Test bank for financial accounting a business process approach 3rd edition jane l reimers

Test Bank for Financial Accounting: A Business Process Approach, 3rd Edition: Jane L. Reimer

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Financial Accounting: A Business Process Approach, 3e (Reimers) Chapter 7 Accounting For Liabilities Learning Objective 7-1 7.1-1) How are liabilities classified on the balance sheet?

A) paid and unpaid B) current and long-term C) current and unfunded D) definitely determinable and estimated Answer: B Diff: 1 Objective: LO 7-1 7.1-2) Current liabilities are liabilities that ________.

A) must be satisfied within two years B) must be paid from revenues C) must be of a definite amount D) are to be settled within one year Answer: D Diff: 2 Objective: LO 7-1 7.1-3) Estimated liabilities are ________.

A) obligations of an exact amount B) obligations of an uncertain amount C) always current liabilities D) always long-term liabilities Answer: B Diff: 1 Objective: LO 7-1 7.1-4) Definitely determinable liabilities are ________.

A) obligations of an exact amount B) obligations of an uncertain amount C) always current liabilities D) always long-term liabilities Answer: A Diff: 1 Objective: LO 7-1

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7.1-5) ABC Company borrows $15,000 from a local bank for six months at 9% annual interest.

Which statement below is TRUE? A) It is a definitely determinable liability.

B) It is a long-term liability.

C) It is an estimated liability.

D) Interest expense of $225 will be recorded each month the loan is outstanding.

Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-6) Liabilities are ________.

A) recorded only when the exact amount of the obligation is determined B) usually not disclosed until they are settled C) recorded even if the exact amount is not known D) recorded in the period the obligation is due Answer: C Diff: 2 Objective: LO 7-1 7.1-7) Which of the following is NOT a definitely determinable liability?

A) Salary payable B) Accounts payable C) Unearned revenue D) Accumulated depreciation Answer: D Diff: 1 Objective: LO 7-1 7.1-8) Beau Brentley earned $60,000 from his job at Bridgestone Tires. He had 15% of his gross pay withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and 1.45% withheld for Medicare taxes. What was Beau’s net pay?

A) $48,200 B) $46,410 C) $48,000 D) $60,000 Answer: B Diff: 1 Skill: Analytic skills Objective: LO 7-1

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7.1-9) Beau Brentley earned $60,000 in 2011 from his job at Bridgestone Tires. He had 15% of his gross pay withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and 1.45% withheld for Medicare taxes. What amount will Bridgestone Tires report as salary expense for 2011?

A) $60,000 B) $64,590 C) $46,410 D) $69,160 Answer: A Diff: 1 Skill: Analytic skills Objective: LO 7-1 7.1-10) Beau Brentley earned $60,000 in 2011 from his job at Bridgestone Tires. He had 15% of his gross pay withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and 1.45% withheld for Medicare taxes. What amount will Bridgestone Tires report as payroll tax expense when it pays these taxes?

A) $13,590 B) $4,590 C) $27,180 D) $9,160 Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-11) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.

Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

What is Homer’s gross pay?

A) $5,000 B) $4,250 C) $3,940 D) $3,867.50 Answer: A Diff: 1 Skill: Analytic skills Objective: LO 7-1

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7.1-12) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.

Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

What is Homer’s net pay?

A) $5,000 B) $4,250 C) $3,940 D) $3,867.50 Answer: D Diff: 1 Skill: Analytic skills Objective: LO 7-1 7.1-13) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.

Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much of Homer’s December salary will be included in Salary expense on Springfield Power’s income statement for the year ended December 31, 2011?

A) $5,000 B) $4,250 C) $3,940 D) $3,867.50 Answer: A Diff: 1 Skill: Analytic skills Objective: LO 7-1 7.1-14) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.

Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much payroll tax expense will Springfield Power record when it pays these taxes?

A) $750 B) $382.50 C) $1,132.50 D) $765 Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-1

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7.1-15) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.

Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much cash will Springfield Power pay the government for FICA because of Homer’s December earnings?

A) $750 B) $382.50 C) $620 D) $310 Answer: C Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-16) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.

Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much cash will Springfield Power pay the government for Medicare tax because of Homer’s December earnings?

A) $72.50 B) $145 C) $620 D) $310 Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-17) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000.

Federal income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

What is Bob’s gross pay?

A) $1,000 B) $823.50 C) $900 D) $923.50 Answer: A Diff: 1 Skill: Analytic skills Objective: LO 7-1

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7.1-18) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000.

Federal income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

What is Bob’s net pay?

A) $1,000 B) $823.50 C) $900 D) $923.50 Answer: B Diff: 1 Skill: Analytic skills Objective: LO 7-1 7.1-19) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000.

Federal income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much payroll tax expense for Bob’s December salary will be reported on Scrooge & Marley’s income statement for the year ended December 31, 2010?

A) $76.50 B) $176.50 C) $153.00 D) $306.00 Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-20) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000.

Federal income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much of Bob’s December salary will be included in Salary expense on Scrooge & Marley’s income statement for the year ended December 31, 2010?

A) $1,000 B) $823.50 C) $900 D) $923.50 Answer: A Diff: 1 Skill: Analytic skills Objective: LO 7-1

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7.1-21) In December, 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000.

Federal income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much cash will Scrooge & Marley pay the government for FICA because of Bob’s December earnings?

A) $62.00 B) $124.00 C) $14.50 D) $29.00 Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-22) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000.

Federal income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%.

How much cash will Scrooge & Marley pay the government for Medicare tax because of Bob’s December earnings?

A) $62.00 B) $124.00 C) $14.50 D) $29.00 Answer: D Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-23) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. What is B. Rich’s gross pay?

A) $12,000 B) $12,765 C) $13,385 D) $10,000 Answer: D Diff: 1 Skill: Analytic skills Objective: LO 7-1

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7.1-24) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. What is B. Rich’s net pay?

