ACTG 221 Ch9,10&11

Front

Which statement best expresses the ‘going concern’ concept?

Back

A company is assumed to continue operations indefinitely, benefitting from assets and paying liabilities.

Answer explanation

A company is assumed to continue operations indefinitely, benefiting from assets and paying liabilities. Unless there is evidence to the contrary, companies are assumed to be going concerns that will continue to operate.

Front

What kind of adjusting entry needs to be recorded at year-end by Bitner Company for a $10,000 loan from Century Bank at an 8% annual interest rate?

Back

$600 to record interest expense and interest payable

Answer explanation

$600 to record interest expense and interest payable. Nine months, April 1 to December 31, of interest expense is accrued at December 31. Note payable $10,000 x 8% interest rate x 9/12 = $600.

Front

The XCel Corporation had the following shares of stock outstanding at December 31, Year 3: Common Stock, $50 par value, 40,000 shares outstanding; and Preferred Stock, 6 percent, $100 par value, cumulative, 10,000 shares outstanding. Dividends for Year 1 and Year 2 were in arrears. On December 31, Year 3, XCel declared total cash dividends of $250,000. The total amounts payable to preferred stockholders and common stockholders, respectively, are:

Back

$180,000 / $70,000

Answer explanation

Preferred stock cash dividend per share = $6 ($100 par value x 6%).  Total preferred stock cash dividend per year $60,000 ($6 x 10,000 shares outstanding).  Years 1 and 2 preferred stock dividends in arrears as well as Year 3 preferred stock dividend must be paid in Year 3 before cash dividend paid to common shareholders.  Preferred stock dividend payable in Year 3 $180,000 ($60,000 annual dividend x three years).  Common stock dividend in Year 3 $70,000 ($250,000 total cash dividend – $180,000 preferred stock dividend).

Front

What is the amount of net income and the net change in cash for Technical Services, Inc. (TSI) in Year 1, given that TSI earned $40,000 of cash revenue and estimates future warranty claims at 6 percent of revenue, while paying $700 cash on warranty claims? Options: $37,600 / $39,300; $37,600 / $37,600; $39,300 / 39,300; $38,300 / $39,300.

Back

$37,600 / $39,300.

Answer explanation

$37,600 / $39,300. Warranty expense = sales revenue $40,000 x 6% = $2,400. Sales revenue $40,000 – warranty expense $2,400 = $37,600 net income. Net change in cash flow $39,300 = cash revenues $40,000 – cash paid on warranty claims $700.

Front

If a bond sells at a discount, which of the following is true? The market interest rate is expected to increase above the stated interest rate on the bond, The market interest rate at the time of issue is less than the stated interest rate on the bond, The market interest rate at the time of issue is the same as the stated interest rate on the bond issue, The market interest rate at the time of issue is greater than the stated interest rate on the bond.

Back

The market interest rate at the time of issue is greater than the stated interest rate on the bond.

Answer explanation

A bond sells at a discount when the market rate of interest at the time of issue is greater than the stated interest rate on the bond.  Because the bond’s stated interest rate is less than the market interest rate the bond will sell for less than face value.  The full face value of the bond will be repaid at the maturity date. The difference is called a bond discount.

Front

How should Stephanie’s Fashions record the sales transactions for $2,000 of merchandise sold plus 5% sales tax on account?

Back

Debit: Accounts Receivable 2,100
Credit: Sales Tax Payable 100
Credit: Sales Revenue 2,000

Answer explanation

Debit accounts receivable $2,100, credit Sales Tax Payable $100, credit Sales Revenue $2,000. Stephanie’s Fashions has a current liability for the amount of sales tax collected but not yet paid to the state. Sales revenue $1,000 x 5% = $100 sales tax payable.

Front

On January 1, Year 1, Intersil, Inc. borrowed $100,000 cash from Front Street Bank on a note that had a 6% annual interest rate and a five-year term. The loan is to be repaid in annual payments of $23,741.69 on January 1 each year. The amount of the January 1, Year 2, payment applied to interest and to principal would be

Back

$6,000 / $17,741.69.

Answer explanation

The amount applied to interest at January 1, Year 2 is $6,000 ($100,000 note x 6% annual interest rate).  Amount applied to principal is $17,741.69 (annual payment $23,741.69 – interest payment $6,000)

Front

Which of the following is an advantage of the corporate form of business organization? Double taxation, Amount of regulation, Entrenched management, Limited liability

Back

Limited liability

Answer explanation

A corporation is legally separate from its owners.  The most that owners of a corporation can lose is the amount they have invested in the company (the value of the company’s stock). Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies. The benefit of limited liability is one of the most significant reasons corporations are so popular.

Front

On January 1, Year 1, Booker Corporation issued a $5,000 face value bond that sold for 90. The bond had a five-year term and paid 10% annual interest. The company used the proceeds from the bond issue to buy land. The land was leased for $600 of cash revenue per year and was sold at the end of the 5th year for $4,200 cash. The straight-line method of amortization is used. The carrying value of the bond liability on January 1, Year 1, would be

Back

$4,500

Answer explanation

$5,000 face value x .90 bond discount = $4,500 carrying value.

Front

On January 1, Year 1, Booker Corporation issued a $5,000 face value bond that sold for 90. The bond had a five-year term and paid 10% annual interest. The company used the proceeds from the bond issue to buy land. The land was leased for $600 of cash revenue per year and was sold at the end of the 5th year for $4,200 cash. The straight-line method of amortization is used. The amount of interest expense reported on the Year 1 income statement would be

Back

$600

Answer explanation

$5,000 face value x 10% interest rate = $500 stated interest rate.  $5,000 face value - $4,500 carrying value = $500 discount on bonds payable.  Amount of bond discount recognized as interest expense each year $500 discount / 5 years = $100.   $500 stated interest rate + $100 amortization of bond discount = $600 amount of interest expense reported on the Year 1 income statement.