CHAPTER 13 &14 & 15 - acc 202 -quiz

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Community College of Philadelphia *

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202

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Accounting

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Apr 3, 2024

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CHAPTER 13 1. Liabilities are a. any accounts having credit balances after closing entries are made. b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles. c. obligations to transfer ownership shares to other entities in the future. d. obligations arising from past transactions and payable in assets or services in the future. 2. Which of the following is true about accounts payable? 1. Accounts payable are also called trade accounts payable. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used. a. 1 b. 2 c. 3 d. Both 2 and 3 are true 3. Which of the following items is a current liability? a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months. b. Bonds due in three years. c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue. 4. Stock dividends distributable should be classified on the a. income statement as an expense. b. balance sheet as an asset. c. balance sheet as a liability. d. balance sheet as an item of stockholders' equity. 5. What is a discount as it relates to zero-interest-bearing notes payable? a. The discount represents the lender's costs to underwrite the note. b. The discount represents the credit quality of the borrower. c. The discount represents the cost of borrowing. d. The discount represents the allowance for uncollectible amounts.

6. Which of the following does NOT allow a company to exclude a short term obligation from current liabilities? a. Management indicated that they are going to refinance the obligation. b. Actually refinance the obligation. c. The liability is contractually due more than one year after the balance sheet date. d. Have a contractual right to defer settlement of the liability for at least one year after the balance sheet date. 7. Which of these is NOT included in an employer's payroll tax expense? a. F.I.C.A. (social security) taxes b. Federal unemployment taxes c. State unemployment taxes d. Federal income taxes 8. What is a contingency? a. An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur. b. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur. c. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future. d. An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur. 9. Which of the following is an example of a contingent liability? a. Obligations related to product warranties. b. Possible receipt from a litigation settlement. c. Pending court case with a probable favorable outcome. d. Tax loss carryforwards. 10. A loss contingency can be accrued when a. it is certain that funds are available to settle the disputed amount. b. an asset may have been impaired. c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred. d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated. 11. A company is legally obligated for the costs associated with the retirement of a long-lived asset a. only when it hires another party to perform the retirement activities. b. only if it performs the activities with its own workforce and equipment. c. whether it hires another party to perform the retirement activities or performs the activities itself. d. when it is probable the asset will be retired.

12. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty A. should be reported as long-term. B. should be reported as current. C. should be reported as part current and part long-term. D. need not be disclosed. 13. Which of the following best describes the accounting for assurance-type warranty costs? a. Expensed when paid. b. Expensed when warranty claims are certain. c. Expensed based on estimate in year of sale. d. Expensed when incurred. 14. Waterway Industries borrowed $402000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31? a. $0. b. $48240. c. $32160. d. $36180. Solution: $402000 × 0.12 × 9/12 = $36180. 15. Sheridan Newspapers sold 5400 of annual subscriptions at $150 each on June. How much unearned revenue will exist as of December 31? a. $0. b. $337500. c. $405000. d. $810000. Solution: (5400 × $150) × 5/12 = $337500. 16. Swifty Co. is a retail store operating in a state with a 7 % retail sales tax. The retailer may keep 2 % of the sales tax collected. Swifty Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $ 753280 . The amount of sales taxes (to the nearest dollar) for May is a. $62216. b. $49280. c. $67823. d. $52731. Solution:

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S + 0.07 S = $753280 => S = $704000 . $753280 – $704000 = $49280 . 17. Swifty Corporation , which has a taxable payroll of $ 1160000 , is subject to FUTA tax of 6.2 % that includes a state contribution rate of 5.4 %. However, because of stable employment experience, the company’s state rate has been reduced to 2 %. What is the total amount of federal and state unemployment tax for Swifty Corporation ? a. $134560 b. $95120 c. $46400 d. $32480 Solution: [( 0.062 – 0.054 ) + 0.02 ] × $ 1160000 = $32480. 18. Crane Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 45 % chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $ 804000 . What is the required journal entry as a result of this litigation? a. Debit Litigation Expense for $804000 and credit Litigation liability for $804000. b. No journal entry is required. c. Debit Litigation Expense for $361800 and credit Litigation Liability for $361800. d. Debit Litigation Expense for $442200 and credit Litigation Liability for $442200. 19. A company buys an oil rig for $ 2300000 on January 1, 2021. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $ 604000 (present value at 12 % is $ 194470 ). 12 % is an appropriate interest rate for this company. What expense should be recorded for 2021 as a result of these events? a. Depreciation expense of $34848 b. Depreciation expense of $276000 and interest expense of $23336 c. Depreciation expense of $276000 and interest expense of $72480 d. Depreciation expense of $249447 and interest expense of $23336 Solution: ($ 2300000 + $ 194470 ) ÷ 10 = $249447; $ 194470 × 0.12 = $23336.

