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Info Seminar Training Finance Management. Jadwal Pelatihan Human Resources Development. Jadwal Training 2023 tersedia online dan offline class untuk public training dan in house training. Topik training Manajemen Keuangan dan HR Development: 1. Accounting for Project - Practice and Tricks 2. Basic Accounting & Finance for Non Finance Staff 3. Budget - A Forecasting Technique 4. Cash Flow and Treasury 5. Corporate Finance 6. Fixed & Intangible Asset Accounting & Management 7. Management and Cost Accounting - A Practical Approach 8. Update PSAK Terkini 9. Effective Manpower Planning 10. HR Administration 11. Job Analysis, Evaluation & Grading 12. Performance Improvement Plan 13. Training for the Trainer Info seminar training lengkap: WA: 0851-0197-2488 Jadwal training lengkap: https://www.informasi-seminar.com | Info Seminar Manajemen Keuangan | Jadwal Training HR Development | Training Finance Management | Info Training 2023 Online dan Offline Class | Jadwal Training Accounting dan Finance | #accounting #akuntansi #financemanagement #hrdevelopment #basicaccounting #finance #finon #budget #cashflow #treasury #corporatefinance #fixedasset #intangibleasset #costaccounting #akuntansibiaya #psak #manpowerplanning #hradministration #jobanalysis #jobevaluation #jobgrading #trainingfortrainer #accountingmanagement #jadwalpelatihan #manajemenkeuangan #humanresources (di Jakarta) https://www.instagram.com/p/Cod9Khsp7Wd/?igshid=NGJjMDIxMWI=
#accounting#akuntansi#financemanagement#hrdevelopment#basicaccounting#finance#finon#budget#cashflow#treasury#corporatefinance#fixedasset#intangibleasset#costaccounting#akuntansibiaya#psak#manpowerplanning#hradministration#jobanalysis#jobevaluation#jobgrading#trainingfortrainer#accountingmanagement#jadwalpelatihan#manajemenkeuangan#humanresources
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Navigating the Unseen: Challenges in Accounting for Intangible Assets 💡📊
Hey Tumblr fam! Let's unravel the mystery behind a topic that often goes unnoticed but plays a crucial role in the financial landscape – accounting for intangible assets. 🧩💼
🔍 What are Intangible Assets? First things first – what are we talking about? Intangible assets are those valuable assets that lack physical substance. Think intellectual property, patents, copyrights, trademarks, and even brand recognition. They're like the unsung heroes of a company's value.
💼 Challenges on the Horizon:
Valuation Struggles: Putting a price tag on something you can't touch is no easy feat. The valuation of intangible assets can be subjective and challenging, making it harder for companies to reflect their true worth.
Amortization vs. Impairment: Unlike tangible assets with clear depreciation, intangibles often face the dilemma of amortization (gradual write-off) or impairment (sudden decline in value). Deciding which method to use can be a tricky dance for accountants.
Changing Regulatory Landscape: Accounting standards for intangible assets are not set in stone. Changes in regulations can throw a curveball, making it essential for accountants to stay on their toes and adapt to evolving guidelines.
Disclosure Dilemmas: Intangibles often hold strategic importance for a company. Balancing the need for transparency with the necessity to protect sensitive information can pose a challenge when it comes to disclosure in financial statements.
🚀 Why Does It Matter? Understanding these challenges is vital because accurate accounting for intangible assets is crucial for assessing a company's true value, making informed investment decisions, and maintaining financial transparency.
💬 Let's Chat! What are your thoughts on the challenges of accounting for intangible assets? Do you think it adds a layer of complexity to financial reporting, or is it a necessary puzzle piece in understanding a company's worth? Share your insights! 💬🌐
#BusinessInsights#FinancialChallenges#IntangibleAssets#AccountingTalks#finance#payment system#thefinrate#100 days of productivity#financialinsights
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Title: "Distinguishing Fictitious Assets from Intangible Assets: A Financial Insight"
Understanding the difference between fictitious assets and intangible assets is essential for financial clarity. Fictitious assets have no tangible value but may represent deferred expenses or losses, affecting a company's balance sheet. In contrast, intangible assets include valuable non-physical assets like patents, copyrights, and trademarks, influencing a company's worth. This guide provides insights into the classification, accounting, and impact of fictitious and intangible assets on financial statements and the valuation of a business. Explore the intricacies of asset categorization, and enhance your financial knowledge to make informed decisions in the world of accounting and corporate finance.
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IND AS 16| Full Coverage | CA Final | English | By our student Deepika Thyagavel
IND AS 16| Full Coverage | CA Final - #indas16 #cafinalfr #cafinal #cafinalclasses #cafinalfr #QuickRevisionofINDAS38 #CAFinalFRRevision #FR #cafinal #IntangibleAssets #financialreporting #fasttrackrevision #fasttrack
https://youtu.be/eKJLxHbfp_w
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Your business is one of the intellectual properties that is considered an intangible asset. In estate planning, intellectual property and its value often get overlooked since they can be invisible to you and those who aren't familiar with its nature.
As a business owner, it's critically important for you to identify and know your intellectual property's value and include all your intangible assets to ensure that they are protected in the event something happens to you.
Read here to know how to ensure your property is documented, protected and how you should work with a legal team. http://ow.ly/C7OE50DOcYy
"Protect what matters most, no matter what."
#intellectualproperty#intangibleasset#valuableasset#businessassets#businessintangibleassets#estateplan#estateplanning#wills#trusts#lawfirm#estateplanningattorney#estateplanningboston#massachusetts#boston#sudburyma#20westlegal
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Do you know that your intellectual property makes a significant portion, sometimes up to 90% of your company's total value?
That's why it is essential to do everything you can to protect these intangible assets, and one of the first IP elements you'll want to protect is your company's brand name and logo.
To safeguard these brand assets, you'll need to secure trademarks, and for maximum protection, you should register your trademark with the U.S. Patent and Trademark Office (USPTO).
Read more to learn some of the leading advantages of registering your trademark: https://bit.ly/registeringtrademarkadvantages
#trademarkregistration#trademark#advantagesofregisteringtrademark#protectingintellectualproperty#intellectualproperty#companybrand#companylogo#BusinessAsset#intangibleassets#familybusinesslawyer#lasvegaslawyer#lasvegasbusinesses#lasvegastrademark#lasvegasnevada#greggordillo#gordillolawfirm
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Finally, the French translation of our article on #intangibles #intangibleassets #valuation is available to read on https://crefovi.fr/articles/pourquoi-l-evaluation-des-actifs-incorporels-est-importante/ @crefovi (at Paris, France) https://www.instagram.com/p/CDlj9q1HO9B/?igshid=1mli3tgophkc7
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We all experience inner turmoil from time to time. Own your mind and control how it affects you. #MindfulGraffiti #MindOverMatter #Throwback #IntangibleAssets #MindStrength #Power #ControlMechanisms #ChallengingTimes #Mindfulness #ThoughtYoga #EnergyHealing #Instamindfulness #Enlightenment #Motivation #Gratitude #PurposefulLiving #CreateYourOwnHappiness #InspirationDaily #PositiveEnergy #GoodVibes #MindBodyAndSoul #FoodForThought #SelfCare #SelfHelp #SelfCareDaily #WordPorn #MindPorn #QuoteOfTheDay #StopTheSpread #MasterAtHome https://www.instagram.com/p/B-9JdXonW58/?igshid=1fhgjmx0fwtmx
#mindfulgraffiti#mindovermatter#throwback#intangibleassets#mindstrength#power#controlmechanisms#challengingtimes#mindfulness#thoughtyoga#energyhealing#instamindfulness#enlightenment#motivation#gratitude#purposefulliving#createyourownhappiness#inspirationdaily#positiveenergy#goodvibes#mindbodyandsoul#foodforthought#selfcare#selfhelp#selfcaredaily#wordporn#mindporn#quoteoftheday#stopthespread#masterathome
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Aset tak berwujud yang perlu kamu miliki secara berkelanjutan adalah perbuatan baik. Bagikan hal itu kepada setiap orang yang kamu temui! Happy Friday! • • #quotes #intangibleassets #denshuquotes #explore #explorenature #seiretei #travelling #nikon #nikonindonesian #leader #leadership (at Grand Mosque of West Sumatra) https://www.instagram.com/p/BzPSoDjhHTW/?igshid=13xrbcs20abgd
#quotes#intangibleassets#denshuquotes#explore#explorenature#seiretei#travelling#nikon#nikonindonesian#leader#leadership
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Sharing the 867ip.org gospel of Ideas to Assets at Start Up Week Phoenix with Sarah Kay was fun and we got some great feedback! We’re on a mission to document, categorize and monetize intangibles, manage and line item as assets and create a standard framework that people can use! 867ip.org check out our white paper. Side note: I am fortunate to have got some time with Sarah Kay. In the short time we were able to talk I gained some valuable insight to my strengths and weaknesses. She’s a great business and life coach and I witnessed that power in person. Thanks! #newmoneyhabits #867foundation #abundancegames #entrepreneur #startupweekphx #antifragile #intangibleassets #influencer #iheartmesa #sarahkay #intellectualproperty #assetmanagement #ideas (at Mesa Arts Center) https://www.instagram.com/p/BuuoqbjhuUy/?utm_source=ig_tumblr_share&igshid=15jg1y6e2s9l4
#newmoneyhabits#867foundation#abundancegames#entrepreneur#startupweekphx#antifragile#intangibleassets#influencer#iheartmesa#sarahkay#intellectualproperty#assetmanagement#ideas
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Intangible Asset . #IntangibleAsset Asset which does NOT have a physical identity e.g. goodwill, patents, copyright etc.
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Lessors Of Nonfinancial Intangible Assets Market Global Competitive Insights And Outlook 2020
The Business Research Company published its Lessors Of Nonfinancial Intangible Assets Global Market Report 2020 which provides strategists, marketers and senior management with the critical information they need to assess the global Lessors Of Nonfinancial Intangible Assets market. The report provides in-depth analysis of the impact of COVID-19 on the market, along with revised market numbers due to the effects of the coronavirus. The report covers the lessors of nonfinancial intangible assets market’s segments- by type: oil royalty companies, patent owners and lessors and by mode: online, offline.
View Complete Report:
https://www.thebusinessresearchcompany.com/report/lessors-of-nonfinancial-intangible-assets-global-market-report-2020-30-covid-19-impact-and-recovery
Lessors Of Nonfinancial Intangible Assets Global Market Report 2020 is the most comprehensive report available on this market and will help gain a truly global perspective as it covers 60 geographies. The chapter on the impact of COVID-19 gives valuable insights on supply chain disruptions, logistical challenges, and other economic implications of the virus on the market. The chapter also covers markets which have been positively affected by the pandemic.
The global lessors of nonfinancial intangible assets market is expected to grow from $531.6 billion in 2019 to $540.7 billion in 2020 at a compound annual growth rate (CAGR) of 1.8%. The low growth is mainly due to economic slowdown across countries owing to the COVID-19 outbreak and the measures to contain it. The market is then expected to recover and grow at a CAGR of 9% from 2021 and reach $691.4 billion in 2023.
A large number of companies are investing in research and development and are trying to make patent leasing as a major source of their revenue. These companies are investing in niche areas and are seeking a high return on their investments towards research and development. Patent owners are licensing their patents to both direct competitors and companies in related industries with most of them creating a new subsidiary unit focused on making money on those assets.
Few Points From Table Of Content
1. Executive Summary
2. Report Structure
3. Lessors Of Nonfinancial Intangible Assets Market Characteristics
4. Lessors Of Nonfinancial Intangible Assets Market Product Analysis
5. Lessors Of Nonfinancial Intangible Assets Market Supply Chain
���…
19. Lessors Of Nonfinancial Intangible Assets Market Competitive Landscape
20. Key Mergers And Acquisitions In The Lessors Of Nonfinancial Intangible Assets Market
21. Market Background: Leasing Market
22. Recommendations
24. Copyright And Disclaimer
Request A Sample Report At: https://www.thebusinessresearchcompany.com/sample.aspx?id=2223&type=smp
Few Points From List Of Table
Table 1: Historic Market Growth, Value ($ Billion)
Table 2: Forecast Market Growth, Value ($ Billion)
Table 3: Global Lessors Of Nonfinancial Intangible Assets Market, 2019, By Region, Value ($ Billion)
……..
Table 127: Global Lessors Of Nonfinancial Intangible Assets Market In 2023- Growth Countries
Table 128: Global Lessors Of Nonfinancial Intangible Assets Market In 2023- Growth Segments
Table 129: Global Lessors Of Nonfinancial Intangible Assets Market In 2023- Growth Strategies
About The Business Research Company:
The Business Research Company is a Business Intelligence Company which excels in company, market and consumer research. It has offices in the UK, the US and India and a network of trained researchers in 15 countries globally.
Contact Information:
The Business Research Company
Europe: +44 207 1930 708
Asia: +91 8897263534
Americas: +1 315 623 0293
Email: [email protected]
Follow us on Blog: http://blog.tbrc.info/
Follow us on LinkedIn: https://in.linkedin.com/company/the-business-research-company
#lessorsofnonfinancialintagibleassets#thebusinessresearchcompany#servicesindustry#intangibleassets#marketgrowth
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ACC 206 Week 2 Quiz – Strayer NEW
Click on the Link Below to Purchase A+ Graded Course Material
http://budapp.net/ACC-206-Accounting-Principles-II-Week-2-Quiz-Strayer-260.htm
CHAPTER10
PLANTASSETS,NATURALRESOURCES,ANDINTANGIBLEASSETS
CHAPTERSTUDYOBJECTIVES
1.Describehowthecostprincipleappliestoplantassets.
2.Explaintheconceptofdepreciation..
3.Computeperiodicdepreciationusingdifferentmethods.
4.Describetheprocedureforrevisingperiodicdepreciation.
5.Distinguishbetweenrevenueandcapitalexpenditures,andexplaintheentriesforeach.
6.Explainhowtoaccountforthedisposalofaplantasset.
7.Computeperiodicdepletionofnaturalresources.
8.Explainthebasicissuesrelatedtoaccountingforintangibleassets.
9.Indicatehowplantassets,naturalresources,andintangibleassetsarereported.
10.Explainhowtoaccountfortheexchangeofplantassets.
TRUE-FALSESTATEMENTS
1. Allplantassets(fixedassets)mustbedepreciatedfor accountingpurposes.
2. Whenpurchasingland,thecostsforclearing,draining,filling,andgradingshouldbe chargedto aLandImprovementsaccount.
3. Whenpurchasingdeliveryequipment,salestaxesandmotorvehiclelicensesshouldbe chargedto DeliveryEquipment.
4. Landimprovementsaregenerallychargedto theLandaccount.
5. Oncecostisestablishedforaplantasset,itbecomes thebasis ofaccounting fortheasset unlesstheassetappreciatesinvalue,inwhichcase,marketvaluebecomesthebasisfor accountability.
6. Thebookvalueof aplantassetisalwaysequaltoitsfairmarketvalue.
7. Recordingdepreciationonplantassetsaffectsthebalancesheetandtheincome statement.
8. Thedepreciablecostof aplant asset is itsoriginalcostminusobsolescence.
9. Recordingdepreciationeachperiodisanapplicationof thematchingprinciple.
10. TheAccumulatedDepreciationaccountrepresentsacashfundavailabletoreplaceplant assets.
11. Incalculatingdepreciation,bothplantassetcost andusefullifearebasedonestimates.
12. Usingtheunits-of-activitymethodofdepreciatingfactoryequipmentwillgenerallyresultin moredepreciationexpensebeingrecordedoverthelifeoftheassetthanifthestraight-line method hadbeenused.
13. Salvagevalueisnotsubtractedfromplantassetcostindeterminingdepreciationexpense underthedeclining-balancemethodofdepreciation.
14. Thedeclining-balancemethodofdepreciationiscalledanaccelerateddepreciation methodbecauseitdepreciatesanassetinashorterperiodoftimethantheasset'suseful life.
15. Underthedouble-declining-balancemethod,thedepreciationrateusedeachyear remainsconstant.
16. TheIRSdoesnotrequirethetaxpayertousethesamedepreciationmethodonthetax returnthatisusedinpreparingfinancialstatements.
17. Achangeintheestimatedusefullifeofaplantassetmaycauseachangeintheamount ofdepreciationrecognizedinthecurrentandfutureperiods,but nottopriorperiods.
18. Achangeintheestimatedsalvagevalueofaplantassetrequiresarestatementofprior years'depreciation.
19. Todetermineanewdepreciationamountafterachangeinestimateofaplantasset's useful life, the asset'sremaining depreciablecost isdividedbyits remainingusefullife.
20. Additionsand improvementstoaplantassetthatincreasethe asset'soperatingefficiency, productive capacity,or expectedusefullife aregenerallyexpensed intheperiodincurred.
21. Capitalexpendituresareexpendituresthatincreasethecompany'sinvestmentin productive facilities.
22. Ordinaryrepairs shouldberecognizedwhenincurredas revenueexpenditures.
23. A characteristicofcapitalexpendituresis that theexpendituresoccurfrequently duringthe period ofownership.
24. Onceanassetisfullydepreciated,noadditionaldepreciationcanbetakeneventhough theasset is still beingusedbythebusiness.
25. Thefairmarketvalueof a plantasset isalwaysthesameasits bookvalue.
26. Iftheproceedsfromthesaleofaplantassetexceeditsbookvalue,againondisposal occurs.
27. Alossondisposalofaplantassetcanonlyoccurifthecashproceeds received fromthe assetsaleis lessthanthe asset'sbook value.
28. Thebookvalueofaplantassetistheamount originallypaid fortheassetlessanticipated salvagevalue.
29. Alossondisposal ofaplantasset asaresult ofasaleoraretirementiscalculated inthe sameway.
30. A plantassetmustbefullydepreciatedbeforeit canberemovedfromthe books.
31. Ifaplantasset issoldata gain,thegain ondisposal shouldreducethecost ofgoodssold section of the incomestatement.
32. Depletioncostperunitiscomputedbydividingthetotalcostofanaturalresourcebythe estimatednumberof unitsintheresource.
33. TheAccumulatedDepletionaccountisdeductedfromthecostofthenaturalresourcein thebalancesheet.
34. Depletionexpenseforaperiodisonlyrecognizedonnaturalresourcesthathavebeen extractedandsoldduringtheperiod.
35. Naturalresourcesarelong-livedproductiveassetsthatareextractedinoperationsand arereplaceableonlybyanactof nature.
36. Thecostofnaturalresourcesisnotallocatedtoexpensebecausethenaturalresources arereplaceableonlybyanactof nature.
37. Conceptually,thecostallocationproceduresfornaturalresourcesparallelsthatofplant assets.
38. Naturalresourcesincludestandingtimberandundergrounddepositsofoil,gas,and minerals.
39. Ifanacquiredfranchiseorlicensehasanindefinitelife,thecostoftheassetisnot amortized.
40. Whenanentirebusinessispurchased,goodwillistheexcessofcostoverthebookvalue of thenet assetsacquired.
41. Researchand development costswhich result in asuccessful product which ispatentable arechargedtothePatentaccount.
42. Thecostof apatentmustbeamortizedovera 20-yearperiod.
43. Thecostofapatentshouldbeamortizedoveritslegallifeorusefullife,whicheveris shorter.
44. The balancesofthe majorclassesofplantassetsand accumulated depreciationby major classes shouldbedisclosedinthebalance sheetornotes.
45. Theassetturnover ratioiscalculated astotalsales dividedbyendingtotalassets.
46. Researchanddevelopmentcostscanbeclassifiedasaproperty,plant,andequipment itemoras an intangibleasset.
a47. An exchangeofplantassetshas commercial substanceifthe futurecashflows change as a resultofthe exchange.
a48. Companiesrecordagainorlossontheexchangeofplantassetsbecausemost exchangeshavecommercialsubstance.
a49. Whenplantassetsareexchanged,thecostofthenewassetisthebookvalueoftheold assetplus anycashpaid.
Additional True-FalseQuestions
50. Whenconstructingabuilding,acompanyispermittedtoincludetheacquisitioncostand certaininterest costs incurredinfinancingtheproject.
51. Recognitionofdepreciationpermitstheaccumulationofcashforthereplacementofthe asset.
52. Whenanassetispurchasedduringtheyear,itisnotnecessarytorecorddepreciation expense inthefirst yearunderthedeclining-balancedepreciationmethod.
53. Depletionexpenseisreported intheincomestatementas anoperatingexpense.
54. Goodwillisnotrecognizedinaccountingunlessitisacquiredfromanotherbusiness enterprise.
55. Researchanddevelopmentcostsshouldbechargedtoexpensewhenincurred.
56. Alossontheexchangeofplantassetsoccurswhenthefairmarketvalueoftheoldasset islessthanitsbookvalue.
MULTIPLECHOICEQUESTIONS
57. Thecostof apurchasedbuildingincludes allofthefollowingexcept a.closingcosts.
b.realestatebroker's commission. c.remodeling costs.
d.Allof theseareincluded.
58. Acompanypurchasedlandfor$90,000cash.Realestatebrokers'commissionwas $5,000and$7,000wasspentfordemolishinganoldbuildingonthelandbefore constructionofanewbuildingcouldstart.Underthecostprinciple,thecostoflandwould be recordedat
a.$97,000. b.$90,000. c.$95,000. d.$102,000.
59. Whichoneofthefollowingitemsisnotconsideredapartofthecostofatruckpurchased for businessuse?
a.Salestax
b.Trucklicensec.Freightcharges
d.Costofletteringonsideoftruck
60. Whichofthefollowingassetsdoesnotdeclineinservicepotentialoverthecourseofits useful life?
a.Equipment b.Furnishings c.Land
d.Fixtures
61. Thefoursubdivisions forplantassetsare
a.land,landimprovements,buildings,andequipment. b.intangibles,land,buildings,andequipment.
c.furnishingsandfixtures,land,buildings, andequipment. d.property,plant,equipment,andland.
62. Thecostof landdoesnotinclude
a.realestatebrokers' commission. b.annualpropertytaxes.
c.accruedpropertytaxesassumedbythepurchaser. d.title fees.
63. FeeneyClinicpurchaseslandfor$130,000cash.Theclinicassumes$1,500inproperty taxesdueontheland.Thetitleandattorneyfeestotaled$1,000.Theclinichastheland gradedfor $2,200.WhatamountdoesFeeneyClinicrecordasthecostforthe land?
a.$132,200 b.$130,000 c.$134,700 d.$132,500
64. BelleCompanybuyslandfor$50,000on12/31/07.Asof3/31/08,thelandhas appreciatedinvalueto$50,700.On12/31/08,thelandhasanappraisedvalueof $51,800.Bywhatamountshouldthe Landaccount beincreasedin 2008?
a.$0b.$700
c.$1,100 d.$1,800
65. PineCompanyacquireslandfor$86,000cash.Additional costsareasfollows:
Removalof shed $300 Fillingandgrading 1,500 Salvagevalue oflumberofshed 120 Brokercommission 1,130 Pavingofparkinglot 10,000 Closingcosts 560
Pinewillrecordtheacquisitioncostof thelandas a.$86,000.
b.$87,690. c.$89,610. d.$89,370.
66. ShawneeHospitalinstallsanewparkinglot.Thepavingcost$30,000andthelightsto illuminatethenewparkingareacost$15,000.Whichofthefollowingstatementsistrue with respecttotheseadditions?
a.$30,000shouldbedebitedtothe Landaccount.
b.$15,000shouldbedebitedtoLandImprovements. c.$45,000shouldbedebitedtotheLandaccount.d.$45,000shouldbedebitedtoLandImprovements.
10-10
67. Landimprovementsshouldbedepreciatedovertheusefullife of the a.land.
b.buildingsontheland.
c.land or landimprovements,whicheverislonger. d.landimprovements.
68. GeneralMoldingisbuildinganewplantthatwilltakethreeyearstoconstruct.The constructionwillbefinancedinpartbyfundsborrowedduringtheconstructionperiod. Therearesignificantarchitectfees,excavationfees,andbuildingpermitfees.Whichof the followingstatementsis true?
a.Excavationfeesarecapitalizedbut building permitfeesarenot. b.Architectfeesarecapitalizedbut buildingpermitfeesarenot.
c.Interestiscapitalizedduring theconstructionas partof thecostofthebuilding.
d.The capitalizedcost is equaltothecontractprice tobuildthe plant less any intereston borrowed funds.
69. Acompanypurchasesaremotesitebuildingforcomputeroperations.Thebuildingwillbe suitableforoperationsaftersomeexpenditures.Thewiringmustbereplacedtocomputer specifications.Theroofisleakyandmustbereplaced.Allroomsmustberepaintedand recarpetedandtherewillalsobesomeplumbingworkdone.Whichofthefollowing statements is true?
a.Thecost ofthebuildingwillnot includetherepaintingandrecarpeting costs. b.Thecostofthebuildingwillincludethecostof replacing theroof.
c.Thecostofthebuildingisthepurchasepriceofthebuilding,whiletheadditional expendituresareallcapitalizedas BuildingImprovements.
d.Thewiringis partofthecomputercosts,notthebuildingcost.
70. CarleyCompany purchasesanewdeliverytruck for$45,000.Thesalestaxesare$3,000. Thelogo of thecompanyis painted on thesideofthe truckfor$1,200.Thetrucklicenseis $120.Thetruckundergoessafetytestingfor$220.WhatdoesCarleyrecordasthecostof thenewtruck?
a.$49,540 b.$49,420 c.$48,000 d.$47,420
71. Allof thefollowingfactorsincomputingdepreciationareestimatesexcept a.cost.
b.residualvalue. c.salvagevalue. d.usefullife.
72. StoriesCompanypurchasedequipmentandthesecostswereincurred:
Cashprice Salestaxes
Insuranceduringtransit Installationandtesting Totalcosts
$22,500 1,800 320
430$25,050
PlantAssets,NaturalResources,andIntangibleAssets 10-11
Storieswillrecordtheacquisitioncostofthe equipmentas a.$22,500.
b.$24,300. c.$24,620. d.$25,050.
73. Becky’sBloomspurchasedadeliveryvanfor$20,000.Thecompany wasgivena$2,000 cashdiscountbythedealer,andpaid$1,000salestax.Annualinsuranceonthevanis $500.Asaresultofthepurchase,byhowmuchwillBecky’sBloomsincreaseitsvan account?
a.$20,000 b.$18,000 c.$19,500 d.$19,000
74. UptonCompanypurchasedequipmentonJanuary1atalistpriceof$50,000,withcredit terms2/10,n/30.PaymentwasmadewithinthediscountperiodandUptonwasgivena $1,000cashdiscount.Uptonpaid$2,500salestaxontheequipment,andpaidinstallation chargesof$880.Priortoinstallation,Uptonpaid$2,000topouraconcreteslabonwhich toplacethe equipment.Whatisthetotalcostofthe newequipment?
a.$52,380 b.$54,380 c.$55,380 d.$50,500
75. Interestmaybe includedintheacquisitioncost ofa plantasset a.duringtheconstructionperiodof aself-constructedasset.b.if theassetis purchasedoncredit.
c.if theassetacquisitionisfinancedbyalong-termnotepayable. d.ifit isapart of a lump-sumpurchase.
76. ThebalanceintheAccumulatedDepreciationaccountrepresentsthe a.cashfundtobeusedtoreplaceplantassets.
b.amounttobedeductedfromthecostoftheplantassettoarriveatitsfairmarket value.
c.amountchargedtoexpenseinthecurrentperiod.
d.amountchargedto expensesincetheacquisitionof theplantasset.
77. Whichoneofthefollowingitemsisnotaconsiderationwhenrecordingperiodic depreciationexpenseonplantassets?
a.Salvagevalue
b.Estimatedusefullife
c.Cashneededtoreplacethe plantasset d.Cost
78. Depreciationisthe processof allocating thecostof aplantasset overits servicelife in a.anequaland equitablemanner.
b.an acceleratedand accuratemanner. c.asystematicandrationalmanner.
d.a conservativemarket-basedmanner.
10-12
79. Thebookvalueof anassetisequaltothe
a.asset'smarketvaluelessits historicalcost.
b.bluebookvaluereliedonbysecondarymarkets. c.replacementcostof theasset.
d.asset'scostlessaccumulateddepreciation.
80. Accountantsdonotattempttomeasurethechangeinaplantasset'smarketvalueduring ownership because
a.theassetsare notheldfor resale. b.plantassetscannotbesold.
c.losseswouldhavetoberecognized.
d.itismanagement'sresponsibilityto determinefair values.
81. Depreciationis aprocessof a.assetdevaluation.
b.costaccumulation. c.cost allocation.
d.assetvaluation.
82. Recordingdepreciationeachperiodisnecessaryinaccordancewiththe a.goingconcernprinciple.
b.costprinciple.
c.matchingprinciple.
d.assetvaluationprinciple.
83. Incomputingdepreciation,salvagevalueis
a.thefairmarketvalueofa plantassetonthedate of acquisition.
b.subtractedfromaccumulateddepreciationtodeterminetheplantasset'sdepreciable cost.
c.anestimateof aplantasset'svalueattheendofitsusefullife. d.ignoredinallthedepreciationmethods.
84. Whenestimatingtheusefullifeofanasset,accountantsdonotconsider a.thecosttoreplacetheassetat theendofits usefullife.
b.obsolescencefactors.
c.expectedrepairsandmaintenance. d.theintendeduse of theasset.
85. Usefullifeisexpressedintermsof useexpectedfromtheassetunderthe a.declining-balancemethod.
b.straight-linemethod.
c.units-of-activitymethod. d.noneof these.
86. Equipmentwaspurchasedfor$75,000.Freightchargesamountedto$3,500andthere wasacostof$10,000forbuildingafoundationandinstallingtheequipment.Itis estimatedthattheequipmentwillhavea$15,000salvagevalueattheendofits5-year useful life. Depreciationexpenseeachyearusingthe straight-linemethodwillbe
a.$17,700. b.$14,700. c.$12,300. d.$12,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-13
87. Atruckwaspurchasedfor$120,000anditwasestimatedtohavea$24,000salvage valueattheendofitsusefullife.Monthlydepreciationexpenseof$2,000wasrecorded using thestraight-linemethod.Theannualdepreciationrateis
a.20%. b.2%.c.8%. d.25%.
88. AcompanypurchasedfactoryequipmentonApril1,2008for$64,000.Itisestimatedthat theequipmentwillhavean$8,000salvagevalueattheendofits10-yearusefullife. Usingthestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008is
a.$6,400. b.$5,600. c.$4,200. d.$4,800.
89. Acompanypurchasedofficeequipmentfor$40,000andestimatedasalvagevalueof $8,000attheendofits5-yearusefullife.Theconstantpercentagetobeappliedagainst book valueeachyearifthedouble-declining-balancemethodisusedis
a.20%. b.25%. c.40%. d.4%.
90. Thedeclining-balancemethodofdepreciationproduces a.adecreasingdepreciationexpenseeachperiod.
b.an increasingdepreciationexpenseeachperiod. c.a decliningpercentagerateeachperiod.
d.a constantamount ofdepreciationexpenseeachperiod.
91. Acompanypurchasedfactoryequipmentfor$250,000.Itisestimatedthattheequipment willhavea$25,000salvagevalueattheendofitsestimated5-yearusefullife.Ifthe companyusesthedouble-declining-balancemethodofdepreciation,theamountofannual depreciationrecordedforthesecondyear afterpurchasewould be
a.$100,000. b.$60,000. c.$90,000. d.$43,200.
92. Theunits-of-activitymethodisgenerallynot suitablefor a.airplanes.
b.buildings.
c.deliveryequipment. d.factorymachinery.
93. Aplantassetcost$144,000andisestimatedtohavean$18,000salvagevalueattheend ofits8-yearusefullife.Theannualdepreciation expenserecordedforthethirdyearusing thedouble-declining-balancemethodwouldbe
a.$12,060. b.$20,250. c.$17,718. d.$13,785.
10-14
94. Afactorymachinewaspurchased for$75,000onJanuary1,2008.Itwasestimatedthatit wouldhavea$15,000salvagevalueattheendofits5-yearusefullife.Itwasalso estimatedthatthemachinewouldberun40,000hoursinthe5years.Thecompanyran themachinefor4,000actualhoursin2008.Ifthecompanyusestheunits-of-activity methodof depreciation,the amountof depreciationexpensefor 2008 wouldbe
a.$7,500.b.$12,000. c.$15,000. d.$6,000.
95. TheModifiedAcceleratedCostRecoverySystem(MACRS)isadepreciationmethod which
a.isusedfortaxpurposes.
b.mustbeusedforfinancialstatementpurposes. c.isrequiredbytheSEC.
d.expensesanassetoverasingleyearbecausecapitalacquisitionsmustbeexpensed in theyearpurchased.
96. Whichofthefollowingmethodsof computing depreciationisproductionbased? a.Straight-line
b.Declining-balance c.Units-of-activityd.Noneof these
97. Managementshouldselect thedepreciationmethodthat a.iseasiesttoapply.
b.bestmeasurestheplantasset'smarketvalueover its usefullife.
c.bestmeasuresthe plantasset'scontributiontorevenue overits usefullife. d.hasbeenusedmostofteninthepastbythe company.
98. Thedepreciationmethodthatappliesaconstantpercentagetodepreciablecostin calculating depreciation is
a.straight-line.
b.units-of-activity.
c.declining-balance. d.noneof these.
Usethefollowing informationforquestions99–100.
OnOctober1,2008,DoleCompanyplacesanewassetintoservice.Thecostoftheassetis $60,000withanestimated5-yearlifeand$15,000salvagevalueattheendof its usefullife.
99. Whatisthedepreciationexpensefor2008ifDoleCompanyusesthestraight-linemethod ofdepreciation?
a.$2,250 b.$12,000 c.$3,000 d.$6,000
PlantAssets,NaturalResources,andIntangibleAssets 10-15
100. WhatisthebookvalueoftheplantassetontheDecember31,2008,balancesheet assuming that DoleCompanyusesthedouble-declining-balancemethodof depreciation? a.$39,000
b.$45,000 c.$54,000 d.$57,000
101. Whichdepreciationmethod ismostfrequentlyusedinbusinessestoday? a.Straight-line
b.Declining-balance c.Units-of-activity
d.Double-declining-balance
102. WineCompanyusestheunits-of-activitymethodincomputingdepreciation.Anewplant assetispurchased for$24,000thatwillproduceanestimated100,000unitsoveritsuseful life.Estimatedsalvagevalue attheend ofitsuseful lifeis$2,000. Whatis the depreciation costperunit?
a.$2.20 b.$2.40 c.$.22 d.$.24
103. Units-of-activityisanappropriatedepreciationmethodtouse when a.it isimpossibleto determinetheproductivityof theasset.
b.theasset'susewillbeconstantoverits usefullife.
c.theproductivityof theassetvariessignificantlyfromoneperiodtoanother. d.thecompanyisamanufacturingcompany.
104. Thecalculationof depreciationusingthedecliningbalancemethod,
a.ignoressalvage valueindeterminingtheamounttowhicha constantrateisapplied. b.multipliesaconstantpercentagetimesthepreviousyear'sdepreciationexpense.
c.yieldsan increasingdepreciationexpenseeachperiod.
d.multipliesadecliningpercentagetimesaconstantbookvalue.
Use thefollowing informationforquestions105–106.
GreyCompanypurchasedanewvanforfloraldeliveriesonJanuary1,2008.Thevancost $36,000withanestimatedlifeof5yearsand$9,000salvagevalueattheendofitsusefullife. Thedouble-declining-balancemethodof depreciationwillbeused.
105. Whatisthedepreciationexpensefor2008? a.$7,200
b.$5,400c.$10,800 d.$14,400
106. WhatisthebalanceoftheAccumulatedDepreciationaccountattheendof2009? a.$5,760
b.$17,280 c.$23,040 d.$8,640
10-16
107. PorterCompanypurchasedequipmentfor$450,000onJanuary1,2007,andwillusethe double-declining-balancemethodofdepreciation.Itisestimatedthattheequipmentwill havea3-yearlifeanda$20,000salvagevalueattheendofitsusefullife.Theamountof depreciationexpenserecognizedintheyear2009willbe
a.$50,000. b.$30,000. c.$54,440. d.$34,440.
108. Aplant asset was purchasedon January 1 for$50,000withan estimatedsalvagevalueof $10,000attheendofitsusefullife.Thecurrentyear'sDepreciationExpenseis$5,000 calculatedonthestraight-linebasisandthebalanceoftheAccumulatedDepreciation accountattheendof theyearis$25,000.Theremainingusefullifeof theplantasset is
a.10 years. b.8years. c.5 years. d.3years.
109. Equipmentwaspurchasedfor$60,000.Freightchargesamountedto$2,800andthere wasacostof$8,000forbuildingafoundation andinstallingtheequipment.Itisestimated thattheequipmentwillhavea$12,000salvagevalueattheendofits5-yearusefullife. Depreciation expenseeachyearusingthestraight-linemethodwill be
a.$14,160. b.$11,760. c.$9,840. d.$9,600.
110. Equipmentwaspurchased for$17,000onJanuary1,2008.Freightchargesamountedto $700andtherewasacostof$2,000forbuildingafoundationandinstallingthe equipment.Itisestimatedthattheequipmentwillhavea$3,000salvagevalueattheend ofits5-year useful life.What istheamountofaccumulateddepreciationatDecember31, 2009,if thestraight-linemethodof depreciationisused?
a.$6,680 b.$3,340 c.$2,860 d.$5,720
111. Acompanypurchasedfactoryequipment onJune 1,2008,for$48,000.Itisestimatedthat theequipmentwillhavea$3,000salvagevalueattheendofits10-yearusefullife.Using thestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008,is
a.$4,500. b.$2,625. c.$2,250. d.$1,875.
112. Aplant asset was purchasedon January 1 for$40,000withan estimatedsalvagevalueof $8,000attheendofitsusefullife.Thecurrentyear'sDepreciationExpenseis$4,000 calculatedonthestraight-linebasisandthebalanceoftheAccumulatedDepreciation accountattheendof theyearis$20,000.Theremainingusefullifeof theplantasset is
PlantAssets,NaturalResources,andIntangibleAssets 10-17
a.10 years. b.8years. c.5 years. d.3years.
Usethefollowing informationforquestions113–115.
BrinkmanCorporationboughtequipmentonJanuary1,2008.Theequipmentcost$90,000and hadanexpectedsalvagevalueof$15,000.Thelifeoftheequipmentwasestimatedtobe6 years.
113. Thedepreciablecostof theequipmentis a.$90,000.
b.$75,000. c.$50,000. d.$12,500.
114. Thedepreciationexpenseusingthestraight-linemethodof depreciationis a.$17,500.
b.$18,000. c.$12,500.
d.noneof theabove.
115. Thebookvalueof the equipmentatthebeginningof thethirdyear wouldbe a.$90,000.
b.$75,000. c.$65,000. d.$25,000.
116. BadenCompanypurchasedmachinerywithalistpriceof$32,000.Theyweregivena 10%discountbythemanufacturer.Theypaid$200forshippingandsalestaxof$1,500. Badenestimatesthatthemachinerywillhaveausefullifeof10yearsandaresidual value of$10,000.IfBadenusesstraight-linedepreciation,annualdepreciationwillbe
a.$2,050. b.$2,036. d.$3,050. d.$1,880.
117. BatesCompanypurchasedequipmentonJanuary1,2008,atatotalinvoicecostof $600,000.Theequipmenthasanestimatedsalvagevalueof$15,000andanestimated usefullifeof5years.WhatistheamountofaccumulateddepreciationatDecember31, 2009,if thestraight-linemethodof depreciationisused?
a.$120,000 b.$240,000 c.$117,000 d.$234,000
10-18
118. OnJanuary1,amachinewithausefullifeoffiveyearsandaresidualvalueof$15,000 waspurchasedfor$45,000.Whatisthedepreciationexpenseforyear2underthe double-declining-balancemethodof depreciation?
a.$10,800 b.$18,000 c.$14,400 d.$8,640
119. Amachinewithacostof$160,000hasanestimatedsalvagevalueof$10,000andan estimatedusefullifeof5yearsor15,000hours.Itistobedepreciatedusingtheunits-of-activitymethodofdepreciation.Whatistheamountofdepreciationforthesecondfull year,during whichthe machinewasused5,000hours?
a.$50,000 b.$30,000 c.$43,333 d.$53,333
120. Equipmentwithacostof$240,000hasanestimatedsalvagevalueof$15,000andan estimatedlifeof4yearsor15,000hours.Itistobedepreciatedusingtheunits-of-activity method.Whatistheamountofdepreciationforthefirstfullyear,duringwhichthe equipmentwasused 3,300 hours?
a.$60,000 b.$67,800 c.$49,500 d.$56,250
121. LarimeCompanypurchasedequipmentfor$40,000onJanuary1,2007,andwillusethe double-declining-balancemethodofdepreciation.Itisestimatedthattheequipmentwill havea5-yearlifeanda$2,000salvagevalueattheendofitsusefullife.Theamountof depreciationexpenserecognizedintheyear2009willbe
a.$5,760. b.$9,120. c.$9,600. d.$5,472.
122. InterlineTruckingpurchasedatractortrailerfor$98,000. Interlineusestheunits-of-activity methodfordepreciatingitstrucksandexpectstodrivethetruck1,000,000milesoverits 12-yearusefullife.Salvagevalueisestimated tobe$14,000.Ifthetruckisdriven90,000 miles in itsfirstyear,howmuchdepreciationexpenseshouldInterlinerecord?
a.$7,000 b.$8,820 c.$7,560 d.$8,167
123. Anassetwaspurchasedfor$150,000.Ithadanestimatedsalvagevalueof$30,000and anestimatedusefullifeof10years.After5yearsofuse,theestimatedsalvagevalueis revisedto$24,000buttheestimatedusefullifeisunchanged.Assumingstraight-line depreciation, depreciationexpenseinyear6 wouldbe
a.$18,000. b.$13,200. c.$9,000. d.$12,600.
PlantAssets,NaturalResources,andIntangibleAssets 10-19
124. Equipmentcosting$30,000withasalvagevalueof$6,000andanestimatedlifeof8 yearshasbeendepreciatedusingthestraight-linemethodfor2years.Assuminga revisedestimatedtotallifeof5yearsandnochangeinthesalvage value,thedepreciation expense for year3wouldbe
a.$3,600. b.$8,000. c.$6,000. d.$4,800.
125. Joe'sQuikShopboughtmachineryfor$25,000onJanuary1,2008.Joeestimatedthe usefullifetobe5yearswithnosalvagevalue,andthestraight-line methodofdepreciation willbeused. OnJanuary 1,2009,Joedecidesthatthebusinesswillusethemachineryfor a total of6 years.What is thereviseddepreciationexpensefor2009?
a.$4,000 b.$2,000 c.$3,333 d$5,000
126. Eachofthefollowingisusedincomputingrevisedannualdepreciationforachangein estimateexcept
a.bookvalue. b.cost.
c.depreciablecost.
d.remaininguseful life.
127. A changeintheestimatedusefullife of equipmentrequires
a.aretroactivechangeintheamountofperiodicdepreciationrecognizedinprevious years.
b.thatnochangebemadeintheperiodicdepreciation sothatdepreciationamounts are comparableoverthelifeof theasset.
c.thattheamountofperiodicdepreciationbechangedinthecurrentyearandinfuture years.
d.that incomeforthecurrent yearbeincreased.
128. HuntCompanyhasdecidedtochangetheestimateoftheusefullifeofanassetthathas beeninservicefor2years. Whichofthefollowingstatementsdescribestheproperwayto revise a usefullifeestimate?
a.Revisionsinusefullifeare permittedifapprovedbytheIRS.
b.Retroactivechangesmustbemadeto correctpreviouslyrecordeddepreciation. c.Onlyfuture yearswill beaffectedbytherevision.
d.Bothcurrentandfutureyearswillbeaffectedbythe revision.
129. Jim'sCopyShopboughtequipmentfor$90,000onJanuary1,2007.Jimestimatedthe usefullifetobe3yearswithnosalvage value, andthestraight-line methodofdepreciation willbeused.OnJanuary1,2008,Jimdecidesthat the businesswilluse theequipmentfor5years.Whatisthereviseddepreciationexpensefor 2008?
a.$30,000 b.$12,000 c.$15,000 d.$22,500
10-20
130. Costsincurredtoincreasetheoperatingefficiencyorusefullifeofaplantassetare referred toas
a.capitalexpenditures.b.expenseexpenditures. c.ordinaryrepairs.
d.revenueexpenditures.
131. Expendituresthatmaintain theoperatingefficiencyandexpectedproductivelifeofaplant assetaregenerally
a.expensedwhenincurred.
b.capitalizedasa partofthecostof theasset.
c.debitedto the AccumulatedDepreciationaccount.d.notrecordeduntiltheybecomematerialinamount.
132. Whichofthefollowingisnottrue of ordinaryrepairs?
a.Theyprimarilybenefitthecurrentaccountingperiod. b.Theycan bereferredto asrevenueexpenditures.
c.Theymaintaintheexpectedproductivelifeof theasset. d.Theyincreasetheproductivecapacityof theasset.
133. Thepaneling ofthe body ofanopenpickuptruckwouldbeclassifiedasa(n) a.revenueexpenditure.
b.addition.
c.improvement.d.ordinaryrepair.
134. Additionsand improvements
a.occurfrequentlyduringtheownershipof aplantasset. b.normallyinvolveimmaterialexpenditures.
c.increasethebookvalueof plantassetswhenincurred. d.typicallyonlybenefitthecurrentaccountingperiod.
135. Ifa plantassetisretiredbeforeit isfullydepreciatedandnosalvagevalueisreceived, a.againondisposaloccurs.
b.a lossondisposal occurs.
c.eitheragainor a losscan occur. d.neitheragainnor alossoccurs.
136. Againorlossondisposalof aplantassetis determinedbycomparingthe a.replacementcost oftheassetwiththeasset'soriginal cost.
b.bookvalueof theassetwiththeasset'soriginalcost.
c.originalcost oftheassetwiththeproceedsreceivedfromitssale. d.bookvalueof the assetwiththe proceedsreceivedfromits sale.
137. Thebookvalueof aplantassetisthedifferencebetweenthe a.replacementcost oftheassetandits historicalcost.
b.costof the asset andtheamountofdepreciationexpenseforthe year. c.costoftheasset andtheaccumulateddepreciationtodate.
d.proceedsreceivedfromthesaleoftheassetand its originalcost.
PlantAssets,NaturalResources,andIntangibleAssets 10-21
138. Ifa plantassetissoldbefore it isfullydepreciated, a.onlyagainondisposalcanoccur.
b.onlya losson disposalcanoccur.c.eitheragainor a losscan occur.d.neitheragainnor alosscanoccur.
139. Ifaplantassetisretiredbeforeitisfullydepreciated,andthesalvagevaluereceivedis less thanthe asset's book value,
a.a gainondisposaloccurs. b.a lossondisposal occurs.
c.thereis nogain or lossondisposal.
d.additionaldepreciationexpensemust berecorded.
140 Acompanysellsaplantassetwhichoriginallycost$180,000for$60,000onDecember31, 2008.TheAccumulatedDepreciationaccounthadabalanceof$72,000afterthecurrent year'sdepreciationof $18,000 hadbeenrecorded.Thecompanyshouldrecognizea
a.$120,000lossondisposal. b.$48,000gainondisposal. c.$48,000lossondisposal. d.$30,000lossondisposal.
141. Ifdisposalofa plantassetoccursduringtheyear,depreciationis a.not recordedfortheyear.
b.recordedforthewholeyear.
c.recordedforthefractionof theyeartothedateof thedisposal. d.not recordediftheasset isscrapped.
142. Ifafullydepreciatedplant asset is still usedbya company,the
a.estimatedremainingusefullifemustberevisedtocalculatethecorrectrevised depreciation.
b.assetisremovedfromthebooks.
c.accumulateddepreciationaccountisremovedfromthebooksbuttheassetaccount remains.
d.assetandtheaccumulateddepreciation continue tobereportedonthebalancesheet withoutadjustment untiltheassetisretired.
143. Whichofthefollowingstatementsisnottruewhenafullydepreciatedplantassetis retired?
a.Theplantasset'sbookvalue isequaltoitsestimated salvagevalue. b.Theaccumulateddepreciationaccountisdebited.
c.Theassetaccount iscredited.
d.Theplantasset'soriginalcost equalsitsbookvalue.
144. Ifaplantassetisretiredbeforeitisfullydepreciated,andnosalvageorscrapvalueis received,
a.againondisposalwillberecorded.
b.phantomdepreciationmustbetakenasthoughtheassetwerestillonthe books. c.a losson disposalwill berecorded.
d.nogainorlossondisposal willberecorded.
10-22
145. Thebookvalueof anassetwillequalitsfairmarket valueatthedateofsaleif a.a gainondisposalisrecorded.
b.nogainorlossondisposalisrecorded. c.theplantassetisfully depreciated.
d.a lossondisposal isrecorded.
146. Atruckcosting$110,000wasdestroyedwhenitsenginecaughtfire.Atthedateofthe fire,theaccumulateddepreciationonthetruckwas$50,000.Aninsurancecheckfor $125,000wasreceivedbasedonthereplacementcostofthetruck.Theentrytorecord theinsuranceproceedsandthedispositionof the truckwill include a
a.GainonDisposalof $15,000.
b.creditto theTruckaccountof $60,000.
c.credittotheAccumulatedDepreciationaccountfor$50,000. d.GainonDisposalof $65,000.
147. OnJuly1,2008,MeedKennelssellsequipmentfor$66,000.Theequipmentoriginally cost$180,000,hadanestimated5-yearlifeandanexpectedsalvagevalueof$30,000. Theaccumulateddepreciationaccounthadabalanceof$105,000onJanuary1,2008, using thestraight-linemethod.Thegainorlossondisposalis
a.$9,000gain. b.$6,000loss. c.$9,000loss. d.$6,000gain.
148. A lossondisposalof aplantassetisreportedinthefinancialstatements a.intheOtherRevenuesandGainssection oftheincomestatement.b.intheOtherExpensesandLossessectionof theincomestatement. c.asadirectincreasetothecapitalaccount onthe balancesheet.
d.as adirectdecrease tothecapitalaccount onthe balancesheet.
149. WellsCompany'sdeliverytruck,whichoriginallycost$70,000,wasdestroyedbyfire.At thetimeofthefire,thebalanceoftheAccumulatedDepreciationaccountamountedto $47,500.The companyreceived$40,000reimbursementfromits insurancecompany.The gain orlossasaresultof thefire was
a.$30,000loss. b.$17,500loss. c.$30,000gain. d.$17,500gain.
150. Atruckthatcost$21,000andonwhich$10,000ofaccumulateddepreciationhasbeen recordedwasdisposedoffor $9,000cash.Theentrytorecordthiseventwouldincludeaa.gainof $2,000.
b.lossof $2,000.
c.credittotheTruckaccountfor$11,000.
d.creditto AccumulatedDepreciationfor$10,000.
151. Atruckthatcost$36,000andonwhich$30,000ofaccumulateddepreciationhasbeen recordedwasdisposedoffor $9,000cash.Theentrytorecordthiseventwouldincludeaa.gainof $3,000.
b.lossof $3,000.
c.credittotheTruckaccountfor$6,000.
d.creditto AccumulatedDepreciationfor$30,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-23
152. AceCorporationsoldequipmentfor$12,000.Theequipmenthadanoriginalcostof $36,000andaccumulateddepreciationof $18,000.Asaresultof thesale,
a.netincomewill increase$12,000. b.netincomewillincrease$6,000.c. netincomewilldecrease$6,000.d.netincomewilldecrease$12,000.
153. Jarman’s CourierServicerecorded alossof$3,000whenitsoldavanthatoriginallycost $28,000for $5,000.Accumulateddepreciationonthevanmusthavebeen
a.$26,000. b.$8,000.c.$25,000. d.$20,000.
154. Onabalancesheet,naturalresourcesmaybedescribedmorespecificallyasallofthe followingexcept
a.landimprovements. b.mineraldeposits.
c.oilreserves. d.timberlands.
155. Naturalresourcesare
a.depreciatedusingtheunits-of-activity method.
b.physicallyextractedinoperationsandarereplaceableonlybyanact ofnature. c.reportedattheirmarketvalue.
d.amortizedovera periodnolongerthan40years.
156. Depletionis
a.a decreaseinmarketvalueof naturalresources.
b.the amountof spoilagethatoccurswhennaturalresourcesareextracted. c.theallocationof the costof naturalresources toexpense.
d.themethodusedtorecordunsuccessfulpatents.
157. Toqualifyasnaturalresourcesintheaccountingsense,assetsmustbe a.underground.
b.replaceable.
c.of amineralnature.
d.physicallyextractedinoperations.
158. Themethodmostcommonlyusedtocomputedepletionisthe a.straight-linemethod.
b.double-declining-balancemethod. c.units-of-activitymethod.
d.effectiveinterestmethod.
159. Incomputingdepletion,salvagevalueis a.alwaysimmaterial.
b.ignored.
c.impossibletoestimate.
d.includedinthe calculation.
10-24
160. Ifa miningcompanyextracts1,500,000tonsinaperiodbutonlysells1,200,000 tons, a.totaldepletiononthemineis basedonthe1,200,000tons.
b.depletionexpenseisrecognized onthe1,500,000tonsextracted.
c.depletionexpenseisrecognized onthe1,200,000tonsextractedandsold.
d.aseparateaccumulateddepletionaccountissetuptorecorddepletiononthe 300,000tonsextractedbutnotsold.
161. Acoalcompanyinvests$16millioninamineestimatedtohave20milliontonsofcoaland nosalvagevalue.Itisexpectedthattheminewillbeinoperationfor5years.Inthefirst year,1,000,000 tonsofcoalareextractedandsold.Whatisthedepletionexpenseforthe first year?
a.$800,000 b.$320,000 c.$80,000
d.Cannotbedeterminedfromtheinformationprovided.
162. AccumulatedDepletion
a.isusedbyallcompanieswithnaturalresources. b.hasanormaldebitbalance.
c.isacontra-assetaccount.
d.isnevershown onthebalancesheet.
163. OnJuly4,2008,MontanaMiningCompanypurchasedthemineralrightstoagranite depositfor$800,000.Itisestimatedthattherecoverablegranitewillbe400,000tons. During2008,100,000tonsofgranitewasextractedand60,000tonsweresold.The amount of theDepletionExpenserecognizedfor2008wouldbe
a.$100,000. b.$60,000.c.$120,000. d.$200,000.
164. Depletionexpenseiscomputedbymultiplyingthedepletioncostperunitbythe a.totalestimatedunits.
b.totalactualunits.
c.numberof unitsextracted. d.numberof unitssold.
165. Intangibleassetsaretherightsandprivilegesthatresultfromownershipoflong-lived assets that
a.mustbegeneratedinternally.
b.aredepletablenaturalresources. c.havebeenexchangedatagain. d.donothavephysicalsubstance.
166. Identifytheitembelowwherethetermsarenotrelated. a.Equipment—depreciation
b.Franchise—depreciation c. Copyright—amortization d.Oilwell—depletion
PlantAssets,NaturalResources,andIntangibleAssets 10-25
167. A patentshould
a.be amortizedovera periodof20years.b.notbeamortizedifithas an indefinitelife.
c.beamortizedoveritsusefullifeor20 years,whicheverislonger. d.beamortizedoveritsusefullifeor20 years,whicheveris shorter.
168. Theentrytorecordpatent amortizationusuallyincludes a creditto a.AmortizationExpense.
b.AccumulatedAmortization. c.Accumulated Depreciation. d.Patents.
169. Thecostof successfullydefendingapatentinaninfringementsuitshouldbe a.chargedtoLegalExpenses.
b.deductedfromthebookvalueof thepatent. c.addedtothecostof thepatent.
d.recognizedasalossinthecurrentperiod.
170. Anassetthatcannotbesoldindividuallyinthe marketplaceis a.apatent.
b.goodwill.
c.a copyright.d.a tradename.
171. Goodwillcan berecorded
a.whencustomerskeepreturningbecausetheyaresatisfiedwiththecompany's products.
b.whenthe companyacquires agoodlocationforits business. c.whenthecompanyhas exceptionalmanagement.
d.onlywhenthereisanexchangetransactioninvolvingthepurchaseofanentire business.
172. OnJuly1,2008,MarshCompanypurchasedthecopyrighttoParsonsComputertutorials for$162,000.Itisestimatedthatthecopyrightwillhaveausefullifeof5yearswithan estimatedsalvagevalueof$12,000.TheamountofAmortizationExpenserecognizedfor theyear2008wouldbe
a.$32,400. b.$15,000. c.$30,000. d.$16,200.
173. Allof thefollowingintangibleassetsare amortizedexcept a.copyrights.
b.limited-lifefranchises. c.patents.
d.trademarks.
174. Whichofthefollowingisnot anintangibleassetarisingfromagovernmentgrant? a.Goodwill
b.Patent
c.Trademarkd.Tradename
10-26
175. Theamortizationperiodforapatentcannotexceed a.50years.
b.40years. c.20years. d.10 years.
