Pre-Assessment: Intermediate Accounting II Units 4-6 (KWV1)

Equipment is placed in service on January 1. The cost of the equipment is $250,000 with a salvage value of $25,000 and an estimated useful life of five years. Which amount of annual depreciation expense should be recorded on December 31 of Year 2 under the sum-of-years'-digits method?

$60,000

A company placed an asset into service on Day 1 of Year 1 with the following data related to the purchase:

Cost of machinery $225,000

Estimated salvage value $75,000

Product life hours 75,000 hours

Useful life 5 years

Hours used in Year 1 5,000 hours

Which amount of annual depreciation expense should be recorded in the first year using the activity method?

$10,000

$225,000-$75,000=$150,000

($150,000*5,000 hours)/75,000

On July 1, a company placed into service a vehicle for $50,000 with an estimated useful life of five years and no salvage value. The company prepares accrual-basis financial statements on a calendar-year basis. How many months should be included in the calculation of depreciation expense for the year of acquisition using the double-declining-balance method?

6

A company purchased a piece of equipment for $120,000 and estimated that the asset will have no salvage value at the end of its 15-year useful life. At the end of Year 5 of ownership, when accumulated depreciation was $40,000 and the asset's book value was $80,000, the company revised the asset's estimated useful life to a total of 10 years. What is the appropriate accounting treatment beginning with Year 6?

The equipment will depreciate $80,000 over the next five years.

A company using the composite approach to depreciation sells equipment for $10,000. The equipment was purchased five years earlier for $15,000, and the company has already recorded $5,000 in accumulated depreciation. What is included in the journal entry for the sale of the equipment?

Debit accumulated depreciation-equipment for $5,000

A steel manufacturer uses the production variable method for depreciating assets. Which combination best describes the depreciation method used?

Straight-line and activity

A company owns an asset with an original cost of $300,000 and a current book value of $160,000. During a review of the asset for impairment, the company estimates the expected future cash flows from the use and disposal of the asset to be $200,000. There is an active market for this asset, and the fair value of the asset, calculated as the present value of expected future cash flows, is $140,000. Should this asset be considered impaired?

No, because the estimate of expected future cash flows (undiscounted) is greater than the book value.

Several years ago, a company acquired an asset at a cost of $400,000. Last year, the company recognized an impairment loss of $25,000 and properly reduced the asset's book value from $250,000 to $225,000.

Using the asset's new base of $225,000, the company calculates depreciation for the current year to be $10,000, bringing the book value down to $215,000. However, the company has also determined that the asset's fair value has recovered and is now estimated to be $260,000.

How should the company measure the asset on its current balance sheet

The company should not reverse the impairment and should depreciate the asset by $10,000 to a new book value of $215,000.

A company invests $15,000,000 into a coal mine estimated to have 20 million tons of coal. The coal mine is estimated to be in operation for the next five years. In Year 1, the company extracted and sold 1 million tons of coal. How much is depletion in Year 1?

$750,000

$15,000,000/20,000,000= $.75

$.75*1,000,000=$750,000

A company invested $15,000,000 in a coal mine estimated to have 1,500,000 tons of coal. In the first year, the company extracted 100,000 tons of coal. At the end of the first year, it became clear that the coal mine was likely to have only another 700,000 tons of coal remaining. Which depletion rate will be used starting in the second year?

$20.00 per ton

$15,000,000/700,000

A company reported total assets of $10,000,000 as of December 31, 2018, and $14,000,000 as of December 31, 2019. Net sales revenue was $6,000,000 for the year ending December 31, 2018, and $8,000,000 for the year ending December 31, 2019. What was the company's asset turnover ratio for the year ending December 31, 2019?

0.67

8,000,000/(10,000,000+14,000,000/2)

8,000,000/12,000,000=.67

A company's profit margin on sales was 2.50%, and its asset turnover was 0.50. What was the company's return on assets for this period?

1.25%

Profit Margin on Sales*Asset Turnover

2.5*.5

A company reported the following information in its 2019 annual report:

Net sales $ 750,000

Total assets at the end of year 2 $ 500,000

Total assets at the end of year 1 $ 450,000

Net income $ 120,000

What is the company's profit margin on sales?

