Test 2 - Practice for test 2 PDF

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Test 2 Chapter 7 1- A company had net sales of $500,000, total sales of $650,000, and an average accounts receivable of $85,000. Its accounts receivable turnover equals: Accounts Receivable Turnover = Net Sales/Average Accounts Receivable Accounts Receivable Turnover = $500,000/$85,000 = 5.88

2-

A company has $95,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 4% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is a(n) $850 credit. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for:

Explanation

Desired balance in allowance account: Current balance in allowance account: Adjustment to allowance:

$95,000 × 0.04 =

$ 3,800 credit -850 credit $ 2,950 credit

3- A company borrowed $19,000 by signing a 180-day promissory note at 10%. The total interest due on the maturity date is: (Use 360 days a year.) Explanation $19,000 * 0.10 * 180 / 360 = $950.00

4- A company receives a 10%, 90-day note for $3,300. The total interest due on the maturity date is: (Use 360 days a year.) Explanation $3,300 × 0.10 × 90/360 = $82.50

5- Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, the Gideon Company wrote off the $2,300 uncollectible account of its customer, A. Hopkins. The entry or entries Gideon makes to record the write off of the account on May 3 is

Allowance for Doubtful Accounts Accounts Receivable—A. Hopkins

2,300 2,300

6- A company has $101,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 3% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is a(n) $910 debit. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for: Explanation

Desired balance in allowance account: Current balance in allowance account: Adjustment to allowance:

$101,000 × 0.03 $3,030 credit = +

910 debit

$3,940 credit

7- On November 1, Orpheum Company accepted a $12,100, 90day, 12% note from a customer to settle an account. What entry should be made on the November 1 to record the note acceptance? Debit Note Receivable $12,100; credit Accounts Receivable $12,100.

8- A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts: Accounts receivable Allowance for uncollectible accounts Net Sales

$ 350,000 debit 650 debit 795,000 credit

All sales are made on credit. Based on past experience, the company estimates that 0.3% of net credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared? Explanation

$795,000 × 0.003 = $2,385

9- On November 19, Nicholson Company receives a $15,600, 60-day, 5% note from a customer as payment on account. What adjusting entry should be made on the December 31 year-end? (Use 360 days a year.) Debit Interest Receivable $91; credit Interest Revenue $91.

Explanation $15,600 × 0.05 × 42/360 = $91 10- Jasper

makes a $85,000, 90-day, 7% cash loan to Clayborn Co. Jasper's entry to record the transaction should be: Debit Notes Receivable for $85,000; credit Cash $85,000.

11A company borrowed $30,000 by signing a 120-day promissory note at 8%. The maturity value of the note is: (Use 360 days a year.) Explanation $30,000 + ($30,000 * 0.08 * 120/360) = $30,800.00

12A company ages its accounts receivables to determine its end of period adjustment for bad debts. At the end of the current year, management estimated that $28,500 of the accounts receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a debit balance of $800. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense? Bad Debts Expense Allowance for Doubtful Accounts Explanation

29,300 29,300

Desired balance in allowance account: $28,500 credit Current balance: 800 debit Required: adjustment to allowance $29,300 credit

On December 31 of the current year, the unadjusted trial 13balance of a company using the percent of receivables method to estimate bad debt included the following: Accounts

Receivable, debit balance of $97,300; Allowance for Doubtful Accounts, credit balance of $971. What amount should be debited to Bad Debts Expense, assuming 4% of outstanding accounts receivable at the end of the current year are estimated to be uncollectible? Explanation

Desired balance in allowance account: Current balance in allowance account: Required: amount of Bad Debts Expense:

$97,300 × 0.04 =

$3,892 credit −971 credit $2,921 credit

14Jasper makes a $38,000, 90-day, 6.5% cash loan to Clayborn Co. Jasper's entry to record the collection of the note and interest at maturity should be: (Use 360 days a year.) Debit Cash $38,617.50; credit Interest Revenue $617.50; credit Notes Receivable $38,000.