176. Costallocationof anintangibleassetisreferredto as a.amortization.
b.depletion. c.accretion.
d.capitalization.
177. A patent
a.hasa legallifeof 40years. b.is nonrenewable.
c.canberenewedindefinitely.
d.israrelysubjectto litigationbecauseitis anexclusiveright.
178. Ifacompanyincurslegalcostsinsuccessfullydefendingitspatent,thesecostsare recordedbydebiting
a.LegalExpense.
b.anIntangibleLossaccount. c.thePatentaccount.
d.a revenueexpenditureaccount.
179. Copyrightsaregrantedbythefederalgovernment
a.forthe lifeofthecreatoror70 years, whicheverislonger. b.forthelife ofthe creatorplus70 years.
c.forthelifeofthe creatoror70years,whicheveris shorter. d.andthereforecannotbeamortized.
180. Goodwill
a.isonlyrecordedwhengeneratedinternally. b.canbesubdividedandsoldinparts.
c.canonlybeidentifiedwith thebusinessasawhole.
d.canbedefinedas normalearningsless accumulatedamortization.
181. Inrecordingtheacquisitioncost ofanentirebusiness,
a.goodwillis recordedas theexcessof costoverthefair valueof identifiablenetassets. b.assetsarerecordedattheseller'sbookvalues.
c.goodwill,ifit exists,is never recorded.
d.goodwillisrecordedastheexcessofcostoverthebookvalueofidentifiablenet assets.
182. Researchanddevelopmentcosts
a.areclassifiedasintangibleassets.
b.mustbeexpensed whenincurredundergenerallyacceptedaccountingprinciples. c.shouldbe included in thecostofthepatenttheyrelateto.
d.arecapitalizedandthenamortizedovera periodnotto exceed40 years.
PlantAssets,NaturalResources,andIntangibleAssets 10-27
183. Acomputercompanyhas$2,000,000inresearchanddevelopmentcosts.Before accountingforthesecosts,thenetincomeofthecompanyis$1,600,000.Whatisthe amount of netincomeorlossafter theseR&D costsareaccountedfor?
a.$400,000loss
b.$1,600,000netincome c.$0
d.Cannotbedeterminedfromtheinformationprovided.
184. DentonCompanyincurred$300,000ofresearchanddevelopmentcostsinitslaboratory todevelopa newproduct.Itspent$40,000 in legalfeesfora patentgrantedon January2, 2008.OnJuly31,2008, Dentonpaid $30,000for legalfees inasuccessfuldefenseofthe patent.Whatisthetotalamountthatshouldbedebitedto PatentsthroughJuly31, 2008?a.$300,000
b.$70,000c.$370,000
d.Someotheramount
185. Giventhefollowingaccountbalancesatyearend,computethetotalintangibleassetson thebalancesheet of AnishaEnterprises.
Cash AccountsReceivable TrademarksGoodwill
Research& DevelopmentCosts
a.$11,500,000 b.$7,500,000c.$5,500,000 d.$9,500,000
$1,500,000 4,000,000 1,000,000 4,500,000 2,000,000
186. During2008,SitterCorporationreportednetsalesof$2,000,000,netincomeof $1,200,000,anddepreciationexpenseof$100,000.Sitteralsoreportedbeginningtotal assetsof$1,000,000,endingtotalassetsof$1,500,000,plantassetsof$800,000,and accumulated depreciationof$500,000.Sitter’sassetturnoverratiois
a.2 times.b.1.6times. c.1.3times. d..96times.
187. During2008,TylerCorporationreportednetsalesof$3,000,000andnetincomeof $1,800,000.Tyleralsoreportedbeginningtotalassetsof$1,000,000andendingtotal assets of $1,500,000.Tyler’sassetturnoverratiois
a.3.0times. b.2.4times. c.2.0times. d.1.4times.
188. Naturalresourcesaregenerallyshownonthebalancesheetunder a.Intangibles.
b.Investments.
c.Property,Plant, andEquipment. d.Owner'sEquity.
10-28
189. Whichofthefollowingstatementsconcerningfinancialstatementpresentationisnota truestatement?
a.IntangiblesarereportedseparatelyunderIntangibleAssets.
b.Thebalancesofmajorclassesof assets maybe disclosedinthefootnotes.
c.Thebalancesoftheaccumulateddepreciationofmajorclassesofassetsmaybe disclosed inthefootnotes.
d.Thebalancesofallindividualassets,astheyappearinthesubsidiaryplantledger, shouldbedisclosedinthefootnotes.
190. Intangibleassets
a.shouldbereported undertheheadingProperty,Plant, andEquipment.
b.arenotreportedonthebalancesheet becausetheylackphysicalsubstance. c.shouldbereportedasCurrentAssets onthebalancesheet.
d.shouldbereported asaseparateclassification onthebalancesheet.
191. Acompanyhasthefollowing assets:
BuildingsandEquipment,lessaccumulateddepreciationof$2,000,000 Copyrights
Patents
Timberlands,lessaccumulateddepletionof$2,800,000
Thetotal amountreportedunderProperty,Plant,andEquipmentwouldbe a.$19,360,000.
b.$14,400,000. c.$18,400,000. d.$15,360,000.
$9,600,000 960,000 4,000,000 4,800,000
a192.Acompanydecidestoexchangeitsoldmachineand$77,000cashforanewmachine. Theoldmachinehasabookvalueof$63,000andafairmarketvalueof$70,000onthe date of theexchange.Thecostof thenewmachinewouldberecordedat
a.$140,000. b.$147,000. c.$133,000.
d.cannotbedetermined.
a193.Acompanyexchanges itsoldofficeequipmentand$40,000 fornewofficeequipment.The oldofficeequipmenthasabookvalueof$28,000andafairmarketvalueof$20,000on thedate ofthe exchange.Thecostofthe newoffice equipment wouldberecordedat
a.$68,000. b.$60,000. c.$48,000.
d.cannotbedetermined.
a194.Inanexchangeofplantassetsthathascommercialsubstance,anydifferencebetween the fair marketvalueandthebookvalueof theoldplantassetis
a.recordedasagainorloss.
b.recorded ifagainbutisdeferredifaloss. c.recordedifaloss but isdeferredifa gain. d.deferredifeitheragainor loss.
PlantAssets,NaturalResources,andIntangibleAssets 10-29
a195.Gainsonanexchangeof plantassetsthathascommercialsubstanceare a.deductedfromthecostofthenewassetacquired.
b.deferred.
c.not possible.
d.recognizedimmediately.
a196.Lossesonanexchangeofplantassetsthathascommercialsubstanceare a.notpossible.
b.deferred.
c.recognizedimmediately.
d.deductedfromthecost of thenewassetacquired.
a197.Thecostofanewassetacquiredinanexchangethathascommercialsubstanceisthe cashpaid plusthe
a.bookvalueof theoldasset.
b.fairmarketvalueoftheoldasset. c. bookvalueoftheassetacquired. d.fair marketvalueof thenewasset.
Additional MultipleChoiceQuestions
198. Thecostof landincludesallof thefollowingexcept a.realestatebrokers’commissions.
b.closingcosts.
c.accruedpropertytaxes. d.parkinglots.
199. A termthatisnotsynonymouswith property,plant,and equipmentis a.plantassets.
b.fixedassets.
c.intangibleassets.
d.long-livedtangibleassets.
200. Thefactorthat isnotrelevantincomputingdepreciationis a.replacementvalue.
b.cost.
c.salvagevalue. d.usefullife.
201. Depreciablecostisthe
a.bookvalueofanassetlessitssalvagevalue. b.costofanasset lessitssalvagevalue.
c.cost of anasset lessaccumulateddepreciation. d.bookvalueofanasset.
202. SantayanaCompanypurchasedamachineonJanuary1,2006,for$12,000withan estimatedsalvagevalueof$3,000andanestimatedusefullifeof8years.OnJanuary1, 2008,Santayanadecidesthemachinewilllast12yearsfromthedateofpurchase.The salvagevalueisstillestimatedat$3,000.Usingthestraight-linemethod,thenewannual depreciation will be
10-30
a.$675. b.$750. c.$900. d.$1,000.
203. Ordinaryrepairs are expenditurestomaintaintheoperatingefficiencyof aplantassetand arereferredto as
a.capitalexpenditures.b.expenseexpenditures. c.improvements.
d.revenueexpenditures.
204. Improvementsare
a.revenueexpenditures.
b.debitedtoanappropriateassetaccountwhentheyincreaseusefullife.
c.debitedtoaccumulateddepreciationwhentheydo not increaseusefullife.
d.debitedtoanappropriateassetaccountwhentheydonotincreaseusefullife.
205. Againon sale of aplantassetoccurs whentheproceedsofthesalearegreaterthanthe a.salvagevalueof theassetsold.
b.marketvalueof the assetsold. c.bookvalueoftheassetsold.
d.accumulateddepreciationontheassetsold.
206. Theentrytorecorddepletionexpense
a.decreasesowner'sequityandassets.
b.decreasesnet incomeandincreasesliabilities. c.decreasesassets and liabilities.
d.decreasesassets andincreasesliabilities.
207. Allof thefollowingare intangibleassetsexcept a.copyrights.
b.goodwill. c.patents.
d.researchand developmentcosts.
208. A purchasedpatenthasa legallifeof 20years.Itshouldbe a.expensedintheyearofacquisition.
b.amortizedover20 yearsregardlessof itsusefullife. c.amortizedoverits usefullife iflessthan20years.d.notamortized.
209. Theassetturnover ratioiscomputedbydividing a.netincomebyaveragetotalassets.
b.netsalesbyaveragetotalassets. c.netincomebyendingtotalassets. d.net salesbyendingtotalassets.
PlantAssets,NaturalResources,andIntangibleAssets 10-31
a210.In anexchangeof plantassetsthathascommercialsubstance a.neithergainsnorlossesarerecognizedimmediately.
b.gains,butnotlosses,arerecognizedimmediately. c.losses,butnotgains,arerecognizedimmediately. d.bothgainsand lossesarerecognizedimmediately.
BRIEFEXERCISES
BE211
Indicatewhethereachofthefollowingexpendituresshouldbeclassifiedasland(L),land improvements (LI),buildings(B),equipment(E), ornone ofthese(X).
1.Parkinglots
2.Electricityused byamachine
3.Excavationcosts
4.Interestonbuilding constructionloan
5.Costof trialrunsformachinery
6.Drainagecosts
7.Costto installa machine
8.Fences
9.Unpaid(past)propertytaxesassumed
10.Costoftearingdownabuilding whenlandandabuildingonitare purchased
BE212
SellerCorporationpurchasedlandadjacenttoitsplanttoimproveaccessfortrucksmaking deliveries.Expendituresincurredinpurchasingthelandwereasfollows:purchaseprice, $50,000;broker’sfees,$6,000;titlesearchandotherfees,$5,000;demolitionofanoldbuilding ontheproperty,$5,700;grading,$1,200;diggingfoundationfortheroad,$3,000;layingand pavingdriveway,$25,000;lighting$7,500;signs,$1,500.Listtheitemsandamountsthatshould be includedin theLand account.
BE213
EastmanCompanypurchasedadeliverytruckfor$35,000onJanuary1,2008.Thetruckwas assignedanestimatedusefullifeof5yearsandhasaresidualvalueof$10,000.Compute depreciationexpenseusingthedouble-declining-balancemethodforthe years2008and2009.
BE214
EastmanCompanypurchasedadeliverytruckfor$35,000onJanuary1,2008.Thetruckwas assignedanestimatedusefullifeof100,000milesandhasaresidual valueof$10,000.Thetruck wasdriven18,000miles in2008and22,000milesin2009.Computedepreciationexpenseusing theunits-of-activitymethodfor the years2008and 2009.
BE215
PorikaCompanypurchasedatruckfor$57,000.Thecompanyexpectedthetrucktolastfour yearsor100,000miles,withanestimatedresidualvalueof$6,000attheendofthattime.During thesecond yearthetruckwasdriven27,000 miles.Computethedepreciationforthesecond year undereachof themethods belowand placeyouranswersintheblanksprovided.
Units-of-activity $
Double-declining-balance $
BE216
On January 1,2006,EckerCompanypurchasedacomputersystemfor$20,500. Thesystemhad anestimatedusefullifeof5yearsandnosalvagevalue.AtJanuary1,2008,thecompany revisedtheremainingusefullifetotwoyears.Whatamountofdepreciationwillberecordedfor 2008and2009?
BE217
RobotEnterprisessoldequipmentonJanuary1,2008for$5,000.Theequipmenthadcost $24,000.ThebalanceinAccumulatedDepreciationatJanuary1is$20,000.Whatentrywould Robotmaketorecordthe saleof theequipment?
BE218
OnJanuary1,2008,FreeportEnterprisespurchasednaturalresourcesfor$1,200,000.The companyexpectstheresourcestoproduce12,000,000unitsofproduct.(1)Whatisthedepletion costperunit?(2)Ifthecompanyminedandsold20,000unitsinJanuary,whatisdepletion expense forthemonth?
BE219
OnJanuary2,2008,ElneerCompanypurchasedapatentfor$38,000.Thepatenthasan estimatedusefullifeof25yearsanda20-yearlegallife.Whatentrywouldthecompanymakeat December31, 2008torecordamortizationexpenseonthepatent?
BE220
Usingthefollowingdatafor Rocky,Inc.,computeits assetturnoverratio.
Rocky, Inc.NetIncome2008
TotalAssets12/31/08 TotalAssets12/31/07 NetSales2008
$123,000 2,443,000 1,880,000 2,135,000
$2,135,000
EXERCISES
Ex.221
HuntCompanypurchasedfactoryequipmentwithaninvoicepriceof$80,000.Othercosts incurredwerefreightcosts,$1,100;installationwiringandfoundation,$2,200;materialandlabor costsintestingequipment, $700;oillubricantsandsupplies tobeusedwithequipment, $500;fire insurancepolicycoveringequipment,$1,400.Theequipmentisestimatedtohavea$5,000 salvagevalueat theendofits5-yearusefulservicelife.
Instructions
(a)Computetheacquisitioncostofthe equipment.Clearlyidentifyeachelement ofcost.
(b)Ifthedouble-declining-balancemethodofdepreciationwasused,theconstantpercentage applied toa decliningbookvalue wouldbe .
Ex.222
Foreachentrybelowmake acorrectingentry ifnecessary.Ifthe entry given iscorrect,then state "Noentryrequired."
(a)The$60cost of repairinga printerwaschargedtoComputerEquipment.
(b)The $5,000cost ofa major engineoverhaulwas debitedto RepairExpense. The overhaulis expected to increasetheoperatingefficiencyof the truck.
(c) The$6,000closingcostsassociatedwiththeacquisitionoflandweredebitedtoLegal Expense.
(d)A$500chargefortransportationexpensesonnewequipmentpurchasedwasdebitedto Freight-In.
Ex.223
BenedictCompanywasorganized onJanuary1.Duringthefirstyearofoperations,the following expendituresandreceipts wererecordedinrandom orderinthe account,Land.
Debits
1.Costofrealestatepurchasedasaplantsite(landandbuilding).
2.Accruedrealestatetaxespaidatthetimeofthepurchaseoftherealestate. 3.Costof demolishingbuilding tomakelandsuitablefor constructionofanew
building.
4.Architect'sfeesonbuildingplans.5.Excavationcostsfor newbuilding. 6.Costoffilling andgradingtheland.
7.Insuranceandtaxesduringconstructionof building.
8.Costofrepairstobuilding underconstructioncaused byasmallfire.
9.Interestpaidduringthe year,of which$54,000pertainstotheconstruction period.
10.Fullpaymentto buildingcontractor. 11.Costof parkinglotsanddriveways.
12.Realestatetaxespaidfor thecurrentyearontheland. TotalDebits
Credits 13.Insuranceproceedsforfire damage.
14.Proceedsfrom salvageof demolishedbuilding TotalCredits
$220,000 4,000
15,000 14,000 24,000 5,000 6,000 7,000
64,000 760,000 36,000
4,000$1,159,000
$3,000
3,500$6,500
Instructions
Analyzetheforegoingtransactionsusingthefollowingtabulararrangement. Insertthenumberof each transactionintheItemspaceandinserttheamountsintheappropriatecolumns.
Item Land Building Other Account Title
Ex.224
DuncanCompanypurchaseda machine atacost of$90,000.The machineisexpected to have a $5,000salvagevalueatthe endof its 5-yearusefullife.
Instructions
Computeannualdepreciationforthefirstandsecond yearsusingthe (a)straight-linemethod.
(b)double-declining-balancemethod.
Ex.225
ReynoldsCompanypurchasedanewmachinefor$300,000.Itisestimatedthatthemachinewill havea$30,000salvagevalueattheendofits5-yearusefulservicelife.Thedouble-declining-balance method of depreciationwillbeused.
Instructions
Prepareadepreciationschedulewhich showstheannualdepreciation expense onthemachine for its5-yearlife.
Ex.226
TannerCompanypurchasedequipmentonJanuary1,2007for$70,000.Itisestimatedthatthe equipmentwillhavea$5,000salvagevalueattheendofits5-yearusefullife.Itisalsoestimated that theequipmentwillproduce100,000unitsoverits 5-yearlife.
Instructions
Answerthefollowingindependentquestions.
1.ComputetheamountofdepreciationexpensefortheyearendedDecember31,2007,using thestraight-linemethodofdepreciation.
2.If16,000unitsofproductareproducedin2007and24,000unitsareproducedin2008,what isthebookvalueoftheequipmentatDecember31,2008?Thecompanyusestheunits-of-activitydepreciationmethod.
3.Ifthecompanyusesthedouble-declining-balancemethodofdepreciation,whatisthe balance of theAccumulatedDepreciation—Equipment accountat December31,2009?
Ex.227
AplantassetacquiredonOctober1,2008,atacostof$300,000hasanestimatedusefullifeof 10years.Thesalvagevalueis estimated tobe$30,000 attheendofthe asset'suseful life.
Instructions
Determinethedepreciationexpenseforthefirsttwoyearsusing: (a) thestraight-linemethod.
(b) the double-declining-balancemethod.
50,000miles
60,000miles
70,000miles
Ex.228
Tony’s,apopularpizzahang-out,hasathrivingdeliverybusiness.Tony’shasafleetofthree deliveryautomobiles.Priortomakingtheentryforthisyear'sdepreciationexpense,the subsidiary ledgerforthefleet is asfollows:
Accumulated
Estimated Depr.—Beg. MilesOperated Car Cost SalvageValue Life in Miles of the YearDuringYear
1 $21,000 $3,000 50,000 $2,520 20,000 2 18,000 2,400 60,000 2,340 22,000 3 20,000 2,500 70,000 2,000 19,000
Instructions
(a)Determinethedepreciationratespermileforeachcar.
(b)DeterminetheDepreciationExpenseforeachcarforthecurrent year.
(c)MakeonecompoundjournalentrytorecordtheannualDepreciationExpenseforthefleet.
$21,000– $3,000
Ex.229
TheBarnettClinicpurchasedanewsurgicallaserfor$80,000.Theestimatedsalvagevalueis $5,000.Thelaserhasausefullifeoffiveyearsandtheclinicexpectstouseit10,000hours.It wasused1,600hours inyear1;2,200 hours in year2;2,400 hoursinyear 3;1,800 hours in year 4;2,000hoursin year5.
Instructions
(a)Computetheannualdepreciationforeachofthefiveyearsundereachofthefollowing methods:
(1)straight-line.(2)units-of-activity.
(b)Ifyouweretheadministratoroftheclinic,whichmethodwouldyoudeemasmost appropriate? Justifyyouranswer.
(c)Whichmethodwouldresultinthelowestreportedincomeinthefirstyear?Whichmethod would resultinthelowesttotalreportedincomeoverthefive-yearperiod?
Ex.230
TheDecember31,2007balancesheetofRitterCompanyshowedEquipmentof$64,000and AccumulatedDepreciationof$18,000.OnJanuary1,2008,thecompanydecidedthatthe equipmenthasaremainingusefullifeof 6yearswitha $4,000salvagevalue.
Instructions
Computethe (a)depreciablecost ofthe equipmentand(b) revisedannualdepreciation.
Ex.231
SoutheastAirlinespurchaseda747aircraftonJanuary1,2007,atacostof$35,000,000.The estimateduseful lifeoftheaircraftis20years,withanestimated salvagevalue of$5,000,000.On January1,2010theairlinerevisesthetotalestimatedusefullifeto15yearswitharevised salvagevalueof$3,500,000.
Instructions
(a)ComputethedepreciationandbookvalueatDecember31,2009usingthestraight-line methodandthedouble-declining-balancemethod.
(b)Assumingthestraight-linemethodisused,computethedepreciationexpensefortheyear ended December31, 2010.
Ex.232
SeymorCompanypurchasedamachineonJanuary1,2008,atacostof$80,000.Itisexpected tohaveanestimatedsalvagevalueof$5,000attheendofits5-yearlife.Thecompany capitalizedthemachineanddepreciateditin2008usingthedouble-declining-balancemethodof depreciation.Thecompany hasapolicyofusingthestraight-linemethod todepreciateequipment butthecompanyaccountantneglectedtofollowcompanypolicywhenheusedthedouble-declining-balancemethod.NetincomefortheyearendedDecember31,2008was$55,000as the resultof depreciatingthemachineincorrectly.
Instructions
Usingthemethodofdepreciationwhichthecompanynormallyfollows,preparethecorrecting entry and determinethecorrectednet income.(Showcomputations.)
Ex.233
Equipment wasacquiredonJanuary1,2005,atacostof$80,000.Theequipmentwasoriginally estimatedtohaveasalvagevalueof$5,000andanestimatedlifeof10years.Depreciationhas beenrecordedthroughDecember31,2008,usingthestraight-linemethod.OnJanuary1,2009, theestimatedsalvagevaluewasrevisedto$6,000andtheusefullifewasrevisedtoatotalof8 years.
Instructions
DeterminetheDepreciationExpensefor 2009.
Ex.234
GantnerCompanypurchasedamachineonJanuary1,2008.Inadditiontothepurchaseprice paid,thefollowingadditionalcostswereincurred:(a)salestaxpaidonthepurchaseprice,(b) transportationandinsurancecostswhilethemachinerywasintransitfromtheseller,(c) personneltrainingcosts forinitial operationofthemachinery,(d)annualcityoperatinglicense,(e) majoroverhaultoextendthelifeofthemachinery,(f)lubricationofthemachinerygearingbefore themachinerywasplacedintoservice,(g)lubricationofthemachinerygearingafterthe machinerywasplacedintoservice,and(h)installationcostsnecessarytosecurethemachinery to thebuildingflooring.
Instructions
Indicatewhethertheitems(a)through(h)arecapitalorrevenueexpendituresinthespaces provided: C= Capital,R=Revenue.
(a) (b) (c) (d)
(e) (f) (g) (h)
Ex.235
CareyWordProcessingServiceusesthestraight-linemethodofdepreciation.Thecompany's fiscalyearendisDecember31.Thefollowingtransactionsandeventsoccurredduringthefirst three years.
2007July 1
Nov.3 Dec.31
2008Dec.31
PurchasedacomputerfromtheComputerCenterfor$2,300cashplussales tax of$150,andshippingcosts of$50.
Incurredordinaryrepairsoncomputerof $140.
Recorded2007depreciationonthebasisofafouryearlifeandestimated salvagevalueof$500.
Recorded2008depreciation.
2009Jan. 1 Paid$400foranupgradeofthecomputer.Thisexpenditureisexpectedto increasetheoperatingefficiency andcapacityofthecomputer.
Instructions
Preparethenecessaryentries.(Showcomputations.)
Ex.236
Identifythefollowingexpendituresascapitalexpenditures orrevenueexpenditures. (a)Replacementof wornoutgearsonfactorymachinery.
(b)Constructionof anewwing onanofficebuilding. (c)Paintingtheexteriorof abuilding.
(d)Oilchangeonacompanytruck.
(e)ReplacingaPentiumIIcomputerchipwithaPentiumIVchip,whichincreasesproductive capacity.Noextensionofusefullifeexpected.
(f) Overhaulofa truckmotor.Oneyearextensioninusefullifeis expected. (g)Purchasedawastebasketatacostof $10.
(h)Paintingandletteringofa usedtruck uponacquisitionofthetruck.
Ex.237
OnJanuary1,2006RosenCompanypurchasedandinstalledatelephonesystematacostof $20,000.Theequipmentwasexpectedtolastfiveyearswithasalvagevalueof$3,000.On January1,2007moretelephoneequipmentwaspurchasedtotie-inwiththecurrentsystemfor $10,000.Thenewequipmentisexpectedtohaveausefullifeoffouryears.Throughanerror,the newequipmentwasdebitedtoTelephoneExpense.RosenCompanyusesthestraight-line methodofdepreciation.
Instructions
PrepareascheduleshowingtheeffectsoftheerroronTelephoneExpense,Depreciation Expense,andNetIncomeforeachyearandintotalbeginningin2007throughtheusefullifeof thenewequipment.
TelephoneExpense Overstated
Year (Understated)
Depreciation Expense Overstated
(Understated)
NetIncome Overstated
(Understated)
2007
2008
2009
2010
Ex.238
BermanCompanysoldequipmentonJuly31,2008for$50,000.Theequipmenthadcost $140,000 andhad$80,000ofaccumulateddepreciationasofJanuary1,2008.Depreciationfor thefirst6monthsof2008 was$8,000.
Instructions
Preparethejournalentrytorecordthesaleoftheequipment.
Ex.239
(a)WattsCompanypurchasedequipmentin2001for$90,000andestimateda$6,000salvage valueattheendoftheequipment's10-yearusefullife.AtDecember31,2007,therewas $58,800intheAccumulatedDepreciationaccountforthisequipmentusingthestraight-line methodof depreciation.On March31, 2008,theequipmentwassoldfor$24,000.
PreparetheappropriatejournalentriestoremovetheequipmentfromthebooksofWatts CompanyonMarch31, 2008.
(b)GormanCompanysoldamachine for$15,000. Themachineoriginallycost$35,000in2005 and$8,000wasspentonamajoroverhaulin2008(chargedtoMachineaccount). AccumulatedDepreciationonthemachinetothe date of disposalwas$28,000.
Preparetheappropriatejournalentrytorecordthedispositionofthemachine.
(c)KlingerCompanysoldofficeequipmentthathadabookvalueof$6,000for$8,000.The officeequipmentoriginallycost$20,000anditisestimatedthatitwouldcost$25,000to replace theofficeequipment.
Preparetheappropriatejournalentrytorecordthedispositionofthe officeequipment.
Ex.240
Fleming'sLumberMillsoldtwomachinesin2009.Thefollowinginformationpertainstothetwo machines:
Purchase Useful Salvage Depreciation Sales
MachineCost Date Life Value Method Date Sold Price
#1 $66,000 7/1/05 5yrs. $6,000 Straight-line 7/1/09 $15,000 #2 $40,000 7/1/08 5yrs. $5,000 Double-declining- 12/31/09 $24,000
balance
Instructions
(a)Computethedepreciationoneachmachinetothedateofdisposal.
(b)Preparethejournalentriesin2009torecord2009depreciationandthesaleofeach machine.
Ex.241
Presentedbelowareselectedtransactionsfor MiltonCompanyfor 2008.
Jan. 1 Received$9,000scrapvalueonretirementofmachinerythatwaspurchasedon January1,1998.Themachinecost$90,000onthatdate,andhadausefullifeof10 yearswithno salvagevalue.
April30
Dec.31
Soldamachinefor$28,000thatwaspurchasedonJanuary1,2005.Themachine cost$75,000,andhadausefullifeof 5 years withnosalvagevalue.
DiscardedabusinessautomobilethatwaspurchasedonOctober1,2003.Thecar cost$32,000andwasdepreciatedona5-yearusefullifewithasalvagevalueof $2,000.
Instructions
Journalizeallentriesrequiredasaresultoftheabovetransactions.MiltonCompanyusesthe straight-linemethodof depreciationandhasrecordeddepreciationthroughDecember31,2007.
Ex.242
WatsonCompanysoldthefollowingtwomachinesin 2008:
Cost Purchasedate Usefullife Salvagevalue
Depreciationmethod Datesold
SalesPrice
MachineA
$68,000 7/1/048years $4,000
Straight-line 7/1/08 $30,000
Machine B $80,000 1/1/055years $4,000
Double-declining-balance 8/1/08$16,000
Instructions
Journalizeallentriesrequiredtoupdatedepreciationandrecordthesalesofthetwoassetsin 2008.ThecompanyhasrecordeddepreciationonthemachinethroughDecember31, 2007.
Ex.243
GirardMininginvested$960,000inamineestimatedtohave1,200,000tonsoforewithno salvagevalue.Duringthefirst year,200,000tons of orewereminedandsold.
Instructions
Preparethejournalentrytorecorddepletionexpense.
Ex.244
Eddy MiningCompanypurchaseda minefor$70 million which isestimated tohave250,000tons ofore anda salvagevalueof $10million.
(a)Inthefirstyear,50,000tonsoforeareextractedandsold.Preparethejournalentryto recorddepletionexpenseforthefirstyear.
(b)Inthesecondyear,150,000tonsoforeareextractedbutonly125,000tonsaresold. Preparethejournalentrytorecorddepletionexpenseforthesecondyear.
(c)Whatamountandinwhataccountare thetonsof orenotsoldreported?
Ex.245
HarperMiningCompanypurchasedlandcontaininganestimated15milliontonsoforeatacost of$4,500,000.Thelandwithouttheoreisestimatedtobeworth$600,000. Thecompany expects tooperatetheminefor10years.Buildingscosting$600,000areerectedonthesiteandare expectedtolastfor25years.Equipmentcosting$300,000withanestimatedlifeof12yearsis installed.Thebuildingsandtheequipmentpossessnosalvagevalueafterthemineisclosed. During thefirst yearof operations,theminingcompanyminedandsold2milliontons ofore.
Instructions
(a)Computethedepletionchargeperton.
(b)Computethedepletionexpensefor thefirst year.
(c)Computetheappropriatefirstyear'sdepreciationexpenseforthebuildings. (d)Computetheappropriatefirstyear'sdepreciationexpensefortheequipment.
(e)Preparejournalentriestorecorddepletionanddepreciationexpensesfortheyear.
Ex.246
(a)AcompanypurchasedapatentonJanuary1,2008, for$2,000,000.Thepatent'slegallifeis 20yearsbutthecompanyestimates thatthepatent'susefullifewillonlybe5yearsfromthe dateofacquisition.OnJune30,2008,thecompanypaidlegalcostsof$135,000in successfullydefendingthepatentinaninfringementsuit.Preparethejournalentryto amortize the patentatyearendonDecember31,2008.
(b)FoleyCompanypurchasedafranchisefromYummieFoodCompanyfor$400,000on January1,2008.Thefranchise isforanindefinite timeperiodandgivesFoleyCompanythe exclusiverightstosellYummieWingsinaparticularterritory.Preparethejournalentryto recordtheacquisitionofthefranchiseandanynecessaryadjustingentryatyearendon December 31, 2008.
(c)DryerCompanyincurredresearchanddevelopmentcostsof$500,000in2008in developinganewproduct.Preparethenecessaryjournalentriesduring2008torecord these eventsandanyadjustmentsat yearendonDecember31,2008.
Ex.247
OnJanuary2,2008,HolmesCompanypurchasedapatentfor$200,000.Thepatenthasan8-yearestimatedusefullife andalegallife of 20years.
Instructions
Preparethejournalentrytorecordpatent amortization.
Ex.248
Foreachitemlistedbelow,enteracodeletterintheblankspacetoindicatetheallocation terminology fortheitem.Usethefollowing codesfor youranswer:
A—Amortization
D—Depreciation
P—Depletion
N—Noneof these
1.Goodwill
2.Land
3.Buildings
4.Patents
5.Copyrights
6.Researchanddevelopmentcosts
7.Timberlands
8.Franchises(indefinite life)
9.Licenses(limitedlife)
10.LandImprovements
11.OilDeposits
12.Equipment
Ex.249
Foreachofthefollowingunrelatedtransactions,(a)determinetheamountoftheamortizationor depletionexpenseforthecurrentyear,and(b)presenttheadjustingentriesrequiredtorecord each expenseatyearend.
(1)Timberrightswerepurchasedonatractoflandfor$360,000.Thetimberisestimatedat 1,200,000boardfeet.Duringthecurrentyear,75,000boardfeetoftimberwerecutand sold.
(2)Costsof$8,000wereincurredonJanuary1toobtainapatent.Shortlythereafter,$22,000 wasspentinlegalcoststosuccessfullydefendthepatentagainstcompetitors.Thepatent has anestimatedlegallifeof12years.
Ex.250
Duringthecurrentyear,LymonCompanyincurredseveralexpenditures.Brieflyexplainwhether theexpenditureslistedbelowshouldberecordedasanoperatingexpenseorasanintangible asset.Ifyouview theexpenditure asanintangibleasset,indicatethenumberofyearsoverwhich theassetshouldbe amortized.Explainyouranswer.
(a)Spent$30,000inlegalcostsinapatentdefensesuit.Thepatentwasunsuccessfully defended.
(b)Purchased atrademark fromanothercompany.Thetrademarkcanberenewedindefinitely. LymonCompanyexpectsthetrademarkto contributetorevenueindefinitely.
(c)LymonCompanyacquiresapatentfor$2,000,000.Thecompanysellingthepatenthas spent$1,000,000ontheresearchanddevelopmentofit.Thepatenthasaremaininglifeof 15years.
(d)LymonCompanyisspendingconsiderabletimeandmoneyindevelopingadifferentpatent foranotherproduct.Sofar$3,000,000hasbeenspentthisyearonresearchand development.LymonCompanyisveryconfidenttheywillobtainthispatentinthenextfew years.
Ex.251
Presentedbelowisinformationrelatedtoplantassets,naturalresources,andintangiblesatyear end on December31,2008,forNortenCompany:
Buildings Goodwill Patents CoalMine
AccumulatedDepreciation AccumulatedDepletion
$1,080,000 350,000 480,000 440,000 670,000 275,000
Instructions
Prepareapartialbalancesheetfor NortenCompanythat showshowtheabovelisted itemswould be presented.
Ex.252
Computetheassetturnover ratiobasedonthefollowing:
Beginningtotal assets Endingtotal assetsNetincome
Netsales
$800,000 1,200,000 300,000 2,200,000
Ex.253
Indicateinthe blank spaces below,thesectionof the balancesheetwherethefollowingitems are reported. Usethefollowingcodeto identifyyour answer:
PPE Property,Plant, andEquipment I Intangibles
O Other
N/A Not onthebalancesheet
1. Goodwill
2.LandImprovements 3.Buildings
4.AccumulatedDepreciation 5.Trademarks
6.Researchand developmentcosts
7.Timberlands 8.Franchises9.Licenses
10.Equipment 11.OilDeposits
12.Land
*Ex.254
Presentedbelowaretwoindependentsituations:
(a)RileyCompanyexchangedanoldmachine(cost$100,000less$60,000accumulated depreciation)plus$7,000cashforanewmachine.Theoldmachinehadafairmarketvalue of$36,000.Preparetheentrytorecordtheexchangeof assets byRileyCompany.
(b)CarlinCompanytradesoldequipment(cost$90,000less$54,000accumulateddeprecia-tion)fornewequipment.Carlinpaid$36,000cashinthetrade.Theoldequipmentthatwas tradedhadafairmarketvalueof$54,000.Preparetheentrytorecordtheexchangeof assetsbyCarlinCompany.
*Ex.255
AglerCompanyexchangesequipmentwithEatonCompanyandPetersCompanyexchanges equipmentwithFieroCompany.Thefollowinginformationpertainstotheexchanges:
Equipment(cost) Accumulateddepreciation
Fairmarketvalueof theequipment Cashpaid
Agler Company $114,000
50,000 75,000 45,000
Peters Company $96,000
45,000 42,000
-0-
Instructions
Prepare thejournalentriestorecordtheexchangesonthebooksofAglerCompanyandPeters Company.
Ex.256
FarrDeliveryCompanyandBellDeliveryCompanyexchangeddeliverytrucksonJanuary1, 2008.Farr'struckcost$84,000,hadaccumulateddepreciationof$69,000,andhasafairmarket valueof$9,000.Bell'struckcost$63,000,hadaccumulateddepreciationof$54,000,andhasa fair marketvalueof$9,000.
Instructions
(a) Journalizetheexchangefor FarrDeliveryCompany. (b) Journalizetheexchangefor BellDeliveryCompany.
Ex.257
Prepare thejournalentriestorecordthefollowingtransactionsforBryantCompanywhichhasa calendaryearendandusesthe straight-linemethodofdepreciation.
a) OnSeptember30,2008,thecompanyexchangedolddeliveryequipmentand$24,000for newdeliveryequipment.The olddeliveryequipmentwas purchasedon January1,2006,for $84,000andwasestimatedtohavea$12,000salvagevalueattheendofits5-yearlife. Depreciationonthedelivery equipmenthasbeenrecordedthroughDecember31,2007.Itis estimatedthatthefairmarketvalueoftheolddeliveryequipmentis$36,000onSeptember 30,2008.
(b)OnJune30,2008,thecompany exchangedoldofficeequipmentand$40,000fornewoffice equipment.Theoldofficeequipmentoriginallycost$80,000andhadaccumulated depreciationtothedateofdisposalof$35,000.Itisestimatedthatthefairmarketvalueof theold officeequipmentonJune30was$60,000.
COMPLETIONSTATEMENTS
258.Withtheexceptionofland,plantassetsexperiencea inservice potentialovertheirusefullives.
259.Whenvacantlandisacquired,expendituresforclearing,draining,filling,andgrading should bechargedtothe account.
260.Thecostofdemolishinganoldbuildingonlandthathasbeenacquiredsothatanew buildingcanbeconstructedshouldbechargedtothe account.
261.Thecostofpaving,fencing,andlightinganewcompanyparkinglotischargedtoa
account.
262.Equipmentwithaninvoicepriceof$20,000waspurchasedandfreightcostswere$900. Thecostofthe equipmentwouldbe$ .
263. istheprocessofallocatingthecostofaplantassettoexpense overits service lifeinarationalandsystematicmanner.
264.Thebookvalueofaplantassetisobtainedbysubtracting fromthe
of theplantasset.
265.Threefactorsthataffectthecomputationofperiodicdepreciationexpenseare(1)
, (2) ,and(3) .
266.The methodofcomputingdepreciationexpenseresultsinanequal amountofperiodicdepreciationthroughouttheservicelife oftheplantasset.
267.Thedeclining-balancemethodofcomputingdepreciationexpenseinvolvesmultiplyinga
bookvaluebya percentage.
268.Thedeclining-balancemethodofcomputingdepreciationisknownasan
depreciationmethod.
269.Ordinaryrepairswhichmaintainoperatingefficiencyandexpectedproductivelifeare called .
270.Additionsandimprovementsarecostsincurredtoincreasetheoperatingefficiency, productive capacity,or expectedusefullife andare referredtoas .
271.Ifdisposalofaplantassetoccursatany timeduringtheyear, for the fractionoftheyeartothedate ofdisposalmustberecorded.
272.Iffullydepreciatedequipmentthatcost$10,000withnosalvagevalueisretired,theentry torecordtheretirementrequiresadebittothe account and acredittothe account.
273.Iftheproceedsfromthesaleofaplantassetexceedits ,againon disposalwilloccur.
274.Aplantassetoriginally cost$48,000andwasestimatedtohavea$3,000salvagevalueat theendofits5-yearusefullife.Ifattheendofthreeyears,theassetwassoldfor$9,000, andhadaccumulateddepreciationrecordedof$27,000,thecompanyshouldrecognizea
ondisposalintheamountof $ .
275.Naturalresourceshavetwodistinguishingcharacteristics(1)theyarephysically
inoperations,and(2)theyare onlybyanactof nature.
276.Inrecordingthepurchaseofabusiness,goodwillshouldberecordedfortheexcessof
overthe of thenet assetsacquired.
277.Theallocationofthecostofanassettoexpenseoveritsusefullifeiscalled
fortangibleplantassets, fornaturalresources, and for intangibleassets.
278.Thecostofapatentshouldbeamortizedoverits lifeorits
life,whicheverisshorter.
279.The ratioiscalculatedbydividingnetsalesbyaveragetotal assets.
a280.Inthecaseofanexchangeofplantassetsresultinginalossondisposal,thecostofthe newassetacquiredisequaltothe oftheassetgivenupplusanycash paid bythepurchaser.
a281.Acompanyexchangedanoldmachine,whichoriginallycost$22,000andhas accumulateddepreciationtodateof$12,000,foranewmachine.Theoldmachinehada fairmarketvalueof$14,000.Thecostofthenewmachineshouldberecordedat$ .
10-63
MATCHING
Set1
282.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Plantassets B.Depreciation C.Bookvalue
D.Salvagevalue
E.Straight-linemethod
F. Units-of-activitymethod
G.Double-declining-balancemethod H.MACRS
I. Revenueexpenditure J. Capitalexpenditure
1.Smallexpenditureswhichprimarilybenefitthecurrent period.
2.Costlessaccumulateddepreciation.
3.Anaccelerateddepreciationmethodusedforfinancialstatementpurposes.
4.Tangibleresourcesthatareusedinoperationsand arenotintendedforresale.
5.Equalamountof depreciationeachperiod.
6.Expectedcashvalueof theassetattheendof itsusefullife.
7.Allocationof thecostofaplant assetto expenseoverits usefullife.
8.Materialexpenditureswhichincreaseanasset'soperatingefficiency,productive capacity,orusefullife.
9.Anaccelerateddepreciationmethodusedfortaxpurposes.
10.Usefullifeisexpressedintermsof units ofproductionor expecteduse.
Set2
283.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Gainondisposal B.Lossondisposal C.Trademark
D.Depletion E.Usefullife
F. Assetturnoverratio G.Goodwill
H.Amortization
I. Intangibleasset
J. Researchanddevelopmentcosts
1.Processofallocating thecost of anintangibleassettoexpenseoverits useful life.
2.Isonlyrecorded whenanexchangehascommercialsubstance.
3.Examplesarefranchisesand licenses.
4.Theallocationofthecost ofanaturalresourcetoexpenseoverits usefullife.
5.Canbeidentifiedonlywitha businessasawhole.
6.Asymbolthat identifiesaparticularenterpriseorproduct.
7.Whenbookvalue of assetisgreaterthantheproceedsreceivedfromitssale.
8.Mustbe expensedwhen incurred.
9.Indicateshowefficientlya companyisabletogenerate saleswithits assets.
10.Anestimateoftheexpectedproductivelife ofanasset.
SHORT-ANSWERESSAYQUESTIONS
S-AE284
Thedeclining-balancemethodisanacceleratedmethodofdepreciation.Brieflyexplainwhatis meantbyanacceleratedmethodofdepreciationandjustifythechoosingofanaccelerated method.
S-AE285
Identifythefactorsthatareconsideredinclassifyinganexpenditureasacapitalorarevenue expenditure.Arethereinstanceswhereitmaybedifficulttoclassifyanexpenditureasoneorthe other(e.g.,thepurchaseofawastebasketthathasausefullifeof5yearsandcost$10)?What basis wouldbe usedin adecision?
S-AE286
Ingeneral,howdoesonedeterminewhetherornotanexpenditureshouldbeincludedinthe acquisitioncostof property,plant,andequipment?
S-AE287
Commentonthevalidityofthefollowingstatements:―Asanassetlosesitsabilitytoprovide services,cashneedstobesetasidetoreplaceit.Depreciationaccomplishesthisgoal.‖
S-AE288
Goodwillisanunusualassetinthatitcannotbesoldindividuallyapartfromabusinessasa whole.Ifgoodwillisanintangibleasset,whycan'titbesoldlikeotherintangibleassetssuchas copyrights andpatents?Brieflyexplainwhatmakesgoodwilldifferent.
S-AE289(Ethics)
PhysicianReferenceService(PRS)providesservicestophysiciansincludingresearch assistance,diagnosiscodingandmedicalpracticesoftwareincludinganadvancedmedical recordcross-referencingsystem.PRSisaggressiveinmonitoringotherfirms'offeringsand ensuring thatits servicesarecomparabletoallothers.
Becauseofitsneedtostayabreastofnewproductofferings,PRSspends alotofmoneysending professionalstotradeshows.Inaddition,PRShasagreementswithseveralclientswherebythe clientrequestsapresentationofacompetitor's services.APRSemployeeposesasanemployee oftheclient'sofficeandattends thepresentation, obtainingasmuchdataandsampleinformation aspossible.ThecostofthetravelandattendingpresentationsischargedtoProduct Developmentandexpensedduring thecurrentyear.
S-AE289(cont.)
InAprilofthisyear,PRSbegansellingasoftwareproductsubstitutebeforethecompetitor's softwarewasreleased.Thecompetitor,Compu-Med,suedforcopyrightinfringementandwon. PRShadtowithdrawitsproductfromthemarketandpay$1.5millionindamages.PRS immediatelynegotiatedanagreementwithCompu-MedtosellCompu-Med'sproduct(sinceit wasprohibitedfromofferingitsownversionforfiveyears.)Thisagreementcostanadditional $1.3million,but itallowedPRStocontinuetooffer afulllineofservices.
PRS'saccountant,JuneBianco,initiallyrecordedthecashpaymentsas"LossfromLawsuit"and "ProductDevelopment,"respectively.However,FredNance,thecontroller,instructedJuneto createanintangibleasset,named"Goodwill"andchargebothcoststothisaccount."We're protectedfromanotherlawsuitaslongasthisagreementisineffect,"hesays."It'saboutas closetogoodwillaswe'llevergetfromourcompetitors.We mightaswellamortizethecostrather thantakethefullhitto income,anyway."
Required:
1.Whataretheethicalissues? 2.WhatshouldJunedo?
S-AE290(Communication)
TheRestor-Itisacompanyspecializingintherestorationofoldhomes.Toshowcaseitswork, thecompanypurchasedanoldVictorianhomeindowntown Pittsburg,Kansas.Theoriginalhome waspurchasedfor$125,000.Anewheatingandair-conditioningsystemwasaddedfor$30,000. Thehousewascompletelyrewiredandre-plumbedatacostof$50,000.Customcabinetswere added,andthefloorsand trimwererefurbishedto theiroriginalcondition,at acostof $75,000.
Theprojectwassuchasuccess, thatRestor-Itdecidedtopurchaseanotherverylargehome,this timeinnearbyJoplin,Missouri.ArealtorofferedtopurchasethehomeinPittsburgfor$175,000. Heplanstoleaseitasluxuryshort-termapartmentsforvisitingdignitaries.Restor-Itdecidedthat amodestreturnwasallthatwasrequired,andsotheyagreedtosell.Onlyafterwarddidthey learnthattheyhada$10,000lossonthesale.Thepresidentofthecompany,JimHerman,does notbelievethatalossispossible."Wesoldthathouseformorethanwepaidforit,"hesaid."I knowweputsomemoneyinit,butwehaddepreciateditforthreeyears.Howintheworldcan we havea loss?"
S-AE290(cont.)
Required:
Writeashort memotoMr.Herman explaining how itwouldbepossibletohavealoss.Do nottry tousespecificnumbersfor costordepreciation.
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ACC 206 Week 5 Mid-Term Exam – Strayer
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Chapters 10 Through 13
CHAPTER10
PLANTASSETS,NATURALRESOURCES,ANDINTANGIBLEASSETS
CHAPTERSTUDYOBJECTIVES
1.Describehowthecostprincipleappliestoplantassets.
2.Explaintheconceptofdepreciation..
3.Computeperiodicdepreciationusingdifferentmethods.
4.Describetheprocedureforrevisingperiodicdepreciation.
5.Distinguishbetweenrevenueandcapitalexpenditures,andexplaintheentriesforeach.
6.Explainhowtoaccountforthedisposalofaplantasset.
7.Computeperiodicdepletionofnaturalresources.
8.Explainthebasicissuesrelatedtoaccountingforintangibleassets.
9.Indicatehowplantassets,naturalresources,andintangibleassetsarereported.
10.Explainhowtoaccountfortheexchangeofplantassets.
TRUE-FALSESTATEMENTS
1. Allplantassets(fixedassets)mustbedepreciatedfor accountingpurposes.
2. Whenpurchasingland,thecostsforclearing,draining,filling,andgradingshouldbe chargedto aLandImprovementsaccount.
3. Whenpurchasingdeliveryequipment,salestaxesandmotorvehiclelicensesshouldbe chargedto DeliveryEquipment.
4. Landimprovementsaregenerallychargedto theLandaccount.
5. Oncecostisestablishedforaplantasset,itbecomes thebasis ofaccounting fortheasset unlesstheassetappreciatesinvalue,inwhichcase,marketvaluebecomesthebasisfor accountability.
6. Thebookvalueof aplantassetisalwaysequaltoitsfairmarketvalue.
7. Recordingdepreciationonplantassetsaffectsthebalancesheetandtheincome statement.
8. Thedepreciablecostof aplant asset is itsoriginalcostminusobsolescence.
9. Recordingdepreciationeachperiodisanapplicationof thematchingprinciple.
10. TheAccumulatedDepreciationaccountrepresentsacashfundavailabletoreplaceplant assets.
11. Incalculatingdepreciation,bothplantassetcost andusefullifearebasedonestimates.
12. Usingtheunits-of-activitymethodofdepreciatingfactoryequipmentwillgenerallyresultin moredepreciationexpensebeingrecordedoverthelifeoftheassetthanifthestraight-line method hadbeenused.
13. Salvagevalueisnotsubtractedfromplantassetcostindeterminingdepreciationexpense underthedeclining-balancemethodofdepreciation.
14. Thedeclining-balancemethodofdepreciationiscalledanaccelerateddepreciation methodbecauseitdepreciatesanassetinashorterperiodoftimethantheasset'suseful life.
15. Underthedouble-declining-balancemethod,thedepreciationrateusedeachyear remainsconstant.
16. TheIRSdoesnotrequirethetaxpayertousethesamedepreciationmethodonthetax returnthatisusedinpreparingfinancialstatements.
17. Achangeintheestimatedusefullifeofaplantassetmaycauseachangeintheamount ofdepreciationrecognizedinthecurrentandfutureperiods,but nottopriorperiods.
18. Achangeintheestimatedsalvagevalueofaplantassetrequiresarestatementofprior years'depreciation.
19. Todetermineanewdepreciationamountafterachangeinestimateofaplantasset's useful life, the asset'sremaining depreciablecost isdividedbyits remainingusefullife.
20. Additionsand improvementstoaplantassetthatincreasethe asset'soperatingefficiency, productive capacity,or expectedusefullife aregenerallyexpensed intheperiodincurred.
21. Capitalexpendituresareexpendituresthatincreasethecompany'sinvestmentin productive facilities.
22. Ordinaryrepairs shouldberecognizedwhenincurredas revenueexpenditures.
23. A characteristicofcapitalexpendituresis that theexpendituresoccurfrequently duringthe period ofownership.
24. Onceanassetisfullydepreciated,noadditionaldepreciationcanbetakeneventhough theasset is still beingusedbythebusiness.
25. Thefairmarketvalueof a plantasset isalwaysthesameasits bookvalue.
26. Iftheproceedsfromthesaleofaplantassetexceeditsbookvalue,againondisposal occurs.
27. Alossondisposalofaplantassetcanonlyoccurifthecashproceeds received fromthe assetsaleis lessthanthe asset'sbook value.
28. Thebookvalueofaplantassetistheamount originallypaid fortheassetlessanticipated salvagevalue.
29. Alossondisposal ofaplantasset asaresult ofasaleoraretirementiscalculated inthe sameway.
30. A plantassetmustbefullydepreciatedbeforeit canberemovedfromthe books.
31. Ifaplantasset issoldata gain,thegain ondisposal shouldreducethecost ofgoodssold section of the incomestatement.
32. Depletioncostperunitiscomputedbydividingthetotalcostofanaturalresourcebythe estimatednumberof unitsintheresource.
33. TheAccumulatedDepletionaccountisdeductedfromthecostofthenaturalresourcein thebalancesheet.
34. Depletionexpenseforaperiodisonlyrecognizedonnaturalresourcesthathavebeen extractedandsoldduringtheperiod.
35. Naturalresourcesarelong-livedproductiveassetsthatareextractedinoperationsand arereplaceableonlybyanactof nature.
36. Thecostofnaturalresourcesisnotallocatedtoexpensebecausethenaturalresources arereplaceableonlybyanactof nature.
37. Conceptually,thecostallocationproceduresfornaturalresourcesparallelsthatofplant assets.
38. Naturalresourcesincludestandingtimberandundergrounddepositsofoil,gas,and minerals.
39. Ifanacquiredfranchiseorlicensehasanindefinitelife,thecostoftheassetisnot amortized.
40. Whenanentirebusinessispurchased,goodwillistheexcessofcostoverthebookvalue of thenet assetsacquired.
41. Researchand development costswhich result in asuccessful product which ispatentable arechargedtothePatentaccount.
42. Thecostof apatentmustbeamortizedovera 20-yearperiod.
43. Thecostofapatentshouldbeamortizedoveritslegallifeorusefullife,whicheveris shorter.
44. The balancesofthe majorclassesofplantassetsand accumulated depreciationby major classes shouldbedisclosedinthebalance sheetornotes.
45. Theassetturnover ratioiscalculated astotalsales dividedbyendingtotalassets.
46. Researchanddevelopmentcostscanbeclassifiedasaproperty,plant,andequipment itemoras an intangibleasset.
a47. An exchangeofplantassetshas commercial substanceifthe futurecashflows change as a resultofthe exchange.
a48. Companiesrecordagainorlossontheexchangeofplantassetsbecausemost exchangeshavecommercialsubstance.
a49. Whenplantassetsareexchanged,thecostofthenewassetisthebookvalueoftheold assetplus anycashpaid.
Additional True-FalseQuestions
50. Whenconstructingabuilding,acompanyispermittedtoincludetheacquisitioncostand certaininterest costs incurredinfinancingtheproject.
51. Recognitionofdepreciationpermitstheaccumulationofcashforthereplacementofthe asset.
52. Whenanassetispurchasedduringtheyear,itisnotnecessarytorecorddepreciation expense inthefirst yearunderthedeclining-balancedepreciationmethod.
53. Depletionexpenseisreported intheincomestatementas anoperatingexpense.
54. Goodwillisnotrecognizedinaccountingunlessitisacquiredfromanotherbusiness enterprise.
55. Researchanddevelopmentcostsshouldbechargedtoexpensewhenincurred.
56. Alossontheexchangeofplantassetsoccurswhenthefairmarketvalueoftheoldasset islessthanitsbookvalue.
MULTIPLECHOICEQUESTIONS
57. Thecostof apurchasedbuildingincludes allofthefollowingexcept a.closingcosts.
b.realestatebroker's commission. c.remodeling costs.
d.Allof theseareincluded.
58. Acompanypurchasedlandfor$90,000cash.Realestatebrokers'commissionwas $5,000and$7,000wasspentfordemolishinganoldbuildingonthelandbefore constructionofanewbuildingcouldstart.Underthecostprinciple,thecostoflandwould be recordedat
a.$97,000. b.$90,000. c.$95,000. d.$102,000.
59. Whichoneofthefollowingitemsisnotconsideredapartofthecostofatruckpurchased for businessuse?
a.Salestax
b.Trucklicensec.Freightcharges
d.Costofletteringonsideoftruck
60. Whichofthefollowingassetsdoesnotdeclineinservicepotentialoverthecourseofits useful life?
a.Equipment b.Furnishings c.Land
d.Fixtures
61. Thefoursubdivisions forplantassetsare
a.land,landimprovements,buildings,andequipment. b.intangibles,land,buildings,andequipment.
c.furnishingsandfixtures,land,buildings, andequipment. d.property,plant,equipment,andland.
62. Thecostof landdoesnotinclude
a.realestatebrokers' commission. b.annualpropertytaxes.
c.accruedpropertytaxesassumedbythepurchaser. d.title fees.
63. FeeneyClinicpurchaseslandfor$130,000cash.Theclinicassumes$1,500inproperty taxesdueontheland.Thetitleandattorneyfeestotaled$1,000.Theclinichastheland gradedfor $2,200.WhatamountdoesFeeneyClinicrecordasthecostforthe land?
a.$132,200 b.$130,000 c.$134,700 d.$132,500
64. BelleCompanybuyslandfor$50,000on12/31/07.Asof3/31/08,thelandhas appreciatedinvalueto$50,700.On12/31/08,thelandhasanappraisedvalueof $51,800.Bywhatamountshouldthe Landaccount beincreasedin 2008?
a.$0b.$700
c.$1,100 d.$1,800
65. PineCompanyacquireslandfor$86,000cash.Additional costsareasfollows:
Removalof shed $300 Fillingandgrading 1,500 Salvagevalue oflumberofshed 120 Brokercommission 1,130 Pavingofparkinglot 10,000 Closingcosts 560
Pinewillrecordtheacquisitioncostof thelandas a.$86,000.
b.$87,690. c.$89,610. d.$89,370.
