, $0

Liability, $20,000,000; Expense, $20,000,000

Liability, $9,000,000; Expense, $9,000,000

Liability, $0; Expense, $0

Answer

A

Liability, $9,000,000; Expense, $0

An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as an offshore oil platform. When an ARO is recognized, an entity should capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the ARO. Subsequently, the entity should amortize the asset retirement cost to expense using a systematic and rational method over its useful life.

The ARO liability is the discounted present value of the liability, or $9,000,000. Accretion expense is recorded at the end of the accounting period, not when the asset is place into service.

Question 6

Q

The term ____refers to the amount capitalized that increases the carrying amount of the long-lived asset when a liability for an asset retirement obligation is recognized

The FASB explains that an asset retirement obligation (ARO) is reasonably estimable if

a) it is evident that the ___of the obligation is embodied in the acquisition price of the asset,
(b) an active ___exists for the transfer of the obligation, or
(c) sufficient information exists to apply an expected ___Technique.

Answer

A

“asset retirement cost”

FV

market

PV

Question 7

Q

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?

$758,300

$735,800

$750,000

$825,800

Question 8

Q

In addition to the liabilities defined above, current liabilities also include obligations that are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date.

Current liabilities may also include long-term obligations that are or will be ___by the creditor because the debtor has violated a covenant in the debt agreement that either:

a. makes the obligation callable or
b. will make the obligation callable if the violation is not ___within a specified grace period.

If such a violation exists, the related debt must be classified as current unless either:

a. the creditor has ___the violation
b. it is probable that the violation will be __within the specified grace period, if one exists.

Answer

A

callable

cured/fixed

waived

cured

Question 9

Q

A common method of acquiring short-term notes payable is a ____

Other short-term obligations may be excluded from current liabilities, but only if the enterprise:

a. intends to ___the obligation on a long-term basis and
b. demonstrates the ability to consummate the __.

Long-term liabilities are initially recorded on a ___basis, which is the sum of the future payments ___at an appropriate rate of interest.

___costs are included in the cost of the bonds and are therefore amortized over the life of the debt

Answer

A

credit line.

refinance

refinancing

present-value

Issue

Question 10

Q

Mill Co.’s trial balance included the following account balances on December 31, 20X1:

Accounts payable $15,000
Bonds payable (due 20X2) 25,000
Discount on bonds payable (due 20X2) (3,000)
Dividends payable 01/31/X2 8,000
Notes payable (due 20X3) 20,000

What amount should be included in the current liability section of Mill’s December 31, 20X1, balance sheet?

$45,000

$78,000

$65,000

$51,000

Answer

A

$45,000

Current liabilities are “obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities”.

Mill Co. should report the following current liabilities on December 31, 20X1:

Accounts payable $15,000
Bonds payable (due 20X2) $25,000
Less: Unamortized discount (3,000) 22,000
Dividends payable 8,000
Total current liabilities $45,000

Question 11

Q

Selected data pertaining to Lore Co. for the calendar year is as follows:

Net cash sales $ 3,000
Cost of goods sold 18,000
Inventory at beginning of year 6,000
Purchases 24,000
Accounts receivable at beginning of year 20,000
Accounts receivable at end of year 22,000

What was the inventory turnover for the year?

0 times
2 times
5 times
0 times

Answer

A

2.0 times

The cost of goods sold is $18,000. Beginning inventory is $6,000. Ending inventory is the beginning inventory plus purchases, less cost of goods sold, and thus ending inventory is $12,000, computed as follows:

$6,000 (Beginning inventory) + $24,000 (Purchases) – $18,000 (Cost of goods sold) = $12,000

The average of the beginning and ending inventory is $9,000, computed as follows:

$6,000 (Beginning inventory) + $12,000 (Ending inventory) = $18,000

$18,000 ÷ 2 =$9,000; thus, the inventory turnover is $18,000 ÷ $9,000, or 2 times.

Question 12

Q

On December 31, 20X1, Largo, Inc., had a $750,000 note payable outstanding, due July 31, 20X2. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing long-term bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, 20X2. In February 20X2, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 20X2. On March 3, 20X2, Largo issued its 20X1 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, 20X1, balance sheet?

$500,000

$250,000

$0

$750,000

Answer

A

$250,000

FASB ASC 470-10-45-14 states that a short-term obligation should be excluded from current liabilities if: “After the date of an enterprise’s balance sheet but before that balance sheet is issued, a long-term obligation or equity securities have been issued for the purpose of refinancing the short-term obligation on a long-term basis…”

Based on this requirement, Largo, Inc., should exclude $500,000 ($750,000 less the $250,000 prepayment) of the note payable—the amount refinanced—from current liabilities. Thus, $250,000 of the note payable, which was paid on January 12, 20X2, would be included in current liabilities on December 31, 20X1.

Question 13

Q

Lime Co.’s payroll for the month ending January 31, 20X1, is summarized as follows:

Total wages $10,000
Federal income tax withheld 1,200

All wages paid were subject to the Federal Insurance Contributions Act (FICA). FICA tax rates were 7.65% each for employee and employer. Lime remits payroll taxes on the 15th of the following month. In its financial statements for the month ending January 31, 20X1, what amounts should Lime report as total payroll tax liability and as payroll tax expense?

Liability: $1,965; Expense: $1,530

Liability: $1,200; Expense: $1,530

Liability: $2,730; Expense: $765

Liability: $1,965; Expense: $765

Answer

A

Liability: $2,730; Expense: $765

Payroll tax liability:

Federal income tax withheld $1,200
Employee FICA (7.65% x $10,000) 765
Employer FICA (7.65% x $10,000) 765
Total $2,730

Payroll tax expense:

Employer FICA (7.65% × $10,000) = $765

Question 14

Q

FASB ASC 470-10-45-14 states that a short-term obligation should be excluded from current liabilities if: “After the date of an enterprise’s balance sheet but before that balance sheet is ___, a long-term obligation or equity securities have been issued for the purpose of refinancing the short-term obligation on a long-term basis…”

Question 15

Q

(Beginning inventory) + (Purchases) – (Cost of goods sold) = ???

Answer

A

Ending Inventory

Question 16

Q

Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent’s debt-to-equity ratio?

08
48
63
52

Answer

A

1.08

The debt-to-equity ratio is the relationship between total liabilities and total equity. Thus, here we divide total liabilities by total equity.

Total equity is simply the sum of both retained earnings added to capital stock:

$150,000 + $215,000 = $365,000

Total liabilities can be computed to be $395,000, as it is the total assets less the total equity:

$760,000 – $365,000 = $395,000

To get the debt-to-equity ratio, divide the total liabilities by the total equity:

$395,000 ÷ $365,000 = 1.08

Question 17

Q

Abel Company will decommission a nuclear electric utility plant at the end of the plant’s useful life. The obligation associated with the retirement should be recorded at fair value in the period in which it is incurred. The journal entry would:

debit Expense and credit Liability.

debit Asset and credit Contra Asset.

debit Asset and credit Liability.

debit Expense and credit Contra Asset.