Chapter 8 1* Ngu owns equipment that cost $96,500 with accumulated depreciation of $66,000. Ngu asks $35,750 for the equipment but sells the equipment for $33,500. Compute the amount of gain or loss on the sale

Explanation

Gain/Loss on Sale = Cash Received − Book Value Gain/Loss on Sale = $33,500 − ($96,500 − $66,000); Gain of $3,000 2* Merchant Company purchased property for a building site. The costs associated with the property were:

Purchase price Real estate commissions Legal fees

$186,000 16,100 1,900

Expenses of clearing the land Expenses to remove old building

3,100 2,100

What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?

$209,200 to Land; $0 to Building.

Explanation

Total cost = $186,000 + $16,100 + $1,900 + $3,100 + $2,100 = $209,200 The entire amount of the cost should be allocated to the land, since the new building is not yet constructed. 3* A company purchased a weaving machine for $190,000. The machine has a useful life of 8 years and a residual value of $10,000. It is estimated that the machine could produce 750,000 bolts of woven fabric over its useful life. In the first year, 105,000 bolts were produced. In the second year, production increased to 109,000 units. Using the units-of-production method, what is the amount of depreciation expense that should be recorded for the second year? Explanation Depreciation Expense = [(Cost − Salvage Value)/Estimated Useful Life (in units)] * Units Produced Depreciation per unit = ($190,000 − $10,000)/750,000 units = $.24 per unit Depreciation Expense = $.24 * 109,000 = $26,160 4* Riverboat Adventures pays $380,000 plus $14,000 in closing costs

to buy out a competitor. The real estate consists of land appraised at $54,600, a building appraised at $155,400, and paddleboats appraised at $210,000. Compute the cost that should be allocated to the building. Explanation

Percent Allocated to Building = $155,400/($155,400 + $54,600 + $210,000) = 0 Cost Allocated to Building = ($380,000 + $14,000) * 0.37 = $145,780 5* A company sold equipment that originally cost $350,000 for

$210,000 cash. The accumulated depreciation on the equipment was $140,000. The company should recognize a: Explanation

Cost of equipment

$ 350,000

Accumulated depreciation Book value Cash received Gain or Loss on sale

(140,000) $ 210,000 (210,000) $ 0

6* Martin Company purchases a machine at the beginning of the

year at a cost of $140,000. The machine is depreciated using the double-declining-balance method. The machine’s useful life is estimated to be 4 years with a $11,600 salvage value. The machine’s book value at the end of year 3 is: Explanation

Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate Depreciation Expense = $140,000 * (2 * 25%) = $70,000 (Depreciation Expense, year 1) Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate Depreciation Expense = ($140,000 - $70,000) * (2 * 25%) = $35,000 (Deprec. Exp, year 2) Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate Depreciation Expense = ($140,000 - $105,000) * (2 * 25%) = $17,500 (Deprec. Exp, year 3) Book Value at end of year 3 = Cost minus Accumulated Depreciation Book Value at end of year 3 = $140,000 - ($70,000 + $35,000 + $17,500) Book Value at end of year 3 = $17,500 7* An asset's book value is $18,300 on December 31, Year 5. The

asset has been depreciated at an annual rate of $3,300 on the straight-line method. Assuming the asset is sold on December 31, Year 5 for $15,300, the company should record: Explanation

Selling price $15,300 - $18,300 Book value = $3,000 Loss. 8* Granite Company purchased a machine costing $127,000, terms 2/10, n/30. The machine was shipped FOB shipping point and freight charges were $2,700. The machine requires special mounting and wiring connections costing $10,700. When installing the machine, $2,200 in damages occurred. Compute the cost recorded for this machine assuming Granite paid within the discount period.

Explanation

Cost of Machine = ($127,000 × 0.98) + $2,700 + $10,700 = $137,860 9* Peavey Enterprises purchased a depreciable asset for $26,500 on April 1, Year 1. The asset will be depreciated using the straight-line method over its four-year useful life. Assuming the asset's salvage value is $2,900, Peavey Enterprises should recognize depreciation expense in Year 2 in the amount of: Explanation Depreciation Expense = (Cost - Salvage Value)/Estimated Useful Life Depreciation Expense = ($26,500 − $2,900)/4 = $5,900 10* A company purchased a delivery van for $24,900 with a salvage value of $2,700 on September 1, Year 1. It has an estimated useful life of 6 years. Using the straight-line method, how much depreciation expense should the company recognize on December 31, Year 1?

