True or False: Notes and accounts receivable that result from sales transactions are often called trade receivables.
True
True or False: A service organization records a receivable at the point of sale of merchandise on account.
False
True or False: Cash (net) realizable value is the net amount the company expects to receive in cash.
True
If a company fails to record estimated bad debt expense,
A. cash realizable value is understated.
B. expenses are understated.
C. revenues are understated.
D. receivables are understated.
B. expenses are understated.
Note:If a company fails to record estimated bad debt expense, then expenses are understated and assets are overstated.
The existing balance in Allowance for Doubtful Accounts is considered in computing bad debt expense in the
A. direct write-off method.
B. percentage-of-receivables basis.
C. percentage-of-sales basis.
D. percentage-of-receivables and percentage-of-sales basis.
B. percentage-of-receivables basis.
Note: The existing balance in the Allowance for Doubtful Accounts is considered in computing bad debt expense when using the percentage-of-receivables basis. The existing balance is ignored when using the percentage-of-sales basis.
Voight Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $1,400,000 and $70,000 (Cr.), respectively. An aging of accounts receivable indicated that $128,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is
A. $128,000.
B. $58,000.
C. $198,000.
D. $70,000.
B. $58,000.
Note: The desired ending balance in the Allowance for Doubtful Accounts is $128,000. The current balance is $70,000, therefore the amount of the adjusting entry is $128,000 - $70,000 = $58,000.
Which of the following approaches for bad debts is best described as a balance sheet method?
A. Percentage-of-receivables basis.
B. Direct write-off method.
C. Percentage-of-sales basis.
D. Both percentage-of-receivables and direct write-off methods.
A. Percentage-of-receivables basis.
Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on the review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is
A. $5,000.
B. $55,000.
C. $60,000.
D. $65,000.
B. $55,000.
Hughes has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on the review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. In this situation, the amount of bad debt expense that should be reported for the year is
A. $5,000.
B. $55,000.
C. $60,000.
D. $65,000.
D. $65,000.
Net sales for the month are $800,000, and bad debts are expected to be 1.5% of net sales. The company uses the percentage-of-sales basis. If the Allowance for Doubtful Accounts has a credit balance of $15,000 before adjustment, what is the balance after adjustment?
A. $15,000
B. $27,000
C. $23,000
D. $31,000
B. $27,000
In 2015, Roso Carlson Company had net credit sales of $750,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2015, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31, 2015?
A. $10,050.
B. $10,500.
C. $22,500.
D. $40,500.
B. $10,500.
An analysis and aging of the accounts receivable of Prince Company at December 31 reveals the following data: Accounts receivable $800,000 Allowance for doubtful accounts per books before adjustment $50,000 Amounts expected to become uncollectible $65,000
The cash realizable value of the accounts receivable at December 31, after adjustment, is
A. $685,000.
B. $750,000.
C. $800,000.
D. $735,000.
D. $735,000.
Companies report accounts receivable on the balance sheet at
A. cost.
B. cash (net) realizable value.
C. gross realizable value.
D. face value.
B. cash (net) realizable value.
Note: Companies report accounts receivable at their cash (net) realizable value on the balance sheet.
Allowance for Doubtful Accounts is
A. closed at the end of the fiscal year.
B. an operating expense.
C. a contra asset account.
D. added to Accounts Receivable on the balance sheet.
C. a contra asset account.
Under the allowance method, estimated uncollectible receivables are credited to
A. Bad Debt Expense.
B. Accounts Receivable.
C. Allowance for Doubtful Accounts.
D. Uncollectible Accounts Expense.
C. Allowance for Doubtful Accounts.
Writing off an uncollectible account under the allowance method requires a debit to
