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ACC 557 Week 7 Quiz – Strayer NEW Click On The Link Below To Purchase A+ Graded Material Instant Download http://budapp.net/ACC-557-Week-7-Quiz-Strayer-NEW-ACC557W7Q.htm All possible questions with answers TRUE-FALSE STATEMENTS All plant assets (fixed assets) must be depreciated for accounting purposes. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Land improvements are generally charged to the Land account. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The book value of a plant asset is always equal to its fair market value. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Recording depreciation on plant assets affects the balance sheet and the income statement. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The depreciable cost of a plant asset is its original cost minus obsolescence. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Recording depreciation each period is an application of the expense recognition principle. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA The Accumulated Depreciation account represents a cash fund available to replace plant assets.


Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In calculating depreciation, both plant asset cost and useful life are based on estimates. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA


Under the double-declining-balance method, the depreciation rate used each year remains constant. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

To determine a new depreciation amount after a change in estimate of a plant asset's useful life, the asset's remaining depreciable cost is divided by its remaining useful life. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Capital expenditures are expenditures that increase the company's investment in productive facilities. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Ordinary repairs should be recognized when incurred as revenue expenditures. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


The fair market value of a plant asset is always the same as its book value. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset's book value. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A plant asset must be fully depreciated before it can be removed from the books.


Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.


Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Conceptually, the cost allocation procedures for natural resources parallels that of plant assets. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Natural resources include standing timber and underground deposits of oil, gas, and minerals. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.


Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Research and development costs which result in a successful product which is patentable are charged to the Patent account. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The cost of a patent must be amortized over a 20-year period. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The cost of a patent should be amortized over its legal life or useful life, whichever is shorter. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting The asset turnover ratio is calculated as total sales divided by ending total assets.


Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Usually, companies combine plant assets and intangibles under "Property, plant, and equipment in the balance sheet. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The asset turnover ratio analyzes the productivity of a company's assets. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Accounting for exchanges of plant assets is easier if the transaction does not have commercial substance. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


a51. Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a52. When plant assets are exchanged with commercial substance, the cost of the new asset is the book value of the old asset plus any cash paid.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When constructing a building, a company is permitted to include in the acquisition cost and certain interest costs incurred in financing the project. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Recognition of depreciation provides for the accumulation of cash for the replacement of the asset. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.


Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Depletion expense is reported in the income statement as an operating expense. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Goodwill is not recognized in accounting unless it is acquired from another business enterprise. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Research and development costs should be charged to expense when incurred. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a59. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

MULTIPLE CHOICE QUESTIONS


The cost of a purchased building includes all of the following except closing costs. real estate broker's commission. remodeling costs. All of these are included. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A company purchased land for $80,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at $97,000. $80,000. $85,000. $92,000. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Which one of the following items is not considered a part of the cost of a truck purchased for business use? Sales tax Truck license Freight charges Cost of lettering on side of truck Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Which of the following assets does not decline in service potential over the course of its useful life? Equipment Furnishings Land Fixtures


Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The four subdivisions for plant assets are land, land improvements, buildings, and equipment. intangibles, land, buildings, and equipment. furnishings and fixtures, land, buildings, and equipment. property, plant, equipment, and land. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The cost of land does not include real estate brokers' commission. annual property taxes. accrued property taxes assumed by the purchaser. title fees. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gagner Clinic purchases land for $150,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land? $132,200 $150,000 $154,700 $132,500 Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


Carey Company buys land for $50,000 on 12/31/12. As of 3/31/13, the land has appreciated in value to $50,700. On 12/31/13, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2013? $0 $700 $1,100 $1,800 Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Hull Company acquires land for $96,000 cash. Additional costs are as follows: Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560

MC. 68 (Cont.) Hull will record the acquisition cost of the land as $86,000. $97,690. $99,610. $99,370. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to illuminate the new parking area cost $20,000. Which of the following statements is true with respect to these additions? $40,000 should be debited to the Land account.


$20,000 should be debited to Land Improvements. $60,000 should be debited to the Land account. $60,000 should be debited to Land Improvements. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Land improvements should be depreciated over the useful life of the land. buildings on the land. land or land improvements, whichever is longer. land improvements. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? Excavation fees are capitalized but building permit fees are not. Architect fees are capitalized but building permit fees are not. Interest is capitalized during the construction as part of the cost of the building. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true? The cost of the building will not include the repainting and recarpeting costs. The cost of the building will include the cost of replacing the roof. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.


The wiring is part of the computer costs, not the building cost. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Engler Company purchases a new delivery truck for $60,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck? $66,050 $65,890 $64,000 $65,600 Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

All of the following factors in computing depreciation are estimates except cost. residual value. salvage value. useful life. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Presto Company purchased equipment and these costs were incurred: Cash price $45,000 Sales taxes 3,600 Insurance during transit 640 Installation and testing 860 Total costs $50,100


Presto will record the acquisition cost of the equipment as $45,000. $48,600. $49,240. $50,100. Ans: LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Angie’s Blooms purchased a delivery van with a list price of $30,000. The company was given a $3,000 cash discount by the dealer, and paid $1,500 sales tax. Annual insurance on the van is $750. As a result of the purchase, by how much will Angie’s Blooms increase its van account? $30,000 $27,000 $29,250 $28,500 Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Yocum Company purchased equipment on January 1 at a list price of $100,000, with credit terms 2/10, n/30. Payment was made within the discount period and Yocum was given a $2,000 cash discount. Yocum paid $5,000 sales tax on the equipment, and paid installation charges of $1,760. Prior to installation, Yocum paid $4,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? $104,760 $108,760 $110,760 $101,000 Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA New equipment was purchased by Tignor Corporation at a list price of $98,000, with credit terms of 2/10, n/30. Payment was made within the discount period and included $7,840 sales tax, in addition to the net purchase price. The company also paid delivery


charges of $990 and labor costs of $1,500 for installing the new equipment at the appropriate location. During installation, an inexperienced employee punctured several containers with a forklift, causing damage to the equipment. Cost to repair the damage was $2,460. What is the total cost of Tignor's equipment? $106,370. $103,910. $108,830. $108,330. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Berger Company purchased equipment having an invoice price of $22,500. The terms of sale were 3/10, n/60, and Berger paid within the discount period. In addition, Berger paid a $235 delivery charge, $615 installation charge, and $1,528 sales tax. Berger paid for optional accident insurance for transport of the equipment amounting to $35. The amount recorded as the cost of this equipment is: $24,913. $24,878. $24,238. $24,203. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Tempest Company purchased land for $464,000. Additional costs include a $30,200 fee to a real estate broker, a survey fee of $4,500, $2,750 to construct a fence, and a legal fee of $11,800. What should Tempest record as the cost of the land? $464,000. $461,250. $513,250. $510,500. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Newton Manufacturing acquired new machinery on January 1 at a cost of $90,000. It is estimated to have a useful life of 10 years and a salvage value of $30,000. Straight-


line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the original estimate of useful life had been too long and that the machinery would have to be retired after two more years (at the end of the eighth year of service). Under this revised, the depreciation expense for the seventh year of would be: $18,000. $11,250. $12,000. $27,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Interest may be included in the acquisition cost of a plant asset during the construction period of a self-constructed asset. if the asset is purchased on credit. if the asset acquisition is financed by a long-term note payable. if it is a part of a lump-sum purchase. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics The balance in the Accumulated Depreciation account represents the cash fund to be used to replace plant assets. amount to be deducted from the cost of the plant asset to arrive at its fair market value. amount charged to expense in the current period. amount charged to expense since the acquisition of the plant asset. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? Salvage value Estimated useful life Cash needed to replace the plant asset Cost


Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Depreciation is the process of allocating the cost of a plant asset over its service life in an equal and equitable manner. an accelerated and accurate manner. a systematic and rational manner. a conservative market-based manner. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The book value of an asset is equal to the asset's fair value less its historical cost. blue book value relied on by secondary markets. replacement cost of the asset. asset's cost less accumulated depreciation. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Accountants do not attempt to measure the change in a plant asset's market value during ownership because the assets are not held for resale. plant assets cannot be sold. losses would have to be recognized. it is management's responsibility to determine fair values. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Depreciation is a process of asset devaluation. cost accumulation. cost allocation.


asset valuation. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Recording depreciation each period is necessary in accordance with the going concern principle. cost principle. expense recognition principle. asset valuation principle. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

In computing depreciation, salvage value is the fair value of a plant asset on the date of acquisition. subtracted from accumulated depreciation to determine the plant asset's depreciable cost. an estimate of a plant asset's value at the end of its useful life. ignored in all the depreciation methods. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When estimating the useful life of an asset, accountants do not consider the cost to replace the asset at the end of its useful life. obsolescence factors. expected repairs and maintenance. the intended use of the asset. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics


Useful life is expressed in terms of use expected from the asset under the declining-balance method. straight-line method. units-of-activity method. none of these. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5year useful life. Depreciation expense each year using the straight-line method will be $35,400. $29,400. $24,600. $24,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded using the straight-line method. The annual depreciation rate is 20%. 2%. 8%. 25%. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A company purchased factory equipment on April 1, 2013 for $80,000. It is estimated that the equipment will have an $10,000 salvage value at the end of its 10-year useful


life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2013 is $8,000. $7,000. $5,250. $6,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 4-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is 20%. 25%. 50%. 5%. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The declining-balance method of depreciation produces a decreasing depreciation expense each period. an increasing depreciation expense each period. a declining percentage rate each period. a constant amount of depreciation expense each period. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A company purchased factory equipment for $350,000. It is estimated that the equipment will have a $35,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be $140,000. $84,000. $126,000. $60,480.


Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The units-of-activity method is generally not suitable for airplanes. buildings. delivery equipment. factory machinery. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A plant asset cost $192,000 and is estimated to have an $24,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be $16,080. $27,000. $23,624. $18,380. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A factory machine was purchased for $125,000 on January 1, 2013. It was estimated that it would have a $25,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2013. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2013 would be $12,500. $20,000. $25,000. $10,000.


Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which is used for tax purposes. must be used for financial statement purposes. is required by the SEC. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following methods of computing depreciation is production based? Straight-line Declining-balance Units-of-activity None of these Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Management should select the depreciation method that is easiest to apply. best measures the plant asset's market value over its useful life. best measures the plant asset's contribution to revenue over its useful life. has been used most often in the past by the company. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is straight-line.


units-of-activity. declining-balance. none of these. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

On October 1, 2013, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for 2013 if Holt Company uses the straight-line method of depreciation? $3,000 $16,000 $4,000 $8,000 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On October 1, 2013, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2013, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation? $52,000 $60,000 $72,000 $76,000 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Which depreciation method is most frequently used in businesses today? Straight-line Declining-balance Units-of-activity


Double-declining-balance Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $36,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $3,000. What is the depreciation cost per unit? $3.30 $3.60 $.33 $.36 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Units-of-activity is an appropriate depreciation method to use when it is impossible to determine the productivity of the asset. the asset's use will be constant over its useful life. the productivity of the asset varies significantly from one period to another. the company is a manufacturing company. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The calculation of depreciation using the declining balance method, ignores salvage value in determining the amount to which a constant rate is applied. multiplies a constant percentage times the previous year's depreciation expense. yields an increasing depreciation expense each period. multiplies a declining percentage times a constant book value. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics


Farr Company purchased a new van for floral deliveries on January 1, 2013. The van cost $48,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2013? $9,600 $7,200 $14,400 $19,200 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Farr Company purchased a new van for floral deliveries on January 1, 2013. The van cost $48,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2014? $7,680 $23,040 $30,720 $11,520 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Moreno Company purchased equipment for $675,000 on January 1, 2012, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $30,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2014 will be $75,000. $45,000. $81,660. $51,660. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of $10,000 at the end of its useful life. The current year's Depreciation Expense is


$5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is 10 years. 8 years. 5 years. 3 years. Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Equipment was purchased for $90,000. Freight charges amounted to $4,200 and there was a cost of $12,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $18,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be $21,240. $17,640. $14,760. $14,400. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Equipment was purchased for $51,000 on January 1, 2012. Freight charges amounted to $2,100 and there was a cost of $6,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $9,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used? $20,040 $10,020 $8,580 $17,160 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A company purchased factory equipment on June 1, 2013, for $80,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 10-year useful


life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2013, is $7,500. $4,375. $3,750. $3,125. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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 of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is 10 years. 8 years. 5 years. 3 years. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Sargent Corporation bought equipment on January 1, 2013. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is $180,000. $150,000. $100,000. $25,000. Ans: LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Sargent Corporation bought equipment on January 1, 2013. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is


$35,000. $36,000. $25,000. none of the above. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Sargent Corporation bought equipment on January 1, 2013. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The book value of the equipment at the beginning of the third year using straight-line depreciation would be $180,000. $150,000. $130,000. $50,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Tomko Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Tomko uses straight-line depreciation, annual depreciation will be $2,050. $2,036. $3,050. $1,880. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Drago Company purchased equipment on January 1, 2012, at a total invoice cost of $800,000. The equipment has an estimated salvage value of $20,000 and an estimated


useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used? $160,000 $320,000 $156,000 $312,000 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On January 1, a machine with a useful life of five years and a residual value of $25,000 was purchased for $75,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? $18,000 $30,000 $24,000 $14,400 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A machine with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the unitsof-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? $75,000 $45,000 $65,000 $80,000 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-ofactivity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? $60,000


$67,800 $49,500 $56,250 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Eckman Company purchased equipment for $80,000 on January 1, 2011, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $4,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2013 will be $11,520. $18,240. $19,200. $10,944. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Grimwood Trucking purchased a tractor trailer for $147,000. Grimwood uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record? $10,500 $13,230 $11,340 $12,250 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On May 1, 2013, Pinkley Company sells office furniture for $150,000 cash. The office furniture originally cost $375,000 when purchased on January 1, 2006. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $37,500. What depreciation expense should be recorded on this asset in 2013? $11,250.


$12,500. $16,875. $33,750. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On May 1, 2013, Pinkley Company sells office furniture for $150,000 cash. The office furniture originally cost $375,000 when purchased on January 1, 2006. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $37,500. What gain should be recognized on the sale? $11,250. $22,500. $23,750. $45,000. Ans: LO: 4, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Mather Company purchased equipment on January 1, 2012 at a total invoice cost of $224,000; additional costs of $4,000 for freight and $20,000 for installation were incurred. The equipment has an estimated salvage value of $8,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2013 if the straight-line method of depreciation is used is: $86,400. $88,000. $96,000. $99,200. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Kingston Company purchased a piece of equipment on January 1, 2012. The equipment cost $120,000 and had an estimated life of 8 years and a salvage value of $15,000. What was the depreciation expense for the asset for 2013 under the doubledeclining-balance method? $13,000. $22,500.


$30,000. $23,438. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Able Towing Company purchased a tow truck for $90,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $18,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2014) and the salvage value to $2,500. What was the depreciation expense for 2014? $9,000. $7,200. $22,500. $18,275. Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Nicholson Company purchased equipment on January 1, 2011, for $40,000 with an estimated salvage value of $10,000 and estimated useful life of 8 years. On January 1, 2013, Nicholson decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $10,000. Using the straight-line method the new annual depreciation will be: $2,250. $2,500. $3,000. $3,333. Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be


$18,000. $13,200. $9,000. $12,600. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Equipment costing $40,000 with a salvage value of $8,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be $4,800. $10,667. $8,000. $6,400. Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Ron's Quik Shop bought machinery for $50,000 on January 1, 2012. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2013, Ron decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2013? $8,000 $4,000 $6,667 d $10,000

Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Each of the following is used in computing revised annual depreciation for a change in estimate except book value. cost.


depreciable cost. remaining useful life. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A change in the estimated useful life of equipment requires a retroactive change in the amount of periodic depreciation recognized in previous years. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. that the amount of periodic depreciation be changed in the current year and in future years. that income for the current year be increased. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Enos Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate? Revisions in useful life are permitted if approved by the IRS. Retroactive changes must be made to correct previously recorded depreciation. Only future years will be affected by the revision. Both current and future years will be affected by the revision. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics Don's Copy Shop bought equipment for $150,000 on January 1, 2012. Don 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, 2013, Don decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2013? $50,000 $20,000 $25,000 $37,500


Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as capital expenditures. expense expenditures. ordinary repairs. revenue expenditures. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally expensed when incurred. capitalized as a part of the cost of the asset. debited to the Accumulated Depreciation account. not recorded until they become material in amount. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is not true of ordinary repairs? They primarily benefit the current accounting period. They can be referred to as revenue expenditures. They maintain the expected productive life of the asset. They increase the productive capacity of the asset. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The addition of shelving to a delivery truck would be classified as a(n) revenue expenditure.


addition. improvement. ordinary repair. Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Additions and improvements occur frequently during the ownership of a plant asset. normally involve immaterial expenditures. increase the book value of plant assets when incurred. typically only benefit the current accounting period. Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If a plant asset is retired before it is fully depreciated and no salvage value is received, a gain on disposal occurs. a loss on disposal occurs. either a gain or a loss can occur. neither a gain nor a loss occurs. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A gain or loss on disposal of a plant asset is determined by comparing the replacement cost of the asset with the asset's original cost. book value of the asset with the asset's original cost. original cost of the asset with the proceeds received from its sale. book value of the asset with the proceeds received from its sale. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


The book value of a plant asset is the difference between the replacement cost of the asset and its historical cost. cost of the asset and the amount of depreciation expense for the year. cost of the asset and the accumulated depreciation to date. proceeds received from the sale of the asset and its original cost. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If a plant asset is sold before it is fully depreciated, only a gain on disposal can occur. only a loss on disposal can occur. either a gain or a loss can occur. neither a gain nor a loss can occur. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If a plant asset is sold before it is fully depreciated, and the salvage value received is less than the asset's book value, a gain on disposal occurs. a loss on disposal occurs. there is no gain or loss on disposal. additional depreciation expense must be recorded. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A company sells a plant asset which originally cost $240,000 for $80,000 on December 31, 2013. The Accumulated Depreciation account had a balance of $96,000 after the current year's depreciation of $24,000 had been recorded. The company should recognize a $160,000 loss on disposal. $64,000 gain on disposal. $64,000 loss on disposal. $40,000 loss on disposal.


Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

If disposal of a plant asset occurs during the year, depreciation is not recorded for the year. recorded for the whole year. recorded for the fraction of the year to the date of the disposal. not recorded if the asset is scrapped. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a fully depreciated plant asset is still used by a company, the estimated remaining useful life must be revised to calculate the correct revised depreciation. asset is removed from the books. accumulated depreciation account is removed from the books but the asset account remains. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following statements is never true when a fully depreciated plant asset is retired? The plant asset's book value is equal to its estimated salvage value. The accumulated depreciation account is debited. The asset account is credited. The plant asset's original cost equals its book value. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received, a gain on disposal will be recorded. phantom depreciation must be taken as though the asset were still on the books. a loss on disposal will be recorded. no gain or loss on disposal will be recorded. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The book value of an asset will equal its fair value at the date of sale if a gain on disposal is recorded. no gain or loss on disposal is recorded. the plant asset is fully depreciated. a loss on disposal is recorded. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A truck costing $88,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $40,000. An insurance check for $100,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a Gain on Disposal of $12,000. credit to the Truck account of $48,000. credit to the Accumulated Depreciation account for $40,000. Gain on Disposal of $52,000. Ans: LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

On July 1, 2013, Hale Kennels sells equipment for $110,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected salvage value of $50,000. The accumulated depreciation account had a balance of $175,000 on January 1, 2013, using the straight-line method. The gain or loss on disposal is $15,000 gain. $10,000 loss.


$15,000 loss. $10,000 gain. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A loss on disposal of a plant asset is reported in the financial statements in the Other Revenues and Gains section of the income statement. in the Other Expenses and Losses section of the income statement. as a direct increase to the capital account on the balance sheet. as a direct decrease to the capital account on the balance sheet. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Yanik Company's delivery truck, which originally cost $70,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $47,500. The company received $40,000 reimbursement from its insurance company. The gain or loss as a result of the fire was $30,000 loss. $17,500 loss. $30,000 gain. $17,500 gain. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Equipment that cost $210,000 and on which $100,000 of accumulated depreciation has been recorded was disposed of for $90,000 cash. The entry to record this event would include a gain of $20,000. loss of $20,000. credit to the Equipment account for $110,000. credit to Accumulated Depreciation for $100,000.


Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A truck that cost $48,000 and on which $40,000 of accumulated depreciation has been recorded was disposed of for $12,000 cash. The entry to record this event would include a gain of $4,000. loss of $4,000. credit to the Truck account for $8,000. credit to Accumulated Depreciation for $40,000. Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Orr Corporation sold equipment for $18,000. The equipment had an original cost of $54,000 and accumulated depreciation of $27,000. As a result of the sale, net income will increase $18,000. net income will increase $9,000. net income will decrease $9,000. net income will decrease $18,000. Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Powell’s Courier Service recorded a loss of $6,000 when it sold a van that originally cost $56,000 for $10,000. Accumulated depreciation on the van must have been $52,000. $16,000. $50,000. $40,000. Ans: LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics


A plant asset cost $45,000 when it was purchased on January 1, 2006. It was depreciated by the straight-line method based on a 9-year life with no salvage value. On June 30, 2013, the asset was discarded with no cash proceeds. What gain or loss should be recognized on the retirement? No gain or loss. $10,000 loss. $7,500 loss. $5,000 gain. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Nicklaus Company has decided to sell one of its old machines on June 30, 2013. The machine was purchased for $160,000 on January 1, 2009, and was depreciated on a straight-line basis for 10 years with no salvage value. If the machine was sold for $52,000, what was the amount of the gain or loss recorded at the time of the sale? $36,000. $108,000. $44,000. $92,000. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Titusville Delivery sold a delivery truck for cash of $10,200. If the original cost of truck was $39,600 and a loss of $8,400 was recognized on the sale, the accumulated depreciation at the date of sale must have been $24,920. $14,560. $3,360. $21,000. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


An asset which costs $29,800 and has accumulated depreciation of $8,000 is sold for $21,600. What amount of gain of loss will be recognized when the asset is sold? A gain of $200. A loss of $200. A loss of $8,200. A gain of $8,200. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Shocker Associates sold office equipment for cash of $162,000. The accumulated depreciation at date of sale amounted to $123,000, and a gain of $16,000 was recognized on the sale. The original cost of the asset must have been: $285,000. $269,000. $262,000. $301,000. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Baines Aircraft sold a depreciable asset for cash of $195,000. The original cost of the asset was $525,000. Baines recognized a gain of $28,500 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale? $496,500. $330,000. $361,500. $358,500. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

In April 2013, Sparkle Enterprises purchased the Crimson Mine at a cost of $18,000,000. The mine is estimated to contain 500,000 tons of ore with a residual value of $2,000,000 after mining operations are completed. During 2013, 120,000 tons of ore were removed from the mine and sold. In this situation: The book value of the mine is $16,000,000 at the end of 2013. The amount of depletion deducted from revenue during 2013 is $3,840,000.


The amount of depletion deducted from revenue during 2013 is $2,000,000. The mine is classified as an intangible asset with in indefinite life and is not amortized. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

In January of the current year, Allegro Co. purchased the Exbar Mine at a cost of $25,000,000. The mine was estimated to contain 1,000,000 tons of the ore have a residual value of $2,500,000 after mining operations are completed. During the year, 315,000 tons of ore were removed from the mine. At year-end, the book value of the mine is $25,000,000. $7,087,500. $17,125,000. $17,912,500. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

On a balance sheet, natural resources may be described more specifically as all of the following except land improvements. mineral deposits. oil reserves. timberlands. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Natural resources are depreciated using the units-of-activity method. physically extracted in operations and are replaceable only by an act of nature. reported at their market value. amortized over a period no longer than 40 years.


Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Depletion is a decrease in market value of natural resources. the amount of spoilage that occurs when natural resources are extracted. the allocation of the cost of natural resources to expense. the method used to record unsuccessful patents. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

To qualify as natural resources in the accounting sense, assets must be underground. replaceable. of a mineral nature. physically extracted in operations. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The method most commonly used to compute depletion is the straight-line method. double-declining-balance method. units-of-activity method. effective interest method. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In computing depletion, salvage value is always immaterial.


ignored. impossible to estimate. included in the calculation. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons, total depletion on the mine is based on the 1,200,000 tons. depletion expense is recognized on the 1,500,000 tons extracted. depletion expense is recognized on the 1,200,000 tons extracted and sold. a separate accumulated depletion account is set up to record depletion on the 300,000 tons extracted but not sold. Ans: LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A coal company invests $12 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year? $600,000 $240,000 $60,000 Cannot be determined from the information provided. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accumulated Depletion is used by all companies with natural resources. has a normal debit balance. is a contra-asset account. is never shown on the balance sheet.


Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

On July 4, 2013, Wyoming Mining Company purchased the mineral rights to a granite deposit for $1,200,000. It is estimated that the recoverable granite will be 400,000 tons. During 2013, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2013 would be $150,000. $90,000. $180,000. $300,000. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Depletion expense is computed by multiplying the depletion cost per unit by the total estimated units. total actual units. number of units extracted. number of units sold. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Intangible assets are the rights and privileges that result from ownership of long-lived assets that must be generated internally. are depletable natural resources. have been exchanged at a gain. do not have physical substance. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics Identify the item below where the terms are not related. Equipment—depreciation Franchise—depreciation


Copyright—amortization Oil well—depletion Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics A patent should be amortized over a period of 20 years. not be amortized if it has an indefinite life. be amortized over its useful life or 20 years, whichever is longer. be amortized over its useful life or 20 years, whichever is shorter. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The entry to record patent amortization usually includes a credit to Amortization Expense. Accumulated Amortization. Accumulated Depreciation. Patents. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The cost of successfully defending a patent in an infringement suit should be charged to Legal Expenses. deducted from the book value of the patent. added to the cost of the patent. recognized as a loss in the current period. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

An asset that cannot be sold individually in the market place is a patent. goodwill.


a copyright. a trade name. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Goodwill can be recorded when customers keep returning because they are satisfied with the company's products. when the company acquires a good location for its business. when the company has exceptional management. only when there is an exchange transaction involving the purchase of an entire business. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

On July 1, 2013, Jenks Company purchased the copyright to Jackson Computer Tutorials for $216,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $16,000. The amount of Amortization Expense recognized for the year 2013 would be $43,200. $20,000. $40,000. $21,600. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

All of the following intangible assets are amortized except copyrights. limited-life franchises. patents. trademarks.


Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following is not an intangible asset arising from a government grant? Goodwill Patent Trademark Trade name Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The amortization period for a patent cannot exceed 50 years. 40 years. 20 years. 10 years. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Cost allocation of an intangible asset is referred to as amortization. depletion. accretion. capitalization. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A patent has a legal life of 40 years. is nonrenewable.


can be renewed indefinitely. is rarely subject to litigation because it is an exclusive right. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting Legal Expense. an Intangible Loss account. the Patent account. a revenue expenditure account. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Copyrights are granted by the federal government for the life of the creator or 70 years, whichever is longer. for the life of the creator plus 70 years. for the life of the creator or 70 years, whichever is shorter. and therefore cannot be amortized. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Goodwill is only recorded when generated internally. can be subdivided and sold in parts. can only be identified with the business as a whole. can be defined as normal earnings less accumulated amortization. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics In recording the acquisition cost of an entire business, goodwill is recorded as the excess of cost over the fair value of identifiable net assets.


assets are recorded at the seller's book values. goodwill, if it exists, is never recorded. goodwill is recorded as the excess of cost over the book value of identifiable net assets. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Research and development costs are classified as intangible assets. must be expensed when incurred under generally accepted accounting principles. should be included in the cost of the patent they relate to. are capitalized and then amortized over a period not to exceed 40 years. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A computer company has $2,500,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,000,000. What is the amount of net income or loss after these R & D costs are accounted for? $500,000 loss $2,000,000 net income $0 Cannot be determined from the information provided. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Henson Company incurred $600,000 of research and development costs in its laboratory to develop a new product. It spent $80,000 in legal fees for a patent granted on January 2, 2013. On July 31, 2013, Henson paid $60,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2013? $600,000 $140,000 $740,000


Some other amount Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Given the following account balances at year end, compute the total intangible assets on the balance sheet of Kepler Enterprises. Cash $1,500,000 Accounts Receivable 4,000,000 Trademarks 1,000,000 Goodwill 2,500,000 Research & Development Costs 2,000,000 $9,500,000 $5,500,000 $3,500,000 $7,500,000 Ans: LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Rooney Company incurred $420,000 of research and development cost in its laboratory to develop a patent granted on January 1, 2013. On July 31, 2013, Rooney paid $63,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2013, should be: $420,000. $63,000. $483,000. $357,000. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


Mehring Company reported net sales of $360,000, net income of $72,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company's asset turnover ratio? 50 24 1.20 0.83 Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

During 2013, Rathke Corporation reported net sales of $2,000,000, net income of $1,200,000, and depreciation expense of $100,000. Rathke also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Rathke’s asset turnover ratio is 2 times. 1.6 times. 1.3 times. .96 times. Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

During 2013, Stein Corporation reported net sales of $3,500,000 and net income of $2,100,000. Stein also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Stein’s asset turnover ratio is 3.5 times. 2.8 times. 2.3 times. 1.7 times. Ans: LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Natural resources are generally shown on the balance sheet under Intangibles. Investments.


Property, Plant, and Equipment. Owner's Equity. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following statements concerning financial statement presentation is not a true statement? Intangibles are reported separately under Intangible Assets. The balances of major classes of assets may be disclosed in the footnotes. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Intangible assets should be reported under the heading Property, Plant, and Equipment. are not reported on the balance sheet because they lack physical substance. should be reported as Current Assets on the balance sheet. should be reported as a separate classification on the balance sheet. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A company has the following assets: Buildings and Equipment, less accumulated depreciation of $2,000,000 $7,600,000 Copyrights 960,000 Patents 4,000,000 Timberlands, less accumulated depletion of $2,800,000 4,800,000


The total amount reported under Property, Plant, and Equipment would be $17,360,000. $12,400,000. $16,400,000. $13,360,000. Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A company decides to exchange its old machine and $154,000 cash for a new machine. The old machine has a book value of $126,000 and a fair value of $140,000 on the date of the exchange. The cost of the new machine would be recorded at $280,000. $294,000. $266,000. cannot be determined. Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A company exchanges its old office equipment and $60,000 for new office equipment. The old office equipment has a book value of $42,000 and a fair value of $30,000 on the date of the exchange. The cost of the new office equipment would be recorded at $102,000. $90,000. $72,000. Cannot be determined. Ans: LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

In an exchange of plant assets that has commercial substance, any difference between the fair value and the book value of the old plant asset is recorded as a gain or loss. recorded if a gain but is deferred if a loss. recorded if a loss but is deferred if a gain. deferred if either a gain or loss.


Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Gains on an exchange of plant assets that has commercial substance are deducted from the cost of the new asset acquired. deferred. not possible. recognized immediately. Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Losses on an exchange of plant assets that has commercial substance are not possible. deferred. recognized immediately. deducted from the cost of the new asset acquired. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the book value of the old asset. fair value of the old asset. book value of the asset acquired. fair value of the new asset. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics


The cost of land includes all of the following except real estate brokers’ commissions. closing costs. accrued property taxes. parking lots. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A term that is not synonymous with property, plant, and equipment is plant assets. fixed assets. intangible assets. long-lived tangible assets. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The factor that is not relevant in computing depreciation is replacement value. cost. salvage value. useful life. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Depreciable cost is the book value of an asset less its salvage value. cost of an asset less its salvage value. cost of an asset less accumulated depreciation. book value of an asset. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics


Santayana Company purchased a machine on January 1, 2011, for $20,000 with an estimated salvage value of $5,000 and an estimated useful life of 8 years. On January 1, 2013, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $5,000. Using the straight-line method, the new annual depreciation will be $1,125. $1,250. $1,500. $1,667. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and are referred to as capital expenditures. expense expenditures. improvements. revenue expenditures. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Improvements are revenue expenditures. debited to an appropriate asset account when they increase useful life. debited to accumulated depreciation when they do not increase useful life. debited to an appropriate asset account when they do not increase useful life. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the


salvage value of the asset sold. market value of the asset sold. book value of the asset sold. accumulated depreciation on the asset sold. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The entry to record depletion expense decreases owner's equity and assets. decreases net income and increases liabilities. decreases assets and liabilities. decreases assets and increases liabilities. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

All of the following are intangible assets except copyrights. goodwill. patents. research and development costs. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A purchased patent has a legal life of 20 years. It should be expensed in the year of acquisition. amortized over 20 years regardless of its useful life. amortized over its useful life if less than 20 years. not amortized. Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


The asset turnover ratio is computed by dividing net income by average total assets. net sales by average total assets. net income by ending total assets. net sales by ending total assets. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting In an exchange of plant assets that has commercial substance neither gains nor losses are recognized immediately. gains, but not losses, are recognized immediately. losses, but not gains, are recognized immediately. both gains and losses are recognized immediately. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

TRUE-FALSE STATEMENTS A current liability must be paid out of current earnings. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.


Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A company whose current liabilities exceed its current assets may have a liquidity problem. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Notes payable usually require the borrower to pay interest. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Notes payable are often used instead of accounts payable. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A note payable must always be paid before an account payable. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A $60,000, 8%, 9-month note payable requires an interest payment of $3,600 at maturity.


Ans: LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Most notes are not interest bearing. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Interest expense on a note payable is only recorded at maturity. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Interest expense is reported under Other Expenses and Losses in the income statement. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.


Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The higher the sales tax rate, the more profit a retailer can earn. Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Metropolitan Symphony sells 200 season tickets for $50,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is $20,000. Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense. Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The current ratio permits analysts to compare the liquidity of different sized companies.


Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Working capital is current assets divided by current liabilities. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Each bondholder may vote for the board of directors in proportion to the number of bonds held. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Registered bonds are bonds that are delivered to owners by U.S. registered mail service. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


A debenture bonds is an unsecured bond which is issued against the general credit of the borrower. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bonds are a form of interest-bearing notes payable. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Neither corporate bond interest nor dividends are deductible for tax purposes. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics

The board of directors may authorize more bonds than are issued. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA


The contractual interest rate is always equal to the market interest rate on the date that bonds are issued. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics


If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000. Ans: LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics


The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Gains and losses are not recognized when convertible bonds are converted into common stock. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Generally, convertible bonds do not pay interest. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.


Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The times interest earned ratio is computed by dividing net income by interest expense. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 48. The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

Ans: LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a 49. The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

Ans: LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.


Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Notes payable usually are issued to meet long-term financing needs. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Bonds that mature at a single specified future date are called term bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The terms of the bond issue are set forth in a formal legal document called a bond indenture. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The carrying value of bonds at maturity should be equal to the face value of the bonds. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


Premium on Bonds Payable is a contra account to Bonds Payable. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS All of the following are reported as current liabilities except accounts payable. bonds payable. notes payable. unearned revenues. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The relationship between current liabilities and current assets is useful in determining income. useful in evaluating a company's liquidity. called the matching principle. useful in determining the amount of a company's long-term debt.


Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Most companies pay current liabilities out of current assets. by issuing interest-bearing notes payable. by issuing stock. by creating long-term liabilities. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A current liability is a debt that can reasonably be expected to be paid within one year or the operating cycle, whichever is longer. between 6 months and 18 months. out of currently recognized revenues. out of cash currently on hand. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Liabilities are classified on the balance sheet as current or deferred. unearned. long-term. accrued. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

From a liquidity standpoint, it is more desirable for a company to have current assets equal current liabilities. liabilities exceed current assets. assets exceed current liabilities.


liabilities exceed long-term liabilities. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The relationship of current assets to current liabilities is used in evaluating a company's operating cycle. revenue-producing ability. short-term debt paying ability. long-range solvency. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following is usually not an accrued liability? Interest payable Wages payable Taxes payable Notes payable Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In most companies, current liabilities are paid within one year through the creation of other current liabilities. the operating cycle through the creation of other current liabilities. one year or the operating cycle out of current assets. the operating cycle out of current assets. Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's maturity value.


market value. face value. cash realizable value. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

With an interest-bearing note, the amount of assets received upon issuance of the note is generally equal to the note's face value. greater than the note's face value. less than the note's face value. equal to the note's maturity value. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A note payable is in the form of a contingency that is reasonably likely to occur. a written promissory note. an oral agreement. a standing agreement. Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The entry to record the proceeds upon issuing an interest-bearing note is Interest Expense Cash Notes Payable Cash Notes Payable Notes Payable Cash


Cash Notes Payable Interest Payable

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is Interest Expense.................................................................... 18,000 Cash....................................................................................... 282,000 Notes Payable............................................................... 300,000 Cash....................................................................................... 300,000 Notes Payable............................................................... 300,000 Cash....................................................................................... 300,000 Interest Expense.................................................................... 18,000 Notes Payable............................................................... 318,000 Cash....................................................................................... 300,000 Interest Expense.................................................................... 18,000 Notes Payable............................................................... 300,000 Interest Payable............................................................ 18,000

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30? Interest Expense.................................................................... 12,000 Interest Payable............................................................ 12,000 Interest Expense.................................................................... 12,000


Cash.............................................................................. 12,000 Interest Payable..................................................................... 12,000 Cash.............................................................................. 12,000 Interest Payable..................................................................... 12,000 Interest Expense........................................................... 12,000

Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? Notes Payable........................................................................ 318,000 Cash.............................................................................. 318,000 Notes Payable........................................................................ 300,000 Interest Payable..................................................................... 18,000 Cash.............................................................................. 318,000 Interest Expense.................................................................... 18,000 Notes Payable........................................................................ 300,000 Cash.............................................................................. 318,000 Interest Payable..................................................................... 12,000 Notes Payable........................................................................ 300,000 Interest Expense.................................................................... 6,000 Cash.............................................................................. 318,000

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

As interest is recorded on an interest-bearing note, the Interest Expense account is increased; the Notes Payable account is increased.


increased; the Notes Payable account is decreased. increased; the Interest Payable account is increased. decreased; the Interest Payable account is increased. Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When an interest-bearing note matures, the balance in the Notes Payable account is less than the total amount repaid by the borrower. the difference between the maturity value of the note and the face value of the note. equal to the total amount repaid by the borrower. greater than the total amount repaid by the borrower.

On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared? Interest Payable..................................................................... 5,000 Interest Expense........................................................... 5,000 Interest Expense.................................................................... 20,000 Interest Payable............................................................ 20,000 Interest Expense.................................................................... 5,000 Interest Payable............................................................ 5,000 Interest Expense.................................................................... 5,000 Notes Payable............................................................... 5,000

Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is Notes Payable........................................................................ 255,000 Cash.............................................................................. 255,000 Notes Payable........................................................................ 250,000


Interest Payable..................................................................... 5,000 Cash.............................................................................. 255,000 Notes Payable........................................................................ 250,000 Interest Payable..................................................................... 20,000 Cash.............................................................................. 270,000 Notes Payable........................................................................ 250,000 Interest Expense.................................................................... 5,000 Cash.............................................................................. 255,000

Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Interest expense on an interest-bearing note is always equal to zero. accrued over the life of the note. only recorded at the time the note is issued. only recorded at maturity when the note is paid. Ans: LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is Notes Payable Interest Payable Cash Notes Payable Interest Expense Cash Notes Payable Cash


MC. 80 (Cont.) Notes Payable Cash Interest Payable

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Sales taxes collected by a retailer are recorded by crediting Sales Taxes Revenue. debiting Sales Taxes Expense. crediting Sales Taxes Payable. debiting Sales Taxes Payable. Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Unearned Rent Revenue is a contra account to Rent Revenue. a revenue account. reported as a current liability. debited when rent is received in advance. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales taxes collected by the retailer are recorded as a(n) revenue. liability. expense. asset.


Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4month, $100,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared? Interest Payable..................................................................... 2,000 Interest Expense........................................................... 2,000 Interest Expense.................................................................... 6,000 Interest Payable............................................................ 6,000 Interest Expense.................................................................... 2,000 Interest Payable............................................................ 2,000 Interest Expense.................................................................... 2,000 Notes Payable............................................................... 2,000

Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4month, $100,000, 6% note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is Notes Payable........................................................................ 102,000 Cash.............................................................................. 102,000 Notes Payable........................................................................ 100,000 Interest Payable..................................................................... 2,000 Cash.............................................................................. 102,000

MC. 85 (Cont.) Notes Payable........................................................................ 100,000 Interest Payable..................................................................... 6,000 Cash.............................................................................. 106,000 Notes Payable........................................................................ 100,000


Interest Expense.................................................................... 2,000 Cash.............................................................................. 102,000

Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The interest charged on a $200,000 note payable, at the rate of 8%, on a 90-day note would be $16,000. $8,888. $4,000. $1,333. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be $6,000. $3,333. $1,500. $1,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The interest charged on a $75,000 note payable, at the rate of 8%, on a 3-month note would be $6,000. $3,000. $1,500. $1,000.


Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be $3,000. $1,500. $750. $500. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2013, the adjusting entry for accrued interest will include a: credit to Notes Payable of $2,000. debit to Interest Expense of $2,000 credit to Interest Payable of $4,000. debit to Interest Expense of $3,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. Assuming interest was accrued in June 30, 2014, the entry to record the payment of the note on July 1, 2014, will include a: debit to Interest Expense of $2,000. credit to Cash of $80,000 debit to Interest Payable of $6,000. debit to Notes Payable of $86,000. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


Crawford Company has total proceeds (before segregation of sales taxes) from sales of $4,770. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is: $4,770. $4,484. $5,056. $4,500. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reliable Insurance Company collected a premium of $30,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Revene at December 31? $0. $10,000. $20,000. $30,000. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A company receives $198, of which $18 is for sales tax. The journal entry to record the sale would include a debit to Sales Tax Expense for $18. credit to Sales Taxes Payable for $18. debit to Sales Revenue for $198. debit to Cash for $180. Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a a debit to Sales Tax Expense for $28. debit to Sales Taxes Payable for $28. debit to Sales Revenue for $348.


debit to Cash for $348. Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $525,000, what is the amount of the sales taxes owed to the taxing agency? $500,000 $525,000 $26,250 $25,000 Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

On January 1, 2013, Howard Company, a calendar-year company, issued $800,000 of notes payable, of which $200,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is Current Liabilities, $800,000. Long-term Debt, $800,000. Current Liabilities, $400,000; Long-term Debt, $400,000. Current Liabilities, $200,000; Long-term Debt, $600,000. Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On January 1, 2013, Donahue Company, a calendar-year company, issued $500,000 of notes payable, of which $125,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is Current Liabilities, $500,000. Long-term Debt , $500,000. Current Liabilities, $125,000; Long-term Debt, $375,000. Current Liabilities, $375,000; Long-term Debt, $125,000.


Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record this information is Cash....................................................................................... 1,620 Sales Revenue.............................................................. 1,620 Cash....................................................................................... 1,620 Sales Taxes Payable.................................................... 120 Sales Revenue.............................................................. 1,500 Cash....................................................................................... 1,500 Sales Tax Expense................................................................ 120 Sales Revenue.............................................................. 1,620 Cash....................................................................................... 1,620 Sales Revenue.............................................................. 1,500 Sales Taxes Revenue................................................... 120

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Ed’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Ed's Bookstore make to show the April remittance? Sales Taxes Payable............................................................. 750 Cash.............................................................................. 750 Sales Tax Expense................................................................ 750 MC. 100 (Cont.) Cash.............................................................................. 750 Sales Tax Expense................................................................ 750 Sales Taxes Payable.................................................... 750 No entry required.


Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $27,300. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? $1,300 $1,365 $65 It cannot be determined. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Valerie's Salon has total receipts for the month of $18,550 including sales taxes. If the sales tax rate is 6%, what are Valerie's sales for the month? $17,437 $19,663 $17,500 It cannot be determined. Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The amount of sales tax collected by a retail store when making sales is a miscellaneous revenue for the store. a current liability. not recorded because it is a tax paid by the customer. recorded as an operating expense. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $273,000, what is the amount of the sales taxes owed to the taxing agency? $260,000 $273,000 $13,650 $13,000 Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Advances from customers are classified as a(n) revenue. expense. current asset. current liability. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The current portion of long-term debt should be paid immediately. be reclassified as a current liability. be classified as a long-term liability. not be separated from the long-term portion of debt. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales taxes collected by a retailer are expenses of the retailer. of the customers. of the government. that are not recognized by the retailer until they are submitted to the government.


Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Sales taxes collected by a retailer are reported as contingent liabilities. revenues. expenses. current liabilities. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Julie's Boutique has total receipts for the month of $30,660 including sales taxes. If the sales tax rate is 5%, what are Julie's sales for the month? $29,127 $29,200 $32,193 It cannot be determined. Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A cash register tape shows cash sales of $2,500 and sales taxes of $150. The journal entry to record this information is Cash....................................................................................... 2,500 Sales Revenue.............................................................. 2,500 Cash....................................................................................... 2,650 Sales Tax Revenue....................................................... 150 Sales Revenue.............................................................. 2,500 Cash....................................................................................... 2,500 Sales Tax Expense................................................................ 150 Sales Revenue.............................................................. 2,650 Cash....................................................................................... 2,650 Sales Revenue.............................................................. 2,500


Sales Taxes Payable.................................................... 150

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim's Pharmacy make to show the March remittance? Sales Tax Expense................................................................ 600 Cash.............................................................................. 600 Sales Taxes Payable............................................................. 600 Cash.............................................................................. 600 Sales Tax Expense................................................................ 600 Sales Taxes Payable.................................................... 600 No entry required. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Oakley Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $32,100. If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes? $2,247 $2,100 $3,210 It cannot be determined. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Any balance in an unearned revenue account is reported as a(n) current liability. long-term debt.


revenue. unearned liability. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions? Subscriptions Receivable...................................................... 1,200,000 Subscription Revenue................................................... 1,200,000 Cash ...................................................................................... 1,200,000 Unearned Subscription Revenue.................................. 1,200,000 Subscriptions Receivable...................................................... 200,000 Unearned Subscription Revenue.................................. 200,000 Prepaid Subscriptions............................................................ 1,200,000 Cash.............................................................................. 1,200,000

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Hilton Company issued a four-year interest-bearing note payable for $400,000 on January 1, 2012. Each January the company is required to pay $100,000 on the note. How will this note be reported on the December 31, 2013 balance sheet? Long-term debt, $400,000. Long-term debt, $300,000. Long-term debt, $200,000; Long-term debt due within one year, $100,000. Long-term debt, $300,000; Long-term debt due within one year, $100,000. Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Kelly Rice 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 Rice account for the cash received at the end of the engagement? Cash


Unearned Service Revenue Cash Service Revenue Prepaid Service Fees Service Revenue No entry is required when the engagement is concluded. Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Which one of the following is shown first under current liabilities by many companies as a matter of custom? Accrued expenses Current maturities of long-term debt Sales taxes payable Notes payable Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Working capital is current assets plus current liabilities. current assets minus current liabilities. current assets divided by current liabilities. current assets multiplied by current liabilities. Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The current ratio is current assets plus current liabilities. current assets minus current liabilities. current assets divided by current liabilities. current assets multiplied by current liabilities.


Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Hardy Company has current assets of $90,000, current liabilities of $100,000, longterm assets of $180,000 and long-term liabilities of $80,000. Hardy Company's working capital and its current ratio are: $90,000 and .90:1. -$10,000 and 1.50:1. $10,000 and .90:1. -$10,000 and .90:1. Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods

Current liabilities generally appear after long-term debt on the balance sheet. in decreasing order of magnitude on the balance sheet. in order of maturity on the balance sheet. in increasing order of magnitude on the balance sheet. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Employee payroll deductions include each of the following except federal unemployment taxes. federal income taxes. FICA taxes. insurance and pensions. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which one of the following payroll taxes does not result in a payroll tax expense for the employer? FICA tax Federal income tax


Federal unemployment tax State unemployment tax Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Each of the following is correct regarding bonds except they are a form of interest-bearing notes payable. attractive to many investors. issued by corporations and governmental agencies. sold in large denominations. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that bond interest is deductible for tax purposes. interest must be paid on a periodic basis regardless of earnings. income to stockholders may increase as a result of trading on the equity. the bondholders do not have voting rights. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? $3,000,000 $90,000 $300,000 $210,000 Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Secured bonds are bonds that


are in the possession of a bank. are registered in the name of the owner. have specific assets of the issuer pledged as collateral. have detachable interest coupons. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called a bond indenture. a bond debenture. trading on the equity. a term bond. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Stockholders of a company may be reluctant to finance expansion through issuing more equity because leveraging with debt is always a better idea. their earnings per share may decrease. the price of the stock will automatically decrease. dividends must be paid on a periodic basis. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which of the following is not an advantage of issuing bonds instead of common stock? Stockholder control is not affected. Earnings per share on common stock may be lower. Income to common stockholders may increase. Tax savings result. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics


Bonds that are secured by real estate are termed mortgage bonds. serial bonds. debentures. bearer bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bonds that mature at a single specified future date are called coupon bonds. term bonds. serial bonds. debentures. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bonds that may be exchanged for common stock at the option of the bondholders are called options. stock bonds. convertible bonds. callable bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called callable bonds. early retirement bonds. options. debentures. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


Investors who receive checks in their names for interest paid on bonds must hold registered bonds. coupon bonds. bearer bonds. direct bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A bondholder that sends in a coupon to receive interest payments must have a(n) unsecured bond. bearer bond. mortgage bond. serial bond. Ans: LO: L, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bonds that are not registered are bearer bonds. debentures. registered bonds. transportable bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Bonds that are issued in the name of the owner are coupon bonds. bearer bonds. serial bonds. registered bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics


Corporations are granted the power to issue bonds through tax laws. state laws. federal security laws. bond debentures. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The party who has the right to exercise a call option on bonds is the investment banker. bondholder. bearer. issuer. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A major disadvantage resulting from the use of bonds is that earnings per share may be lowered. interest must be paid on a periodic basis. bondholders have voting rights. taxes may increase. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bonds will always fall into all but which one of the following categories? Callable or convertible Term or serial Registered or bearer Secured or unsecured Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


Which of the following statements concerning bonds is not a true statement? Bonds are generally sold through an investment company. The bond indenture is prepared after the bonds are printed. The bond indenture and bond certificate are separate documents. The trustee keeps records of each bondholder. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A bond trustee does not issue the bonds. keep a record of each bondholder. hold conditional title to pledged property. maintain custody of unsold bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The contractual interest rate is always stated as a(n) monthly rate. daily rate. semiannual rate. annual rate. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When authorizing bonds to be issued, the board of directors does not specify the total number of bonds authorized to be sold. contractual interest rate. selling price. total face value of the bonds. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


The following exhibit is for Kmart bonds. Bonds Close Yield Volume Net Change Kmart 8 3/8 17 100Âź 8.4 35 +7/8 The contractual interest rate of the K mart bonds is greater than the market interest rate. less than the market interest rate. equal to the market interest rate. not determinable. Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The following exhibit is for Kmart bonds. Bonds Close Yield Volume Net Change Kmart 8 3/8 17 100Âź 8.4 35 +7/8

On the day of trading referred to above, no Kmart bonds were traded. bonds with market prices of $3,500 were traded. at closing, the selling price of the bond was higher than the previous day's price. the bond sold for $100.25 Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A $1,000 face value bond with a quoted price of 97 is selling for $1,000. $970. $907. $97. Ans: LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


A bond with a face value of $200,000 and a quoted price of 102Âź has a selling price of $240,450. $204,050. $200,450. $204,500. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Premium on Bonds Payable has a debit balance. is a contra account. is considered to be a reduction in the cost of borrowing. is deducted from bonds payable on the balance sheet. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If the market interest rate is greater than the contractual interest rate, bonds will sell at a premium. at face value. at a discount. only after the stated interest rate is increased. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

On January 1, 2013, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 103. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2013 is Cash....................................................................................... 5,000,000 Bonds Payable.............................................................. 5,000,000

Cash....................................................................................... 5,150,000 Bonds Payable.............................................................. 5,150,000


Premium on Bonds Payable.................................................... 150,000 Cash....................................................................................... 5,000,000 Bonds Payable.............................................................. 5,150,000 MC. 153 (Cont.) Cash....................................................................................... 5,150,000 Bonds Payable.............................................................. 5,000,000 Premium on Bonds Payable........................................... 150,000

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The total cost of borrowing is increased only if the bonds were issued at a premium. bonds were issued at a discount. bonds were sold at face value. market interest rate is less than the contractual interest rate on that date. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semiannually would sell at an amount less than face value. equal to face value. greater than face value. that cannot be determined. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The present value of a $10,000, 5-year bond, will be less than $10,000 if the contractual interest rate is less than the market interest rate.


contractual interest rate is greater than the market interest rate. bond is convertible. contractual interest rate is equal to the market interest rate. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Hernandez Corporation issues 3,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 98. The journal entry to record the issuance will show a debit to Cash of $3,000,000. credit to Discount on Bonds Payable for $60,000. credit to Bonds Payable for $3,040,000. debit to Cash for $2,960,000. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The market interest rate is often called the stated rate. effective rate. coupon rate. contractual rate. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If bonds are issued at a discount, it means that the financial strength of the issuer is suspect. market interest rate is higher than the contractual interest rate. market interest rate is lower than the contractual interest rate. bondholder will receive effectively less interest than the contractual interest rate. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics Each of the following accounts is reported as long-term liabilities except Interest Payable.