66. ShawneeHospitalinstallsanewparkinglot.Thepavingcost$30,000andthelightsto illuminatethenewparkingareacost$15,000.Whichofthefollowingstatementsistrue with respecttotheseadditions?
a.$30,000shouldbedebitedtothe Landaccount.
b.$15,000shouldbedebitedtoLandImprovements. c.$45,000shouldbedebitedtotheLandaccount.d.$45,000shouldbedebitedtoLandImprovements.
10-10
67. Landimprovementsshouldbedepreciatedovertheusefullife of the a.land.
b.buildingsontheland.
c.land or landimprovements,whicheverislonger. d.landimprovements.
68. GeneralMoldingisbuildinganewplantthatwilltakethreeyearstoconstruct.The constructionwillbefinancedinpartbyfundsborrowedduringtheconstructionperiod. Therearesignificantarchitectfees,excavationfees,andbuildingpermitfees.Whichof the followingstatementsis true?
a.Excavationfeesarecapitalizedbut building permitfeesarenot. b.Architectfeesarecapitalizedbut buildingpermitfeesarenot.
c.Interestiscapitalizedduring theconstructionas partof thecostofthebuilding.
d.The capitalizedcost is equaltothecontractprice tobuildthe plant less any intereston borrowed funds.
69. Acompanypurchasesaremotesitebuildingforcomputeroperations.Thebuildingwillbe suitableforoperationsaftersomeexpenditures.Thewiringmustbereplacedtocomputer specifications.Theroofisleakyandmustbereplaced.Allroomsmustberepaintedand recarpetedandtherewillalsobesomeplumbingworkdone.Whichofthefollowing statements is true?
a.Thecost ofthebuildingwillnot includetherepaintingandrecarpeting costs. b.Thecostofthebuildingwillincludethecostof replacing theroof.
c.Thecostofthebuildingisthepurchasepriceofthebuilding,whiletheadditional expendituresareallcapitalizedas BuildingImprovements.
d.Thewiringis partofthecomputercosts,notthebuildingcost.
70. CarleyCompany purchasesanewdeliverytruck for$45,000.Thesalestaxesare$3,000. Thelogo of thecompanyis painted on thesideofthe truckfor$1,200.Thetrucklicenseis $120.Thetruckundergoessafetytestingfor$220.WhatdoesCarleyrecordasthecostof thenewtruck?
a.$49,540 b.$49,420 c.$48,000 d.$47,420
71. Allof thefollowingfactorsincomputingdepreciationareestimatesexcept a.cost.
b.residualvalue. c.salvagevalue. d.usefullife.
72. StoriesCompanypurchasedequipmentandthesecostswereincurred:
Cashprice Salestaxes
Insuranceduringtransit Installationandtesting Totalcosts
$22,500 1,800 320
430$25,050
PlantAssets,NaturalResources,andIntangibleAssets 10-11
Storieswillrecordtheacquisitioncostofthe equipmentas a.$22,500.
b.$24,300. c.$24,620. d.$25,050.
73. Becky’sBloomspurchasedadeliveryvanfor$20,000.Thecompany wasgivena$2,000 cashdiscountbythedealer,andpaid$1,000salestax.Annualinsuranceonthevanis $500.Asaresultofthepurchase,byhowmuchwillBecky’sBloomsincreaseitsvan account?
a.$20,000 b.$18,000 c.$19,500 d.$19,000
74. UptonCompanypurchasedequipmentonJanuary1atalistpriceof$50,000,withcredit terms2/10,n/30.PaymentwasmadewithinthediscountperiodandUptonwasgivena $1,000cashdiscount.Uptonpaid$2,500salestaxontheequipment,andpaidinstallation chargesof$880.Priortoinstallation,Uptonpaid$2,000topouraconcreteslabonwhich toplacethe equipment.Whatisthetotalcostofthe newequipment?
a.$52,380 b.$54,380 c.$55,380 d.$50,500
75. Interestmaybe includedintheacquisitioncost ofa plantasset a.duringtheconstructionperiodof aself-constructedasset.b.if theassetis purchasedoncredit.
c.if theassetacquisitionisfinancedbyalong-termnotepayable. d.ifit isapart of a lump-sumpurchase.
76. ThebalanceintheAccumulatedDepreciationaccountrepresentsthe a.cashfundtobeusedtoreplaceplantassets.
b.amounttobedeductedfromthecostoftheplantassettoarriveatitsfairmarket value.
c.amountchargedtoexpenseinthecurrentperiod.
d.amountchargedto expensesincetheacquisitionof theplantasset.
77. Whichoneofthefollowingitemsisnotaconsiderationwhenrecordingperiodic depreciationexpenseonplantassets?
a.Salvagevalue
b.Estimatedusefullife
c.Cashneededtoreplacethe plantasset d.Cost
78. Depreciationisthe processof allocating thecostof aplantasset overits servicelife in a.anequaland equitablemanner.
b.an acceleratedand accuratemanner. c.asystematicandrationalmanner.
d.a conservativemarket-basedmanner.
10-12
79. Thebookvalueof anassetisequaltothe
a.asset'smarketvaluelessits historicalcost.
b.bluebookvaluereliedonbysecondarymarkets. c.replacementcostof theasset.
d.asset'scostlessaccumulateddepreciation.
80. Accountantsdonotattempttomeasurethechangeinaplantasset'smarketvalueduring ownership because
a.theassetsare notheldfor resale. b.plantassetscannotbesold.
c.losseswouldhavetoberecognized.
d.itismanagement'sresponsibilityto determinefair values.
81. Depreciationis aprocessof a.assetdevaluation.
b.costaccumulation. c.cost allocation.
d.assetvaluation.
82. Recordingdepreciationeachperiodisnecessaryinaccordancewiththe a.goingconcernprinciple.
b.costprinciple.
c.matchingprinciple.
d.assetvaluationprinciple.
83. Incomputingdepreciation,salvagevalueis
a.thefairmarketvalueofa plantassetonthedate of acquisition.
b.subtractedfromaccumulateddepreciationtodeterminetheplantasset'sdepreciable cost.
c.anestimateof aplantasset'svalueattheendofitsusefullife. d.ignoredinallthedepreciationmethods.
84. Whenestimatingtheusefullifeofanasset,accountantsdonotconsider a.thecosttoreplacetheassetat theendofits usefullife.
b.obsolescencefactors.
c.expectedrepairsandmaintenance. d.theintendeduse of theasset.
85. Usefullifeisexpressedintermsof useexpectedfromtheassetunderthe a.declining-balancemethod.
b.straight-linemethod.
c.units-of-activitymethod. d.noneof these.
86. Equipmentwaspurchasedfor$75,000.Freightchargesamountedto$3,500andthere wasacostof$10,000forbuildingafoundationandinstallingtheequipment.Itis estimatedthattheequipmentwillhavea$15,000salvagevalueattheendofits5-year useful life. Depreciationexpenseeachyearusingthe straight-linemethodwillbe
a.$17,700. b.$14,700. c.$12,300. d.$12,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-13
87. Atruckwaspurchasedfor$120,000anditwasestimatedtohavea$24,000salvage valueattheendofitsusefullife.Monthlydepreciationexpenseof$2,000wasrecorded using thestraight-linemethod.Theannualdepreciationrateis
a.20%. b.2%.c.8%. d.25%.
88. AcompanypurchasedfactoryequipmentonApril1,2008for$64,000.Itisestimatedthat theequipmentwillhavean$8,000salvagevalueattheendofits10-yearusefullife. Usingthestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008is
a.$6,400. b.$5,600. c.$4,200. d.$4,800.
89. Acompanypurchasedofficeequipmentfor$40,000andestimatedasalvagevalueof $8,000attheendofits5-yearusefullife.Theconstantpercentagetobeappliedagainst book valueeachyearifthedouble-declining-balancemethodisusedis
a.20%. b.25%. c.40%. d.4%.
90. Thedeclining-balancemethodofdepreciationproduces a.adecreasingdepreciationexpenseeachperiod.
b.an increasingdepreciationexpenseeachperiod. c.a decliningpercentagerateeachperiod.
d.a constantamount ofdepreciationexpenseeachperiod.
91. Acompanypurchasedfactoryequipmentfor$250,000.Itisestimatedthattheequipment willhavea$25,000salvagevalueattheendofitsestimated5-yearusefullife.Ifthe companyusesthedouble-declining-balancemethodofdepreciation,theamountofannual depreciationrecordedforthesecondyear afterpurchasewould be
a.$100,000. b.$60,000. c.$90,000. d.$43,200.
92. Theunits-of-activitymethodisgenerallynot suitablefor a.airplanes.
b.buildings.
c.deliveryequipment. d.factorymachinery.
93. Aplantassetcost$144,000andisestimatedtohavean$18,000salvagevalueattheend ofits8-yearusefullife.Theannualdepreciation expenserecordedforthethirdyearusing thedouble-declining-balancemethodwouldbe
a.$12,060. b.$20,250. c.$17,718. d.$13,785.
10-14
94. Afactorymachinewaspurchased for$75,000onJanuary1,2008.Itwasestimatedthatit wouldhavea$15,000salvagevalueattheendofits5-yearusefullife.Itwasalso estimatedthatthemachinewouldberun40,000hoursinthe5years.Thecompanyran themachinefor4,000actualhoursin2008.Ifthecompanyusestheunits-of-activity methodof depreciation,the amountof depreciationexpensefor 2008 wouldbe
a.$7,500.b.$12,000. c.$15,000. d.$6,000.
95. TheModifiedAcceleratedCostRecoverySystem(MACRS)isadepreciationmethod which
a.isusedfortaxpurposes.
b.mustbeusedforfinancialstatementpurposes. c.isrequiredbytheSEC.
d.expensesanassetoverasingleyearbecausecapitalacquisitionsmustbeexpensed in theyearpurchased.
96. Whichofthefollowingmethodsof computing depreciationisproductionbased? a.Straight-line
b.Declining-balance c.Units-of-activityd.Noneof these
97. Managementshouldselect thedepreciationmethodthat a.iseasiesttoapply.
b.bestmeasurestheplantasset'smarketvalueover its usefullife.
c.bestmeasuresthe plantasset'scontributiontorevenue overits usefullife. d.hasbeenusedmostofteninthepastbythe company.
98. Thedepreciationmethodthatappliesaconstantpercentagetodepreciablecostin calculating depreciation is
a.straight-line.
b.units-of-activity.
c.declining-balance. d.noneof these.
Usethefollowing informationforquestions99–100.
OnOctober1,2008,DoleCompanyplacesanewassetintoservice.Thecostoftheassetis $60,000withanestimated5-yearlifeand$15,000salvagevalueattheendof its usefullife.
99. Whatisthedepreciationexpensefor2008ifDoleCompanyusesthestraight-linemethod ofdepreciation?
a.$2,250 b.$12,000 c.$3,000 d.$6,000
PlantAssets,NaturalResources,andIntangibleAssets 10-15
100. WhatisthebookvalueoftheplantassetontheDecember31,2008,balancesheet assuming that DoleCompanyusesthedouble-declining-balancemethodof depreciation? a.$39,000
b.$45,000 c.$54,000 d.$57,000
101. Whichdepreciationmethod ismostfrequentlyusedinbusinessestoday? a.Straight-line
b.Declining-balance c.Units-of-activity
d.Double-declining-balance
102. WineCompanyusestheunits-of-activitymethodincomputingdepreciation.Anewplant assetispurchased for$24,000thatwillproduceanestimated100,000unitsoveritsuseful life.Estimatedsalvagevalue attheend ofitsuseful lifeis$2,000. Whatis the depreciation costperunit?
a.$2.20 b.$2.40 c.$.22 d.$.24
103. Units-of-activityisanappropriatedepreciationmethodtouse when a.it isimpossibleto determinetheproductivityof theasset.
b.theasset'susewillbeconstantoverits usefullife.
c.theproductivityof theassetvariessignificantlyfromoneperiodtoanother. d.thecompanyisamanufacturingcompany.
104. Thecalculationof depreciationusingthedecliningbalancemethod,
a.ignoressalvage valueindeterminingtheamounttowhicha constantrateisapplied. b.multipliesaconstantpercentagetimesthepreviousyear'sdepreciationexpense.
c.yieldsan increasingdepreciationexpenseeachperiod.
d.multipliesadecliningpercentagetimesaconstantbookvalue.
Use thefollowing informationforquestions105��106.
GreyCompanypurchasedanewvanforfloraldeliveriesonJanuary1,2008.Thevancost $36,000withanestimatedlifeof5yearsand$9,000salvagevalueattheendofitsusefullife. Thedouble-declining-balancemethodof depreciationwillbeused.
105. Whatisthedepreciationexpensefor2008? a.$7,200
b.$5,400c.$10,800 d.$14,400
106. WhatisthebalanceoftheAccumulatedDepreciationaccountattheendof2009? a.$5,760
b.$17,280 c.$23,040 d.$8,640
10-16
107. PorterCompanypurchasedequipmentfor$450,000onJanuary1,2007,andwillusethe double-declining-balancemethodofdepreciation.Itisestimatedthattheequipmentwill havea3-yearlifeanda$20,000salvagevalueattheendofitsusefullife.Theamountof depreciationexpenserecognizedintheyear2009willbe
a.$50,000. b.$30,000. c.$54,440. d.$34,440.
108. Aplant asset was purchasedon January 1 for$50,000withan estimatedsalvagevalueof $10,000attheendofitsusefullife.Thecurrentyear'sDepreciationExpenseis$5,000 calculatedonthestraight-linebasisandthebalanceoftheAccumulatedDepreciation accountattheendof theyearis$25,000.Theremainingusefullifeof theplantasset is
a.10 years. b.8years. c.5 years. d.3years.
109. Equipmentwaspurchasedfor$60,000.Freightchargesamountedto$2,800andthere wasacostof$8,000forbuildingafoundation andinstallingtheequipment.Itisestimated thattheequipmentwillhavea$12,000salvagevalueattheendofits5-yearusefullife. Depreciation expenseeachyearusingthestraight-linemethodwill be
a.$14,160. b.$11,760. c.$9,840. d.$9,600.
110. Equipmentwaspurchased for$17,000onJanuary1,2008.Freightchargesamountedto $700andtherewasacostof$2,000forbuildingafoundationandinstallingthe equipment.Itisestimatedthattheequipmentwillhavea$3,000salvagevalueattheend ofits5-year useful life.What istheamountofaccumulateddepreciationatDecember31, 2009,if thestraight-linemethodof depreciationisused?
a.$6,680 b.$3,340 c.$2,860 d.$5,720
111. Acompanypurchasedfactoryequipment onJune 1,2008,for$48,000.Itisestimatedthat theequipmentwillhavea$3,000salvagevalueattheendofits10-yearusefullife.Using thestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008,is
a.$4,500. b.$2,625. c.$2,250. d.$1,875.
112. Aplant asset was purchasedon January 1 for$40,000withan estimatedsalvagevalueof $8,000attheendofitsusefullife.Thecurrentyear'sDepreciationExpenseis$4,000 calculatedonthestraight-linebasisandthebalanceoftheAccumulatedDepreciation accountattheendof theyearis$20,000.Theremainingusefullifeof theplantasset is
PlantAssets,NaturalResources,andIntangibleAssets 10-17
a.10 years. b.8years. c.5 years. d.3years.
Usethefollowing informationforquestions113–115.
BrinkmanCorporationboughtequipmentonJanuary1,2008.Theequipmentcost$90,000and hadanexpectedsalvagevalueof$15,000.Thelifeoftheequipmentwasestimatedtobe6 years.
113. Thedepreciablecostof theequipmentis a.$90,000.
b.$75,000. c.$50,000. d.$12,500.
114. Thedepreciationexpenseusingthestraight-linemethodof depreciationis a.$17,500.
b.$18,000. c.$12,500.
d.noneof theabove.
115. Thebookvalueof the equipmentatthebeginningof thethirdyear wouldbe a.$90,000.
b.$75,000. c.$65,000. d.$25,000.
116. BadenCompanypurchasedmachinerywithalistpriceof$32,000.Theyweregivena 10%discountbythemanufacturer.Theypaid$200forshippingandsalestaxof$1,500. Badenestimatesthatthemachinerywillhaveausefullifeof10yearsandaresidual value of$10,000.IfBadenusesstraight-linedepreciation,annualdepreciationwillbe
a.$2,050. b.$2,036. d.$3,050. d.$1,880.
117. BatesCompanypurchasedequipmentonJanuary1,2008,atatotalinvoicecostof $600,000.Theequipmenthasanestimatedsalvagevalueof$15,000andanestimated usefullifeof5years.WhatistheamountofaccumulateddepreciationatDecember31, 2009,if thestraight-linemethodof depreciationisused?
a.$120,000 b.$240,000 c.$117,000 d.$234,000
10-18
118. OnJanuary1,amachinewithausefullifeoffiveyearsandaresidualvalueof$15,000 waspurchasedfor$45,000.Whatisthedepreciationexpenseforyear2underthe double-declining-balancemethodof depreciation?
a.$10,800 b.$18,000 c.$14,400 d.$8,640
119. Amachinewithacostof$160,000hasanestimatedsalvagevalueof$10,000andan estimatedusefullifeof5yearsor15,000hours.Itistobedepreciatedusingtheunits-of-activitymethodofdepreciation.Whatistheamountofdepreciationforthesecondfull year,during whichthe machinewasused5,000hours?
a.$50,000 b.$30,000 c.$43,333 d.$53,333
120. Equipmentwithacostof$240,000hasanestimatedsalvagevalueof$15,000andan estimatedlifeof4yearsor15,000hours.Itistobedepreciatedusingtheunits-of-activity method.Whatistheamountofdepreciationforthefirstfullyear,duringwhichthe equipmentwasused 3,300 hours?
a.$60,000 b.$67,800 c.$49,500 d.$56,250
121. LarimeCompanypurchasedequipmentfor$40,000onJanuary1,2007,andwillusethe double-declining-balancemethodofdepreciation.Itisestimatedthattheequipmentwill havea5-yearlifeanda$2,000salvagevalueattheendofitsusefullife.Theamountof depreciationexpenserecognizedintheyear2009willbe
a.$5,760. b.$9,120. c.$9,600. d.$5,472.
122. InterlineTruckingpurchasedatractortrailerfor$98,000. Interlineusestheunits-of-activity methodfordepreciatingitstrucksandexpectstodrivethetruck1,000,000milesoverits 12-yearusefullife.Salvagevalueisestimated tobe$14,000.Ifthetruckisdriven90,000 miles in itsfirstyear,howmuchdepreciationexpenseshouldInterlinerecord?
a.$7,000 b.$8,820 c.$7,560 d.$8,167
123. Anassetwaspurchasedfor$150,000.Ithadanestimatedsalvagevalueof$30,000and anestimatedusefullifeof10years.After5yearsofuse,theestimatedsalvagevalueis revisedto$24,000buttheestimatedusefullifeisunchanged.Assumingstraight-line depreciation, depreciationexpenseinyear6 wouldbe
a.$18,000. b.$13,200. c.$9,000. d.$12,600.
PlantAssets,NaturalResources,andIntangibleAssets 10-19
124. Equipmentcosting$30,000withasalvagevalueof$6,000andanestimatedlifeof8 yearshasbeendepreciatedusingthestraight-linemethodfor2years.Assuminga revisedestimatedtotallifeof5yearsandnochangeinthesalvage value,thedepreciation expense for year3wouldbe
a.$3,600. b.$8,000. c.$6,000. d.$4,800.
125. Joe'sQuikShopboughtmachineryfor$25,000onJanuary1,2008.Joeestimatedthe usefullifetobe5yearswithnosalvagevalue,andthestraight-line methodofdepreciation willbeused. OnJanuary 1,2009,Joedecidesthatthebusinesswillusethemachineryfor a total of6 years.What is thereviseddepreciationexpensefor2009?
a.$4,000 b.$2,000 c.$3,333 d$5,000
126. Eachofthefollowingisusedincomputingrevisedannualdepreciationforachangein estimateexcept
a.bookvalue. b.cost.
c.depreciablecost.
d.remaininguseful life.
127. A changeintheestimatedusefullife of equipmentrequires
a.aretroactivechangeintheamountofperiodicdepreciationrecognizedinprevious years.
b.thatnochangebemadeintheperiodicdepreciation sothatdepreciationamounts are comparableoverthelifeof theasset.
c.thattheamountofperiodicdepreciationbechangedinthecurrentyearandinfuture years.
d.that incomeforthecurrent yearbeincreased.
128. HuntCompanyhasdecidedtochangetheestimateoftheusefullifeofanassetthathas beeninservicefor2years. Whichofthefollowingstatementsdescribestheproperwayto revise a usefullifeestimate?
a.Revisionsinusefullifeare permittedifapprovedbytheIRS.
b.Retroactivechangesmustbemadeto correctpreviouslyrecordeddepreciation. c.Onlyfuture yearswill beaffectedbytherevision.
d.Bothcurrentandfutureyearswillbeaffectedbythe revision.
129. Jim'sCopyShopboughtequipmentfor$90,000onJanuary1,2007.Jimestimatedthe usefullifetobe3yearswithnosalvage value, andthestraight-line methodofdepreciation willbeused.OnJanuary1,2008,Jimdecidesthat the businesswilluse theequipmentfor5years.Whatisthereviseddepreciationexpensefor 2008?
a.$30,000 b.$12,000 c.$15,000 d.$22,500
10-20
130. Costsincurredtoincreasetheoperatingefficiencyorusefullifeofaplantassetare referred toas
a.capitalexpenditures.b.expenseexpenditures. c.ordinaryrepairs.
d.revenueexpenditures.
131. Expendituresthatmaintain theoperatingefficiencyandexpectedproductivelifeofaplant assetaregenerally
a.expensedwhenincurred.
b.capitalizedasa partofthecostof theasset.
c.debitedto the AccumulatedDepreciationaccount.d.notrecordeduntiltheybecomematerialinamount.
132. Whichofthefollowingisnottrue of ordinaryrepairs?
a.Theyprimarilybenefitthecurrentaccountingperiod. b.Theycan bereferredto asrevenueexpenditures.
c.Theymaintaintheexpectedproductivelifeof theasset. d.Theyincreasetheproductivecapacityof theasset.
133. Thepaneling ofthe body ofanopenpickuptruckwouldbeclassifiedasa(n) a.revenueexpenditure.
b.addition.
c.improvement.d.ordinaryrepair.
134. Additionsand improvements
a.occurfrequentlyduringtheownershipof aplantasset. b.normallyinvolveimmaterialexpenditures.
c.increasethebookvalueof plantassetswhenincurred. d.typicallyonlybenefitthecurrentaccountingperiod.
135. Ifa plantassetisretiredbeforeit isfullydepreciatedandnosalvagevalueisreceived, a.againondisposaloccurs.
b.a lossondisposal occurs.
c.eitheragainor a losscan occur. d.neitheragainnor alossoccurs.
136. Againorlossondisposalof aplantassetis determinedbycomparingthe a.replacementcost oftheassetwiththeasset'soriginal cost.
b.bookvalueof theassetwiththeasset'soriginalcost.
c.originalcost oftheassetwiththeproceedsreceivedfromitssale. d.bookvalueof the assetwiththe proceedsreceivedfromits sale.
137. Thebookvalueof aplantassetisthedifferencebetweenthe a.replacementcost oftheassetandits historicalcost.
b.costof the asset andtheamountofdepreciationexpenseforthe year. c.costoftheasset andtheaccumulateddepreciationtodate.
d.proceedsreceivedfromthesaleoftheassetand its originalcost.
PlantAssets,NaturalResources,andIntangibleAssets 10-21
138. Ifa plantassetissoldbefore it isfullydepreciated, a.onlyagainondisposalcanoccur.
b.onlya losson disposalcanoccur.c.eitheragainor a losscan occur.d.neitheragainnor alosscanoccur.
139. Ifaplantassetisretiredbeforeitisfullydepreciated,andthesalvagevaluereceivedis less thanthe asset's book value,
a.a gainondisposaloccurs. b.a lossondisposal occurs.
c.thereis nogain or lossondisposal.
d.additionaldepreciationexpensemust berecorded.
140 Acompanysellsaplantassetwhichoriginallycost$180,000for$60,000onDecember31, 2008.TheAccumulatedDepreciationaccounthadabalanceof$72,000afterthecurrent year'sdepreciationof $18,000 hadbeenrecorded.Thecompanyshouldrecognizea
a.$120,000lossondisposal. b.$48,000gainondisposal. c.$48,000lossondisposal. d.$30,000lossondisposal.
141. Ifdisposalofa plantassetoccursduringtheyear,depreciationis a.not recordedfortheyear.
b.recordedforthewholeyear.
c.recordedforthefractionof theyeartothedateof thedisposal. d.not recordediftheasset isscrapped.
142. Ifafullydepreciatedplant asset is still usedbya company,the
a.estimatedremainingusefullifemustberevisedtocalculatethecorrectrevised depreciation.
b.assetisremovedfromthebooks.
c.accumulateddepreciationaccountisremovedfromthebooksbuttheassetaccount remains.
d.assetandtheaccumulateddepreciation continue tobereportedonthebalancesheet withoutadjustment untiltheassetisretired.
143. Whichofthefollowingstatementsisnottruewhenafullydepreciatedplantassetis retired?
a.Theplantasset'sbookvalue isequaltoitsestimated salvagevalue. b.Theaccumulateddepreciationaccountisdebited.
c.Theassetaccount iscredited.
d.Theplantasset'soriginalcost equalsitsbookvalue.
144. Ifaplantassetisretiredbeforeitisfullydepreciated,andnosalvageorscrapvalueis received,
a.againondisposalwillberecorded.
b.phantomdepreciationmustbetakenasthoughtheassetwerestillonthe books. c.a losson disposalwill berecorded.
d.nogainorlossondisposal willberecorded.
10-22
145. Thebookvalueof anassetwillequalitsfairmarket valueatthedateofsaleif a.a gainondisposalisrecorded.
b.nogainorlossondisposalisrecorded. c.theplantassetisfully depreciated.
d.a lossondisposal isrecorded.
146. Atruckcosting$110,000wasdestroyedwhenitsenginecaughtfire.Atthedateofthe fire,theaccumulateddepreciationonthetruckwas$50,000.Aninsurancecheckfor $125,000wasreceivedbasedonthereplacementcostofthetruck.Theentrytorecord theinsuranceproceedsandthedispositionof the truckwill include a
a.GainonDisposalof $15,000.
b.creditto theTruckaccountof $60,000.
c.credittotheAccumulatedDepreciationaccountfor$50,000. d.GainonDisposalof $65,000.
147. OnJuly1,2008,MeedKennelssellsequipmentfor$66,000.Theequipmentoriginally cost$180,000,hadanestimated5-yearlifeandanexpectedsalvagevalueof$30,000. Theaccumulateddepreciationaccounthadabalanceof$105,000onJanuary1,2008, using thestraight-linemethod.Thegainorlossondisposalis
a.$9,000gain. b.$6,000loss. c.$9,000loss. d.$6,000gain.
148. A lossondisposalof aplantassetisreportedinthefinancialstatements a.intheOtherRevenuesandGainssection oftheincomestatement.b.intheOtherExpensesandLossessectionof theincomestatement. c.asadirectincreasetothecapitalaccount onthe balancesheet.
d.as adirectdecrease tothecapitalaccount onthe balancesheet.
149. WellsCompany'sdeliverytruck,whichoriginallycost$70,000,wasdestroyedbyfire.At thetimeofthefire,thebalanceoftheAccumulatedDepreciationaccountamountedto $47,500.The companyreceived$40,000reimbursementfromits insurancecompany.The gain orlossasaresultof thefire was
a.$30,000loss. b.$17,500loss. c.$30,000gain. d.$17,500gain.
150. Atruckthatcost$21,000andonwhich$10,000ofaccumulateddepreciationhasbeen recordedwasdisposedoffor $9,000cash.Theentrytorecordthiseventwouldincludeaa.gainof $2,000.
b.lossof $2,000.
c.credittotheTruckaccountfor$11,000.
d.creditto AccumulatedDepreciationfor$10,000.
151. Atruckthatcost$36,000andonwhich$30,000ofaccumulateddepreciationhasbeen recordedwasdisposedoffor $9,000cash.Theentrytorecordthiseventwouldincludeaa.gainof $3,000.
b.lossof $3,000.
c.credittotheTruckaccountfor$6,000.
d.creditto AccumulatedDepreciationfor$30,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-23
152. AceCorporationsoldequipmentfor$12,000.Theequipmenthadanoriginalcostof $36,000andaccumulateddepreciationof $18,000.Asaresultof thesale,
a.netincomewill increase$12,000. b.netincomewillincrease$6,000.c. netincomewilldecrease$6,000.d.netincomewilldecrease$12,000.
153. Jarman’s CourierServicerecorded alossof$3,000whenitsoldavanthatoriginallycost $28,000for $5,000.Accumulateddepreciationonthevanmusthavebeen
a.$26,000. b.$8,000.c.$25,000. d.$20,000.
154. Onabalancesheet,naturalresourcesmaybedescribedmorespecificallyasallofthe followingexcept
a.landimprovements. b.mineraldeposits.
c.oilreserves. d.timberlands.
155. Naturalresourcesare
a.depreciatedusingtheunits-of-activity method.
b.physicallyextractedinoperationsandarereplaceableonlybyanact ofnature. c.reportedattheirmarketvalue.
d.amortizedovera periodnolongerthan40years.
156. Depletionis
a.a decreaseinmarketvalueof naturalresources.
b.the amountof spoilagethatoccurswhennaturalresourcesareextracted. c.theallocationof the costof naturalresources toexpense.
d.themethodusedtorecordunsuccessfulpatents.
157. Toqualifyasnaturalresourcesintheaccountingsense,assetsmustbe a.underground.
b.replaceable.
c.of amineralnature.
d.physicallyextractedinoperations.
158. Themethodmostcommonlyusedtocomputedepletionisthe a.straight-linemethod.
b.double-declining-balancemethod. c.units-of-activitymethod.
d.effectiveinterestmethod.
159. Incomputingdepletion,salvagevalueis a.alwaysimmaterial.
b.ignored.
c.impossibletoestimate.
d.includedinthe calculation.
10-24
160. Ifa miningcompanyextracts1,500,000tonsinaperiodbutonlysells1,200,000 tons, a.totaldepletiononthemineis basedonthe1,200,000tons.
b.depletionexpenseisrecognized onthe1,500,000tonsextracted.
c.depletionexpenseisrecognized onthe1,200,000tonsextractedandsold.
d.aseparateaccumulateddepletionaccountissetuptorecorddepletiononthe 300,000tonsextractedbutnotsold.
161. Acoalcompanyinvests$16millioninamineestimatedtohave20milliontonsofcoaland nosalvagevalue.Itisexpectedthattheminewillbeinoperationfor5years.Inthefirst year,1,000,000 tonsofcoalareextractedandsold.Whatisthedepletionexpenseforthe first year?
a.$800,000 b.$320,000 c.$80,000
d.Cannotbedeterminedfromtheinformationprovided.
162. AccumulatedDepletion
a.isusedbyallcompanieswithnaturalresources. b.hasanormaldebitbalance.
c.isacontra-assetaccount.
d.isnevershown onthebalancesheet.
163. OnJuly4,2008,MontanaMiningCompanypurchasedthemineralrightstoagranite depositfor$800,000.Itisestimatedthattherecoverablegranitewillbe400,000tons. During2008,100,000tonsofgranitewasextractedand60,000tonsweresold.The amount of theDepletionExpenserecognizedfor2008wouldbe
a.$100,000. b.$60,000.c.$120,000. d.$200,000.
164. Depletionexpenseiscomputedbymultiplyingthedepletioncostperunitbythe a.totalestimatedunits.
b.totalactualunits.
c.numberof unitsextracted. d.numberof unitssold.
165. Intangibleassetsaretherightsandprivilegesthatresultfromownershipoflong-lived assets that
a.mustbegeneratedinternally.
b.aredepletablenaturalresources. c.havebeenexchangedatagain. d.donothavephysicalsubstance.
166. Identifytheitembelowwherethetermsarenotrelated. a.Equipment—depreciation
b.Franchise—depreciation c. Copyright—amortization d.Oilwell—depletion
PlantAssets,NaturalResources,andIntangibleAssets 10-25
167. A patentshould
a.be amortizedovera periodof20years.b.notbeamortizedifithas an indefinitelife.
c.beamortizedoveritsusefullifeor20 years,whicheverislonger. d.beamortizedoveritsusefullifeor20 years,whicheveris shorter.
168. Theentrytorecordpatent amortizationusuallyincludes a creditto a.AmortizationExpense.
b.AccumulatedAmortization. c.Accumulated Depreciation. d.Patents.
169. Thecostof successfullydefendingapatentinaninfringementsuitshouldbe a.chargedtoLegalExpenses.
b.deductedfromthebookvalueof thepatent. c.addedtothecostof thepatent.
d.recognizedasalossinthecurrentperiod.
170. Anassetthatcannotbesoldindividuallyinthe marketplaceis a.apatent.
b.goodwill.
c.a copyright.d.a tradename.
171. Goodwillcan berecorded
a.whencustomerskeepreturningbecausetheyaresatisfiedwiththecompany's products.
b.whenthe companyacquires agoodlocationforits business. c.whenthecompanyhas exceptionalmanagement.
d.onlywhenthereisanexchangetransactioninvolvingthepurchaseofanentire business.
172. OnJuly1,2008,MarshCompanypurchasedthecopyrighttoParsonsComputertutorials for$162,000.Itisestimatedthatthecopyrightwillhaveausefullifeof5yearswithan estimatedsalvagevalueof$12,000.TheamountofAmortizationExpenserecognizedfor theyear2008wouldbe
a.$32,400. b.$15,000. c.$30,000. d.$16,200.
173. Allof thefollowingintangibleassetsare amortizedexcept a.copyrights.
b.limited-lifefranchises. c.patents.
d.trademarks.
174. Whichofthefollowingisnot anintangibleassetarisingfromagovernmentgrant? a.Goodwill
b.Patent
c.Trademarkd.Tradename
10-26
175. Theamortizationperiodforapatentcannotexceed a.50years.
b.40years. c.20years. d.10 years.
176. Costallocationof anintangibleassetisreferredto as a.amortization.
b.depletion. c.accretion.
d.capitalization.
177. A patent
a.hasa legallifeof 40years. b.is nonrenewable.
c.canberenewedindefinitely.
d.israrelysubjectto litigationbecauseitis anexclusiveright.
178. Ifacompanyincurslegalcostsinsuccessfullydefendingitspatent,thesecostsare recordedbydebiting
a.LegalExpense.
b.anIntangibleLossaccount. c.thePatentaccount.
d.a revenueexpenditureaccount.
179. Copyrightsaregrantedbythefederalgovernment
a.forthe lifeofthecreatoror70 years, whicheverislonger. b.forthelife ofthe creatorplus70 years.
c.forthelifeofthe creatoror70years,whicheveris shorter. d.andthereforecannotbeamortized.
180. Goodwill
a.isonlyrecordedwhengeneratedinternally. b.canbesubdividedandsoldinparts.
c.canonlybeidentifiedwith thebusinessasawhole.
d.canbedefinedas normalearningsless accumulatedamortization.
181. Inrecordingtheacquisitioncost ofanentirebusiness,
a.goodwillis recordedas theexcessof costoverthefair valueof identifiablenetassets. b.assetsarerecordedattheseller'sbookvalues.
c.goodwill,ifit exists,is never recorded.
d.goodwillisrecordedastheexcessofcostoverthebookvalueofidentifiablenet assets.
182. Researchanddevelopmentcosts
a.areclassifiedasintangibleassets.
b.mustbeexpensed whenincurredundergenerallyacceptedaccountingprinciples. c.shouldbe included in thecostofthepatenttheyrelateto.
d.arecapitalizedandthenamortizedovera periodnotto exceed40 years.
PlantAssets,NaturalResources,andIntangibleAssets 10-27
183. Acomputercompanyhas$2,000,000inresearchanddevelopmentcosts.Before accountingforthesecosts,thenetincomeofthecompanyis$1,600,000.Whatisthe amount of netincomeorlossafter theseR&D costsareaccountedfor?
a.$400,000loss
b.$1,600,000netincome c.$0
d.Cannotbedeterminedfromtheinformationprovided.
184. DentonCompanyincurred$300,000ofresearchanddevelopmentcostsinitslaboratory todevelopa newproduct.Itspent$40,000 in legalfeesfora patentgrantedon January2, 2008.OnJuly31,2008, Dentonpaid $30,000for legalfees inasuccessfuldefenseofthe patent.Whatisthetotalamountthatshouldbedebitedto PatentsthroughJuly31, 2008?a.$300,000
b.$70,000c.$370,000
d.Someotheramount
185. Giventhefollowingaccountbalancesatyearend,computethetotalintangibleassetson thebalancesheet of AnishaEnterprises.
Cash AccountsReceivable TrademarksGoodwill
Research& DevelopmentCosts
a.$11,500,000 b.$7,500,000c.$5,500,000 d.$9,500,000
$1,500,000 4,000,000 1,000,000 4,500,000 2,000,000
186. During2008,SitterCorporationreportednetsalesof$2,000,000,netincomeof $1,200,000,anddepreciationexpenseof$100,000.Sitteralsoreportedbeginningtotal assetsof$1,000,000,endingtotalassetsof$1,500,000,plantassetsof$800,000,and accumulated depreciationof$500,000.Sitter’sassetturnoverratiois
a.2 times.b.1.6times. c.1.3times. d..96times.
187. During2008,TylerCorporationreportednetsalesof$3,000,000andnetincomeof $1,800,000.Tyleralsoreportedbeginningtotalassetsof$1,000,000andendingtotal assets of $1,500,000.Tyler’sassetturnoverratiois
a.3.0times. b.2.4times. c.2.0times. d.1.4times.
188. Naturalresourcesaregenerallyshownonthebalancesheetunder a.Intangibles.
b.Investments.
c.Property,Plant, andEquipment. d.Owner'sEquity.
10-28
189. Whichofthefollowingstatementsconcerningfinancialstatementpresentationisnota truestatement?
a.IntangiblesarereportedseparatelyunderIntangibleAssets.
b.Thebalancesofmajorclassesof assets maybe disclosedinthefootnotes.
c.Thebalancesoftheaccumulateddepreciationofmajorclassesofassetsmaybe disclosed inthefootnotes.
d.Thebalancesofallindividualassets,astheyappearinthesubsidiaryplantledger, shouldbedisclosedinthefootnotes.
190. Intangibleassets
a.shouldbereported undertheheadingProperty,Plant, andEquipment.
b.arenotreportedonthebalancesheet becausetheylackphysicalsubstance. c.shouldbereportedasCurrentAssets onthebalancesheet.
d.shouldbereported asaseparateclassification onthebalancesheet.
191. Acompanyhasthefollowing assets:
BuildingsandEquipment,lessaccumulateddepreciationof$2,000,000 Copyrights
Patents
Timberlands,lessaccumulateddepletionof$2,800,000
Thetotal amountreportedunderProperty,Plant,andEquipmentwouldbe a.$19,360,000.
b.$14,400,000. c.$18,400,000. d.$15,360,000.
$9,600,000 960,000 4,000,000 4,800,000
a192.Acompanydecidestoexchangeitsoldmachineand$77,000cashforanewmachine. Theoldmachinehasabookvalueof$63,000andafairmarketvalueof$70,000onthe date of theexchange.Thecostof thenewmachinewouldberecordedat
a.$140,000. b.$147,000. c.$133,000.
d.cannotbedetermined.
a193.Acompanyexchanges itsoldofficeequipmentand$40,000 fornewofficeequipment.The oldofficeequipmenthasabookvalueof$28,000andafairmarketvalueof$20,000on thedate ofthe exchange.Thecostofthe newoffice equipment wouldberecordedat
a.$68,000. b.$60,000. c.$48,000.
d.cannotbedetermined.
a194.Inanexchangeofplantassetsthathascommercialsubstance,anydifferencebetween the fair marketvalueandthebookvalueof theoldplantassetis
a.recordedasagainorloss.
b.recorded ifagainbutisdeferredifaloss. c.recordedifaloss but isdeferredifa gain. d.deferredifeitheragainor loss.
PlantAssets,NaturalResources,andIntangibleAssets 10-29
a195.Gainsonanexchangeof plantassetsthathascommercialsubstanceare a.deductedfromthecostofthenewassetacquired.
b.deferred.
c.not possible.
d.recognizedimmediately.
a196.Lossesonanexchangeofplantassetsthathascommercialsubstanceare a.notpossible.
b.deferred.
c.recognizedimmediately.
d.deductedfromthecost of thenewassetacquired.
a197.Thecostofanewassetacquiredinanexchangethathascommercialsubstanceisthe cashpaid plusthe
a.bookvalueof theoldasset.
b.fairmarketvalueoftheoldasset. c. bookvalueoftheassetacquired. d.fair marketvalueof thenewasset.
Additional MultipleChoiceQuestions
198. Thecostof landincludesallof thefollowingexcept a.realestatebrokers’commissions.
b.closingcosts.
c.accruedpropertytaxes. d.parkinglots.
199. A termthatisnotsynonymouswith property,plant,and equipmentis a.plantassets.
b.fixedassets.
c.intangibleassets.
d.long-livedtangibleassets.
200. Thefactorthat isnotrelevantincomputingdepreciationis a.replacementvalue.
b.cost.
c.salvagevalue. d.usefullife.
201. Depreciablecostisthe
a.bookvalueofanassetlessitssalvagevalue. b.costofanasset lessitssalvagevalue.
c.cost of anasset lessaccumulateddepreciation. d.bookvalueofanasset.
202. SantayanaCompanypurchasedamachineonJanuary1,2006,for$12,000withan estimatedsalvagevalueof$3,000andanestimatedusefullifeof8years.OnJanuary1, 2008,Santayanadecidesthemachinewilllast12yearsfromthedateofpurchase.The salvagevalueisstillestimatedat$3,000.Usingthestraight-linemethod,thenewannual depreciation will be
10-30
a.$675. b.$750. c.$900. d.$1,000.
203. Ordinaryrepairs are expenditurestomaintaintheoperatingefficiencyof aplantassetand arereferredto as
a.capitalexpenditures.b.expenseexpenditures. c.improvements.
d.revenueexpenditures.
204. Improvementsare
a.revenueexpenditures.
b.debitedtoanappropriateassetaccountwhentheyincreaseusefullife.
c.debitedtoaccumulateddepreciationwhentheydo not increaseusefullife.
d.debitedtoanappropriateassetaccountwhentheydonotincreaseusefullife.
205. Againon sale of aplantassetoccurs whentheproceedsofthesalearegreaterthanthe a.salvagevalueof theassetsold.
b.marketvalueof the assetsold. c.bookvalueoftheassetsold.
d.accumulateddepreciationontheassetsold.
206. Theentrytorecorddepletionexpense
a.decreasesowner'sequityandassets.
b.decreasesnet incomeandincreasesliabilities. c.decreasesassets and liabilities.
d.decreasesassets andincreasesliabilities.
207. Allof thefollowingare intangibleassetsexcept a.copyrights.
b.goodwill. c.patents.
d.researchand developmentcosts.
208. A purchasedpatenthasa legallifeof 20years.Itshouldbe a.expensedintheyearofacquisition.
b.amortizedover20 yearsregardlessof itsusefullife. c.amortizedoverits usefullife iflessthan20years.d.notamortized.
209. Theassetturnover ratioiscomputedbydividing a.netincomebyaveragetotalassets.
b.netsalesbyaveragetotalassets. c.netincomebyendingtotalassets. d.net salesbyendingtotalassets.
PlantAssets,NaturalResources,andIntangibleAssets 10-31
a210.In anexchangeof plantassetsthathascommercialsubstance a.neithergainsnorlossesarerecognizedimmediately.
b.gains,butnotlosses,arerecognizedimmediately. c.losses,butnotgains,arerecognizedimmediately. d.bothgainsand lossesarerecognizedimmediately.
BRIEFEXERCISES
BE211
Indicatewhethereachofthefollowingexpendituresshouldbeclassifiedasland(L),land improvements (LI),buildings(B),equipment(E), ornone ofthese(X).
1.Parkinglots
2.Electricityused byamachine
3.Excavationcosts
4.Interestonbuilding constructionloan
5.Costof trialrunsformachinery
6.Drainagecosts
7.Costto installa machine
8.Fences
9.Unpaid(past)propertytaxesassumed
10.Costoftearingdownabuilding whenlandandabuildingonitare purchased
BE212
SellerCorporationpurchasedlandadjacenttoitsplanttoimproveaccessfortrucksmaking deliveries.Expendituresincurredinpurchasingthelandwereasfollows:purchaseprice, $50,000;broker’sfees,$6,000;titlesearchandotherfees,$5,000;demolitionofanoldbuilding ontheproperty,$5,700;grading,$1,200;diggingfoundationfortheroad,$3,000;layingand pavingdriveway,$25,000;lighting$7,500;signs,$1,500.Listtheitemsandamountsthatshould be includedin theLand account.
BE213
EastmanCompanypurchasedadeliverytruckfor$35,000onJanuary1,2008.Thetruckwas assignedanestimatedusefullifeof5yearsandhasaresidualvalueof$10,000.Compute depreciationexpenseusingthedouble-declining-balancemethodforthe years2008and2009.
BE214
EastmanCompanypurchasedadeliverytruckfor$35,000onJanuary1,2008.Thetruckwas assignedanestimatedusefullifeof100,000milesandhasaresidual valueof$10,000.Thetruck wasdriven18,000miles in2008and22,000milesin2009.Computedepreciationexpenseusing theunits-of-activitymethodfor the years2008and 2009.
BE215
PorikaCompanypurchasedatruckfor$57,000.Thecompanyexpectedthetrucktolastfour yearsor100,000miles,withanestimatedresidualvalueof$6,000attheendofthattime.During thesecond yearthetruckwasdriven27,000 miles.Computethedepreciationforthesecond year undereachof themethods belowand placeyouranswersintheblanksprovided.
Units-of-activity $
Double-declining-balance $
BE216
On January 1,2006,EckerCompanypurchasedacomputersystemfor$20,500. Thesystemhad anestimatedusefullifeof5yearsandnosalvagevalue.AtJanuary1,2008,thecompany revisedtheremainingusefullifetotwoyears.Whatamountofdepreciationwillberecordedfor 2008and2009?
BE217
RobotEnterprisessoldequipmentonJanuary1,2008for$5,000.Theequipmenthadcost $24,000.ThebalanceinAccumulatedDepreciationatJanuary1is$20,000.Whatentrywould Robotmaketorecordthe saleof theequipment?
BE218
OnJanuary1,2008,FreeportEnterprisespurchasednaturalresourcesfor$1,200,000.The companyexpectstheresourcestoproduce12,000,000unitsofproduct.(1)Whatisthedepletion costperunit?(2)Ifthecompanyminedandsold20,000unitsinJanuary,whatisdepletion expense forthemonth?
BE219
OnJanuary2,2008,ElneerCompanypurchasedapatentfor$38,000.Thepatenthasan estimatedusefullifeof25yearsanda20-yearlegallife.Whatentrywouldthecompanymakeat December31, 2008torecordamortizationexpenseonthepatent?
BE220
Usingthefollowingdatafor Rocky,Inc.,computeits assetturnoverratio.
Rocky, Inc.NetIncome2008
TotalAssets12/31/08 TotalAssets12/31/07 NetSales2008
$123,000 2,443,000 1,880,000 2,135,000
$2,135,000
EXERCISES
Ex.221
HuntCompanypurchasedfactoryequipmentwithaninvoicepriceof$80,000.Othercosts incurredwerefreightcosts,$1,100;installationwiringandfoundation,$2,200;materialandlabor costsintestingequipment, $700;oillubricantsandsupplies tobeusedwithequipment, $500;fire insurancepolicycoveringequipment,$1,400.Theequipmentisestimatedtohavea$5,000 salvagevalueat theendofits5-yearusefulservicelife.
Instructions
(a)Computetheacquisitioncostofthe equipment.Clearlyidentifyeachelement ofcost.
(b)Ifthedouble-declining-balancemethodofdepreciationwasused,theconstantpercentage applied toa decliningbookvalue wouldbe .
Ex.222
Foreachentrybelowmake acorrectingentry ifnecessary.Ifthe entry given iscorrect,then state "Noentryrequired."
(a)The$60cost of repairinga printerwaschargedtoComputerEquipment.
(b)The $5,000cost ofa major engineoverhaulwas debitedto RepairExpense. The overhaulis expected to increasetheoperatingefficiencyof the truck.
(c) The$6,000closingcostsassociatedwiththeacquisitionoflandweredebitedtoLegal Expense.
(d)A$500chargefortransportationexpensesonnewequipmentpurchasedwasdebitedto Freight-In.
Ex.223
BenedictCompanywasorganized onJanuary1.Duringthefirstyearofoperations,the following expendituresandreceipts wererecordedinrandom orderinthe account,Land.
Debits
1.Costofrealestatepurchasedasaplantsite(landandbuilding).
2.Accruedrealestatetaxespaidatthetimeofthepurchaseoftherealestate. 3.Costof demolishingbuilding tomakelandsuitablefor constructionofanew
building.
4.Architect'sfeesonbuildingplans.5.Excavationcostsfor newbuilding. 6.Costoffilling andgradingtheland.
7.Insuranceandtaxesduringconstructionof building.
8.Costofrepairstobuilding underconstructioncaused byasmallfire.
9.Interestpaidduringthe year,of which$54,000pertainstotheconstruction period.
10.Fullpaymentto buildingcontractor. 11.Costof parkinglotsanddriveways.
12.Realestatetaxespaidfor thecurrentyearontheland. TotalDebits
Credits 13.Insuranceproceedsforfire damage.
14.Proceedsfrom salvageof demolishedbuilding TotalCredits
$220,000 4,000
15,000 14,000 24,000 5,000 6,000 7,000
64,000 760,000 36,000
4,000$1,159,000
$3,000
3,500$6,500
Instructions
Analyzetheforegoingtransactionsusingthefollowingtabulararrangement. Insertthenumberof each transactionintheItemspaceandinserttheamountsintheappropriatecolumns.
Item Land Building Other Account Title
Ex.224
DuncanCompanypurchaseda machine atacost of$90,000.The machineisexpected to have a $5,000salvagevalueatthe endof its 5-yearusefullife.
Instructions
Computeannualdepreciationforthefirstandsecond yearsusingthe (a)straight-linemethod.
(b)double-declining-balancemethod.
Ex.225
ReynoldsCompanypurchasedanewmachinefor$300,000.Itisestimatedthatthemachinewill havea$30,000salvagevalueattheendofits5-yearusefulservicelife.Thedouble-declining-balance method of depreciationwillbeused.
Instructions
Prepareadepreciationschedulewhich showstheannualdepreciation expense onthemachine for its5-yearlife.
Ex.226
TannerCompanypurchasedequipmentonJanuary1,2007for$70,000.Itisestimatedthatthe equipmentwillhavea$5,000salvagevalueattheendofits5-yearusefullife.Itisalsoestimated that theequipmentwillproduce100,000unitsoverits 5-yearlife.
Instructions
Answerthefollowingindependentquestions.
1.ComputetheamountofdepreciationexpensefortheyearendedDecember31,2007,using thestraight-linemethodofdepreciation.
2.If16,000unitsofproductareproducedin2007and24,000unitsareproducedin2008,what isthebookvalueoftheequipmentatDecember31,2008?Thecompanyusestheunits-of-activitydepreciationmethod.
3.Ifthecompanyusesthedouble-declining-balancemethodofdepreciation,whatisthe balance of theAccumulatedDepreciation—Equipment accountat December31,2009?
Ex.227
AplantassetacquiredonOctober1,2008,atacostof$300,000hasanestimatedusefullifeof 10years.Thesalvagevalueis estimated tobe$30,000 attheendofthe asset'suseful life.
Instructions
Determinethedepreciationexpenseforthefirsttwoyearsusing: (a) thestraight-linemethod.
(b) the double-declining-balancemethod.
50,000miles
60,000miles
70,000miles
Ex.228
Tony’s,apopularpizzahang-out,hasathrivingdeliverybusiness.Tony’shasafleetofthree deliveryautomobiles.Priortomakingtheentryforthisyear'sdepreciationexpense,the subsidiary ledgerforthefleet is asfollows:
Accumulated
Estimated Depr.—Beg. MilesOperated Car Cost SalvageValue Life in Miles of the YearDuringYear
1 $21,000 $3,000 50,000 $2,520 20,000 2 18,000 2,400 60,000 2,340 22,000 3 20,000 2,500 70,000 2,000 19,000
Instructions
(a)Determinethedepreciationratespermileforeachcar.
(b)DeterminetheDepreciationExpenseforeachcarforthecurrent year.
(c)MakeonecompoundjournalentrytorecordtheannualDepreciationExpenseforthefleet.
$21,000– $3,000
Ex.229
TheBarnettClinicpurchasedanewsurgicallaserfor$80,000.Theestimatedsalvagevalueis $5,000.Thelaserhasausefullifeoffiveyearsandtheclinicexpectstouseit10,000hours.It wasused1,600hours inyear1;2,200 hours in year2;2,400 hoursinyear 3;1,800 hours in year 4;2,000hoursin year5.
Instructions
(a)Computetheannualdepreciationforeachofthefiveyearsundereachofthefollowing methods:
(1)straight-line.(2)units-of-activity.
(b)Ifyouweretheadministratoroftheclinic,whichmethodwouldyoudeemasmost appropriate? Justifyyouranswer.
(c)Whichmethodwouldresultinthelowestreportedincomeinthefirstyear?Whichmethod would resultinthelowesttotalreportedincomeoverthefive-yearperiod?
Ex.230
TheDecember31,2007balancesheetofRitterCompanyshowedEquipmentof$64,000and AccumulatedDepreciationof$18,000.OnJanuary1,2008,thecompanydecidedthatthe equipmenthasaremainingusefullifeof 6yearswitha $4,000salvagevalue.
Instructions
Computethe (a)depreciablecost ofthe equipmentand(b) revisedannualdepreciation.
Ex.231
SoutheastAirlinespurchaseda747aircraftonJanuary1,2007,atacostof$35,000,000.The estimateduseful lifeoftheaircraftis20years,withanestimated salvagevalue of$5,000,000.On January1,2010theairlinerevisesthetotalestimatedusefullifeto15yearswitharevised salvagevalueof$3,500,000.
Instructions
(a)ComputethedepreciationandbookvalueatDecember31,2009usingthestraight-line methodandthedouble-declining-balancemethod.
(b)Assumingthestraight-linemethodisused,computethedepreciationexpensefortheyear ended December31, 2010.
Ex.232
SeymorCompanypurchasedamachineonJanuary1,2008,atacostof$80,000.Itisexpected tohaveanestimatedsalvagevalueof$5,000attheendofits5-yearlife.Thecompany capitalizedthemachineanddepreciateditin2008usingthedouble-declining-balancemethodof depreciation.Thecompany hasapolicyofusingthestraight-linemethod todepreciateequipment butthecompanyaccountantneglectedtofollowcompanypolicywhenheusedthedouble-declining-balancemethod.NetincomefortheyearendedDecember31,2008was$55,000as the resultof depreciatingthemachineincorrectly.
Instructions
Usingthemethodofdepreciationwhichthecompanynormallyfollows,preparethecorrecting entry and determinethecorrectednet income.(Showcomputations.)
Ex.233
Equipment wasacquiredonJanuary1,2005,atacostof$80,000.Theequipmentwasoriginally estimatedtohaveasalvagevalueof$5,000andanestimatedlifeof10years.Depreciationhas beenrecordedthroughDecember31,2008,usingthestraight-linemethod.OnJanuary1,2009, theestimatedsalvagevaluewasrevisedto$6,000andtheusefullifewasrevisedtoatotalof8 years.
Instructions
DeterminetheDepreciationExpensefor 2009.
Ex.234
GantnerCompanypurchasedamachineonJanuary1,2008.Inadditiontothepurchaseprice paid,thefollowingadditionalcostswereincurred:(a)salestaxpaidonthepurchaseprice,(b) transportationandinsurancecostswhilethemachinerywasintransitfromtheseller,(c) personneltrainingcosts forinitial operationofthemachinery,(d)annualcityoperatinglicense,(e) majoroverhaultoextendthelifeofthemachinery,(f)lubricationofthemachinerygearingbefore themachinerywasplacedintoservice,(g)lubricationofthemachinerygearingafterthe machinerywasplacedintoservice,and(h)installationcostsnecessarytosecurethemachinery to thebuildingflooring.
Instructions
Indicatewhethertheitems(a)through(h)arecapitalorrevenueexpendituresinthespaces provided: C= Capital,R=Revenue.
(a) (b) (c) (d)
(e) (f) (g) (h)
Ex.235
CareyWordProcessingServiceusesthestraight-linemethodofdepreciation.Thecompany's fiscalyearendisDecember31.Thefollowingtransactionsandeventsoccurredduringthefirst three years.