20. During 2019, Swifty Corporation introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2 % of sales in the year of sale, 3 % in the year after sale, and 4 % in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Sales Actual Warranty Expenditures 201 9 $1604000 $40000 202 0 2490000 67000 202 1 2094000 134000 $6188000 $241000 What amount should Swifty report as a liability at December 31, 2021? a. $0 b. $69840 c. $83760 d. $315920 Solution: ($ 6188000 × 0.09 ) – $ 241000 = $315920. CHAPTER 14 1. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the a. bond indenture. b. bond debenture.

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c. registered bond. d. bond coupon. 2. A company issues $15700000 , 5.8 %, 20-year bonds to yield 6 % on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $15337098 . Using effective-interest amortization, how much interest expense will be recognized in 2020? a. $455300 b. $910600 c. $920370 d. $920246 Solution: ($15337098 × 0.03 ) + 15341911 × 0.03 ) = $920370 . Interest paid in every six month = 15700000*5.8%*6/12 = 455300 Interest expense on June 30 = 15337098*6%*6/12 = 460112.94 =>Interest expense dif= 4812.94 Interest expense on Dec 31 = (15337098+4812.94)*6%*6/12 = 460257.32 Total interest expense 2020= 460257.32 + 460112.94 = 923370.26 3. A company issues $25650000 , 5.8 %, 20-year bonds to yield 6 % on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $25057110 . Using effective-interest amortization, how much interest expense will be recognized in 2020? a. $743850 b. $1487700 c. $1503662 d. $1503455 Solution: ($25057110 × 0.03 ) + ($25064973 × 0.03 ) = $1503662 . Interest paid in every six month = 25650000*5.8%*6/12 = 743850 Interest expense on June 30 = 25057110*6%*6/12 = 751713.3 =>Interest expense dif= 7863.3 Interest expense on Dec 31 = (25057110+7863.3)*6%*6/12 = 751949.19 Total interest expense 2020= 751713.3+ 751949.19= 1503662.49

4. A company issues $25700000 , 9.8 %, 20-year bonds to yield 10 % on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $25259010 . What is interest expense for 2021, using straight-line amortization? a. $2491169 b. $2518600 c. $2527399 d. $2540650 Solution: ($25700000 × 0.098 ) + ($440990 ÷ 20) = $2540650 . Discount on share= 25259010 – 25700000 = 44099 5. On January 2, 2020, a calendar-year corporation sold 6 % bonds with a face value of $3070000 . These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2821000 to yield 8 %. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2020? a. $184200. b. $225680. c. $226510. d. $245600. Solution Interest expense = $2821000 × 0.040 = $112840 Interest paid = 307000 * 0.03 = 92100 [$2821000 + ($112840 - $92100)] × 0.040= 113670 112840 + 113670=$226510 6. On October 1, 2020 Vaughn Manufacturing issued 4 %, 10-year bonds with a face value of $8130000 at 103 . Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a a. credit of $162600 to Interest Payable. b. credit of $243900 to Premium on Bonds Payable. c. credit of $7886100 to Bonds Payable. d. debit of $243900 to Discount on Bonds Payable. Solution: ($8130000 × 1.03 ) - $8130000 = $243900 premium.

