Section 2G - Payables/Accrued Exp

Question 1

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

1. Accounting and legal fees $ 25,000
2. Freight-in 175,000
3. Freight-out 160,000
4. Officers salaries 150,000
5. Insurance 85,000
6. 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 1

$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

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 2

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

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 3

$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

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 4

product warranty

defective

Question 5

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 5

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

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

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

Answer 6

“asset retirement cost”

FV

market

PV

Question 7

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

Answer 7

$758,300

Question 8

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 8

callable

cured/fixed

waived

cured

Question 9

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 9

credit line.

refinance

refinancing

present-value

Issue

Question 10

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 10

$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

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?

2. 0 times
3. 2 times
4. 5 times
5. 0 times

Answer 11

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

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 12

$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

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

1. Total wages $10,000
2. 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 13

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

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…”

Answer 14

issued

Question 15

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

Answer 15

Ending Inventory

Question 16

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?

1. 08
2. 48
3. 63
4. 52

Answer 16

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

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 17

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

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 18

$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

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 19

capitalize , liability

Question 20

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 20

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

Answer 21

$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

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

Answer 22

$6,000

v

Question 23

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 23

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

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 24

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

Current items cover a period which is the company \_\_\_or a \_\_\_, whichever is longer

Answer 25

operating cycle , year

Question 26

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 26

$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

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 27

$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

Selected information from the accounting records of Dalton Manufacturing Company is as follows: 1. Net sales from the current year $1,800,000 2. Cost of goods sold for the current year 1,200,000 3. Inventories at December 31 previous year 336,000 4. 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 28

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

Acme Co.'s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information: 1. 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. 2. 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 29

$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

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 30

$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

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 31

cash surrender face, cash surrender value

Question 32

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: 15. 0 to 1. 10. 0 to 1. 9. 6 to 1. 30. 0 to 1.

Answer 32

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

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 33

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

Answer 34

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

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: 4. 0 to 1 1. 7 to 1. 1. 4 to 1. 2. 4 to 1.

Answer 35

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

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

Answer 36

The times preferred dividend earned ratio

Question 37

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 37

$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

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 38

**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

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 39

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

Answer 40

$2,170,000 ## Footnote 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

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 41

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

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 42

$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

Answer 43

1.40 ## Footnote 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

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 44

quick ratio

Question 45

Answer 45

a

Question 46

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 46

$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

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 47

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

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 48

$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

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 49

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

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 50

$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

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 51

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

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 52

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: 1. the nature of the entity's operations, 2. the use of estimates in the preparation of the entity's financial statements, and 3. significant concentrations in certain aspects of the entity's operations.

Question 53

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? 1. 16 0. 53 2. 12 0. 46

Answer 53

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

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

Answer 54

$140,000

Question 55

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 55

$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

Answer 56

$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). 1. Salesperson A has already been paid more than the commission and is not due any more. 2. Salesperson B was paid $10,000 less than the commission earned and is due a $10,000 commission payable ($24,000 − $14,000 salary). 3. 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

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: 1. Stockholders' equity at 12/31 $4,500,000 2. Net income year ended 12/31 1,200,000 3. Dividend on preferred stock year ended 12/31 300,000 4. 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 57

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

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 58

$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

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

Answer 59

market inflation

Question 60

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 60

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

Question 61

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 61

Current ratio increased and quick ratio decreased

Question 62

Answer 62

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

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 63

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

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 64

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

Question 65

On October 1, 20X8, Holyoak Company borrowed $128,000 and gave the lender a 5-month note payable. The note payable has an interest rate of 5%. Holyoak has a December 31 year-end. What amount of interest expense should Holyoak report as interest payable at December 31, 20X8? $2,133 $1,600 $1,067 $3,840

Answer 65

$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.

Question 66

Under state law, Acme may pay 3% of eligible gross wages or it may reimburse the state directly for actual unemployment claims. Acme believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $10,000 of gross wages paid to each employee. Acme had five employees each of whom earned $20,000 during 20X1. In its December 31, 20X1, balance sheet, what amount should Acme report as accrued liability for unemployment claims? $3,000 $1,000 $1,500 $2,000

Answer 66

$1,000

Question 67

On June 1, year 2, Archer, Inc. issued a purchase order to Cotton Co. for a new copier machine. The machine requires one month to produce and is shipped F.O.B. destination on July 1, year 2, and is received by Archer on July 15, year 2. Cotton issues a sales invoice dated July 2, year 2, for the machine. As of what date should Archer record a liability for the machine? July 15, year 2 July 1, year 2 June 1, year 2 July 2, year 2

Answer 67

**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.

Question 68

Hill Corp. began production of a new product. During the first calendar year, 1,000 units of the product were sold for $1,200 per unit. Each unit had a two-year warranty. Based on warranty costs for similar products, Hill estimates that warranty costs will average $100 per unit. Hill incurred $12,000 in warranty costs during the first year and $22,000 in warranty costs during the second year. The company uses the expense warranty accrual method. What should be the balance in the estimated liability under warranties account at the end of the first calendar year? $66,000 $112,000 $88,000 $100,000

Answer 68

$88,000 ## Footnote 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.