2007July 1
Nov.3 Dec.31
2008Dec.31
PurchasedacomputerfromtheComputerCenterfor$2,300cashplussales tax of$150,andshippingcosts of$50.
Incurredordinaryrepairsoncomputerof $140.
Recorded2007depreciationonthebasisofafouryearlifeandestimated salvagevalueof$500.
Recorded2008depreciation.
2009Jan. 1 Paid$400foranupgradeofthecomputer.Thisexpenditureisexpectedto increasetheoperatingefficiency andcapacityofthecomputer.
Instructions
Preparethenecessaryentries.(Showcomputations.)
Ex.236
Identifythefollowingexpendituresascapitalexpenditures orrevenueexpenditures. (a)Replacementof wornoutgearsonfactorymachinery.
(b)Constructionof anewwing onanofficebuilding. (c)Paintingtheexteriorof abuilding.
(d)Oilchangeonacompanytruck.
(e)ReplacingaPentiumIIcomputerchipwithaPentiumIVchip,whichincreasesproductive capacity.Noextensionofusefullifeexpected.
(f) Overhaulofa truckmotor.Oneyearextensioninusefullifeis expected. (g)Purchasedawastebasketatacostof $10.
(h)Paintingandletteringofa usedtruck uponacquisitionofthetruck.
Ex.237
OnJanuary1,2006RosenCompanypurchasedandinstalledatelephonesystematacostof $20,000.Theequipmentwasexpectedtolastfiveyearswithasalvagevalueof$3,000.On January1,2007moretelephoneequipmentwaspurchasedtotie-inwiththecurrentsystemfor $10,000.Thenewequipmentisexpectedtohaveausefullifeoffouryears.Throughanerror,the newequipmentwasdebitedtoTelephoneExpense.RosenCompanyusesthestraight-line methodofdepreciation.
Instructions
PrepareascheduleshowingtheeffectsoftheerroronTelephoneExpense,Depreciation Expense,andNetIncomeforeachyearandintotalbeginningin2007throughtheusefullifeof thenewequipment.
TelephoneExpense Overstated
Year (Understated)
Depreciation Expense Overstated
(Understated)
NetIncome Overstated
(Understated)
2007
2008
2009
2010
Ex.238
BermanCompanysoldequipmentonJuly31,2008for$50,000.Theequipmenthadcost $140,000 andhad$80,000ofaccumulateddepreciationasofJanuary1,2008.Depreciationfor thefirst6monthsof2008 was$8,000.
Instructions
Preparethejournalentrytorecordthesaleoftheequipment.
Ex.239
(a)WattsCompanypurchasedequipmentin2001for$90,000andestimateda$6,000salvage valueattheendoftheequipment's10-yearusefullife.AtDecember31,2007,therewas $58,800intheAccumulatedDepreciationaccountforthisequipmentusingthestraight-line methodof depreciation.On March31, 2008,theequipmentwassoldfor$24,000.
PreparetheappropriatejournalentriestoremovetheequipmentfromthebooksofWatts CompanyonMarch31, 2008.
(b)GormanCompanysoldamachine for$15,000. Themachineoriginallycost$35,000in2005 and$8,000wasspentonamajoroverhaulin2008(chargedtoMachineaccount). AccumulatedDepreciationonthemachinetothe date of disposalwas$28,000.
Preparetheappropriatejournalentrytorecordthedispositionofthemachine.
(c)KlingerCompanysoldofficeequipmentthathadabookvalueof$6,000for$8,000.The officeequipmentoriginallycost$20,000anditisestimatedthatitwouldcost$25,000to replace theofficeequipment.
Preparetheappropriatejournalentrytorecordthedispositionofthe officeequipment.
Ex.240
Fleming'sLumberMillsoldtwomachinesin2009.Thefollowinginformationpertainstothetwo machines:
Purchase Useful Salvage Depreciation Sales
MachineCost Date Life Value Method Date Sold Price
#1 $66,000 7/1/05 5yrs. $6,000 Straight-line 7/1/09 $15,000 #2 $40,000 7/1/08 5yrs. $5,000 Double-declining- 12/31/09 $24,000
balance
Instructions
(a)Computethedepreciationoneachmachinetothedateofdisposal.
(b)Preparethejournalentriesin2009torecord2009depreciationandthesaleofeach machine.
Ex.241
Presentedbelowareselectedtransactionsfor MiltonCompanyfor 2008.
Jan. 1 Received$9,000scrapvalueonretirementofmachinerythatwaspurchasedon January1,1998.Themachinecost$90,000onthatdate,andhadausefullifeof10 yearswithno salvagevalue.
April30
Dec.31
Soldamachinefor$28,000thatwaspurchasedonJanuary1,2005.Themachine cost$75,000,andhadausefullifeof 5 years withnosalvagevalue.
DiscardedabusinessautomobilethatwaspurchasedonOctober1,2003.Thecar cost$32,000andwasdepreciatedona5-yearusefullifewithasalvagevalueof $2,000.
Instructions
Journalizeallentriesrequiredasaresultoftheabovetransactions.MiltonCompanyusesthe straight-linemethodof depreciationandhasrecordeddepreciationthroughDecember31,2007.
Ex.242
WatsonCompanysoldthefollowingtwomachinesin 2008:
Cost Purchasedate Usefullife Salvagevalue
Depreciationmethod Datesold
SalesPrice
MachineA
$68,000 7/1/048years $4,000
Straight-line 7/1/08 $30,000
Machine B $80,000 1/1/055years $4,000
Double-declining-balance 8/1/08$16,000
Instructions
Journalizeallentriesrequiredtoupdatedepreciationandrecordthesalesofthetwoassetsin 2008.ThecompanyhasrecordeddepreciationonthemachinethroughDecember31, 2007.
Ex.243
GirardMininginvested$960,000inamineestimatedtohave1,200,000tonsoforewithno salvagevalue.Duringthefirst year,200,000tons of orewereminedandsold.
Instructions
Preparethejournalentrytorecorddepletionexpense.
Ex.244
Eddy MiningCompanypurchaseda minefor$70 million which isestimated tohave250,000tons ofore anda salvagevalueof $10million.
(a)Inthefirstyear,50,000tonsoforeareextractedandsold.Preparethejournalentryto recorddepletionexpenseforthefirstyear.
(b)Inthesecondyear,150,000tonsoforeareextractedbutonly125,000tonsaresold. Preparethejournalentrytorecorddepletionexpenseforthesecondyear.
(c)Whatamountandinwhataccountare thetonsof orenotsoldreported?
Ex.245
HarperMiningCompanypurchasedlandcontaininganestimated15milliontonsoforeatacost of$4,500,000.Thelandwithouttheoreisestimatedtobeworth$600,000. Thecompany expects tooperatetheminefor10years.Buildingscosting$600,000areerectedonthesiteandare expectedtolastfor25years.Equipmentcosting$300,000withanestimatedlifeof12yearsis installed.Thebuildingsandtheequipmentpossessnosalvagevalueafterthemineisclosed. During thefirst yearof operations,theminingcompanyminedandsold2milliontons ofore.
Instructions
(a)Computethedepletionchargeperton.
(b)Computethedepletionexpensefor thefirst year.
(c)Computetheappropriatefirstyear'sdepreciationexpenseforthebuildings. (d)Computetheappropriatefirstyear'sdepreciationexpensefortheequipment.
(e)Preparejournalentriestorecorddepletionanddepreciationexpensesfortheyear.
Ex.246
(a)AcompanypurchasedapatentonJanuary1,2008, for$2,000,000.Thepatent'slegallifeis 20yearsbutthecompanyestimates thatthepatent'susefullifewillonlybe5yearsfromthe dateofacquisition.OnJune30,2008,thecompanypaidlegalcostsof$135,000in successfullydefendingthepatentinaninfringementsuit.Preparethejournalentryto amortize the patentatyearendonDecember31,2008.
(b)FoleyCompanypurchasedafranchisefromYummieFoodCompanyfor$400,000on January1,2008.Thefranchise isforanindefinite timeperiodandgivesFoleyCompanythe exclusiverightstosellYummieWingsinaparticularterritory.Preparethejournalentryto recordtheacquisitionofthefranchiseandanynecessaryadjustingentryatyearendon December 31, 2008.
(c)DryerCompanyincurredresearchanddevelopmentcostsof$500,000in2008in developinganewproduct.Preparethenecessaryjournalentriesduring2008torecord these eventsandanyadjustmentsat yearendonDecember31,2008.
Ex.247
OnJanuary2,2008,HolmesCompanypurchasedapatentfor$200,000.Thepatenthasan8-yearestimatedusefullife andalegallife of 20years.
Instructions
Preparethejournalentrytorecordpatent amortization.
Ex.248
Foreachitemlistedbelow,enteracodeletterintheblankspacetoindicatetheallocation terminology fortheitem.Usethefollowing codesfor youranswer:
A—Amortization
D—Depreciation
P—Depletion
N—Noneof these
1.Goodwill
2.Land
3.Buildings
4.Patents
5.Copyrights
6.Researchanddevelopmentcosts
7.Timberlands
8.Franchises(indefinite life)
9.Licenses(limitedlife)
10.LandImprovements
11.OilDeposits
12.Equipment
Ex.249
Foreachofthefollowingunrelatedtransactions,(a)determinetheamountoftheamortizationor depletionexpenseforthecurrentyear,and(b)presenttheadjustingentriesrequiredtorecord each expenseatyearend.
(1)Timberrightswerepurchasedonatractoflandfor$360,000.Thetimberisestimatedat 1,200,000boardfeet.Duringthecurrentyear,75,000boardfeetoftimberwerecutand sold.
(2)Costsof$8,000wereincurredonJanuary1toobtainapatent.Shortlythereafter,$22,000 wasspentinlegalcoststosuccessfullydefendthepatentagainstcompetitors.Thepatent has anestimatedlegallifeof12years.
Ex.250
Duringthecurrentyear,LymonCompanyincurredseveralexpenditures.Brieflyexplainwhether theexpenditureslistedbelowshouldberecordedasanoperatingexpenseorasanintangible asset.Ifyouview theexpenditure asanintangibleasset,indicatethenumberofyearsoverwhich theassetshouldbe amortized.Explainyouranswer.
(a)Spent$30,000inlegalcostsinapatentdefensesuit.Thepatentwasunsuccessfully defended.
(b)Purchased atrademark fromanothercompany.Thetrademarkcanberenewedindefinitely. LymonCompanyexpectsthetrademarkto contributetorevenueindefinitely.
(c)LymonCompanyacquiresapatentfor$2,000,000.Thecompanysellingthepatenthas spent$1,000,000ontheresearchanddevelopmentofit.Thepatenthasaremaininglifeof 15years.
(d)LymonCompanyisspendingconsiderabletimeandmoneyindevelopingadifferentpatent foranotherproduct.Sofar$3,000,000hasbeenspentthisyearonresearchand development.LymonCompanyisveryconfidenttheywillobtainthispatentinthenextfew years.
Ex.251
Presentedbelowisinformationrelatedtoplantassets,naturalresources,andintangiblesatyear end on December31,2008,forNortenCompany:
Buildings Goodwill Patents CoalMine
AccumulatedDepreciation AccumulatedDepletion
$1,080,000 350,000 480,000 440,000 670,000 275,000
Instructions
Prepareapartialbalancesheetfor NortenCompanythat showshowtheabovelisted itemswould be presented.
Ex.252
Computetheassetturnover ratiobasedonthefollowing:
Beginningtotal assets Endingtotal assetsNetincome
Netsales
$800,000 1,200,000 300,000 2,200,000
Ex.253
Indicateinthe blank spaces below,thesectionof the balancesheetwherethefollowingitems are reported. Usethefollowingcodeto identifyyour answer:
PPE Property,Plant, andEquipment I Intangibles
O Other
N/A Not onthebalancesheet
1. Goodwill
2.LandImprovements 3.Buildings
4.AccumulatedDepreciation 5.Trademarks
6.Researchand developmentcosts
7.Timberlands 8.Franchises9.Licenses
10.Equipment 11.OilDeposits
12.Land
*Ex.254
Presentedbelowaretwoindependentsituations:
(a)RileyCompanyexchangedanoldmachine(cost$100,000less$60,000accumulated depreciation)plus$7,000cashforanewmachine.Theoldmachinehadafairmarketvalue of$36,000.Preparetheentrytorecordtheexchangeof assets byRileyCompany.
(b)CarlinCompanytradesoldequipment(cost$90,000less$54,000accumulateddeprecia-tion)fornewequipment.Carlinpaid$36,000cashinthetrade.Theoldequipmentthatwas tradedhadafairmarketvalueof$54,000.Preparetheentrytorecordtheexchangeof assetsbyCarlinCompany.
*Ex.255
AglerCompanyexchangesequipmentwithEatonCompanyandPetersCompanyexchanges equipmentwithFieroCompany.Thefollowinginformationpertainstotheexchanges:
Equipment(cost) Accumulateddepreciation
Fairmarketvalueof theequipment Cashpaid
Agler Company $114,000
50,000 75,000 45,000
Peters Company $96,000
45,000 42,000
-0-
Instructions
Prepare thejournalentriestorecordtheexchangesonthebooksofAglerCompanyandPeters Company.
Ex.256
FarrDeliveryCompanyandBellDeliveryCompanyexchangeddeliverytrucksonJanuary1, 2008.Farr'struckcost$84,000,hadaccumulateddepreciationof$69,000,andhasafairmarket valueof$9,000.Bell'struckcost$63,000,hadaccumulateddepreciationof$54,000,andhasa fair marketvalueof$9,000.
Instructions
(a) Journalizetheexchangefor FarrDeliveryCompany. (b) Journalizetheexchangefor BellDeliveryCompany.
Ex.257
Prepare thejournalentriestorecordthefollowingtransactionsforBryantCompanywhichhasa calendaryearendandusesthe straight-linemethodofdepreciation.
a) OnSeptember30,2008,thecompanyexchangedolddeliveryequipmentand$24,000for newdeliveryequipment.The olddeliveryequipmentwas purchasedon January1,2006,for $84,000andwasestimatedtohavea$12,000salvagevalueattheendofits5-yearlife. Depreciationonthedelivery equipmenthasbeenrecordedthroughDecember31,2007.Itis estimatedthatthefairmarketvalueoftheolddeliveryequipmentis$36,000onSeptember 30,2008.
(b)OnJune30,2008,thecompany exchangedoldofficeequipmentand$40,000fornewoffice equipment.Theoldofficeequipmentoriginallycost$80,000andhadaccumulated depreciationtothedateofdisposalof$35,000.Itisestimatedthatthefairmarketvalueof theold officeequipmentonJune30was$60,000.
COMPLETIONSTATEMENTS
258.Withtheexceptionofland,plantassetsexperiencea inservice potentialovertheirusefullives.
259.Whenvacantlandisacquired,expendituresforclearing,draining,filling,andgrading should bechargedtothe account.
260.Thecostofdemolishinganoldbuildingonlandthathasbeenacquiredsothatanew buildingcanbeconstructedshouldbechargedtothe account.
261.Thecostofpaving,fencing,andlightinganewcompanyparkinglotischargedtoa
account.
262.Equipmentwithaninvoicepriceof$20,000waspurchasedandfreightcostswere$900. Thecostofthe equipmentwouldbe$ .
263. istheprocessofallocatingthecostofaplantassettoexpense overits service lifeinarationalandsystematicmanner.
264.Thebookvalueofaplantassetisobtainedbysubtracting fromthe
of theplantasset.
265.Threefactorsthataffectthecomputationofperiodicdepreciationexpenseare(1)
, (2) ,and(3) .
266.The methodofcomputingdepreciationexpenseresultsinanequal amountofperiodicdepreciationthroughouttheservicelife oftheplantasset.
267.Thedeclining-balancemethodofcomputingdepreciationexpenseinvolvesmultiplyinga
bookvaluebya percentage.
268.Thedeclining-balancemethodofcomputingdepreciationisknownasan
depreciationmethod.
269.Ordinaryrepairswhichmaintainoperatingefficiencyandexpectedproductivelifeare called .
270.Additionsandimprovementsarecostsincurredtoincreasetheoperatingefficiency, productive capacity,or expectedusefullife andare referredtoas .
271.Ifdisposalofaplantassetoccursatany timeduringtheyear, for the fractionoftheyeartothedate ofdisposalmustberecorded.
272.Iffullydepreciatedequipmentthatcost$10,000withnosalvagevalueisretired,theentry torecordtheretirementrequiresadebittothe account and acredittothe account.
273.Iftheproceedsfromthesaleofaplantassetexceedits ,againon disposalwilloccur.
274.Aplantassetoriginally cost$48,000andwasestimatedtohavea$3,000salvagevalueat theendofits5-yearusefullife.Ifattheendofthreeyears,theassetwassoldfor$9,000, andhadaccumulateddepreciationrecordedof$27,000,thecompanyshouldrecognizea
ondisposalintheamountof $ .
275.Naturalresourceshavetwodistinguishingcharacteristics(1)theyarephysically
inoperations,and(2)theyare onlybyanactof nature.
276.Inrecordingthepurchaseofabusiness,goodwillshouldberecordedfortheexcessof
overthe of thenet assetsacquired.
277.Theallocationofthecostofanassettoexpenseoveritsusefullifeiscalled
fortangibleplantassets, fornaturalresources, and for intangibleassets.
278.Thecostofapatentshouldbeamortizedoverits lifeorits
life,whicheverisshorter.
279.The ratioiscalculatedbydividingnetsalesbyaveragetotal assets.
a280.Inthecaseofanexchangeofplantassetsresultinginalossondisposal,thecostofthe newassetacquiredisequaltothe oftheassetgivenupplusanycash paid bythepurchaser.
a281.Acompanyexchangedanoldmachine,whichoriginallycost$22,000andhas accumulateddepreciationtodateof$12,000,foranewmachine.Theoldmachinehada fairmarketvalueof$14,000.Thecostofthenewmachineshouldberecordedat$ .
10-63
MATCHING
Set1
282.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Plantassets B.Depreciation C.Bookvalue
D.Salvagevalue
E.Straight-linemethod
F. Units-of-activitymethod
G.Double-declining-balancemethod H.MACRS
I. Revenueexpenditure J. Capitalexpenditure
1.Smallexpenditureswhichprimarilybenefitthecurrent period.
2.Costlessaccumulateddepreciation.
3.Anaccelerateddepreciationmethodusedforfinancialstatementpurposes.
4.Tangibleresourcesthatareusedinoperationsand arenotintendedforresale.
5.Equalamountof depreciationeachperiod.
6.Expectedcashvalueof theassetattheendof itsusefullife.
7.Allocationof thecostofaplant assetto expenseoverits usefullife.
8.Materialexpenditureswhichincreaseanasset'soperatingefficiency,productive capacity,orusefullife.
9.Anaccelerateddepreciationmethodusedfortaxpurposes.
10.Usefullifeisexpressedintermsof units ofproductionor expecteduse.
Set2
283.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Gainondisposal B.Lossondisposal C.Trademark
D.Depletion E.Usefullife
F. Assetturnoverratio G.Goodwill
H.Amortization
I. Intangibleasset
J. Researchanddevelopmentcosts
1.Processofallocating thecost of anintangibleassettoexpenseoverits useful life.
2.Isonlyrecorded whenanexchangehascommercialsubstance.
3.Examplesarefranchisesand licenses.
4.Theallocationofthecost ofanaturalresourcetoexpenseoverits usefullife.
5.Canbeidentifiedonlywitha businessasawhole.
6.Asymbolthat identifiesaparticularenterpriseorproduct.
7.Whenbookvalue of assetisgreaterthantheproceedsreceivedfromitssale.
8.Mustbe expensedwhen incurred.
9.Indicateshowefficientlya companyisabletogenerate saleswithits assets.
10.Anestimateoftheexpectedproductivelife ofanasset.
SHORT-ANSWERESSAYQUESTIONS
S-AE284
Thedeclining-balancemethodisanacceleratedmethodofdepreciation.Brieflyexplainwhatis meantbyanacceleratedmethodofdepreciationandjustifythechoosingofanaccelerated method.
S-AE285
Identifythefactorsthatareconsideredinclassifyinganexpenditureasacapitalorarevenue expenditure.Arethereinstanceswhereitmaybedifficulttoclassifyanexpenditureasoneorthe other(e.g.,thepurchaseofawastebasketthathasausefullifeof5yearsandcost$10)?What basis wouldbe usedin adecision?
S-AE286
Ingeneral,howdoesonedeterminewhetherornotanexpenditureshouldbeincludedinthe acquisitioncostof property,plant,andequipment?
S-AE287
Commentonthevalidityofthefollowingstatements:―Asanassetlosesitsabilitytoprovide services,cashneedstobesetasidetoreplaceit.Depreciationaccomplishesthisgoal.‖
S-AE288
Goodwillisanunusualassetinthatitcannotbesoldindividuallyapartfromabusinessasa whole.Ifgoodwillisanintangibleasset,whycan'titbesoldlikeotherintangibleassetssuchas copyrights andpatents?Brieflyexplainwhatmakesgoodwilldifferent.
S-AE289(Ethics)
PhysicianReferenceService(PRS)providesservicestophysiciansincludingresearch assistance,diagnosiscodingandmedicalpracticesoftwareincludinganadvancedmedical recordcross-referencingsystem.PRSisaggressiveinmonitoringotherfirms'offeringsand ensuring thatits servicesarecomparabletoallothers.
Becauseofitsneedtostayabreastofnewproductofferings,PRSspends alotofmoneysending professionalstotradeshows.Inaddition,PRShasagreementswithseveralclientswherebythe clientrequestsapresentationofacompetitor's services.APRSemployeeposesasanemployee oftheclient'sofficeandattends thepresentation, obtainingasmuchdataandsampleinformation aspossible.ThecostofthetravelandattendingpresentationsischargedtoProduct Developmentandexpensedduring thecurrentyear.
S-AE289(cont.)
InAprilofthisyear,PRSbegansellingasoftwareproductsubstitutebeforethecompetitor's softwarewasreleased.Thecompetitor,Compu-Med,suedforcopyrightinfringementandwon. PRShadtowithdrawitsproductfromthemarketandpay$1.5millionindamages.PRS immediatelynegotiatedanagreementwithCompu-MedtosellCompu-Med'sproduct(sinceit wasprohibitedfromofferingitsownversionforfiveyears.)Thisagreementcostanadditional $1.3million,but itallowedPRStocontinuetooffer afulllineofservices.
PRS'saccountant,JuneBianco,initiallyrecordedthecashpaymentsas"LossfromLawsuit"and "ProductDevelopment,"respectively.However,FredNance,thecontroller,instructedJuneto createanintangibleasset,named"Goodwill"andchargebothcoststothisaccount."We're protectedfromanotherlawsuitaslongasthisagreementisineffect,"hesays."It'saboutas closetogoodwillaswe'llevergetfromourcompetitors.We mightaswellamortizethecostrather thantakethefullhitto income,anyway."
Required:
1.Whataretheethicalissues? 2.WhatshouldJunedo?
S-AE290(Communication)
TheRestor-Itisacompanyspecializingintherestorationofoldhomes.Toshowcaseitswork, thecompanypurchasedanoldVictorianhomeindowntown Pittsburg,Kansas.Theoriginalhome waspurchasedfor$125,000.Anewheatingandair-conditioningsystemwasaddedfor$30,000. Thehousewascompletelyrewiredandre-plumbedatacostof$50,000.Customcabinetswere added,andthefloorsand trimwererefurbishedto theiroriginalcondition,at acostof $75,000.
Theprojectwassuchasuccess, thatRestor-Itdecidedtopurchaseanotherverylargehome,this timeinnearbyJoplin,Missouri.ArealtorofferedtopurchasethehomeinPittsburgfor$175,000. Heplanstoleaseitasluxuryshort-termapartmentsforvisitingdignitaries.Restor-Itdecidedthat amodestreturnwasallthatwasrequired,andsotheyagreedtosell.Onlyafterwarddidthey learnthattheyhada$10,000lossonthesale.Thepresidentofthecompany,JimHerman,does notbelievethatalossispossible."Wesoldthathouseformorethanwepaidforit,"hesaid."I knowweputsomemoneyinit,butwehaddepreciateditforthreeyears.Howintheworldcan we havea loss?"
S-AE290(cont.)
Required:
Writeashort memotoMr.Herman explaining how itwouldbepossibletohavealoss.Do nottry tousespecificnumbersfor costordepreciation.
CHAPTER11
CURRENTLIABILITIESANDPAYROLLACCOUNTING
CHAPTERSTUDYOBJECTIVES
1.Explainacurrentliability,andidentifythemajortypesofcurrentliabilities.
2.Describetheaccountingfornotespayable.
3.Explaintheaccountingforothercurrentliabilities.
4.Explainthefinancialstatementpresentationandanalysisofcurrentliabilities.
5.Describetheaccountinganddisclosurerequirementsforcontingentliabilities.
6.Computeandrecordthepayrollforapayperiod.
7.Describeandrecordemployerpayrolltaxes.
8.Discusstheobjectivesofinternalcontrolforpayroll.
9.Identifyadditionalfringebenefitsassociatedwithemployeecompensation.
TRUE-FALSESTATEMENTS
1. A currentliability must bepaidoutof currentearnings.
2. Currentliabilitiesareexpectedtobepaidwithinoneyearortheoperatingcycle, whichever islonger.
3. Therelationshipbetweencurrentliabilitiesandcurrentassetsisimportantinevaluatinga company'sabilityto payoffits long-termdebt.
4. Acompanywhosecurrentliabilitiesexceeditscurrentassetsmayhavealiquidity problem.
5. Notespayableusuallyrequiretheborrowerto payinterest.
6. Notespayableare oftenusedinsteadofaccountspayable.
7. A notepayablemustalwaysbepaidbeforeanaccountpayable.
8. A $30,000,8%,9-monthnotepayablerequiresaninterestpayment of$1,800 atmaturity.
9. Mostnotesarenotinterest bearing.
10. Withaninterest-bearingnote,theamountofcashreceiveduponissuanceofthenote generallyexceedsthenote'sfacevalue.
11. Interestexpenseonanote payableis onlyrecordedatmaturity.
12. Interestexpenseis reportedunderOtherExpensesandLossesinthe incomestatement.
13. UnearnedrevenuesshouldbeclassifiedasOtherRevenuesandGainsontheIncome Statement.
14. Thehigherthesalestaxrate,themoreprofitaretailercanearn.
15. MetropolitanSymphonysells200seasonticketsfor$60,000thatincludesafiveconcert season. TheamountofUnearnedTicketRevenueafterthesecondconcertis$24,000.
16. Duringthemonth,acompanysellsgoodsforatotalof$108,000,whichincludessales taxesof$8,000;therefore,thecompanyshouldrecognize$100,000inSalesRevenues and $8,000in SalesTaxExpense.
17. Current maturitiesoflong-termdebtreferstotheamountofinterestonanotepayable that must be paidinthecurrent year.
18. Thecurrentratiopermitsanalyststocomparethe liquidityofdifferent sizedcompanies.
19. Workingcapital is currentassetsdivided bycurrentliabilities.
20. Contingentliabilitiesshouldberecordedintheaccountsifthereisaremotepossibility that thecontingencywillactuallyoccur.
21. A contingentliabilityisa liabilitythatmayoccur ifsomefutureeventtakesplace.
22. Inconcept,theestimatingofWarrantyExpensewhenproductsaresoldunderwarrantyis similar to theestimatingofBadDebtsExpensebasedon creditsales.
23. FICAtaxesandfederalincometaxesare leviedonemployees'earningswithoutlimit.
24. FICAtaxeswithheldandfederalincometaxes withheldaremandatorypayrolldeductions.
25. Theemployerincursapayrolltaxexpenseequaltotheamountwithheldfromthe employees'wagesforfederalincometaxes.
26. Internalcontroloverpayrollisnotnecessarybecauseemployeeswillcomplainiftheydo not receivethecorrectamount ontheirpayrollchecks.
27. Thetimekeepingfunctionincludessupervisorsmonitoringhoursworkedthroughtime cardsandtimereports.
28. Thehumanresourcesdepartmentdocumentsandauthorizesemploymentofnew employees.
29. Payrollactivitiesinvolvethreefunctions:hiringemployees,preparingthepayroll,and payingthepayroll.
a30. Post-retirementbenefitsconsistofpaymentsbyemployerstoretiredemployees forhealth care, life insurance,andpensions.
Additional True-FalseQuestions
31. A debt that isexpectedto be paidwithinone yearthroughthecreationof long-termdebt is a current liability.
32. Notespayableusuallyareissuedtomeet long-termfinancingneeds.
33. Currentmaturitiesoflong-termdebtareoftenidentifiedaslong-termdebtduewithinone yearon thebalancesheet.
34. Inagivenyear,totalwarrantyexpenseisthesumofactualwarrantycostsincurredon unitssoldplustheestimatedcostofservicingthose unitsinthefuture.
35. FICAtaxesarea voluntarydeductionfromemployeeearnings.
36. FICAtaxesareadeductionfromemployeeearningsandarealsoimposedupon employersas an expense.
37. Theobjectivesofinternalaccountingcontrolforpayrollsare(a)tosafeguardcompany assetsfromunauthorizedpaymentsofpayrollsand(b)toassureaccuracyandreliability oftheaccountingrecordspertainingto payroll.
a38. Whenacompanygivesemployeesrightstoreceivecompensationforabsencesandthe paymentforsuchabsencesisprobableandtheamountcanbereasonablyestimated, the companyshould accruea liability.
MULTIPLECHOICEQUESTIONS
39. Allof thefollowingarereportedascurrent liabilitiesexcept a.accountspayable.
b.bonds payable. c.notespayable.
d.unearnedrevenues.
40. Therelationshipbetweencurrentliabilitiesandcurrentassets is a.usefulindetermining income.
b.usefulinevaluatinga company'sliquidity. c.calledthematchingprinciple.
d.usefulindeterminingtheamountof acompany'slong-termdebt.
41. Mostcompaniespaycurrent liabilities a.outof currentassets.
b.by issuinginterest-bearing notespayable. c.byissuingstock.
d.bycreatinglong-term liabilities.
42. A currentliability isadebt thatcanreasonably beexpectedtobepaid a.withinoneyear.
b.between6monthsand 18months.
c.outof currentlyrecognizedrevenues. d.outof cashcurrentlyonhand.
43. Liabilitiesare classifiedon thebalancesheetascurrentor a.deferred.
b.unearned. c.long-term. d.accrued.
44. Froma liquiditystandpoint,itismoredesirablefora companytohavecurrent a.assetsequalcurrentliabilities.
b.liabilitiesexceedcurrentassets. c.assetsexceedcurrentliabilities.
d.liabilitiesexceed long-termliabilities.
45. Therelationshipof current assetstocurrentliabilitiesisusedinevaluatinga company's a.operatingcycle.
b.revenue-producingability.
c.short-termdebtpayingability. d.long-rangesolvency.
46. Whichofthefollowingisusuallynotan accruedliability? a.Interestpayable
b.Wagespayable c.Taxespayable d.Notespayable
47. Inmostcompanies,current liabilitiesarepaidwithin
a.oneyearthroughthecreationof othercurrentliabilities.
b.theoperatingcyclethroughthecreationof othercurrentliabilities. c.oneyearout of currentassets.
d.theoperatingcycle out of currentassets.
48. Theentrytorecord theissuance ofaninterest-bearingnotecreditsNotesPayable forthe note's
a.maturityvalue. b.marketvalue. c.facevalue.
d.cashrealizablevalue.
49. Withaninterest-bearingnote,theamountofassets receiveduponissuanceofthenoteis generally
a.equaltothenote'sface value.
b.greaterthanthe note'sface value. c.lessthanthenote'sfacevalue.
d.equaltothenote'smaturityvalue.
11-8
50. A notepayableis intheformof
a.a contingencythat isreasonablylikelyto occur. b.awrittenpromissorynote.
c.anoralagreement.
d.a standingagreement.
51. Theentrytorecordthe proceedsuponissuinganinterest-bearingnoteis a.InterestExpense
Cash
NotesPayable b.Cash
NotesPayable c.NotesPayable
Cash d.Cash
NotesPayable InterestPayable
Usethefollowing informationforquestions52–54.
CoffeyCounty Bank agrees tolend Adcock BrickCompany$200,000on January1.Adcock Brick Companysignsa$200,000,8%,9-monthnote.
52. TheentrymadebyAdcockBrickCompanyonJanuary1torecordtheproceedsand issuance ofthenote is
a.InterestExpense.................................................................. 12,000 Cash.................................................................................... 188,000
NotesPayable............................................................ 200,000 b.Cash.................................................................................... 200,000
NotesPayable............................................................ 200,000 c.Cash.................................................................................... 200,000
InterestExpense.................................................................. 12,000
NotesPayable............................................................ 212,000 d.Cash.................................................................................... 200,000
InterestExpense.................................................................. 12,000
NotesPayable............................................................ 200,000 InterestPayable.......................................................... 12,000
53. WhatistheadjustingentryrequiredifAdcockBrickCompanypreparesfinancial statements onJune30?
a.InterestExpense.................................................................. 8,000
InterestPayable.......................................................... 8,000 b.InterestExpense.................................................................. 8,000
Cash........................................................................... 8,000 c.InterestPayable................................................................... 8,000
Cash........................................................................... 8,000 d.InterestPayable................................................................... 8,000
InterestExpense......................................................... 8,000
CurrentLiabilitiesandPayroll Accounting 11-9
54. WhatentrywillAdcockBrickCompanymaketopayoffthenoteandinterestatmaturity assumingthat interesthas beenaccruedtoSeptember30?
a.NotesPayable...................................................................... 212,000 Cash............................................................................ 212,000
b.NotesPayable...................................................................... 200,000 InterestPayable................................................................... 12,000
Cash............................................................................ 212,000 c.InterestExpense.................................................................. 12,000
NotesPayable...................................................................... 200,000 Cash............................................................................ 212,000
d.InterestPayable................................................................... 8,000 NotesPayable...................................................................... 200,000 InterestExpense.................................................................. 4,000
Cash............................................................................ 212,000
55. As interestisrecordedon an interest-bearingnote, theInterestExpenseaccountis a.increased;the NotesPayableaccountis increased.
b.increased;the NotesPayableaccountisdecreased.c. increased;theInterestPayableaccountisincreased.d. decreased;theInterestPayableaccountis increased.
56. Whenaninterest-bearing notematures,thebalance intheNotes Payableaccountis a.lessthanthetotalamountrepaidbythe borrower.
b.thedifferencebetweenthematurityvalueof thenoteandthefacevalueof thenote. c.equal to thetotalamountrepaidbytheborrower.
d.greaterthanthetotalamountrepaidbytheborrower.
Usethefollowing informationforquestions57–58.
OnOctober1,Jerry'sCarpetServiceborrows$250,000fromFirstNationalBankona3-month, $250,000,8% note.
57. WhatentrymustJerry'sCarpetServicemakeonDecember31beforefinancial statements are prepared?
a.InterestPayable................................................................... 5,000
InterestExpense.......................................................... 5,000
b.InterestExpense.................................................................. 20,000
InterestPayable........................................................... 20,000
c.InterestExpense.................................................................. 5,000
InterestPayable........................................................... 5,000
d.InterestExpense.................................................................. 5,000
NotesPayable............................................................. 5,000
58. Theentry by Jerry's Carpet Serviceto recordpaymentof thenoteandaccrued intereston January1 is
a.NotesPayable...................................................................... Cash............................................................................
b.NotesPayable...................................................................... InterestPayable...................................................................
Cash............................................................................
255,000
250,000 5,000
255,000
255,000
11-10
58. (cont.)
c.NotesPayable..................................................................... InterestPayable................................................................... Cash...........................................................................
d.NotesPayable..................................................................... InterestExpense.................................................................. Cash...........................................................................
250,000 20,000
250,000 5,000
270,000
255,000
59. Interestexpenseonaninterest-bearingnoteis a.alwaysequaltozero.
b.accruedoverthelifeof thenote.
c.onlyrecordedatthetimethenoteisissued.
d.onlyrecordedatmaturitywhenthenoteispaid.
60. Theentrytorecordthepaymentofaninterest-bearingnoteatmaturityafterallinterest expense has beenrecognizedis
a.NotesPayable InterestPayable
Cash
b.NotesPayable Interest Expense Cash
c.NotesPayable Cash
d.NotesPayable Cash
InterestPayable
61. Salestaxescollectedbya retailerarerecordedby a.creditingSalesTaxesRevenue.
b.debitingSalesTaxesExpense. c.creditingSales TaxesPayable. d.debitingSalesTaxesPayable.
62. UnearnedRentalRevenueis
a.a contraaccounttoRentalRevenue. b.a revenueaccount.
c.reportedasacurrentliability.
d.debitedwhenrentis receivedinadvance.
63. Salestaxescollectedbytheretailerare recordedasa(n) a.revenue.
b.liability.c.expense. d.asset.
Usethefollowing informationforquestions64–65.
OnSeptember1,Ken'sPaintingServiceborrows$50,000fromNationalBankona4-month, $50,000,6%note.
CurrentLiabilitiesandPayroll Accounting 11-11
64. WhatentrymustKen'sPaintingServicemakeonDecember31before statements are prepared?
a.InterestPayable................................................................... 1,000 InterestExpense..........................................................
b.InterestExpense.................................................................. 3,000 InterestPayable...........................................................
c.InterestExpense.................................................................. 1,000 InterestPayable...........................................................
d.InterestExpense.................................................................. 1,000 NotesPayable.............................................................
financial
1,000
3,000
1,000
1,000
65. The entrybyKen'sPainting Serviceto recordpayment of thenoteandaccrued intereston January1 is
a.NotesPayable...................................................................... 51,000 Cash............................................................................ 51,000
b.NotesPayable...................................................................... 50,000 InterestPayable................................................................... 1,000
Cash............................................................................ 51,000 c.NotesPayable...................................................................... 50,000
InterestPayable................................................................... 3,000 Cash............................................................................ 53,000
d.NotesPayable...................................................................... 50,000 InterestExpense.................................................................. 1,000
Cash............................................................................ 51,000
66. Theinterestchargedona$100,000notepayable,attherateof8%,ona90-daynote would be
a.$8,000. b.$4,444. c.$2,000. d.$667.
67. Theinterestchargedona$100,000notepayable,attherateof6%,ona60-daynote would be
a.$6,000. b.$3,333. c.$1,500. d.$1,000.
68. Theinterestchargedona$50,000notepayable,attherateof8%,ona3-monthnote would be
a.$4,000. b.$2,000. c.$1,000. d.$667.
69. Theinterestchargedona$50,000notepayable,attherateof6%,ona2-monthnote would be
a.$3,000. b.$1,500. c.$750.d.$500.
11-12
70. Acompanyreceives$132,ofwhich$12isforsalestax.Thejournalentrytorecordthe sale wouldincludea
a.debittoSales TaxExpensefor$12. b.credit toSales TaxPayable for$12. c.debit to Salesfor $132.
d.debitto Cashfor $120.
71. Acompanyreceives$174,ofwhich$14isforsalestax.Thejournalentrytorecordthe sale wouldincludea
adebittoSalesTaxExpensefor$14. b.debittoSalesTaxPayablefor$14. c.debit to Salesfor $174.
d.debitto Cashfor $174.
72. A retailstore creditedtheSalesaccountforthesales priceandtheamount ofsalestaxon sales.Ifthesalestaxrateis5%andthebalanceintheSalesaccountamountedto $315,000,whatisthe amount of thesalestaxesowedto thetaxingagency?
a.$300,000 b.$315,000 c.$15,750 d.$15,000
73. OnJanuary1,2008,DunnonCompany,acalendar-yearcompany,issued$600,000of notespayable, ofwhich$150,000 isdueonJanuary 1foreachofthenextfouryears. The properbalancesheetpresentation on December31,2008,is
a.CurrentLiabilities,$600,000. b.Long-termDebt,$600,000.
c.CurrentLiabilities,$300,000;Long-termDebt,$300,000. d.CurrentLiabilities,$150,000;Long-termDebt,$450,000.
74. OnJanuary1,2008,BrunsonCompany,acalendar-yearcompany,issued$400,000of notespayable, ofwhich$100,000 isdueonJanuary1foreachofthenextfouryears. The properbalancesheetpresentation on December31,2008,is
a.CurrentLiabilities,$400,000. b.Long-termDebt, $400,000.
c.CurrentLiabilities,$100,000;Long-termDebt,$300,000. d.CurrentLiabilities,$300,000;Long-termDebt,$100,000.
75. Acashregistertapeshowscashsalesof$1,500andsalestaxesof$120.Thejournal entry torecordthis information is
a.Cash.................................................................................... 1,620 Sales........................................................................... 1,620
b.Cash.................................................................................... 1,620
SalesTaxPayable...................................................... 120 Sales........................................................................... 1,500
c.Cash.................................................................................... 1,500 SalesTaxExpense.............................................................. 120
Sales........................................................................... 1,620 d.Cash.................................................................................... 1,620
Sales........................................................................... 1,500 SalesTaxesRevenue................................................. 120
CurrentLiabilitiesandPayroll Accounting 11-13
76. Jo’sBookstorehascollected$750insalestaxesduringApril.Ifsalestaxesmustbe remittedtothestategovernmentmonthly,whatentrywillJo'sBookstoremaketoshow theAprilremittance?
a.SalesTaxesPayable............................................................ 750 Cash............................................................................ 750
b.SalesTaxExpense............................................................. 750 Cash............................................................................ 750
c.SalesTaxExpense.............................................................. 750
SalesTaxesPayable................................................... 750 d.Noentryrequired.
77. JordonCompanydoesnotringupsalestaxesseparatelyonthecashregister.Total receiptsforOctoberamountedto$18,900.Ifthesalestaxrateis5%,whatamountmust be remittedtothestateforOctober'ssalestaxes?
a.$900 b.$945 c.$45
d.Itcannotbedetermined.
78. Enrique'sSalonhastotalreceiptsforthemonthof$16,430includingsalestaxes.Ifthe sales taxrateis 6%,whatareEnrique'ssalesfor themonth?
a.$15,444.20 b.$17,415.80 c.$15,500.00
d.Itcannotbedetermined.
79. Theamountof salestaxcollectedbyaretailstore whenmakingsalesis a.amiscellaneousrevenuefor thestore.
b.a currentliability.
c.notrecordedbecauseit isataxpaidbythecustomer. d.recordedasanoperatingexpense.
80. Aretailstorecredited theSalesaccount forthesalesprice andtheamountofsales taxon sales.Ifthesalestaxrateis5%andthebalanceintheSalesaccountamountedto $189,000,whatisthe amount of thesalestaxesowedto thetaxingagency?
a.$180,000 b.$189,000 c.$9,450d.$9,000
81. Advancesfromcustomersareclassifiedasa(n) a.revenue.
b.expense.
c.currentasset.d.currentliability.
82. Thecurrentportionof long-term debtshould a.bepaidimmediately.
b.be reclassifiedasa currentliability. c.beclassifiedasa long-termliability.
d.notbeseparatedfromthelong-termportionof debt.
11-14
83. Salestaxescollectedbya retailerareexpenses a.of theretailer.
b.of thecustomers.c.ofthegovernment.
d.that arenotrecognizedbythe retaileruntiltheyaresubmittedtothegovernment.
84. Salestaxescollectedbya retailerarereportedas a.contingentliabilities.
b.revenues. c.expenses.
d.currentliabilities.
85. Linda'sBoutiquehastotalreceiptsforthemonthof$29,295includingsalestaxes.Ifthe sales taxrateis 5%,whatareLinda'ssalesforthemonth?
a.$27,831 b.$27,900 c.$29,295
d.Itcannotbedetermined.
86. A cashregistertapeshowscashsalesof$1,500and salestaxesof $90.Thejournalentry to recordthisinformationis
a.Cash.................................................................................... 1,500 Sales........................................................................... 1,500
b.Cash.................................................................................... 1,590
SalesTaxRevenue..................................................... 90 Sales........................................................................... 1,500
c.Cash.................................................................................... 1,500 SalesTaxExpense.............................................................. 90
Sales........................................................................... 1,590
d.Cash.................................................................................... 1,590 Sales........................................................................... 1,500 SalesTaxesPayable.................................................. 90
87. Tim'sPharmacyhascollected$600insalestaxesduringMarch.Ifsalestaxesmustbe remittedtothestategovernmentmonthly,whatentrywillTim'sPharmacymaketoshow theMarch remittance?
a.SalesTaxExpense.............................................................. 600
Cash........................................................................... 600 b.SalesTaxesPayable........................................................... 600
Cash........................................................................... 600 c.SalesTaxExpense.............................................................. 600
SalesTaxesPayable.................................................. 600 d.Noentryrequired.
88. LangerCompanydoesnotringupsalestaxesseparatelyonthecashregister.Total receiptsforFebruaryamountedto$28,600.Ifthesalestaxrateis4%,whatamountmust be remittedtothestatefor February'ssalestaxes?
a.$1,144 b.$1,100 c.$1,716
d.Itcannotbedetermined.
CurrentLiabilitiesandPayroll Accounting 11-15
89. Anybalanceinanunearnedrevenueaccountisreportedasa(n) a.currentliability.
b.long-termdebt. c.revenue.
d.unearnedliability.
90. StanleyCompany typicallysellssubscriptionsonanannualbasis,andpublishessixtimes ayear.Themagazinesells60,000subscriptionsinJanuaryat$15each.Whatentryis made inJanuary torecordthesaleof thesubscriptions?
a.SubscriptionsReceivable..................................................... SubscriptionRevenue.................................................
b.Cash..................................................................................... UnearnedSubscriptionRevenue.................................
c.SubscriptionsReceivable..................................................... UnearnedSubscriptionRevenue.................................
d.PrepaidSubscriptions.......................................................... Cash............................................................................
900,000
900,000
150,000
900,000
900,000
900,000
150,000
900,000
91. Milton Companyissuedafour-year interest-bearingnotepayablefor$300,000on January 1,2007.EachJanuarythecompany isrequiredtopay$75,000onthenote.Howwillthis note be reportedontheDecember31,2008balancesheet?
a.Long-termdebt,$300,000. b.Long-termdebt,$225,000.
c.Long-termdebt,$150,000;Long-termdebtduewithinone year,$75,000. d.Long-termdebt,$225,000;Long-termdebtduewithinone year,$75,000.
92. JanisKnothasalargeconsultingpractice.Newclientsarerequiredtopayone-halfofthe consultingfeesupfront.Thebalanceispaidattheconclusionoftheconsultation.How does Knotaccountforthe cashreceivedattheend of theengagement?
a.Cash
UnearnedConsultingRevenue b.Cash
EarnedConsultingRevenue c.PrepaidConsultingFees
EarnedConsultingRevenue
d.Noentryisrequiredwhentheengagementisconcluded.
93. Whichoneofthefollowingisshownfirstundercurrentliabilitiesbymanycompaniesasa matter ofcustom?
a.Accruedexpenses
b.Currentmaturities of long-term debt c.Salestaxespayable
d.Notespayableandaccountspayable
94. Workingcapital is
a.currentassetspluscurrentliabilities.b.currentassetsminuscurrent liabilities.
c.currentassetsdividedbycurrentliabilities.d.currentassetsmultipliedbycurrentliabilities.
11-16
95. Thecurrentratiois
a.currentassetspluscurrentliabilities.b.currentassetsminuscurrent liabilities.
c.currentassetsdividedbycurrentliabilities.d.currentassetsmultipliedbycurrentliabilities.
96. Acontingentliabilityneedonlybedisclosedinthefinancialstatementnoteswhenthe likelihood of thecontingencyis
a.reasonablypossible. b.probable.
c.remote. d.unlikely.
97. Ifacontingentliabilityisreasonablyestimableanditisreasonablypossiblethatthe contingencywilloccur,thecontingentliability
a.shouldberecorded intheaccounts.
b.shouldbedisclosedin the notesaccompanyingthefinancialstatements.
c.shouldnotberecordedordisclosedinthenotesuntilthecontingencyactually happens.
d.mustbepaidforthe amountestimated.
98. Theaccountingforwarrantycostisbasedonthematchingprinciple,whichrequiresthat theestimatedcost of honoring warrantycontractsshouldberecognizedasanexpense
a.whenthe productisbrought inforrepairs.b.intheperiodinwhichtheproductwassold. c.attheendofthewarrantyperiod.
d.onlyif therepairsareexpectedtobemadewithinone year.
99. Ifa liabilityis dependentonafutureevent,it iscalleda a.potentialliability.
b.hypotheticalliability. c.probabilisticliability. d.contingentliability.
100. Currentmaturities of long-termdebt a.requireanadjustingentry.
b.areoptionallyreportedonthebalancesheet.
c.canbeproperlyclassifiedduringbalancesheetpreparation,withnoadjustingentry required.
d.arenotconsideredtobecurrentliabilities.
101. A contingencythatisremote
a.shouldbedisclosedinthefinancialstatements. b.mustbeaccruedasa loss.
c.doesnotneedto bedisclosed.
d.isrecordedasacontingentliability.
102. Theaccountingfor warrantycostsisbasedonthe a.goingconcernprinciple.
b.matchingprinciple.
c.conservatismprinciple. d.objectivityprinciple.
CurrentLiabilitiesandPayroll Accounting 11-17
103. Warrantyexpensesarereported ontheincomestatementas a.administrativeexpenses.
b.part of costofgoodssold. c.contra-revenues.
d.sellingexpenses.
Usethefollowing informationforquestions104–105.
NeerCompanysells2,000unitsofitsproductfor$500each.Thesellingpriceincludesaone-yearwarrantyonparts.Itisexpectedthat3%oftheunitswillbedefectiveandthatrepaircosts willaverage$50perunit.Intheyearofsale,warrantycontractsarehonoredon40unitsfora totalcostof$2,000.
104. WhatamountshouldNeerCompanyaccrueonDecember31forestimatedwarranty costs?
a.$3,000 b.$2,000 c.$1,000 d.$15,000
105. WhatamountwillbereportedonNeerCompany'sbalancesheetasEstimatedWarranty Liabilityon December31,2008?
a.$2,000 b.$3,000 c.$1,000
d.Itcannotbedetermined.
106. Whichofthefollowingitemswouldnotbeidentifiedifacontingentliabilityweredisclosed in a financialstatementfootnote?
a.Thenatureof theitem
b.Theexpectedoutcomeof thefutureeventc.Anumericalprobabilityof theexpectedloss d.Theamountofthecontingency,if known
107. Disclosureofa contingentliabilityisusuallymade
a.parenthetically,inthebodyofthebalancesheet.
b.parenthetically,inthebodyoftheincomestatement. c.in anotetothefinancialstatements.
d.inthemanagementdiscussionsectionofthefinancial statement.
108. Currentliabilitiesgenerallyappear
a.after long-termdebtonthebalancesheet.
b.indecreasingorderofmagnitudeonthebalancesheet. c.in orderofmaturityonthebalancesheet.
d.in increasingorderofmagnitudeonthe balancesheet.
109. Whichofthefollowingemployees wouldlikelyreceivea salaryinsteadofwages? a.Storeclerk
b.Factoryemployee c.Salesmanager
d.Manuallaborer
11-18
110. Thetotalcompensationearnedbyanemployeeis called a.take-homepay.
b.netpay.
c.netearnings.d.grossearnings.
111. Whichoneofthefollowingpayrolltaxesdoesnotresultinapayrolltaxexpenseforthe employer?
a.FICAtax
b.Federalincometax
c.Federalunemployment tax d.Stateunemploymenttax
112. SueStein'sregularrateofpayis$12perhourwithoneandone-halftimesherregular rateforanyhourswhichexceed40hoursperweek.Sheworked48hourslastweek. Therefore, hergross wageswere
a.$576. b.$480. c.$624. d.$864.
113. AssumingaFICAtaxrateof8%onthefirst$90,000inwages,andafederalincometax rateof20%onallwages,whatwouldbeanemployee'snetpay fortheyearifheearned $100,000for theyear?
a.$92,800 b.$72,000 c.$80,000 d.$72,800
114. Mostcompaniesinvolvedin interstatecommercearerequiredtocomputeovertimeat a.theworker'sregularhourlywage.
b.1.25timestheworker'sregularhourlywage. c.1.5timestheworker'sregularhourlywage. d.2.5timesthe worker'sregularhourlywage.
115. SueRicehasworked44hoursthisweek.Sheworkedinexcessof8hourseachday.Her regularhourlywageis$15perhour.WhatareSue'sgrosswagesfortheweek?(The company Sue worksfor is incompliancewiththeFair LaborStandardsAct.)
a.$660 b.$690 c.$990 d.$720
116. FICAtaxesdonotprovideworkerswith a.lifeinsurance.
b.supplementalretirement. c.employmentdisability.d.medicalbenefits.
CurrentLiabilitiesandPayroll Accounting 11-19
117. Employeepayroll deductionsincludeeachofthefollowingexcept a.federalunemployment taxes.
b.federalincometaxes. c.FICAtaxes.
d.insurance,pension plans,anduniondues.
118. ThejournalentrytorecordthepayrollforaperiodwillincludeacredittoWagesand SalariesPayableforthegross
a.amountlessallpayrolldeductions. b.amountof allpaychecksissued.c.paylesstaxespayable.
d.paylessvoluntarydeductions.
119. Theamountofincometaxeswithheldfromemployeesisdependentoneachofthe followingexceptthe
a.employee'sgrossearnings. b.employee'snetpay.
c.length ofthepayperiod.
d.numberof allowancesclaimedbytheemployee.
Use thefollowing informationforquestions120–123.
Thefollowingtotalsforthemonthof Aprilweretakenfromthepayrollregisterof MainCompany.
Salaries
FICAtaxeswithheld IncometaxeswithheldMedicalinsurancedeductions Federalunemploymenttaxes Stateunemploymenttaxes
$24,000 1,100 5,000 900
64 432
120. Thejournalentrytorecordthemonthlypayrollon April30wouldincludea a.debit toSalariesExpensefor $24,000.
b.credittoSalariesPayablefor$24,000. c.debittoSalariesPayablefor$24,000. d.debit to Salaries Expensefor $17,000.
121. Theentrytorecordthe paymentofnetpayroll wouldincludea a.debit toSalariesPayablefor$16,504.
b.debittoSalariesPayable for$17,000. c.debittoSalariesPayablefor$15,900. d.credit to Cashfor $18,100.
122. TheentrytorecordaccrualofMainCompany’spayrolltaxeswouldincludea a.debit toPayrollTaxExpensefor$496.
b.debittoPayrollTaxExpensefor$1,596. c.credit toFICA Taxes Payablefor$2,200. d.credit to PayrollTaxExpensefor $496.
11-20
123. Theentrytorecordthe accrualof federal unemploymenttaxeswouldincludea a.credit to FederalUnemploymentTaxes Payablefor $64.
b.debitto Federal UnemploymentTaxes Expensefor $64. c.creditto PayrollTaxExpensefor$64.
d.debitto Federal UnemploymentTaxes Payablefor $64
Usethefollowing informationforquestions124–127.
Thefollowingtotalsforthemonthof June weretakenfromthepayrollregisterof LaneCompany.
Salaries
FICAtaxeswithheld IncometaxeswithheldMedicalinsurancedeductions Federalunemploymenttaxes Stateunemploymenttaxes
$20,000 1,533 4,400 800
160 1,000
124. Thejournalentrytorecordthemonthlypayrollon June30wouldincludea a.debit toSalariesExpensefor $20,000.
b.credittoSalariesPayablefor$20,000. c.debittoSalariesPayablefor$20,000. d.debit to Salaries Expensefor $13,267
125. Theentrytorecordthe paymentofnetpayroll wouldincludea a.debitto SalariesPayablefor$12,107.
b.debittoSalariesPayable for$13,267. c.debittoSalariesPayablefor$12,267. d.credit to Cashfor $12,267.
126. TheentrytorecordaccrualofLaneCompany’spayrolltaxeswouldincludea a.debit toPayrollTaxExpensefor$2,693
b.credittoPayrollTaxExpensefor$2,693 c.credit toFICA TaxesPayablefor$1,160. d.credit to PayrollTaxExpensefor $1,160.
127. Theentrytorecordthe accrualof federal unemploymenttaxeswouldincludea a.credit to FederalUnemploymentTaxes Payablefor $160.
b.creditto Federal UnemploymentTaxes Expensefor $160. c.creditto PayrollTaxExpensefor$160.
d.debitto Federal UnemploymentTaxes Payablefor $160.
128. Whichoneofthefollowingpayrolltaxesisnotwithheldfromanemployee'swages because it is notleviedontheemployee?
a.Federalincometax
b.Federalunemployment tax c.State incometax
d.FICAtax
CurrentLiabilitiesandPayroll Accounting 11-21
129. ByJanuary31followingtheendofacalendaryear,anemployerisrequiredtoprovide each employeewitha(n)
a.stateunemploymenttaxform.
b.federalunemployment taxform940. c.wageandtaxstatementformW-2.
d.employee'swithholdingallowancecertificateformW-4.
