Reference no: EM132462403

Part A - Multiple Choice Questions

Q1. Which of the following costs related to the purchase of production equipment incurred by Lincoln Company during 2011 would be considered a revenue expenditure?

a. Installation costs for equipment

b. Purchase price of the equipment less the cash discount

c. Repair and maintenance costs during the equipment's first year of service

d. Transportation charges to deliver the equipment to Lincoln Company

Q2. A company should choose a depreciation method that

a. best allocates the original cost of the asset to the periods benefited by the use of the asset.

b. saves the most taxes.

c. minimizes net income

d. shows the highest amount of net income.

Grover, Inc. - Grover, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2013 and was used 2,700 hours in 2013 and 2,600 hours in 2014.

Q3. Refer to the information for Grover, Inc. Based on this information, what method of depreciation will produce the maximum depreciation expense in 2013?

a. Straight-line

b. Double-declining-balance

c. Units-of-production

d. All methods produce the same expense in 2013.

Q4. Refer to the information about Grover, Inc. What amount will Grover, Inc. report as depreciation expense over the 8-year life of the equipment?

a. $60,000

b. $75,000

c. $72,000

d. $80,000

Q5. Refer to the information about Grover, Inc. If Grover uses the double-declining-balance depreciation method, what amount is the depreciation expense for 2014?

a. $14,063

b. $18,750

c. $15,000

d. $20,000

Q6. Which of the following sets of factors is needed to calculate depreciation on plant and equipment?

a. The asset's acquisition cost, replacement cost, and its estimated residual value

b. The estimated residual value of the asset, its replacement cost, and its market value

c. The asset's replacement cost, its estimated life, and its estimated residual value

d. The estimated life of the asset, its acquisition cost, and its estimated residual value

Q7. Blanton Company bought equipment with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for 4 years. Due to obsolescence, it was determined at the beginning of 2014 that the useful life should be shortened by 3 years and the residual value changed to zero. The depreciation expense for 2014 is

a. $11,636

b. $16,000

c. $11,000

d. $8,000

Q8. Royal Company purchased a dump truck at the beginning of 2012 at a cost of $50,000. The truck had an estimated life of 5 years and an estimated residual value of $20,000. On January 1, 2014, the company made major repairs of $30,000 to the truck that extended the life 3 years. Thus, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method

What is the book value of the truck to be reported on the balance sheet at December 31, 2014?

a. $44,000

b. $56,000

c. $50,000

d. $62,000

Q9. Crouch Apartments purchased an apartment building to rent to university students on December 15, 2012. The tenants moved in on January 1, 2013. On Super Bowl Sunday, a student punched a hole in the wall when his favorite team fumbled the ball. It cost the landlord $400 to repair the hole. How should this cost be recorded?

a. It should be recorded as part of the asset account.

b. It should be recorded as repair and maintenance expense.

c. It should not be recorded as the tenants will be charged for the damage.

d. It should not be recorded since this is an immaterial amount to the landlord.

Q10. When a company discards machinery that is fully depreciated, this transaction would be have an effect on accounting equation as follows:

a. decrease Accumulated Depreciation; decrease Machinery

b. increase Machinery; increase Accumulated Depreciation

c. increase Cash; increase Accumulated Depreciation

d. increase Depreciation Expense; increase Accumulated Depreciation

Q11. GAAP require that research and development costs to develop a new product be

a. capitalized in the patents account.

b. expensed in the period incurred.

c. capitalized in the research and development costs account.

d. amortized over the expected economic life of the new product.

Q12. Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should

a. not be amortized.

b. be reported on the statement of retained earnings in the year in which acquired.

c. be amortized over a reasonable period of time not to exceed 40 years.

d. increase an expense account entirely in the year in which acquired.

Q13. Which of the following accounts is not classified as a current liability?

a. Taxes payable

b. Salaries payable

c. Note payable, due in three (3) years

d. Accounts payable

Q14. Which of the following is not classified as a noncurrent liability?

a. Bonds payable

b. Current portion of long-term debt

c. Capital lease obligations

d. Mortgage payable

Q15. If current assets amount to $150, total assets $350, current liabilities $65, and total liabilities $100, then the current ratio is

a. 2.12 to 1

b. 3.03 to 1

c. 2.31 to 1

d. 3.50 to 1

Q16. Long-term assets are $5,000, current liabilities are $700, and long-term liabilities are $3,000. If the current ratio is 3 to 1, then current assets are

a. $9,000

b. $4,300

c. $6,900

d. $2,100

Q17. On November 1, Greenfield Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000. If you assume 360 days in year, the November adjustment will:

a. Increase Interest Expense $550 and decrease Cash $550.

b. Increase Discount on Notes Payable $1,100 and increase Interest Payable $1,100.

c. Increase Interest Expense $550 and increase Interest Payable $550.

d. Increase Interest Expense $550 and increase Notes Payable $550.

