MGAC03H3 Lecture Notes - Lecture 2: Financial Statement, Kijiji, Income Approach
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| . Make all 16 adjustments to journal entries. Remember to include a description under each journal entry. |
| 1 | On March 1, ABC purchased a one-year liability insurance policy for $98,400. | ||||||||
| Upon purchase, the following journal entry was made: | |||||||||
| Dr Prepaid insurance | 98,400 | ||||||||
| Cr Cash | 98,400 | ||||||||
| The expired portion of insurance must be recorded as of 12/31/14. | |||||||||
| Notice that the expired portion from March through November has been recorded already. | |||||||||
| Make sure that the Prepaid Insurance balance after the adjusting entry is correct. | |||||||||
| 2 | Depreciation expense must be recorded for the month of December. | ||||||||
| The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000. | |||||||||
| The method of depreciation for the building is straight-line. | |||||||||
| The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000. | |||||||||
| The method of depreciation for the equipment is double-declining balance. | |||||||||
| Depreciation has been recorded for the building and equipment for months February through November. | |||||||||
| 3 | On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month, | ||||||||
| and XYZ paid ABC on December 1 in advance for the first three months' rent. | |||||||||
| The entry made on December 1 was as follows: | |||||||||
| Dr Cash | 36,000 | ||||||||
| Cr Unearned rent revenue | 36,000 | ||||||||
| The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14. | |||||||||
| 4 | Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours. | ||||||||
| Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015. | |||||||||
| The liability for wages payable must be recorded as of 12/31/14. | |||||||||
| 5 | On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable. | ||||||||
| This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%. | |||||||||
| The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item) | |||||||||
| Dr Cash | 235,000 | ||||||||
| Cr Notes payable | 235,000 | ||||||||
| On February 28, 2015 ABC must pay the bank the amount borrowed plus interest. | |||||||||
| Assume the beginning balance for Notes Payable is correct. | |||||||||
| Interest through 12/31/14 must be accrued on the $235,000 note. | |||||||||
| 6 | ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete | ||||||||
| physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at | |||||||||
| that time totaled $75,000, which reflects historical cost. | |||||||||
| Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment. | |||||||||
| Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. | |||||||||
| A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of | |||||||||
| completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory | |||||||||
| using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting | |||||||||
| for adjustments of inventory to market value. | |||||||||
| 7 | It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized | ||||||||
| that their intangible asset might be impaired on December 31, 2014. Record the impairment if any. | |||||||||
| The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500. | |||||||||
| 8 | On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury | ||||||||
| stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14, | |||||||||
| ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock. | |||||||||
| 9 | On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry | ||||||||
| to reflect the issuance of the stock on 12/31/14. | |||||||||
| 10 | On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are | ||||||||
| dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of | |||||||||
| amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14. | |||||||||
| Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. | |||||||||
| 11 | The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies. | ||||||||
| Securities | Cost | Fair Value | |||||||
| 2,200 shares of Toyota Corporation Common Stock | $ 100,000 | $ 125,000 | |||||||
| 1,100 shares of G.M. Corporation Common Stock | $ 67,000 | $ 34,000 | |||||||
| $ 167,000 | $ 159,000 | ||||||||
| Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. | |||||||||
| 12 | On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824, | ||||||||
| which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization. | |||||||||
| Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used. | |||||||||
| Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the | |||||||||
| investment account. | |||||||||
| 13 | ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used, | ||||||||
| prepare the entry to record bad debt expense. | |||||||||
| 14 | On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make | ||||||||
| annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 | |||||||||
| unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method | |||||||||
| of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet | |||||||||
| been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal | |||||||||
| entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for | |||||||||
| this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.) | |||||||||
| 15 | ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension | ||||||||
| plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014. | |||||||||
| Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry. | |||||||||
| Pension asset/liability (January 1) | $0 | ||||||||
| Actual return on plan assets | $40,000 | ||||||||
| Expected return on plan assets | $20,000 | ||||||||
| Contributions (funding) in 2014 | $37,000 | ||||||||
| Fair value of plan assets (December 31) | $75,000 | ||||||||
| Settlement rate | 10% | ||||||||
| Projected benefit obligation (January 1) | $0 | ||||||||
| Service cost | $60,000 | ||||||||
| Benefits paid in 2014 | $0 | ||||||||
| *For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature. | |||||||||
| 16 | On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of | ||||||||
| $10 per share on December 31, 2014. Additional information is as follows: | |||||||||
| a. The service period related to the restricted stock is 2 years. | |||||||||
| b. Vesting occurs if the CFO stays with the company for a two-year period. | |||||||||
| c. The par value of the common stock is $3 per share. | |||||||||
| Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation. | |||||||||
| Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense) | |||||||||
| 17 | Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. | ||||||||
| However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full | |||||||||
| on the return's March 15, 2015 due date. | |||||||||
| ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600, | |||||||||
| so January through November income tax expense recognized amounts to $63,800 (11/12 months). | |||||||||
| Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents | |||||||||
| tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. | |||||||||
| Based on the income before income taxes figure from the income statement, record December's income tax expense | |||||||||
| so that the entire year's total tax expense is correct. | |||||||||
Questions for a practice study test for final. Use ABCD in youranswer instead of writing it out. Thank You!
