Unit 5 Flashcards
A company has two pending lawsuits and is trying to determine if the losses should be recorded in the December 31, Year 1 financial statements. It was already determined that the outcomes will be unfavorable and can be reasonably estimated. Lawsuit A involved an event that occurred on November 28, Year 1, and Lawsuit B involved an event that occurred on January 3, Year 2 after the financial statement date, but before the issuance.
Which loss contingency should be recorded by this company in Year 1?
For Lawsuit A only
The event occurred before the date of the financial statement, unfavorable outcome is probable, and the amount of loss can be reasonably estimated. These situations must be present to record a loss contingency.
A Parent Company guaranteed a $700,000 mortgage for its Subsidiary Company, which is financially solvent.
What is the proper accounting treatment for this situation?
Parent Company should not record a $700,000 liability on its balance sheet but should disclose in the notes to the financial statements the nature and amount of the guarantee and the amount it can recover from outside parties if it can be estimated.
Parent Company should disclose the guarantee of indebtedness in the notes to the financial statements even if the possibility of the loss is remote. Parent Company should not record a liability on the balance sheet because the Subsidiary is financially solvent.
A company originally sold 20-year bonds with a face value of $500,000 for a $20,000 discount. The bonds were held to maturity.
How much will the gain be on the maturity date?
$0
If a company holds the bonds to maturity, the company does not compute any gains or losses. It will have fully amortized any premium or discount at the date the bonds mature.
A company issues a $25,000 three-year note. The stated and effective interest rates are 2%.
Which journal entry should be used to record the annual interest expense at the end of the first year?
Debit Interest Expense for $500; credit Cash for $500
$500 = ($25,000 x 0.02). When the stated and effective interest rates are the same, annual interest is calculated by multiplying the face of the note times the interest rate.
A hardware retailer recently purchased $1,000,000 of lawn mowers from a local manufacturer with terms 2/10, n/30.
How should this transaction be reported on the balance sheet?
Accounts payable
Accounts payable are balances owed for goods or services to vendors.
A company reports the following financial information:
Net income: $110,000
Interest expense: $47,000
Income tax expense: $22,000
R&D expense: $38,000
Operating income: $190,000
What is the company’s times interest earned?
3.81
3.81 = ($110,000 + $47,000+ $22,000) / $47,000. This choice correctly sums net income, interest expense, and income tax expense and divides it by interest expense.
A company collected sales tax of $2,800 on sales of $35,000. The sales tax rate is 8.5%.
Which entry should be used to record the amount due to the taxing agency?
Debit Sales Revenue for $2,800; debit Loss on sales tax collection of $175; credit Cash of $2,975
Sales tax revenue = $35,000 * .0825 = $2,975. The company undercollected sales tax by $175. Debit Sales Revenue $2,800 Debit Loss on Sales Tax Collection $175 (Credit) Cash $2,975
A company’s most recent balance sheet depicts the following amounts:
Current assets: $300,000
Long-term assets: $400,000
Current liabilities: $100,000
Long-term liabilities: $200,000
What is the company’s debt-to-assets ratio, rounded to the nearest percent?
43%
43% = ($100,000 + $200,000) / ($300,000 + $400,000). The debt-to-assets ratio is calculated as total liabilities divided by total assets.
A private airline company sold 110 tickets at $350 each on March 1 for a round-trip ticket to a sporting event occurring on February 1 of the following year.
Which entry should the company use to record the sale of the tickets?
Debit Cash for $38,500; credit Unearned Passenger Revenue for $38,500
$350 x 110 = $38,500. Debit Cash for $38,500 and credit Unearned Revenue for $38,500. Revenue is not earned until the airline provides the service.