A) $10,000 B) $8,000 C) $7,235 D) $6,615 Answer: C Diff: 1 Skill: Analytic skills Objective: LO 7-1 7.1-25) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much of B. Rich’s December salary will be included in Salary expense on Payless’ income statement for the year ended December 31, 2011?

A) $10,000 B) $7,235 C) $8,000 D) $12,000 Answer: A Diff: 1 Skill: Analytic skills Objective: LO 7-1 7.1-26) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much payroll tax expense for B. Rich’s December salary will Payless record when it pays these taxes?

A) $2,765 B) $765 C) $3,170.45 D) $1,240 Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-1

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7.1-27) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much cash will Payless pay the government for FICA because of B. Rich’s December earnings?

A) $1,240 B) $2,765 C) $765 D) $1,530 Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-28) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much cash will Payless pay the government for Medicare tax because of B. Rich’s December earnings?

A) $765 B) $145 C) $290 D) $1,530 Answer: C Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-29) Liabilities are recorded once the amount is definitely determinable.

Answer: FALSE Diff: 2 Objective: LO 7-1 7.1-30) Salary payable is considered an estimated liability.

Answer: FALSE Diff: 2 Objective: LO 7-1 7.1-31) An employee’s gross pay is recorded as an expense on the employer’s books.

Answer: TRUE Diff: 1 Objective: LO 7-1 7.1-32) The amount withheld for FICA (Social Security) is first recorded as a liability on the employer’s books.

Answer: TRUE Diff: 1 Objective: LO 7-1

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7.1-33) Employers are required by law to withhold from their employees’'earnings.

Answer: TRUE Diff: 1 Objective: LO 7-1 7.1-34) Interest is the cost of using someone else’s money.

Answer: TRUE Diff: 1 Objective: LO 7-1 7.1-35) What are definitely determinable liabilities and estimated liabilities?

Answer: Definitely determinable liabilities are liabilities of a known amount. For example, if an organization borrows $50,000 from a bank at 8% interest, both the principal and the interest that accrues can be measured exactly, so they are definitely determinable debts. Estimated liabilities, on the other hand, are definitely debts, but the exact amount is unknown. The classic example of an estimated liability is a warranty issued to customers when goods or services are sold. It is unknown how much, if any, of the promises will have to be satisfied at a later date.

Diff: 1 Skill: Communication abilities Objective: LO 7-1 7.1-36) Identify each of the items below as a(n): ∙ definitely determinable liability ∙ estimated liability a. amount of warranty obligations b. amount owed on outstanding loans c. amount owed to employees for work performed d. amount owed to suppliers for inventory purchases e. amount owed for employee payroll taxes Answer: a. estimated liability b. definitely determinable c. definitely determinable d. definitely determinable e. definitely determinable Diff: 1 Objective: LO 7-1

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7.1-37) Indicate with an “X” whether each description results in the reporting of a current liability, long-term liability, or neither on the company’s Balance Sheet. Assume a December 31, 2011 yearend.

Current Long-term Neither 1. Amount owed to employees for work performed in the last week of December 2011.

Amount of loan payment due in 2. 2012.

3. The estimated amount owed for utilities; the exact amount will not be known until January 2012 when the bill is received.

4. A three-year note payable due in January 2014.

Answer: 1. Current; 2. Current; 3. Current; 4. Long-term Diff: 1 Objective: LO 7-1 7.1-38) Indicate with an “X” whether each description results in the reporting of a definitely determinable liability, an estimated liability or neither on the company’s Balance Sheet. Assume a December 31, 2011 yearend.

Definitely determinable Estimated

Neither

1. Amount owed to employees for work performed in the last week of December 2011.

Amount of loan payment due in 2. 2012.

3. The estimated amount owed for utilities; the exact amount will not be known until January 2012 when the bill is received.

4. A three-year note payable due in January 2014.

Answer: 1. Definitely determinable; 2. Definitely determinable; 3. Estimated; 4. Definitely determinable Diff: 1 Objective: LO 7-1

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7.1-39) Indicate with an “X” whether each description results in the reporting of a current liability, long-term liability, or neither on the company’s balance sheet. Assume a December 31, 2011 yearend.

Current Long-term Neither 1. The company has debt obligations due in two years.

2. Amount owed to suppliers for merchandise purchased.

3. Amount accrued for outside legal fees owed. The bill with the exact amount will not be received until 2012.

4. Employees have earned $4,000 in the last 3 days of 2011. They will not be paid until January 2012.

5. On December 31, the company purchased merchandise on account with terms FOB destination; the merchandise is in transit at yearend.

Answer: 1. Long-term; 2. Current; 3. Current; 4. Current; 5. Neither Diff: 2 Objective: LO 7-1

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7.1-40) Indicate with an “X” whether each description results in the reporting of a definitely determinable liability, an estimated liability or neither on the company’s balance sheet. Assume a December 31, 2011 yearend.

Definitely determinable Estimated

Neither

1. The company has debt obligations due in two years.

Amount owed to suppliers for 2. merchandise purchased.

3. Amount accrued for outside legal fees owed. The bill with the exact amount will not be received until 2012.

4. Employees have earned $4,000 in the last 3 days of 2011. They will not be paid until January 2012.

5. On December 31, the company purchased merchandise on account with terms FOB destination; the merchandise is in transit at yearend.

Answer: 1. Definitely determinable; 2. Definitely determinable; 3. Estimated; 4. Definitely determinable; 5. Neither Diff: 1 Objective: LO 7-1

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7.1-41) The following data comes from the payroll department of LoJack Corporation for the last pay period of 2011. Employees will not be paid until 2012.

Gross employee earnings Federal income taxes withheld FICA Social Security taxes withheld Medicare taxes withheld

$330,000 $48,000 $20,460 $4,785

Required: 1. Determine the amount the balance sheet will report as Wages payable.