Q18. An invoice received from a supplier for $8,000 on January 1 with terms 1/15, n/30 means that the company should pay

a. $7,920 before the end of January.

b. either $7,920 before January 16 or $8,000 before the end of the month.

c. $8,000 between January 2 and January 16.

d. $6,800 before January 16.

Q19. On October 1, Lawrence Company borrowed $60,000 from Fourth National Bank on a 1-year, 7% note. If the company's fiscal year ends as of December 31, which of the following increasing effects would Lawrence show?

a. interest expense, $4,200.

b. interest payable, $1,050.

c. notes payable, $1,050.

d. prepaid interest, $3,150.

Q20. A company's weekly payroll amounts to $50,000 and payday for the week is every Friday. Employees work five days per week, Monday through Friday. The appropriate journal entry was recorded at the end of the accounting period, Tuesday, March 31, 2013. What amount is wages expense for April for the payday, Friday, April, 3, 2013?

a. $ -0-

b. $30,000

c. $20,000

d. $50,000

Q21. Almost all current liabilities affect the operating category of the statement of cash flows, but one that does not affect cash provided by operating activities is

a. accounts payable.

b. notes payable.

c. interest payable.

d. taxes payable.

Q22. A cereal company includes one premium coupon in every cereal box. Upon returning 10 such coupons to the company, a customer will be sent a free cereal bowl. In a recent year, the company sold 200,000 boxes of cereal for $1 a box. It is estimated that 20% of the coupons will be returned. If the cereal bowls cost the company $3 each, what amount of liability for premium redemptions must be recorded by the company?

a. $ 6,000

b. $ 24,000

c. $ 12,000

d. $200,000

Q23. A firm is required to estimate a liability for repairs for products sold with a warranty. If the firm's accountants later find that the estimated amount for repairs has been overstated, the correct accounting procedure is to

a. make an adjustment to reduce the amount of estimate.

b. make a correction because the overstatement is an error.

c. show the amount of overstatement on the income statement as a loss.

d. do nothing for the year in question and modify the next year's estimate.

Q24. Judge Inc. issues numerous discount coupons throughout the year. A balance in the Estimated Liability for Coupon Redemption

a. indicates an error had been made in posting.

b. should equal the same amount of coupons redeemed.

c. is the amount of outstanding coupons it expects to be redeemed.

d. indicates that more coupons were redeemed than estimated.

Q25. The total amount of simple interest calculated annually on a $6,000 note payable for 3 years at 11% is

a. $1,980

b. $6,600

c. $2,205

d. $7,980

Q26. The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.

 

How much would have to be deposited in a savings account earning 6%, so that equal annual withdrawals of $200 can be made at the end of each of 10 years? The balance at the end of the last year would be zero.

a. $ 528

b. $2,000

c. $1,472

d. $2,636

Q27. The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.

If the interest factor used to calculate the future value of $1 at 6% for 5 periods is 1.338, then the present value of $1 at 6% for 5 periods is

a. 1.338 x 1.338.

b. 1/(1.338 x 1.338).

c. 1/1.338.

d. 0.338.

Q28. The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.

Marti and Sue want to buy a house in 4 years. If the house will cost $180,000, how much must they deposit at the end of every year for the next 4 years at 5% compounded annually in order to buy the house?

a. $32,040

b. $41,763

c. $36,990

d. $45,000

Q29. The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.

If Garrett has $5,000 per year to invest for 10 years and wants to accumulate $87,745 at the end of that time, he must find an investment that is earning at a rate of

a. 15%

b. 11%

c. 12%

d. 6%

Q30. Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet?

a. Current liability

b. Current asset

c. Long-term liability

d. Owners' equity

Q31. A convertible bond is one where

a. the issuer can convert from a fixed interest rate to a floating one.

b. the issuer can convert it from long-term to short-term.

c. the issuer can retire the bond before its specified due date.

d. the holder can convert the bond into common stock at a future time.