Answer

A

debit Asset and credit Liability.

FASB ASC 410-20-25-5 provides: “Upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability.”

Question 18

Q

Willem Co. reported the following liabilities at December 31, Year 1:

Accounts payable trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion $100,000 3,500,000
Other bank loan, matures June 30, Year 2 1,000,000

The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem’s audited financial statements were issued February 28, Year 2. What amount should Willem report as current liabilities at December 31, Year 1?

$850,000

$1,250,000

$2,250,000

$1,150,000

Answer

A

$1,250,000

Accounts payable trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion 100,000
Total $1,250,000

The refinanced loan is not included in current liabilities. FASB ASC 470-10-45-13 and 45-14, “Short-Term Obligations Expected to Be Refinanced,” addresses this refinanced loan:

“Short-term obligations arising from transactions in the normal course of business that are due in customary terms shall be classified as current liabilities. A short-term obligation shall be excluded from current liabilities only if the conditions in the following paragraph are met. Funds obtained on a long-term basis before the balance sheet date would be excluded from current assets if the obligation to be liquidated is excluded from current liabilities.

Question 19

Q

FASB ASC 410-20-25-5 provides: “Upon initial recognition of a liability for an asset retirement obligation, an entity shall ___an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the ____.”

Answer

A

capitalize , liability

Question 20

Q

FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties. One of the situations requiring disclosure is vulnerability to concentrations. Vulnerability to concentrations refers to risk due to the lack of diversification. Disclosure of such risk must be made if, based on management’s information, which of the following criteria are met?

The concentration makes the entity vulnerable to the risk of a near-term severe impact.

All of the conditions listed here exist.

It is at least reasonably possible that the events that could cause the severe impact will occur in the near term.

The concentration exists at the date of the financial statements.

Answer

A

All of the conditions listed here exist.

Vulnerability to concentrations refers to risk due to a lack of diversification. Disclosure of such risk must be made if, based on management’s information, the following criteria are met:

The concentration exists at the date of the financial statements.
The concentration makes the entity vulnerable to the risk of a near-term severe impact.
It is at least reasonably possible that the events that could cause the severe impact will occur in the near term.

Question 21

Q

Answer

A

$540

correct 20X2 Interest:

Loan 1 $ 5,000 x 12% x 10/12 = $500
Loan 2 $15,000 x 12% x 6/12 = 900
Loan 3 $ 8,000 x 12% x 8/12 = 640
Total interest expense $2,040
Recorded to date 1,500
Understatement $ 540

Question 22

Q

Wall Co. sells a product under a 2-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall’s first two years in business, it made the following sales and incurred the following warranty repair costs:
Year 1
——
Total sales $250,000
Total repair costs incurred 4,500

Total sales $300,000
Total repair costs incurred 5,000

What amount should Wall report as warranty expense for Year 2

Question 23

Q

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

12 months.

24 months.

6 months.

18 months.

Answer

A

12 months.

Current items cover a period which is the company operating cycle (6 months) or a year, whichever is longer, and a year is longer than six months. Thus, for this company, items covering a 12-month period going forward are current.

Question 24

Q

On January 1, 20X1, Sip Co. signed a 5-year contract enabling it to use a patented manufacturing process beginning in 20X1. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, Sip prepaid a sum equal to two years’ minimum annual fees. In 20X1, only minimum fees were incurred. The royalty prepayment should be reported in Sip’s December 31, 20X1, financial statements as:

a current asset and noncurrent asset.

a noncurrent asset.

a current asset and an expense.

an expense only.

Answer

A

a current asset and an expense.

The prepayment on January 1, 20X1, represented the minimum annual fees for 20X1 and 20X2. On December 31, 20X1, the 20X1 fee is an expense and the payment for the 20X2 fee is a current asset (prepaid fee).

Question 25

Q

Current items cover a period which is the company ___or a ___, whichever is longer

Answer

A

operating cycle , year

Question 26

Q

he following information pertains to Deal Corp.’s current-year cost of goods sold:

Inventory, 12/31 of the previous year $90,000
Purchases 124,000
Write-off of obsolete inventory 34,000
Inventory, 12/31 of current year 30,000

The inventory written off became obsolete due to an unexpected and unusual technological advance by a competitor. In its year-end income statement, what amount should Deal report as cost of goods sold?

$150,000

$218,000

$124,000

$184,000

Answer

A

$150,000

Deal should report $150,000 as cost of goods sold, calculated as follows:

Beginning inventory $ 90,000
Purchases 124,000
Goods available for sale $214,000
Write-off of obsolete inventory (34,000)
Ending inventory (30,000)
Cost of goods sold $150,000

Question 27

Q

Barnel Corp. owns and manages 19 apartment complexes. On signing a lease, each tenant must pay the first and last month’s rent and a $500 refundable security deposit. The security deposits are rarely refunded in total, because cleaning costs of $150 per apartment are almost always deducted. About 30% of the time, the tenants are also charged for damages to the apartment, which typically cost $100 to repair. If a 1-year lease is signed on a $900 per month apartment, what amount would Barnel report as refundable security deposit?

$1,400

$350

$320

$500

Answer

A

$500

Barnel Corp. should report the full $500 as a refundable security deposit (liability). A final determination is not possible until the lease ends. To recognize charges to be retained at the beginning of the lease would be similar to recognizing revenue or gains before they occur.

Question 28

Q

Selected information from the accounting records of Dalton Manufacturing Company is as follows:

Net sales from the current year $1,800,000
Cost of goods sold for the current year 1,200,000
Inventories at December 31 previous year 336,000
Inventories at December 31 current year 288,000

Assuming that there are 300 working days per year, what is the number of days’ sales in average inventories for the current year?

52

78

72

48

Answer

A

78

Days’ sales in inventory = (Average inventory ÷ Cost of goods sold) × Working days per year:

(($336,000 + $288,000) ÷ 2) ÷ $1,200,000 = 0.26

0.26 × 300 days = 78 days

Question 29

Q

Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:

At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme’s specifications.
Goods shipped FOB destination on December 20 were received and recorded by Acme on January 2; the invoice cost was $45,000.

In its December 31 balance sheet, what amount should Acme report as accounts payable?

$900,000

$850,000

$945,000

$895,000

Answer

A

$900,000

The $50,000 debit balance in accounts payable for goods to be manufactured should be shown in accounts receivable unless right to set off exists. The goods shipped FOB destination should not be included as a liability until received and were not included in the $850,000 balance.

$850,000 + 50,000 = $900,00

Question 30

Q

In 20X1, Chain, Inc., purchased a $1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ending December 31, 20X6, follows:

Cash surrender value (01/01/X6) $ 87,000
Cash surrender value (12/31/X6) 108,000
Annual advance premium paid (01/01/X6) 40,000

During 20X6, dividends of $6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for 20X6?

$40,000

$25,000

$13,000

$19,000

Answer

A

$19,000

Since the cash surrender value of a life insurance policy is an asset, then the insurance expense is only the premium less the increase in the asset (surrender value).