2. Determine the amount the income statement will report as Wages expense from this pay period.

3. What type of liability is Wages payable?

4. To what party must the company pay the FICA taxes?

5. Why does LoJack have to withhold taxes from its employees?

Answer: 1. $256,755 = $330,000 — 48,000 — 20,460 — 4,785 2. $330,000 3. definitely determinable current liability 4. to the federal government (US Treasury), usually by deposit in a local bank 5. Federal law requires that employers withhold taxes from employees.

Diff: 2 Skill: Analytic skills, Communication abilities Objective: LO 7-1 7.1-42) Explain how payroll affects the liabilities of a firm.

Answer: Employers must, by law, withhold federal income tax, FICA, and Medicare taxes from employees and pay those amounts to the federal government periodically. Amounts withheld from employees become liabilities for the employer. The employer must also match the FICA and Medicare withheld from employees, which increases the employer’s liabilities. In addition, the employer must pay the employee the net amount of what has been earned. A current liability called salaries payable or wages payable increases when salaries and wages are earned and decreases when employees are paid.

Diff: 2 Skill: Communication abilities Objective: LO 7-1

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7.1-43) Albert, the accountant, has been asked by his boss to calculate the net pay for each of Pinnock Company’s three employees. Albert has gathered the following information about payroll for the period:

Gross pay Federal income taxes withheld

Larry $50,000 $7,500

Curly $20,000 $3,000

Moe $35,000 $4,000

Required: Calculate the net pay for each of the employees. Assume that FICA (Social Security) taxes are withheld at the rate of 6.2% of gross pay and that Medicare taxes are withheld at the rate of 1.45% of gross pay.

Answer: Larry Curly Moe Gross pay $50,000 $20,000 $35,000.00 Federal income taxes withheld 7,500 3,000 4,000.00 FICA withheld (.062) 3,100 1,240 2,170.00 Medicare withheld (.0145) 725 290 507.50 Net pay $38,675 $15,470 $28,322.50 Diff: 2 Skill: Analytic skills Objective: LO 7-1 7.1-44) Robert, the accountant, has to calculate the net pay for each of Dotson Company’s three employees. Robert has gathered the following information about payroll for the period:

Gross pay Federal income taxes withheld

Ken $60,000 $8,500

Barbie $40,000 $5,500

Skipper $38,000 $4,500

Required: Calculate the net paycheck for each of the employees. Assume that FICA (Social Security) taxes are withheld at the rate of 6.2% of gross earnings and that Medicare taxes are withheld at the rate of 1.45% of gross earnings.

Answer: Gross pay Federal income taxes withheld FICA withheld (.062) Medicare withheld (.0145) Net pay

Ken $60,000 $8,500 3,720 870 $46,910

Barbie $40,000 $5,500 2,480 580 $31,440

Skipper $38,000 $4,500 2,356 551 $30,593

Diff: 2 Skill: Analytic skills Objective: LO 7-1

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7.1-45) Payless, Inc’s gross payroll was $100,000 for the current pay period. Federal income tax (FIT) withheld totals $20,000. The FICA (Social Security) rate is 6.2% and the Medicare rate is 1.45%.

Part A: Show the effect of paying its employees (do not record the employer’s payroll taxes):

Assets

Shareholders' equity Retained CC earnings

Liabilities

Part B: How much cash will Payless, Inc. have to pay to the government for Federal income taxes, Social Security, and Medicare on the gross payroll of $100,000?

Answer: Part A: Assets

Liabilities

Shareholders' equity CC Retained earnings

20,000 FIT payable (72,350) Cash 6,200 FICA taxes payable 1,450 Medicare taxes payable

(100,000) salary expense

Part B: $35,300 = $20,000 + 2 * (6,200 + 1,450) Diff: 2 7.1-46) Identify each of the liabilities listed below using the following code: a. definitely determinable liability b. estimated liability _______ 1. purchased merchandise on account _______ 2. had the employees work all month but won’t pay them until next month _______ 3. owes the bank interest on an outstanding loan _______ 4. withheld $9,000 from the employees’ earnings for payroll taxes _______ 5. sold 1,000,000 units during the current period and agreed to fix or replace each unit sold if it did not last two years or completely satisfy the customer _______ 6. borrowed money from a local bank Answer: a, a, a, a, b, a Diff: 1 Skill: Analytic skills Objective: LO 7-1

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Learning Objective 7-2 7.2-1) Brooke’s Bike Company sold $3,780 worth of mountain bikes in June. Warranty expense is estimated to be 2% of sales. During June, Brooke’s Bikes replaced two faulty parts under warranty. The parts cost a total of $100. The warranty expense for June was ________.

A) $65.60 B) $75.60 C) $100 D) $175.60 Answer: B Diff: 3 Skill: Analytic skills Objective: LO 7-2 7.2-2) Brook’s Bike Company sold 80 mountain bikes during May. The company offered a oneyear warranty. Future warranty expense was estimated to be $25 per bike. During May, the company spent $115 on parts and labor to repair three bikes that were under warranty. The warranty expense for May was ________.

A) $115 B) $345 C) $2,000 D) $2,115 Answer: C Diff: 3 Skill: Analytic skills Objective: LO 7-2 7.2-3) In November, Mayberry Repair Shop spent $395 on parts to fix appliances under warranty. The $395 will be a reduction to ________.

A) Warranty liability B) Warranty expense C) Parts expense D) Allowance for uncollectible accounts Answer: A Diff: 3 Skill: Analytic skills Objective: LO 7-2 7.2-4) Warranty expense is recognized when products are sold. This is required by the ________.

A) revenue recognition principle B) matching principle C) full disclosure principle D) going concern principle Answer: B Diff: 2 Objective: LO 7-2 17 Copyright © 2011 Pearson Education, Inc.