7. If bonds are issued initially at a premium and the effective- interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used. b. greater than the amount of the interest payments. c. the same as if the straight-line method were used. d. less than if the straight-line method were used. 8. The rate of interest actually earned by bondholders is called the a. stated rate. b. coupon rate. c. nominal rate. d. effective rate. 9. Bonita Industries issued $100000 of ten-year, 12 % bonds that pay interest semiannually. The bonds are sold to yield 10 %. One step in calculating the issue price of the bonds is to a. multiply $12000 by the table value for 10 periods and 12% from the present value of an annuity table. b. multiply $12000 by the table value for 20 periods and 6% from the present value of an annuity table. c. multiply $12000 by the table value for 20 periods and 5% from the present value of an annuity table. d. none of these answers is correct. 10. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d. the market rate multiplied by the beginning-of-period carrying amount of the bonds. 11. Bond interest paid is equal to the a. carrying value of the bonds multiplied by the effective-interest rate. b. carrying value of the bonds multiplied by the stated interest rate. c. face amount of the bonds multiplied by the stated interest rate. d. face amount of the bonds multiplied by the effective-interest rate. 12. On January 1, 2020, Swifty Corporation issued eight-year bonds with a face value of $5550000 and a stated interest rate of 6 %, payable semiannually on June 30 and December 31. The bonds were sold to yield 8 %. Table values are:

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Present value of 1 for 8 periods at 6% 0.627 Present value of 1 for 8 periods at 8% 0.540 Present value of 1 for 16 periods at 3% 0.623 Present value of 1 for 16 periods at 4% 0.534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652 The issue price of the bonds is a. $4903758. b. $4910751. c. $4937058. d. $5547780. Solution: Interest expense: PV of $5550000 at 4% = $5550000 x 0.534 = $2963700 Interest paid: PV of annuity at 4% = $5550000 x 0.03 x 11.652 = 1940058 $2963700 + $1940058 = $4903758 . 13. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a. an adjustment to the cost basis of the asset obtained by the debt issue. b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.

c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. 14. Concord Corporation retires its $360000 face value bonds at 101 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $346500 . The entry to record the redemption will include a. credit of $13500 to Loss on Bond Redemption. b. credit of $13500 to Discount on Bonds Payable. c. debit of $17100 to Gain on Bond Redemption. d. debit of $3600 to Premium on Bonds Payable. Solution: $360000 - $346500 = $13500 discount. 15. Bonita Industries retires its $400000 face value bonds at 106 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $414980 . The entry to record the redemption will include a. credit of $14980 to Loss on Bond Redemption. b. debit of $14980 to Premium on Bonds Payable. c. credit of $9020 to Gain on Bond Redemption. d. debit of $24000 to Premium on Bonds Payable. 16. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? A. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability. B. The balance of mortgage payable will remain a constant amount over the 10-year period. C. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. 17. The amount of interest expense will remain constant over the 10-year period. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated. b. the stated interest rate is unreasonable. c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note. d. any of these answers are correct.

18. On January 1, 2021, Vaughn Manufacturing sold property to Ivanhoe Company which originally cost Vaughn $2700000 . There was no established exchange price for this property. Ivanhoe gave Vaughn a $4230000 zero-interest- bearing note payable in three equal annual installments of $1410000 with the first payment due December 31, 2021. The note has no ready market. The prevailing rate of interest for a note of this type is 10 %. The present value of a $4230000 note payable in three equal annual installments of $1410000 at a 10 % rate of interest is $3506670 . What is the amount of interest income that should be recognized by Vaughn in 2021, using the effective-interest method? a. $0. b. $141000. c. $350667. d. $423000. Solution: $3506670 × 0.1 = $350667 . 19. On January 1, 2021, Sheridan Company sold property to Carla Vista Company . There was no established exchange price for the property, and Carla Vista gave Sheridan a $4400000 zero-interest-bearing note payable in 5 equal annual installments of $880000 , with the first payment due December 31, 2021. The prevailing rate of interest for a note of this type is 8 %. The present value of the note at 8 % was $3513576 at January 1, 2021. What should be the balance of the Discount on Notes Payable account on the books of Carla Vista at December 31, 2021 after adjusting entries are made, assuming that the effective-interest method is used? a. $0. b. $605338. c. $631038. d. $886424. Solution: $4400000 - $3513576 - ($3513576 × 0.08 ) = $605338 . 20. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Gain/Loss-Income. d. Realized Holding Gain.

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