Intermediate Accounting II - D104 WGU

Which method should be used to handle indirect costs of self-constructed assets?

Assigning no variable overhead to a constructed asset

Allocating overhead on the basis of gained production

Assigning a pro rata portion of all overhead to the asset

Allocating the total overhead to the asset

Assigning a pro rata portion of all overhead to the asset

A company purchases land for development into a subdivision. The land has a factory building on it that will need to be demolished.

Where should the interest costs be allocated?

Interest expenses

General administrative expenses

Cost of the land

Cost of the plant

Cost of land

In which situation can capitalization of interest be included in the cost of land?

When holding the land as an investment

When purchasing land with the intension of developing it for lots sales

When selling the land

When building a structure on the land

When purchasing land with the intension of developing it for lots sales

Which value should be used to record machinery that was purchased with a long-term note?

Sum of all estimated payments

Market price of the machinery

Present value of the future payments

Appraised value of the machinery

Present value of the future payments

Which item is considered to be a technology-related intangible asset?

Trade secrets

Goodwill

Artistic-related rights

Licensing agreements

Trade Secrets

Pay out ratio

Pay out ratio = cash dividends/net income (less preferred dividends, if applicable)

Return on common stockholders' equity

Return on Common Stockholders' Equity = (Net Income - Preferred Dividends) / Average Common Stockholders' Equity

Book value per share

Book Value per Share = common stockholders equity/outstanding shares

Dilutive Securities

Are securities that can be converted to common stock. Upon conversion or exercise by the holder, the dilutive securities reduce (dilute) earnings per share

Antidilutive securities

Securities, which upon conversion or exercise, increase earnings per share (or reduce the loss per share). Companies with complex capital structures will not report diluted EPS if the securities in their capital structure are antidilutive; they will report only the basic EPS number.

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 loss on sale of equipment for $5,000

Credit loss on sale of equipment for $5,000

Debit accumulated depreciation-equipment for $5,000

Credit accumulated depreciation-equipment for $5,000

Debit accumulated depreciation-equipment for $5,000.

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 reverse the prior impairment and measure the asset at its current fair value of $260,000.

The company should reverse the prior impairment and measure the asset at its fair value prior to the initial impairment of $250,000.

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

The company should not reverse the impairment and should not depreciate the asset further, leaving the book value at $225,000.

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 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?

$6.36 per ton

$10.00 per ton

$20.00 per ton

$21.43 per ton

$20.00 per ton

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

Debit Unearned Sales Revenue for $10,000; Credit Sales Revenue for $10,000

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

Debit to Sales Revenue for $10,000; Credit Unearned Sales Revenue for $10,000

Debit Unearned Sales Rev for $2000; Credit Sales Rev for $2000

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?

1.25

1.75

2.50

3.75

2.50

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

Debit cash $24,600, credit current maturities of long-term debt $4,510, credit note payable $20,090

Debit note payable $20,090, debit current maturities of long-term debt $4,510, credit cash $24,600

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

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

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 $70,000; Credit Bonds Payable for $70,000

Debit Interest Expense for $70,000; Credit Cash for $70,000

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

Debit Bonds Payable for $35,000: Credit Interest Expense for $35,000

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

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

$27,500 loss

$10,000 gain

$10,000 loss

$27500 Gain

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?

Credit Common Stock for $100

Debit Retained Earnings for $400

Credit Convertible Preferred Stock for $100

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

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

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?

$15

$25

$30

$60

$25

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?

$5.13

$5.19

$5.26

$5.00

$5.19

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 effects of both the bonds and the warrants.

The company should exclude the effects of both the bonds and the warrants.

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

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

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

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?

$100,000

$300,000

$330,000

$380,000

$380,000

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.

It will increase Additional Paid-in Capital by $15,000.

It will decrease Additional Paid-in Capital by $13,000.

It will decrease Additional Paid-in Capital by $15,000.

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?

Retained earnings is reduced by $100,000.

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

The number of shares of stock outstanding is reduced to 5,000.

Paid-in Capital in Excess of Par Value - Common Stock is reduced by $30,000.

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

The activity method (also called the variable-charge or units-of-production approach)

(Cost less Salvage Value) x Useful hours this year/Total Estimated Hours = Depreciation Charge

The straight-line method considers depreciation as a function of time rather than a function of usage

Cost less Salvage Value/Estimated Service Life = Depreciation Charge

The decreasing-charge methods provide for a higher depreciation cost in the earlier years and lower charges in later periods. Because these methods allow for higher early-year charges than in the straight-line method, they are often called accelerated depreciation methods.

A. Sum-of-the-years'-digits method results in a decreasing depreciation charge based on a decreasing fraction of depreciable cost (original cost less salvage value). Each fraction uses the sum of the years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator is the number of years of estimated life remaining as of the beginning of the year. In this method, the numerator decreases year by year, and the denominator remains constant (5/15, 4/15, 3/15, 2/15, and 1/15)

B. The declining-balance method utilizes a depreciation rate (expressed as a percentage) that is some multiple of the straight-line method. For example, the double-declining rate for a 10-year asset is 20 percent (double the straight-line rate, which is 1/10 or 10 percent). Companies apply the constant rate to the declining book value each year.

Unlike other methods, the declining-balance method does not deduct the salvage value in computing the depreciation base.

Calculating the declining-balance method

The declining-balance rate is multiplied by the book value of the asset at the beginning of each period

Earnings Per Share

net income - preferred dividends / weighted average common shares outstanding

depletion cost per unit

(total cost - salvage value) / total estimated units available

Asset Turnover

net sales/average total assets

Profit Margin on Sales

net income/net sales

Return on Assets

= Profit Margin on Sales x Asset Turnover

= Net Income/Average Total Assets

Current Ratio

Current Assets/Current Liabilities

Acid Test Ratio

Cash + Short Term Investments + Current Receivable (net)/Current Liabilities

Under the effective-interest method, companies:

Compute bond interest expense first by multiplying the carrying value (book value) of the bonds at the beginning of the period by the effective-interest rate.6

Determine the bond discount or premium amortization next by comparing the bond interest expense with the interest (cash) to be paid.

Debt to Asset Ratio

total liabilities/total assets

Times Interest Earned

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

Proportional Method

If the fair value or other sound basis for determining relative value is available for each class of security, the company allocates the lump sum received among the classes of securities on a proportional basis.

For instance, assume a company issues 1,000 shares of $10 stated value common stock having a market price of $20 a share, and 1,000 shares of $10 par value preferred stock having a market price of $12 a share, for a lump sum of $30,000. Figure 6.1 shows how the company allocates the $30,000 to the two classes of stock.

Incremental Method

In instances where a company cannot determine the fair value of all classes of securities, it may use the incremental method. It uses the fair value of the securities as a basis for those classes that it knows, and allocates the remainder of the lump sum to the class for which it does not know the fair value. For instance, if a company issues 1,000 shares of $10 stated value common stock having a fair value of $20, and 1,000 shares of $10 par value preferred stock having no established fair value, for a lump sum of $30,000, it allocates the $30,000 to the two classes as shown in Figure 6.2. If a company cannot determine fair value for any of the classes of stock involved in a lump-sum exchange, it may need to use other approaches.

Accounting for the issuance of shares of stock for property or services involves an issue of valuation

The general rule is: Companies should record stock issued for services or property other than cash at either the fair value of the stock issued or the fair value of the noncash consideration received, whichever is more clearly determinable.

If a company can readily determine both, and the transaction results from an arm's-length exchange, there will probably be little difference in their fair values. In such cases, the basis for valuing the exchange should not matter.