Question 69

Kent Co.'s advertising expense account had a balance of $292,500 on December 31, 20X1, before any necessary year-end adjustment relating to the following: Included in the $292,500 is the $30,000 cost of printing catalogs for a sales promotional campaign in January 20X2. Radio advertising spots broadcast during December 20X1 were billed to Kent on January 2, 20X2. Kent paid the $17,500 invoice on January 11, 20X2. What amount should Kent report as advertising expense in its income statement for the year ending December 31, 20X1? $245,000 $262,500 $310,000 $280,000

Answer 69

$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

Question 70

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: 1. Accrued interest payable $17,000 decrease 2. Prepaid interest 23,000 decrease In its income statement for the current year, what amount should Ness report as interest expense? $64,000 $110,000 $30,000 $76,000

Answer 70

$76,000

Question 71

Oak Co. offers a 3-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of 20X2, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of $80,000 and $96,000 were reported in 20X0 and 20X1, respectively. Sales for 20X2 were $5,000,000. What amount should be disclosed in Oak's 20X2 financial statements as warranty expenses? $50,000 $100,000 $88,000 $138,000

Answer 71

$50,000 The technological advance applies only to 20X2 production. Therefore: 20X2 Warranty expense = 0.01 × $5,000,000 = $50,000

Question 72

On December 31, 20X1, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp. made under customary trade terms, is due in nine months and the note from Maxx, Inc., is due in five years. The market interest rate for similar notes on December 31, 20X1, was 8%. The compound interest factors to convert future values into present values at 8% follow: 1. Present value of $1 due in nine months: .9440 2. Present value of $1 due in five years: .6806 At what amounts should these two notes receivable be reported in Jet's December 31, 20X1, balance sheet? Hart: $9,652; Maxx: $7,827 Hart: $10,000; Maxx: $7,827 Hart: $9,440; Maxx: $6,800 Hart: $10,000; Maxx: $6,800

Answer 72

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

Question 73

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year-end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet (statement of financial position)? Current liabilities of $130,000 Current liabilities of $30,000, long-term liabilities of $100,000 Long-term liabilities of $130,000 Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan

Answer 73

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.

Question 74

On July 1, 20X1, Ran County issued realty tax assessments for its fiscal year ending June 30, 20X2. On September 1, 20X1, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year's real estate tax obligation, but instead recorded tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, 20X1, Day paid the first of two equal installments of $12,000 for realty taxes. What amount of this payment should Day have recorded as a debit to real estate taxes payable? $8,000 $10,000 $4,000 $12,000

Answer 74

$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.

Question 75

Estimates are a necessary part of the preparation of financial statements. It is necessary to explicitly communicate to the users of the financial statements that estimates have been used and that many of the amounts reported are approximations rather than exact amounts. Which of the following is not an example of certain significant estimates as listed in Topic 275 of the FASB's Accounting Standards Codification? Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets Expensed computer software costs Contingent liabilities for obligations of other entities Inventory subject to rapid technological obsolescence

Answer 75

Expensed computer software costs ## Footnote 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

Question 76

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): \_\_\_subject to rapid technological obsolescence \_\_\_equipment subject to technological obsolescence \_\_\_remediation-related obligations \_\_\_liabilities for obligations of other entities Amounts reported for long-term obligations, such as amounts reported for \_\_\_and \_\_\_benefits Estimated net proceeds \_\_\_, the provisions for expected loss to be incurred, or both, on disposition of a business or assets

Answer 76

Inventory specalized equipment environmental continegnent pension/opeb recoverable

Question 77

For the week ended February 14, 20X3, Valentino & Sons 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, what is the total expense to Valentino related to payroll? $53,500 $50,000 $50,840 $54,340

Answer 77

$54,340 ## Footnote 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.