7.2-5) In its first month of business, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that 1% of its sales will be uncollectible and that warranty costs will be approximately $100 on its sales. Fish Nets’ financial statements should include ________.

A) Bad debts expense of $800 and Warranty expense of $100 on its income statement B) Allowance for uncollectible accounts of $(80) and nothing for the warranties on its balance sheet C) Bad debts expense of $80 and Warranty expense of $100 on its income statement D) Allowance for uncollectible accounts of $(80) and Unearned warranty of $100 on its balance sheet Answer: A Diff: 2 Objective: LO 7-2 7.2-6) In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that warranty costs will be approximately $100 on these sales. The actual warranty cost for the sales made in May was $30 in June and $50 in July. Fish Nets should ________.

A) record Warranty expense of $100 in May B) record Warranty expense of $30 in June C) report Allowance for uncollectible accounts of $(100) in May D) report Allowance for uncollectible accounts of $(30) in June Answer: A Diff: 2 Objective: LO 7-2 7.2-7) In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that warranty costs will be approximately $100 on these sales. What effect will the warranty adjusting entry have on Fish Nets’ current ratio?

A) It will cause the current ratio to increase.

B) It will cause the current ratio to decrease.

C) It will have no effect on the current ratio because the entry will cause the current assets to increase by $100 and the current liabilities to decrease by $100.

D) It will have no effect on the current ratio because no adjusting entry is made for estimated warranty costs.

Answer: B Diff: 3 Skill: Analytic skills Objective: LO 7-2 7.2-8) Companies are required to recognize warranty expense at the time of sale due to the matching principle.

Answer: TRUE Diff: 2 Objective: LO 7-2

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7.2-9) Brooke’s Bike Company sold 225 mountain bikes in October. The future estimated warranty cost for the bikes is $25 per bike. The warranty period is one year. The amount of warranty expense for October is $468.75 Answer: FALSE Diff: 3 Skill: Analytic skills Objective: LO 7-2 7.2-10) Companies are required to recognize warranty expense in the period the goods are returned for repairs.

Answer: FALSE Diff: 2 Objective: LO 7-2 7.2-11) How should companies estimate and report warranty expense?

Answer: For financial statement purposes, businesses should recognize warranty expense at the time of sale. The matching principle requires that revenues and expenses that go together should be on the same income statement. Even though a company does not know whether a product or service will require warranty work, the cost to honor a warranty must be estimated in advance.

Usually, the amount of the estimate of future warranty work is based on past experience or a set percentage of sales. At the time of the sale, or at the end of the month during the adjustment process, a business will record warranty expense and match the expense with an estimated warranty liability account.

Diff: 2 Skill: Communication/Writing Objective: LO 7-2

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7.2-12) Matt’s Rug Company began business on January 1, 2011.

Part A: Show the effect of the following events on the accounting equation:

Matt's Rug Company: 1 had sales of $100,000 in 2011, all on account. The cost of goods sold was $60,000.

2 expects that warranty expenses will be 6% of sales.

3 pays $4,000 cash for warranty obligation

Assets

Shareholders' equity Retained Liabilities CC earnings

Part B: Write in the amount (even if $0) as of or for the Year Ended December 31, 2011. Write in the one financial statement where the line item is found.

Amount 1.

2.

3.

4.

Financial Statement

Warranty expense Estimated warranty liability Sales Cash paid for warranty obligations

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Answer: Part A:

Assets 1 100,000 AR (60,000) Inventory 2 3 (4,000) Cash

Liabilities

6,000 Estimated warranty liability (4,000) Estimated warranty liability

Shareholders' equity CC Retained earnings 100,000 Sales (60,000) COGS (6,000) Warranty expense

Part B: 1.

2.

3.

4.

Warranty expense Estimated warranty liability Sales Cash paid for warranty obligations

Amount $(6,000) $2,000 $100,000 $(4,000)

Financial Statement Income statement Balance sheet Income statement Statement of cash flows

Diff: 2 Skill: Analytic skills Objective: LO 7-2

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7.2-13) WhackCo began business on January 1, 2011. Show the effect of the following events:

Assets

Shareholders' equity Retained Liabilities CC earnings

Assets

Shareholders' equity Retained Liabilities CC earnings

1 WhackCo had sales of $300,000 in 2011, all on account. The cost of goods sold was 60% of sales.

2 WhackCo expects that warranty expenses will be 5% of sales.

Answer:

1 WhackCo had sales of $300,000 in 2011, all on account. The cost of goods sold was 60% of sales.

2 WhackCo expects that warranty expenses will be 5% of sales.

300,00 AR (180,000) Inventory

300,000 Sales (180,000) COGS 15,000 Estimated warranty liability

15,000 Warranty expense

Diff: 2 Skill: Analytic skills Objective: LO 7-2 Learning Objective 7-3 7.3-1) When companies borrow money for longer than one year, that obligation is called ________.

A) equity financing B) a long-term liability C) an operating activity D) a current liability Answer: B Diff: 2 Objective: LO 7-3

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2) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual installments of $1,358,679. The first payment was made on December 31, 2011. How much of the first mortgage payment was interest? Round your answer to the nearest dollar.

A) $1,000,000 B) $81,521 C) $1,358,679 D) $600,000 Answer: D Diff: 2 Skill: Analytic skills, Dynamics of the global economy Objective: LO 7-3 3) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual installments of $1,358,679. The first payment was made on December 31, 2011. How much of the first mortgage payment will be used to reduce the principal? Round your answer to the nearest dollar.