16%

Net Income/Net Sales

$120,000/$750,000 = .16

A company reported the following information in its 2019 annual report:

Net sales $ 750,000

Total assets at the end of year 2 $ 500,000

Total assets at the end of year 1 $ 450,000

Net income $ 120,000

What is the company's return on assets?

0.25

Net Income/Ave. Total Assets

A local restaurant has taken a $40,000 loan from their bank to perform needed renovations. The restaurant must repay the borrowed funds in eight months with 3% interest. How should the restaurant record the loan?

Debit Cash for $40,000; Credit Notes Payable for $40,000

On January 1, a company received $24,000 in advance for monthly pest services for the year. Which entry should the company use to record the month of May's revenue?

Debit Unearned Sales Revenue for $2,000; Credit Sales Revenue for $2,000

A company's normal operating cycle is one year, and they have the following account balances taken from the trial balance:

Accounts payable: $50,000

Accounts receivable: $25,000

Notes payable (due in 30 months): $15,000

Customer advances: $10,000

Bonds payable (due in 60 months): $30,000

Sales tax payable: $5,000

Which amount should be included as current liabilities on the balance sheet?

$65,000

Accounts Payable+Customer Advances+Sales Tax Payable

A manufacturing company produced 900 items this year. By December 31, 850 of the items were sold. The company also sells an extended warranty at a cost of $50 per item. Warranties were purchased on 725 of the items. The company incurred and paid an average of $35 per item warranty expense this year. Which amount of unearned warranty revenue should be recorded at the time of the sale?

$36,250

$50*725=$36,250

A corporation has been sued by a customer, and legal counsel believes it is probable that the corporation will lose the lawsuit. The loss is estimated to be $500,000. What is the proper presentation and disclosure for this lawsuit?

The corporation will record a $500,000 loss contingency and related liability. The corporation also will disclose the nature of the contingency.

A company reported the following excerpts from its balance sheet:

Cash: $150,000

Short-term investments: $350,000

Accounts receivable (net): $200,000

Inventory: $300,000

Property, plant, and equipment (net): $500,000

Total current liabilities: $400,000

What is the company's current ratio?

2.50

Current Assets/Current Liabilities

(Cash+Short-Term Investments+Accounts Rec.+Inventory)/Current Liabilities

On February 1, a company borrowed $24,600 from a bank. The terms of the loan require five equal annual installments beginning January 31. The company has a calendar year-end. Which entry should the company use to record the loan?

Debit cash $24,600, credit current maturities of long-term debt $4,920, credit note payable $19,680

A company issues $10,000,000 in 20-year bonds at a 9% interest rate, paid annually. On the issue date, the bonds sold for $9,875,000. At which value were the bonds issued?

Discount

A company issues bonds at par with a 10-year term for $1,000,000 on January 1 of Year 1. The bonds bear interest at an annual rate of 7% payable semiannually on January 1 and July 1. Which journal entry should be recorded on July 1 of Year 1?

Debit Interest Expense for $35,000; Credit Cash for $35,000

A company issues bonds with a face value of $1,000,000 with a 10-year term at 95 on January 1 of Year 1. The bonds bear interest at an annual rate of 5% payable semiannually on January 1 and July 1. Which journal entry should be recorded on January 1 of Year 1?

Debit Cash for $950,000; Debit Discount on Bonds Payable for $50,000; Credit Bonds Payable for $1,000,000

On July 22, a company issues bonds at 105, bonds with a par value of $1,000,000, due in 20 years. Five years after the issue date, the company calls the entire issue at 101 and redeems it. At that time, the unamortized premium balance is $37,500. What is the effect of this transaction?

$27,500 gain

A company issued a 30-year mortgage note with a face value of $425,000 to purchase a new production plant. The lender assessed 3 points to close the financing. Which amount should be recorded on the balance sheet for the Mortgage Note Payable?

$425,000

On January 1 in Year 1 a company signs a three-year $100,000 note with a stated and effective interest rate of 8%. Interest payments are made annually on the anniversary of the note, and the principal will be paid in a lump sum when the note matures. How much interest should the company pay on January 1 in Year 2?

