IA2 Problems

Equipment is placed on service on January 1 of Year 1. The cost of the equipment is $500,00 with a salvage value of $50,000 and an estimated useful life of five years.

Which amount of annual depreciation expense should be recorded on December 31 of Year 1 under the straight-line method?

$90,000

Equipment is placed in service January 1. The cost of the equipment is $750,000 with a salvage value of $150,000 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 double-declining balance method?

$180,000

A company purchased and placed into service a vehicle for $30,000 on January 1 of Year 1. The vehicle has an estimated useful life of five years and a $4,000 salvage value. The company prepares accrual financial statements on a calendar-year basis. The following chart illustrates the vehicle’s book value included in the company’s balance sheets throughout the vehicle’s useful life.

	Cost	Accumulated Depreciation	Book Value
December 31, Year 1	$30,000	$5,200	$24,800
December 31, Year 2	$30,000	$10,400	$19,600
December 31, Year 3	$30,000	$15,600	$14,400
December 31, Year 4	$30,000	$20,800	$9,200
December 31, Year 5	$30,000	$26,000	$4,000

How much did the depreciation of this vehicle add to the replacement funds for a new asset?

$0

On January 1, a company uses the straight-line method of depreciation and purchases and places in service an asset costing $11,000 The asset is expected to have a useful life of five years and a salvage value of $1,000. At the beginning of Year 2, the company revises its estimate for the useful life from 5 years to 6 years.

Which equation should be used to calculate the depreciation expense for Year 2?

($11,000 - $1,000 - $2,000) / 5

A company purchased a long-lived asset for its business at a cost of $84,000. At the end of Year 3, when the carrying value was $78,000 the company recorded an impairment loss of $5,000, resulting in the asset having an impaired value of $73,000. At the end of Year 5, it was determined that the asset’s present value of future cash flow was $85,000. The company is holding the asset for continued future use and is trying to determine which value should be used to calculate depression expense in Year 5.

Which value should the company use?

$73,000

A company’s depletion base for an oil well is $500,000. The company expects to extract 200,000 barrels of oil from the well over the next 10 years. 

How much should the inventory account be debited if the company extracts 50,000 barrels of oil during its first year of operation?

$125,000

A company reported the following financial information:

As of December 31,2018

• Total assets of $10,000,000

• Net sales revenue of $6,000,000

• Net income of $1,000,000

As of December 31, 2019

• Total assets of $14,000,000

• Net sales revenue of $8,000,000

• Net income of $2,000,000

What was the company’s return on assets for the year ending December 31, 2019?

16.67%

A company reported total assets of $300,000 as of December 31, 2018, and $500,000 as of December 31, 2019. Net sales revenue was $200,000 for the year ending December 31, 2019. Net income was $20,000 for the year ending December 31, 2019.

What was the company’s return on assets for the year ending December 31, 2019?

5%

The selected financial statement information for a company includes the following items:

• Total assets of $300,000 at the end of the current year

• Total assets of $500,000 at the end of the prior year

• Net sales of $3,00,000 in the current year

• Net income of $1,200,000 in the current year

What is the profit margin on sales for the current year?

40.00%

The selected financial statement information for a company includes the following items:

• Total assets of $300,000 at the end of the current year

• Total assets of $500,000 at the end of the prior year

• Net sales at $3,000,000 in the current year

• Net income of $1,200,000 in the current year

What is the return on assets for the current year?

3.0

A company currently has the following accounts:

• Cash: $7,000

• Accounts receivable (net): $11,000

• Short-Term investment: $3,000

• Inventory: $3,000

• Current liabilities: $5,000

The company has just learned that a $4,000 accounts receivable will not be collectable.

How will this change impact the current ratio?

It will decrease from 4.8 to 4.0

A bank will only continue a credit line for one of its small business customers if the small business can keep an acid-test greater than 1. The company’s reported current accounts are as follows:

• Cash: $3,000

• Accounts receivable (net): $9,000

• Inventory: $13,000

• Short-term investment: $1,500

• Current liabilities: $14,000

What should be the bank’s response?

The bank should close the credit line because the acid-test ratio is .96

A company reported the following accounts from its year-end balance sheet:

Cash: $50,000

Short-tem investments: $125,000

Accounts receivable: $230,000

Inventory: $720,000

Property, plant, and equipment, net: $800,000

Investments: $95,000

Accounts payable: $193,000

Accued liabilities: $29,000

Current portion of long-term debt: $170,000

Long-term debt: $715,000

Stockholder’s equity: $963,000

What is the company’s current ratio?

2.9

A company issued a $122,000, six-month, zero-interest bearing note to a bank. The present value of the note is $118,000.

Which entry should the company use to record the note?

Debit cash $118,000, debit discount on notes payable $4,000, credit notes payable $122,000

A company issues $1,000,000 of bonds at 103.

How will the discount or premium be recorded in the bond insurance journal entry?

Credit to Premium on Bonds Payable for $30,000

A company issued $100,000 at five-year bonds at 10% at a time when the market rate was 12%. The bonds pay interest annually and were issued at 93. 

What will be the annual cash interest payment for the bonds?

$10,000

A company borrows $100,000 by issuing a three-year note bearing interest at 8%, when the market rare of interest on a note of this type is significantly less, at 6%. As a result, the note was exchanged at a premium amount of $119,104. Interest payments are made each year on the anniversary of the note. 

How much should the company pay in interest ton the first anniversary of the note?

$8,000

A company’s income statement reveals the following amounts related to the company’s operations for the most recent year:

• Net sales revenue: $3,000,000

• Interest expense: $30,000

• Income tax expense: $60,000

• Net income: $300,000

What was the company’s times-interest earned ratio for the year?

13.00

A company reports the following financial information: 

• Current assets: $200,000

• Long-term assets: $500,000

• Current liabilities: $100,000

• Long-term liabilities: $300,000

• Stockholder’s equity: $300,000

What is this company’s debt-to assets ratio, rounded to the nearest percent?

57%

A company acquired 1,000 shares of treasury stock for $15 per share and later sold 500 shares of that treasury stock for $17 per share.

What is the journal entry for this transaction?

Debit Cash for $8,500; Credit Treasury Stock for $7,500; Credit Paid-in Capital from Treasury Stock for $1,000

A corporation has outstanding $3,000 shares of $10 par value common stock and retained earnings of $90,000. The corporation declares 15% stock dividend, and the stock has a fair value of $100 per share on both the declaration date and the distribution date.

How much should retained earnings be debited on the date of declaration?

$45,000

A company has a $1,000 bond and it is being converted into 100 shares of common stock ($1 par). At the time of conversion, there is an unamortized discount of $50. 

How much should be recorded in Paid-in Capital in Excess of Par-Common Stock?

$850

A company issues a $1,000 par value bond at 100. The bonds have one warrant attached to buy one share of common stock for $30 within the next five years. At the time, the stock is trading at $60, and the warrant can be traded separately from the bond. The bond alone trades at 99 without warrant. Once Issued, the market price for the warrant is $31. 

How much of the bond sale proceeds is allocated to the warrant if the proportional method is used?

$30.36

On January 1, a company uses the fair value method of reporting stock options. It grants its employees 15,000 shares of $6 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, and the expected period of benefit is three years.

Which amount is debited to compensation expense in Year 1?

$10,000