Annual advance premium payment $40,000
Less increase in cash surrender value
($108,000 - $87,000 21,000
Life insurance expense for 20X6 $19,000

Question 31

Q

Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the ___value of the policy is an asset of the enterpris

At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the ___amount of the policy over the ____at the time, as presented:

Answer

A

cash surrender

face, cash surrender value

Question 32

Q

The following data pertain to Thorne Corp. for the current calendar year:

Net income $240,000
Dividends paid on common stock 120,000
Common stock outstanding
(unchanged during year) 300,000 shares

The market price per share of Thorne’s common stock at December 31 was $12. The price-earnings ratio at December 31 was:

0 to 1.
0 to 1.
6 to 1.
0 to 1.

Answer

A

15.0 to 1.

The price-to-earnings ratio is the relationship between the stock price per share to the earnings per share. The stock price per share is given as $12, but the earnings per share will have to be computed.

Earnings per share is net income divided by common shares outstanding:

$240,000 ÷ $300,000 = 0.8

Thus, the price-to-earnings ratio is $12 ÷ 0.8, or 15 to 1.

Question 33

Q

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000. What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance sheet risk?

Risk of accounting loss: $230,000; Off-balance sheet risk: $0

Risk of accounting loss: $230,000; Off-balance sheet risk: $20,000

Risk of accounting loss: $0; Off-balance sheet risk: $0

Risk of accounting loss: $250,000; Off-balance sheet risk: $20,000

Answer

A

Risk of accounting loss: $230,000; Off-balance sheet risk: $0

FASB ASC 825-10-50-20 defines risk of accounting loss as the amount of write-off that a company would record if any party to an agreement failed to fully perform in accordance with the terms of the contract.

Off-balance sheet risk occurs when the amount of an accounting loss exceeds the amount of the associated asset or liability recorded on the balance sheet

. The maximum possible accounting loss associated with trade accounts receivable occurs if no amount of the current asset is collected. In this case,

Butler’s trade accounts receivable has a net book value of $230,000, which represents the maximum amount of potential write-off associated with trade accounts receivable. Butler would not be required to pay an amount in addition to the net book value of this asset, so there is no off-balance sheet risk.

Question 34

Q

Answer

A

4.7

Receivables turnover is defined as net credit sales divided by average receivables.

For Year 2, sales were $400,000. To get average receivables, one needs to get the net beginning and net ending receivables balances, add them, and then divide the total by 2.
Beginning balance was $130,000 – $40,000, or $90,000.
Ending balance was $100,000 – $20,000, or $80,000.
The average balance is $85,000: ($80,000 + $90,000) = $170,000; $170,000 ÷ 2 = $85,000.
The receivables turnover is thus 4.7: $400,000 ÷ $85,000 = 4.7.

Question 35

Q

The following selected financial data pertains to Alex Corporation for the current year ended December 31:

Operating income $900,000
Interest expense (100,000)
Income before income tax 800,000
Income tax expense (320,000)
Net income 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders $280,000

The times preferred dividend earned ratio is:

0 to 1
7 to 1.
4 to 1.
4 to 1.

Answer

A

2.4 to 1.

This particular ratio is the relationship to earnings available to pay preferred stock dividends, net income, divided by the preferred stock dividends total. Thus, here it is $480,000/$200,000, or 2.4 to 1.

Question 36

Q

net income, divided by the preferred stock dividends = ???

Answer

A

The times preferred dividend earned ratio

Question 37

Q

Household Magic sells electric ranges for home use. They offer a warranty to customers who purchase an electric range that covers defects in parts and manufacturing for two years after purchase. During 20X4, Household sold 1,450 electric ranges. When repairs are required, the average cost per repair $280. Household expects 4% of the electric ranges sold to need warranty repairs. By the end of 20X4, 27 electric ranges sold during 20X4 had required warranty repairs at a cost of $7,840. How much warranty expense will Household report in its 20X4 income statement?

$16,240

$7,840

$8,400

$0

Answer

A

$16,240

Total expected warranty costs for the electric ranges sold equal 1,450 units × 0.04 warranty rate = 58 units expected to require warranty repair. The average cost per repair is $280, so the total expected warranty expense is $16,240 ($280 × 58). This is the amount of warranty expense Household will report because the warranty expense needs to be recorded in the same period in which the electric ranges were sold.

Question 38

Q

On October 1 of the prior year, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1 of the prior year. Fleur’s prior-year financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1 of the current year. Fleur’s prior-year cost of goods sold for the holiday merchandise was:

understated by the difference between the note’s face amount and the note’s October 1 present value.

overstated by the difference between the note’s face amount and the note’s October 1 present value.

overstated by the difference between the note’s face amount and the note’s October 1 present value plus 11% interest for two months

understated by the difference between the note’s face amount and the note’s October 1 present value plus 16% interest for two months.

Answer

A

understated by the difference between the note’s face amount and the note’s October 1 present value.

the easier way to figure it out is to plug some numbers to the question. Let’s assume the face amount of the note is $100,000.

The stated rate 16% is higher than market rate 11%, so the note is sold for a premium, let’s say $125,000. On the day the note is sold, Fleur will receive $125,000 instead of $100,000.

The difference ($125,000 – $100,000) is to “compensate” the higher interest rate, 5% (16%-11%).

The question said “Fluer records the purchase at face amount of the note”, which mean, in our case, $100,000. That $100,000 should have been $125,000 (the present value of the note) because that is true cost of the note of $100,000 in 16%.

Therefore, purchase is under-valued for $25,000 (in our case), which is the difference between the face value of the note ($100,000) & the present value of the note ($125,000).

Since, COGS=Beginning Bal + purchase – Ending Bal, COGS will absorb the undervalued difference.

Question 39

Q

On October 1 of the prior year, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1 of the prior year. Fleur’s prior-year financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1 of the current year. As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, yes

Prior-year 12/31 retained earnings, yes; Prior-year 12/31 interest payable, no

Prior-year 12/31 retained earnings, yes; Prior-year 12/31 interest payable, yes

Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, no

Answer

A

Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, yes

The cost of the merchandise purchased (and sold by the end of the year) should have been based on the present value of the note used to pay for them, not the face amount. Since the note paid a higher rate of interest than what was required as a yield, the note would have a premium, a higher value than face.

Thus, the note’s present value was higher than its face amount, and the higher value should have been added to purchase cost and moved to cost of goods sold. The lower value that was used for purchase cost understated the cost of goods sold. If cost of goods sold was understated, then net income was wrong and retained earnings was not correct.

Question 40

Q

Answer

A

$2,170,000

The items shipped to the company on December 22 shipping point should be added to inventory, even though the items were lost. The title to the goods transferred at the time the common carrier picked them up and the goods were part of the company inventory upon receipt by the common carrier. (The common carrier owes the company the price of the goods lost in transit, but that is a separate legal matter.)

The items that were returned to the vendor in the prior year (with the vendor’s approval) should be taken out of purchases and removed from the payables for the year.

