# Financial Accounting

July 29, 2019
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July 29, 2019

Ch 8.

48. Greer Company purchased land for \$256,000. Additional costs include a \$15,300 fee to a broker, a survey fee of \$2,400, \$1,750 to construct a fence and a legal fee of \$8,500. What is the cost of the land?

a.

\$256,000

b.

\$282,200

c.

\$284,600

d.

\$281,000

b

RATIONALE:

All costs except the fence construction are included in the cost of the land.

57. ​Cranberry Corp. constructed equipment to manufacture a new line of home products during 2016. The average balance of accumulated expenditures on the equipment during September through December 2016 was \$500,000. Construction started on September 1, 2016 and was still in progress at the end of 2016. If Cranberry borrowed \$500,000 for one year on September 1, 2016, to finance the construction, and the interest rate on the construction loan was 6%, how much interest can Cranberry capitalize as part of the equipment cost for 2016?

a.

\$ -0-

b.

\$10,000

c.

\$20,000

d.

\$30,000

b

RATIONALE:

(\$500,000 × 6%) × 4/12 = \$10,000

Wexford Co.

Wexford Co. purchased a new delivery truck at the beginning of 2016. The truck has a cost of \$37,000, an estimated life of 5 years, and an estimated residual value of \$7,000. A full year’s depreciation expense is to be recorded in 2016. The truck was driven 20,000 miles during 2016 and 24,000 miles during 2017. The number of expected miles over five years is 100,000.

65. Refer to information for Wexford Co.

What is the amount by which double-declining-balance depreciation exceeds straight-line depreciation over the 5-year life of the truck?

a.

\$ -0-

b.

\$ 7,000

c.

\$37,000

d.

\$ 6,000

a

DIFFICULTY:

Moderate

121. Ramirez Stores purchased a trademark at the beginning of 2016 for \$340,000. Economic benefits were expected for 10 years, but the trademark’s legal life was 20 years. Also, during 2016, Ramirez incurred research and development costs of \$200,000. The book value of the trademarks at December 31, 2016, is

a.

\$506,000

b.

\$306,000

c.

\$323,000

d.

\$486,000

b

Ch 9.

51. If a company purchases \$3,200 worth of inventory with terms of 3/10, n/30 on March 3 and pays March 12, then the amount paid to the seller would be

a.

\$96

b.

\$3,104

c.

\$3,200

d.

None of these choices

b

68. On November 1, 2016, Brownsville Co. borrowed \$80,000 from State Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately. At December 31, 2016, the adjusting entry for this note includes a:

a.

Debit to Interest Expense for \$3,200.

b.

Credit to Notes Payable for \$1,600.

c.

Credit to Cash for \$4,800.

d.

Credit to Interest Payable for \$1,600.

d

89. Which of the following statements regarding contingencies is true?

a.

Contingencies that are probable and not estimable appear on the balance sheet.

b.

Contingencies that are probable and not estimable are disclosed in the notes to the financial statements.

c.

Contingencies that are remote but estimable are disclosed in the notes to the financial statements.

d.

Contingent assets are recorded on the balance sheet, but not in the notes to the financial statements.

b

111. Using the future value table, a student found that the future value amount of \$1 for 5 years at an annual interest rate of 10% is 1.611. The student also observed that the future value of \$1 for 5 years at 10% compounded semiannually is 1.629. This means that

a.

the more often the compounding, the higher the future value.

b.

the student was looking in the wrong column; the second amount should be 1.611/2.

c.

there was an error in the table.

d.

when interest is compounded semiannually, more money must be deposited to have a desired ending balance.

a

Ch 10.

57. 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.

a

70. Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of interest was 9%. This means that the bonds were issued

a.

b.

at a discount.

c.

at the face value.

d.

with an additional 3 years of interest.

b

100. On January 2, 2016, Lawn 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 at the end of ten years before the final maturity payment is made?

a.

\$574,540

b.

\$525,000

c.

\$500,000

d.

\$425,460

c

113. Happy Corporation leased a building from Sensor Company. The 10-year lease is recorded as a capital lease. The annual payments are \$10,000 and the recorded cost of the asset is \$67,100. The straight-line method is used to calculate depreciation. Which of the following statements is true?

a.

Depreciation expense of \$6,710 will be recorded each year.

b.

Depreciation expense of \$10,000 will be recorded each year.

c.

No depreciation expense will be recorded by Happy Corporation.

d.

No interest expense will be recorded by Happy Corporation.

a

136. Which of the following statements is false with respect to bonds?

a.

Firms issue bonds in very large single issues.

b.

Bonds must be held until maturity by the initial investor.

c.

The denomination of the bond is usually referred to as the face value.

d.

Bonds that are not backed by specific collateral of the issuing company are known as debenture bonds.

b

Ch 11.

48. Mendes Charters reported the following information at December 31, 2016:

Preferred stock, \$100 par, 500 shares authorized, and outstanding; cumulative; nonparticipating; callable at par value

\$ 50,000

Common stock, \$12 par, 50,000 shares authorized and outstanding

600,000

25,000

Retained earnings

825,000

Mendes’ total contributed capital is

a.

\$650,000

b.

\$675,000

c.

\$1,500,000

d.

\$625,000

b

55. Stockholders prefer to invest in preferred stock because

a.

preferred stock confers preferred voting rights.

b.

preferred stock can always be converted to common stock if they desire.

c.

the dividends are generally increased each year.

d.

the dividends are paid on preferred stock before they are paid on common stock.

d

62. Perry Corporation issues 20,000 shares of \$0.50 par common stock for \$6 per share; the Additional Paid-in Capital—Common account will increase by

a.