130. Whichofthefollowingpayroll taxesareusuallyfiledandremittedannually? a.Federalunemployment taxes
b.FICAtaxes
c.Stateunemploymenttaxes
d.Federalandstateunemploymenttaxes
131. Thetaxthatispaidequallybytheemployerand employeeis the a.federalincometax.
b.federalunemployment tax. c.stateunemploymenttax.d.FICAtax.
132. The effectivefederalunemploymenttaxrateisusually a.6.2%.
b.0.8%. c.5.4%. d.8.0%.
133. Thetreasurer'sdepartmentisresponsiblefor a.approvingthepayroll.
b.maintainingpayrollrecords.c.preparingpayroll taxreturns. d.signingpayrollchecks.
134. Thepayrollis paidbythea.personneldepartment. b.payrolldepartment.
c.cashier.
d.treasurer'sdepartment.
a135.Post-retirementbenefitsconsistof payments byemployerstoretiredemployeesfor a.healthcareand lifeinsuranceonly.
b.healthcareandpensionsonly.c.lifeinsuranceandpensionsonly.
d.healthcare,lifeinsurance,andpensions.
a136.Thepaidabsencethat ismostcommonlyaccruedis a.votingleave.
b.vacationtime.c.maternityleave. d.disabilityleave.
11-22
a137.BlakeCompanyhastenemployeeswhoeachearn$160perday.Iftheyaccumulate vacationtimeattherateof1.5vacationdaysforeachmonthworked,theamountof vacation benefitsthatshouldbeaccruedatthe end of themonthis
a.$160.b.$1,600. c.$2,400. d.$240.
a138.Anemployer'sestimatedcostfor post-retirement benefitsforitsemployeesshouldbe a.recognizedas anexpensewhenpaid.
b.recognizedasanexpenseduringtheemployees'workyears.
c.recognizedas an expenseduringtheemployees'retirementyears.
d.chargedto thegoodwillaccount because providingemployees with benefits generates employee goodwill.
Additional MultipleChoiceQuestions
139. Acurrentliabilityisadebtthecompanyreasonablyexpectstopayfromexistingcurrent assetswithin
a.oneyear.
b.theoperatingcycle.
c.one yearor theoperatingcycle, whicheverislonger. d.oneyearor theoperatingcycle, whicheveris shorter.
140. Whichofthefollowingstatements concerningcurrent liabilitiesis incorrect? a.Currentliabilitiesincludeunearnedrevenues.
b.Acompanythat hasmore currentliabilities thancurrentassets is usuallythesubjectof someconcern.
c.Currentliabilitiesincludeprepaidexpenses.
d.Acurrentliabilityisadebtthatcanreasonablybeexpectedtobepaidoutofexisting currentassetsorresult inthecreationof other currentliabilities.
141. OnAugust1,2008,acompanyborrowedcashandsignedaone-yearinterest-bearing noteonwhichboththefacevalueandinterestarepayableonAugust1,2009.Howwill thenotepayableandtherelatedinterestbeclassifiedintheDecember31,2008,balance sheet?
NotePayable Interest Payablea.Currentliability Noncurrentliability b.Noncurrentliability Currentliability
c.Currentliability Currentliability d.Noncurrentliability Notshown
142. Companiesreportcurrentliabilitiesonthebalancesheetin a.alphabeticalorder.
b.order ofmaturity. c.randomorder.
d.order ofmagnitude.
CurrentLiabilitiesandPayroll Accounting 11-23
143. A contingencyneednotberecordednordisclosedwhen
a.itisprobablethecontingencywillhappenandtheamountcanbereasonably estimated.
b.itisprobablethecontingencywillhappenbuttheamountcannotbereasonably estimated.
c.itisreasonablypossiblethecontingencywillhappenandtheamountcanbe reasonablyestimated.
d.thepossibilityof the contingencyhappeningisremote.
144. A contingentliabilityis recordedwhenthe likelihoodof thecontingency is a.remote.
b.reasonablypossible. c.probable.
d.nil or zero.
145. MikeKohl,anemployeeofSpottswoodCompany,hasgrossearningsforthemonthof Octoberof$6,000.FICAtaxesare8%ofgrossearnings, federalincometaxesamount to $952forthemonth,stateincometaxesare2%ofgrossearnings,andMikeauthorizes voluntarydeductionsof$15permonthtotheUnitedFund.WhatisthenetpayforMike Kohl?
a.$4,442 b.$4,433 c.$4,448 d.$4,452
146. Apayrollrecordthataccumulatesthegrossearnings,deductions,andnetpayby employeefor eachpayperiodis the
a.withholdingtaxtable.
b.employeeearningsrecord. c.payrollregister.
d.WageandTaxStatement.
147. ThejournalentrytorecordthepayrollforMarcusGarveyCompanyfortheweekending January8,wouldprobablyincludea
a.creditto OfficeSalaries.b.credittoWages Expense.
c.debittoFederalIncomeTaxesPayable. d.creditto FICATaxesPayable.
148. Employerpayroll taxesincludeallofthefollowingexcept a.FICAtaxes.
b.federalunemployment taxes. c.stateunemploymenttaxes.d.federalincometaxes.
149. Therecordthatprovidesacumulativesummaryofeachemployee’sgrossearnings, payrolldeductions, and netpayduring theyearandisrequiredtobemaintainedtocomply with stateandlocalfederallawisthe
a.register.
b.employeeearningsrecord. c.statementofearnings.
d.wageandtaxstatement.
11-24
a150.Post-retirementbenefitsincludeallofthefollowingexcept a.healthcare.
b.lifeinsurance. c.pensions.
d.vacationbenefits.
BRIEFEXERCISES
BE151
SaldanaSalesCompanyhasthefollowingselectedaccountsafterpostingadjustingentries:
AccountsPayableNotesPayable,3-month
AccumulatedDepreciation—Equipment NotesPayable,5-year,6%
PayrollTax Expense InterestPayable MortgagePayable SalesTaxPayable
$62,000 50,000 14,000 80,000 4,000 3,000 120,000 38,000
Instructions
PreparethecurrentliabilitysectionofSaldanaSalesCompany'sbalancesheet,assuming $20,000of themortgageispayablenextyear.
BE152
Identifywhichof thefollowingwouldbeclassifiedas currentliabilitiesasof December31,2008: 1.WagesPayable
2.BondsPayable, maturingin 2013 3.InterestPayable,dueJuly1,2009 4.TaxesPayable
5.NotesPayable, dueJanuary30,2010
BE153
OnDecember1,DestinCorporationborrowed$5,000ona90-day,6%note.Preparetheentries torecordtheissuanceofthenote,theaccrualofinterestatyearend,andthepaymentofthe note.
�� BE154
DuringDecember2008,FashionVixenPublishingsold2,50012-monthannualmagazine subscriptionsatarateof$30each.ThefirstissuesweremailedinFebruary2009.Preparethe entriesonFashionVixen’sbookstorecordthesaleofthesubscriptionsandthemailingofthe first issues.
BE155
Landen Companyhadcashsalesof$54,250(includingtaxes)forthemonthofJune.Salesare subjectto8.5%salestax.Preparetheentryto recordthesale.
BE156
OnDecember1, WynnCompanyintroducesanewproductthatincludesaone-yearwarrantyon parts.InDecember,500unitsaresold.Managementbelievesthat5%oftheunitswillbe defectiveandthattheaveragewarrantycostswillbe$60perunit.Preparetheadjustingentryat December31toaccruethe estimatedwarrantycost.
BE157
MaryStine’sregularhourlywagerateis$12,andshereceivesanhourlyrateof$18forworkin excessof40hours.DuringaMarchpayperiod,Maryworks47hours.Mary’sfederalincometax withholdingis$70,andshehasnovoluntarydeductions.ComputeMaryStine’sgrossearnings and netpayforthepayperiod.
BE158
Data forMaryStinearepresentedinBE157.PreparethejournalentrytorecordMary’spayfor theperiod.Use March15fortheendof thepayperiod.
BE159
InFebruary,grossearningsinZennCompanytotaled$50,000.Allearningsaresubjectto8% FICAtaxes,5.4%stateunemploymenttaxes,and0.8%federalunemploymenttaxes.Prepare theentrytorecordJanuarypayrolltaxexpense.
*BE160
WeaverCompanyemployeesareentitledtooneday’svacationforeachmonthworked.In February,60employeesworkedthefullmonth.RecordthevacationpayliabilityforFebruary assuming theaveragedailypayfor eachemployeeis$90.
EXERCISES
Ex.161
StinerCompanyhasthefollowingselectedaccounts afterpostingadjustingentries:
AccountsPayableNotesPayable,3-month
AccumulatedDepreciation—Equipment PayrollandBenefitsPayable
NotesPayable,5-year,8% EstimatedWarrantyLiability PayrollTax ExpenseInterestPayable MortgagePayable
SalesTaxPayable
$45,000 80,000 14,000 27,000 30,000 34,000 6,000 3,000 200,000 16,000
Instructions
(a)PreparethecurrentliabilitysectionofStinerCompany'sbalancesheet,assuming$25,000 of themortgageispayablenextyear. (Listliabilities inmagnitudeorder,withlargestfirst.)
(b)Commenton Stiner's liquidity,assumingtotalcurrentassetsare$450,000.
Ex.162
Preparethenecessaryjournalentriesforthefollowingtransactions:
(a)On September1,LoreCompanyborrowed$150,000fromNationalBankona6-month,8% note.
(b)On December31, LoreCompanyaccruedinterest(assumeadjustingentries areonlymade at theendoftheyear).
CurrentLiabilitiesandPayroll Accounting 11-29
Ex.163
OnMarch1,FeltonCompanyborrows$90,000fromOttawaStateBankbysigninga6-month, 8%,interest-bearingnote.
Instructions
PreparethenecessaryentriesbelowassociatedwiththenotepayableonthebooksofFelton Company.
(a)Preparetheentryon March 1whenthe notewasissued.
(b)PrepareanyadjustingentriesnecessaryonJune30inordertopreparethesemi-annual financialstatements. Assumenootherinterestaccrualentrieshavebeenmade.
(c)Preparetheadjustingentry at August31to accrueinterest. (d)Preparetheentryto recordpaymentof thenote atmaturity.
Ex.164
TomByerssellstelevisionswitha2-yearwarranty.Pastexperienceindicatesthat2%oftheunits soldwillbereturnedduringthewarrantyperiodforrepairs.Theaveragecostofrepairsunder warrantyisestimatedtobe$50perunit.During2008,7,000unitsweresoldatanaverageprice of$400.Duringtheyear,repairsweremadeon55unitsatacost of $2,400.
Instructions
Preparejournalentriestorecordtherepairsmadeunderwarrantyandestimatedwarranty expense fortheyear.
Ex.165
SommersCompanybilleditscustomersatotalof$1,575,000forthemonthofNovember.The totalincludesa 5% statesalestax.
Instructions
(a)Determinetheproperamountof revenuetoreportforthemonth.
(b)Preparethegeneraljournalentrytorecordtherevenue andrelatedliabilitiesforthemonth.
Ex.166
StevensCompany does notsegregatesales andsales taxes onitscashregister.Its registertotal for themonthis$259,700, whichincludesa 6%salestax.
Instructions
Computesalestaxespayable,andmaketheentrytorecordsalesandsalestaxespayable.
Ex.167
SuttonCoatCompany,whichpreparesannualfinancialstatements,ispreparingadjustingentries on December31. Analysisindicatesthefollowing:
1.Thecompanyisthedefendantinanemployeediscriminationlawsuitinvolving$50,000of damages.Legalcounselbelievesitisunlikelythatthecompanywillhavetopayany damages.
2.December31stisaFriday.TheemployeesofthecompanyhavebeenpaidonMonday, December27thforthepreviousweekwhichendedonFriday,December24th.Thecompany employs30peoplewhoearn$100perdayand15peoplewhoearn$150perday.All employees work5-day weeks.
3.Thecompany isadefendantina$500,000productliability lawsuit.Legal counsel believesthe companyprobablywill havetopaytheamountrequested.
a4.Employeesareentitledtooneday'svacationforeachmonthworked.Allemployees describedabove in(2.) workedthemonthof December.
Instructions
Prepareanyadjustingentriesnecessaryattheendof theyear.
Ex.168
Basedonthefollowinginformation,computethe(1) currentratioand(2) workingcapital.
Currentassets Totalassets Currentliabilities Totalliabilities
$240,000 900,000 80,000 500,000
Ex.169
LindaEstessellsexercisemachinesforhomeuse.Themachinescarrya2-yearwarranty.Past experienceindicatesthat6%oftheunitssoldwillbereturnedduringthewarrantyperiodfor repairs.Theaveragecostofrepairsunderwarrantyis$60forlaborand$90forpartsperunit. During2008,2,500exercise machines weresoldatanaverageprice of$800.Duringtheyear,60 of themachinesthat weresold wererepairedattheaveragepriceper unit.
Instructions
(a) Preparethejournalentrytorecordtherepairsmadeunderwarranty.
(b) Preparethejournalentrytorecordtheestimatedwarrantyexpense fortheyear.
Ex.170
GolfWorldPublicationspublishesagolfmagazineforwomen.Themagazinesellsfor$3acopy onthenewsstand.Yearlysubscriptionstothemagazinecost$24peryear(12issues).During December2008,GolfWorldPublicationssells9,000copiesofthegolfmagazineatnewsstands andreceivespaymentfor15,000subscriptionsfor2009.Financialstatementsareprepared monthly.
Instructions
(a)Preparethe December2008journalentriesto record the newsstandsales and subscriptions received.
(b)PreparethenecessaryadjustingentryonJanuary31,2009.TheJanuary2009issuehas been mailedto subscribers.
CurrentLiabilitiesandPayroll Accounting 11-33
Ex.171
PresleyCompanysellsaproduct thatincludesaone-yearwarrantyonpartsandlabor.During the year,10,000unitsaresold.Presleyexpectsthat3%oftheunitswillbedefectiveandthatthe averagewarrantycostwillbe$50perunit.Actualwarrantycostsincurredduringtheyearwere $14,000.
Instructions
Preparethejournalentriestorecord(a)theestimatedwarrantycostsand(b) theactualcosts incurred.
Ex.172
DobsonCompanyispreparingadjustingentriesatDecember31.Ananalysisrevealsthe following:
1.DuringDecember,DobsonCompanysold2,000unitsofaproductthatcarriesa60-day warranty.Thesalesforthisproducttotaled$100,000.Thecompanyexpects4%oftheunits toneedrepairunderthe warrantyanditestimates thattheaveragerepaircostperunitwillbe $15.
2.Thecompanyhasbeensuedbyadisgruntledemployee.Legalcounselbelievesthatitis reasonablypossiblethatthecompanywillhaveto pay$200,000indamages.
3.Thecompanyhasbeennamedasoneofseveraldefendantsina$400,000damagesuit. Legalcounselbelievesit is unlikelythatthecompanywillhavetopayanydamages.
a4.Employeesearnvacationpayatarateof1daypermonth.DuringDecember,tenemployees qualifyforvacationpay.Theiraveragedailywageis $90per employee.
Instructions
Prepareadjustingentries,if required,for eachofthefouritems.
Ex.173
Matchthecodesassignedtothefollowingpayrollfunctionstotheprocedureslistedbelow:
H HiringEmployees T Timekeeping
PRE PreparingthePayroll PAY Payingthe Payroll
1.Distributionof checksbythetreasurer 2.Supervisorapproveshoursworked
3.Documentationof employeehiring 4.Maintenanceofpayrollrecords
5.Verificationof payrollcalculations
6.Screeningand interviewingofjobapplicants 7.Useofatimeclock
8.Signingprenumberedpayrollchecks
Ex.174
SueWiebe'sregularhourlywageis$14anhour.Shereceivesovertimepayattherateoftime andahalf.TheFICAtaxrateis8%.Sueispaideverytwoweeks.Forthefirstpayperiodin January,Sueworked86hoursofwhich6wereovertimehours.Sue'sfederalincometax withholdingis$300andherstateincometaxwithholding is$100.Suehasauthorizedthat$50be withheldfrom hercheckeachpayperiodforsavingsbonds.
Instructions
ComputeSueWiebe'sgrossearningsandnetpayforthepayperiodshowingeachpayroll deductioninarrivingatnet pay.
Ex.175
StacyCooper'sregularhourlywagerateis$12,andshereceivesawageof11/2timesher regularrateforworkinexcessof40hours.DuringaJunepayperiod,Stacyworked46hours. Stacy'sfederalincometaxwithholdingis$58,andheronlyvoluntarydeductionis$25forgroup hospitalization insurance.
Instructions
ComputeStacy's(a)grossearningsand(b) net payforthepayperiod.
Ex.176
OatesCompany'spayrollfortheweekendingJanuary15amountedto$95,000forOffice Salariesand$150,000forStoreWages.Noneoftheemployeeshasreachedtheearningslimits specifiedforfederalorstateemployerpayrolltaxes.Thefollowingdeductionswerewithheldfrom employees'salaries andwages:
FederalIncomeTax StateIncomeTax FICATaxes
UnionDues UnitedFund
$50,000 9,000 19,600 2,700 1,800
Federalunemploymenttax(FUTA)rateis6.2%lessacreditequaltotheratepaidforstate unemployment taxes.Thestateunemploymenttax(SUTA)rateis5.4%.
Instructions
Preparethe journal entrytorecord theweeklypayroll endingJanuary 15 andalsothe employer’s payroll taxexpenseonthe payroll.
Ex.177
AnnFinleyhadearned(accumulated)salaryof$86,000throughNovember30.HerDecember salaryamounted to$7,800.JimLanebeganemploymentonDecember1andwillbepaidhisfirst month'ssalaryof$5,000onDecember31.IncometaxwithholdingforDecemberforeach employee isasfollows:
Ann Finley JimLane FederalIncomeTax $2,180 $990 StateIncomeTax 390 180
CurrentLiabilitiesandPayroll Accounting 11-37
Ex.177 (cont.)
Thefollowingpayrolltaxratesareapplicable:
FICAtaxonfirst $90,000 8% FUTAtaxonfirst $7,000 6.2%* SUTAtaxonfirst$7,000 5.4%
*Lessacredit equaltothe stateunemploymentcontribution
Instructions
RecordthepayrollforthetwoemployeesatDecember31andrecordtheemployer'sshareof payroll taxexpenseforthe December31payroll.
Ex.178
AssumethatthepayrollrecordsofGibbsOilCompanyprovidedthefollowinginformationforthe weeklypayrollendedNovember30, 2008.
Year-to-Date Hourly Federal EarningsThrough
Employee HoursWorked PayRate Income Tax Union Dues PreviousWeek
C.White 44 J.Ward 46 K.Hurt 39 M.King 42
$45 $362 10 �� 65 20 118 22 169
$9 $91,000 5 23,200 — 5,700 7 49,500
Ex.178 (cont.)
Additionalinformation:Allemployeesarepaidovertimeattimeandahalfforhoursworkedin excessof40perweek.TheFICAtaxrateis8%forthefirst$90,000ofeachemployee'sannual earnings.Theemployerpaysunemploymenttaxesof6.2%(5.4%forstateand.8%forfederal) on thefirst $7,000ofeachemployee'sannualearnings.
Instructions
(a) Preparethepayrollregisterforthepayperiod.
(b) Preparegeneraljournalentriestorecordthepayrollandpayrolltaxes.
Ex.179
DianeJenksearnsasalaryof$8,000permonthduringtheyear.FICAtaxesare8%onthefirst $90,000ofgrossearnings.Federalunemploymentinsurancetaxesare6.2%ofthefirst$7,000; however,acreditisallowedequaltothestateunemploymentinsurancetaxesof5.4%onthe $7,000.During the year, $27,300waswithheldfor federal incometaxesand$5,700was withheld for state incometaxes.
CurrentLiabilitiesandPayroll Accounting 11-39
Ex.179 (cont.)
Instructions
(a)PrepareajournalentrysummarizingthepaymentofJenks’total salaryduringthe year.
(b)PrepareajournalentrysummarizingtheemployerpayrolltaxexpenseonJenks’salaryfor theyear.
(c)Determinethecostof employing Jenksfor theyear.
Ex.180
TolanCompanyhadthefollowingpayroll datafortheyear:
Grossearningsof employees Employeeearnings notsubjectto FICAtax
Employeeearnings notsubjecttoFUTAor SUTAtax
$640,000 140,000 490,000
Assumingthefollowing: FICAtaxrate
StateUnemploymenttaxrate Federal Unemploymenttaxrate
8%
5.4%(SUTA) .8%(FUTA)
Instructions
ComputeTolan'spayrolltaxexpensefortheyear.Makeasummaryjournalentrytorecordthe payroll taxexpense.
Ex.181
InMarch,grossearningsofMilnerCompanytotaled$150,000.AllearningsaresubjecttoFICA taxes,5.4%stateunemploymenttaxes,and0.8%federalunemployment taxes.
Instructions
(a)Computetheemployer'spayrolltaxexpense. (b)Preparetheentrytorecordpayrolltaxes.
Ex.182
ThefollowingpayrollliabilityaccountsareincludedintheledgerofClementsCompanyon January1,2008:
FICATaxes Payable $1,750 FederalIncomeTaxesPayable 4,000 StateIncomeTaxesPayable 665 FederalUnemploymentTaxesPayable 175 StateUnemploymentTaxes Payable 1,190 UnionDuesPayable 400 HealthInsurancePremiumPayable 5,000 ChristmasClubSavingsPayable 1,500
InJanuary,thefollowingtransactionsoccurred:
Jan.9 Sentacheckfor $5,000toBlueCrossandBlueShield.
11 Depositedacheckfor$5,750inFederalReserveBankforFICAtaxesandfederal incometaxeswithheld.
14 Sentacheckfor $400totheuniontreasurerforuniondues. 18 Paidstateincometaxeswithheldfromemployees.
21 Paidstateandfederalunemployment taxes.
22 Senta$1,500checktoaSavingsandLoanforthe ChristmasClubwithholdings.
Instructions
JournalizetheJanuarytransactions
COMPLETIONSTATEMENTS
183.Acurrentliabilityisadebtthatcanbeexpectedtobepaidwithin year or the ,whicheveris longer.
184.Liabilitiesareclassifiedonthebalancesheetasbeing liabilitiesor
liabilities.
185.Obligationsinwrittenformarecalled andusuallyrequiretheborrower topayinterest.
186.Withaninterest-bearingnote,aborrowermustpaythe ofthenote plus atmaturity.
187.Salestaxescollectedfromcustomersarea ofthebusinessuntilthey areremittedtothetaxing agency.
188.Thecurrentratioiscurrent assetsdivided by .
189.Acontingentliabilityshouldberecordedintheaccountsifitis thatthe contingencywilloccurand theamountis .
190.Twofederaltaxeswhichareleviedagainstemployees'wagesthatmustbedeductedin arrivingatnetpay are(1) taxesand(2) taxes.
191.Theemployerincursapayrolltaxexpenseequaltotheamountcontributedbyeach employeefor taxes.
192.Apayrolltaxexpensewhichisborneentirelybytheemployeristhefederal
tax.
MATCHING
193.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Currentliability B.NotesPayable
C.WageandTaxStatement D.Currentratio
E.Contingentliabilities
F. Federalincometaxes G.FICAtaxes
H.Federalunemploymenttaxes aI. Post-retirementbenefits
aJ.Pensionplan
1.Leviedagainstemployees'wageswithoutlimit.
2.Anobligationintheformofa writtenpromissorynote.
3.Anagreementwherebyanemployerprovidesbenefitsto employeesaftertheyretire.
4.Apayrolltaxexpenseleviedonlyagainstthe employerbasedonemployees'wages.
5.Ameasureofacompany’sliquidity.
6.Adebtthancanreasonablybeexpected tobepaidfromcurrentassets.
7.Aformshowinggrossearnings andincometaxeswithheld.
8.Leviedagainstemployees'wageswithamaximumlimit.
9.Paymentsbyemployerstoretiredemployees.
10.Apotentialliabilitythat maybecome anactualliability inthefuture.
SHORT-ANSWERESSAYQUESTIONS
S-AE194
Acompanywillincurproductrepaircostsinthefutureifproductsthatitsellscurrentlyunder warrantyarebroughtinforrepairduringthewarrantyperiod.Thecompanywillalsoincurbad debtsexpenseinthefutureifcustomerswhobuyoncreditcurrentlyareunabletopaytheir accounts.Aretheaccountingproceduresforthesetwocontingentcosts(warrantyexpenseand bad debtexpense)relatedorguidedbythesameaccountingprinciple?Brieflyexplain.
S-AE195
Anemployee'snetpayconsistsofgrosspaylessmandatoryandvoluntarypayrolldeductions. Identifythemandatorypayrolldeductionsandgivetwoorthreeexamplesofcommonvoluntary deductions.Arethesedeductionsrecognizedaspayrollexpensesbytheemployer? Whattypeof payroll expensesdoesthe employerincurrelatedto havingapayroll?
S-AE196(Ethics)
Quaney Companymaintainstwoseparateaccountspayablecomputersystems.Oneisknownto alltheusers,andisusedtoprocesspaymentstovendors.Employeesenterthevendorcode,or thenameandaddressofnewvendors,theamount,theaccount,andsoon.Theothersystemis asecretone.Itisusedtocross-checkthevendorsagainstanapprovedvendorlist.Ifavendoris notlistedasapproved, thepaymentprocessishalted.Internalauditemployeesseektoverifythe existenceofabonafideclaimbythevendor.Allinquiriesaremadeatthetopmanagement level, andverydiscreetly.Noonebuttopmanagement,theinternalauditstaff,andtheBoardof Directorsofthecompanyis evenawareof thesecondsystem.
Required:
Isit ethicalforacompanytohavea secretsystemliketheonedescribed?Explain.
S-AE197(Communication)
Al-Fabisamanufacturingcompanythatmakesvariousindustrialcomponentsoutofaluminum. Al-FabislocatedinalargecityinthenortheasternUnitedStates.Variouslabordisputeshave occurredinthecity,somewithacrimoniouspublicdebateconcerningthehonestyof management.DuringoneofAl-Fab'sroutineemployeemeetings,JackGrant,aproduction worker, broughtuptheissueof thecostof aworkerasreportedinthecompany'sannualreport.
Thecostwasgivenas$32,000peryear.Jackpointsoutthattheaveragewagerateof$12per hourisatmostaround$25,000ingrosswages.Heaskswhetherthecompanyisaddingin overtime,becauseifso,thefiguresaremisleadingbecausetheemployeesarenotallowedto workovertime.
Required:
PrepareanoteexplainingtoMr.GranthowAl-Fabmightcalculateacostperemployeethatis greater thangross wages.Explainingeneraltermsonly.Do notuseanycalculations.
CHAPTER12
ACCOUNTINGFORPARTNERSHIPS
CHAPTERSTUDYOBJECTIVES
1.Identifythecharacteristicsofthepartnershipformofbusinessorganization.
2.Explaintheaccountingentriesfortheformationofapartnership.
3.Identifythebasesfordividingnetincomeornetloss.
4.Describetheformandcontentofpartnershipfinancialstatements.
5.Explaintheeffectsoftheentriestorecordtheliquidationofapartnership.
6.Explaintheeffectsoftheentrieswhenanewpartnerisadmitted.
7.Describetheeffectsoftheentrieswhenapartnerwithdrawsfromthefirm.
TRUE-FALSESTATEMENTS
1. Thepersonalassets,liabilities,andpersonaltransactionsofpartnersareexcludedfrom theaccountingrecordsofthepartnership.
2. Theactofanypartnerisbindingonallotherpartnersiftheactappearstobeappropriate forthepartnership.
3. Amajoradvantageofthepartnershipformoforganizationisthatthepartnershave unlimitedliability.
4. Partnershipcreditorsmayhaveaclaimonthepersonalassetsofanyofthepartnersifthe partnershipassetsarenotsufficienttosettleclaims.
5. Thepartnershipagreementbetweenpartnersmustbeinwriting.
6. Ifapartnerinvestsnoncashassetsinapartnership,theyshouldberecordedbythe partnershipattheirfairmarketvalue.
7. L.Hillinveststhefollowingassetsinanewpartnership:$15,000incash,andequipment thatcost$30,000buthasabookvalueof$17,000andfairmarketvalueof$20,000.Hill, Capitalwillbecreditedfor$32,000.
8. Twoproprietorshipscannotcombineandformapartnership.
9. Ifapartner'sinvestmentinapartnershipconsistsofequipmentthathasaccumulated depreciationof$8,000,itwouldnotbeappropriateforthepartnershiptorecordthe accumulateddepreciation.
10. Ifapartner'sinvestmentinapartnershipconsistsofAccountsReceivableof$25,000and anAllowanceforDoubtfulAccountsof$7,000,itwouldnotbeappropriateforthe partnershiptorecordthe AllowanceforDoubtfulAccounts.
11. Unlessstatedotherwiseinthepartnershipcontract,profitsandlossesaresharedamong thepartnersintheratiooftheircapitalequitybalances.
12. Ifsalaryallowancesandinterestoncapitalarestipulatedinthepartnershipprofitandloss sharingagreement,theyareimplementedonlyifincomeissufficienttocovertheamounts requiredbythesefeatures.
13. Unlessthepartnershipagreementspecificallyindicatesanincomeratio,partnershipnet incomeorlossisnotallocatedtothepartners.
AccountingforPartnerships 12-5
14. Partnershipincomeorlossneednotbeclosedtopartners'capitalaccountseachperiod becauseoftheunlimitedlifecharacteristicofpartnerships.
15. Ifapartnershiphasalossfortheperiod,theclosingentrytotransferthelosstothe partnerswillrequireacredittotheIncomeSummaryaccount.
16. Thepartners'drawingaccountsareclosedeachperiodintotheIncomeSummary account.
17. Salaryallowancestopartnersareamajorexpenseonmostpartnershipincome statements.
18. Aninterestallowanceinsharingpartnershipnetincome(ornetloss)isrelatedtothe amountofpartners'investedcapital duringtheperiod.
19. Thefinancialstatementsofapartnershiparesimilartothoseofaproprietorship.
20. Theincomeearnedbyapartnershipwillalwaysbegreaterthantheincomeearnedbya proprietorshipbecauseinapartnershipthereismorethanoneownercontributingtothe successofthebusiness.
21. ThefunctionofthePartners'CapitalStatementistoexplainthechangesinpartners' capitalaccountbalancesduringaperiod.
22. Adetailedlistingofalltheassetsinvestedbyapartnerinapartnershipappearsonthe Partners'CapitalStatement.
23. Totalpartners'equityofapartnershipisequaltothesumofallpartners'capitalaccount balances.
24. Thedistributionofcashtopartnersinapartnershipliquidationisalwaysmadebasedon thepartners'incomesharingratio.
25. Theliquidationofapartnershipmeansthatanewpartnerhasbeenadmittedtothe partnership.
a26. Theadmissionofanewpartnerresultsinthelegaldissolutionoftheexistingpartnership andthebeginningofanewpartnership.
a27. Ifanewpartnerisadmittedintoapartnershipbyinvestment,thetotalassetsandtotal capitalwillchange.
a28. Abonustooldpartnersresultswhenthenewpartner'scapitalcreditonthedateof admittanceisgreaterthanhisorherinvestmentinthefirm.
a29. Ifanewpartnerinvestsinapartnershipatbookvalueandacquiresa1/4interestintotal partnershipcapital,itindicatesthatabonuswaspaidtotheoriginalpartners.
a30. Abonustotheremainingpartnersresultswhenaretiringpartnerreceivespartnership assetswhicharelessthanhisorhercapitalbalanceonthedateofwithdrawal.
AdditionalTrue-FalseQuestions
31. Apartnershipisanassociationofnomorethantwopersonstocarryonasco-ownersofa businessforprofit.
32. Onceassetshavebeeninvestedinthepartnership,theyareownedjointlybyallpartners.
33. Eachpartner'sinitialinvestmentinapartnershipshouldberecordedatbookvalue.
34. Partnershipincomeissharedinproportiontoeachpartner'scapitalequityinterestunless thepartnershipcontractspecificallyindicatesthemannerinwhichnetincomeornetloss istobedivided.
35. Inaliquidation,thefinaldistributionofcashtopartnersshouldbeonthebasisoftheir incomeratios.
a36. Inanadmissionofapartnerbyinvestmentofassets,thetotalnetassetsandtotalcapital ofthepartnershipdonotchange.
a37. Thewithdrawalofapartnerlegallydissolvesthepartnership.
MULTIPLECHOICEQUESTIONS
38. Ahybridformofbusinessorganizationwithcertainfeatureslikeacorporationisa(n) a.limitedliabilitypartnership.
b.limitedliabilitycompany. c."S"corporation.
d.sub-chapter"S"corporation.
39. Apartnership
a.hasonlyoneowner.
b.paystaxesonpartnershipincome. c.mustfileaninformationtaxreturn.
d.isnotanaccountingentityforfinancialreporting purposes.
40. Ageneralpartnerinapartnership
a.hasunlimitedliabilityforallpartnershipdebts. b.isalwaysthegeneralmanagerofthefirm.
c.isthepartnerwholacksaspecialization.
d.isliableforpartnershipliabilitiesonlytotheextentofthatpartner'scapitalequity.
AccountingforPartnerships 12-7
41. Theindividualassetsinvestedbyapartnerinapartnership a.revertbacktothatpartnerifthepartnershipliquidates.
b.determinethatpartner'sshareofnetincomeorlossfortheyear. c.arejointlyownedbyallpartners.
d.determinethescopeofauthorityofthatpartner.
42. Whichoneofthefollowingwouldnotbeconsideredadisadvantageofthepartnership formoforganization?
a.Limitedlife
b.Unlimitedliability c.Mutualagency
d.Easeofformation
43. Thepartnershipformofbusinessis
a.restrictedtolawandmedicalpractices.
b.restrictedtofirmshavingfewerthan10partners. c.notrestrictedtoanyparticulartypeofbusiness. d.mostoftenusedinrelativelylargecompanies.
44. Whichofthefollowingisnotaprincipalcharacteristicofthepartnershipformofbusiness organization?
a.Mutualagency
b.Associationofindividuals c.Limitedliability
d.Limitedlife
45. Thepartnershipagreementshouldincludeeachofthefollowingexceptthe a.dateofthepartnershipinception.
b.principallocationofthefirm.
c.survivingfamilymembersintheeventofapartner'sdeath. d.Eachoftheseshouldbeincluded.
46. Whichofthefollowingstatementsistrueregardingtheformofalegallybinding partnershipcontract?
a.Thepartnershipcontractmustbeinwriting.
b.Thepartnershipcontractmaybebasedonahandshake. c.Thepartnershipcontractmaybeimplied.
d.Thepartnershipcontractcannotbe oral.
47. Whichofthefollowingstatementsaboutapartnershipiscorrect?
a.Thepersonalassetsofapartnerareincludedinthepartnershipaccountingrecords. b.Apartnershipisnotrequiredtofileaninformationtaxreturn.
c.Eachpartner'sshareofincomeistaxabletothepartnership.
d.Apartnershiprepresentsanaccountingentityforfinancialreportingpurposes.
48. Inapartnership,mutualagencymeans
a.eachpartneractsonhisownbehalfwhenengaginginpartnershipbusiness.
b.theactofanypartnerisbindingonallotherpartners,onlyifpartnersactwithintheir copeofauthority.
c.anactbyapartnerisjudgedasbindingonotherpartnersdependingonwhetherthe actappearstobeappropriateforthepartnership.
d.thatpartnersmustpaytaxesonamutualorcombinedbasis.
12-8 TestBankforAccountingPrinciples,EighthEdition
49. Apartnership
a.isdissolvedonlybythewithdrawalofapartner.
b.isdissolvedupontheacceptanceofanewpartner. c.dissolutionmeansthebusinessmustliquidate.
d.hasunlimitedlife.
50. Thepartnerinalimitedpartnershipthathasunlimitedliabilityisreferredtoasthe a.leadpartner.
b.headpartner.
c.generalpartner.d.unlimitedpartner.
51. Limitedpartnerships
a.musthaveatleastonegeneralpartner.
b.guaranteethatapartnerwillreceiveareturn.
c.guaranteethatapartnerwillgetbackhisoriginalinvestment. d.arelimitedtoonlythreepartners.
52. TheMaris-Cranepartnershipisterminatedwhencreditorclaimsexceedpartnership assetsby$40,000.CraneisamillionaireandMarishasnopersonalassets.Maris' partnershipinterestis75%andCrane'sis25%.Creditors
a.mustcollecttheirclaimsequallyfromMarisandCrane. b.maycollecttheentire$40,000fromCrane.
c.mustcollecttheirclaims75%fromMarisand25%fromCrane.
d.maynotrequireCranetousehispersonalassetstosatisfythe$40,000inclaims.
53. Whichofthefollowingstatementsaboutpartnershipsisincorrect? a.Partnershipassetsareco-ownedbypartners.
b.Ifa partnership isterminated,the assets do not legallyrevert totheoriginal contributor.c.Ifthepartnershipagreementdoesnotspecifythemannerinwhichnetincomeistobe
shared,itisdistributedaccordingtocapitalcontributions.
d.Eachpartnerhasaclaimonassetsequaltothebalanceinthepartner'scapital account.
54. Whichofthefollowingisnotanadvantageofthepartnershipformofbusiness? a.Mutualagency
b.Easeofformation
c.Easeofdecisionmaking
d.Freedomfromgovernmentalregulationsandrestrictions
55. ThelargestcompaniesintheUnitedStatesareprimarilyorganizedas a.limitedpartnerships.
b.partnerships. c.corporations.
d.proprietorships.
56. Thebasisfordividingpartnershipnetincomeornetlossisreferredtoasanyofthe followingexceptthe
a.incomeratio.
b.incomeandlossratio. c.profitandlossratio.d.incomesharingratio.
AccountingforPartnerships 12-9
57. Whichofthefollowingstatementsisincorrectregardingpartnershipagreements? a.Itmaybereferredtoasthe“articlesofco-partnership.”
b.Oralagreementsarepreferabletowrittenarticles.
c.Itshouldspecifythedifferentrelationshipsthataretoexistamongthepartners. d.Itshouldstateproceduresforsubmittingdisputestoarbitration.
58. Nortoninvestspersonallyownedequipment,whichoriginallycost$110,000andhas accumulateddepreciationof$30,000intheNortonandKennettpartnership.Bothpartners agreethatthefairmarketvalueoftheequipmentwas$60,000.Theentrymadebythe partnershiptorecordNorton'sinvestmentshouldbe
a.Equipment............................................................................ 110,000AccumulatedDepreciation—Equipment...................... 30,000 Norton,Capital............................................................. 80,000
b.Equipment............................................................................ 80,000
Norton,Capital............................................................. 80,000 c.Equipment............................................................................ 60,000
LossonPurchaseofEquipment.......................................... 20,000 AccumulatedDepreciation—Equipment............................... 30,000
Norton,Capital............................................................. 110,000 d.Equipment............................................................................ 60,000
Norton,Capital............................................................. 60,000
59. PartnerBisinvestinginapartnershipwithPartnerA.Bcontributesaspartofhisinitial investment,AccountsReceivableof$80,000;anAllowanceforDoubtfulAccountsof $12,000;and$8,000cash.TheentrythatthepartnershipmakestorecordB'sinitial contributionincludesa
a.credittoB,Capitalfor$88,000.
b.debittoAccountsReceivablefor$68,000. c.credittoB,Capitalfor$76,000.
d.debittoAllowanceforDoubtfulAccountsfor$12,000.
60. Whichofthefollowingwouldnotberecordedintheentryfortheformationofa partnership?
a.Accumulateddepreciation
b.Allowancefordoubtfulaccounts c.Accountsreceivable
d.Allofthesewouldberecorded.
61. BobisinvestinginapartnershipwithJerry.Bobcontributesequipmentthatoriginallycost $63,000,hasabookvalueof$30,000,andafairmarketvalueof$39,000.Theentrythat thepartnershipmakestorecordBob'sinitialcontributionincludesa
a.debittoEquipmentfor$33,000. b.debittoEquipmentfor$63,000. c.debittoEquipmentfor$39,000.
d.credittoAccumulatedDepreciationfor$33,000.
62. Apartnercontributes,aspartofherinitialinvestment,accountsreceivablewithan allowancefordoubtfulaccounts.Whichofthefollowingreflectsapropertreatment?
12-10TestBankforAccountingPrinciples,EighthEdition
a.Thebalanceoftheaccountsreceivableaccountshouldberecordedonthebooksof thepartnershipatitsnetrealizablevalue.
b.Theallowanceaccountmaybesetuponthebooksofthepartnershipbecauseit relatestotheexistingaccountsthatarebeingcontributed.
c.Theallowanceaccountshouldnotbecarriedontothebooksofthepartnership.
d.Theaccountsreceivableandallowanceshouldnotberecordedonthebooksofthe partnershipbecauseapartnermustinvestcashinthebusiness.
63. Whichoneofthefollowingwouldnotbeconsideredanexpenseofapartnershipin determiningincomefortheperiod?
a.Expiredinsurance
b.Salaryallowancetopartners c.Suppliesused
d.Freight-out
64. Apartnerinvestsintoapartnershipabuildingwithanoriginalcostof$90,000and accumulateddepreciationof$40,000.Thisbuildinghasa$70,000fairmarketvalue.Asa resultoftheinvestment,thepartner’scapitalaccountwillbecreditedfor
a.$70,000. b.$50,000. c.$90,000. d.$120,000.
Usethefollowinginformationforquestions65–67.
JamesandLauraareformingapartnership.Jameswillinvestatruckwithabookvalueof $10,000andafairmarketvalueof$14,000.Laurawillinvestabuildingwithabookvalueof $30,000andafairmarketvalueof$42,000withamortgageof$15,000.
65. Atwhatamountshouldthebuildingberecorded? a.$30,000
b.$27,000 c.$42,000 d.$45,000
66. WhatamountshouldberecordedinLaura’scapitalaccount? a.$30,000
b.$27,000 c.$42,000 d.$14,000
67. WhatamountshouldberecordedinJames’capitalaccount? a.$30,000
b.$27,000 c.$42,000 d.$14,000
68. SpeirandPablodecidetoorganizeapartnership.Speirinvests$15,000cash,andPablo contributes$12,000cashandequipmenthavingabookvalueof$6,000.Choosetheentry torecordPablo’sinvestmentinthepartnershipassumingtheequipmenthasafairmarket valueof$9,000.
AccountingforPartnerships 12-11
a.Cash..................................................................................... 12,000 Equipment........................................................................... 6,000
Pablo,Capital............................................................. 18,000 b.Equipment........................................................................... 6,000
Pablo,Capital............................................................. 6,000 c.Cash..................................................................................... 12,000
Pablo,Capital............................................................. 12,000 d.Cash..................................................................................... 12,000
Equipment........................................................................... 9,000
Pablo,Capital............................................................. 21,000
Usethefollowinginformationforquestions69–71.
PartnersAbelandCainhavecapitalbalancesinapartnershipof$40,000and$60,000, respectively.Theyagreetoshareprofitsandlossesasfollows:
Abel Cain
Assalaries $10,000 $12,000 Asinterestoncapitalatthebeginningoftheyear 10% 10% Remainingprofitsorlosses 50% 50%
69. Ifincomefortheyearwas$50,000,whatwillbethedistributionofincometoCain? a.$23,000
b.$27,000 c.$20,000 d.$10,000
70. Ifincomefortheyearwas$30,000,whatwillbethedistributionofincometoAbel? a.$13,000
b.$77,000 c.$10,000 d.$14,000
71. Ifnetlossfortheyearwas$2,000,whatwillbethedistributiontoCain? a.$12,000income
b.$1,000income c.$1,000loss
d.$2,000loss
72. PartnersJimandJoehaveagreedtoshareprofitsandlossesinan80:20ratio respectively,afterJimisallowedasalaryallowanceof$140,000andJoeisalloweda salaryallowanceof$70,000.Ifthepartnershiphadnetincomeof$140,000for2008, Joe’sshareoftheincomewouldbe
a.$70,000. b.$56,000. c.$84,000. d.$14,000.
12-12TestBankforAccountingPrinciples,EighthEdition
73. Themostappropriatebasisfordividingpartnershipnetincomewhenthepartnersdonot plantotakeanactiveroleindailyoperationsis
a.onafixedratio.
b.interestoncapitalbalancesandsalariestothepartners. c.onaratiobasedaveragecapitalbalances.
d.salariestothepartnersandtheremainderonafixedratio.
74. TheSmithandJonespartnershipagreementstipulatesthatprofitsandlosseswillbe sharedequallyaftersalaryallowancesof$160,000forSmithand$80,000forJones.At thebeginningoftheyear,Smith'sCapitalaccounthadabalanceof$320,000,whileJones' Capitalaccounthadabalanceof$280,000.Netincomefortheyearwas$200,000.The balanceofJones'Capitalaccountattheendoftheyearafterclosingis
a.$380,000. b.$80,000.c.$340,000. d.$360,000.
75. Apartner'sshareofnetincomeisrecognizedintheaccountsthrough a.adjustingentries.
b.closingentries.
c.correctingentries. d.accrualentries.
76. ThepartnershipofNottandReesereportsnetincomeof$60,000.Thepartnersshare equallyinincomeandlosses.Theentrytorecordthepartners'shareofnetincomewill includea
a.credittoIncomeSummaryfor$60,000. b.credittoNott,Capitalfor$30,000.
c.debittoReese,Capitalfor$30,000.d.credittoReese,Drawingfor$30,000.
77. PartnerAreceives$210,000andPartnerBreceives$140,000inasplitof$350,000net income.Whichexpressiondoesnotreflecttheincomesplittingarrangement?
a.3:2
b.3/5&2/5 c.6:4
d.2:1
78. Anincomeratiobasedoncapitalbalancesmightbeappropriatewhen a.serviceisa primaryconsideration.
b.some,butnotall,partnersplantoworkinthebusiness.
c.fundsinvestedinthepartnershipareconsideredthecriticalfactor. d.littlenetincomeisexpected.
79. Ifthepartnershipagreementspecifiessalariestopartners,interestonpartners'capital, andtheremainderonafixedratio,andpartnershipnetincomeisnotsufficienttocover bothsalariesandinterest,
a.onlysalariesareallocatedtothepartners. b.onlyinterestisallocatedtothepartners.
c.theentirenetincomeissharedonafixedratio.
d.bothsalariesandinterestareallocatedtothepartners.
AccountingforPartnerships 12-13
80. Whichofthefollowingwouldnotbeconsideredanexpenseofapartnershipin determiningincomefortheperiod?
a.Expiredinsuranceb.Incometaxexpense c.Rentexpense
d.Utilitiesexpense
Usethefollowinginformationforquestions81–82.
ThenetincomeofthePineandMilespartnershipis$180,000.Thepartnershipagreement specifiesthatPineandMileshaveasalaryallowanceof$48,000and$72,000,respectively.The partnershipagreementalsospecifiesaninterestallowanceof10%oncapitalbalancesatthe beginningoftheyear.Eachpartnerhadabeginningcapitalbalanceof$120,000.Anyremaining netincomeornetlossissharedequally.
81. WhatisPine'sshareofthe$180,000netincome? a.$48,000
b.$60,000 c.$66,000 d.$78,000
82. WhatisthebalanceofMiles'Capitalaccountattheendoftheyearafternetincomehas beendistributed?
a.$204,000 b.$192,000 c.$222,000 d.$210,000
83. ThenetincomeoftheTorreyandGorepartnershipis$250,000.Thepartnership agreementspecifiesthatprofitsandlosseswillbesharedequallyaftersalaryallowances of$200,000(Torrey)and$150,000(Gore)havebeenallocated.Atthebeginningofthe year,Torrey'sCapitalaccounthadabalanceof$500,000andGore'sCapitalaccounthad abalanceof$650,000.WhatisthebalanceofGore'sCapitalaccountattheendofthe yearafterprofitsandlosseshavebeendistributed?
a.$650,000 b.$100,000 c.$750,000 d.$775,000
84. Apartners'capitalstatementexplains
a.theamountoflegalliabilityofeachofthepartners.
b.thetypesofassetsinvestedinthebusinessbyeachpartner.
c.howthepartnershipwillbecapitalizedifanewpartnerisadmittedtothepartnership.d.thechangesineachpartner'scapitalaccountandintotalpartnershipcapitalduringa
period.
85. Eachofthefollowingisusedinpreparingthepartners’capitalstatementexceptthe a.balancesheet.
b.incomestatement.
c.partners’capitalaccounts.d.partners’drawingaccounts.
12-14TestBankforAccountingPrinciples,EighthEdition
86. Theowners'equitystatementforapartnershipiscalledthe a.partners'proportionalstatement.
b.partners'capitalstatement.
c.statementofshareholders'equity. d.capitalanddrawingstatement.
87. Whichofthefollowingwouldnotcauseanincreaseinpartnershipcapital? a.Drawings
b.Netincome
c.Additionalcapitalinvestmentbythepartners d.Initialcapitalinvestmentbythepartners
88. JillGrier'scapitalstatementrevealsthatherdrawingsduringtheyearwere$50,000.She madeanadditionalcapitalinvestmentof$25,000andhershareofthenetlossforthe yearwas$10,000.Herendingcapitalbalancewas$200,000.WhatwasJillGrier's beginningcapitalbalance?
a.$225,000 b.$185,000 c.$235,000 d.$260,000
89. BillWrenstartedtheyearwithacapitalbalanceof$180,000.Duringtheyear,hisshareof partnershipnetincomewas$160,000andhewithdrew$30,000fromthepartnershipfor personaluse.Hemadeanadditionalcapitalcontributionof$50,000duringtheyear.The amountofBillWren'scapitalbalancethatwillbereportedontheyear-endbalancesheet willbe
a.$160,000. b.$390,000. c.$300,000. d.$360,000.
90. ThePartners'CapitalStatementfortheUnitedCenterreportedthefollowinginformationin total:
Capital,January1..................................................$120,000 Additionalinvestment............................................. 40,000 Drawings................................................................ 80,000 Netincome............................................................. 100,000
Thepartnershiphasthreepartners:Moon,Garr,andRicewithendingcapitalbalancesin aratio40:20:40.Whataretherespectiveendingbalancesof thethreepartners?
a.Moon,$80,000;Garr,$40,000;Rice, $80,000. b.Moon,$72,000:Garr,$36,000;Rice, $72,000.
c.Moon,$136,000;Garr,$68,000;Rice,$136,000. d.Moon,$90,000;Garr,$48,000;Rice, $90,000.
AccountingforPartnerships 12-15
91. ThetotalcolumnofthePartners'CapitalStatementforNorth Companyis asfollows:
Capital,January1................................................. Additionalinvestment............................................ Drawings............................................................... Netincome............................................................
$150,000 60,000 90,000 180,000
Thepartnershiphasthreepartners.Thefirsttwopartnershaveendingcapitalbalances thatareequal.Theendingbalanceofthethirdpartnerishalfoftheendingbalanceofthe firstpartner. Whatistheendingcapitalbalanceofthethirdpartner?
a.$72,000 b.$48,000 c.$60,000 d.$66,000
92. Thepartners'drawingaccountsare
a.reportedontheincomestatement. b.reportedonthebalancesheet.
c.closedtoIncomeSummary.
d.closedtothepartners'capitalaccounts.
93. TheUniformPartnershipActprovidesthat
a.apurchaserofapartnershipinterestisnotapartneruntilheorsheisacceptedinto thefirmbythecontinuingpartners.
b.apartnermustobtaintheapprovalofotherpartnersbeforesellinghisorherinterest.c.thepricepaidinapurchaseofpartner'sinterestmustbeequaltothecapitalequity
acquired.
d.thepricepaidinapurchaseofpartner'sinterestmustbegreaterthanthecapital equityacquired.
94. Thebalancesheetofapartnershipwill
a.reportretainedearningsbelowthepartnershipcapitalaccounts. b.showaseparatecapitalaccountforeachpartner.
c.showaseparatedrawingaccountforeachpartner.
d.showtheamountofincomethatwasdistributedtoeachpartner.
95. Theliquidationofapartnershipmayresultfromeachofthefollowingexceptthe a.bankruptcyofthepartnership.
b.deathofapartner.
c.retirementofapartner.
d.saleofthebusinessbythepartners.
96. Intheliquidationofapartnership,anygainorlossontherealizationofnoncashassets shouldbeallocated
a.firsttocreditorsandtheremaindertopartners.
b.tothepartnersonthebasisoftheircapitalbalances.
c.tothepartnersonthebasisoftheir income-sharingratio. d.onlyafterallcreditorshavebeenpaid.
97. Intheliquidationofapartnership,anypartnerwhohasacapitaldeficiency a.hasapersonaldebttothepartnershipfortheamountofthedeficiency. b.isautomaticallyterminatedasapartner.
c.willreceiveacashdistributiononlyonthebasisofhisorherincome-sharingratio. d.isnotobligatedtomakeupthecapitaldeficiency.
12-16TestBankforAccountingPrinciples,EighthEdition
98. PartnersA,B,andChavecapitalaccountbalancesof$120,000each.Theincomeand lossratiois5:2:3,respectively.Intheprocessofliquidatingthepartnership,noncash assetswithabookvalueof$100,000aresoldfor$40,000.ThebalanceofPartnerB's Capitalaccountafterthesaleis
a.$90,000. b.$102,000. c.$108,000. d.$132,000.
Usethefollowinginformationforquestions99–101.
Thepartners'incomeandlosssharingratiois2:3:5,respectively.
D,E,ANDFPARTNERSHIP BalanceSheetDecember31,2008
Assets LiabilitiesandOwners'Equity
Cash
Noncashassets
Total
$90,000 570,000
$660,000
Liabilities D,Capital E,Capital F,Capital
Total
$300,000 120,000 180,000
60,000$660,000
99. IftheD,E,andFPartnershipisliquidatedbysellingthenoncashassetsfor$390,000and creditorsarepaidinfull,whatistheamountofcashthatcanbesafelydistributedtoeach partner?
a.D,$72,000;E,$108,000;F,$0.
b.D,$84,000;E,$126,000;F,$30,000. c.D,$69,000;E,$111,000;F,$0.
d.D,$66,000;E,$114,000;F,$0.
100. IftheD,E,andFPartnershipisliquidatedbysellingthenoncashassetsfor$750,000, andcreditorsarepaidinfull,whatisthetotalamountofcashthatPartnerDwillreceivein thedistributionofcashtopartners?
a.$36,000 b.$234,000 c.$156,000 d.$150,000
101. IftheD,E,andFPartnershipisliquidatedandthenoncashassetsareworthless,the creditorswilllooktowhatpartner'spersonalassetsforsettlementofthecreditors'claims? a.ThepersonalassetsofPartnerE.
b.ThepersonalassetsofPartnersDandF.
c.ThepersonalassetsofPartnersD,E,andF.
d.Thepersonalassetsofthepartnersarenotavailableforpartnershipdebts.
AccountingforPartnerships 12-17
102. Ifapartnerhasacapitaldeficiencyanddoesnothavethepersonalresourcestoeliminate it,
a.thecreditorswillhavetoabsorbthecapitaldeficiency.
b.theotherpartnerswillabsorbthecapitaldeficiencyonthebasisoftheirrespective capitalbalances.
c.theotherpartnerswillhavetoabsorbthecapitaldeficiencyonthebasisoftheir respectiveincomesharingratios.
d.neitherthecreditorsnortheotherpartnerswillhavetoabsorbthecapitaldeficiency.
103. Whenapartnershipterminatesbusiness,thesaleofnoncashassetsiscalled a.liquidation.
b.realization. c.recognition. d.disposition.
104. Theliquidationofapartnership
a.cannotbeavoluntaryactofthepartners. b.terminatesthebusiness.
c.eliminatesthosepartnerswithacapitaldeficiency. d.cannotoccurunlessallpartnersapprove.
105. Theliquidationofapartnershipisaprocesscontainingthefollowingsteps:
1.Paypartnershipliabilitiesincash.
2.Allocatethegainorlossonrealizationtothepartnersontheirincomeratios. 3.Sellnoncashassetsforcashandrecognizeagainorlossonrealization.
4.Distributeremainingcashtopartnersonthebasisoftheirremainingcapitalbalances.
Identifythepropersequencingofthestepsintheliquidationprocess. a.3,2,4,1.
b.3,2,1,4. c.1,3,2,4. d.1,4,3,2.
106. Inthefinalstepoftheliquidationprocess,remainingcashisdistributedtopartners a.onanequalbasis.
b.onthebasisoftheincomeratios.
c.onthebasisoftheremainingcapitalbalances. d.regardlessofcapitaldeficiencies.
107. Intheliquidationprocess,ifacapitalaccountshowsadeficiency
a.thepartnerwithadeficiencyhasanobligationtothepartnershipfortheamountofthe deficiency.
b.itmaybewrittenofftoa"Loss"account.
c.itisdisregardeduntilafterthepartnershipbooksareclosed. d.itcanbewrittenofftoa"Gain"account.
108. Beforedistributinganyremainingcashtopartnersinapartnershipliquidation,itis necessarytodoeachof thefollowingexcept
a.sellnoncashassetsforcash.
b.recognizeagainorlossonrealization.
c.allocatethegainorlosstothepartnersbasedontheircapitalbalances. d.paypartnershipliabilitiesincash.