A. Accounts Receivable.
B. Allowance for Doubtful Accounts.
C. Bad Debt Expense.
D. Uncollectible Accounts Expense.
B. Allowance for Doubtful Accounts.
The percentage-of-sales basis of estimating uncollectibles
A. produces a better estimate of cash realizable value.
B. results in a better matching of expenses with revenues.
C. emphasizes balance sheet relationships.
D. considers the existing balance in Allowance for Doubtful Accounts.
B. results in a better matching of expenses with revenues.
The percentage-of-receivables basis of estimating uncollectibles
A. produces a better estimate of cash realizable value.
B. results in a better matching of expenses with revenues.
C. emphasizes income statement relationships.
D. ignores the existing balance in Allowance for Doubtful Accounts.
A. produces a better estimate of cash realizable value.
The direct write-off method
A. is acceptable for financial reporting purposes.
B. debits Allowance for Doubtful Accounts to record write-offs of accounts.
C. shows only actual losses from uncollectible accounts.
D. estimates bad debt losses.
C. shows only actual losses from uncollectible accounts.
The balance of the Allowance for Doubtful Accounts account at January 1 of the current year was $6,800 credit. During the year, accounts receivable in the amount of $9,000 were written off. Estimated uncollectible accounts expense for the year amounts to $7,200. The balance of the Allowance for Doubtful Accounts account to be reported on the balance sheet at year-end is
A. $14,000.
B. $7,200.
C. $8,600.
D. $5,000.
D. $5,000.
Bond Company recorded bad debt expense of $35,000 and wrote off accounts receivable of $20,000 during the current year. The net effect of these two transactions on net income was
A. a decrease of $55,000.
B. a decrease of $35,000.
C. a decrease of $20,000.
D. no effect.
B. a decrease of $35,000.
Sanders Company has a debit balance of $7,000 in its Allowance for Doubtful Accounts before any adjustments are made. Based on a review of its accounts receivable at the end of the year, Sanders estimates that $70,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is
A. $7,000.
B. $77,000.
C. $70,000.
D. $63,000.
B. $77,000.
True or False: The cost of land includes closing costs such as title and attorney's fees.
True
Bailey Company purchases a new delivery truck for $35,000. The sales taxes are $2,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Bailey record as the cost of the new truck?
A. $38,200
B. $38,420
C. $37,000
D. $36,420
B. $38,420
Note: The cost of truck includes the purchase price, the sales tax, painting the logo on the side of the truck, and the safety testing.
Erin Danielle Company purchased equipment and incurred the following costs:
Cash price $24,000
Sales taxes 1,200
Insurance during transit 200
Installation and testing 400
Total costs $25,800
What amount should be recorded as the cost of the equipment?
A. $24,000
B. $25,200
C. $25,400
D. $25,800
D. $25,800
Plant assets decline in service potential over their useful lives except for
A. buildings.
B. equipment.
C. land.
D. land improvements.
C. land.
Note: All plant assets decline in service potential over their useful lives except for land.
The cost of land includes all of the following except
A. real estate brokers' commissions.
B. closing costs.
C. accrued property taxes.
D. parking lots.
D. parking lots.
A company purchased land for $100,000 cash. Accrued real estate taxes on the land, $2,000, and real estate taxes on the land for the current year, $3,000, were also paid in cash. Real estate brokers' commission was $8,000 and $10,000 was spent on demolishing the building that was on the property before construction of a new building could begin. The company was able to sell some of the salvaged materials from the demolished building for $2,000 cash. Under the historical cost principle, the cost of the land would be recorded at
A. $123,000.
B. $121,000.
C. $100,000.
D. $118,000.
D. $118,000.
True or False: Recognizing depreciation on asset results in an accumulation of cash for replacement of the asset.
False
True or False: The Internal Revenue Service (IRS) requires the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
False
True or False: To determine the revised depreciation expense, the company computes the asset's depreciable cost at the time of the revision and divides it by the asset's remaining useful life.
True
The balance in the Accumulated Depreciation account represents the
A. cash fund to be used to replace plant assets.
B. amount to be deducted from the cost of the plant asset to arrive at its fair value.
C. amount charged to expense in the current period.
D. amount charged to expense since the acquisition of the plant asset.
D. amount charged to expense since the acquisition of the plant asset.
Note: Accumulated Depreciation is a contra asset account containing total depreciation on the asset since its acquisition.