Q32. Bonds are a popular source of financing because

a. bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment of interest to bondholders.

d. the bondholders can always convert their bonds into stock if they choose.

Q33. Use the information provided in the time value of money tables (Tables 9-1 through 9-4 on pages 454-457) in the text to answer the question that follows.

Cosmic Company issued $1,000,000, 8%, 7 year bonds, interest payable semiannually. The market rate of interest was 6%. The issuance price of the bonds is

a. $1,111,560

b. $1,151,480

c. $1,000,000

d. $1,112,840

Q34. In 2012, Park Company issued $200,000 of bonds for $189,640. If the face rate of interest was 8% and the effective rate of interest was 6.73%, how would Park calculate the interest expense for the first year on the bonds using the effective interest method?

a. $189,640 x 6.73%

b. $10,000 x 6.73%

c. $189,640 x 8%

d. $10,000 x 8%

Q35. On January 1, 2012, Breaker, Inc. issued $400,000, 10-year, 10% bonds for $354,200. The bonds pay interest on June 30 and December 31. The market rate is 12%. What is the carrying value of the bonds after the first interest payment is made on June 30, 2012?

a. $352,960

b. $355,452

c. $354,200

d. $400,000

Q36. On January 2, 2012, Dock Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying value of the bonds after the first interest payment is made on June 30, 2012?

a. $574,540

b. $568,920

c. $571,776

d. $500,000

Q37. Shuttle Master Airlines has leased an aircraft from Streamline Aircraft Company. The annual payments are $1,000,000 and the life of the lease is 18 years. It is estimated that the useful life of the aircraft is 20 years. How would Shuttle Master Airlines record the acquisition of the aircraft? The effective rate of interest is 9%.

a. The company would not record the aircraft as an asset but would record rent expense of $1,000,000 per year for 18 years.

b. The company would not record the aircraft as an asset but would record rent expense of $900,000 per year for 20 years.

c. The aircraft would be recorded as an asset with a cost of $8,756,000.

d. The aircraft would be recorded as an asset with a cost of $9,129,000.

Q38. Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement

Q39. Deferred income taxes arise because

a. corporations often make errors in their tax estimations.

b. companies can use accounting methods that minimize net income for tax purposes and other methods that maximize net income for reporting to shareholders.

c. the IRS owes a company a refund from last year.

d. large corporations generally have operations in foreign countries whose tax law is quite different from U.S. tax law.

Q40. Marshland Company uses the straight-line depreciation for financial reporting purposes and an accelerated depreciation method for tax purposes. As a result, Marshland will record:

a. a deferred tax asset.

b. a deferred tax liability.

c. a permanent difference.

d. tax-exempt depreciation.

Part B - Problems

Problem 1 - Below are several accounts and balances from the 2013 financial statements for Valcaria, Inc.. Prepare the intangible asset section of the company's balance sheet, as well as a partial income statement in the space provided below using the accounts provided.

Amortization expense	$32,000
Amortization since inception	89,000
Loss on sale of copyright	12,000
Copyright	120,000
Patents	60,000
Land	80,000
Goodwill	140,000
Research and development costs	160,000

Problem 2 - Racer Company acquired patent rights on January 1, 2013 for $1,080,000. The patent has a useful life equal to its legal life of 15 years. On January 2, 2016, Racer successfully defended the patent in a lawsuit at a cost of $78,000.

Required -

(1) Determine the patent amortization expense for the current year ended December 31, 2016.

(2) Identify and analyze the effects of the transaction to recognize the amortization.

Problem 3 - A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face on January 2, 2012. The issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate.

Required -

a) Determine the effect on the accounting equation upon recording the issuance of the bonds.

b) Determine the effect on the accounting equation upon recording the recognition of interest expense at December 31, 2012. Any premium or discount should be amortized using the effective interest rate method.

c) Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2013.

d) Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2013. Any premium or discount should be amortized using the effective interest rate method.

Problem 4 - Burger Barn Company issued $150,000 face value bonds at a premium of $6,000. The bonds contain a call provision of 102. Burger Barn decides to redeem the bonds due to a significant decline in interest rates. On that date, Burger Barn had amortized only $1,500 of the premium.

REQUIRED -

1. Calculate the gain or loss on early redemption of the bonds.

2. Identify and analyze the effects of the transaction recorded at the time of bond redemption.

3. Where should the gain or loss should be presented on the financial statements?

4. Why is the call price is normally higher than 100?