12-18TestBankforAccountingPrinciples,EighthEdition
109. Kate,Sue,andTinaformedapartnershipwithincome-sharingratiosof50%,30%,and 20%,respectively.Cashof$180,000wasavailableafterthepartnership’sassetswere liquidated.Priortothefinaldistributionofcash,Kate’scapitalbalancewas$200,000, Sue’scapitalbalancewas$150,000,andTinahadacapitaldeficiencyof$50,000.Based uponacashpaymentsschedule,Kateshouldreceive
a.$175,000. b.$168,750. c.$131,250. d.$200,000.
110. A,BandCarepartners,sharingincome2:1:2.Aftersellingalloftheassetsforcash, dividinggainsandlossesonrealization,andpayingliabilities,thebalancesinthecapital accountsareasfollows:A,$10,000Cr;B,$10,000Cr;andC,$30,000Cr.Howmuch cashshouldbedistributedtoA?
a.$6,000 b.$20,000 c.$10,000 d.$16,667
111. Inliquidation,balancespriortothedistributionofcashtothepartnersare:Cash$300,000; Moorman,Capital$140,000;Simpson,Capital$130,000,andKelton,Capital$30,000. Theincomeratiois6:2:2,respectively.Howmuchcashshouldbedistributedto Moorman?
a.$125,000 b.$136,250 c.$140,000 d.$150,000
112. Assumethesamefactsinquestion111above,exceptthatthereisonly$255,000incash andKeltonhasacapitaldeficiencyof$15,000.Howmuchcashshouldbedistributedto SimpsonifKeltondoes notpayhisdeficiency?
a.$122,500 b.$126,250 c.$118,750 d.$130,000
a113. D.Givenspurchasesa25%interestfor$30,000whentheSuppan,Porter,James partnershiphastotalcapitalof$270,000.PriortotheadmissionofGivens,eachpartner hasacapitalbalanceof$90,000.Eachpartnerrelinquishesanequalamountofhiscapital balancetoGivens.TheamounttoberelinquishedbyJamesis
a.$15,000. b.$19,000. c.$22,500. d.$37,500.
a114.Bryantisadmittedtoapartnershipwitha25%capitalinterestbyacashinvestmentof $90,000.Iftotalcapitalofthepartnershipis$390,000beforeadmittingBryant,thebonus toBryantis
a.$30,000. b.$15,000. c.$45,000. d.$60,000.
AccountingforPartnerships 12-19
Usethefollowinginformationforquestions115–116.
CarleyandKingmanarepartnerswhoshareincomeandlossesintheratioof3:2,respectively. OnAugust31,theircapitalbalanceswere:Carley,$175,000andKingman,$150,000.Onthat date,theyagreetoadmitLernerasapartnerwithaone-thirdcapital interest.
a115.IfLernerinvests$125,000inthepartnership,whatisCarley'scapitalbalanceafter Lerner'sadmittance?
a.$150,000 b.$158,333 c.$160,000 d.$175,000
a116.IfLernerinvests$200,000inthepartnership,whatisKingman'scapitalbalanceafter Lerner'sadmittance?
a.$175,000 b.$160,000 c.$157,500 d.$150,000
a117.KingandNottarepartnerswhoshareprofitsandlossesequallyandhavecapital balancesof$560,000and$490,000,respectively.Starrisadmittedintothepartnership byinvesting$490,000for30%capitalinterest.TheaccountbalanceofNott,Capitalafter theadmissionofStarrwouldbe
a.$462,000. b.$476,000. c.$504,000. d.$490,000.
a118.StineandWatsonhavepartnershipcapitalbalancesof$320,000and$240,000, respectively.WatsonnegotiatestosellhispartnershipinteresttoLearyfor$280,000. StineagreestoacceptLearyasanewpartner.Thepartnershipentrytorecordthis transactionis
a.Cash..................................................................................... 280,000
Leary,Capital.............................................................. 280,000 b.Watson,Capital.................................................................... 280,000
Leary,Capital.............................................................. 280,000 c.Cash..................................................................................... 40,000
Watson,Capital.................................................................... 240,000
Leary,Capital.............................................................. 280,000 d.Watson,Capital.................................................................... 240,000
Leary,Capital.............................................................. 240,000
a119.HillandEddysharepartnershipprofitsandlossesintheratioof6:4.Hill'sCapitalaccount balanceis$320,000andEddy’sCapitalaccountbalanceis$200,000.Porterisadmittedto thepartnershipbyinvesting$360,000andistoreceiveaone-fourthownershipinterest.Hill, Eddy andPorter's capitalbalancesafter Porter'sinvestment will be
Hill Eddy Porter
a.$320,000 $200,000 $360,000 b.$404,000 $256,000 $220,000 c.$396,000 $264,000 $220,000 d.$390,000 $270,000 $220,000
12-20TestBankforAccountingPrinciples,EighthEdition
a120.JudyandDebhavepartnershipcapitalaccountbalancesof$600,000and$450,000, respectivelyandshareprofitsandlossesequally.Anneisadmittedtothepartnershipby investing$250,000foraone-fourthownershipinterest.ThebalanceofDeb'sCapital accountafterAnneisadmittedis
a.$412,500. b.$450,000. c.$487,500. d.$325,000.
a121.Theadmissionofanewpartnertoanexistingpartnership
a.maybeaccomplishedonlybyinvestingassetsinthepartnership. b.requirespurchasingtheinterestofoneormoreexistingpartners. c.causesalegaldissolutionoftheexistingpartnership.
d.isalmostalwaysaccompaniedbytheliquidationofthebusiness.
a122.Whenapartnershipinterestispurchased
a.everypartner’scapitalaccountisaffected.
b.thetransactionisapersonaltransactionbetweenthepurchaserandtheselling partner(s).
c.thebuyerreceivesequityequaltotheamountofcashpaid. d.allpartnerswillreceivesomepartofthepurchaseprice.
a123.AdlerandLynneachsell1/3oftheirpartnershipinteresttoSele,receiving$140,000each. Atthetimeoftheadmission,eachpartnerhasa$420,000capitalbalance.Theentryto recordtheadmissionofSelewillshowa
a.debittoCashfor$280,000.
b.credittoSele,Capitalfor$420,000. c.debittoLynn,Capitalfor$420,000. d.debittoAdler,Capitalfor$140,000.
a124.BallandGantsell1/4oftheirpartnershipinteresttoIvesreceiving$200,000each.Atthe timeofadmission,BallandGanteachhada$350,000capitalbalance.Theadmissionof Iveswillcausethenetpartnershipassetsto
a.increaseby$400,000. b.remainat$700,000.
c.decreaseby$400,000. d.remainat$1,100,000.
a125.ColeandGlennselltoNabba1/3interestintheCole-Glennpartnership.Nabbwillpay ColeandGlenneach$70,000foradmissionintotheorganization.Beforethistransaction, ColeandGlennshowcapitalbalancesof$105,000each.Thejournalentrytorecordthe admissionofNabbwill
a.showadebittoCashfor$140,000. b.notshowadebittoCash.
c.showadebittoGlenn,Capitalfor$70,000. d.showacredittoNabb,Capitalfor$140,000.
AccountingforPartnerships 12-21
a126.Foxxinvests$20,000incash(admissionbyinvestment)intheMassey-Dixpartnershipto acquirea1/4interest.Inthiscase
a.theaccountingwillbethesameasapurchaseofaninterest.
b.thetotalnet assets of thenewpartnershipareunchanged fromthepreviouspartnership. c.thetotalcapitalofthenewpartnershipisgreaterthanthetotalcapitaloftheold
partnership.
d.Foxx'sincomeratiowillautomaticallybe1/4.
a127.Whichofthefollowingiscorrectwhenadmittinganewpartnerintoanexisting partnership?
PurchaseofanInterest AdmissionbyInvestment a.Totalnetassets unchanged unchanged
b.Totalcapital increased unchanged c.Totalnetassets unchanged increasedd.Totalcapital unchanged unchanged
a128.Whenadmittinganewpartnerbyinvestment,abonustooldpartners
a.isusuallyunjustifiedbecausebookvaluesclearlyreflectpartnershipnetworth.
b.issometimes justifiedbecause goodwill may exist andit isnot reflected in theaccounts. c.resultsifthedebittocashislessthanthenewpartner'scapitalcredit.
d.resultsifthedebittocashisequaltothenewpartner'scapitalcredit.
a129.Whenadmittinganewpartnerbyinvestment,abonustooldpartnersisallocatedon a.thebasisofcapitalbalances.
b.thebasisoftheoriginalinvestmentoftheoldpartners.
c.thebasisofincomeratiosbeforetheadmissionofthenewpartner. d.asenioritybasis.
a130.Abonustoanewpartner a.isprohibitedbyGAAP.
b.resultswhenthenewpartner'scapitalcreditislessthanhisorherinvestmentof assetsinthefirm.
c.mayoccurwhenrecordedbookvaluesarelowerthanmarketvalues.
d.resultswhenthenewpartner'scapitalcreditisgreaterthanhisorherinvestmentof assetsinthefirm.
a131.Abonustoanewpartnerwill
a.increasethecapitalbalancesofexistingpartnersbasedontheirincomeratiosbefore theadmissionofthenewpartner.
b.increasethecapitalbalancesofexistingpartnersbasedontheirincomeratiosafter theadmissionofthenewpartner.
c.decreasethecapitalbalancesofexistingpartnersbasedontheirincomeratiosbefore theadmissionofthenewpartner.
d.decreasethecapitalbalancesofexistingpartnersbasedontheircapitalbalances beforetheadmissionofthenewpartner.
a132.Jane,Ken,andMarkhavepartnershipcapitalaccountbalancesof$225,000,$450,000 and$105,000,respectively.TheincomesharingratioisJane,50%;Ken,40%;andMark, 10%.Janedesirestowithdrawfromthepartnershipanditisagreedthatpartnership assetsof$195,000willbeusedtopayJaneforherpartnershipinterest.Thebalancesof Ken'sandMark'sCapitalaccountsafterJane'swithdrawalwouldbe
12-22TestBankforAccountingPrinciples,EighthEdition
a.Ken,$450,000;Mark,$105,000. b.Ken,$474,000;Mark,$111,000. c.Ken,$426,000;Mark,$99,000. d.Ken,$435,000;Mark,$90,000.
a133.Ace,Bell,andColehavepartnershipcapitalaccountbalancesof$400,000each.Income andlossesaresharedequally.Coleagreestosellthree-fourthsofhisownershipinterest toAcefor$350,000andone-fourthtoBellfor$125,000.AceandBellwillusepersonal assetstopurchaseCole'sinterest.Thepartnership'sentrytorecordCole'swithdrawal fromthepartnershipwouldbe
a.Cole,Capital....................................................................... 475,000
Cash.......................................................................... 475,000 b.Cole,Capital....................................................................... 475,000
Ace,Capital............................................................... 350,000 Bell,Capital................................................................ 125,000
c.Cole,Capital....................................................................... 400,000
Ace,Capital............................................................... 300,000 Bell,Capital................................................................ 100,000
d.Ace,Capital........................................................................ 356,250 Bell,Capital......................................................................... 118,750
Cole,Capital............................................................. 475,000
a134.Whenapartnerwithdrawsfromthefirm,whichofthefollowingreflectsthecorrect partnershipeffects?
Paymentfrom Paymentfrom Partners'PersonalAssetsPartnershipAssets
a.Totalnetassets decreased decreased b.Totalcapital decreased decreased c.Totalnetassets unchanged decreased d.Totalcapital unchanged unchanged
a135.Whichofthefollowingisnotanecessaryactionthatthepartnershipmusttakeuponthe deathofapartner?
a.Determinethenetincomeornetlossfortheyeartodate. b.Discontinuebusinessoperations.
c.Closethebooks.
d.Preparefinancialstatements.
Usethefollowinginformationforquestions136–138.
OnNovember30,capitalbalancesareGray$90,000,Carr$75,000andMelton$75,000.The incomeratiosare20%,20%and60%,respectively.Graydecidestoretirefromthepartnership.
a136.ThepartnershippaysGray$105,000cashforherpartnershipinterest.AfterGray's retirement,whatisthebalanceof Carr'scapitalaccount?
a.$71,250 b.$72,000 c.$75,000 d.$97,500
AccountingforPartnerships 12-23
a137.ThepartnershippaysGray$75,000cashforherpartnershipinterest.AfterGray's retirement,whatisthebalanceofMelton'scapitalaccount?
a.$66,000 b.$75,000 c.$84,000 d.$86,250
a138.InorderforCarrandMeltontohaveequalcapitalinterestsaftertheretirementofGray, howmuchpartnershipcashwouldhavetobepaidtoGrayforherpartnershipinterest?
a.$0
b.$80,000 c.$90,000
d.AnyamountpaidtoGraywillcauseCarrandMeltontostillhaveequalcapital balances.
AdditionalMultipleChoiceQuestions
139. Allofthefollowingarecharacteristicsofpartnershipsexcept a.co-ownershipofproperty.
b.mutualagency. c.unlimitedlife.
d.association ofindividuals.
140. TheButkus,Sayers,andHalaspartnershipisterminatedwhentheclaimsofcompany creditorsexceedpartnershipassetsby$50,000.ThecapitalbalancesforButkus,Sayers, andHalasare$35,000,$5,000,and$0,respectively.Theoriginalclaimsofthecreditors werenegotiatedbySayersandHalas.Whichpartner(s)is(are)personallyandindividually liableforallpartnershipliabilities?
a.Butkus b.Sayers
c.SayersandHalas
d.Butkus,Sayers,andHalas
141. Whenapartnerinvestsnoncashassetsinapartnership,theassetsshouldberecordedat their
a.bookvalue.
b.carryingvalue.
c.fairmarketvalue. d.originalcost.
142. ThepartnershipagreementofRossiandPetryprovidesforsalaryallowancesof$45,000 toRossiand$35,000toPetry,withtheremainingincomeorlosstobedividedequally. Duringtheyear,RossiandPetryeachwithdrawcashequalto80%oftheirsalary allowances.Ifpartnershipnetincomeis$100,000,Rossi'sequityinthepartnershipwould a.increasemorethanPetry’s.
b.decreasemorethanPetry's.c.increasethesameasPetry's. d.decreasethesameasPetry's.
12-24TestBankforAccountingPrinciples,EighthEdition
143. Whichofthefollowingstatementsiscorrect?
a.Salariestopartnersandinterestonpartners'capitalareexpensesofthepartnership.b.Salariestopartnersareexpensesofthepartnershipbutnotinterestonpartners'
capital.
c.Interestonpartners'capitalisanexpenseofthepartnershipbutnotsalariesto partners.
d.Neithersalariestopartnersnorinterestonpartners'capitalareexpensesofthe partnership.
144. Intheliquidationofapartnership,thegainsandlossesfromassetssoldare a.dividedequallyamongthepartners.
b.dividedamongthepartnersinthestatedincomeratio.
c.dividedamongthepartnersinproportiontotheircapitalequityinterests. d.ignored.
145. Ifapartnerwithacapitaldeficiencyisunabletopaytheamountowedtothepartnership, thedeficiencyisallocatedtothepartnerswithcreditbalances
a.equally.
b.onthebasisoftheirincomeratios.
c.onthebasisoftheircapitalbalances.
d.onthebasisoftheiroriginalinvestments.
146. Anentryisnotrequiredintheliquidationofapartnershiptorecordthe a.paymentofcashtocreditors.
b.distributionofcashtothepartners. c.saleofnoncashassets.
d.allocationofacapitaldeficiencytopartnerswithcreditbalanceswhenthedeficient partnerisexpectedtopaythedeficiency.
147. Thefirststepintheliquidationofapartnershipisto
a.allocateagainorlossonrealizationtothepartners. b.distributeremainingcashtothepartners.
c.paypartnershipliabilities.
d.sellnoncash assetsandrecognizeagainorlossonrealization.
148. BakerjoinsthepartnershipofKubekandMusialbypaying$30,000incash.Ifthenet assetsofthepartnershiparestillthesameamountafterBakerhasbeenadmittedasa partner,thenBaker
a.musthavebeenadmittedbyinvestmentofassets.
b.musthavebeenadmittedbypurchaseofapartner'sinterest. c.musthavereceivedabonusuponbeingadmitted.
d.couldhavebeenadmittedbyaninvestmentofassetsorbyapurchaseofapartner's interest.
149. Loweisadmittedtoapartnershipwitha25%capitalinterestbyacashinvestmentof $120,000.Iftotalcapitalofthepartnershipis$520,000beforeadmittingLowe,thebonus toLoweis
a.$40,000. b.$20,000. c.$60,000. d.$80,000.
BRIEFEXERCISES
BE150
BrandyandJohnsondecidetoorganizeapartnership.Brandyinvests$25,000cash,and Johnsoncontributes$5,000andequipmenthavingabookvalueof$3,500andafairmarket valueof$10,000.
Instructions
Preparetheentrytorecordeachpartner’sinvestment.
BE151
TontoCompanyandRangerCompanydecidetomergetheirproprietorshipsintoapartnership calledWestwardHoCompany.ThebalancesheetofRangerCompanyshows:
AccountsReceivable
Less:Allowancefordoubtfulaccounts
Equipment
Less:Accumulateddepreciation
$15,000
1,500
$20,000
10,000
$13,500
$10,000
Thepartnersagreethatthenetrealizablevalueofthereceivablesis$12,500andthatthefair marketvalueoftheequipmentis$15,000.
Instructions
Indicatehowthefouraccountsshouldappearintheopeningbalancesheetofthepartnership.
BE152
TheJill&FrillCo.reportsnetincomeof$28,000.InterestallowancesareJill$3,000andFrill $5,000;partnersalaryallowancesareJill$18,000andFrill$10,000andtheremainderisshared equally.
Instructions
Indicatethedivisionofnetincometoeachpartner,andpreparetheentrytodistributethenet income.
BE153
DebaugeCo.hadbeginningcapitalbalancesonJanuary1,2008,asfollows:NickFoley$30,000 andTomWenger$25,000.Duringtheyear,drawingswereFoley$15,000andWenger$8,000. Netincomewas$50,000,andthepartnersshareincomeequally.
Instructions
Preparethepartners’capitalstatementfortheyear.
BE154
Afterliquidatingnoncashassetsandpayingcreditors,accountbalancesintheMainCo.areCash $29,000,ACapital(Cr.)$11,000,BCapital(Cr,)$8,000andCCapital(Cr.)$10,000.The partnersshareincomeequally.
Instructions
Journalizethefinaldistributionofcashtothepartners.
BE155
BarnesCompanyatDecember31hascash$40,000,noncashassets$200,000,liabilities $110,000,andthefollowingcapitalbalances:Carpenter$90,000andPendleton$40,000.The firmisliquidated,and$240,000incashisreceivedforthenoncashassets.Carpenterand Pendletonincomeratiosare60%and40%,respectively.
Instructions
Prepareacashdistributionschedule.
BE156
InNelsonCo.,capitalbalancesareOzzie$60,000andHarriet$75,000.Thepartnersshare incomeequally.Dennyisadmittedtothefirmwitha40%interestbyaninvestmentofcashof $65,000.JournalizetheadmissionofDenny.
BE157
BobandKathyarepartnerswhoshareprofits60%and40%.Theircapitalbalanceswereboth $90,000beforeBettywasadmittedtothepartnership.Bettycontributed$120,000incashtothe partnershipfora30%interest.
Instructions
ComputethecapitalbalancesofBobandKathyafterBettyisadmittedtothepartnership.
AccountingforPartnerships 12-29
BE158
CapitalbalancesinJetsonCo.areGeorge$50,000,Jane$38,000,andFrank$25,000.The partnersshareincomeequally.Frankreceives$35,000frompartnershipassetsinwithdrawing fromthefirm.
Instructions
JournalizethewithdrawalofFrank.
BE159
Mike,Andy,andJoearepartnerswhoshareprofits40%,20%,and40%.Theircapitalbalances were$630,000,$420,000,and$210,000,respectively,beforeJoe’sretirement.Joewaspaid $270,000frompartnershipassetstobuyhisinterest.
Instructions
ComputethecapitalbalancesofMikeandAndyafterJoehaswithdrawn.
EXERCISES
Ex.160
DickAcerandGeorgeDooleydecidetoformapartnership.Acerinvests$25,000cashand accountsreceivableof$30,000lessallowancefordoubtfulaccountsof$2,000.Dooley contributes$20,000cashandequipmenthavinga$6,000bookvalue.Itisagreedthatthe allowanceaccountshouldbe$3,000andthefairmarketvalueoftheequipmentis$10,000.
Instructions
Preparethenecessaryjournalentrytorecordtheformationofthepartnership.
Ex.161
KenLottandJimStineoperateseparateautorepairshops.OnJanuary1,2008,theydecideto combinetheirseparatebusinesseswhichwereoperatedasproprietorshipstoformL&SAuto Repair,apartnership.Informationfromtheirseparatebalancesheetsispresentedbelow:
Cash
Accountsreceivable
Allowancefordoubtfulaccounts Accountspayable
Notespayable Salariespayable Equipment
Accumulatedamortization—Equipment
LottAutoRepair $10,000
9,000 1,000 5,000
— 1,000
12,000 2,000
StineAutoRepair $12,000
10,000 500 6,000 3,000 1,500 24,000 4,000
ItisagreedthattheexpectedrealizablevalueofLott'saccountsreceivableis$8,000andStine's receivablesis$7,000.ThefairmarketvalueofLott'sequipmentis$13,000andthevalueof Stine'sequipmentis$20,000.Itisfurtheragreedthatthenewpartnershipwillassumeall liabilitiesoftheproprietorshipswiththeexceptionofthenotespayableonStine'sbalancesheet whichhewillpayhimself.
Instructions
Preparethejournalentriesnecessarytorecordtheformationofthepartnership.
AccountingforPartnerships 12-31
Ex.162
TheSmithandWilsonpartnershipreportsnetincomeof$45,000.Partnersalaryallowancesare Smith$18,000andWilson$12,000.Anyremainingincomeisshared60:40.
Instructions
Determinetheamountofnetincomeallocatedtoeachpartner.
Ex.163
Bass,Ellis,andGorenformedapartnershiponJanuary1,2008.Bassinvested$60,000,Ellis $60,000andGoren$140,000.Basswillmanagethestoreandwork40hoursperweekinthe store.Elliswillwork20hoursperweekinthestore,andGorenwillnotwork.Eachpartner withdrew30percentofhisincomedistributionduring2008.Iftherewasnoincomedistributionto apartner,therewerenowithdrawalsofcash.
Instructions
Computethepartners'capitalbalancesattheendof2008underthefollowingindependent conditions:(Hint:useTaccountstodetermineeachpartner'scapitalbalances.)
Ex.163 (cont.)
(1) Netincomeis$120,000 andtheincomeratioisBass40%,Ellis35%,andGoren25%.
(2) Netincomeis$140,000andthepartnershipagreementonlyspecifiesasalaryof$50,000to Bassand$30,000toEllis.
(3) Netincomeis$86,000andthepartnershipagreementprovidesfor(a)asalaryof$40,000to Bassand$40,000toEllis,(b)interestonbeginningcapitalbalancesattherateof10%,and (c)anyremainingincomeorlossistobesharedbyBass40%,Ellis35%,andGoren25%.
Ex.164
CarlinandLarvehaveapartnershipagreementwhichincludesthefollowingprovisionsregarding sharingnetincomeornetloss:
1.Asalaryallowanceof$54,000toCarlinand$36,000toLarve.
2.Aninterestallowanceof10%oncapitalbalancesatthebeginningoftheyear. 3.Theremaindertobedivided60%toCarlinand40%toLarve.
ThecapitalbalanceonJanuary1,2008,forCarlinandLarvewas$90,000and$120,000, respectively.During2008,theCarlinandLarvePartnershiphadsalesof$495,000,costofgoods soldof$290,000,andoperatingexpensesof$75,000.
Instructions
PrepareanincomestatementfortheCarlinandLarvePartnershipfortheyearendedDecember 31,2008.Asapartoftheincomestatement,includeaDivisionofNetIncometoeachofthe partners.
Ex.165
Hope&CrosbyCo.reportsnetincomeof$34,000.Thepartnershipagreementprovidesfor annualsalariesof$24,000forHopeand$15,000forCrosbyandinterestallowancesof$4,000to Hopeand$6,000toCrosby.Anyremainingincomeorlossistobeshared70%byHopeand 30%byCrosby.
Instructions
Computetheamountofnetincomedistributedtoeachpartner.
Ex.166
TheadjustedtrialbalanceoftheKarrisandWattsPartnershipfortheyearendedDecember31, 2008,appearsbelow:
KARRISANDWATTSPARTNERSHIP AdjustedTrialBalance
FortheYearEndedDecember31,2008
CurrentAssets....................................................................................... PlantAssets.......................................................................................... CurrentLiabilities................................................................................... Long-termDebt..................................................................................... Karris,Capital........................................................................................ Karris,Drawing...................................................................................... Watts,Capital........................................................................................ Watts,Drawing...................................................................................... Sales..................................................................................................... CostofGoodsSold............................................................................... OperatingExpenses..............................................................................
Debit
19,000 80,000
4,000
7,000
62,000
23,000195,000
Credit
7,000 50,000 20,000
18,000
100,000
195,000
Thepartnershipagreementstipulatesthatadivisionofpartnershipnetincomeornetlossistobe madeasfollows:
1.Asalaryallowanceof$12,000toKarrisand$23,000toWatts. 2.Theremainderistobedividedequally.
Instructions
(a) Prepareaschedulewhichshowsthedivisionofnetincometoeachpartner.
(b) Preparetheclosingentriesforthedivisionofnetincomeandforthedrawingaccountsat December31,2008.
Ex.167
KimCareyandMaryHallhaveformedtheCHPartnership,andhavecapitalbalancesof $130,000and$100,000,respectively,onJanuary1,2008.OnJune1,2008,Hallinvestedan additional$30,000.Alsoduringtheyear,Careywithdrew$60,000andHallwithdrew$48,000. Salesfortheyearamountedto$360,000andexpenseswere$260,000.CareyandHallshare incomeandlossesona3:1basis.
Instructions
(a) PreparetheclosingentriesatDecember31,2008,fortheCHPartnership. (b) Prepareapartners'capitalstatementfor2008.
Ex.168
Prepareapartners'capitalstatementforCrestwoodCompanybasedonthefollowinginformation.
Crest Wood
Beginningcapital $30,000 $27,000 Drawingsduringyear 15,000 8,000
Netincomewas$35,000,andthepartnersshareincome60%toCrestand40%toWood.
Ex.169
OnDecember31,ThompsonCompanyhascash$30,000,noncashassets$150,000,and liabilities$80,000.CapitalbalanceswereTerry$55,000andNott$45,000.Thefirmisliquidated, andthenoncashassetsaresoldfor$125,000.TerryandNottshareincomeina60:40ratio.
Instructions
Prepareentriestorecord(a)thesaleofnoncashassetsand(b)theallocationofthegain(loss) onliquidationtothepartners.
AccountingforPartnerships 12-37
Ex.170
TheABCPartnershipistobeliquidatedandyouhavebeenhiredtoprepareaScheduleofCash Paymentsforthepartnership.PartnersA,B,andCshareincomeandlossesintheratioof4:3:3, respectively.Assumethefollowing:
1.Thenoncashassetsweresoldfor$75,000. 2.Liabilitieswerepaidinfull.
3.Theremainingcashwasdistributedtothepartners.(Ifanypartnerhasacapital deficiency,assumethatthepartnerisunabletomakeupthecapitaldeficiency.)
Instructions
Usingtheaboveinformation,completetheScheduleofCashPaymentsbelow:
ABCPARTNERSHIP ScheduleofCashPayments
Item Cash+ Balancesbefore
liquidation 25,000+
Noncash
Assets=
150,000=
Liabilities+
50,000 +
A Capital+
25,000+
B Capital+
35,000+
C Capital
65,000
Ex.171
TheODSPartnershipistobeliquidatedwhentheledgershowsthefollowing:
Cash
NoncashAssets Liabilities
Oslo,Capital Decker,Capital Silas,Capital
$50,000 200,000 50,000 75,000 100,000 25,000
Oslo,Decker,andSilas'incomeratiosare6:3:1,respectively.
Instructions
Prepareseparateentriestorecordtheliquidationofthepartnershipassumingthatthenoncash assetsare soldfor$150,000incash.
Ex.172
Priortothedistributionofcashtothepartners,theaccountsofABCCompanyare:Cash $30,000,AltCapital(Dr.)$10,000,BellCapital(Cr.)$25,000,andColeCapital(Cr.)$15,000. Theyshareincomeona5:3:2basis.
Instructions
Prepareentriestorecord(a)theabsorptionofAlt'scapitaldeficiencybytheotherpartnersand (b)thedistributionofcashtothepartnerswithcreditbalances.
AccountingforPartnerships 12-39
Ex.173
TheGFPartnershipisliquidatedwhentheledgershows:
Cash
NoncashAssets Liabilities
Grant,Capital Fleming,Capital
$60,000 90,000 44,000 100,000 6,000
GrantandFleming'sincomeratiosare3:2,respectively.
Instructions
Prepareascheduleofcashpayments,assumingthatthenoncashassetsweresoldfor$70,000. Assumethatanypartner’scapitaldeficienciescannotbepaidtothepartnership.
Ex.174
TheHowellandParksPartnershiphaspartnercapitalaccountbalancesasfollows:
Howell,Capital Parks,Capital
$550,000 250,000
Thepartnersshareincomeandlossesintheratioof60%toHowelland40%toParks.
Instructions
PreparethejournalentryonthebooksofthepartnershiptorecordtheadmissionofTylerasa newpartnerunderthefollowingthreeindependentcircumstances.
1.Tylerpays$350,000toHowelland$150,000toParksforone-halfofeachoftheirownership interestinapersonaltransaction.
2.Tylerinvests$850,000inthepartnershipforaone-thirdinterestinpartnershipcapital. 3.Tylerinvests$175,000inthepartnershipforaone-thirdinterestinpartnershipcapital.
Ex.175
Key,Riser,andStoneshareincomeona6:3:1basis.Theyhavecapitalbalancesof$80,000, $60,000,and$45,000,respectively,whenHortonisadmittedtothepartnership.
Instructions
PreparethejournalentrytorecordtheadmissionofHortonintothepartnershipifHorton purchasesone-halfofKey'sequityfor$45,000;one-halfofRiser'sequityfor$22,000;andone-thirdofStone'sequityfor$18,000.
Ex.176
TomRosenandJoeFinneysharepartnershipincomeona3:2basis.Theyhavecapitalbalances of$560,000and$280,000,respectively,whenEdVannisadmittedtothepartnership.
Instructions
PreparethejournalentrytorecordtheadmissionofVannundereachofthefollowing assumptions:
(a)Vanninvests$340,000fora25%ownershipinterest. (b)Vanninvests$200,000fora25%ownershipinterest.
(c)Vanninvestsanamountthatgiveshima25%ownershipinterest.
Ex.177
CindyMillsandAmyPetershavecapitalaccountsof$480,000and$420,000,respectively.Bill DennyandMarkMorganaretojointhepartnership.Dennyinvests$450,000inthepartnership forwhichhereceivesacapitalcreditof$450,000.Morganpurchasesaone-halfinterestfrom Millsfor$300,000andaone-fourthinterestfromPetersfor$90,000.
Instructions
(a) PreparethejournalentriestorecordtheadmissionofDennyandMorgantothepartnership.
(b) DeterminethecapitalbalancesofthepartnersaftertheadmissionofDennyandMorgan.
AccountingforPartnerships 12-43
Ex.178
Adel,Gaines,andYockeyshareincomeandlossesinaratioof3:2:5,respectively.Thecapital accountbalancesofthepartnersareasfollows:
Adel,Capital Gaines,Capital Yockey,Capital
$600,000 360,000 240,000
Instructions
PreparethejournalentryonthebooksofthepartnershiptorecordthewithdrawalofYockey underthefollowingindependentcircumstances:
1.ThepartnersagreethatYockeyshouldbepaid$280,000bythepartnershipforhisinterest. 2.ThepartnersagreethatYockeyshouldbepaid$180,000bythepartnershipforhisinterest.
3.AdelagreestopayYockey$180,000forone-halfofhiscapitalinterestandGainesagreesto payYockey$180,000forone-halfofhiscapitalinterestinapersonaltransactionamongthe partners.
Ex.179
Dixon,Larsen,andPolleyhavecapitalbalancesof$150,000,$100,000,and$75,000, respectively,andtheirincomeratiosare4:2:4.
Instructions
RecordthewithdrawalofPolleyfromthepartnershipundereachofthefollowingassumptions: 1.Polleyispaid$75,000frompartnershipassets.
2.Polleyispaid$90,000frompartnershipassets. 3.Polleyispaid$55,000frompartnershipassets.
COMPLETIONSTATEMENTS
180.The______________Actprovidesthebasicrulesfortheformationandoperationof partnershipsinmorethan90%ofthestates.
181.Apartnershipcharacteristicwhichenableseachpartnertoactonbehalfofthepartnership whenengaginginpartnershipbusinessiscalled______________.
182.Amajordisadvantageofthepartnershipformoforganizationis______________,which makeseach partnerpersonallyandindividuallyliableforallpartnershipliabilities.
183.Thecapitalaccountsindicateeachpartner's______________investment,whilethe partner'sdrawingaccountsare______________owner'sequityaccounts.
184.The______________ratiospecifiesthebasisforsharingincomeandlosses.
185.Anincomeratiobasedon______________balancesmaybeappropriatewhenthe amountoffundsinvestedinthepartnershipiscriticaltothepartnership.
186.A______________allowanceor______________onpartners'capitalaccountsarenot expensesofthepartnershipwhentheyarespecifiedasthebasisforsharingincomeand losses.
187.Inliquidatingapartnership,itisnecessarytoconvert______________intocashandto allocateany______________or______________tothepartnersbasedontheirincome ratios.
188.Adebitbalanceinapartner'scapitalaccountiscalleda_____________.
a189.Anewpartnermaybeadmittedtothepartnershipby______________theinterestofan existingpartner,orby______________assetsinthepartnership.
a190.Whenanewpartner'scapitalinterestonthedateofadmittanceislessthanhisorher investmentinthefirm,a______________resultsforthe______________partner(s).
a191.Ifabonusisgiventoanewpartner,theoldpartners'capitalaccountsaredecreased basedontheir______________ratiopriortotheadmissionofthenewpartner.
MATCHING
192.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A. MutualagencyB. Unlimitedliability
C.Partnershipagreement D.Incomeratio
E. Partners'capitalstatement F. Admissionbyinvestment
G. Purchaseofaninterest H. Partnershipliquidation
I. Capitaldeficiency
J. Distributionofcashtopartnersin liquidationofapartnership.
____ 1.Eachpartnerispersonallyandindividuallyliableforpartnershipdebts.
____ 2.Madeonbasisofpartners'capitalbalances.
____ 3.Explainschangesinindividualpartner'scapitalaccountsduringaperiod.
____ 4.Eachpartnercanbindthepartnershipsolongastheactionappearstobeappropriate forthepartnership.
____ 5.Businessterminates.
____a6.Resultsinanincreaseintotalnetassetsandtotalcapitalofthepartnership.
____ 7.Capitalaccountwithadebitbalance.
____ 8.Thebasisforsharingincomeandlosses.
____a9.Totalnetassetsandtotalcapitalofthepartnershipdonotchange.
____10.Writtenorverbalcontractestablishingdutiesandresponsibilitiesofpartners.
SHORT-ANSWERESSAYQUESTIONS
S-AE193
Identifyandexplaintheprincipal characteristicsofthepartnershipformofbusinessorganization.
S-AE194
Apartnershipisliquidatedbysellingthenon-cashassets,payingthecreditorsinfull,and distributingtheremainingassetstothepartners.Explainwhygainsandlossesontherealization ofnon-cashassetsaredistributedtothepartnersbasedontheirincomeratios,whereascashis distributedtothepartnersbasedontheirequityasshownintheircapitalaccounts.Whateffects doesthepaymentornonpaymentofacapitaldeficiencyhaveonthedistributionofcashtothe partners?
S-AE195(Ethics)
Threedoctors,FrankWhite,MarkRosen,andSteveJenner,openedafamilymedicineclinic.All threedoctorshadbeenlifelongfriends.Allbelongedtothesamereligiousfaith.Allwerevery activeinchurchaffairs,andtriedtomoldtheirprofessionalbehaviortotheirreligiousbeliefs.
Aboutayearago,Dr.Whiteannouncedthathewasleavingthechurch.Theothersnoticedthat hispersonalityalsobegantochange.Hebegantodressinflamboyantstyles,andhestarted wearingexpensive-lookingjewelry.Histemperbecameunstable—oneminutehewascalm,and thenext,hemightbethrowingchartsdownthehallandscreaming.Hestartedcomingtothe officelate,andforgettingtoseesomeofhispatientsbeforeheleftagain.Theothertwoatfirst werestunnedatthechanges.Hiswifeaskedthemwhethertheythoughthemighthaveadrinking problem.Afterfinallydecidingtoinvestigate,theyfoundwhatlookedtothemlikealargeamount ofcocaine,(hundredsofplasticsacksofwhitepowder)tuckedawayinboxesofoldmedical equipment.
Frightened,Drs.RosenandJennerdecidedtoactquickly.Theirpartnershipagreementsaid nothingaboutdissolvingthepartnership—onlyaboutwhattodoifoneofthemdied.They thereforesecretlyrentedofficespaceacrosstownandbegantomovethemostnecessary equipmentandsuppliestothenewoffice.Amonthlater,theychangedthelocksontheoldoffice andbeganseeingpatientsinthenewofficewithoutanynoticetoDr.Whiteatall.Dr.White simplycameinataroundteno'clockasusual,andfoundhimselflockedoutofanemptyoffice.
Required:
DidDrs.RosenandJenneractethicallyintheirendingofthepartnership?Explain.
S-AE196(Communication)
MattJonesandJerryWatsonbegandetailworkonautomobilesasahobby.First,theyuseda mail-orderkittoadd"pinstriping"totheirowncars,a1968Mustanganda1970GTOJudge, respectively.ThenMattaddedmoreflourishes,includinghisname.Jerrypracticedpainting flamesonhisJudge.Gradually,theircarsbecamerecognizedaroundtownandothersbeganto askthemtoaddaflourishhereortheretotheircars.Theyweretalkedintoattendinga"muscle car"showinanearbylargecitytoshowofftheircars.Theyhadmorerequestsforworkthanthey couldhandle.Now,theyareconsideringquittingtheirotherjobsandmakingthisapermanent business.Jerry,forexample,turnsdownmorejobsthanheacceptsandstillgetsmorerequests everyweek.
S-AE196(cont.)
MattandJerryareunsurehowtoproceed.Theyliketheideaofapartnership,buttheyonlyknow theyworkwelltogether—thingslikehowtosplitpaymenthavejustbeensettledindividuallyfor eachjob,dependingonwhichonedidmorework.Matt'sfathersuggestsawrittenpartnership agreement.Mattdisagrees.Hebelievesthatitwillspoilthewholearrangementbyreducingitto words.
Required:
WriteabriefnotetoMattexplainingwhyheneedsapartnershipagreement.
CHAPTER13
CORPORATIONS:ORGANIZATIONANDCAPITALSTOCKTRANSACTIONS
CHAPTERSTUDYOBJECTIVES
1.Identifythemajorcharacteristicsofacorporation.
2.Differentiatebetweenpaid-incapitalandretainedearnings.
3.Recordtheissuanceofcommonstock.
4.Explaintheaccountingfortreasurystock.
5.Differentiatepreferredstockfromcommonstock.
6.Prepareastockholders'equitysection.
7.Computebookvaluepershare.
TRUE-FALSESTATEMENTS
1. A corporationisnotanentitywhichis separateand distinctfrom itsowners.
2. A corporationcanbeorganizedforthepurposeof makingaprofitor it maybenonprofit.
3. A corporationactsunderits ownname ratherthaninthename of its stockholders.
4. Ifacorporationpaystaxesonitsincome,thenstockholderswillnothavetopaytaxeson thedividendsreceivedfrom thatcorporation.
5. A corporationmust be incorporatedineachstateinwhichitdoesbusiness.
6. A stockholderhastherightto voteintheelectionof theboard ofdirectors.
7. Aproxyisalegaldocumentthatinstructsastockholder’sagenthowtovotesharesof stock for thestockholder.
8. Assoon as acorporationisauthorizedtosell stock,an accountingjournalentry shouldbe maderecordingthetotalvalueof thesharesauthorized.
9. Theparvalueofcommonstockmustalwaysbeequaltoitsmarketvalueonthedatethe stockisissued.
10. Whenno-parvaluestockdoesnothaveastatedvalue,theentireproceedsfromthe issuance ofthestock becomes legalcapital.
11. Acorporationcanissuemoresharesthanitisauthorizedinitscharter,iftheboardof directorsapprovesof anincreaseinthenumberof authorizedshares.
12. Themarketvalueofacorporation's stockisdeterminedbythenumberofsharesthatthe corporation has beenauthorized to issue.
13. Eachstockholderinacorporationhasaseparatecapitalaccountinthestockholders' equitysection of thebalancesheet.
14. Thestockholders'equitysectionofacorporation'sbalancesheetconsistsof(1)paid-in capital, (2)retainedearnings,and(3)drawings.
15. Dividendsaredeclaredout ofretainedearnings.
16. Whenacorporationhasonlyoneclass of capitalstock,it is identifiedaspreferredstock.
17. Retainedearningsare apartof stockholders'equity.
Corporations:OrganizationandCapitalStockTransactions 13-5
18. Retainedearningsaresubtractedfrompaid-incapitaltoarriveattotalstockholders' equity.
19. Stockcanbeissuedonly inexchangefor cash.
20. Theparvalueofstockissuedfornoncashassetsisneverafactorindeterminingthecost of the assetsreceived.
21. Theacquisitionoftreasurystockbyacorporationincreasestotalassetsandtotal stockholders' equity.
22. Treasurystockshouldnotbeclassifiedasacurrent asset.
23. Treasury stockpurchasedfor$25persharethatisreissued at$20pershare,resultsina Losson SaleofTreasuryStockbeingrecognizedontheincomestatement.
24. Treasurystockisacontrastockholders'equityaccount.
25. Thenumberofcommonsharesoutstandingcanneverbegreaterthanthenumberof shares issued.
26. Preferredstock hascontractualpreferenceover commonstockincertainareas.
27. Preferredstockholdersgenerallydo nothavetherighttovoteforthe board of directors.
28. Dividendsinarrearsoncumulativepreferredstockareconsidereda liability.
29. Inpublishedannualreports,subclassificationswithinthestockholders'equitysectionare seldompresented,butadditionalinformationisfrequentlyincludedinthefootnotestothe financialstatements.
30. Bookvaluepershareofcommonstockisthesameamountasthemarketvalueper share.
Additional True-FalseQuestions
31. A successfulcorporationcan haveacontinuousandperpetuallife.
32. OrganizationalcostsarecapitalizedbydebitinganintangibleassetentitledOrganization Costs.
33. Thecashproceedsfromissuingparvaluestockmaybeequaltoorgreaterthan,butnot less thanparvalue.
34. Thecostofanoncashassetacquiredinexchange forcommonstockshouldbeeitherthe fairmarketvalueoftheconsiderationgivenuportheconsiderationreceived,whicheveris more clearlydeterminable.
35. Underthecostmethod,TreasuryStockisdebitedatthepricepaidtoreacquirethe shares, andthesameamountiscreditedtoTreasuryStockwhenthe sharesaresold.
36. Bookvaluepershareis thesamethingas liquidationvalueper share.
MULTIPLECHOICEQUESTIONS
37. Whichoneof thefollowingisaprivatelyheldcorporation? a.Intel
b.GeneralElectric c.CaterpillarInc.d.CargillInc.
38. ThedominantformofbusinessorganizationintheUnitedStatesintermsofdollarsales volume,earnings,andemployees is
a.thesoleproprietorship. b.thepartnership.
c.thecorporation. d.notknown.
39. Underthecorporateformofbusinessorganization
a.a stockholderispersonallyliableforthedebtsof thecorporation.
b.stockholders'actscanbindthecorporationeventhoughthestockholdershavenot been appointedasagents of thecorporation.
c.thecorporation'slife isstipulated inits charter.
d.stockholderswishingtoselltheircorporationsharesmustgettheapprovalofother stockholders.
40. Stockholdersof acorporationdirectlyelect a.thepresidentof thecorporation.
b.theboardof directors.
c.thetreasurerofthecorporation.
d.allof theemployeesof thecorporation.
41. Thechief accountingofficerinacompanyisknownasthe a.controller.
b.treasurer.
c.vice-president. d.president.
42. Afactorwhichdistinguishesthecorporateformoforganizationfromasoleproprietorship orpartnershipisthata
a.corporationis organizedforthepurposeof makingaprofit.
b.corporationissubjecttonumerousfederalandstategovernmentregulations. c.corporationisanaccountingeconomicentity.
d.corporation’stemporaryaccountsareclosedattheend oftheaccountingperiod.
Corporations:OrganizationandCapitalStockTransactions 13-7
43. Whichoneof thefollowingwouldnotbeconsideredan advantage of the corporate form of organization?
a.Limitedliabilityofowners b.Separatelegalexistence c.Continuouslife
d.Governmentregulation
44. Theconceptof an"artificialbeing"referstowhichform of businessorganization? a.Partnership
b.Soleproprietorship c.Corporation
d.Limitedpartnership
45. Thetwowaysthatacorporationcanbeclassifiedbypurposeare a.generalandlimited.
b.profitandnonprofit. c.stateandfederal.
d.publiclyheldandprivatelyheld.
46. Thetwowaysthatacorporationcanbeclassifiedbyownershipare a.publiclyheldandprivatelyheld.
b.stockandnon-stock. c.insideandoutside.d.majorityandminority.
47. Whichofthefollowingwouldnotbetrue of aprivatelyheldcorporation? a.Itissometimescalleda closelyheldcorporation.
b.Its sharesareregularlytradedontheNewYork Stock Exchange. c.Itdoesnotofferitssharesfor saletothegeneralpublic.
d.Itisusuallysmallerthana publiclyheld company.
48. Whichofthefollowingisnottrueof acorporation? a.It maybuy,own,andsellproperty.
b.It maysueandbesued.
c.Theacts of itsownersbindthecorporation.
d.It mayenterintobindinglegalcontractsin its own name.
49. EdStonehasinvested$400,000inaprivatelyheldfamilycorporation.Thecorporation does not do wellandmustdeclarebankruptcy.WhatamountdoesStonestandto lose?a.Uptohistotal investmentof $400,000.
b.Zero.
c.The$400,000plusanypersonalassetsthecreditors demand. d.$200,000.
50. Whichofthefollowingstatementsreflectsthetransferabilityofownershiprightsina corporation?
a.Ifa shareholderdecidesto transferownership,hemust transferallofhisshares. b.Ashareholdermaydisposeof partor allof hisshares.
c.A shareholdermustobtainpermissionfromtheboardof directorsbeforesellingshares. d.Ashareholdermustobtainpermissionfromatleastthreeotherstockholdersbefore
sellingshares.
13-8
51. A corporateboardofdirectorsdoesnotgenerally a.selectofficers.
b.formulateoperatingpolicies. c.declaredividends.
d.executepolicy.
52. A typicalorganizationchart showingdelegationof authoritywouldshow a.stockholdersdelegatingtotheboard of directors.
b.theboardof directorsdelegatingtostockholders.
c.thechief executiveofficerdelegatingtotheboard of directors. d.thecontrollerdelegatingtothechiefexecutiveofficer.
53. Theofficerwhoisgenerallyresponsibleformaintainingthecashpositionofthe corporation is the
a.controller. b. treasurer. c.cashier.
d.internalauditor.
54. Thechief accountingofficerinacorporationis the a.treasurer.
b.president. c.controller.
d.vice-presidentoffinance.
55. Theabilityofacorporationtoobtaincapitalis
a.enhancedbecauseof limitedliabilityandeaseofsharetransferability. b.lessthanapartnership.
c.restrictedbecause ofthe limitedlifeof thecorporation. d.aboutthesame asapartnership.
56. Whichofthefollowingstatements concerningtaxationisaccurate?
a.Partnerships paystateincometaxesbutnotfederalincometaxes. b.Corporationspay federal income taxes butnotstateincome taxes. c.Corporationspayfederaland stateincometaxes.
d.Onlytheownersmustpaytaxesoncorporateincome.
57. Whichofthefollowingstatementsisnotconsideredadisadvantageofthecorporateform oforganization?
a.Additionaltaxes
b.Governmentregulations
c.Limitedliabilityofstockholders
d.Separationof ownershipandmanagement
58. Whatis ordinarilythefirststepintheformationofa corporation? a.Developmentofby-lawsforthecorporation
b.Issuanceof thecorporatecharter
c.Applicationfor incorporationtothe appropriate SecretaryofState d.RegistrationwiththeSEC
Corporations:OrganizationandCapitalStockTransactions 13-9
59. Whichoneof thefollowingisnotanownership right ofastockholderinacorporation? a.Tovoteintheelectionof directors
b.Todeclaredividends onthecommonstock c.Toshareinassetsuponliquidation
d.Toshareincorporateearnings
60. Ifno-parstock isissuedwithoutastatedvalue,then a.thepar valueis automatically$1 pershare.
b.theentire proceedsareconsideredto be legalcapital. c.thereis nolegalcapital.
d.thecorporationisautomaticallyin violationofits statecharter.
61. Ifastockholdercannotattendastockholder's meeting,hemaydelegatehisvotingrights bymeansof
a.an absenteeballot. b.aproxy.
c.a certifiedletter. d.atelegram.
62. Ifa corporationhasonlyoneclassof stock,itisreferredto as a.ClasslessStock.
b.PreferredStock. c.SolitaryStock.d.CommonStock.
63. Thetermresidualclaimreferstoashareholder'srightto a.receivedividends.
b.shareinassetsuponliquidation.
c.acquireadditionalshares whenoffered. d.exerciseaproxyvote.
64. Whichofthefollowingfactors doesnotaffecttheinitialmarketpriceofa stock? a.Thecompany'santicipatedfutureearnings
b.Theparvalueof thestock
c.Thecurrentstateof theeconomy
d.Theexpecteddividendratepershare
65. Ifan investmentfirm underwritesastockissue,the
a.riskof beingunabletoselltheshares stays withthe issuingcorporation. b.corporationobtainscash immediatelyfromtheinvestmentfirm.
c.investmentfirm hasguaranteedprofitsonthesaleofthestock. d.issuanceofstockis likelytobedirectlyto creditors.
66. Theparvalueofastock a.is legallysignificant.
b.reflectsthemostrecentmarket price. c.isselectedbythe SEC.
d.isindicativeof the worthof thestock.
13-10
67. Acorporation hasthefollowingaccountbalances:Commonstock,$1parvalue,$30,000; Paid-in CapitalinExcess ofParValue,$1,350,000.Basedonthisinformation,the
a.legalcapitalis$1,380,000.
b.numberof sharesissuedare30,000.
c.numberof sharesoutstanding are1,380,000. d.averagepricepershareissuedis$4.60.
68. Theauthorizedstock of acorporation
a.onlyreflectstheinitialcapital needsofthecompany. b.isindicatedinits by-laws.
c.is indicatedinitscharter.
d.mustberecordedinaformalaccountingentry.
69. Owners'equityfor acorporationis identified aseach ofthefollowingexcept a.corporatecapital.
b.paid-incapital.
c.shareholders'equity. d.stockholders'equity.
70. Retainedearnings
a.isuniquetothecorporateformofbusiness.
b.isanoptionalaccountinthepartnershipformofbusiness. c.reflectscashpaidinbyshareholderstodate.
d.isclosed attheendof the year.
71. Dividendsaredeclaredout of a.CapitalStock.
b.Paid-inCapitalinExcessofPar Value. c.RetainedEarnings.
d.TreasuryStock.
72. Retainedearningsis
a.alwaysequaltotheamountofcashthatthecorporationhasgeneratedfrom operations.
b.a part ofthepaid-incapitalof thecorporation.
c.a partofthestockholders'claimonthetotal assetsofthecorporation. d.closedat theendof eachaccountingperiod.
73. Whenstockisissuedforlegalservices,thetransactionisrecordedbydebiting OrganizationExpenseforthe
a.statedvalueofthestock. b.parvalueof thestock.
c.marketvalueof thestock. d.bookvalueof thestock.
74. IfVickersCompanyissues2,000sharesof $5par valuecommonstockfor$140,000, a.CommonStock willbe creditedfor$140,000.
b.Paid-InCapitalinExcessofPar Valuewillbecreditedfor $10,000.c.Paid-InCapitalin ExcessofPar Valuewillbecreditedfor $130,000. d.Cashwill bedebitedfor $130,000.
Corporations:OrganizationandCapitalStockTransactions 13-11
75. Ifcommonstockisissuedforanamountgreaterthanparvalue,theexcessshouldbe creditedto
a.Cash.
b.RetainedEarnings.
c.Paid-inCapitalinExcessofPar Value. d.LegalCapital.
76. Ifstockisissuedforanoncashasset,theassetshouldberecordedonthebooksofthe corporation at
a.fairmarketvalue. b.cost.
c.zero.
d.a nominalamount.
77. Ifstockis issuedforlessthanpar value,the accounta.Paid-InCapitalin ExcessofPar Valueis credited.
b.Paid-InCapitalinExcessofParValueisdebitedifadebitbalanceexistsinthe account.
c.Paid-InCapitalinExcessofParValueisdebitedifacreditbalanceexistsinthe account.
d.RetainedEarningsiscredited.
78. Thesaleof commonstockbelowpar
a.isacommonoccurrenceinmoststates. b.isnotpermittedinmost states.
c.isapracticethatmostshareholdersencourage.
d.requiresthataliabilityberecordedforthedifferencebetweenthesalespriceandthe parvalueof theshares.
79. Paid-InCapitalin ExcessofStatedValue
a.iscreditedwhenno-parstockdoesnothaveastatedvalue. b.isreportedaspart ofpaid-incapitalonthebalancesheet.c.representstheamountof legalcapital.
d.normallyhas a debitbalance.
80. Aseparatepaid-incapitalaccountisusedtorecordeachofthefollowingexceptthe issuance of
a.no-parstock.
b.par valuestock.
c.stated valuestock.
d.treasurystockabovecost.
81. BeckerCompany isapubliclyheldcorporation whose$1parvaluestockisactivelytraded at$20pershare.Thecompanyissued2,000sharesofstocktoacquirelandrecently advertised at$50,000.Whenrecordingthistransaction, Becker Companywill
a.debitLandfor $50,000.
b.creditCommonStockfor $40,000. c.debitLandfor $40,000.
d.creditPaid-InCapitalinExcessofParValuefor $48,000.
13-12
82. SimonCompanyissued6,000sharesofits$5parvaluecommonstockinpaymentofits attorney'sbillof$45,000.Thebillwasforservicesperformedinhelpingthecompany incorporate. Simonshouldrecordthistransactionbydebiting
a.LegalExpensefor $30,000. b.LegalExpensefor $45,000.
c.OrganizationExpensefor $30,000. d.OrganizationExpensefor $45,000.
83. Inthefinancialstatements,organizationcostsappears
a.immediatelybelowRetainedEarningsinthestockholders' equity section. b.intheincomestatement.
c.aspartof paid-in capitalinthe stockholders' equitysection. d.asanintangibleasset.
84. Whichofthefollowingrepresentsthelargestnumberof commonshares? a.Treasuryshares
b.Issuedshares
c.Outstandingshares d.Authorizedshares
85. NewCorp.issues1,000sharesof$10parvaluecommonstockat$14pershare.When the transactionisrecorded,creditsaremadeto
a.CommonStock$10,000andPaid-inCapitalin Excess of StatedValue$4,000. b.CommonStock$14,000.
c.CommonStock $10,000andPaid-inCapitalinExcess of Par Value$4,000. d.CommonStock$10,000andRetainedEarnings$4,000.
86. IfKinerCompanyissues1,000sharesof$5parvaluecommonstockfor$70,000,the account
a.CommonStockwillbe creditedfor$5,000.
b.Paid-inCapitalinExcessofPar Valuewill becreditedfor $5,000.c.Paid-inCapitalin ExcessofParValuewillbecreditedfor $70,000. d.Cashwill bedebitedfor $65,000.
87. JansenPackagingCorporationbeganbusinessin2008byissuing40,000sharesof$5 parcommonstockfor$8pershareand10,000sharesof6%,$10parpreferredstockfor par.Atyearend,thecommonstockhadamarket value of$10.OnitsDecember31,2008 balance sheet, JansenPackagingwould report
a.CommonStockof$400,000. b.CommonStockof$200,000. c.Common Stockof$320,000. d.Paid-InCapitalof $300,000.