Depreciation is a process of
A. asset devaluation.
B. cost accumulation.
C. cost allocation.
D. asset valuation.
C. cost allocation.
Note: Depreciation is a process of allocating the cost of an asset over its useful life.
Factors that affect the computation of depreciation include all of the following except
A. cost.
B. book value.
C. salvage value.
D. useful life.
B. book value.
Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life.
Depreciation expense each year using the straight-line method will be
A. $14,160.
B. $11,760.
C. $9,840.
D. $9,600.
B. $11,760.
Note:The amount to be depreciated over the 5-year period is the cost of the asset plus the freight charges plus the construction of the foundation minus the estimated salvage value = $60,000 + $2,800 + $8,000 - $12,000 = $58,800. $58,800/5 years = $11,760 annual depreciation using the straight-line method.
A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's depreciation expense is $4,000 calculated on the straight-line basis and the balance in the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is
A. 10 years.
B. 8 years.
C. 5 years.
D. 3 years.
D. 3 years.
Note: $40,000 - $8,000 = $32,000 depreciable cost. $32,000/$4,000 = 8 year estimated useful life. If the Accumulated Depreciation account has a balance of $20,000, then the asset must be 5 years old ($20,000/$4,000). 8 years total life minus 5 years = 3 years remaining useful life.
Micah Bartlett Company purchased equipment on January 1, 2014, at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The amount of accumulated depreciation at December 31, 2015, if the straight-line method of depreciation is used, is
A. $80,000.
B. $160,000.
C. $78,000.
D. $156,000.
D. $156,000.
Note: Accumulated depreciation will be the sum of two years of depreciation expense. Annual depreciation for this asset is ($400,000 - $10,000)/5 = $78,000. The sum of two years depreciation is $156,000 ($78,000 + $78,000).
Ann Torbert purchased a truck for $11,000 on January 1, 2014. The truck will have an estimated salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in accumulated depreciation at December 31, 2015, can be computed by the following formula:
A. ($11,000 / Total estimated activity) X Units of activity for 2015).
B. ($10,000 / Total estimated activity) X Units of activity for 2015).
C. ($11,000 / Total estimated activity) X Units of activity for 2014 and 2015.
D. ($10,000 / Total estimated activity) X Units of activity for 2014 and 2015.
D. ($10,000 / Total estimated activity) X Units of activity for 2014 and 2015.
Note: The units-of-activity method takes salvage into consideration; therefore the depreciable cost is $10,000. This amount is divided by total estimated activity. The resulting number is multiplied by the units of activity used in 2014 and 2015 to compute the accumulated depreciation at the end of 2015, the second year of the asset's use.
Jefferson Company purchased a piece of equipment on January 1, 2014. The equipment cost $60,000 and had an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2015 under the double-declining-balance method?
A. $6,500.
B. $11,250.
C. $15,000.
D. $6,562.
B. $11,250.
Note: For the double-declining method, the depreciation rate would be 25% or (1/8 x 2). For 2014, annual depreciation expense is $15,000 = $60,000 (book value) x 25%; for 2015, annual depreciation expense is $11,250 = [($60,000-$15,000) x 25%].
Depreciable cost is the
A. book value of an asset less its salvage value.
B. cost of an asset less its salvage value.
C. cost of an asset less accumulated depreciation.
D. book value of an asset.
B. cost of an asset less its salvage value.
The depreciation method that produces a decreasing annual depreciation expense over an asset's useful life is the
A. straight-line method.
B. units-of-activity method.
C. declining-balance method.
D. None of these answer choices are correct.
C. declining-balance method.
The method that ignores salvage value in determining the amount of depreciation until the final year of the asset's useful life is the
A. straight-line method.
B. units-of-activity method.
C. declining-balance method.
D. None of these answer choices are correct.
C. declining-balance method.
Equipment was purchased for $800,000 on January 1, 2013. It has an estimated useful life of 8 years and a salvage value of $120,000. Depreciation is being computed using the straight-line method. What amount should be shown for the Equipment, net of accumulated depreciation, in the company's 2014 balance sheet?