Bonds Payable. Discount on Bonds Payable. Premium on Bonds Payable. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the market interest rate increases, the contractual interest rate will decrease. contractual interest rate increases, then bond prices will go down. market interest rate decreases, then bond prices will go up. contractual interest rate increases, the market interest rate will decrease. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The carrying value of bonds will equal the market price at the close of every trading day. at the end of the fiscal period. on the date of issuance. every six months on the date interest is paid. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The sale of bonds above face value is a rare occurrence. will cause the total cost of borrowing to be less than the bond interest paid. will cause the total cost of borrowing to be more than the bond interest paid. will have no net effect on Interest Expense by the time the bonds mature. Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In the balance sheet, the account, Premium on Bonds Payable, is added to Bonds Payable.


deducted from Bonds Payable. classified as a stockholders' equity account. classified as a revenue account. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Four thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issuance is Cash ...................................................................................... 4,160,000 Bonds Payable ............................................................. 4,160,000

Cash ...................................................................................... 4,000,000 Premium on Bonds Payable ................................................... 160,000 Bonds Payable ............................................................. 4,160,000

Cash ...................................................................................... 4,160,000 Premium on Bonds Payable .......................................... 160,000 Bonds Payable ............................................................. 4,000,000

MC. 165 (Cont.) Cash ...................................................................................... 4,160,000 Discount on Bonds Payable ......................................... 160,000 Bonds Payable ............................................................. 4,000,000

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Bond interest paid is higher when bonds sell at a discount. lower when bonds sell at a premium. the same whether bonds sell at a discount or a premium. higher when bonds sell at a discount and lower when bonds sell at a premium.


Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 104. The journal entry to record the issuance will show a debit to Cash of $5,000,000. credit to Premium on Bonds Payable for $200,000. credit to Bonds Payable for $5,040,000. credit to Cash for $5,020,000. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Lake Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Lake uses the straight-line method of amortization. What is the amount of interest Lake must pay the bondholders in 2011? $15,080 $16,000 $17,150 $14,850 Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Beonce Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Beonce uses the straightline method of amortization. Beonce Company decided to redeem the bonds on January 1, 2013. What amount of gain or loss would Beonce report on its 2013 income statement? $9,200 gain $11,200 gain $11,200 loss $9,200 loss


Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Bargain Company has $1,600,000 of bonds outstanding. The unamortized premium is $21,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? $5,600 gain $5,600 loss $16,000 gain $16,000 loss MC. 170 (Cont.)

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The current carrying value of Kane’s $900,000 face value bonds is $897,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders? $897,000 $900,000 $906,000 $927,000 Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Lark Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a credit of $10,040 to Loss on Bond Redemption. debit of $10,040 to Loss on Bond Redemption. credit of $10,040 to Premium on Bonds Payable. debit of $40,000 to Premium on Bonds Payable. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A $600,000 bond was retired at 103 when the carrying value of the bond was $622,000. The entry to record the retirement would include a


gain on bond redemption of $18,000. loss on bond redemption of $12,000. loss on bond redemption of $18,000. gain on bond redemption of $4,000. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

If sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is Bonds Payable ...................................................................... 69,000 Common Stock ............................................................. 69,000

Bonds Payable ...................................................................... 60,000 Premium on Bonds Payable ................................................... 9,000 Common Stock ............................................................. 69,000

Bonds Payable ...................................................................... 60,000 Premium on Bonds Payable ................................................... 9,000 Common Stock ............................................................. 45,000 Paid-in Capital in Excess of Par ................................... 24,000

Bonds Payable ...................................................................... 69,000 Discount on Bonds Payable ......................................... 9,000 Common Stock ............................................................. 45,000 Paid-in Capital in Excess of Par ................................... 15,000

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA A corporation recognizes a gain or loss only when bonds are converted into common stock. only when bonds are redeemed before maturity.


when bonds are redeemed at or before maturity. when bonds are converted into common stock and when they are redeemed before maturity. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If there is a loss on bonds redeemed early, it is debited directly to Retained Earnings. reported as an "Other Expense" on the income statement. reported as an "Extraordinary Item" on the income statement. debited to Interest Expense, as a cost of financing. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If bonds can be converted into common stock, they will sell at a lower price than comparable bonds without a conversion feature. they will carry a higher interest rate than comparable bonds without the conversion feature. they will be converted only if the issuer calls them in for conversion. the bondholder may benefit if the market price of the common stock increases substantially. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When bonds are converted into common stock, the market price of the stock on the date of conversion is credited to the Common Stock account. the market price of the bonds on the date of conversion is credited to the Common Stock account. the market price of the stock and the bonds is ignored when recording the conversion. gains or losses on the conversion are recognized. Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA


If bonds with a face value of $150,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to Bonds Payable for $150,000. Bonds Payable for $135,000. Discount on Bonds Payable for $15,000. Bonds Payable equal to the market price of the bonds on the date of conversion. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A $600,000 bond was retired at 98 when the carrying value of the bond was $592,000. The entry to record the retirement would include a gain on bond redemption of $8,000. loss on bond redemption of $8,000. loss on bond redemption of $4,000. gain on bond redemption of $4,000. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Thirty $1,000 bonds with a carrying value of $39,600 are converted into 3,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is Bonds Payable ...................................................................... 39,600 Common Stock ............................................................. 15,000 Paid-in Capital in Excess of Par.................................... 24,600

Bonds Payable ...................................................................... 30,000 Premium on Bonds Payable ................................................... 9,600 Common Stock ............................................................. 27,000 Paid-in Capital in Excess of Par ................................... 12,600

Bonds Payable ...................................................................... 30,000 Premium on Bonds Payable ................................................... 9,600 Common Stock ............................................................. 15,000


Paid-in Capital in Excess of Par.................................... 24,600

Bonds Payable ...................................................................... 39,600 Common Stock ............................................................. 27,000 Paid-in Capital in Excess of Par.................................... 12,600

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

On March 31, 2014, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2013, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount received (including accrued interest) by the issuing corporation is $5,060,000. Which of the following is correct? The bonds were issued at a premium. The amount of cash paid to bondholders on the next interest date, June 30, 2013, is $300,000. The amount of cash paid to bondholders on the next interest date, June 30, 3013, is $50,000. The bonds were issued at a discount.

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $10 million of these bonds it will report: A $700,000 gain. A $400,000 loss. An unrealized gain. Neither gains nor losses are recognized on early retirements of debt.

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting


On December 1, 2013, Crawley Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2013. The portion of the second monthly payment made on January 31, 2014, which represents repayment of principal is: $800. $808. $4,800. $3,992. MC. 184 (Cont.)

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Which one of the following amounts increases each period when accounting for longterm notes payable? Cash payment Interest expense Principal balance Reduction of principal Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

In the balance sheet, mortgage notes payable are reported as a current liability only. a long-term liability only. both a current and a long-term liability. a current liability except for the reduction in principal amount. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting


A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal. Portion Allocated Portion Allocated to Interest Expense to Payment of Principal Increases Increases Increases Decreases Decreases Decreases Decreases Increases Ans: LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The entry to record an installment payment on a long-term note payable is Mortgage Payable Cash Interest Expense Cash Mortgage Payable Interest Expense Cash Bonds Payable Cash

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Winter Company purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a debit to the Cash account for $5,400. credit to the Cash account for $5,000. debit to the Interest Expense account for $5,000.


credit to the Mortgage Payable account for $5,400. Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,400. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be $480,000. $479,600. $476,000. $475,600. Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the amount of expense Farris must recognize on its 2013 income statement? $76,000 $63,427 $56,206 $49,659 Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2013? $800,000 $522,729 $667,651 $648,000


Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Each of the following may be shown on a supporting schedule instead of on the balance sheet except the current maturities of long-term debt. conversion privileges. interest rates. maturity dates. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The times interest earned ratio is computed by dividing net income by interest expense. income before income taxes by interest expense. income before interest expense by interest expense. income before income taxes and interest expense by interest expense. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable: Premium on Discount on Bonds Payable Bonds Payable Add Add Deduct Add Add Deduct Deduct Deduct Ans: LO: 8, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA


In a recent year Joey Corporation had net income of $140,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned ratio for the year? 5.00 4.00 3.50 3.00 Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cold Corporation’s income before taxes for the year? $500,000 $450,000 $400,000 None of the above. Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The adjusted trial balance for Lamar Corp. at the end of the current year, 2013, contained the following accounts. 5-year Bonds Payable 8% $1,600,000 Interest Payable 50,000 Premium on Bonds Payable 150,000 Notes Payable (3 mo.) 40,000 Notes Payable (5 yr.) 145,000 Mortgage Payable ($15,000 due currently) 300,000 Salaries and Wages Payable 18,000 Taxes Payable (due 3/15 of 2014) 25,000 MC. 198 (Cont.)