$8,000

$100,000*.08 = $8,000

A company reports the following financial information:

Net income: $45,000

Interest expense: $13,000

Income tax expense: $9,000

R&D expense: $8,000

Operating income: $70,000

What is the company's times interest earned?

5.15

(Net Income+Interest Expense+Interest Tax Expense)/Interst Expense

($45,000+$13,000+$9,000)/$13,000=5.15

A share of stock has a preemptive right. From which event is the stockholder protected?

Involuntary dilution of ownership interest

An accountant is explaining to a client that each share of common stock comes with rights and privileges for the owner and that a specific right protects existing stockholders from having their interest diluted. Which right is the accountant referencing to this client?

Right to share in new issues of common stock

A company's balance sheet displays common stock of $150,000, preferred stock of $50,000, additional paid-in capital from common stock of $100,000, and retained earnings of $80,000. Which amount represents stockholders' equity?

$380,000

$150,000+$50,000+$100,000+$80,000

A company has acquired 15,000 shares of its treasury stock at $10 per share using the cost method. The company now decides to sell 2,000 of its treasury stock for $12 per share. The journal entry to record the sale of treasury stock includes a debit to Cash for $24,000. What is the correct credit entry?

Treasury Stock for $20,000 and Paid-in Capital Treasury Stock for $4,000

On Year 1, a company issued 10,000 shares of $2 par stock at $12 per share. On Year 3, the company reacquired 1,000 shares of its stock for $15 per share. How will this transaction in Year 3 affect Additional Paid-in Capital, if at all?

It will not affect Additional Paid-in Capital.

A company has 10,000 shares of $6 par value common stock outstanding. The market value of the stock is $10. What is the impact of a 2-for-1 stock split?

Par value of the stock is is reduced to $3 per share.

$6/2 = $3

A company reported the following information in its financial statements:

Net income: $70,000

Preferred dividends: $10,000

Beginning common stockholders' equity: $100,000

Ending common stockholders' equity: $200,000

Common shares outstanding: 50,000

What is the return on common stockholders' equity?

40%

(Net Income - Preferred Stockholders Equity)/Ave. common stockholders Equity

($70,000-$10,000)/$150,000=40%

When a company issued 100 shares of preferred stock with a par value of $1 per share, it recorded a $50 premium. The company recently converted this preferred stock into 100 shares of common stock with a par value of $5 per share. Which information should be included in the journal entry at the time of conversion?

Debit Paid-in Capital in Excess of Par-Preferred Stock for $50

A company has a $1,000 bond that is convertible into 100 shares of common stock (par value $10). How will this conversion impact earnings per share if the company chooses to convert the debt?

Decreases immediately

A company receives a lump sum of $1,015 for a $1,000 par value bonds with one warrant attached. The warrant is for the purchase one share of common stock for $30 within the next five years when the stock is trading at $60, and the warrant can be traded separately from the bond. The bond's market price is 99. How much of the lump-sum sale proceeds is allocated to the warrant if the incremental method is used?

$25

On January 1, a company uses the fair value method of reporting stock options. It grants its employees 1,000 shares of $1 par value common stock options, which can be exercised anytime within the next five years. Under an acceptable option-pricing model, the total compensation expense is $30,000. The employees exercise all 1,000 options for $15,000. Which part of the journal entry should be recorded for the exercise of the options?

Debit Paid-in Capital - Stock Options for $30,000

A company reports a net income of $5,000,000. Shares outstanding at the beginning of the calendar year equal 1,000,000. There are 950,000 shares outstanding on April 1. How much are earnings per share?

$5.19

(Net Income-Preferred Dividends)/Weighted Ave. Common Stock Shares Outstanding

Corporation A issues convertible bonds. If the bonds where converted, the net savings from retiring the bonds is greater than the impact on earnings per share. What is the effect on earnings per share?

Antidilutive

A company had both outstanding convertible bonds and stock warrants during the current year. The company determined that if the bonds had been converted during the year, calculated basic earnings per share (EPS) would have decreased, and if the warrants had been exercised during the year, calculated basic EPS would have increased. How should the company consider these securities when calculating and presenting diluted earnings per share on the income statement?

The company should include the effect of the bonds, but exclude the effect of the warrants.