88. Kim,Inc.issued5,000sharesofstockatastatedvalueof$10/share.Thetotalissueof stock soldfor $15/share.Thejournalentrytorecordthistransactionwouldincludea
a.debitto Cashfor $50,000.
b.creditto Common Stockfor $50,000.
c.credittoPaid-inCapitalinExcessofParValuefor $25,000. d.creditto CommonStockfor $75,000.
Corporations:OrganizationandCapitalStockTransactions 13-13
89. FoleyManufacturingCorporationpurchased3,000sharesofitsownpreviouslyissued $10parcommonstockfor $69,000.Asaresultofthisevent,
a.Foley’sCommonStockaccountdecreased$30,000. b.Foley’stotalstockholders’equitydecreased$69,000.
c.Foley’sPaid-inCapitalin Excessof ParValueaccountdecreased $39,000. d.All of theabove.
90. Acorporationpurchases20,000sharesofitsown$20parcommonstockfor$35per share, recordingit atcost.Whatwill bethe effectontotalstockholders’equity?
a.Increaseby$700,000 b.Decreaseby$400,000 c.Decreaseby$700,000 d.Increaseby$400,000
91. Acorporationpurchases10,000sharesofitsown$10parcommonstockfor$25per share, recordingit atcost.Whatwill bethe effectontotalstockholders’equity?
a.Increaseby$100,000 b.Decreaseby$250,000 c.Increaseby$250,000 d.Decreaseby$100,000
92. BeckhamCompanyhas1,000sharesof4%,$100parcumulativepreferredstock outstandingatDecember31, 2008.No dividendshave been paid on thisstockfor2007 or 2008.Dividendsinarrearsat December31,2008total
a.$0.b.$400.
c.$4,000. d.$8,000.
93. EphramCompanyhas2,000sharesof5%,$100parnon-cumulativepreferredstock outstandingatDecember31, 2008.No dividendshave been paid on thisstockfor2007 or 2008.Dividendsinarrearsat December31,2008total
a.$0.
b.$1,000.c.$10,000. d.$20,000.
94. RebelInc.issued2,000sharesofno-parcommonstockwithastatedvalueof$3per share.The marketpriceofthestockonthedate ofissuancewas$12pershare. Theentry to recordthistransactionincludesa
a.debitto Cashfor $6,000.
b.creditto Common Stockfor $24,000. c.creditto CommonStockfor $6,000.
d.debitto Paid-inCapitalin Excessof ParValuefor $24,000.
95. RanchoCorporationsold100sharesoftreasurystockfor$40pershare.Thecostforthe shares was$30.Theentry torecordthesalewillincludea
a.credittoGainon SaleofTreasuryStockfor $3,000.
b.creditto Paid-inCapitalfromTreasuryStockfor $1,000.c.debittoPaid-in Capitalin Excessof ParValuefor $1,000. d.credittoTreasuryStockfor $4,000.
13-14
96. Eachof thefollowingiscorrectregardingtreasurystockexceptthatit has been a.issued.
b.fullypaidfor. c.reacquired. d.retired.
97. Treasurystockis
a.stockissuedbytheU.S.TreasuryDepartment.
b.stockpurchased byacorporationandheldasan investmentin itstreasury. c.corporatestockissuedbythetreasurerof acompany.
d.a corporation'sownstockwhichhasbeenreacquiredbutnotcanceled.
98. Theacquisitionoftreasurystock byacorporation
a.increasesitstotalassetsandtotal stockholders' equity. b.decreasesitstotalassetsandtotal stockholders'equity.
c.hasnoeffectontotalassetsandtotalstockholders'equity.
d.requiresthatagain or lossberecognizedontheincomestatement.
99. Treasurystockshouldbereportedinthefinancialstatementsof acorporationasa(n) a.investment.
b.liability.
c.deductionfromtotalpaid-incapital.
d.deductionfromtotal paid-incapitalandretainedearnings.
100. A companywouldnot acquiretreasurystock a.inordertoreissuesharesto officers.
b.as anassetinvestment.
c.inordertoincreasetrading of thecompany's stock.
d.tohaveadditionalsharesavailabletouseinacquisitions of othercompanies.
101. Accountingfor treasurystock isdonebythe a.FIFOmethod.
b.LIFOmethod. c.costmethod.
d.lower ofcostormarketmethod.
102. Treasurystockisgenerallyaccountedfor bythe a.costmethod.
b.marketvaluemethod. c.parvaluemethod.
d.statedvaluemethod.
103. TreasuryStockis a(n)
a.contra assetaccount.
b.retainedearningsaccount. c.assetaccount.
d.contrastockholders’equityaccount.
Corporations:OrganizationandCapitalStockTransactions 13-15
104. FourthousandsharesoftreasurystockofMeyer,Inc.,previouslyacquiredat$12per share, aresoldat $18per share.Theentrytorecordthistransactionwill includea
a.credittoTreasuryStockfor $72,000.
b.debitto Paid-In CapitalfromTreasuryStockfor $24,000. c.debittoTreasuryStockfor $48,000.
d.creditto Paid-InCapitalfromTreasuryStockfor $24,000.
105. ReevesCompanyoriginallyissued2,000sharesof$10parvaluecommonstockfor $60,000($30pershare).Reevessubsequentlypurchases200sharesoftreasurystock for$27pershareandresellsthe200sharesoftreasurystockfor$29pershare.Inthe entry torecordthesaleof thetreasurystock,therewill bea
a.creditto Common Stockfor $5,400. b.credittoTreasuryStockfor $2,000.
c.debittoPaid-In CapitalinExcessofParValueof$6,000. d.creditto Paid-InCapitalfromTreasuryStockfor$400.
106. Whenpreferredstockiscumulative,preferreddividendsnotdeclaredinaperiodare a.consideredaliability.
b.calleddividendsinarrears. c.distributionsof earnings.d.neverpaid.
107. Whichofthefollowingisnot aright or preferenceassociatedwith preferredstock? a.Therighttovote
b.Firstclaimtodividends
c.Preferencetocorporateassetsincase of liquidation
d.Toreceivedividendsin arrears beforecommonstockholdersreceivedividends
Usethefollowing informationforquestions108and 109.
ColeCorporationissues15,000sharesof$50parvaluepreferredstockforcashat$60per share.
108. Theentrytorecordthetransactionwill consistofadebitto Cashfor $900,000 anda credit or credits to
a.PreferredStockfor $900,000.
b.PreferredStockfor$750,000andPaid-inCapitalinExcessofParValue—Preferred Stockfor $150,000.
c.PreferredStockfor $750,000andPaid-inCapitalfromPreferredStockfor$150,000. d.Paid-inCapitalfromPreferredStockfor$900,000.
109. Inthe stockholders'equitysection,theeffectsofthe transactionabove will bereported a.entirelywithinthecapitalstocksection.
b.entirelywithinthe additionalpaid-incapitalsection.
c.underboththecapitalstock andadditionalpaid-incapitalsections. d.entirelyundertheretainedearningssection.
110. Dividendsinarrearsoncumulativepreferredstock a.neverhavetobepaid.
b.mustbepaidbeforecommonstockholderscanreceivea dividend. c.shouldberecordedasacurrentliabilityuntiltheyarepaid.
d.enablethepreferredstockholderstoshareequallyincorporateearningswiththe commonstockholders.
13-16
111. Dividendsinarrearsoncumulativepreferredstock a.areconsideredtobea non-current liability.
b.areconsideredto bea currentliability.
c.onlyoccurwhenpreferreddividendshavebeendeclared.d.shouldbedisclosedinthenotestothefinancialstatements.
112. Ifpreferredstockiscumulative, the
a.preferreddividendsnot declaredinagivenyeararecalleddividendsinarrears. b.preferredshareholders andthecommonshareholdersreceiveequaldividends.
c.preferredshareholdersandthecommonshareholdersreceivethesametotaldollar amount of dividends.
d.commonshareholders willshareinthe preferreddividends.
113. TheNiceCorporationissues10,000sharesof$100parvaluepreferredstockforcashat $110pershare.TheentrytorecordthetransactionwillconsistofadebittoCashfor $1,100,000andacreditor creditsto
a.PreferredStockfor $1,100,000.
b.Paid-inCapitalfromPreferredStockfor$1,100,000.
c.PreferredStockfor $1,000,000 andRetainedEarningsfor $100,000.
d.PreferredStockfor$1,000,000andPaid-inCapitalinExcessofParValue—Preferred Stockfor $100,000.
Usethefollowing informationforquestions114–116.
TriadCorporation’sDecember31,2008balancesheetshowedthefollowing:
8%preferredstock,$20par value,cumulative,10,000sharesauthorized; 5,000sharesissued
Commonstock,$10parvalue,1,000,000sharesauthorized;650,000 sharesissued,640,000sharesoutstanding
Paid-incapitalinexcessofparvalue—preferredstock Paid-incapitalinexcessofparvalue—commonstock Retainedearnings
Treasurystock(10,000shares)
$100,000
6,500,000 20,000 9,000,000 2,500,000 210,000
114. Triaddeclaredandpaida$25,000 cashdividendonDecember 15,2008.Ifthecompany’s dividendsinarrearspriortothatdatewere$6,000,Triad’scommonstockholdersreceived a.$19,000.
b.$9,000.c.$11,000.
d.no dividend.
115. Triad’stotalpaid-incapital was a.$15,620,000.
b.$15,830,000. c.$15,410,000. d.$9,020,000.
116. Triad’stotalstockholders’equitywas a.$18,380,000.
b.$15,620,000. c.$18,170,000. d.$17,910,000.
Corporations:OrganizationandCapitalStockTransactions 13-17
117. BurgessCorporationbeganbusinessbyissuing100,000sharesof$5parvaluecommon stockfor$24pershare.Duringitsfirstyear,thecorporationsustainedanetlossof $20,000.Theyear-endbalancesheet wouldshow
a.Commonstock of $500,000.b.Commonstockof $2,400,000.
c.Totalpaid-incapitalof $2,380,000. d.Totalpaid-incapitalof $1,900,000.
Usethefollowing informationforquestions118–119.
StarrCorporation’sDecember31,2008BalanceSheetshowedthefollowing:
8%preferredstock,$20par value,cumulative,20,000shares authorized;10,000shares issued
Commonstock,$10parvalue,2,000,000sharesauthorized; 1,300,000sharesissued,1,280,000sharesoutstanding
Paid-incapitalinexcessofparvalue–preferredstock Paid-incapitalinexcessofparvalue–commonstock Retainedearnings
Treasurystock(10,000shares)
$ 200,000
13,000,000 40,000 18,000,000 5,100,000 420,000
118. Starr’stotalpaid-incapitalwas a.$31,240,000.
b.$31,660,000. c.$30,820,000. d.$18,040,000.
119. Starr’stotalstockholders’equitywas a.$36,760,000.
b.$31,240,000. c.$36,340,000. d.$35,920,000.
120. AdcockCorporationbeganbusinessbyissuing150,000sharesof$5parvaluecommon stockfor$24pershare.Duringitsfirstyear,thecorporationsustainedanetlossof $30,000.Theyear-endbalancesheet wouldshow
a.Commonstock of $750,000.b.Commonstockof $3,600,000.
c.Totalpaid-incapitalof $3,570,000. d.Totalpaid-incapitalof $2,850,000.
121. ThetrialbalanceofHackmanInc.includesthefollowingbalances:CommonStock, $39,000;Paid-inCapitalinExcessofPar,$96,000;TreasuryStock,$9,000;Preferred Stock,$30,000.Capitalstocktotals
a.$69,000. b.$126,000. c.$165,000. d.$174,000.
13-18
122. Eachof thefollowingisreportedforcommonstock exceptthe a.parvalue.
b.sharesissued.
c.sharesoutstanding. d.liquidationvalue.
123. Paid-incapitalfromtreasurystock wouldappearon abalancesheetunderthecategory a.capitalstock.
b.treasurystock.
c.additionalpaid-incapital. d.contratoowners'equity.
124. Twoclassificationsappearing inthepaid-incapitalsectionof thebalancesheetare a.preferredstockandcommonstock.
b.paid-incapitalandretainedearnings.
c.capitalstockandadditionalpaid-incapital. d.capitalstockandtreasurystock.
125. Informationthatis notgenerallyreportedfor eachclassof stockonthe balancesheetis a.the marketvalue.
b.theparvalue.
c.sharesauthorized. d.sharesissued.
126. Inpublishedannualreports
a.subclassificationswithinthestockholders’equitysectionareroutinelyreportedin detail.
b.capitalsurplusisused inplaceofretained earnings.
c.theindividualsourcesofadditionalpaid-incapitalareoftencombined. d.retainedearnings isoftennotshownseparately.
127. Additionalpaid-in capitalincludesallof thefollowingexcept a.paid-incapitalfromtreasurystock.
b.paid-incapitalin excessof par.
c.paid-incapitalinexcessof statedvalue. d.paid-incapitalin excessof bookvalue.
128. Bookvaluepershareiscomputedbydividingtotal
a.paid-incapitalbythenumberofcommonsharesoutstanding. b.paid-incapitalbythenumberof commonsharesissued.
c.stockholders'equitybythenumberof commonsharesoutstanding. d.stockholders'equitybythe numberofcommonsharesissued.
129. Bookvaluepershareisusually
a.equaltothemarketvalueper share. b.lessthanthemarketvaluepershare.
c.greaterthanthemarketvaluepershare. d.equaltothepar valuepershare.
Corporations:OrganizationandCapitalStockTransactions 13-19
130. Bookvaluepershareis
a.theequityacommonstockholderhasinthenetassetsofthecorporationfromowning one share ofstock.
b.theequityacommonstockholderhasinthetotalassetsofthecorporationfrom owningoneshareof stock.
c.alwaysequaltothemarketvalueofthestock. d.computedonlyforpreferredstockholders.
131. Thebookvaluepershare
a.isusuallya closeapproximationofthemarketpricepershare. b.isthesameastheparvaluepershare.
c.maybeusefulindeterminingthetrendofastockholder'spershareequityina corporation.
d.alwaysfalls withintheannualrangeof acompany'smarketvaluepershare.
132. Barr,Inc.reports$3,000,000ofcommonstock,and$4,500,000ofadditionalpaid-in capitalonitsbalancesheet.Thenumberofcommonsharesissuedandoutstandingis 500,000shares.Thebook valuepershareis
a.$15. b.$9.c.$6.
d.notdeterminable.
Additional MultipleChoiceQuestions
133. Whichofthefollowingisan incorrectstatementaboutacorporation? a.Acorporationis anentityseparateanddistinctfrom its owners.
b.Creditorsordinarilyhaverecourseonlytocorporateassetsinsatisfactionoftheir claims.
c.Acorporationmaybeformedinwriting,orally,or implied.
d.Acorporationis subjecttonumerousstateandfederalregulations.
134. Capitalstockto whichthe charterhasassignedavalueper shareiscalled a.parvaluestock.
b.no-parvaluestock. c.statedvaluestock.
d.assignedvaluestock.
135. Legalcapitalpersharecannotbeequaltothe a.parvaluepershareofpar valuestock.
b.totalproceedsfromthesaleof parvaluestockabove parvalue. c.statedvaluepershareof no-parvaluestock.
d.totalproceedsfromthesaleof no-parvaluestock.
136. Whencommonstockisissuedforservicesor non-cashassets,costshouldbe a.onlythefairmarketvalueoftheconsiderationgivenup.
b.onlythefairmarket valueoftheconsiderationreceived. c.thebookvalue of thecommonstockissued.
d.eitherthefairmarketvalueoftheconsiderationgivenuportheconsideration received,whicheverismoreclearlyevident.
13-20
137. Whenthesellingpriceoftreasurystockisgreaterthanitscost,thecompanycreditsthe differenceto
a.GainonSaleof TreasuryStock.
b.Paid-inCapitalfromTreasuryStock.
c.Paid-inCapitalin ExcessofPar Value. d.TreasuryStock.
138. RobersonCorporationwasorganizedonJanuary1,2008,withauthorizedcapitalof 750,000sharesof$10parvaluecommonstock.During2008,Robersonissued30,000 sharesat$12pershare,purchased3,000sharesoftreasurystockat$13pershare,and sold3,000sharesoftreasurystockat$14pershare.Whatistheamountofadditional paid-in capitalat December31,2008?
a.$0
b.$3,000c.$60,000 d.$63,000
139. Thepurchaseof treasurystock
a.decreasescommonstockauthorized. b.decreasescommonstock issued.
c.decreasescommonstockoutstanding.
d.hasnoeffectoncommonstockoutstanding.
140. Preferredstockholdershavea priorityovercommonstockholdersasto a.dividendsonly.
b.assetsin theeventofliquidationonly. c.votingrights.
d.bothdividendsand assetsintheeventof liquidation.
141. OnJanuary2,2005,RileyCorporationissued20,000sharesof6%cumulativepreferred stockat$100parvalue.OnDecember31,2008,RileyCorporationdeclaredandpaidits firstdividend.Whatdividendsarethepreferredstockholdersentitledtoreceiveinthe currentyearbeforeanydistributionismadetocommonstockholders?
a.$0
b.$120,000 c.$360,000 d.$480,000
142. Additionalpaid-in capitalincludesallof thefollowingexceptthe amountspaidin a.overpar value.
b.overstated value.c.fromtreasurystock.
d.fortheparvalueofcommonstock.
143. Inthestockholders'equitysectionofthebalancesheet,theclassificationofcapitalstock consistsof
a.additionalpaid-in capital andcommonstock. b.commonstockandtreasurystock.
c.commonstock,preferredstock,andtreasurystock. d.commonstockandpreferredstock.
Corporations:OrganizationandCapitalStockTransactions 13-21
144. AtDecember31,thestockholders’equitysectionshows:
Commonstock,$5parvalue;1,320,000sharesissued
and1,200,000sharesoutstanding.................................................. Additionalpaid-in capital....................................................................... Retainedearnings................................................................................. Treasurystock,(120,000shares).......................................................... Totalstockholders’equity......................................................................
Thebookvaluepershare ofcommonstockis a.$5.91.
b.$6.50. c.$7.08. d.$6.44.
$6,600,000 1,400,000 500,000
(700,000) $7,800,000
BRIEFEXERCISES
BE145
Identify(by letter) each of the followingcharacteristicsasbeing anadvantage,adisadvantage, or notapplicabletothecorporateformof businessorganization.
A= Advantage
D= Disadvantage N= NotApplicable
Characteristics
1.Separatelegalentity
2.Taxableentityresultinginadditionaltaxes
3.Continuouslife
4.Unlimitedliability of owners
5.Governmentregulation
6.Separationof ownershipandmanagement
7.Abilitytoacquirecapital
8.Easeoftransferof ownership
BE146
OnJuly6,XOTCorporationissued2,300sharesofits$1.50parcommonstock.Themarket price of thestockonthatdate was$17 pershare.Journalizethe issuanceof thestock.
BE147
BennettCorporationisauthorizedtoissue1,000,000sharesof$1parvaluecommonstock. During2008,thecompanyhasthefollowingstocktransactions.
Jan.15 Issued500,000sharesof stockat$7per share.
Sept.5 Purchased20,000sharesofcommonstockforthetreasuryat $8pershare.
Instructions
Journalizethetransactionsfor BennettCorporation.
BE148
AninexperiencedaccountantforDuranCorporationmadethefollowingentries.
July1 Cash..................................................................................... 170,000 CommonStock............................................................ 170,000
(Issued20,000sharesof commonstock, parvalue$6pershare)
Sept.1 CommonStock..................................................................... 36,000 RetainedEarnings................................................................ 24,000
Cash............................................................................ 60,000 (Purchased4,000sharesissuedonJuly1forthe
treasuryat$15pershare)
Instructions
Onthebasis oftheexplanation foreachentry,preparetheentry thatshouldhavebeenmadefor the transactions.
BE149
OnSeptember5,BertolliCorporationacquired2,500sharesofitsown$1parcommonstockfor $23pershare.OnOctober 15,1,000sharesofthetreasurystock is soldfor $25pershare.
Instructions
Journalizethepurchaseandsaleofthetreasurystockassumingthatthecompanyusesthecost method.
BE150
WarrenCompanyhadthefollowingtransactions.
1.Issued6,000sharesofcommonstockwithastatedvalueof$10for $110,000. 2.Issued3,000sharesof$100parpreferredstockat$107forcash.
Instructions
Preparethejournalentriestorecordtheabove stocktransactions.
BE151
OnFebruary1,BurchessCorporationissued4,000 sharesofits$20par valuepreferredstockfor $24pershare.
Instructions Journalizethetransaction.
Corporations:OrganizationandCapitalStockTransactions 13-25
BE152
BellinghamCorporationhasthefollowing stockholders’ equitybalancesatDecember31,2008:
CommonStock,$1par
Paid-inCapitalin ExcessofPar RetainedEarnings
Total
$3,500 24,500
62,500$90,500
Calculatebookvaluepershare.
EXERCISES
Ex.153
Thefollowingselectedtransactionspertainto LintonCorporation:
Jan. 3 Issued150,000shares,$10parvalue,commonstockfor $22 pershare.
Feb.10 Issued8,000shares,$10parvalue,commonstockinexchangeforspecialpurpose equipment.LintonCorporation'scommonstockhasbeenactivelytradedonthestock exchange at $25pershare.
InstructionsJournalizethetransactions.
Ex.154
ThecorporatecharterofHunterCorporationallowstheissuanceofamaximumof2,500,000 sharesof$1parvaluecommonstock.Duringitsfirstthreeyearsofoperation,Hunterissued 1,500,000sharesat$15pershare.Itlateracquired30,000ofthesesharesastreasurystockfor $25pershare.
Instructions
Basedonthe aboveinformation,answerthefollowingquestions: (a)Howmanyshareswereauthorized?
(b)Howmanyshareswereissued?
(c)Howmanyshares areoutstanding?
(d)Whatisthebalanceof the CommonStockaccount? (e)Whatisthebalanceof theTreasuryStockaccount?
Ex.155
GarnerCorporationisauthorizedtoissue1,000,000sharesof$5parvaluecommonstock. During2008,itsfirst yearofoperation,thecompanyhasthefollowingstock transactions.
Jan. 1 Paidthe state$2,000forincorporationfees.Jan.15 Issued500,000sharesofstock at$7 pershare.
Jan.30 Attorneysforthecompanyaccepted500sharesofcommonstockaspaymentfor legalservicesrenderedinhelpingthecompanyincorporate.Thelegalservicesare estimatedtohavea valueof $8,000.
July 2 Issued100,000sharesofstockforland.Thelandhadanaskingpriceof$900,000. Thestockiscurrentlyselling onanational exchangeat $8pershare.
Sept.5 Purchased15,000sharesofcommonstockforthetreasuryat $10pershare. Dec.6 Sold11,000sharesofthe treasurystockat$11per share.
Instructions
JournalizethetransactionsforGarnerCorporation.
Ex.156
Preparethenecessaryjournalentryfor eachofthefollowingtransactionsfor Starr Corporation.
(a)Issued2,000sharesofits$5par valuecommonstockfor $16pershare.
(b)Issued5,000sharesofitsstockforlandadvertisedforsaleat$80,000.Starr'sstockis activelytradedat amarketpriceof $15pershare.
Solution156 (5 min.)
(a)Cash(2,000× $16,000).................................................................. 32,000 CommonStock..................................................................... 10,000 Paid-inCapitalin Excess ofParValue................................. 22,000
(b)Land(5,000×$15)......................................................................... 75,000 CommonStock..................................................................... 25,000 Paid-inCapitalin Excess ofParValue................................. 50,000
Ex.157
1.Nameatleastthreefactorsthat influencethemarketvalueofstock.
2.Corporationsacquiretreasurystockforavarietyofpurposes.Namethreereasonswhy treasurystockmaybeacquiredbyacorporation.
13-28
Ex.158
ThefollowingitemswereshownonthebalancesheetofHermanCorporationonDecember31, 2008:
Stockholders’Equity Paid-InCapital
CapitalStock
Commonstock,$5parvalue,360,000shares
authorized; sharesissuedand outstanding...................
Additionalpaid-in capital
Inexcessof par value.............................................................................. Totalpaid-incapital............................................................................
RetainedEarnings............................................................................................... Totalpaid-incapitalandretainedearnings..............................................
Less:Treasurystock(15,000shares)................................................................ Totalstockholders' equity........................................................................
$1,650,000
165,000 1,815,000
750,000 2,565,000
(180,000) $2,385,000
Instructions
Completethefollowingstatementsandshowyourcomputations.
(a)Thenumberofsharesof commonstockissuedwas . (b)Thenumberofsharesof commonstockoutstandingwas. (c)Thesalespriceof thecommonstockwhenissuedwas$ . (d)Thecostpershareof thetreasurystock was$ .
(e)Theaverageissuepriceof thecommonstockwas$ .
(f)Assumingthat25%ofthetreasurystockissoldat$20pershare,thebalanceinthe TreasuryStockaccountwouldbe$ .
Ex.159
OnMay1,Hite Corporationpurchased1,000shares ofits$10par value commonstockat acash price of$13/share.OnJuly15, 600sharesof thetreasurystockweresoldforcashat$15/share.
Instructions
Journalizethetwotransactions.
Ex.160
WernerCorporationhasthefollowingstockholders'equityaccountsonJanuary1, 2008:
CommonStock,$10parvalue............................................ Paid-inCapitalinExcess ofPar........................................... RetainedEarnings................................................................ TotalStockholders'Equity..............................................
$1,500,000 200,000
500,000$2,200,000
Thecompanyusesthecostmethodtoaccountfortreasurystocktransactions.During2008,the followingtreasurystocktransactionsoccurred:
April 1 August 1 October 1
Purchased9,000sharesat $16pershare. Sold3,000sharesat $18pershare.
Sold3,000sharesat $15pershare.
Instructions
(a)Journalizethetreasurystocktransactionsfor 2008.
(b)PreparetheStockholders'EquitysectionofthebalancesheetforWernerCorporationat December31, 2008.Assumenet incomewas$110,000for2008.
Ex.161
BatesCorporationpurchased2,000sharesofits$5parvaluecommonstockforacashpriceof $12pershare.Twomonths later,Bates soldthetreasurystockfor acashpriceof$10pershare.
Instructions
Preparethejournalentrytorecordthesaleofthetreasurystockassuming (a)Nobalancein Paid-inCapitalfromTreasuryStock.
(b)A$3,000balanceinPaid-inCapitalfromTreasuryStock.
Ex.162
AninexperiencedaccountantforMoonCorporationmadethefollowingentries.
July1 Cash..................................................................................... 210,000 CommonStock............................................................ 210,000
(Issued15,000sharesof no-parcommonstock, statedvalue$10pershare)
Sept.1 CommonStock..................................................................... 28,000 RetainedEarnings................................................................ 6,000
Cash............................................................................ 34,000 (Purchased2,000sharesissuedonJuly1forthe
treasuryat$17pershare)
Dec.1 Cash..................................................................................... 18,000 CommonStock............................................................ 14,000 Gainon Sale of Stock.................................................. 4,000
(Sold 1,000sharesof the treasurystockat$18per share)
Instructions
(a)Onthebasisoftheexplanationforeachentry,preparetheentrythatshouldhavebeen madefor thetransactions.(Omitexplanations.)
(b)PreparethecorrectingentriesthatshouldbemadetocorrecttheaccountsofMoon Corporation.(Donotreversetheoriginalentry.)
13-32
Ex.163
OnJanuary1,2008,EdmondCompanyissued30,000sharesof$2parvaluecommonstockfor $150,000.OnMarch1,2008,thecompanypurchased4,000sharesofitscommonstockfor$8 pershareforthetreasury.OnJune1,2008,1,000ofthetreasurysharesaresoldfor$10per share.On September1,2008,2,000treasurysharesaresold at $6pershare.
Instructions
Journalizethestocktransactionsof EdmondCompanyin2008.
Ex.164
WixenCompanyoriginallyissued30,000sharesof$5parcommonstockfor$180,000on January3,2008.Wixenpurchased1,500sharesoftreasurystockfor$12,000onNovember2, 2008.OnDecember6,2008,600sharesof thetreasurystockaresoldfor$6,000.
Instructions
Preparejournalentriesto recordthesestocktransactions.
Ex.165
Thestockholders'equitysectionofPalmerCorporation'sbalancesheetatDecember31,2007, appearsbelow:
Stockholders'equity Paid-incapital
Commonstock,$10 parvalue,400,000sharesauthorized; 250,000issuedandoutstanding
Paid-incapitalinexcessofpar Totalpaid-incapital
Retainedearnings
Totalstockholders'equity
$2,500,000
1,200,000 3,700,000
600,000$4,300,000
During2008,thefollowingstocktransactionsoccurred:
Jan.18 Issued50,000sharesofcommonstock at $30per share.
Aug.20 Purchased25,000shares ofPalmer Corporation'scommonstockat$24pershareto be held inthe treasury.
Nov. 5 Reissued9,000 sharesof treasurystockfor $28per share.
Instructions
(a)Preparethejournalentriestorecordtheabovestocktransactions.
(b)Preparethestockholders'equitysectionofthebalancesheetforPalmerCorporationat December31,2008.Assumethatnetincomefortheyearwas$100,000andthatno dividends weredeclared.
13-34
Ex.166
TylerCorporationhas100,000sharesof$40parvaluepreferredstockauthorized.Duringthe year,ithadthefollowingtransactionsrelatedto its preferredstock.
(a)Issued30,000sharesat$55pershare.
(b)Issued10,000sharesfor equipmenthavinga$700,000askingprice.Thestockhadamarket value of$60pershare
InstructionsJournalizethetransactions.
Ex.167
CarsonCorporationhasthefollowingcapitalstockoutstandingat December31,2008:
9%Preferredstock,$100parvalue,cumulative
15,000sharesissuedand outstanding....................................................
Commonstock,nopar,$10 statedvalue,500,000sharesauthorized, 350,000shares issuedand outstanding..................................................
$1,500,000
3,500,000
Thepreferredstock wasissued at$110pershare.Thecommonstockwas issuedatanaverage persharepriceof$16.
Instructions
Preparethepaid-incapitalsection ofthebalancesheetat December31,2008.
Ex.168
Initsfirstyearofoperations, WebberCorporationhadthefollowingtransactionspertainingtoits $30parvaluepreferredstock.
Feb.1 Issued6,000sharesforcashat $41pershare. Nov.1 Issued3,000sharesforcashat $44pershare.
Instructions
(a)Journalizethetransactions.
(b)Indicatetheamounttobe reportedfor (1)preferredstock, and (2)paid-incapital in excess of parvalue—preferredstock attheend oftheyear.
13-36
Ex.169
BoswellCorporationhasthefollowingstockholders'equityaccounts:
Preferred Stock
Paid-inCapitalinExcess ofParValue—PreferredStock CommonStock
Paid-inCapitalinExcess ofStatedValue—CommonStock Paid-inCapitalfromTreasuryStock—Common RetainedEarnings
TreasuryStock—Common
Instructions
Classifyeach accountusing thefollowingtabularalignment.
Paid-inCapital Retained
Account CapitalStock Additional Earnings Other
Ex.170
Thefollowinginformationis availableforStewartCorporation:
CommonStock($10par)
Paid-inCapitalin ExcessofParValue—Preferred Paid-inCapitalin ExcessofStatedValue—Common PreferredStock
RetainedEarnings TreasuryStock—Common
$1,000,000 180,000 600,000 550,000 750,000 50,000
Instructions
Basedonthe precedinginformation,calculateeach of thefollowing: (a)Totalpaid-incapital.
(b)Totalstockholders'equity.
Ex.171
Placeeachoftheitemslistedbelowintheappropriatesubdivisionofthestockholders'equity section ofabalancesheet.
Commonstock,$10statedvalue Retainedearnings
8%Preferredstock,$100parvaluePaid-in capitalinexcessofparvalue Paid-in capital inexcessofstatedvalue Treasury stock
Paid-incapitalfromtreasurystock
Stockholders'equity Paid-incapital
Capitalstock
Additionalpaid-in capital
Totaladditionalpaid-incapital
Totalpaid-incapital Retainedearnings
13-38
Ex.171 (cont.)
Totalpaid-incapitalandretainedearnings
Totalstockholders' equity
Ex.172
ThefollowinginformationisavailableforGordonCorporation:
Commonstock($5par)
Paid-incapitalinexcessofpar—common Retainedearnings
Treasurystock Commonsharesissued Commonsharesoutstanding
$500,000 200,000 360,00070,000100,000shares 90,000shares
Instructions
Basedonthe precedinginformation,calculatethebookvaluepershare.
Ex.173
OnDecember 31,2008,ColawCompanyreportsthe following amountsinitsstockholders'equity section:
Commonstock $2,400,000 Paid-incapitalinexcessofstatedvalue—common 900,000 Retainedearnings 1,180,000 Treasurystock—common 180,000
Thecommon stockhasastated value of$10 per share.Onemillion shares ofcommonstock are authorizedand 40,000sharesareheld inthetreasury.
Instructions
Computethebookvalueper shareof commonstock.
COMPLETIONSTATEMENTS
174.Acorporationhasaseparate apartfromitsowners.
175.Themajoradvantagesofthecorporateformoforganizationinclude(1)limited
ofowners,(2)continuous and(3)easeof transferring.
176.Stockholderselectthe ,whointurnhirethe ofthe companywhohavedaytodayresponsibilityforrunningthecorporation.
177.Ifacorporation'sstockistradedonthemajorstockexchanges,thecorporationmust generallyreportperiodicallyto afederalagencyknownasthe .
178.Stockholdersgenerallyhavetherighttoshareincorporate andin
uponliquidation.
179.Parvalueofstockrepresentsthe persharethatmustberetained in thebusinessforthe protection ofcorporate.
180.Thestockholders'equitysectionofacorporation'sbalancesheetisgenerallydividedin two majorsections:(1) and(2) .
181.Ifstockisissuedinexchangefornoncashassets,theassetsshouldbevaluedatthe
oftheconsideration ortheassets
,whicheveris moreclearlyevident.
182.Acorporation'sownstockthathasbeenreacquiredbythecorporationbutnotcanceledis called andisdeductedfromtotal on thebalancesheet.
183.The featureofpreferredstockgivesthepreferredstockholdersthe righttoreceivecurrent-yeardividendsandunpaidprior-yeardividendsbeforecommon stockholders receiveanydividends.
184.Preferredstockhascontractualprovisionsthat giveitapreferenceovercommonstockas to andtoin the eventof liquidation.
185.Thepaid-incapitalsectionofthebalancesheetconsistsoftwoclassifications:
and .
186.Bookvaluepersharerepresentstheequityacommonstockholderhasinthe
ofthecorporationfromowningone shareof stock.
MATCHING
187.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Limitedliability B.Capitalstock
C.Board of directors D.Paid-incapital
E.Retainedearnings
F. Preemptiveright G.Par value
H.Legalcapital
I. Treasurystock
J. Cumulativefeature
1. Net incomeretainedinthecorporation.
2. Theamountthatmustberetainedinthebusinessfortheprotectionof creditors.
3. Preferredstockholders havearighttoreceivecurrentandunpaidprior-year dividends before commonstockholdersreceiveanydividends.
4. Creditorsonlyhavecorporateassetstosatisfytheirclaims.
5. Responsibleto stockholdersfor corporateactivity.
6. Theamountassignedtoeachshareof stockinthecorporatecharter.
7. Unitofownershipinacorporation.
8. Enablesstockholderstomaintaintheirsamepercentageownershipwhennewshares areissued.
9. Corporation'sownstockthat has beenreacquiredbythe corporationbutnot retired.
10. Totalamountpaid-inoncapitalstock.
SHORT-ANSWERESSAYQUESTIONS
S-AE188
Identifyatleastsixcharacteristicsofthecorporate formofbusinessorganization.Contrasteach one with thepartnershipformof organization.
S-AE189
Companiesfrequentlyissuebothpreferredstockandcommonstock.Whatarethemajor differences intherightsof stockholdersbetweenthesetwoclassesof stock?
S-AE190
Definepar value,anddiscussitssignificanceinaccounting.
S-AE191(Ethics)
JeffMadden,thepresidentandCEOofEarthSystems,Inc.,awastemanagementfirm,was recentlyhospitalized,sufferingfromexhaustionandaheartailment.Immediatelypriortohis hospitalization,EarthSystemshadexperiencedasharpdeclineinitsstockprice,andtrading activitybecamealmostnonexistent.Theprimaryreasonforthiswasconcernexpressedinthe mediaoveranewuntestedwastemanagementsystemimplementedbythecompany.Mr. Maddenhadbeenunwillingtosubmittheproceduretotestingbeforeimplementation,buthe reluctantlyagreedtolimitedtestsafterthesystemwasoperational.Noproblemshavebeen identifiedbytheteststodate.
Theothermembersofmanagementcalledameetingtodeterminewhattheyshoulddo.Rick Farrell,themarketingmanager,suggestedthatthecompanypurchasealargenumberofshares oftreasurystock.Inthat way,investors mightnoticethatactivityhadpicked up,and mightdecide tobuysomemoreshares.Thisplanwoulduseupmostofthecompany'savailablecash,sothat therewillbenomoneyavailableforacashdividend.EarthSystemshaspaidcashdividends everyquarterfor overtenyears.
Required:
1.IsMr. Farrell'ssuggestionethical?Explain.
2.Isitethicaltodiscontinuethecashdividend?Explain.
S-AE192(Communication)
AspartofaCareersinAccountingprogramsponsoredbyaccountingorganizationsand supportedbyyourcompany,youwillbetakingagroupofhighschoolstudentsthroughthe accountingdepartmentinyourcompany.Youwillalsoprovidethemwithvariousmaterialsto explaintheworkofanaccountant.OneofthematerialsyouwillprovideistheStockholders’ Equity sectionofarecent balancesheet.
Required:
Prepareasentenceortwoexplainingeachmajorsection:CommonStock,AdditionalPaid-in Capital,andRetainedEarnings.Youshouldtrytobebriefbut clear.
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ACC 206 Week 5 Mid-Term Exam – Strayer
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Chapters 10 Through 13
CHAPTER10
PLANTASSETS,NATURALRESOURCES,ANDINTANGIBLEASSETS
CHAPTERSTUDYOBJECTIVES
1.Describehowthecostprincipleappliestoplantassets.
2.Explaintheconceptofdepreciation..
3.Computeperiodicdepreciationusingdifferentmethods.
4.Describetheprocedureforrevisingperiodicdepreciation.
5.Distinguishbetweenrevenueandcapitalexpenditures,andexplaintheentriesforeach.
6.Explainhowtoaccountforthedisposalofaplantasset.
7.Computeperiodicdepletionofnaturalresources.
8.Explainthebasicissuesrelatedtoaccountingforintangibleassets.
9.Indicatehowplantassets,naturalresources,andintangibleassetsarereported.
10.Explainhowtoaccountfortheexchangeofplantassets.
TRUE-FALSESTATEMENTS
1. Allplantassets(fixedassets)mustbedepreciatedfor accountingpurposes.
2. Whenpurchasingland,thecostsforclearing,draining,filling,andgradingshouldbe chargedto aLandImprovementsaccount.
3. Whenpurchasingdeliveryequipment,salestaxesandmotorvehiclelicensesshouldbe chargedto DeliveryEquipment.
4. Landimprovementsaregenerallychargedto theLandaccount.
5. Oncecostisestablishedforaplantasset,itbecomes thebasis ofaccounting fortheasset unlesstheassetappreciatesinvalue,inwhichcase,marketvaluebecomesthebasisfor accountability.
6. Thebookvalueof aplantassetisalwaysequaltoitsfairmarketvalue.
7. Recordingdepreciationonplantassetsaffectsthebalancesheetandtheincome statement.
8. Thedepreciablecostof aplant asset is itsoriginalcostminusobsolescence.
9. Recordingdepreciationeachperiodisanapplicationof thematchingprinciple.
10. TheAccumulatedDepreciationaccountrepresentsacashfundavailabletoreplaceplant assets.
11. Incalculatingdepreciation,bothplantassetcost andusefullifearebasedonestimates.
12. Usingtheunits-of-activitymethodofdepreciatingfactoryequipmentwillgenerallyresultin moredepreciationexpensebeingrecordedoverthelifeoftheassetthanifthestraight-line method hadbeenused.
13. Salvagevalueisnotsubtractedfromplantassetcostindeterminingdepreciationexpense underthedeclining-balancemethodofdepreciation.
14. Thedeclining-balancemethodofdepreciationiscalledanaccelerateddepreciation methodbecauseitdepreciatesanassetinashorterperiodoftimethantheasset'suseful life.
15. Underthedouble-declining-balancemethod,thedepreciationrateusedeachyear remainsconstant.
16. TheIRSdoesnotrequirethetaxpayertousethesamedepreciationmethodonthetax returnthatisusedinpreparingfinancialstatements.
17. Achangeintheestimatedusefullifeofaplantassetmaycauseachangeintheamount ofdepreciationrecognizedinthecurrentandfutureperiods,but nottopriorperiods.
18. Achangeintheestimatedsalvagevalueofaplantassetrequiresarestatementofprior years'depreciation.
19. Todetermineanewdepreciationamountafterachangeinestimateofaplantasset's useful life, the asset'sremaining depreciablecost isdividedbyits remainingusefullife.
20. Additionsand improvementstoaplantassetthatincreasethe asset'soperatingefficiency, productive capacity,or expectedusefullife aregenerallyexpensed intheperiodincurred.
21. Capitalexpendituresareexpendituresthatincreasethecompany'sinvestmentin productive facilities.
22. Ordinaryrepairs shouldberecognizedwhenincurredas revenueexpenditures.
23. A characteristicofcapitalexpendituresis that theexpendituresoccurfrequently duringthe period ofownership.
24. Onceanassetisfullydepreciated,noadditionaldepreciationcanbetakeneventhough theasset is still beingusedbythebusiness.
25. Thefairmarketvalueof a plantasset isalwaysthesameasits bookvalue.
26. Iftheproceedsfromthesaleofaplantassetexceeditsbookvalue,againondisposal occurs.
27. Alossondisposalofaplantassetcanonlyoccurifthecashproceeds received fromthe assetsaleis lessthanthe asset'sbook value.
28. Thebookvalueofaplantassetistheamount originallypaid fortheassetlessanticipated salvagevalue.
29. Alossondisposal ofaplantasset asaresult ofasaleoraretirementiscalculated inthe sameway.
30. A plantassetmustbefullydepreciatedbeforeit canberemovedfromthe books.
31. Ifaplantasset issoldata gain,thegain ondisposal shouldreducethecost ofgoodssold section of the incomestatement.
32. Depletioncostperunitiscomputedbydividingthetotalcostofanaturalresourcebythe estimatednumberof unitsintheresource.
33. TheAccumulatedDepletionaccountisdeductedfromthecostofthenaturalresourcein thebalancesheet.
34. Depletionexpenseforaperiodisonlyrecognizedonnaturalresourcesthathavebeen extractedandsoldduringtheperiod.
35. Naturalresourcesarelong-livedproductiveassetsthatareextractedinoperationsand arereplaceableonlybyanactof nature.
36. Thecostofnaturalresourcesisnotallocatedtoexpensebecausethenaturalresources arereplaceableonlybyanactof nature.
37. Conceptually,thecostallocationproceduresfornaturalresourcesparallelsthatofplant assets.
38. Naturalresourcesincludestandingtimberandundergrounddepositsofoil,gas,and minerals.
39. Ifanacquiredfranchiseorlicensehasanindefinitelife,thecostoftheassetisnot amortized.
40. Whenanentirebusinessispurchased,goodwillistheexcessofcostoverthebookvalue of thenet assetsacquired.
41. Researchand development costswhich result in asuccessful product which ispatentable arechargedtothePatentaccount.
42. Thecostof apatentmustbeamortizedovera 20-yearperiod.
43. Thecostofapatentshouldbeamortizedoveritslegallifeorusefullife,whicheveris shorter.
44. The balancesofthe majorclassesofplantassetsand accumulated depreciationby major classes shouldbedisclosedinthebalance sheetornotes.
45. Theassetturnover ratioiscalculated astotalsales dividedbyendingtotalassets.
46. Researchanddevelopmentcostscanbeclassifiedasaproperty,plant,andequipment itemoras an intangibleasset.
a47. An exchangeofplantassetshas commercial substanceifthe futurecashflows change as a resultofthe exchange.
a48. Companiesrecordagainorlossontheexchangeofplantassetsbecausemost exchangeshavecommercialsubstance.
a49. Whenplantassetsareexchanged,thecostofthenewassetisthebookvalueoftheold assetplus anycashpaid.
Additional True-FalseQuestions
50. Whenconstructingabuilding,acompanyispermittedtoincludetheacquisitioncostand certaininterest costs incurredinfinancingtheproject.
51. Recognitionofdepreciationpermitstheaccumulationofcashforthereplacementofthe asset.
52. Whenanassetispurchasedduringtheyear,itisnotnecessarytorecorddepreciation expense inthefirst yearunderthedeclining-balancedepreciationmethod.
53. Depletionexpenseisreported intheincomestatementas anoperatingexpense.
54. Goodwillisnotrecognizedinaccountingunlessitisacquiredfromanotherbusiness enterprise.
55. Researchanddevelopmentcostsshouldbechargedtoexpensewhenincurred.
56. Alossontheexchangeofplantassetsoccurswhenthefairmarketvalueoftheoldasset islessthanitsbookvalue.
MULTIPLECHOICEQUESTIONS
57. Thecostof apurchasedbuildingincludes allofthefollowingexcept a.closingcosts.
b.realestatebroker's commission. c.remodeling costs.
d.Allof theseareincluded.
58. Acompanypurchasedlandfor$90,000cash.Realestatebrokers'commissionwas $5,000and$7,000wasspentfordemolishinganoldbuildingonthelandbefore constructionofanewbuildingcouldstart.Underthecostprinciple,thecostoflandwould be recordedat
a.$97,000. b.$90,000. c.$95,000. d.$102,000.
59. Whichoneofthefollowingitemsisnotconsideredapartofthecostofatruckpurchased for businessuse?
a.Salestax
b.Trucklicensec.Freightcharges
d.Costofletteringonsideoftruck
60. Whichofthefollowingassetsdoesnotdeclineinservicepotentialoverthecourseofits useful life?
a.Equipment b.Furnishings c.Land
d.Fixtures
61. Thefoursubdivisions forplantassetsare
a.land,landimprovements,buildings,andequipment. b.intangibles,land,buildings,andequipment.
c.furnishingsandfixtures,land,buildings, andequipment. d.property,plant,equipment,andland.
62. Thecostof landdoesnotinclude
a.realestatebrokers' commission. b.annualpropertytaxes.
c.accruedpropertytaxesassumedbythepurchaser. d.title fees.
63. FeeneyClinicpurchaseslandfor$130,000cash.Theclinicassumes$1,500inproperty taxesdueontheland.Thetitleandattorneyfeestotaled$1,000.Theclinichastheland gradedfor $2,200.WhatamountdoesFeeneyClinicrecordasthecostforthe land?
a.$132,200 b.$130,000 c.$134,700 d.$132,500
64. BelleCompanybuyslandfor$50,000on12/31/07.Asof3/31/08,thelandhas appreciatedinvalueto$50,700.On12/31/08,thelandhasanappraisedvalueof $51,800.Bywhatamountshouldthe Landaccount beincreasedin 2008?
a.$0b.$700
c.$1,100 d.$1,800
65. PineCompanyacquireslandfor$86,000cash.Additional costsareasfollows:
Removalof shed $300 Fillingandgrading 1,500 Salvagevalue oflumberofshed 120 Brokercommission 1,130 Pavingofparkinglot 10,000 Closingcosts 560
Pinewillrecordtheacquisitioncostof thelandas a.$86,000.
b.$87,690. c.$89,610. d.$89,370.
66. ShawneeHospitalinstallsanewparkinglot.Thepavingcost$30,000andthelightsto illuminatethenewparkingareacost$15,000.Whichofthefollowingstatementsistrue with respecttotheseadditions?
a.$30,000shouldbedebitedtothe Landaccount.
b.$15,000shouldbedebitedtoLandImprovements. c.$45,000shouldbedebitedtotheLandaccount.d.$45,000shouldbedebitedtoLandImprovements.
10-10
67. Landimprovementsshouldbedepreciatedovertheusefullife of the a.land.
b.buildingsontheland.
c.land or landimprovements,whicheverislonger. d.landimprovements.
68. GeneralMoldingisbuildinganewplantthatwilltakethreeyearstoconstruct.The constructionwillbefinancedinpartbyfundsborrowedduringtheconstructionperiod. Therearesignificantarchitectfees,excavationfees,andbuildingpermitfees.Whichof the followingstatementsis true?
a.Excavationfeesarecapitalizedbut building permitfeesarenot. b.Architectfeesarecapitalizedbut buildingpermitfeesarenot.
c.Interestiscapitalizedduring theconstructionas partof thecostofthebuilding.
d.The capitalizedcost is equaltothecontractprice tobuildthe plant less any intereston borrowed funds.
69. Acompanypurchasesaremotesitebuildingforcomputeroperations.Thebuildingwillbe suitableforoperationsaftersomeexpenditures.Thewiringmustbereplacedtocomputer specifications.Theroofisleakyandmustbereplaced.Allroomsmustberepaintedand recarpetedandtherewillalsobesomeplumbingworkdone.Whichofthefollowing statements is true?
a.Thecost ofthebuildingwillnot includetherepaintingandrecarpeting costs. b.Thecostofthebuildingwillincludethecostof replacing theroof.
c.Thecostofthebuildingisthepurchasepriceofthebuilding,whiletheadditional expendituresareallcapitalizedas BuildingImprovements.
d.Thewiringis partofthecomputercosts,notthebuildingcost.
70. CarleyCompany purchasesanewdeliverytruck for$45,000.Thesalestaxesare$3,000. Thelogo of thecompanyis painted on thesideofthe truckfor$1,200.Thetrucklicenseis $120.Thetruckundergoessafetytestingfor$220.WhatdoesCarleyrecordasthecostof thenewtruck?
a.$49,540 b.$49,420 c.$48,000 d.$47,420
71. Allof thefollowingfactorsincomputingdepreciationareestimatesexcept a.cost.
b.residualvalue. c.salvagevalue. d.usefullife.
72. StoriesCompanypurchasedequipmentandthesecostswereincurred:
Cashprice Salestaxes
Insuranceduringtransit Installationandtesting Totalcosts
$22,500 1,800 320
430$25,050
PlantAssets,NaturalResources,andIntangibleAssets 10-11
Storieswillrecordtheacquisitioncostofthe equipmentas a.$22,500.
b.$24,300. c.$24,620. d.$25,050.
73. Becky’sBloomspurchasedadeliveryvanfor$20,000.Thecompany wasgivena$2,000 cashdiscountbythedealer,andpaid$1,000salestax.Annualinsuranceonthevanis $500.Asaresultofthepurchase,byhowmuchwillBecky’sBloomsincreaseitsvan account?
a.$20,000 b.$18,000 c.$19,500 d.$19,000
74. UptonCompanypurchasedequipmentonJanuary1atalistpriceof$50,000,withcredit terms2/10,n/30.PaymentwasmadewithinthediscountperiodandUptonwasgivena $1,000cashdiscount.Uptonpaid$2,500salestaxontheequipment,andpaidinstallation chargesof$880.Priortoinstallation,Uptonpaid$2,000topouraconcreteslabonwhich toplacethe equipment.Whatisthetotalcostofthe newequipment?
a.$52,380 b.$54,380 c.$55,380 d.$50,500
75. Interestmaybe includedintheacquisitioncost ofa plantasset a.duringtheconstructionperiodof aself-constructedasset.b.if theassetis purchasedoncredit.
c.if theassetacquisitionisfinancedbyalong-termnotepayable. d.ifit isapart of a lump-sumpurchase.
76. ThebalanceintheAccumulatedDepreciationaccountrepresentsthe a.cashfundtobeusedtoreplaceplantassets.
b.amounttobedeductedfromthecostoftheplantassettoarriveatitsfairmarket value.
c.amountchargedtoexpenseinthecurrentperiod.
d.amountchargedto expensesincetheacquisitionof theplantasset.
77. Whichoneofthefollowingitemsisnotaconsiderationwhenrecordingperiodic depreciationexpenseonplantassets?
a.Salvagevalue
b.Estimatedusefullife
c.Cashneededtoreplacethe plantasset d.Cost
78. Depreciationisthe processof allocating thecostof aplantasset overits servicelife in a.anequaland equitablemanner.
b.an acceleratedand accuratemanner. c.asystematicandrationalmanner.
d.a conservativemarket-basedmanner.
10-12
79. Thebookvalueof anassetisequaltothe
a.asset'smarketvaluelessits historicalcost.
b.bluebookvaluereliedonbysecondarymarkets. c.replacementcostof theasset.
d.asset'scostlessaccumulateddepreciation.
80. Accountantsdonotattempttomeasurethechangeinaplantasset'smarketvalueduring ownership because
a.theassetsare notheldfor resale. b.plantassetscannotbesold.
c.losseswouldhavetoberecognized.
d.itismanagement'sresponsibilityto determinefair values.
81. Depreciationis aprocessof a.assetdevaluation.
b.costaccumulation. c.cost allocation.
d.assetvaluation.
82. Recordingdepreciationeachperiodisnecessaryinaccordancewiththe a.goingconcernprinciple.
b.costprinciple.
c.matchingprinciple.
d.assetvaluationprinciple.
83. Incomputingdepreciation,salvagevalueis
a.thefairmarketvalueofa plantassetonthedate of acquisition.
b.subtractedfromaccumulateddepreciationtodeterminetheplantasset'sdepreciable cost.
c.anestimateof aplantasset'svalueattheendofitsusefullife. d.ignoredinallthedepreciationmethods.
84. Whenestimatingtheusefullifeofanasset,accountantsdonotconsider a.thecosttoreplacetheassetat theendofits usefullife.
b.obsolescencefactors.
c.expectedrepairsandmaintenance. d.theintendeduse of theasset.
85. Usefullifeisexpressedintermsof useexpectedfromtheassetunderthe a.declining-balancemethod.
b.straight-linemethod.
c.units-of-activitymethod. d.noneof these.
86. Equipmentwaspurchasedfor$75,000.Freightchargesamountedto$3,500andthere wasacostof$10,000forbuildingafoundationandinstallingtheequipment.Itis estimatedthattheequipmentwillhavea$15,000salvagevalueattheendofits5-year useful life. Depreciationexpenseeachyearusingthe straight-linemethodwillbe
a.$17,700. b.$14,700. c.$12,300. d.$12,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-13
87. Atruckwaspurchasedfor$120,000anditwasestimatedtohavea$24,000salvage valueattheendofitsusefullife.Monthlydepreciationexpenseof$2,000wasrecorded using thestraight-linemethod.Theannualdepreciationrateis
a.20%. b.2%.c.8%. d.25%.
88. AcompanypurchasedfactoryequipmentonApril1,2008for$64,000.Itisestimatedthat theequipmentwillhavean$8,000salvagevalueattheendofits10-yearusefullife. Usingthestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008is
a.$6,400. b.$5,600. c.$4,200. d.$4,800.
89. Acompanypurchasedofficeequipmentfor$40,000andestimatedasalvagevalueof $8,000attheendofits5-yearusefullife.Theconstantpercentagetobeappliedagainst book valueeachyearifthedouble-declining-balancemethodisusedis
a.20%. b.25%. c.40%. d.4%.
90. Thedeclining-balancemethodofdepreciationproduces a.adecreasingdepreciationexpenseeachperiod.
b.an increasingdepreciationexpenseeachperiod. c.a decliningpercentagerateeachperiod.
d.a constantamount ofdepreciationexpenseeachperiod.
91. Acompanypurchasedfactoryequipmentfor$250,000.Itisestimatedthattheequipment willhavea$25,000salvagevalueattheendofitsestimated5-yearusefullife.Ifthe companyusesthedouble-declining-balancemethodofdepreciation,theamountofannual depreciationrecordedforthesecondyear afterpurchasewould be
a.$100,000. b.$60,000. c.$90,000. d.$43,200.
92. Theunits-of-activitymethodisgenerallynot suitablefor a.airplanes.
b.buildings.
c.deliveryequipment. d.factorymachinery.
93. Aplantassetcost$144,000andisestimatedtohavean$18,000salvagevalueattheend ofits8-yearusefullife.Theannualdepreciation expenserecordedforthethirdyearusing thedouble-declining-balancemethodwouldbe
a.$12,060. b.$20,250. c.$17,718. d.$13,785.
10-14
94. Afactorymachinewaspurchased for$75,000onJanuary1,2008.Itwasestimatedthatit wouldhavea$15,000salvagevalueattheendofits5-yearusefullife.Itwasalso estimatedthatthemachinewouldberun40,000hoursinthe5years.Thecompanyran themachinefor4,000actualhoursin2008.Ifthecompanyusestheunits-of-activity methodof depreciation,the amountof depreciationexpensefor 2008 wouldbe
a.$7,500.b.$12,000. c.$15,000. d.$6,000.
95. TheModifiedAcceleratedCostRecoverySystem(MACRS)isadepreciationmethod which
a.isusedfortaxpurposes.
b.mustbeusedforfinancialstatementpurposes. c.isrequiredbytheSEC.
d.expensesanassetoverasingleyearbecausecapitalacquisitionsmustbeexpensed in theyearpurchased.