The total long-term liabilities reported on the balance sheet are $2,045,000. $2,100,000. $2,195,000. $2,180,000. Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The 2013 financial statements of Marker Co. contain the following selected data (in millions). Current Assets $ 75 Total Assets 140 Current Liabilities 40 Total Liabilities 95 Cash 8 The debt to total assets ratio is 67.9%. 96.4%. 28.6%. 256%. Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on Greyson's debt to total assets ratio if Greyson issues an additional $8 million in stock to finance its expansion? The debt to total asset ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale. The debt to total asset ratio will decrease from 4/36 before to 4/44 after the additional stock sale.


The debt to total asset ratio will increase from 40 before to 48 after the additional investment. The additional stock issuance will have no effect on the debt to total asset ratio. Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The present value of a bond is also known as its face value. market price. future value. deferred value. Ans: LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

$3 million, 8%, 10-year bonds are issued at face value. Interest will be paid semiannually. When calculating the market price of the bond, the present value of $240,000 received for 10 periods must be calculated. $3 million received in 10 periods must be calculated. $3 million received in 20 periods must be calculated. $120,000 received for 10 periods must be calculated. Ans: LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 203. Either the straight-line method or the effective-interest method of amortization will always result in the same amount of interest expense being recognized over the term of the bonds. the same amount of interest expense being recognized each year. more interest expense being recognized than if premium or discounts were not amortized. the same carrying value each year during the term of the bonds.


Ans: LO: 10, 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A corporation issued $600,000, 10%, 5-year bonds on January 1, 2013 for $648,666, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2013, is $30,000. $24,000. $32,434. $25,946. Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A bond discount must always be amortized using straight-line amortization. always be amortized using the effective-interest method. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method. s Ans: LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When the effective-interest method of bond discount amortization is used, the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date. the carrying value of the bonds will decrease each period. interest expense will not be a constant dollar amount over the life of the bond. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued. Ans: LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA


When the effective-interest method of bond premium amortization is used, the amount of premium amortized will get larger with successive amortization. carrying value of the bonds will increase with successive amortization. interest paid to bondholders will increase after each interest payment date. interest rate used to calculate interest expense will be the contractual rate. Ans: LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually. What amount of discount (to the nearest dollar) should be amortized for the first interest period? $14,089 $6,815 $9,096 $4,548 Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a debit to Interest Expense for $30,000. credit to Cash for $34,548. credit to Discount on Bonds Payable for $4,548. debit to Interest Expense for $40,000. Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?


$34,639 $34,548 $34,457 $30,000 Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Greene uses the effective-interest method of amortizing bond discount. At the end of the first year, Greene should report unamortized bond discount of $274,500. $285,500. $258,050. $255,000. Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 212. On January 1, Dade Corporation issued $3,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for $360,000. $376,473. $385,955. $420,000. Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 213. On January 1, Jorge Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jorge uses the effective-interest method of amortizing bond discount. At the end of the first year, Jorge should report unamortized bond discount of: $164,700.


$171,300. $154,830. $153,000. Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 214. On January 1, Runner Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $2,197,080. The market rate of interest for these bonds was 12%. On the first interest date, using the effectiveinterest method, the debit entry to Interest Expense is for: $120,000. $153,796. $131,825. $263,650. Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 215. Which of the following statements regarding the effective-interest method of accounting for bonds characteristics is false? GAAP always requires use of the effective interest method. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective-interest method is used. Over the life of the bonds, the carrying value increases for discounted bonds when using the effective-interest method. The effective-interest method applies a constant percentage to the bond carrying value to compute interest expense. Ans: LO: 10, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a 216. On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The carrying value of the bonds at the end of the third interest period is: $972,000 $976,000


$944,000 $928,000 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 217. If bonds are originally sold at a discount using the straight-line amortization method: Interest expense in the earlier years of the bond’s life will be less than the interest to be paid. Interest expense in the earlier years of the bond’s life will be the same as interest to be paid. Unamortized discount is subtracted from the face value of the bond to determine its carrying value. Unamortized discount is added to the face value of the bond to determine its carrying value. Ans: LO: 11, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 218. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2012 $8,000 $208,000 January 1, 2013 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (i)? $20,800 $21,600 $20,000 $4,000 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


a 219. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2012 $8,000 $208,000 January 1, 2013 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (ii)? $21,600 $18,400 $20,800 $19,200 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 220. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2012 $12,000 $212,000 January 1, 2013 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (iii)? $6,000 $12,000 $2,400 $1,200


Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 221. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2012 $12,000 $212,000 January 1, 2013 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (iv)? $10,800 $7,200 $14,400 $9,600 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 222. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.

BOND AMORTIZATION SCHEDULE Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value January 1, 2012 $8,000 $208,000 January 1, 2013 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (v)? $209,600 $208,800 $206,400 $207,200


Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a 223. On January 1, Health Corporation issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a debit to Interest Expense, $180,000. debit to Interest Expense, $360,000. credit to Discount on Bonds Payable, $12,000. credit to Discount on Bonds Payable, $24,000. Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

224. On January 1, 2013, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is $19,400. $6,000. $1,616. $500. Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A corporation issues $500,000, 10%, 5-year bonds on January 1, 2013, for $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2013’s adjusting entry is $54,200. $50,000. $45,800. $4,200. Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


a 226. Stable Company issued $600,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the total interest cost of the bonds? $180,000 $192,000 $168,000 $174,000 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 227. Pakota Company issued $800,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? $784,000 $785,600 $787,200 $790,400 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a 228. Trendy Company issued $600,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? $48,000 $55,200 $40,800 $7,200 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

a 229. Dart Company issued $600,000 of 8%, 5-year bonds at 106, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?


$636,000 $632,400 $628,800 $639,600 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On January 1, 2013, $3,000,000, 5-year, 10% bonds, were issued for $2,910,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is $17,424. $18,000. $1,452. $1,500. Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A corporation issues $500,000, 10%, 5-year bonds on January 1, 2013 for $479,000. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight- line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2013 is $52,100. $25,000. $27,100. $22,900. Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Over the term of the bonds, the balance in the Discount on Bonds Payable account will fluctuate up and down if the market is volatile. decrease. increase. be unaffected until the bonds mature.


Ans: LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Bond discount should be amortized to comply with the historical cost principle. the matching principle. the revenue recognition principle. conservatism. Ans: LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If bonds have been issued at a discount, over the life of the bonds, the carrying value of the bonds will decrease. carrying value of the bonds will increase. interest expense will increase, if the discount is being amortized on a straight-line basis. unamortized discount will increase. Ans: LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Hooke Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Hooke uses the straightline method of amortization. What is the amount of interest expense Hooke will show with relation to these bonds for the year ended December 31, 2013? $16,000 $15,080 $17,150 $14,850 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA


Jarmin Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Jarmin uses the straightline method of amortization. What is the carrying value of the bonds on January 1, 2013? $200,000 $190,800 $197,700 $189,650 Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A current liability is a debt the company reasonably expects to pay from existing current assets within one year. the operating cycle. one year or the operating cycle, whichever is longer. one year or the operating cycle, whichever is shorter. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following statements concerning current liabilities is incorrect? Current liabilities include unearned revenues. A company that has more current liabilities than current assets is usually the subject of some concern. Current liabilities include prepaid expenses. A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

On August 1, 2012, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2013. How


will the note payable and the related interest be classified in the December 31, 2012, balance sheet? Note Payable Interest Payable Current liability Noncurrent liability Noncurrent liability Current liability Current liability Current liability Noncurrent liability Not shown Ans: LO: 2,3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Companies report current liabilities on the balance sheet in alphabetical order. order of maturity. random order. order of magnitude. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The market value (present value) of a bond is a function of all of the following except the dollar amounts to be received. length of time until the amounts are received. market rate of interest. length of time until the bond is sold. Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

On the date of issue, Chudzick Corporation sells $5 million of 5-year bonds at 97. The entry to record the sale will include the following debits and credits: Bonds Payable Discount on Bonds Payable $4,850,000 Cr. $0 Dr. $5,000,000 Cr. $150,000 Dr. $5,000,000 Cr. $1,250,000 Dr.


$5,000,000 Cr. $15,000 Dr. Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The market rate of interest for a bond issue which sells for more than its face value is independent of the interest rate stated on the bond. higher than the interest rate stated on the bond. equal to the interest rate stated on the bond. less than the interest rate stated on the bond. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the carrying value of the bonds. face value of the bonds. original selling price of the bonds. maturity value of the bonds. Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a credit of $31,500 to Loss on Bond Redemption. debit of $36,000 to Premium on Bonds Payable. credit of $5,250 to Gain on Bond Redemption. debit of $31,500 to Premium on Bonds Payable. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA


Each payment on a mortgage note payable consists of interest on the original balance of the loan. reduction of loan principal only. interest on the original balance of the loan and reduction of loan principal. interest on the unpaid balance of the loan and reduction of loan principal. Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The debt to total assets ratio is computed by dividing long-term liabilities by total assets. total debt by total assets. total assets by total debt. total assets by long-term liabilities. Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The market price of a bond is the present value of its principal amount at maturity plus the present value of all future interest payments. principal amount plus the present value of all future interest payments. principal amount plus all future interest payments. present value of its principal amount only. Ans: LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Acc 557 week 7 quiz – strayer new  
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