A) $758,679 B) $1,358,679 C) $0 D) $600,000 Answer: A Diff: 2 Skill: Analytic skills, Dynamics of the global economy Objective: LO 7-3 4) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual installments of $1,358,679. Over the 10-year period, as each installment payment is made, the portion of the payment that is interest expense will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills, Dynamics of the global economy Objective: LO 7-3

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5) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual installments of $1,358,679. Over the 10-year period, as each installment payment is made, the portion of the payment that is used to reduce the principal will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: A Diff: 2 Skill: Analytic skills, Dynamics of the global economy Objective: LO 7-3 6) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual installments of $1,358,679. Over the 10-year period, as each installment payment is made, the amount that Climax Corporation will show on its balance sheet for mortgage payable will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills, Dynamics of the global economy Objective: LO 7-3 7) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. The first payment was made on December 31, 2011. How much of the first mortgage payment was interest? Round your answer to the nearest dollar.

A) $9,967 B) $70,000 C) $0 D) $142,378 Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3

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8) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. The first payment was made on December 31, 2011. How much of the first mortgage payment will be used to reduce the principal? Round your answer to the nearest dollar.

A) $72,378 B) $132,412 C) $0 D) $142,378 Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-3 9) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. Over the 10-year period, as each installment payment is made, the portion of the payment that is interest expense will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-10) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378.

Over the 10-year period, as each installment payment is made, the portion of the payment that is used to reduce the principal will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-11) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378.

Over the 10-year period, as each installment payment is made, the amount that Ajax Corporation will show on its balance sheet for mortgage payable will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-12) On January 1, 2011, Alpha Enterprise signed a $100,000, 6%, 20-year mortgage note to buy a new warehouse. The mortgage will be repaid in a series of twenty equal annual installment payments. Over the 20-year period, as each installment payment is made, the portion of the payment that is interest expense will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-13) On January 1, 2011, Alpha Enterprise signed a $100,000, 6%, 20-year mortgage note to buy a new warehouse. The mortgage will be repaid in a series of twenty equal annual installment payments. Over the 20-year period, as each installment payment is made, the portion of the payment that is used to reduce the principal will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-14) On January 1, 2011, Alpha Enterprise signed a $100,000, 6%, 20-year mortgage note to buy a new warehouse. The mortgage will be repaid in a series of twenty equal annual installment payments. Over the 20-year period, as each installment payment is made, the amount that Alpha Enterprise will show on its balance sheet for mortgage payable will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-15) On January 1, 2011, Zenith, Inc. signed a $200,000, 5%, 20-year mortgage note to buy a new office building. The mortgage will be repaid in a series of twenty equal annual installment payments. Over the 20-year period, as each installment payment is made, the portion of the payment that is interest expense will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-16) On January 1, 2011, Zenith, Inc., signed a $200,000, 5%, 20-year mortgage note to buy a new office building. The mortgage will be repaid in a series of twenty equal annual installment payments. Over the 20-year period, as each installment payment is made, the portion of the payment that is used to reduce the principal will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-17) On January 1, 2011, Zenith, Inc., signed a $200,000, 5%, 20-year mortgage note to buy a new office building. The mortgage will be repaid in a series of twenty equal annual installment payments. Over the 20-year period, as each installment payment is made, the amount that Zenith, Inc., will show on its balance sheet for mortgage payable will ________.

A) increase B) decrease C) stay the same D) The answer cannot be determined from the information given.

Answer: B Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-18) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.

On its statement of cash flows for the year ended December 31, 2011, Ace will show cash paid for interest as ________ activity.

A) $(9,756), an operating B) $(2,800), a financing C) $(9,756), a financing D) $(2,800), an operating Answer: D Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-19) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.

Interest expense for the year ended December 31, 2012 will be ________ interest expense for 2011.

A) higher than B) the same as C) lower than D) The answer cannot be determined from the information given.

Answer: C Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-20) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.

Notes payable at December 31, 2012 will be ________ notes payable at December 31, 2011.

A) higher than B) the same as C) lower than D) The answer cannot be determined from the information given.

Answer: C Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-21) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.

With each successive payment on the note, ________ of the payment will be applied to the loan principal.

A) more B) the same amount C) less D) The answer cannot be determined from the information given.

Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-22) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. Ace will pay ONLY THE INTEREST on the loan on December 31 each year. The entire principal will be repaid on December 31, 2015, the last interest payment date. On its statement of cash flows for the year ended December 31, 2011, Ace will show cash paid for interest as ________ activity.

A) $(9,756), an operating B) $(2,800), a financing C) $(9,756), a financing D) $(2,800), an operating Answer: D Diff: 2 Skill: Analytic skills Objective: LO 7-3 & LO 7-5

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7.3-23) On January 1, 2012, Ace Electronics borrowed $40,000 on a five-year, 7% note. Ace will pay ONLY THE INTEREST on the loan on December 31 each year. The entire principal will be repaid on December 31, 2016, the last interest payment date. Interest expense for the year ended December 31, 2013 will be ________ interest expense for 2012.

A) higher than B) the same as C) lower than D) The answer cannot be determined from the information given.

Answer: B Diff: 1 Skill: Analytic skills Objective: LO 7-3 7.3-24) On January 1, 2012, Ace Electronics borrowed $40,000 on a five-year, 7% note. Ace will pay ONLY THE INTEREST on the loan on December 31 each year. The entire principal will be repaid on December 31, 2016, the last interest payment date. Notes payable at December 31, 2013 will be ________ notes payable at December 31, 2012.

A) higher than B) the same as C) lower than D) The answer cannot be determined from the information given.

Answer: B Diff: 1 Skill: Analytic skills Objective: LO 7-3 7.3-25) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31 each year. What effect will the payments have on the accounting equation?

A) Total assets, liabilities and shareholders’ equity will all decrease.

B) Only total assets and total liabilities will decrease.

C) Only total assets and total shareholders’ equity will decrease.

D) Total liabilities will increase and total shareholders’ equity will decrease.

Answer: A Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-26) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31 each year. After the first payment, Mortgage payable will have a balance of ________.