The goods shipped FOB destination that did not arrive until January were not the company inventory until the title passed in January (upon arrival), so they should not be added to payables.

Thus, the end-of-year payables should be $2,170,000:

$2,200,000 + $40,000 – $70,000 = $2,170,000

Question 41

Q

XYZ Corporation pays an insurance premium of $5,000 on a whole life policy on the life of its president. The cash surrender value of the policy increases from $22,000 to $25,000 during the period covered. Which of the following is included in the entry to record the payment of the premium?

Cash surrender value of life insurance is debited for $5,000

Life insurance expense is debited for $2,000.

Life insurance expense is credited for $3,000.

Cash is debited for $50,000.

Answer

A

Life insurance expense is debited for $2,000.

Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is the amount of such premiums paid less the increase in cash surrender value during the period.

Question 42

Q

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

$264,000

$238,000

$280,000

$306,000

Answer

A

$264,000

The amount is $264,000, computed as follows:

Total obligation $257,000
Add: undiscounted cash flow 68,000*
Accretion expense 26,000
D_educt: payment (87,000)_
$264,000

* The original undiscounted cash flow of $110,000 should be adjusted to the discounted estimate.

Question 43

Q

Answer

A

1.40

The acid-test or quick ratio divides total cash, accounts receivables, and short-term investments (if relevant) by total current liabilities. Thus, at the end of the year the acid-test ratio will be 1.40, computed as follows:

(Cash + Accounts receivable + Short-term investments) ÷ Total current liabilities

($410 + $2,194 + $0) ÷ $1,860

$2,604 ÷ $1,860 = 1.40

Question 44

Q

Current assets used in the ___include:

Cash and cash equivalents

Marketable securities

Accounts receivable

_____include holdings such as stocks, bonds, and other securities that are bought and sold daily.

Answer

A

quick ratio

Question 45

Q

Question 46

Q

For the week ended February 14, 20X3, Valentino & Sons paid recorded total salaries and wages expense of $50,000. The federal income taxes withheld from the employee paychecks were $8,300. FICA taxes withheld from the employee paychecks were $3,500. Employees had voluntary deductions of $1,200 withheld as well. Combined federal and state unemployment taxes are charged at a rate of 4% on qualifying salaries and wages and, of the $50,000 total salaries and wages expense, $21,000 qualified for unemployment taxes. All salaries and wages paid were subject to FICA tax rates of 7% each for employer and employee. For the week ended February 14, 20X3, how much cash will be paid to Valentino & Sons employees?

$32,600

$37,000

$33,500

$38,200

Answer

A

$37,000

The total to be received by the employees in their paychecks on February 14, 20X3, is computed as follows. (Note: Unemployment is paid by the employer only; it is not withheld from salaries and wages.)

Total salaries and wages $50,000
Federal income taxes withheld (8,300)
FICA taxes withheld (3,500)
Voluntary deductions (1,200)
Total $37,000

Question 47

Q

North Bank is analyzing Belle Corp.’s financial statements for a possible extension of credit. Belle’s quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle’s creditworthiness?

Belle may need to sell its available-for-sale debt investments to meet its current obligations.

Increasing market prices for Belle’s inventory may adversely affect the ratio.

Fluctuating market prices of short-term investments may adversely affect the ratio.

Belle may need to liquidate its inventory to meet its long-term obligations.

Answer

A

Fluctuating market prices of short-term investments may adversely affect the ratio.

A creditor relying on the quick ratio would need to be aware of the quick ratio’s risks. The quick ratio is based on quick assets, such as short-term investments, that are measured at fair value, a value that could decline quickly.

Question 48

Q

Brite Corp. had the following liabilities on December 31, 20X1:

Accounts payable $ 55,000
Unsecured notes, 8% (due 7-1-X2) 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred income tax liability 25,000
Senior bonds, 7% (due 3-31-X2) 1,000,000

The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite’s legal counsel expects the suit to be settled in 20X3, and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in 20X3. What amount should Brite report in its December 31, 20X1, balance sheet for current liabilities?

$1,515,000

$515,000

$1,490,000

$940,000

Answer

A

$1,490,000

The contingent liability will not be settled until 20X3; therefore, the liability is noncurrent. All deferred income tax liabilities are classified as noncurrent. Brite Corp.’s current liabilities on December 31, 20X1, would include:

Accounts payable $ 55,000
Unsecured notes, 8% (due 7-1-X2) 400,000
Accrued expenses 35,000
Senior bonds, 7% (due 3-31-X2) 1,000,000
Total $1,490,000

Question 49

Q

Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a $2 per room, per night occupancy tax. Sales taxes for each month are due at the end of the following month, and occupancy taxes are due 15 days after the end of each calendar quarter. On January 3, 20X2, Hudson paid its November 20X1 sales tax and its fourth quarter 20X1 occupancy taxes. Additional information pertaining to Hudson’s operations is:
Room Room
Rentals__ Nights
October 20X1 $100,000 1,100
November 20X1 110,000 1,200
December 20X1 150,000 1,800

What amounts should Hudson report as sales taxes payable and occupancy taxes payable in its December 31, 20X1, balance sheet?

Sales taxes: $39,000; Occupancy taxes: $6,000

Sales taxes: $39,000; Occupancy taxes: $8,200

Sales taxes: $54,000; Occupancy taxes: $6,000

Sales taxes: $54,000; Occupancy taxes: $8,200

Answer

A

Sales taxes: $39,000; Occupancy taxes: $8,200

Since Hudson paid the November sales tax on January 3, sales tax for both November and December are payable on December 31:

Sales taxes payable on December 31, 20X1:
November sales $110,000 x .15 = $16,500
December sales $150,000 x .15 = 22,500
Total $39,000

Occupancy taxes payable on December 31, 20X1:

Taxes = Room nights for 4th quarter x $2
= (1,100 + 1,200 + 1,800) x $2
= 4,100 x $2
= $8,200

Question 50

Q

In its 20X2 financial statements, Cris Co. reported interest expense of $85,000 in its income statement and cash paid for interest of $68,000 in its cash flow statement. There was no prepaid interest or interest capitalization either at the beginning or end of 20X2. Accrued interest on December 31, 20X1, was $15,000. What amount should Cris report as accrued interest payable in its December 31, 20X2, balance sheet?

$15,000

$32,000

$17,000

$2,000

Answer

A

$32,000

The interest payable on January 1 was last year’s expense, but was paid this year. Only $53,000 of this year’s expense was paid this year, leaving $32,000.

Interest expense for 20X2 $85,000
Less: Interest paid in 20X2 - 68,000

Increase in accrued interest $17,000
Add: Dec. 31, 20X1, accrued bal. 15,000

Accrued interest on December 31, 20X2 $32,000

Question 51

Q

Cali, Inc., had a $4,000,000 note payable due on March 15 of the current year. On January 28 of the current year, before the issuance of its prior-year financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its prior-year December 31 financial statements?