1 of 35
Which of the following would NOT be considered part of the costof a constructed building?
| Contractor charges | |
| Architectural fees | |
| Building permit fees | |
| Realtor commissions |
Question
2 of 35
Under the direct write-off method, to record the receipt of cashafter an account has previously being written off, you wouldfirst
| debit Bad Debt Expense. | |
| debit Allowance for DoubtfulAccounts. | |
| reinstate the customer'saccount. | |
| debit Cash and credit thecustomer's account. |
Question
3 of 35
Which of the following would be considered a naturalresource?
| Wheat | |
| Corn | |
| Livestock | |
| Timber |
Question
4 of 35
An asset has a cost of $50,000 with a residual value of $10,000.It has a life of 5 years and was purchased on January 1. Its fourthfull year of depreciation expense under double-declining-balancewill be
| $7,200. | |
| $800. | |
| $4,320. | |
| $0. |
Question
5 of 35
Which would be considered part of land improvements?
| Signs | |
| Removing unwanted buildings fromthe land | |
| Fencing | |
| In-ground sprinkler systems |
Question
6 of 35
Cesario Corporation purchases a machine for $125,000. It has anestimated salvage value of $10,000 and is expected to produce50,000 units in its lifetime. During the first year of operation,it produced 14,500 units. To the nearest dollar, the depreciationfor the first year under the units of production method will be
| $35,500. | |
| $33,350. | |
| $36,250. | |
| $31,250. |
Question
7 of 35
When using the allowance method for uncollectible accounts, theaging method is called the
| Allowance approach. | |
| Income Statement approach. | |
| Direct write-off approach. | |
| Balance Sheet approach. |
Question
8 of 35
Which of the following would be considered a cashequivalent?
| Time deposits | |
| Checks | |
| Currency | |
| Money orders |
Question
9 of 35
Leo Company has a petty cash fund of $300. At the end of themonth, $42.38 remains in the fund along with $260.75 in variousreceipts for purchases. The journal entry to replenish the fundwould be
| debit various expenses, $260.75,and credit Cash for $260.75. | |
| debit Petty Cash for $257.62, andcredit Cash for $257.62. | |
| debit various expenses, $260.75;credit Cash Over for $3.13, and credit Cash for $257.62. | |
| debit various expenses, $254.49;debit Cash Short for $3.13, and credit Cash for $257.62. |
Question
10 of 35
Gallego & Co. reported sales of $515,000; beginning netAccounts Receivable of $212,000; and ending net Accounts Receivableof $224,000. Gallego & Co.'s receivable collection period(rounded to the nearest day) is
| 159. | |
| 150. | |
| 106. | |
| 155. |
Question
11 of 35
When companies extend credit to customers
| the likelihood of not collectingmoney from customers increases. | |
| sales generally decrease. | |
| the likelihood of not collectingmoney from customers decreases. | |
| the amount of business stays thesame. |
Question
12 of 35
Lionworks Company has cash of $143,000; net Accounts Receivableof $89,000; short-term investments of $35,000; and prepaid expensesof $40,000. It also has $50,000 in current liabilities and $80,000in long-term liabilities. The quick ratio for Lionworks Companyis
| 6.14. | |
| 5.34. | |
| 3.34. | |
| 4.64. |
Question
13 of 35
Which of the following is NOT true concerning NSF checks?
| NSF checks represent customerchecks that the business previously deposited but have turned outto be worthless. | |
| The amount of the NSF check willneed to be added to the book balance. | |
| NSF stands for nonsufficientfunds. | |
| The amount of the NSF check willneed to be subtracted from the book balance. |
Question
14 of 35
Leo's Lawn Care purchased equipment on January 1. The cost was$15,000, and the equipment had a residual value of $4,000. Theequipment was given a useful life of 7 years. After the end of twoyears, it was determined that the equipment would be obsolete in 3more years, and the residual value would still be $4,000. What willbe the depreciation under the straight-line method to the nearestdollar for the third year?