Question 78

Cardamom Limited wants to get an idea about the effectiveness of its inventory management processes. The following data have been compiled to provide a benchmark for future comparisons. 1. Net cash sales $ 51,000 2. Cost of goods sold 272,000 3. Inventory at beginning of year 37,000 4. Purchases 263,000 5. Accounts receivable at beginning of year 47,000 6. Accounts receivable at end of year 52,000 What was the inventory turnover for the year? 8. 1 8. 4 7. 1 7. 5

Answer 78

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).

Question 79

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year? $400,000 $100,000 $500,000 $0

Answer 79

$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.

Question 80

How are dividends per share for common stock used in the calculation of the following? Dividend per share payout ratio as numerator and earnings per share not used Dividend per share payout ratio as numerator and earnings per share as numerator Dividend per share payout ratio as denominator and earnings per share not used Dividend per share payout ratio as denominator and earnings per share as denominator

Answer 80

Dividend per share payout ratio as numerator and earnings per share not used ## Footnote 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.

Question 81

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For Year 1, income for Cone's branch was $160,000 before income taxes and Cone's bonus. Cone's bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone's bonus for Year 1? $15,000 $25,000 $12,000 $32,000

Answer 81

$12,000

Question 82

Answer 82

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

Question 83

Which of the following ratios useful in assessing the liquidity position of a company? Return on stockholders' equity only Defensive-interval ratio only Neither defensive-interval ratio nor return on stockholders' equity Both defensive-interval ratio and return on stockholders' equity

Answer 83

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.

Question 84

The following computations were made from Clay Co.’s current-year-end books: Number of days' sales in inventory 61 Number of days' sales in trade accounts receivable 33 What was the number of days in Clay’s current-year operating cycle?

Answer 84

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

Question 85

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. What amount of estimated warranty liability should Household report in its 20X4 balance sheet? $7,840 $16,240 $0 $8,400

Answer 85

$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.

Question 86

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year-end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation? $50,000 $100,000 $95,000 $10,000

Answer 86

$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

Question 87

Within the context of FASB ASC 410-10-20 (Asset Retirement Obligations), the term “retirement” is defined as the other-than-temporary removal of a long-lived asset from service. Which of the following is not considered a retirement? Sale of a long-lived asset Abandonment of a long-lived asset The temporary idling of a long-lived asset Recycling of a long-lived asset

Answer 87

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.

Question 88

Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart’s three million shares will receive payment of the note principal plus interest. The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth year? $450,000 $4,500,000 $2,250,000 $6,750,000

Answer 88

$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

Question 89

On May 1 of the current year, Marno County issued property tax assessments for the fiscal year ending the following June 30. The first of two equal installments was due on November 1 of this year. On Sep­tember 1, Dyur Co. purchased a 4-year-old factory in Marno subject to an allowance for accrued taxes. Dyur did not record the entire year’s property tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid property taxes or property taxes payable, as appropriate. The record­ing of the November 1, payment by Dyur should have been allocated between an increase in prepaid property taxes and a decrease in property taxes payable in which of the following percentages? Increase in prepaid property taxes, 66-2/3%; Decrease in property taxes payable, 33-1/3% Increase in prepaid property taxes, 0%; Decrease in property taxes payable, 100% Increase in prepaid property taxes, 33-1/3%; Decrease in property taxes payable, 66-2/3% Increase in prepaid property taxes, 50%; Decrease in property taxes payable, 50%

Answer 89

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

Question 90

Answer 90

$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).

Question 91

On January 1, 10 years ago, Andrew Co. created a subsidiary for the purpose of buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove underground storage tanks. It was estimated that it would cost $150,000 to dismantle the depot and remove the tanks at the end of the depot's useful life. However, the actual cost to demolish and dismantle the depot and remove the tanks in the 10th year is $155,000. What amount of retirement expense should Andrew Co. recognize in its financial statements in Year 10? $20,000 expense $155,000 expense $150,000 expense None, recognized in prior years

Answer 91

$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.

Question 92

An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by: decreasing a deferred charge. decreasing annual insurance expense. recording a memorandum entry only. increasing investment income.

Answer 92

decreasing annual insurance expense.

Question 93

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 income statement for the year, what amount should World report as interest expense? $22,500 $14,200 $30,000 $0

Answer 93

$22,500 **The interest expense is:** Principal × Interest rate × Time **In this case, it is:** $1,000,000 × .09 × .25 = $22,500

Question 94

Answer 94

$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).

Question 95

Answer 95

$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

Question 96

Lind Co.'s salaries expense of $10,000 is paid every other Friday for the 10 workdays then ending. Lind's employees do not work on Saturdays and Sundays. The last payroll was paid on June 18. On Wednesday, June 30, the month-end balance in the salaries expense account before accruals was $14,000. What amount should Lind report as salaries expense in its income statement for the month ended June 30? $22,000 $24,000 $18,000 $20,000

Answer 96

$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).