Explanation Depreciation Expense = (Cost − Salvage Value)/Est Useful Life * Length of Ownership Depreciation Expense = ($24,900 − $2,700)/6 × 4/12; Depreciation Expense = $1,233

11* Marlow Company purchased a point of sale system on January 1

for $6,400. This system has a useful life of 5 years and a salvage value of $900. What would be the depreciation expense for the second year of its useful life using the double-declining-balance method? Explanation

Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate Depreciation Expense = $6,400 × (2 × 20%) = $2,560 (Year 1, depreciation)

Depreciation Expense = Beginning of Year Book Value * Double Straight-line Rate Depreciation Expense = ($6,400 − $2,560) × (2 × 20%) = $1,536 (Year 2, depreciation) 12* A company used straight-line depreciation for an item of equipment that cost $16,250, had a salvage value of $3,800 and a six-year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $1,625 but its total useful life remained the same. Determine the amount of depreciation to be charged against the equipment during each of the remaining years of its useful life:

Explanation

Accumulated Depreciation through the end of year 3: (Cost of Asset − Salvage Value)/Estimated Useful Life * Years Elapsed ($16,250 − $3,800)/6 × 3 = $6,225 Depreciation, years 4 through 6 = (Cost of Asset - Accumulated Depreciation - Salvage Value)/Remaining Estimated Useful Life ($16,250 − $6,225 − $1,625)/3 = $2,800 13* When originally purchased, a vehicle costing $25,020 had an

estimated useful life of 8 years and an estimated salvage value of $2,700. After 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. The depreciation expense in year 5 equals: Explanation

Accumulated Depreciation through the end of year 4: (Cost of Asset − Salvage Value)/Estimated Useful Life * Years Elapsed ($25,020 − $2,700)/8 × 4 = $11,160 Depreciation in Year 5 = (Cost of Asset − Accumulated Depreciation - Salvage Value)/Remaining Estimated Useful Life ($25,020 − $11,160 − $2,700)/2 = $5,580 14* A company had average total assets of $985,000. Its gross sales were $1,120,000 and its net sales were $910,000. The company's total asset turnover equals:

Explanation

Total Asset Turnover = Net Sales/Average Total Assets Total Asset Turnover = $910,000/$985,000 = 0.92

Chapter 9 1- An employee earned $43,800 during the year working for an employer when the maximum limit for Social Security was $118,500. The FICA tax rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The employee's annual FICA taxes amount is:

Explanation

FICA Taxes = Wages × (FICA tax rate + Medicare tax rate) FICA Taxes = $43,800 × (0.062 + 0.0145) = $3,350.70

2- On November 1, Alan Company signed a 120-day, 12% note payable, with a face value of $18,900. What is the adjusting entry for the accrued interest at December 31 on the note? (Use 360 days a year.) Debit Interest Expense, $378; credit Interest Payable, $378.

Explanation

Interest Expense = Principal × Interest Rate × Time Interest Expense = $18,900 × 0.12 × 60/360 = $378

3- On December 1, Victoria Company signed a 90-day, 8% note payable, with a face value of $11,400. What amount of interest expense is accrued at December 31 on the note? (Use 360 days a year.)

Explanation

Interest Expense = Principal × Interest Rate × Time Interest Expense = $11,400 × 0.08 × 30/360 = $76

4- Gary Marks is paid on a monthly basis. For the month of January of the current year, he earned a total of $8,938. FICA tax for Social Security is 6.2% on the first $118,500 of earnings each calendar year and the FICA tax for Medicare is 1.45% of all earnings. The FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both unemployment taxes are applied to the first $7,000 of an employee's pay. The amount of Federal Income Tax withheld from his earnings was $1,483.07. What is the amount of the employer's payroll taxes expenses for this employee? (Round your intermediate calculations to two decimal places.) $1,103.76

Explanation Payroll Taxes = FICA-SS Tax + FICA-Medicare Tax + FUTA Tax + SUTA Tax Payroll Taxes = $554.16 1 + $129.602 + $42.003 + $378.004 = $1,103.76 1

FICA—Social security $8,938 × 0.062 = $554.16 FICA—Medicare $8,938 × 0.0145 = $129.60

2

3

FUTA $7,000 × 0.006 = $42.00 SUTA $7,000 × 0.054 = $378.00

4

5- On November 1, Alan Company signed a 120-day, 10% note payable, with a face value of $45,000. Alan made the appropriate year-end accrual. What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made? (Use 360 days a year.) Debit Notes Payable $45,000; debit Interest Payable $750; debit Interest Expense $750; credit Cash $46,500.