As a current liability, with no separate disclosure required

As a noncurrent liability, with separate disclosure of the note refinancing

As a current liability, with separate disclosure of the note refinancing

As a noncurrent liability, with no separate disclosure required

Answer

A

As a noncurrent liability, with separate disclosure of the note refinancing

When a debt that is due within the next 12 months is refinanced (repaid with the proceeds of a long-term debt) after the balance sheet date, but prior to balance sheet issuance, the debt that was due in 12 months can be classified as a noncurrent liability, as long as the refinance was intended by management as of the balance sheet date. A disclosure of the details is required in the footnotes to the balance sheet.

Question 52

Q

Topic 275 of the FASB’s Accounting Standards Codification is entitled “Risks and Uncertainties.” The types of risks and uncertainties discussed in the topic are:

significant concentrations in certain aspects of the entity’s operations.

All of the answer choices are correct.

the use of estimates in the preparation of the entity’s financial statements.

the nature of the entity’s operations.

Answer

A

All of the answer choices are correct.

The disclosures discussed by this topic focuses on risks and uncertainties that could significantly affect amounts reported in the near-term. Near-term is defined as a period not to exceed one year from the date of the financial statements. (FASB ASC 275-10-20)

The types of risks and uncertainties discussed in the topic are:

the nature of the entity’s operations,
the use of estimates in the preparation of the entity’s financial statements, and
significant concentrations in certain aspects of the entity’s operations.

Question 53

Q

Rosemary Corporation had current assets of $266,000, noncurrent assets of $632,000, capital stock of $189,000, and retained earnings of $227,000. What was Rosemary’s debt-to-equity ratio?

16
53
12
46

Answer

A

1.16

The debt-to-equity ratio is the relationship between total liabilities and total equity. Thus, here we divide total liabilities by total equity. Total equity is simply the sum of retained earnings and capital stock:

$189,000 + $227,000 = $416,000

Total liabilities can be computed to be $482,000, following the accounting equation (Assets = Liabilities + Stockholders’ equity), as it is the total assets less the total equity:

($266,000 + 632,000) – $416,000 = $482,000

To get the debt-to-equity ratio, divide the total liabilities by the total equity:

$482,000 ÷ $416,000 = 1.16

Question 54

Q

Clark Co.’s advertising expense account had a balance of $146,000 on December 31, 20X1, before any necessary year-end adjustment relating to the following:

Included in the $146,000 is the $15,000 cost of printing catalogs for a sales promotional campaign in January 20X2.

Radio advertisements broadcast during December 20X1 were billed to Clark on January 2, 20X2. Clark paid the $9,000 invoice on January 11, 20X2.

What amount should Clark report as advertising expense in its income statement for the year ending December 31, 20X1?

$131,000

$155,000

$122,000

$140,000

Question 55

Q

Coriander Corporation acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $237,000 and discounted cash flow estimates of $153,000. Coriander reported a total asset retirement obligation of $196,000 in last year’s financial statements. Coriander paid $102,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $61,000. What amount should Coriander report for the asset retirement obligation in this year’s balance sheet?

$563,000

$308,000

$349,000

$257,000

Answer

A

$308,000

An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. An entity should originally recognize the fair value of an ARO in the period in which it is incurred if a reasonable estimate of fair value can be made. The amount is $308,000, computed as follows:

Total obligation $196,000
Add: Discounted cash flow 153,000*
Accretion expense 61,000
Deduct: Payment (102,000)
$308,000

* The original undiscounted cash flow of $237,000 should be adjusted to the discounted cash flows estimate.

Question 56

Q

Answer

A

$28,000

The amounts earned and payable are based on the fixed salaries and commission rights accrued for the period. To the extent that amounts in excess of the fixed salaries paid by the end of the month are earned, then they are a payable at the end of the month until paid.

Salesperson A has earned a commission of $8,000 ($200,000 × 0.04), Salesperson B has earned a commission of $24,000 ($400,000 × 0.06), and Salesperson C has earned a $36.000 commission (600,000 × 0.06).

Salesperson A has already been paid more than the commission and is not due any more.
Salesperson B was paid $10,000 less than the commission earned and is due a $10,000 commission payable ($24,000 − $14,000 salary).
Salesperson C is due $18,000 more as a commission over the salary already paid ($36,000 − $18,000 salary).

Thus, the commissions due and payable at the end of the month are $28,000 ($10,000 for Salesperson B and $18,000 for Salesperson C).

Question 57

Q

On December 31 of the previous and current year, Taft Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information for the current year follows:

Stockholders’ equity at 12/31 $4,500,000
Net income year ended 12/31 1,200,000
Dividend on preferred stock year ended 12/31 300,000
Market price per share of common stock on 12/31 72

The price-earnings ratio on common stock at December 31 was:

9 to 1.

8 to 1.

6 to 1.

5 to 1.

Answer

A

8 to 1.

The price-earnings ratio is P/E = Stock price ÷ EPS (earnings per share).

The net earnings per common share is $9:

($1,200,000 – $300,000) ÷ 100,000 = $9

Price-earnings ratio:

$72 ÷ $9 = $8

Question 58

Q

On January 1, 2X01, Big Oil placed in service an offshore oil platform that it constructed. Big Oil is legally required to dismantle and remove the platform at the end of its 10-year estimated life. Using expected present value techniques, Big Oil recorded an estimated asset retirement obligation (ARO) of $100,000 on January 1, 2X01. The ARO measurements on January 1, 2X01, are as follows:

Expected cash flow before inflation: $190,000
Expected cash flow adjusted for inflation and market risk: $220,000
Present value using credit-adjusted risk-free rate: $100,000

Assuming that the ARO is settled on December 31, 2X10, for $170,000, what is the gain or loss on the settlement?

No gain or loss

$70,000 loss

$50,000 gain

$20,000 gain

Answer

A

$50,000 gain

The gain or loss on the settlement of the ARO liability is the difference between the ARO liability on settlement date of $220,000 and the actual settlement cost of $170,000.

FASB ASC 410-20-40-2 requires the initial liability of $100,000 to be increased to the expected cash flow adjusted for market risk and inflation. Since the expected cash payment for the ARO liability was $220,000, a gain on settlement of $50,000 results.

Note: Accounting for ARO liability is similar to the treatment of bonds payable. The liability is initially recorded at its present value and is amortized. Amortization is recorded with a debit to accretion expense and a credit to ARO liability.

Question 59

Q

FASB ASC 410-20-40-2 requires the ARO Liability to be increased to the expected cash flow adjusted for the ____ risk and ___.

Answer

A

market

inflation

Question 60

Q

As of December 1, Year 2, a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 3-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet (statement of financial position) on December 31, Year 2, if no debt repayments were made in December?