A) $100,000 B) $85,762 C) $92,762 D) $93,000 Answer: C Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-27) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31 each year. After the SECOND payment, Mortgage payable will have a balance of ________ (rounded to the nearest $1).

A) $100,000 B) $85,762 C) $85,017 D) $86,000 Answer: C Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-28) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31 each year. Interest expense for the year ended December 31, 2012 will be ________ interest expense for 2011.

A) higher than B) the same as C) lower than D) The answer cannot be determined from the information given.

Answer: C Diff: 3 Skill: Analytic skills Objective: LO 7-3 7.3-29) When a company borrows money for longer than one year, that obligation is called a long-term liability.

Answer: TRUE Diff: 1 Objective: LO 7-3

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7.3-30) Principal = rate multiplied by time multiplied by interest.

Answer: FALSE Diff: 1 Objective: LO 7-3 7.3-31) Each time a company makes a payment on a mortgage the amount of the payment that reduces the principal increases.

Answer: TRUE Diff: 2 Objective: LO 7-3 7.3-32) Each time a company makes a payment on a mortgage interest expense will increase.

Answer: FALSE Diff: 2 Objective: LO 7-3 7.3-33) Monthly mortgage payments cause assets and liabilities to decrease and shareholders’ equity to remain the same.

Answer: FALSE Diff: 2 Objective: LO 7-3 7.3-34) Monthly mortgage payments cause assets and liabilities to decrease and shareholders’ equity to increase.

Answer: FALSE Diff: 2 Objective: LO 7-3 7.3-35) China Company borrowed $20,000 at 8% for 10 years. The loan requires annual payments of $2,717.35. When China Company makes the first annual payment: a. how much of the first payment will be interest? b. how much of the first payment will be used to reduce the principal of the loan?

Answer: a. $1,600 = $20,000 x 0.08 b. $1,117.35 = $2,727.35 — 1,600 Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-36) Alpha Company has arranged to borrow $30,000 for 8 years at an annual interest rate of 6%. Annual payments of $4,831.08 will be made. When Alpha makes its first payment at the end of the loan’s first year: 1. how much of the payment will be interest?

2. how much of the payment will be used to reduce the principal of the loan?

Answer: 1. $1,800 = $30,000 x 0.06 2. $3,031.08 = $4,831.08 - 1,800 Diff: 2 Skill: Analytic skills Objective: LO 7-3 7.3-37) Beta Company borrowed $20,000 at 8% for 6 years. The loan requires annual payments of $4,326.31. When Beta Company makes the first annual payment: 1. how much of the first payment will be interest?

2. how much of the payment will be used to reduce the principal of the loan?

Answer: 1. $1,600 = $20,000 x 0.08 2. $2,726.31 = $4,326.31 — 1,600 Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-38) On December 31, 2010, a company purchased a $100,000 building by signing a $100,000, 20-year mortgage note. The ANNUAL interest rate is 6%, with payments of $8,718 made on December 31 each year.

Required: 1. Complete the last line of the table below. ROUND YOUR ANSWERS TO THE NEAREST DOLLAR.

Beginning balance After 1st payment After 2nd payment

$

Mortgage balance

Annual payment

Interest portion of payment

Amount of mortgage reduction

$100,000 1st

$8,718

$6,000

$2,718

$97,282

$8,718

$5,837

$2,881

2nd 3rd

$

$

$

2. Use the information from the previous table to complete the statements below.

Circle the name of a financial statement where needed using the following code: IS = Income Statement for the Year Ended December 31, 2011 BS = Balance Sheet at December 31, 2011 SOCF = Statement of Cash Flows for the Year Ended December 31, 2011 AFTER THE FIRST PAYMENT IS MADE ON DECEMBER 31, 2011: a. Mortgage payable of $______________________ will appear on the (circle one) IS BS SOCF b. Interest expense of $______________________ will appear on the (circle one) IS BS SOCF c. Cash paid for interest of $______________________ will appear on the (circle one) IS BS SOCF as part of (circle one) operating investing financing activities. d. Cash paid on loan principal of $______________________ will appear on the (circle one) IS BS SOCF as part of (circle one) operating investing financing activities. e. With each payment that is made, the amount of each payment that is used for interest expense (circle one) increases decreases stays the same f. With each payment that is made, the amount still owed on the loan, mortgage payable, (circle one) increases decreases stays the same g. With each payment that is made, the amount of the payment that goes toward the balance owed on the mortgage loan (circle one) increases decreases stays the same 34 Copyright © 2011 Pearson Education, Inc.

Answer:

1.

Beginning balance After 1st payment After 2nd payment

Annual payment

Interest portion of mortgage

Amount of mortgage reduction

1st

$8,718

$6,000

$2,718

$97,282 2nd $94,401 $97,282 - 2,881 3rd

$8,718

$5,837 $5,664 $94,401 x .06

$2,881 $3,054 $8,718 - 5,664

Mortgage balance $100,000

$8,718

2. a. $97,282; BS b. $6,000; IS c. $6,000; SOCF; operating d. $2,718; SOCF; financing e. decreases f. decreases g. increases Diff: 2 Skill: Analytic skills Objective: LO 7-3

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7.3-39) Mini Storage Company needed some long-term financing and arranged for a $100,000, 10-year mortgage loan on January 1, 2010. The annual interest rate is 9%, with a payment of $15,582 made December 31 each year.

Required: 1. Complete the amortization schedule for the first TWO YEARS of the note.

Mortgage Annual Interest portion of Amount of balance payment mortgage mortgage reduction Beginning balance $100,000 1st $ $ $ After 1st payment $ 2nd $ $ $ 2. Complete the table below for the first TWO YEARS of the note. Fill in the correct dollar amount AND put an X in the appropriate box to indicate the financial statement where the amount will be found.