A. $715,000.
B. $630,000.
C. $595,000.
D. $510,000.
B. $630,000.
Note: This response is incorrect as it deducts the salvage value ($120,000) and the accumulated depreciation, 2013 – 2014 ($170,000) from the cost of the equipment. Annual depreciation expense = Cost ($800,000) – salvage value ($120,000) / useful life (8 years) = $85,000. Accumulated depreciation, 2013 – 2014 = Annual depreciation expense ($85,000) x 2 years = $170,000. Amount of Equipment, net of accumulated depreciation at December 31, 2014 = Cost of equipment ($800,000) – accumulated depreciation, 2013 – 2014($170,000) = $630,000
change in the estimated useful life of equipment requires
A. a retroactive change in the amount of periodic depreciation recognized in previous years.
B. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
C. that the amount of periodic depreciation be changed in the current year and in future years.
D. that income for the current year be increased.
C. that the amount of periodic depreciation be changed in the current year and in future years.
Notes: A change in the estimated useful life of a plant asset is shown on the current and future years' financial statements; no retroactive adjustment is made.
Joe's Copy Shop bought equipment for $60,000 on January 1, 2013. Joe estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2014, Joe decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2014?
A. $20,000.
B. $8,000.
C. $10,000.
D. $15,000.
C. $10,000.
Note:$60,000/3 years = $20,000 annual depreciation. The book value on January 1, 2014 is $40,000. $40,000/4 remaining years = $10,000 revised depreciation expense for 2014.
When there is a change in estimated depreciation
A. previous depreciation should be corrected.
B. current and future years' depreciation should be revised.
C. only future years' depreciation should be revised.
D. None of the answer choices are correct.
B. current and future years' depreciation should be revised.
True or False: A current liability is a debt that the company reasonably expects to pay from existing current assets.
False
The time period for classifying a liability as current is one year or the operating cycle, whichever is
A. longer.
B. shorter.
C. probable.
D. possible.
A. longer.
Note:Because some firms have an operating cycle longer than one year, the time period for classifying a liability as current is one year or the operating cycle, whichever is longer.
All of the following are current liabilities except
A. sales taxes payable.
B. unearned rental revenue.
C. current maturities of long-term debt.
D. all of these answer choices are current liabilities.
D. all of these answer choices are current liabilities.
True or False: Notes payable due for payment within one year of the balance sheet date are usually classified as current liabilities.
True
Maggie Sharrer Company borrows $88,500 on September 1, 2014, from Sandwich State Bank by signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2014?
A. $2,655
B. $3,540
C. $4,425
D. $10,620
B. $3,540
RS Company borrowed $70,000 on December 1 on a 6-month, 12% note. At December 31
A. neither the notes payable nor the interest payable is a current liability.
B. the notes payable is a current liability, but the interest payable is not.
C. the interest payable is a current liability but the notes payable is not.
D. both the notes payable and interest payable are current liabilities.
D. both the notes payable and interest payable are current liabilities.
Note: Both the notes payable and interest payable are current liabilities. Notes due for payment within one year of the balance sheet date are usually classified as current liabilities.
True or False: Companies report any balance in an unearned revenue account as a current liability in the balance sheet.
True
A retail store did not ring up sales tax separately. If the
sales tax rate is 5% and the total receipts amounted to $126,000, what
is the amount of the sales taxes owed to the taxing agency?
A. $120,000
B. $126,000
C. $6,300
D. $6,000
D. $6,000
Note: The $126,000 includes both the sales and the sales tax. $126,000/1.05 = $120,000 of sales. Therefore, the sales tax = $126,000 - $120,000 = $6,000.
Janis Vick has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Vick account for the cash received at the end of the engagement?
A. debit Cash and credit Unearned Service Revenue.
B. debit Cash and credit Service Revenue.
C. debit Prepaid Service Fees and Service Revenue.
D. No entry is required when the engagement is concluded.
B. debit Cash and credit Service Revenue.
Note: The cash received at the end of the engagement is recorded as a debit to Cash and a credit to Service Revenue.
Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, the amount to be credited to Sales Revenue is
A. $4,000.
B. $4,300.
C. $4,289.25.
D. None of these answer choices are correct.
B. $4,300.
Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Service Revenue at December 31?
A. $0
B. $4,500
C. $13,500
D. $18,000
B. $4,500
The amount of sales tax collected by a retailer is recorded in the
A. Sales Tax Expense account.
B. Sales Taxes Payable account.
C. Sales Tax Revenue account.
D. Sales Revenue account.
B. Sales Taxes Payable account.
Which of the following is not a payroll deduction?
A. FICA taxes.
B. Federal income tax.
C. State income tax
D. Federal unemployment taxes.
D. Federal unemployment taxes.
Note: Federal unemployment taxes are payroll taxes paid by the employer not the employee.
Employer payroll taxes do not include
A. federal unemployment taxes.
B. state unemployment taxes.
C. federal income taxes.
D. FICA taxes.
C. federal income taxes.
Note: This is one of the payroll taxes paid by employers.
True or False: Secured bonds, also called debenture bonds, are issued against the general credit of the borrower.
False
True or False: The market interest rate is the rate used to determine the amount of cash interest the borrower pays.
False
If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
A. $2,000,000
B. $60,000
C. $200,000
D. $140,000
D. $140,000
Note: $2,000,000 X 10% X 70% after-tax rate = $140,000 annual net cash cost of borrowing.
Bond
A. issuance must be approved by the board of directors.
B. terms are set forth in a legal document called a bond indenture.
C. contractual interest rate is also referred to as the stated rate.
D. All of these answer choices are correct.
D. All of these answer choices are correct.
The major disadvantages resulting from the use of bonds are that
A. interest is not tax deductible and the principal must be repaid.
B. the principal is tax deductible and interest must be paid.
C. neither interest nor principal is tax deductible.
D. interest must be paid and the principal must be repaid.
D. interest must be paid and the principal must be repaid.
True or False: If the market rate of interest is lower than the contractual interest rate, the bonds will sell at a premium.
True
True or False: If the market rate of interest is lower than the contractual interest rate, the bonds will sell at a premium.
True
True or False: The sale of bonds above face value causes the total cost of borrowing to be more than the bond interest paid.
False
True or False: The sale of bonds above face value causes the total cost of borrowing to be more than the bond interest paid.
False
Premium on Bonds Payable
A. has a debit balance.
B. is a contra account.
C. is considered to be a reduction in the cost of borrowing.
D. is deducted from bonds payable on the balance sheet.
C. is considered to be a reduction in the cost of borrowing.
Note: The Premium on Bonds Payable account reduces interest expense as the premium is amortized over the life of the bonds. Therefore the premium is a reduction in the cost of borrowing.
Four-Nine Corporation issued bonds that pay interest every July 1 and January 1. The entry to accrue bond interest at December 31 includes a
A. debit to Interest Payable.
B. credit to Cash.
C. credit to Interest Expense.
D. credit to Interest Payable.
D. credit to Interest Payable.
Discount on Bonds Payable
A. has a credit balance.
B. is a contra account.
C. is added to bonds payable on the balance sheet.
D. increases over the term of the bonds.
B. is a contra account.
If the company issues a $100,000, 12%, 10-year bond, that pays interest semiannually when market interest rate is 10%, the bond would sell at an amount
A. less than face value.
B. equal to face value.
C. greater than face value.
D. that cannot be determined based on the information given.
C. greater than face value.
Note: If the market rate of interest is lower than the contractual rate of interest, investor's will have to pay more than face value for the bonds. In these cases, bonds will sell at a premium.
True or False: When the issuing company records a conversion of bonds into common stock, no gain or loss is recognized.
True
Bryce Company has $500,000 of bonds outstanding. The unamortized premium is $7,200. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?
A. $2,200 gain.
B. $2,200 loss.
C. $5,000 gain.
D. $5,000 loss.
A. $2,200 gain.
Note: The carrying value of the bonds is $500,000 + $7,200 = $507,200. The cash used to retire the bonds is $505,000. Therefore the gain is $507,200 - $505,000 = $2,200.