Current liabilities of $500,000; long-term liabilities of $800,000

Current liabilities of $400,000; long-term liabilities of $900,000

Current liabilities of $1,000,000; long-term liabilities of $1,050,000

Current liabilities of $500,000; long-term liabilities of $1,550,000

Answer

A

Current liabilities of $400,000; long-term liabilities of $900,000

Question 61

Q

At December 30 of the current year, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Current ratio decreased and quick ratio increased

Current ratio increased and quick ratio no effect

Current ratio decreased and quick ratio no effect

Current ratio increased and quick ratio decreased

Answer

A

Current ratio increased and quick ratio decreased

Question 62

Q

Answer

A

Employer’s payroll taxes do not include amounts withheld from employee pay. Employer payroll taxes include:

the employer’s matching share of FICA taxes ($80,000 × 0.07 = $5,600) and

unemployment taxes ($20,000 × 0.03 = $600),

for a total of $6,200 ($5,600 + $600).

Question 63

Q

Under East Co.’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, Year 2, is as follows:

Prepaid insurance at December 31, Year 1 $105,000
Charges to insurance expense during Year 2
(including a year-end adjustment of $17,500) 437,500
Prepaid insurance at December 31, Year 2 122,500

What was the total amount of insurance premiums paid by East during Year 2?

$332,500

$437,500

$455,000

$420,000

Answer

A

To answer this question, one needs to convert from the accrual insurance expense to cash paid for insurance. Basically, add the insurance expense for the year ($437,500) to the increase in prepaid insurance during the year (from $105,000 to $122,500, a $17,500 increase):

$437,500 + $17,500 = $455,000

Question 64

Q

On December 31, 20X1, Paxton Co. had a note payable due on August 1, 20X2. On January 20, 20X2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, 20X2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, 20X2. How should Paxton classify the note on its balance sheet at December 31, 20X1?

As a long-term liability because no violation of any provision in the financing agreement exists

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

As a current liability because the financing agreement was signed after the balance sheet date

As a long-term liability because the agreement does not expire within one year

Answer

A

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

Without the agreement to refinance the note payable, the note must be paid within the following year. Consequently, the note payable is a current liability.

Answer 60

A

$1,600

Interest has accrued for 3 months (October, November, and December) at the end of 20X8. The computation for the interest payable is $128,000 × 0.05 × 3/12 = $1,600.

Answer 61

A

July 15, year 2

Items in transit at month-end that were shipped F.O.B. shipping point should be included on the balance sheet of the buyer as title passed to the buyer at the shipping dock of the seller.

Items in transit at month-end that were shipped F.O.B. destination should be included on the balance sheet of the seller, as title does not pass to the buyer until the items reach their destination (i.e., the buyer’s receiving dock).

Therefore, Archer should record the liability for the machine on July 15, year 2, the day title passed to Archer.

Answer 62

A

$88,000

Revenues recognized at the point of sale result in the recognition of an asset and a credit to a revenue account.

Allowances for various unresolved items at the point of sale must also be recognized at the point of sale to complete the matching process for the income statement, including warranty costs.

Hill would initially recognize $100,000 (1,000 × $100) in warranty liabilities at the point of sale, and that amount would be reduced for the $12,000 incurred in year 1, leaving a balance of $88,000 in the estimated liability under warranty account at the end of the first year.

Answer 63

A

$280,000

.The printing cost for the January catalogues is a 20X2 expense and should be deferred. The cost of the December radio spots was incurred in 20X1 (although paid in 20X2) and should be accrued:

Unadjusted advertising expense balance $292,500
Deduct prepaid advertising (catalogs) (30,000)
Add cost of December radio spots 17,500
Adjusted balance of advertising expense $280,000

Answer 64

A

$50,000

The technological advance applies only to 20X2 production. Therefore:

20X2 Warranty expense = 0.01 × $5,000,000 = $50,000

Answer 65

A

Hart: $10,000; Maxx: $7,827

FASB ASC 310 provides that notes receivable stating either no interest or an unreasonably low interest rate be reported at their present value computed using an appropriate interest rate if the original maturity date of the note exceeds one year.

The Hart note would be reported at its face amount of $10,000 since it matures within the current 1-year accounting period.

The correct value for reporting the Maxx note is:
Present value of Maxx note
= Maturity amount x Present value factor
= ($10,000 + ($10,000 x 3% x 5 years)) x .6806
= ($10,000 + $1,500) x .6806
= $7,827

Answer 66

A

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

The accounts payable will be paid with current assets, so it is considered a current liability.

Answer 67

A

$8,000

The payable has been accruing since July at the rate of $2,000 per month ($24,000 ÷ 12) and is at $8,000 when paid.

Answer 68

A

Expensed computer software costs

Disclosure must include the nature of the uncertainty and an indication that it is at least reasonably possible that this change in the estimate will occur in the near term. (FASB ASC 275-10-50-8)

Examples of items that might require disclosure under this topic include the following (FASB ASC 275-10-50-15):

Inventory subject to rapid technological obsolescence

Specialized equipment subject to technological obsolescence

Environmental remediation-related obligations

Contingent liabilities for obligations of other entities

Amounts reported for long-term obligations, such as amounts reported for pension and postemployment benefits

Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets

Answer 69

A

Inventory

specalized equipment

environmental

continegnent

pension/opeb

recoverable

Answer 70

A

$54,340

The total expense to Valentino & Sons of the February 14, 20X3, is computed as follows:

Salary and wage expense $50,000
Unemployment taxes ($21,000 × 4%) 840
Employer FICA ($50,000 × 7%) 3,500
Total $54,340

The total expense includes the total amount earned by employees, $50,000, and the taxes to be paid by the employer, $4,340 (which consist of the employer’s portion of FICA and all the unemployment tax). The $8,300 in income taxes withheld and $3,500 of FICA taxes withheld are not expenses to the company. They are paid by the employee. Valentino & Sons only serves as a pass-through from the employee to the taxing authorities.

Answer 71

A

8.4

The cost of goods sold is $272,000. Beginning inventory is $37,000. Ending inventory is the beginning inventory plus purchases, less cost of goods sold, and thus ending inventory is $28,000, computed as follows:

$37,000 (Beginning inventory) + $263,000 (Purchases) – $272,000 (Cost of goods sold) = $28,000 (Ending inventory)

The average of the beginning and ending inventory is $32,500, computed as follows:

$37,000 (Beginning inventory) + $28,000 (Ending inventory) = $65,000

$65,000 ÷ 2 =$32,500; thus, the inventory turnover is $272,000 ÷ $32,500, or 8.4 times (rounded).

Answer 72

A

$100,000

FASB ASC 470-10-45-14 requires that short-term obligations be reported as long-term liabilities if a company (1) intends to refinance the short-term obligation on a long-term basis and (2) demonstrates the ability to refinance it a long-term basis.

The intent is stated in the problem. Verona’s issuance of common stock for $400,000 before the statements were issued demonstrates the ability to refinance $400,000 of the short-term obligations on a long-term basis.

The balance of the obligation ($100,000) must be reported as a current liability.

Answer 73

A

Dividend per share payout ratio as numerator and earnings per share not used

Dividends per share is the dividends paid out divided by total shares. Whereas the dividend payout ratio would be included in the numerator, the earnings per share is not involved, only the number of shares outstanding.