| $2,619 | |
| $7,857 | |
| $3,142 | |
| $1,571 |
Question
15 of 35
Goodwill is defined as
| liabilities minus assets. | |
| the acquisition costs of afranchise. | |
| excess of the cost of the purchaseof a business over the market value of its net assets. | |
| assets minus liabilities. |
Question
16 of 35
During the month, Evergreen Roofing settled $300 in warrantyclaims by replacing defective flashing. Evergreen uses an estimatedwarranty account. The journal entry to record the settled claimswould have been
| debit Warranty Expense $300; creditCash $300. | |
| debit Estimated Warranty Payable$300; credit Inventory $300. | |
| debit Estimated Warranty Payable$300; credit Cash $300. | |
| debit Warranty Expense $300; creditEstimated Warranty Payable $300. |
Question
17 of 35
TLR Productions reported Interest expense of $8,300, Income taxexpense of $26,400, and Net income of $88,700. TLR's interestcoverage ratio is (rounded to three decimals)
| 0.067. | |
| 0.072. | |
| 14.867. | |
| 13.867. |
Question
18 of 35
The entry to record S&C, Inc. selling 1,000 shares of $12par common stock for $20 per share would be to
| debit Cash $12,000; debit Paid-InCapital in Excess of ParâCommon $8,000; credit Common Stock$20,000. | |
| debit Cash $12,000; credit CommonStock $12,000. | |
| debit Cash $20,000; credit CommonStock $20,000. | |
| debit Cash $20,000; credit CommonStock $12,000; credit Paid-In Capital in Excess of Par-Common Stock$8,000. |
Question
19 of 35
The entry to record selling 300 shares of stated value $60common stock for $70 per share would be
| debit Cash $21,000; credit CommonStock $18,000; credit Paid-in Capital in Excess of StatedValueâ$3,000. | |
| debit Cash $21,000; credit CommonStock $21,000. | |
| debit Cash $18,000; debit Paid-inCapital in Excess of Stated Valueâ$3,000; credit Common Stock$21,000. | |
| debit Cash $18,000; credit CommonStock $18,000. |
Question
20 of 35
Salty's Seafood has 2,000 shares of $10-par common stockoutstanding. During the current year, the company distributed a 10%stock dividend. The market value of the stock at that time was$16/share. After the distribution, Salty's total Stockholders'Equity should increase or decrease by
| $1,200. | |
| $2,000. | |
| ($3,200). | |
| $0. |
Question
21 of 35
The rate of interest that is printed on a bond is called the________ rate of interest.
| variable | |
| stated | |
| maturity | |
| market |
Question
22 of 35
The adjusting entry to record incurred but not yet paid employeewages includes
| a debit to Cash. | |
| a debit to Wages Payable. | |
| a debit to Wages Expense. | |
| a debit to Wages Earned. |
Question
23 of 35
At least one class of stock MUST have
| voting rights. | |
| liquidation rights. | |
| preemptive rights. | |
| dividend rights. |
Question
24 of 35
On October 31, 2014, Aspen Inc. recorded their semiannual bondinterest expense that contained a credit to Discount on bondspayable of $1,200. The adjusting entry on December 31, 2014 willshow a credit to Discount on bonds payable of
| $400. | |
| $600. | |
| $800. | |
| $1,200. |
Question
25 of 35
Charmed, Inc. reacquired 5,000 shares of its $15-par commonstock for $13/share. The debit to Treasury Stock will be
| $65,000. | |
| $75,000. | |
| $10,000. | |
| based on the last treasury stocktransaction. |
Question
26 of 35
The basic unit of stock is called a(n)
| authorization. | |
| ownership record. | |
| certificate. | |
| share. |
Question
27 of 35
Accrued liabilities, such as interest payable, would beconsidered a(n)
| unknown liability. | |
| known liability. | |
| contingent liability. | |
| estimated liability. |
Question
28 of 35
By NOT accruing warranty expense
| reported expenses will beunderstated, and net income will be understated. | |
| reported expenses will beoverstated, and reported liabilities will be understated. | |
| reported liabilities will beunderstated, and net income will be overstated. | |
| reported liabilities will beoverstated, and net income will be understated. |
Question
29 of 35
Which of the following would NOT be a liability?
| An obligation that is estimated inamount | |
| The signing of a three-yearemployment contract at a fixed annual salary | |
| A note payable with no specificmaturity date | |
| An obligation to provide goods orservices in the future |
Question
30 of 35
One type of liability that is easy to overlook is a(n)
| tax liability. | |
| account payable. | |
| contingent liability. | |
| note payable. |
Question
31 of 35
Inventory turnover measures the relationship between
| total assets and merchandiseinventory. | |
| cost of goods sold and totalliabilities. | |
| cost of goods sold and merchandiseinventory. | |
| merchandise inventory and currentliabilities. |
Question
32 of 35
Transactions involving the purchase and sale of long-termassets, lending money, and collecting the principal on loans arecalled
| operating activities. | |
| investing activities. | |
| financing activities. | |
| buying and selling activities. |
Question
33 of 35
The Statement of Cash Flows reports the sources and uses of cashfrom all of the following EXCEPT
| financing activities. | |
| managerial activities. | |
| operating activities. | |
| investing activities. |
Question
34 of 35
Which of the following ratios measures the earnings of a companyon each dollar of assets invested?
| Return on equity | |
| Return on assets | |
| Return on sales | |
| Current ratio |
Question
35 of 35
Are all decreases to cash the result of an unfavorablesituation?
| No. Cash could decrease as a resultof acquiring long-term assets the company needs to expand or staycompetitive. | |
| Yes. Cash could decrease as aresult of paying off long-term debt, which is an unfavorable actionto take. | |
| No. Cash could decrease because thecompany issued more stock. | |
| Yes. Decreases to cash are alwaysbad. |