Amount At or for the Year ended 12/31/10 Interest expense $ Notes payable $ Cash paid on loan principal $ Cash paid for loan interest $

Amount At or for the YEAR ended 12/31/11 IS $ $ $ $

BS SOCF

Answer: 1.

Mortgage balance Beginning balance

After 1st payment

$100,000 $93,418 100,000 6,582

1st

2nd

Amount of mortgage reduction $6,582 15,582-9,000

Annual Interest portion of payment mortgage $15,382 $9,000 100,000 x .09 $15,582 $8,407.62 $7,174.38 93,418 x .09 15,582 - 8,407.62

2.

Interest expense Notes payable Cash paid on loan principal Cash paid for loan interest

Amount At or for the Year ended 12/31/10 $9,000 $93,418 $(6,582) $(9,000)

Amount At or for the YEAR ended 12/31/11 IS BS SOCF $8,407.62 X $86,243.62 93,418 = 7,174.38 X $(7,174.38) X $(8,407.62) X

Diff: 3 Skill: Analytic skills Objective: LO 7-3 36 Copyright © 2011 Pearson Education, Inc.

7.3-40) Ace Electronics, Inc. needed some long-term financing and arranged for a 20-year, $200,000, 8% mortgage loan on January 1, 2011. Equal annual payments of $20,370 will be made on December 31 each year.

Required: a. Record the FIRST LOAN PAYMENT made on December 31, 2011 in the accounting equation below. Fill in both the correct dollar AMOUNT and the LETTER of the account title from the list of accounts below.

A. Cash C. Interest payable E. Interest income B. Interest expense D. Notes payable

Assets

Liabilities

Shareholders' equity CC Retained earnings

b. Fill in the correct dollar amount AND put an X in the appropriate box to indicate the financial statement where the amount will be found.

Amount At or for the Year ended 12/31/11 Notes payable Interest expense Answer: a.

Assets A. (20,370)

$ $

Amount At or for the YEAR ended 12/31/12 IS BS SOCF $ $

Liabilities D. (4,370) 20,370 - 16,000

Shareholders' equity CC Retained earnings B. (16,000) 200,000 x .08

b.

Amount At or for the Year ended 12/31/11

Notes payable

$195,630 200,000 - 4,370

Interest expense

$16,000

Amount At or for the YEAR ended 12/31/12 IS BS SOCF $190,910.40 195,630 - (20,370 15,650.40) X $15,650.40 195,630 x .08 X

Diff: 3 Skill: Analytic skills Objective: LO 7-3

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7.3-41) Stephen’s Storage Company needed some long-term financing and arranged for a 20year, $100,000, 9% mortgage loan on January 1, 2011. Annual payments of $10,955 will be made on December 31 each year.

Part A: Prepare an amortization schedule for the first two loan payments: Interest Amount of Mortgage Annual portion of mortgage balance payment mortgage reduction Beginning balance $100,000 1st $ $ $ After 1st payment $ 2nd $ $ $ Part B: Show the effect on the accounting equation of each of the events listed below: Shareholders' equity Assets Liabilities CC Retained earnings Jan. 1, 2011, borrowed $100,000 Dec. 31, 2011, made the first loan payment Dec. 31, 2012 made the second loan payment Part C: For each item listed below, fill in the correct dollar amount in the column that represents the financial statement where the item will appear.

Income Statement of Statement Cash Flows 1 2 3 4 5 6 7 8

Balance Sheet

Interest expense for 2011 Mortgage payable at December 31,2011 Interest paid in 2011 Loan principal paid in 2011 Interest expense for 2012 Mortgage payable at December 31, 2012 Interest paid in 2012 Loan principal paid in 2012

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Answer: Part A: Mortgage balance Beginning balance After 1st payment

$100,000 $98,045 100,000 1,955

Interest Amount of portion of mortgage mortgage reduction $9,000 $1,955 $10,955 100,000 x .09 10,955 - 9,000 $2,130.95 $8,824.05 10,955 $10, 955 98,045 x .09 8,824.05 Annual payment

1st

2nd

Part B: Show the effect on the accounting equation of each of the events listed below: Shareholders' equity Retained Assets Liabilities CC earnings Jan. 1, 2011, borrowed $100,000 100,000 Cash 100,000 Notes payable Dec. 31, 2011, (9,000) made the first Interest loan payment (10,955) Cash (1,955) Notes payable expense Dec. 31, 2012 (8,824.05) made the second (2,130.95) Notes Interest loan payment (10,955) Cash payable expense Part C: For each item listed below, fill in the correct dollar amount in the column that represents the financial statement where the item will appear.

1 2 3 4 5 6 7 8

Interest expense for 2011 Mortgage payable at December 31,2011 Interest paid in 2011 Loan principal paid in 2011 Interest expense for 2012 Mortgage payable at December 31, 2012 Interest paid in 2012 Loan principal paid in 2012

Income Statement $9,000

Statement of Cash Flows

Balance Sheet

$98,045 $(9,000) $(1,955) $8,824.05 $95,914.05 98,045 - 2,130.95 $(8,824.05) $(2,130.95)

Diff: 3 Skill: Analytic skills Objective: LO 7-3

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7.3-42) Ron’s Wrenches needs a new, $35,000 delivery truck. Ron sees two alternatives: 1. Buy the truck for $35,000 by signing a 5-year, 6% installment note. Monthly payments will be $675.

2. Sign a 5-year lease to rent the truck for $650 a month. Ron’s Wrenches will not own the truck when the lease expires.

Required: Show the effect on the accounting equation of: a.) purchasing the truck by signing a $35,000 installment note and b.) the entry to record the first payment.

Assets

Liabilities

Shareholders' equity CC Retained earnings

a. b. c. Will leasing the truck require different entries? d. Is it ethical for a company to acquire the use of assets by renting them?

Answer: (Principles students have not studied capital leases. They will rightly assume that the lease described is an operating lease.)