Question 97

At the beginning of the year, the carrying value of an asset was $830,000 with 12 years of remaining life. The fair value of the liability for the asset retirement obligation was $86,000. At year-end, the carrying value of the asset was $760,000. The credit-adjusted, risk-free interest rate was 7%. The risk-free interest rate was 3%. What was the amount of accretion expense for the year related to the asset retirement obligation? $6,020 $2,580 $70,000 $83,420

Answer 97

$6,020 ## Footnote 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

Question 98

Answer 98

$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.

Question 99

On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent's 20X2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, 20X1, the balance in the escrow account was $3,000. On September 30, 20X2, what amount should Bell show as an escrow liability to Kent? $1,500 $11,500 $8,500 $4,500

Answer 99

$4,500

Question 100

Estimates are a necessary part of the preparation of financial statements. It is necessary to explicitly communicate to the users of the financial statements that estimates have been used and that many of the amounts reported are approximations rather than exact amounts. This understanding should help users to make better decisions. Disclosure of certain significant estimates must be made when which of the following conditions are present? The effect of the change would be material. Both of the conditions described must be present. At least one of the conditions described must be present. 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.

Answer 100

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.

Question 101

Disclosure of 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 \_\_\_\_\_(reasonably possible is the chance is more than remote but less than likely). The effect of the change would be \_\_\_\_.

Answer 101

future confirming events material

Question 102

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as expense: at the date the royalty agreement began. in the period paid. in the period incurred. at the date the royalty agreement expired.

Answer 102

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

Question 103

For the week ended June 30, 20X1, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30, 20X1? $22,800 $21,400 $25,300 $23,900

Answer 103

$21,400

Question 104

The following selected financial data pertains to Alex Corporation for the current year ended December 31: 1. Operating income $900,000 2. Interest expense (100,000) 3. Income before income tax 800,000 4. Income tax expense (320,000) 5. Net income 480,000 6. Preferred stock dividends (200,000) 7. Net income available to common stockholders $280,000 The times interest earned ratio is: 2. 8 to 1. 9. 0 to 1. 8. 0 to 1. 4. 8 to 1.

Answer 104

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.

Question 105

Times interest Earned ratio??

Answer 105

Earngs before interest & Taxes / Interest Expense

Question 106

The following information pertains to Ali Corp. as of and for the current year ended December 31: Liabilities $ 60k Stockholders' equity 500k Shares of com stock issued and outstdn 1k Net income 30k During the year, Ali’s officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. What was the effect of exercising the stock options? Earnings per share increased by $0.33. Asset turnover increased to 5.4%. Debt-to-equity ratio decreased to 12%. No ratios were affected.

Answer 106

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%)

Question 107

During December 20X1, Nile Co. incurred special insurance costs but did not record these costs until payment was made during 20X2. These insurance costs related to inventory that had been sold by December 31, 20X1. What is the effect of the omission on Nile's accrued liabilities and retained earnings at December 31, 20X1? Understated accrued liabilities and overstated retained earnings Understated accrued liabilities and no effect on retained earnings No effect on accrued liabilities or retained earnings No effect on accrued liabilities and overstated retained earnings

Answer 107

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.

Question 108

Cardamom Limited wants to get an idea about the effectiveness of its inventory management processes. The following data have been compiled to provide a benchmark for future comparisons. Net cash sales $ 51,000 Cost of goods sold 272,000 Inventory at beginning of year 37,000 Purchases 263,000 Accounts receivable at beginning of year 47,000 Accounts receivable at end of year 52,000 What was the number of days’ sales in average inventory turnover for the current year? 49. 7 days 43. 6 days 45. 0 days 37. 6 days

Answer 108

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.

Question 109

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. a loss would be recognized equal to the fair value of the policy over the proceeds received. a gain would be recognized equal to the increase in the fair value of the policy. no gain or loss could be recognized.

Answer 109

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:

Question 110

Clove Corporation had the following liabilities at the fiscal year end of 20X6: Accounts payable $ 31,000 6% Bonds payable, due on July 1, 20X7 126,000 Notes payable, due in 20X9 75,000 Payroll liabilities 11,000 Unearned revenue to be earned in 20X8 10,000 Accrued vacation liabilities 14,000 4% bonds payable, due on December 1, 20X7 132,000 The 4% bonds have a related sinking fund that has been classified as restricted cash and is classified as a noncurrent asset on the balance sheet. How much should Clove Corporation report as current liabilities in its December 31, 20X6, balance sheet? **$192,000** **$182,000** **$314,000** **$389,000**

Answer 110

$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.**

Question 111

Able Co. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income before income tax but after deduction of the bonus. If the tax rate is 40% and net income after bonus and income tax was $360,000, what was the amount of the bonus? $66,000 $36,000 $60,000 $90,000

Answer 111

$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.