Explanation

Interest Expense = Principal × Interest Rate × Time Interest Expense = $45,000 × 0.10 × 60/360; Interest Expense = $750 (debit to Interest Expense) Interest Payable = Principal × Interest Rate × Time Interest Payable = $45,000 × 0.10 × 60/360; Interest Payable = $750 (debit to Interest Payable) Maturity Value = Principal + Interest Expense Maturity Value = $45,000 + $1,500 = $46,500 (credit to Cash)

6- An employee earns $5,700 per month working for an employer. The FICA tax rate for Social Security is 6.2% of the first $118,500 earned each calendar year and the FICA tax rate for Medicare is 1.45% of all earnings. The current FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both unemployment taxes are applied to the first $7,000 of an employee's pay. The employee has $190 in federal income taxes withheld. The employee has voluntary deductions for health insurance of $158 and contributes $79 to a retirement plan each month. What is the amount of net pay for the employee for the month of January? (Round your intermediate calculations to two decimal places.) $4,836.95

Explanation Net Pay = Gross Pay − Federal Income Tax − FICA-SS Tax − FICA-Medicare Tax − Health Insurance − Retirement Plan Net Pay = $5,700 − $190 − $353.40* − $82.65** − $158 − $79 = $4,836.95

*FICA-SS Tax $5,700 * 0.062 = $353.40 **FICA-Medicare Tax $5,700 * 0.0145 = $82.65

7- On November 1, Alan Company signed a 120-day, 12% note payable, with a face value of $19,800. What is the maturity value of the note on March 1? (Use 360 days a year.) Explanation

Interest Expense = Principal × Interest Rate × Time Interest Expense = $19,800 × 0.12 × 120/360 = $792 Maturity Value = Principal + Interest Expense Maturity Value = $19,800 + $792 = $20,592

8- The current FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both taxes are applied to the first $7,000 of an employee's pay. Assume that an employee earned total wages of $9,900. What is the amount of total unemployment taxes the employer must pay on this employee's wages? Explanation Unemployment Taxes = $7,000 × (0.006 + 0.054); Unemployment Taxes = $420.00

9- Portia Grant is an employee who is paid monthly. For the month of January of the current year, she earned a total of 8,738. The FICA tax for social security is 6.2% of the first $118,500 of employee earnings each calendar year and the FICA tax rate for Medicare is 1.45% of all earnings. The FUTA tax rate of 0.6% and the SUTA tax rate of 5.4% are applied to the first $7,000 of an employee's pay. The amount of federal income tax withheld from her earnings was $1,449.87. Her net pay for the month is: (Round your intermediate calculations to two decimal places.) Explanation

Net Pay = Gross Pay − Federal Income Tax − FICA-SS Tax − FICA-Medicare Tax Net Pay = $8,738 − $1,449.87 − $541.76* − $126.70**; Net Pay = $6,619.67 *FICA-SS Tax $8,738 × 0.062 = $541.76 **FICA-Medicare Tax $8,738 × 0.0145 = $126.70

Chapter 10 1- A company issues 6%, 7-year bonds with a par value of $240,000 on January 1 at a price of $254,029, when the market

rate of interest was 5%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

Explanation $240,000 * .06 * 6/12 year = $7,200

2- A company issued 5-year, 9% bonds with a par value of $107,000. The company received $104,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

Explanation Cash interest paid: $107,000 × .09 × ½ year = $4,815.00 Discount amortization: ($107,000 – $104,947) / 10 periods = $205.30 Interest expense = $4,815.00 + $205.30 = $5,020.30

3- On January 1, Parson Freight Company issues 8.5%, 10-year bonds with a par value of $4,300,000. The bonds pay interest semiannually. The market rate of interest is 9.5% and the bond selling price was $4,007,812. The bond issuance should be recorded as: Debit Cash $4,007,812; debit Discount on Bonds Payable $292,188; credit Bonds Payable $4,300,000.

4- Morgan Company issues 9%, 20-year bonds with a par value of $840,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is...