\$110,000

b.

\$10,000

c.

\$120,000.

d.

\$130,000.

a

89. Port, Inc. paid a cash dividend on January 2 that had been declared prior to the end of its fiscal year. The entry to pay the dividend will

a.

increase Cash and increase Cash Dividend Payable.

b.

decrease Cash Dividend Payable and decrease Cash.

c.

decrease Retained Earnings and increase Cash Dividend Payable.

d.

decrease Cash Dividend Payable and increase Retained Earnings.

b

Ch 12.

42. Which of the following statements is true?

a.

If a company reports net income on its income statement, it should report an increase in cash on its statement of cash flows.

b.

If a company reports a net loss on its income statement, it should report a decrease in cash on its statement of cash flows.

c.

If a company uses the accrual basis of accounting, it will improve its cash position if it reports net income for the same period.

d.

If a company uses the accrual basis of accounting, its cash balance can increase even if it reports a net loss.

d

65. In 2016, Valencia Company purchased equipment for \$363,000 and also sold some special purpose machinery with a book value of \$155,000 for \$182,000. In its statement of cash flows for 2016, Valencia should report the following with respect to the above transactions:

a.

\$363,000 cash used by operating activities; \$182,000 cash provided by financing activities.

b.

\$181,000 net cash used by investing activities.

c.

\$181,000 net cash used by investing activities; \$27,000 net cash provided by operating activities.

d.

\$363,000 net cash used by investing activities.

b

RATIONALE:

Investing cash flows: \$363,000 used – \$182,000 provided = \$181,000 used

73. Upon review of Young’s Garden Center statement of cash flows, the following was noted:

Cash flows from operating activities

\$ 15,000

Cash flows from investing activities

80,000

Cash flows from financing activities

(60,000)

From this information, the most likely explanation is that Young’s is

a.

using cash from operations and selling long-term assets to pay back debt.

b.

using cash from operations and borrowing to purchase long-term assets.

c.

using its profits to expand growth.

d.

using cash from investors to provide for operations

a

117. At the end of the first year of operations, the balance sheet of Huntington Beach Co. Industries had the following balances: Accounts Receivable, \$5,000; Accounts Payable, \$6,000; Inventory, \$3,000; and Unexpired Insurance, \$2,000. The corporation reported net income of \$79,000 for the year, including depreciation expense of \$5,000, and uses the indirect method of computing net cash flow from operating activities. Based on this information, net cash flow from operating activities is:

a.

\$82,000

b.

\$78,000

c.

\$80,000

d.

\$77,000

c

Ch 13.

47. Which of the following statements is true regarding valuation amounts on the balance sheet?

a.

Stockholders’ equity reflects the amount the stockholders would receive upon liquidation.

b.

Assets are recorded at current cost.

c.

Stockholders’ equity reflects the current market value of the stock

d.

There are a variety of assumptions used in determining amounts reported on the balance sheet.

d

Mother Nature Supplies Following are selected data from the financial statements of Mother Nature Supplies:

2017

2016

Accounts receivable

\$ 60,000

\$ 38,000

Merchandise inventory

12,000

16,000

Total assets

450,000

380,000

Net sales

380,000

270,000

Cost of goods sold

160,000

210,000

56. Refer to the data for Mother Nature Supplies.

Which of the following would not result from a vertical analysis of its balance sheet?

a.

Accounts receivable increased \$22,000 or 36.7% during 2017.

b.

Accounts receivable is five times larger than Merchandise inventory in 2017.

c.

Accounts receivable is 13.3% of total assets for 2017.

d.

Merchandise inventory is 2.7% of total assets for 2017.

a

86. Moonbeam Gift Shop’s inventory turned over six times during the year. Similar gift shops have an inventory turnover equal to twelve times per year. What explains Moonbeam’s state of inventory management?

a.

Moonbeam sold too much inventory during the year.

b.

Moonbeam needs to increase sales and decrease the amount of inventory on hand.

c.

Moonbeam is performing twice as well as its competitors.

d.

Moonbeam should increase the amount of goods on hand to accommodate the additional inventory demand.

b

Westmoreland Company Following are selected data from Westmoreland Company’s financial statements.

2017

2016

Current liabilities

\$230,000

\$160,000

Long-term debt

120,000

320,000

Stockholders’ equity

420,000

540,000

Cash payments for additions to plant and equipment

45,000

32,000

Net cash flow from operating activities

80,000

51,000

Interest and principal payments

12,000

8,000

Net operating cash flows before interest and taxes

68,000

43,000

Net income

90,000

72,000

Interest expense

8,500

11,500

Income taxes

16,000

14,500

Dividends paid

15,000

30,000

107. Refer to the Westmoreland Company data.

The company’s times interest earned ratio for 2017

a.

shows an increase in the company’s ability to pay its current debt when it comes due.

b.

indicates the company cannot meet its current year interest payments out of current year earnings.

c.

increased, which indicates the company’s lenders will be pleased.

d.

decreased, which indicates the company has more cash to pay interest on its debt.

c

RATIONALE:

Times-interest-earned = (NI + Interest Expense + Income Tax Expense) / Interest Expense

2017: (\$90,000 + 8,500 + 16,000) / \$8,500 = 13.5

2016: (\$72,000 + 11,500 + 14,500) / \$11,500 = 8.5

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Financial Accounting was first posted on July 29, 2019 at 7:38 am.

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