Question 112

Topic 275 of the FASB's Accounting Standards Codification is entitled “Risks and Uncertainties.” In discussing the disclosure required by this section, what element is identified as important in determining the matters that are significant to a specific entity? Risk Uncertainty Significance Selectivity

Answer 112

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.

Question 113

Answer 113

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.

Question 114

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

Answer 114

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.

Question 115

Lyle, Inc., is preparing its financial statements for the year ending December 31, 20X1. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following: * On December 31, 20X1, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle's specifications. * Checks in the amount of $100,000 were written to vendors and recorded on December 29, 20X1. The checks were mailed on January 5, 20X2. What amount should Lyle report as accounts payable in its December 31, 20X1, balance sheet? $510,000 $410,000 $310,000 $210,000

Answer 115

$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?

Question 116

XYZ Corporation pays an insurance premium of $5,000 on a $100,000 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. The insured officer dies at the end of the period of coverage. Which of the following would be included in the entry to receipt of the proceeds of the death benefit? Insurance expense is credited for $5,000 Cash Surrender Value of Life Insurance is credited for $100,000. Gain of Life Insurance Coverage is credited for $75,000. Cash is credited for $100,000.

Answer 116

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

Question 117

Black Co. requires advance payments with special orders for machinery constructed to customer specifications. These advances are nonrefundable. Information for 20X1 is as follows: **Customer advances balance December 31, 20X0 $118,000 Advances received with orders in 20X1 184,000 Advances applied to orders shipped in 20X1 164,000 Advances applicable to orders canceled in 20X1 50,000** In Black's December 31, 20X1, balance sheet (statement of financial position), what amount should be reported as a current liability for advances from customers? $88,000 $138,000 $148,000 $0

Answer 117

a

Question 118

Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales. Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the current year ended March 31 were $15,000,000. The unadjusted balance in the commissions expense account on March 31 was $400,000. March advances were paid on April 3. In its income statement for the current year ended March 31, what amount should Zach report as commission expense? $415,000 $450,000 $400,000 $465,000

Answer 118

$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.

Question 119

An entity should recognize the fair value of an asset retirement obligation in the period: when a legal injunction is filed to require the asset retirement. None of the answer choices are correct. immediately prior to the asset retirement. in which the obligation is incurred if a reasonable estimate of fair value can be made.

Answer 119

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.

Question 120

Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP? Expensed immediately Never amortized Amortized over 60 months Amortized over 40 years

Answer 120

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

Question 121

Answer 121

$605,000

Question 122

Hemple Co. maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escrow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Hemple reported the following account data: Escrow liability beginning of year $ 500,000 Escrow receipts during the year 1,200,000 Real estate taxes paid during the year 1,450,000 Interest earned during the year 40,000 What amount represents the escrow liability balance on Hemple's books? $210,000 $290,000 $286,000 $214,000

Answer 122

$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.

Question 123

Which of the following statements is correct concerning start-up costs? Costs of start-up activities, including organization costs, should be capitalized and expensed only if an impairment exists. Costs of start-up activities, including organization costs, should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months. Costs of start-up activities should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months, while organization costs should be expensed as incurred. Costs of start-up activities, including organization costs, should be expensed as incurred.

Answer 123

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.

Question 124

An entity should recognize the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The entry to record the initial liability would include: a debit to the carrying value of the related asset. a credit to the carrying value of the related asset. a debit to asset retirement obligation. a debit to asset retirement expense.

Answer 124

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

Question 125

uring the current year, Casual Wear Co. had total retail sales of $800,000 and collected a 5% state sales tax on all sales. At the end of the prior year, Casual Wear had $4,500 in sales taxes that had not been remitted to the state authorities. During the current year, Casual Wear remitted $39,500 in state sales tax. What amount should be recorded in Casual Wear's current-year financial statements? $840,000 in sales revenue $5,000 in sales tax payable $40,000 in sales tax revenue $39,500 in sales tax expense

Answer 125

$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

Question 126

a

Answer 126

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).

Question 127

Topic 275 of the FASB's Accounting Standards Codification is entitled “Risks and Uncertainties.” The primary subject discussed in this topic is: disclosure. bankruptcy. going concern. All of the answer choices are discussed.

Answer 127

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.