Answer 74

A

The acid-test or quick ratio divides total cash and accounts receivable over total current liabilities. Thus, the acid-test ratio will be, at the end of the year, 1.5, computed as follows:

$300 + $1,200 = $1,500

$1,500 ÷ $1,000 = 1.5

Answer 75

A

Defensive-interval ratio only

The defensive-interval ratio is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable). Thus, it is computed by dividing total quick assets by average daily cash expenditures. This is a liquidity measure, as it assesses how long a company can continue to keep up with its debts.

Answer 76

A

The operating cycle is the approximate time from investment in inventory to receipt of cash from sales of inventory. The operating cycle is the time that inventory is kept prior to sale added to the time from sale to cash collection (days in accounts receivables).

Thus, the company’s operating cycle is simply the total of both of these times given in the question: days’ sales in inventory plus days’ sales in accounts receivable:

61 days + 33 days = 94 days

Answer 77

A

$8,400

Total expected warranty costs for the electric ranges sold equal 1,450 units × 0.04 warranty rate = 58 units expected to require warranty repair. The average cost per repair is $280, so the total expected warranty expense is $16,240 ($280 × 58). Since Household has already paid $7,840 in warranty repairs during 20X4, the amount to be recorded as warranty liability at the end of 20X4 is $16,240 – $7,840 = $8,400.

Answer 78

A

$10,000

Changes in the value of a liability for an asset retirement obligation must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be:

$100,000 × 0.10 = $10,000

Answer 79

A

The temporary idling of a long-lived asset

Within the context of FASB ASC 410-10-20, the term “retirement” is defined as the other-than-temporary removal of a long-lived asset from service. It includes the sale, abandonment, recycling, or disposal in some other manner, but does not encompass the temporary idling of a long-lived asset.

Answer 80

A

$6,750,000

The note does not compound the interest due; the payment here is a simple interest computation. The total interest is the principal multiplied by the rate, multiplied by the total time outstanding:

$4,500,000 × 0.10 × 5 years = $2,250,000

Add this to the principal of $4,500,000 to get the total payment of principal and interest:

$4,500,000 + $2,250,000 = $6,750,000

Answer 81

A

Increase in prepaid property taxes, 33-1/3%; Decrease in property taxes payable, 66-2/3%

The payment of property taxes, when made, will be a payment covering 6 months’ accrual. The payment will be made in the middle of the 6-month period covered, and thus some of the expense will have already accrued.

The 6 months covered by the payment are July, August, September, October, November, and December, and the payment is made on November 1. Thus, the payment is two-thirds (4 out of 6 months) for property tax expenses already accrued and payable (lowering the payable) and one-third for expenses yet to accrue (2 out of 6 months, prepaid for November and December).

Answer 82

A

$834.84

Smith will have the 6.2% tax withheld on $3,700 ($118,000 – $114,300) of her salary and Jones will have the tax withheld on $5,090 ($118,000 – $112,910) of his salary.

This amount totals $544.98 (($3,700 + $5,090) × 0.062). Smith and Jones will pay the 1.45% tax (Medicare) on the full amount of their salaries for the current pay period. This amount totals $289.86 (($10,240 + $9,750) × 0.0145).

The total to be withheld from the salaries of Smith and Jones is $834.84 ($544.98 + $289.86).

Answer 83

A

$20,000 expense

The estimated cost to dismantle the depot and remove the underground storage tanks would be expensed during the 10 years the assets were being used. Only the annual amortization of the estimated costs ($150,000 ÷ 10) plus the additional, unexpected expense $5,000 would be recognized at the end of the assets’ lives.

Answer 84

A

decreasing annual insurance expense.

Answer 85

A

$22,500

The interest expense is:

Principal × Interest rate × Time

In this case, it is:

$1,000,000 × .09 × .25 = $22,500

Answer 86

A

$13,000

Current maturities of long-term debt on December 31, 20X1, include the following:

14-1/2% term note (due 20X2) $ 3,000
8% note (1/11th of $110,000) 10,000
Total $13,000

Note: The interest due on the 8% note on December 31, 20X2, is classified as interest payable; this amount is not part of the current maturities of the long-term debt.

The 11-1/8% term note and 7% debentures are of course, noncurrent (due 20X5 and 20X6, respectively).

Answer 87

A

$1,000,000

One can use the ratios given along with some algebra to solve for average total assets. Accounts receivables turnover is the multiple of accounts receivable to get the sales total. The receivables turned over 10 times during the year, so the sales were 10 times the receivables, or $2,000,000 (10 × $200,000).

Total asset turnover is the multiple of total assets to get sales. Since the total asset turnover is 2, the sales were twice the level of total assets, so dividing sales in half results in total assets of $1,000,000.

Asset Turnover = Sales / Net Assets

Answer 88

A

$22,000

The last pay period consisted of 8 days (June 21–25 plus June 28–30). Therefore, the payroll accrual would be for 8/10 days, or $8,000. The entry would be to debit Salaries Expense and credit Salaries Payable, making the total month-end amount in the Salaries Expense account $22,000 ($14,000 + $8,000).

Answer 89

A

$6,020

An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant.

After the initial measurement, an entity should recognize period-to-period changes in the liability for an ARO resulting from (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

Changes in the value of a liability for an ARO must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be:

$86,000 × 0.07 = $6,020

Answer 90

A

$93,000

The entry to accomplish all of these changes at one time would include an increase to prepaid expenses with a $5,000 debit, and a $100,000 debit to operating expenses. One of the credits would be needed to increase the accrued liabilities by $12,000 and the other remaining credit to finish the entry would be to cash for $5,000 + $100,000 − $12,000, or $93,000.

Answer 91

A

Both of the conditions described must be present.

Disclosure of these significant estimates must be made when both of the following conditions are present (FASB ASC 275-10-50-8):

It is at least reasonably possible that the estimate of the effect on the financial statements will change in the near term due to one or more future confirming events (reasonably possible is the chance is more than remote but less than likely).

The effect of the change would be material.

Answer 92

A

future confirming events

material

Answer 93

A

in the period incurred.

Royalty expenses should be recognized in the income statement as they accrue, as incurred.

Answer 94

A

The times interest earned ratio is income before interest expenses and taxes divided by interest expense. In this question, that would be the operating income prior to either of those expenses, or $900,000 divided by the interest expense of $100,000, giving an answer of 9.0 to 1.

Answer 95

A

Earngs before interest & Taxes / Interest Expense

Answer 96

A

Debt-to-equity ratio decreased to 12%.

The information presented is at the end of the year. The option exercise occurred during the year, resulting in these numbers.

The ratio after the transaction is:

$60,000 ÷ $500,000 = 0.12 (12%)

Answer 97

A

Understated accrued liabilities and overstated retained earnings

The insurance costs relate to inventory sold in 20X1. Therefore, the unpaid cost should have been in accounts payable at December 31, 20X1, but was not.

Likewise, the costs should have been included in cost of goods sold for 20X1 because the inventory was sold in that period. Therefore, expenses were understated, resulting in an overstatement of 20X1 net income and of the December 31, 20X1, retained earnings.