Shareholders' equity Assets Liabilities CC Retained earnings a.

35,000 Truck 35,000 Notes payable b.

(675) Cash (500) Notes payable (175) Interest expense c. Yes d. Yes Diff: 2 Skill: Ethical understanding and reasoning abilities Objective: LO 7-3

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7.3-43) On May 1, 2009, DS Company borrowed $50,000 at 7% to buy a machine. The loan will be repaid in equal annual payments at the end of each of the next 5 years, beginning May 1, 2010.

Part A: What is the annual payment on the $50,000 loan?

Part B: Complete the amortization schedule for the five years of the loan repayment: Mortgage balance

Annual payment

Interest portion of mortgage

Amount of mortgage reduction

Beginning balance $50,000 1st After 1st payment 2nd After 2nd payment 3rd After 3rd payment 4th After 4th payment 5th After 5th payment 0 Answer: Part A: $12,194.53 = $50,000 / 4.10020 Part B: Mortgage Annual Interest portion balance payment of mortgage Beginning $3,500 balance $50,000 1st $12,194.53 50,000 x .07 41,305.47 After 1st 50,000 $2,891.38 payment 8,694.53 2nd 12,194.53 41,305.47 x .07 32,002.32 After 2nd 41,305.47 2,240.16 payment 9,303.15 3rd 12,194.53 32,002.32 x .07 2,047.95 After 3rd 32,002.32 1,543.36 payment 9,954.37 4th 12, 194.53 22,047.95 x .07 12,194.55 Last 11,396.78 payment = After 4th 22,047.95 11,396.78 + 797.77 payment 10,651.17 5th 797.77 11,396.78 x .07 After 5th payment 0 Diff: 3 Skill: Analytic skills Objective: LO 7-3

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Amount of mortgage reduction $8,694.53 12,194.53 - 3,500 9,303.15 12,194.53 - 2,891.38 9,954.37 12,194.53 - 2,240.16 10,651.17 12,194.53 - 1,543.36

11,396.78 Remaining principal balance

7.3-44) On January 1, 2011, the company borrowed $200,000 from Suwannee Local Bank for 10 years at 6%. The company will make equal annual payments of $27,173.58 on December 31 of each year, beginning December 31, 2011.

Part A: Complete the amortization schedule for the first four loan payments:

Beginning balance After 1st payment After 2nd payment After 3rd payment

Mortgage balance $200,000

Annual Interest portion of Amount of payment mortgage mortgage reduction 1st 2nd 3rd 4th

Part B: Select the column that represents the financial statement where the line item will appear.

Then fill in the correct dollar amount.

Income Statement 1 2 3 4 5 6 7 8

Statement of Cash Flows

Interest expense for 2011 Mortgage payable at December 31,2011 Interest paid in 2011 Loan principal paid in 2011 Interest expense for 2012 Mortgage payable at December 31, 2012 Interest paid in 2012 Loan principal paid in 2012

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Balance Sheet

Answer: Part A: Mortgage Annual Interest portion of Amount of mortgage balance payment mortgage reduction Beginning $12,000 $15,173.58 balance $200,000 1st 27,173.58 200,000 x .06 27,173.58 - 12,000 184,826.42 After 1st 200,000 11,089.59 16,083.99 payment 15,173.58 2nd 27,173.58 184,826.42 x .06 27,173.58 - 11,089.59 168,742.43 After 2nd 184,826.42 10,124.55 17,049.03 payment 16,083.99 3rd 27,173.58 168,742.43 x .06 27,173.58 - 10,124.55 151,695.40 After 3rd 168,742.43 9,101.60 18,071.98 payment 17,049.03 4th 27,173.58 151,693.40 x .06 27,173.58 - 9,101.60 Part B:

1 2 3 4 5 6 7 8

Interest expense for 2011 Mortgage payable at December 31,2011 Interest paid in 2011 Loan principal paid in 2011 Interest expense for 2012 Mortgage payable at December 31, 2012 Interest paid in 2012 Loan principal paid in 2012

Income Statement of Statement Cash Flows $12,000

Balance Sheet

$184,826.42 $(12,000) (15,173.58) 11,089.59 168,742.43 (11,089.59) (16,083.99)

Diff: 3 Skill: Analytic skills Objective: LO 7-3

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7.3-45) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7% mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31 each year. Round to the nearest dollar.

Part A: Show the effect on the accounting equation: Shareholders' equity Assets Liabilities CC Retained earnings 1. Jan. 1, 2010, borrowed $100,000 2. Dec. 31, 2010, made the first loan payment 3. Dec. 31, 2011, made the second loan payment Part B: For each item, write in the amount (even if $0) as of or for the Year Ended December 31, 2010 and 2011 in the column of one financial statement where each amount is found.

2010: 1.

Mortgage payable 2.

Interest expense 3.

Payment of loan principal 4.

Interest paid

Amount

Financial

2011: 5.

Mortgage payable 6.

Interest expense

Amount

Financial

Answer: Part A: Shareholders' equity Assets Liabilities CC Retained earnings 1. 100,000 Cash 100,000 Mortgage payable 2. (14,238) Cash (7,238) Mortgage payable (7,000) Interest expense 3. (14,238) Cash (7,745) Mortgage payable (6,493) Interest expense Part B: 2010: 1.

Mortgage payable 2.

Interest expense 3.

Payment of loan principal 4.

Interest paid

Amount $92,762 $(7,000) $(7,238) $(7,000)

Financial Balance sheet Income statement Statement of cash flows Statement of cash flows

2011: 5.

Mortgage payable 6.

Interest expense

Amount $85,017 $(6,493)

Financial Balance sheet Income statement

Diff: 3 Skill: Analytic skills Objective: LO 7-3 44 Copyright © 2011 Pearson Education, Inc.