The unrecorded accounts payable means that liabilities were understated at December 31, 20X1.

Answer 98

A

43.6 days

cost of goods sold is $272,000. Beginning inventory is $37,000. Ending inventory is the beginning inventory plus purchases, less cost of goods sold, and thus ending inventory is $28,000, computed as follows:

$37,000 (Beginning inventory) + $263,000 (Purchases) – $272,000 (Cost of goods sold) = $28,000

The average of the beginning and ending inventory is $32,500, computed as follows:

$37,000 (Beginning inventory) + $28,000 (Ending inventory) = $65,000

$65,000 ÷ 2 =$32,500; the inventory turnover is $272,000 ÷ $32,500, or 8.4 times

Finally, 365 days ÷ 8.4 = 43.5 days. It can also be computed as (Average Inventory ÷ Cost of Goods Sold) × Days per year: ($32,500 ÷ $272,000) × 365 = 43.6 days.

Answer 99

A

a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time.

At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time, as presented:

Answer 100

A

$182,000

Current liabilities are those obligations that will be settled by the use of current assets. The items in the list that will be settled by the use of current assets (cash) are accounts payable, 6% bonds payable, payroll liabilities, and accrued vacation liabilities, for a total of $182,000 ($31,000 + $126,000 + $11,000 + $14,000).

the notes payable are not due until 20X9, and the unearned revenue will not be earned until 20X8. Even though the 4% bonds are due within the next year, they are not included in current liabilities because the related bond sinking is classified as a noncurrent asset. The 4% bonds classification in the balance sheet needs to be the same (current vs. noncurrent) as the bond sinking fund.

Answer 101

A

$60,000..

To solve this problem, work backwards. If net income after the bonus and the taxes was $360,000, then (taking the tax expense back first) income before taxes was $600,000 (using the after-tax back to pre-tax conversion formula, $360,000 ÷ 0.6 = $600,000, 0.6 = 1 less the tax rate of 40%).

Now, the bonus is equal to 10% of the income after deducting the bonus, which would be the income before taxes of $600,000. Thus the bonus is 0.10 × $600,000, or $60,000.

Answer 102

A

Selectivity

One of the purposes of financial statements is to provide information to help users to predict the reporting entity’s future cash flows and results of operations. This assessment depends, to some degree, on the users’ knowledge and assessment of the risks and uncertainties involving the entity’s operations. Disclosure of these risks and uncertainties is a critical component of the user’s process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties.

An important element of this topic is selectivity. Selectivity involves the specified criteria that serve to screen the risks and uncertainties encountered by every entity. The objective is to restrict required disclosures to matters that are significant to that specific entity.

Answer 103

A

When a debt that is due within the next 12 months is refinanced (repaid with the proceeds of a long-term debt) after the balance sheet date, but prior to balance sheet issuance, the debt that was due within 12 months can be classified as a noncurrent liability, as long as the refinance was intended by management as of the balance sheet date. A disclosure of the details is required in the footnotes to the balance sheet.

These rules are applicable as long as the agreement from whence the refinancing funds are received has terms that are readily determinable, the company that is the source of the refinancing funds is capable of honoring its agreement, and no violations of the agreement have occurred. Since both of the notes payable were refinanced long term prior to the issuance of the balance sheet, both can be reclassified as long term, and so nothing remains as short term.

Answer 104

A

the amount of such premiums paid less the increase in cash surrender value during the period.

Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is the amount of such premiums paid less the increase in cash surrender value during the period.

Answer 105

A

$510,000

The 100,000 of checks you reverse is because Lyle really hasn’t paid that money yet, they didn’t go out the door until the following year. Thus at the close of they year Lyle company still really owed that money. A/P was understated by the value of those checks. Think about paying your cable bill- if you haven’t mailed it yet, you still owe it, right?

Answer 106

A

Gain of Life Insurance Coverage is credited for $75,000.

At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time. In this case, the entry would b

Answer 107

A

$450,000

Commission expense for the year ended March 31 should be 3% of the annual sales of $15,000,000, or $450,000. Information regarding the amount of advances is not needed to solve this question.

Answer 108

A

in which the obligation is incurred if a reasonable estimate of fair value can be made.

If a reasonable estimate of fair value can be made, an entity should recognize the fair value of an asset retirement obligation in the period in which the obligation is incurred. If the estimate cannot be made, the liability should be recognized in the first period in which a reasonable estimate can be made.

Answer 109

A

Expensed immediately

Organization costs are start-up costs and are required to be expensed when incurred.

Answer 110

A

$286,000

The ending liability balance must be found, so start with the beginning balance of $500,000. Add to this any receipts, since these are additional liabilities owed to the customers. The payments of taxes lower the liability, so subtract them; they are the fulfillment of the requirements. Add the interest, since these are like additional receipts from the customers, but subtract the 10% fee of $40,000 × 0.10, which is $4,000.

Thus, $500,000 + $1,200,000 - $1,450,000 + $40,000 - $4,000, for a final balance of $286,000.

Answer 111

A

Costs of start-up activities, including organization costs, should be expensed as incurred.

An asset can be recorded only when the business is certain that it will derive a benefit from the expenditure.

Certain expenditures for research and development, advertising, training, start-up and pre-operating activities, relocation or rearrangement, and goodwill are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain.

Consequently, expenditures for start-up costs should be expensed as incurred.

Answer 112

A

a debit to the carrying value of the related asset.

While a company records the legal liability (a credit), it also records the same amount as an increase (a debit) in the carrying value of the related asse

Answer 113

A

$5,000 in sales tax payable

Expenses are accrued (expensed) based on the matching principle. The matching principle states that the accrual basis of accounting correctly matches the revenue from the sale of goods with the historical cost of the inventory sold, the salesperson’s salary, and other applicable costs and expenses such as sales tax.

Beginning sales tax payable $ 4,500
Additional sales tax due ($800,000 × 5%) 40,000
Sales tax remitted to the state (39,500)
Current-year sales tax payable balance $ 5,000

Answer 114

A

3.7

Receivables turnover is defined as net credit sales divided by average net receivables. For 20X4, sales were $879,000. To get average receivables, one needs to get the net beginning and net ending receivables balances, add them, and then divide the total by 2.

Net beginning balance was $273,000 – $17,000, or $256,000.
Net ending balance was $249,000 – $25,000, or $224,000.
The average net balance is $240,000: ($256,000 + $224,000) = $480,000; $480,000 ÷ 2 = $240,000.
The receivables turnover is thus 3.7: $879,000 ÷ $240,000 = 3.7 (rounded).

Answer 115

A

disclosure.

One of the purposes of financial statements is to provide information to help users predict the reporting entity’s future cash flows and results of operations.

This assessment depends, to some degree, on the users’ knowledge and assessment of the risks and uncertainties involving the entity’s operations.

Disclosure of these risks and uncertainties is a critical component of the user’s process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties.

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Section 2G - Payables/Accrued Exp Flashcards

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