96. Whichofthefollowingmethodsof computing depreciationisproductionbased? a.Straight-line
b.Declining-balance c.Units-of-activityd.Noneof these
97. Managementshouldselect thedepreciationmethodthat a.iseasiesttoapply.
b.bestmeasurestheplantasset'smarketvalueover its usefullife.
c.bestmeasuresthe plantasset'scontributiontorevenue overits usefullife. d.hasbeenusedmostofteninthepastbythe company.
98. Thedepreciationmethodthatappliesaconstantpercentagetodepreciablecostin calculating depreciation is
a.straight-line.
b.units-of-activity.
c.declining-balance. d.noneof these.
Usethefollowing informationforquestions99–100.
OnOctober1,2008,DoleCompanyplacesanewassetintoservice.Thecostoftheassetis $60,000withanestimated5-yearlifeand$15,000salvagevalueattheendof its usefullife.
99. Whatisthedepreciationexpensefor2008ifDoleCompanyusesthestraight-linemethod ofdepreciation?
a.$2,250 b.$12,000 c.$3,000 d.$6,000
PlantAssets,NaturalResources,andIntangibleAssets 10-15
100. WhatisthebookvalueoftheplantassetontheDecember31,2008,balancesheet assuming that DoleCompanyusesthedouble-declining-balancemethodof depreciation? a.$39,000
b.$45,000 c.$54,000 d.$57,000
101. Whichdepreciationmethod ismostfrequentlyusedinbusinessestoday? a.Straight-line
b.Declining-balance c.Units-of-activity
d.Double-declining-balance
102. WineCompanyusestheunits-of-activitymethodincomputingdepreciation.Anewplant assetispurchased for$24,000thatwillproduceanestimated100,000unitsoveritsuseful life.Estimatedsalvagevalue attheend ofitsuseful lifeis$2,000. Whatis the depreciation costperunit?
a.$2.20 b.$2.40 c.$.22 d.$.24
103. Units-of-activityisanappropriatedepreciationmethodtouse when a.it isimpossibleto determinetheproductivityof theasset.
b.theasset'susewillbeconstantoverits usefullife.
c.theproductivityof theassetvariessignificantlyfromoneperiodtoanother. d.thecompanyisamanufacturingcompany.
104. Thecalculationof depreciationusingthedecliningbalancemethod,
a.ignoressalvage valueindeterminingtheamounttowhicha constantrateisapplied. b.multipliesaconstantpercentagetimesthepreviousyear'sdepreciationexpense.
c.yieldsan increasingdepreciationexpenseeachperiod.
d.multipliesadecliningpercentagetimesaconstantbookvalue.
Use thefollowing informationforquestions105–106.
GreyCompanypurchasedanewvanforfloraldeliveriesonJanuary1,2008.Thevancost $36,000withanestimatedlifeof5yearsand$9,000salvagevalueattheendofitsusefullife. Thedouble-declining-balancemethodof depreciationwillbeused.
105. Whatisthedepreciationexpensefor2008? a.$7,200
b.$5,400c.$10,800 d.$14,400
106. WhatisthebalanceoftheAccumulatedDepreciationaccountattheendof2009? a.$5,760
b.$17,280 c.$23,040 d.$8,640
10-16
107. PorterCompanypurchasedequipmentfor$450,000onJanuary1,2007,andwillusethe double-declining-balancemethodofdepreciation.Itisestimatedthattheequipmentwill havea3-yearlifeanda$20,000salvagevalueattheendofitsusefullife.Theamountof depreciationexpenserecognizedintheyear2009willbe
a.$50,000. b.$30,000. c.$54,440. d.$34,440.
108. Aplant asset was purchasedon January 1 for$50,000withan estimatedsalvagevalueof $10,000attheendofitsusefullife.Thecurrentyear'sDepreciationExpenseis$5,000 calculatedonthestraight-linebasisandthebalanceoftheAccumulatedDepreciation accountattheendof theyearis$25,000.Theremainingusefullifeof theplantasset is
a.10 years. b.8years. c.5 years. d.3years.
109. Equipmentwaspurchasedfor$60,000.Freightchargesamountedto$2,800andthere wasacostof$8,000forbuildingafoundation andinstallingtheequipment.Itisestimated thattheequipmentwillhavea$12,000salvagevalueattheendofits5-yearusefullife. Depreciation expenseeachyearusingthestraight-linemethodwill be
a.$14,160. b.$11,760. c.$9,840. d.$9,600.
110. Equipmentwaspurchased for$17,000onJanuary1,2008.Freightchargesamountedto $700andtherewasacostof$2,000forbuildingafoundationandinstallingthe equipment.Itisestimatedthattheequipmentwillhavea$3,000salvagevalueattheend ofits5-year useful life.What istheamountofaccumulateddepreciationatDecember31, 2009,if thestraight-linemethodof depreciationisused?
a.$6,680 b.$3,340 c.$2,860 d.$5,720
111. Acompanypurchasedfactoryequipment onJune 1,2008,for$48,000.Itisestimatedthat theequipmentwillhavea$3,000salvagevalueattheendofits10-yearusefullife.Using thestraight-linemethodofdepreciation,theamounttoberecordedasdepreciation expense atDecember31,2008,is
a.$4,500. b.$2,625. c.$2,250. d.$1,875.
112. Aplant asset was purchasedon January 1 for$40,000withan estimatedsalvagevalueof $8,000attheendofitsusefullife.Thecurrentyear'sDepreciationExpenseis$4,000 calculatedonthestraight-linebasisandthebalanceoftheAccumulatedDepreciation accountattheendof theyearis$20,000.Theremainingusefullifeof theplantasset is
PlantAssets,NaturalResources,andIntangibleAssets 10-17
a.10 years. b.8years. c.5 years. d.3years.
Usethefollowing informationforquestions113–115.
BrinkmanCorporationboughtequipmentonJanuary1,2008.Theequipmentcost$90,000and hadanexpectedsalvagevalueof$15,000.Thelifeoftheequipmentwasestimatedtobe6 years.
113. Thedepreciablecostof theequipmentis a.$90,000.
b.$75,000. c.$50,000. d.$12,500.
114. Thedepreciationexpenseusingthestraight-linemethodof depreciationis a.$17,500.
b.$18,000. c.$12,500.
d.noneof theabove.
115. Thebookvalueof the equipmentatthebeginningof thethirdyear wouldbe a.$90,000.
b.$75,000. c.$65,000. d.$25,000.
116. BadenCompanypurchasedmachinerywithalistpriceof$32,000.Theyweregivena 10%discountbythemanufacturer.Theypaid$200forshippingandsalestaxof$1,500. Badenestimatesthatthemachinerywillhaveausefullifeof10yearsandaresidual value of$10,000.IfBadenusesstraight-linedepreciation,annualdepreciationwillbe
a.$2,050. b.$2,036. d.$3,050. d.$1,880.
117. BatesCompanypurchasedequipmentonJanuary1,2008,atatotalinvoicecostof $600,000.Theequipmenthasanestimatedsalvagevalueof$15,000andanestimated usefullifeof5years.WhatistheamountofaccumulateddepreciationatDecember31, 2009,if thestraight-linemethodof depreciationisused?
a.$120,000 b.$240,000 c.$117,000 d.$234,000
10-18
118. OnJanuary1,amachinewithausefullifeoffiveyearsandaresidualvalueof$15,000 waspurchasedfor$45,000.Whatisthedepreciationexpenseforyear2underthe double-declining-balancemethodof depreciation?
a.$10,800 b.$18,000 c.$14,400 d.$8,640
119. Amachinewithacostof$160,000hasanestimatedsalvagevalueof$10,000andan estimatedusefullifeof5yearsor15,000hours.Itistobedepreciatedusingtheunits-of-activitymethodofdepreciation.Whatistheamountofdepreciationforthesecondfull year,during whichthe machinewasused5,000hours?
a.$50,000 b.$30,000 c.$43,333 d.$53,333
120. Equipmentwithacostof$240,000hasanestimatedsalvagevalueof$15,000andan estimatedlifeof4yearsor15,000hours.Itistobedepreciatedusingtheunits-of-activity method.Whatistheamountofdepreciationforthefirstfullyear,duringwhichthe equipmentwasused 3,300 hours?
a.$60,000 b.$67,800 c.$49,500 d.$56,250
121. LarimeCompanypurchasedequipmentfor$40,000onJanuary1,2007,andwillusethe double-declining-balancemethodofdepreciation.Itisestimatedthattheequipmentwill havea5-yearlifeanda$2,000salvagevalueattheendofitsusefullife.Theamountof depreciationexpenserecognizedintheyear2009willbe
a.$5,760. b.$9,120. c.$9,600. d.$5,472.
122. InterlineTruckingpurchasedatractortrailerfor$98,000. Interlineusestheunits-of-activity methodfordepreciatingitstrucksandexpectstodrivethetruck1,000,000milesoverits 12-yearusefullife.Salvagevalueisestimated tobe$14,000.Ifthetruckisdriven90,000 miles in itsfirstyear,howmuchdepreciationexpenseshouldInterlinerecord?
a.$7,000 b.$8,820 c.$7,560 d.$8,167
123. Anassetwaspurchasedfor$150,000.Ithadanestimatedsalvagevalueof$30,000and anestimatedusefullifeof10years.After5yearsofuse,theestimatedsalvagevalueis revisedto$24,000buttheestimatedusefullifeisunchanged.Assumingstraight-line depreciation, depreciationexpenseinyear6 wouldbe
a.$18,000. b.$13,200. c.$9,000. d.$12,600.
PlantAssets,NaturalResources,andIntangibleAssets 10-19
124. Equipmentcosting$30,000withasalvagevalueof$6,000andanestimatedlifeof8 yearshasbeendepreciatedusingthestraight-linemethodfor2years.Assuminga revisedestimatedtotallifeof5yearsandnochangeinthesalvage value,thedepreciation expense for year3wouldbe
a.$3,600. b.$8,000. c.$6,000. d.$4,800.
125. Joe'sQuikShopboughtmachineryfor$25,000onJanuary1,2008.Joeestimatedthe usefullifetobe5yearswithnosalvagevalue,andthestraight-line methodofdepreciation willbeused. OnJanuary 1,2009,Joedecidesthatthebusinesswillusethemachineryfor a total of6 years.What is thereviseddepreciationexpensefor2009?
a.$4,000 b.$2,000 c.$3,333 d$5,000
126. Eachofthefollowingisusedincomputingrevisedannualdepreciationforachangein estimateexcept
a.bookvalue. b.cost.
c.depreciablecost.
d.remaininguseful life.
127. A changeintheestimatedusefullife of equipmentrequires
a.aretroactivechangeintheamountofperiodicdepreciationrecognizedinprevious years.
b.thatnochangebemadeintheperiodicdepreciation sothatdepreciationamounts are comparableoverthelifeof theasset.
c.thattheamountofperiodicdepreciationbechangedinthecurrentyearandinfuture years.
d.that incomeforthecurrent yearbeincreased.
128. HuntCompanyhasdecidedtochangetheestimateoftheusefullifeofanassetthathas beeninservicefor2years. Whichofthefollowingstatementsdescribestheproperwayto revise a usefullifeestimate?
a.Revisionsinusefullifeare permittedifapprovedbytheIRS.
b.Retroactivechangesmustbemadeto correctpreviouslyrecordeddepreciation. c.Onlyfuture yearswill beaffectedbytherevision.
d.Bothcurrentandfutureyearswillbeaffectedbythe revision.
129. Jim'sCopyShopboughtequipmentfor$90,000onJanuary1,2007.Jimestimatedthe usefullifetobe3yearswithnosalvage value, andthestraight-line methodofdepreciation willbeused.OnJanuary1,2008,Jimdecidesthat the businesswilluse theequipmentfor5years.Whatisthereviseddepreciationexpensefor 2008?
a.$30,000 b.$12,000 c.$15,000 d.$22,500
10-20
130. Costsincurredtoincreasetheoperatingefficiencyorusefullifeofaplantassetare referred toas
a.capitalexpenditures.b.expenseexpenditures. c.ordinaryrepairs.
d.revenueexpenditures.
131. Expendituresthatmaintain theoperatingefficiencyandexpectedproductivelifeofaplant assetaregenerally
a.expensedwhenincurred.
b.capitalizedasa partofthecostof theasset.
c.debitedto the AccumulatedDepreciationaccount.d.notrecordeduntiltheybecomematerialinamount.
132. Whichofthefollowingisnottrue of ordinaryrepairs?
a.Theyprimarilybenefitthecurrentaccountingperiod. b.Theycan bereferredto asrevenueexpenditures.
c.Theymaintaintheexpectedproductivelifeof theasset. d.Theyincreasetheproductivecapacityof theasset.
133. Thepaneling ofthe body ofanopenpickuptruckwouldbeclassifiedasa(n) a.revenueexpenditure.
b.addition.
c.improvement.d.ordinaryrepair.
134. Additionsand improvements
a.occurfrequentlyduringtheownershipof aplantasset. b.normallyinvolveimmaterialexpenditures.
c.increasethebookvalueof plantassetswhenincurred. d.typicallyonlybenefitthecurrentaccountingperiod.
135. Ifa plantassetisretiredbeforeit isfullydepreciatedandnosalvagevalueisreceived, a.againondisposaloccurs.
b.a lossondisposal occurs.
c.eitheragainor a losscan occur. d.neitheragainnor alossoccurs.
136. Againorlossondisposalof aplantassetis determinedbycomparingthe a.replacementcost oftheassetwiththeasset'soriginal cost.
b.bookvalueof theassetwiththeasset'soriginalcost.
c.originalcost oftheassetwiththeproceedsreceivedfromitssale. d.bookvalueof the assetwiththe proceedsreceivedfromits sale.
137. Thebookvalueof aplantassetisthedifferencebetweenthe a.replacementcost oftheassetandits historicalcost.
b.costof the asset andtheamountofdepreciationexpenseforthe year. c.costoftheasset andtheaccumulateddepreciationtodate.
d.proceedsreceivedfromthesaleoftheassetand its originalcost.
PlantAssets,NaturalResources,andIntangibleAssets 10-21
138. Ifa plantassetissoldbefore it isfullydepreciated, a.onlyagainondisposalcanoccur.
b.onlya losson disposalcanoccur.c.eitheragainor a losscan occur.d.neitheragainnor alosscanoccur.
139. Ifaplantassetisretiredbeforeitisfullydepreciated,andthesalvagevaluereceivedis less thanthe asset's book value,
a.a gainondisposaloccurs. b.a lossondisposal occurs.
c.thereis nogain or lossondisposal.
d.additionaldepreciationexpensemust berecorded.
140 Acompanysellsaplantassetwhichoriginallycost$180,000for$60,000onDecember31, 2008.TheAccumulatedDepreciationaccounthadabalanceof$72,000afterthecurrent year'sdepreciationof $18,000 hadbeenrecorded.Thecompanyshouldrecognizea
a.$120,000lossondisposal. b.$48,000gainondisposal. c.$48,000lossondisposal. d.$30,000lossondisposal.
141. Ifdisposalofa plantassetoccursduringtheyear,depreciationis a.not recordedfortheyear.
b.recordedforthewholeyear.
c.recordedforthefractionof theyeartothedateof thedisposal. d.not recordediftheasset isscrapped.
142. Ifafullydepreciatedplant asset is still usedbya company,the
a.estimatedremainingusefullifemustberevisedtocalculatethecorrectrevised depreciation.
b.assetisremovedfromthebooks.
c.accumulateddepreciationaccountisremovedfromthebooksbuttheassetaccount remains.
d.assetandtheaccumulateddepreciation continue tobereportedonthebalancesheet withoutadjustment untiltheassetisretired.
143. Whichofthefollowingstatementsisnottruewhenafullydepreciatedplantassetis retired?
a.Theplantasset'sbookvalue isequaltoitsestimated salvagevalue. b.Theaccumulateddepreciationaccountisdebited.
c.Theassetaccount iscredited.
d.Theplantasset'soriginalcost equalsitsbookvalue.
144. Ifaplantassetisretiredbeforeitisfullydepreciated,andnosalvageorscrapvalueis received,
a.againondisposalwillberecorded.
b.phantomdepreciationmustbetakenasthoughtheassetwerestillonthe books. c.a losson disposalwill berecorded.
d.nogainorlossondisposal willberecorded.
10-22
145. Thebookvalueof anassetwillequalitsfairmarket valueatthedateofsaleif a.a gainondisposalisrecorded.
b.nogainorlossondisposalisrecorded. c.theplantassetisfully depreciated.
d.a lossondisposal isrecorded.
146. Atruckcosting$110,000wasdestroyedwhenitsenginecaughtfire.Atthedateofthe fire,theaccumulateddepreciationonthetruckwas$50,000.Aninsurancecheckfor $125,000wasreceivedbasedonthereplacementcostofthetruck.Theentrytorecord theinsuranceproceedsandthedispositionof the truckwill include a
a.GainonDisposalof $15,000.
b.creditto theTruckaccountof $60,000.
c.credittotheAccumulatedDepreciationaccountfor$50,000. d.GainonDisposalof $65,000.
147. OnJuly1,2008,MeedKennelssellsequipmentfor$66,000.Theequipmentoriginally cost$180,000,hadanestimated5-yearlifeandanexpectedsalvagevalueof$30,000. Theaccumulateddepreciationaccounthadabalanceof$105,000onJanuary1,2008, using thestraight-linemethod.Thegainorlossondisposalis
a.$9,000gain. b.$6,000loss. c.$9,000loss. d.$6,000gain.
148. A lossondisposalof aplantassetisreportedinthefinancialstatements a.intheOtherRevenuesandGainssection oftheincomestatement.b.intheOtherExpensesandLossessectionof theincomestatement. c.asadirectincreasetothecapitalaccount onthe balancesheet.
d.as adirectdecrease tothecapitalaccount onthe balancesheet.
149. WellsCompany'sdeliverytruck,whichoriginallycost$70,000,wasdestroyedbyfire.At thetimeofthefire,thebalanceoftheAccumulatedDepreciationaccountamountedto $47,500.The companyreceived$40,000reimbursementfromits insurancecompany.The gain orlossasaresultof thefire was
a.$30,000loss. b.$17,500loss. c.$30,000gain. d.$17,500gain.
150. Atruckthatcost$21,000andonwhich$10,000ofaccumulateddepreciationhasbeen recordedwasdisposedoffor $9,000cash.Theentrytorecordthiseventwouldincludeaa.gainof $2,000.
b.lossof $2,000.
c.credittotheTruckaccountfor$11,000.
d.creditto AccumulatedDepreciationfor$10,000.
151. Atruckthatcost$36,000andonwhich$30,000ofaccumulateddepreciationhasbeen recordedwasdisposedoffor $9,000cash.Theentrytorecordthiseventwouldincludeaa.gainof $3,000.
b.lossof $3,000.
c.credittotheTruckaccountfor$6,000.
d.creditto AccumulatedDepreciationfor$30,000.
PlantAssets,NaturalResources,andIntangibleAssets 10-23
152. AceCorporationsoldequipmentfor$12,000.Theequipmenthadanoriginalcostof $36,000andaccumulateddepreciationof $18,000.Asaresultof thesale,
a.netincomewill increase$12,000. b.netincomewillincrease$6,000.c. netincomewilldecrease$6,000.d.netincomewilldecrease$12,000.
153. Jarman’s CourierServicerecorded alossof$3,000whenitsoldavanthatoriginallycost $28,000for $5,000.Accumulateddepreciationonthevanmusthavebeen
a.$26,000. b.$8,000.c.$25,000. d.$20,000.
154. Onabalancesheet,naturalresourcesmaybedescribedmorespecificallyasallofthe followingexcept
a.landimprovements. b.mineraldeposits.
c.oilreserves. d.timberlands.
155. Naturalresourcesare
a.depreciatedusingtheunits-of-activity method.
b.physicallyextractedinoperationsandarereplaceableonlybyanact ofnature. c.reportedattheirmarketvalue.
d.amortizedovera periodnolongerthan40years.
156. Depletionis
a.a decreaseinmarketvalueof naturalresources.
b.the amountof spoilagethatoccurswhennaturalresourcesareextracted. c.theallocationof the costof naturalresources toexpense.
d.themethodusedtorecordunsuccessfulpatents.
157. Toqualifyasnaturalresourcesintheaccountingsense,assetsmustbe a.underground.
b.replaceable.
c.of amineralnature.
d.physicallyextractedinoperations.
158. Themethodmostcommonlyusedtocomputedepletionisthe a.straight-linemethod.
b.double-declining-balancemethod. c.units-of-activitymethod.
d.effectiveinterestmethod.
159. Incomputingdepletion,salvagevalueis a.alwaysimmaterial.
b.ignored.
c.impossibletoestimate.
d.includedinthe calculation.
10-24
160. Ifa miningcompanyextracts1,500,000tonsinaperiodbutonlysells1,200,000 tons, a.totaldepletiononthemineis basedonthe1,200,000tons.
b.depletionexpenseisrecognized onthe1,500,000tonsextracted.
c.depletionexpenseisrecognized onthe1,200,000tonsextractedandsold.
d.aseparateaccumulateddepletionaccountissetuptorecorddepletiononthe 300,000tonsextractedbutnotsold.
161. Acoalcompanyinvests$16millioninamineestimatedtohave20milliontonsofcoaland nosalvagevalue.Itisexpectedthattheminewillbeinoperationfor5years.Inthefirst year,1,000,000 tonsofcoalareextractedandsold.Whatisthedepletionexpenseforthe first year?
a.$800,000 b.$320,000 c.$80,000
d.Cannotbedeterminedfromtheinformationprovided.
162. AccumulatedDepletion
a.isusedbyallcompanieswithnaturalresources. b.hasanormaldebitbalance.
c.isacontra-assetaccount.
d.isnevershown onthebalancesheet.
163. OnJuly4,2008,MontanaMiningCompanypurchasedthemineralrightstoagranite depositfor$800,000.Itisestimatedthattherecoverablegranitewillbe400,000tons. During2008,100,000tonsofgranitewasextractedand60,000tonsweresold.The amount of theDepletionExpenserecognizedfor2008wouldbe
a.$100,000. b.$60,000.c.$120,000. d.$200,000.
164. Depletionexpenseiscomputedbymultiplyingthedepletioncostperunitbythe a.totalestimatedunits.
b.totalactualunits.
c.numberof unitsextracted. d.numberof unitssold.
165. Intangibleassetsaretherightsandprivilegesthatresultfromownershipoflong-lived assets that
a.mustbegeneratedinternally.
b.aredepletablenaturalresources. c.havebeenexchangedatagain. d.donothavephysicalsubstance.
166. Identifytheitembelowwherethetermsarenotrelated. a.Equipment—depreciation
b.Franchise—depreciation c. Copyright—amortization d.Oilwell—depletion
PlantAssets,NaturalResources,andIntangibleAssets 10-25
167. A patentshould
a.be amortizedovera periodof20years.b.notbeamortizedifithas an indefinitelife.
c.beamortizedoveritsusefullifeor20 years,whicheverislonger. d.beamortizedoveritsusefullifeor20 years,whicheveris shorter.
168. Theentrytorecordpatent amortizationusuallyincludes a creditto a.AmortizationExpense.
b.AccumulatedAmortization. c.Accumulated Depreciation. d.Patents.
169. Thecostof successfullydefendingapatentinaninfringementsuitshouldbe a.chargedtoLegalExpenses.
b.deductedfromthebookvalueof thepatent. c.addedtothecostof thepatent.
d.recognizedasalossinthecurrentperiod.
170. Anassetthatcannotbesoldindividuallyinthe marketplaceis a.apatent.
b.goodwill.
c.a copyright.d.a tradename.
171. Goodwillcan berecorded
a.whencustomerskeepreturningbecausetheyaresatisfiedwiththecompany's products.
b.whenthe companyacquires agoodlocationforits business. c.whenthecompanyhas exceptionalmanagement.
d.onlywhenthereisanexchangetransactioninvolvingthepurchaseofanentire business.
172. OnJuly1,2008,MarshCompanypurchasedthecopyrighttoParsonsComputertutorials for$162,000.Itisestimatedthatthecopyrightwillhaveausefullifeof5yearswithan estimatedsalvagevalueof$12,000.TheamountofAmortizationExpenserecognizedfor theyear2008wouldbe
a.$32,400. b.$15,000. c.$30,000. d.$16,200.
173. Allof thefollowingintangibleassetsare amortizedexcept a.copyrights.
b.limited-lifefranchises. c.patents.
d.trademarks.
174. Whichofthefollowingisnot anintangibleassetarisingfromagovernmentgrant? a.Goodwill
b.Patent
c.Trademarkd.Tradename
10-26
175. Theamortizationperiodforapatentcannotexceed a.50years.
b.40years. c.20years. d.10 years.
176. Costallocationof anintangibleassetisreferredto as a.amortization.
b.depletion. c.accretion.
d.capitalization.
177. A patent
a.hasa legallifeof 40years. b.is nonrenewable.
c.canberenewedindefinitely.
d.israrelysubjectto litigationbecauseitis anexclusiveright.
178. Ifacompanyincurslegalcostsinsuccessfullydefendingitspatent,thesecostsare recordedbydebiting
a.LegalExpense.
b.anIntangibleLossaccount. c.thePatentaccount.
d.a revenueexpenditureaccount.
179. Copyrightsaregrantedbythefederalgovernment
a.forthe lifeofthecreatoror70 years, whicheverislonger. b.forthelife ofthe creatorplus70 years.
c.forthelifeofthe creatoror70years,whicheveris shorter. d.andthereforecannotbeamortized.
180. Goodwill
a.isonlyrecordedwhengeneratedinternally. b.canbesubdividedandsoldinparts.
c.canonlybeidentifiedwith thebusinessasawhole.
d.canbedefinedas normalearningsless accumulatedamortization.
181. Inrecordingtheacquisitioncost ofanentirebusiness,
a.goodwillis recordedas theexcessof costoverthefair valueof identifiablenetassets. b.assetsarerecordedattheseller'sbookvalues.
c.goodwill,ifit exists,is never recorded.
d.goodwillisrecordedastheexcessofcostoverthebookvalueofidentifiablenet assets.
182. Researchanddevelopmentcosts
a.areclassifiedasintangibleassets.
b.mustbeexpensed whenincurredundergenerallyacceptedaccountingprinciples. c.shouldbe included in thecostofthepatenttheyrelateto.
d.arecapitalizedandthenamortizedovera periodnotto exceed40 years.
PlantAssets,NaturalResources,andIntangibleAssets 10-27
183. Acomputercompanyhas$2,000,000inresearchanddevelopmentcosts.Before accountingforthesecosts,thenetincomeofthecompanyis$1,600,000.Whatisthe amount of netincomeorlossafter theseR&D costsareaccountedfor?
a.$400,000loss
b.$1,600,000netincome c.$0
d.Cannotbedeterminedfromtheinformationprovided.
184. DentonCompanyincurred$300,000ofresearchanddevelopmentcostsinitslaboratory todevelopa newproduct.Itspent$40,000 in legalfeesfora patentgrantedon January2, 2008.OnJuly31,2008, Dentonpaid $30,000for legalfees inasuccessfuldefenseofthe patent.Whatisthetotalamountthatshouldbedebitedto PatentsthroughJuly31, 2008?a.$300,000
b.$70,000c.$370,000
d.Someotheramount
185. Giventhefollowingaccountbalancesatyearend,computethetotalintangibleassetson thebalancesheet of AnishaEnterprises.
Cash AccountsReceivable TrademarksGoodwill
Research& DevelopmentCosts
a.$11,500,000 b.$7,500,000c.$5,500,000 d.$9,500,000
$1,500,000 4,000,000 1,000,000 4,500,000 2,000,000
186. During2008,SitterCorporationreportednetsalesof$2,000,000,netincomeof $1,200,000,anddepreciationexpenseof$100,000.Sitteralsoreportedbeginningtotal assetsof$1,000,000,endingtotalassetsof$1,500,000,plantassetsof$800,000,and accumulated depreciationof$500,000.Sitter’sassetturnoverratiois
a.2 times.b.1.6times. c.1.3times. d..96times.
187. During2008,TylerCorporationreportednetsalesof$3,000,000andnetincomeof $1,800,000.Tyleralsoreportedbeginningtotalassetsof$1,000,000andendingtotal assets of $1,500,000.Tyler’sassetturnoverratiois
a.3.0times. b.2.4times. c.2.0times. d.1.4times.
188. Naturalresourcesaregenerallyshownonthebalancesheetunder a.Intangibles.
b.Investments.
c.Property,Plant, andEquipment. d.Owner'sEquity.
10-28
189. Whichofthefollowingstatementsconcerningfinancialstatementpresentationisnota truestatement?
a.IntangiblesarereportedseparatelyunderIntangibleAssets.
b.Thebalancesofmajorclassesof assets maybe disclosedinthefootnotes.
c.Thebalancesoftheaccumulateddepreciationofmajorclassesofassetsmaybe disclosed inthefootnotes.
d.Thebalancesofallindividualassets,astheyappearinthesubsidiaryplantledger, shouldbedisclosedinthefootnotes.
190. Intangibleassets
a.shouldbereported undertheheadingProperty,Plant, andEquipment.
b.arenotreportedonthebalancesheet becausetheylackphysicalsubstance. c.shouldbereportedasCurrentAssets onthebalancesheet.
d.shouldbereported asaseparateclassification onthebalancesheet.
191. Acompanyhasthefollowing assets:
BuildingsandEquipment,lessaccumulateddepreciationof$2,000,000 Copyrights
Patents
Timberlands,lessaccumulateddepletionof$2,800,000
Thetotal amountreportedunderProperty,Plant,andEquipmentwouldbe a.$19,360,000.
b.$14,400,000. c.$18,400,000. d.$15,360,000.
$9,600,000 960,000 4,000,000 4,800,000
a192.Acompanydecidestoexchangeitsoldmachineand$77,000cashforanewmachine. Theoldmachinehasabookvalueof$63,000andafairmarketvalueof$70,000onthe date of theexchange.Thecostof thenewmachinewouldberecordedat
a.$140,000. b.$147,000. c.$133,000.
d.cannotbedetermined.
a193.Acompanyexchanges itsoldofficeequipmentand$40,000 fornewofficeequipment.The oldofficeequipmenthasabookvalueof$28,000andafairmarketvalueof$20,000on thedate ofthe exchange.Thecostofthe newoffice equipment wouldberecordedat
a.$68,000. b.$60,000. c.$48,000.
d.cannotbedetermined.
a194.Inanexchangeofplantassetsthathascommercialsubstance,anydifferencebetween the fair marketvalueandthebookvalueof theoldplantassetis
a.recordedasagainorloss.
b.recorded ifagainbutisdeferredifaloss. c.recordedifaloss but isdeferredifa gain. d.deferredifeitheragainor loss.
PlantAssets,NaturalResources,andIntangibleAssets 10-29
a195.Gainsonanexchangeof plantassetsthathascommercialsubstanceare a.deductedfromthecostofthenewassetacquired.
b.deferred.
c.not possible.
d.recognizedimmediately.
a196.Lossesonanexchangeofplantassetsthathascommercialsubstanceare a.notpossible.
b.deferred.
c.recognizedimmediately.
d.deductedfromthecost of thenewassetacquired.
a197.Thecostofanewassetacquiredinanexchangethathascommercialsubstanceisthe cashpaid plusthe
a.bookvalueof theoldasset.
b.fairmarketvalueoftheoldasset. c. bookvalueoftheassetacquired. d.fair marketvalueof thenewasset.
Additional MultipleChoiceQuestions
198. Thecostof landincludesallof thefollowingexcept a.realestatebrokers’commissions.
b.closingcosts.
c.accruedpropertytaxes. d.parkinglots.
199. A termthatisnotsynonymouswith property,plant,and equipmentis a.plantassets.
b.fixedassets.
c.intangibleassets.
d.long-livedtangibleassets.
200. Thefactorthat isnotrelevantincomputingdepreciationis a.replacementvalue.
b.cost.
c.salvagevalue. d.usefullife.
201. Depreciablecostisthe
a.bookvalueofanassetlessitssalvagevalue. b.costofanasset lessitssalvagevalue.
c.cost of anasset lessaccumulateddepreciation. d.bookvalueofanasset.
202. SantayanaCompanypurchasedamachineonJanuary1,2006,for$12,000withan estimatedsalvagevalueof$3,000andanestimatedusefullifeof8years.OnJanuary1, 2008,Santayanadecidesthemachinewilllast12yearsfromthedateofpurchase.The salvagevalueisstillestimatedat$3,000.Usingthestraight-linemethod,thenewannual depreciation will be
10-30
a.$675. b.$750. c.$900. d.$1,000.
203. Ordinaryrepairs are expenditurestomaintaintheoperatingefficiencyof aplantassetand arereferredto as
a.capitalexpenditures.b.expenseexpenditures. c.improvements.
d.revenueexpenditures.
204. Improvementsare
a.revenueexpenditures.
b.debitedtoanappropriateassetaccountwhentheyincreaseusefullife.
c.debitedtoaccumulateddepreciationwhentheydo not increaseusefullife.
d.debitedtoanappropriateassetaccountwhentheydonotincreaseusefullife.
205. Againon sale of aplantassetoccurs whentheproceedsofthesalearegreaterthanthe a.salvagevalueof theassetsold.
b.marketvalueof the assetsold. c.bookvalueoftheassetsold.
d.accumulateddepreciationontheassetsold.
206. Theentrytorecorddepletionexpense
a.decreasesowner'sequityandassets.
b.decreasesnet incomeandincreasesliabilities. c.decreasesassets and liabilities.
d.decreasesassets andincreasesliabilities.
207. Allof thefollowingare intangibleassetsexcept a.copyrights.
b.goodwill. c.patents.
d.researchand developmentcosts.
208. A purchasedpatenthasa legallifeof 20years.Itshouldbe a.expensedintheyearofacquisition.
b.amortizedover20 yearsregardlessof itsusefullife. c.amortizedoverits usefullife iflessthan20years.d.notamortized.
209. Theassetturnover ratioiscomputedbydividing a.netincomebyaveragetotalassets.
b.netsalesbyaveragetotalassets. c.netincomebyendingtotalassets. d.net salesbyendingtotalassets.
PlantAssets,NaturalResources,andIntangibleAssets 10-31
a210.In anexchangeof plantassetsthathascommercialsubstance a.neithergainsnorlossesarerecognizedimmediately.
b.gains,butnotlosses,arerecognizedimmediately. c.losses,butnotgains,arerecognizedimmediately. d.bothgainsand lossesarerecognizedimmediately.
BRIEFEXERCISES
BE211
Indicatewhethereachofthefollowingexpendituresshouldbeclassifiedasland(L),land improvements (LI),buildings(B),equipment(E), ornone ofthese(X).
1.Parkinglots
2.Electricityused byamachine
3.Excavationcosts
4.Interestonbuilding constructionloan
5.Costof trialrunsformachinery
6.Drainagecosts
7.Costto installa machine
8.Fences
9.Unpaid(past)propertytaxesassumed
10.Costoftearingdownabuilding whenlandandabuildingonitare purchased
BE212
SellerCorporationpurchasedlandadjacenttoitsplanttoimproveaccessfortrucksmaking deliveries.Expendituresincurredinpurchasingthelandwereasfollows:purchaseprice, $50,000;broker’sfees,$6,000;titlesearchandotherfees,$5,000;demolitionofanoldbuilding ontheproperty,$5,700;grading,$1,200;diggingfoundationfortheroad,$3,000;layingand pavingdriveway,$25,000;lighting$7,500;signs,$1,500.Listtheitemsandamountsthatshould be includedin theLand account.
BE213
EastmanCompanypurchasedadeliverytruckfor$35,000onJanuary1,2008.Thetruckwas assignedanestimatedusefullifeof5yearsandhasaresidualvalueof$10,000.Compute depreciationexpenseusingthedouble-declining-balancemethodforthe years2008and2009.
BE214
EastmanCompanypurchasedadeliverytruckfor$35,000onJanuary1,2008.Thetruckwas assignedanestimatedusefullifeof100,000milesandhasaresidual valueof$10,000.Thetruck wasdriven18,000miles in2008and22,000milesin2009.Computedepreciationexpenseusing theunits-of-activitymethodfor the years2008and 2009.
BE215
PorikaCompanypurchasedatruckfor$57,000.Thecompanyexpectedthetrucktolastfour yearsor100,000miles,withanestimatedresidualvalueof$6,000attheendofthattime.During thesecond yearthetruckwasdriven27,000 miles.Computethedepreciationforthesecond year undereachof themethods belowand placeyouranswersintheblanksprovided.
Units-of-activity $
Double-declining-balance $
BE216
On January 1,2006,EckerCompanypurchasedacomputersystemfor$20,500. Thesystemhad anestimatedusefullifeof5yearsandnosalvagevalue.AtJanuary1,2008,thecompany revisedtheremainingusefullifetotwoyears.Whatamountofdepreciationwillberecordedfor 2008and2009?
BE217
RobotEnterprisessoldequipmentonJanuary1,2008for$5,000.Theequipmenthadcost $24,000.ThebalanceinAccumulatedDepreciationatJanuary1is$20,000.Whatentrywould Robotmaketorecordthe saleof theequipment?
BE218
OnJanuary1,2008,FreeportEnterprisespurchasednaturalresourcesfor$1,200,000.The companyexpectstheresourcestoproduce12,000,000unitsofproduct.(1)Whatisthedepletion costperunit?(2)Ifthecompanyminedandsold20,000unitsinJanuary,whatisdepletion expense forthemonth?
BE219
OnJanuary2,2008,ElneerCompanypurchasedapatentfor$38,000.Thepatenthasan estimatedusefullifeof25yearsanda20-yearlegallife.Whatentrywouldthecompanymakeat December31, 2008torecordamortizationexpenseonthepatent?
BE220
Usingthefollowingdatafor Rocky,Inc.,computeits assetturnoverratio.
Rocky, Inc.NetIncome2008
TotalAssets12/31/08 TotalAssets12/31/07 NetSales2008
$123,000 2,443,000 1,880,000 2,135,000
$2,135,000
EXERCISES
Ex.221
HuntCompanypurchasedfactoryequipmentwithaninvoicepriceof$80,000.Othercosts incurredwerefreightcosts,$1,100;installationwiringandfoundation,$2,200;materialandlabor costsintestingequipment, $700;oillubricantsandsupplies tobeusedwithequipment, $500;fire insurancepolicycoveringequipment,$1,400.Theequipmentisestimatedtohavea$5,000 salvagevalueat theendofits5-yearusefulservicelife.
Instructions
(a)Computetheacquisitioncostofthe equipment.Clearlyidentifyeachelement ofcost.
(b)Ifthedouble-declining-balancemethodofdepreciationwasused,theconstantpercentage applied toa decliningbookvalue wouldbe .
Ex.222
Foreachentrybelowmake acorrectingentry ifnecessary.Ifthe entry given iscorrect,then state "Noentryrequired."
(a)The$60cost of repairinga printerwaschargedtoComputerEquipment.
(b)The $5,000cost ofa major engineoverhaulwas debitedto RepairExpense. The overhaulis expected to increasetheoperatingefficiencyof the truck.
(c) The$6,000closingcostsassociatedwiththeacquisitionoflandweredebitedtoLegal Expense.
(d)A$500chargefortransportationexpensesonnewequipmentpurchasedwasdebitedto Freight-In.
Ex.223
BenedictCompanywasorganized onJanuary1.Duringthefirstyearofoperations,the following expendituresandreceipts wererecordedinrandom orderinthe account,Land.
Debits
1.Costofrealestatepurchasedasaplantsite(landandbuilding).
2.Accruedrealestatetaxespaidatthetimeofthepurchaseoftherealestate. 3.Costof demolishingbuilding tomakelandsuitablefor constructionofanew
building.
4.Architect'sfeesonbuildingplans.5.Excavationcostsfor newbuilding. 6.Costoffilling andgradingtheland.
7.Insuranceandtaxesduringconstructionof building.
8.Costofrepairstobuilding underconstructioncaused byasmallfire.
9.Interestpaidduringthe year,of which$54,000pertainstotheconstruction period.
10.Fullpaymentto buildingcontractor. 11.Costof parkinglotsanddriveways.
12.Realestatetaxespaidfor thecurrentyearontheland. TotalDebits
Credits 13.Insuranceproceedsforfire damage.
14.Proceedsfrom salvageof demolishedbuilding TotalCredits
$220,000 4,000
15,000 14,000 24,000 5,000 6,000 7,000
64,000 760,000 36,000
4,000$1,159,000
$3,000
3,500$6,500
Instructions
Analyzetheforegoingtransactionsusingthefollowingtabulararrangement. Insertthenumberof each transactionintheItemspaceandinserttheamountsintheappropriatecolumns.
Item Land Building Other Account Title
Ex.224
DuncanCompanypurchaseda machine atacost of$90,000.The machineisexpected to have a $5,000salvagevalueatthe endof its 5-yearusefullife.
Instructions
Computeannualdepreciationforthefirstandsecond yearsusingthe (a)straight-linemethod.
(b)double-declining-balancemethod.
Ex.225
ReynoldsCompanypurchasedanewmachinefor$300,000.Itisestimatedthatthemachinewill havea$30,000salvagevalueattheendofits5-yearusefulservicelife.Thedouble-declining-balance method of depreciationwillbeused.
Instructions
Prepareadepreciationschedulewhich showstheannualdepreciation expense onthemachine for its5-yearlife.
Ex.226
TannerCompanypurchasedequipmentonJanuary1,2007for$70,000.Itisestimatedthatthe equipmentwillhavea$5,000salvagevalueattheendofits5-yearusefullife.Itisalsoestimated that theequipmentwillproduce100,000unitsoverits 5-yearlife.
Instructions
Answerthefollowingindependentquestions.
1.ComputetheamountofdepreciationexpensefortheyearendedDecember31,2007,using thestraight-linemethodofdepreciation.
2.If16,000unitsofproductareproducedin2007and24,000unitsareproducedin2008,what isthebookvalueoftheequipmentatDecember31,2008?Thecompanyusestheunits-of-activitydepreciationmethod.
3.Ifthecompanyusesthedouble-declining-balancemethodofdepreciation,whatisthe balance of theAccumulatedDepreciation—Equipment accountat December31,2009?
Ex.227
AplantassetacquiredonOctober1,2008,atacostof$300,000hasanestimatedusefullifeof 10years.Thesalvagevalueis estimated tobe$30,000 attheendofthe asset'suseful life.
Instructions
Determinethedepreciationexpenseforthefirsttwoyearsusing: (a) thestraight-linemethod.
(b) the double-declining-balancemethod.
50,000miles
60,000miles
70,000miles
Ex.228
Tony’s,apopularpizzahang-out,hasathrivingdeliverybusiness.Tony’shasafleetofthree deliveryautomobiles.Priortomakingtheentryforthisyear'sdepreciationexpense,the subsidiary ledgerforthefleet is asfollows:
Accumulated
Estimated Depr.—Beg. MilesOperated Car Cost SalvageValue Life in Miles of the YearDuringYear
1 $21,000 $3,000 50,000 $2,520 �� 20,000 2 18,000 2,400 60,000 2,340 22,000 3 20,000 2,500 70,000 2,000 19,000
Instructions
(a)Determinethedepreciationratespermileforeachcar.
(b)DeterminetheDepreciationExpenseforeachcarforthecurrent year.
(c)MakeonecompoundjournalentrytorecordtheannualDepreciationExpenseforthefleet.
$21,000– $3,000
Ex.229
TheBarnettClinicpurchasedanewsurgicallaserfor$80,000.Theestimatedsalvagevalueis $5,000.Thelaserhasausefullifeoffiveyearsandtheclinicexpectstouseit10,000hours.It wasused1,600hours inyear1;2,200 hours in year2;2,400 hoursinyear 3;1,800 hours in year 4;2,000hoursin year5.
Instructions
(a)Computetheannualdepreciationforeachofthefiveyearsundereachofthefollowing methods:
(1)straight-line.(2)units-of-activity.
(b)Ifyouweretheadministratoroftheclinic,whichmethodwouldyoudeemasmost appropriate? Justifyyouranswer.
(c)Whichmethodwouldresultinthelowestreportedincomeinthefirstyear?Whichmethod would resultinthelowesttotalreportedincomeoverthefive-yearperiod?
Ex.230
TheDecember31,2007balancesheetofRitterCompanyshowedEquipmentof$64,000and AccumulatedDepreciationof$18,000.OnJanuary1,2008,thecompanydecidedthatthe equipmenthasaremainingusefullifeof 6yearswitha $4,000salvagevalue.
Instructions
Computethe (a)depreciablecost ofthe equipmentand(b) revisedannualdepreciation.
Ex.231
SoutheastAirlinespurchaseda747aircraftonJanuary1,2007,atacostof$35,000,000.The estimateduseful lifeoftheaircraftis20years,withanestimated salvagevalue of$5,000,000.On January1,2010theairlinerevisesthetotalestimatedusefullifeto15yearswitharevised salvagevalueof$3,500,000.
Instructions
(a)ComputethedepreciationandbookvalueatDecember31,2009usingthestraight-line methodandthedouble-declining-balancemethod.
(b)Assumingthestraight-linemethodisused,computethedepreciationexpensefortheyear ended December31, 2010.
Ex.232
SeymorCompanypurchasedamachineonJanuary1,2008,atacostof$80,000.Itisexpected tohaveanestimatedsalvagevalueof$5,000attheendofits5-yearlife.Thecompany capitalizedthemachineanddepreciateditin2008usingthedouble-declining-balancemethodof depreciation.Thecompany hasapolicyofusingthestraight-linemethod todepreciateequipment butthecompanyaccountantneglectedtofollowcompanypolicywhenheusedthedouble-declining-balancemethod.NetincomefortheyearendedDecember31,2008was$55,000as the resultof depreciatingthemachineincorrectly.
Instructions
Usingthemethodofdepreciationwhichthecompanynormallyfollows,preparethecorrecting entry and determinethecorrectednet income.(Showcomputations.)
Ex.233
Equipment wasacquiredonJanuary1,2005,atacostof$80,000.Theequipmentwasoriginally estimatedtohaveasalvagevalueof$5,000andanestimatedlifeof10years.Depreciationhas beenrecordedthroughDecember31,2008,usingthestraight-linemethod.OnJanuary1,2009, theestimatedsalvagevaluewasrevisedto$6,000andtheusefullifewasrevisedtoatotalof8 years.
Instructions
DeterminetheDepreciationExpensefor 2009.
Ex.234
GantnerCompanypurchasedamachineonJanuary1,2008.Inadditiontothepurchaseprice paid,thefollowingadditionalcostswereincurred:(a)salestaxpaidonthepurchaseprice,(b) transportationandinsurancecostswhilethemachinerywasintransitfromtheseller,(c) personneltrainingcosts forinitial operationofthemachinery,(d)annualcityoperatinglicense,(e) majoroverhaultoextendthelifeofthemachinery,(f)lubricationofthemachinerygearingbefore themachinerywasplacedintoservice,(g)lubricationofthemachinerygearingafterthe machinerywasplacedintoservice,and(h)installationcostsnecessarytosecurethemachinery to thebuildingflooring.
Instructions
Indicatewhethertheitems(a)through(h)arecapitalorrevenueexpendituresinthespaces provided: C= Capital,R=Revenue.
(a) (b) (c) (d)
(e) (f) (g) (h)
Ex.235
CareyWordProcessingServiceusesthestraight-linemethodofdepreciation.Thecompany's fiscalyearendisDecember31.Thefollowingtransactionsandeventsoccurredduringthefirst three years.
2007July 1
Nov.3 Dec.31
2008Dec.31
PurchasedacomputerfromtheComputerCenterfor$2,300cashplussales tax of$150,andshippingcosts of$50.
Incurredordinaryrepairsoncomputerof $140.
Recorded2007depreciationonthebasisofafouryearlifeandestimated salvagevalueof$500.
Recorded2008depreciation.
2009Jan. 1 Paid$400foranupgradeofthecomputer.Thisexpenditureisexpectedto increasetheoperatingefficiency andcapacityofthecomputer.
Instructions
Preparethenecessaryentries.(Showcomputations.)
Ex.236
Identifythefollowingexpendituresascapitalexpenditures orrevenueexpenditures. (a)Replacementof wornoutgearsonfactorymachinery.
(b)Constructionof anewwing onanofficebuilding. (c)Paintingtheexteriorof abuilding.
(d)Oilchangeonacompanytruck.
(e)ReplacingaPentiumIIcomputerchipwithaPentiumIVchip,whichincreasesproductive capacity.Noextensionofusefullifeexpected.
(f) Overhaulofa truckmotor.Oneyearextensioninusefullifeis expected. (g)Purchasedawastebasketatacostof $10.
(h)Paintingandletteringofa usedtruck uponacquisitionofthetruck.
Ex.237
OnJanuary1,2006RosenCompanypurchasedandinstalledatelephonesystematacostof $20,000.Theequipmentwasexpectedtolastfiveyearswithasalvagevalueof$3,000.On January1,2007moretelephoneequipmentwaspurchasedtotie-inwiththecurrentsystemfor $10,000.Thenewequipmentisexpectedtohaveausefullifeoffouryears.Throughanerror,the newequipmentwasdebitedtoTelephoneExpense.RosenCompanyusesthestraight-line methodofdepreciation.
Instructions
PrepareascheduleshowingtheeffectsoftheerroronTelephoneExpense,Depreciation Expense,andNetIncomeforeachyearandintotalbeginningin2007throughtheusefullifeof thenewequipment.
TelephoneExpense Overstated
Year (Understated)
Depreciation Expense Overstated
(Understated)
NetIncome Overstated
(Understated)
2007
2008
2009
2010
Ex.238
BermanCompanysoldequipmentonJuly31,2008for$50,000.Theequipmenthadcost $140,000 andhad$80,000ofaccumulateddepreciationasofJanuary1,2008.Depreciationfor thefirst6monthsof2008 was$8,000.
Instructions
Preparethejournalentrytorecordthesaleoftheequipment.
Ex.239
(a)WattsCompanypurchasedequipmentin2001for$90,000andestimateda$6,000salvage valueattheendoftheequipment's10-yearusefullife.AtDecember31,2007,therewas $58,800intheAccumulatedDepreciationaccountforthisequipmentusingthestraight-line methodof depreciation.On March31, 2008,theequipmentwassoldfor$24,000.
PreparetheappropriatejournalentriestoremovetheequipmentfromthebooksofWatts CompanyonMarch31, 2008.
(b)GormanCompanysoldamachine for$15,000. Themachineoriginallycost$35,000in2005 and$8,000wasspentonamajoroverhaulin2008(chargedtoMachineaccount). AccumulatedDepreciationonthemachinetothe date of disposalwas$28,000.
Preparetheappropriatejournalentrytorecordthedispositionofthemachine.
(c)KlingerCompanysoldofficeequipmentthathadabookvalueof$6,000for$8,000.The officeequipmentoriginallycost$20,000anditisestimatedthatitwouldcost$25,000to replace theofficeequipment.
Preparetheappropriatejournalentrytorecordthedispositionofthe officeequipment.
Ex.240
Fleming'sLumberMillsoldtwomachinesin2009.Thefollowinginformationpertainstothetwo machines:
Purchase Useful Salvage Depreciation Sales
MachineCost Date Life Value Method Date Sold Price
#1 $66,000 7/1/05 5yrs. $6,000 Straight-line 7/1/09 $15,000 #2 $40,000 7/1/08 5yrs. $5,000 Double-declining- 12/31/09 $24,000
balance
Instructions
(a)Computethedepreciationoneachmachinetothedateofdisposal.
(b)Preparethejournalentriesin2009torecord2009depreciationandthesaleofeach machine.
Ex.241
Presentedbelowareselectedtransactionsfor MiltonCompanyfor 2008.
Jan. 1 Received$9,000scrapvalueonretirementofmachinerythatwaspurchasedon January1,1998.Themachinecost$90,000onthatdate,andhadausefullifeof10 yearswithno salvagevalue.
April30
Dec.31
Soldamachinefor$28,000thatwaspurchasedonJanuary1,2005.Themachine cost$75,000,andhadausefullifeof 5 years withnosalvagevalue.
DiscardedabusinessautomobilethatwaspurchasedonOctober1,2003.Thecar cost$32,000andwasdepreciatedona5-yearusefullifewithasalvagevalueof $2,000.
Instructions
Journalizeallentriesrequiredasaresultoftheabovetransactions.MiltonCompanyusesthe straight-linemethodof depreciationandhasrecordeddepreciationthroughDecember31,2007.
Ex.242
WatsonCompanysoldthefollowingtwomachinesin 2008:
Cost Purchasedate Usefullife Salvagevalue
Depreciationmethod Datesold
SalesPrice
MachineA
$68,000 7/1/048years $4,000
Straight-line 7/1/08 $30,000
Machine B $80,000 1/1/055years $4,000
Double-declining-balance 8/1/08$16,000
Instructions
Journalizeallentriesrequiredtoupdatedepreciationandrecordthesalesofthetwoassetsin 2008.ThecompanyhasrecordeddepreciationonthemachinethroughDecember31, 2007.
Ex.243
GirardMininginvested$960,000inamineestimatedtohave1,200,000tonsoforewithno salvagevalue.Duringthefirst year,200,000tons of orewereminedandsold.
Instructions
Preparethejournalentrytorecorddepletionexpense.
Ex.244
Eddy MiningCompanypurchaseda minefor$70 million which isestimated tohave250,000tons ofore anda salvagevalueof $10million.
(a)Inthefirstyear,50,000tonsoforeareextractedandsold.Preparethejournalentryto recorddepletionexpenseforthefirstyear.
(b)Inthesecondyear,150,000tonsoforeareextractedbutonly125,000tonsaresold. Preparethejournalentrytorecorddepletionexpenseforthesecondyear.
(c)Whatamountandinwhataccountare thetonsof orenotsoldreported?
Ex.245
HarperMiningCompanypurchasedlandcontaininganestimated15milliontonsoforeatacost of$4,500,000.Thelandwithouttheoreisestimatedtobeworth$600,000. Thecompany expects tooperatetheminefor10years.Buildingscosting$600,000areerectedonthesiteandare expectedtolastfor25years.Equipmentcosting$300,000withanestimatedlifeof12yearsis installed.Thebuildingsandtheequipmentpossessnosalvagevalueafterthemineisclosed. During thefirst yearof operations,theminingcompanyminedandsold2milliontons ofore.
Instructions
(a)Computethedepletionchargeperton.
(b)Computethedepletionexpensefor thefirst year.
(c)Computetheappropriatefirstyear'sdepreciationexpenseforthebuildings. (d)Computetheappropriatefirstyear'sdepreciationexpensefortheequipment.
(e)Preparejournalentriestorecorddepletionanddepreciationexpensesfortheyear.
Ex.246
(a)AcompanypurchasedapatentonJanuary1,2008, for$2,000,000.Thepatent'slegallifeis 20yearsbutthecompanyestimates thatthepatent'susefullifewillonlybe5yearsfromthe dateofacquisition.OnJune30,2008,thecompanypaidlegalcostsof$135,000in successfullydefendingthepatentinaninfringementsuit.Preparethejournalentryto amortize the patentatyearendonDecember31,2008.
(b)FoleyCompanypurchasedafranchisefromYummieFoodCompanyfor$400,000on January1,2008.Thefranchise isforanindefinite timeperiodandgivesFoleyCompanythe exclusiverightstosellYummieWingsinaparticularterritory.Preparethejournalentryto recordtheacquisitionofthefranchiseandanynecessaryadjustingentryatyearendon December 31, 2008.
(c)DryerCompanyincurredresearchanddevelopmentcostsof$500,000in2008in developinganewproduct.Preparethenecessaryjournalentriesduring2008torecord these eventsandanyadjustmentsat yearendonDecember31,2008.
Ex.247
OnJanuary2,2008,HolmesCompanypurchasedapatentfor$200,000.Thepatenthasan8-yearestimatedusefullife andalegallife of 20years.
Instructions
Preparethejournalentrytorecordpatent amortization.
Ex.248
Foreachitemlistedbelow,enteracodeletterintheblankspacetoindicatetheallocation terminology fortheitem.Usethefollowing codesfor youranswer:
A—Amortization
D—Depreciation
P—Depletion
N—Noneof these
1.Goodwill
2.Land
3.Buildings
4.Patents
5.Copyrights
6.Researchanddevelopmentcosts
7.Timberlands
8.Franchises(indefinite life)
9.Licenses(limitedlife)
10.LandImprovements
11.OilDeposits
12.Equipment
Ex.249
Foreachofthefollowingunrelatedtransactions,(a)determinetheamountoftheamortizationor depletionexpenseforthecurrentyear,and(b)presenttheadjustingentriesrequiredtorecord each expenseatyearend.
(1)Timberrightswerepurchasedonatractoflandfor$360,000.Thetimberisestimatedat 1,200,000boardfeet.Duringthecurrentyear,75,000boardfeetoftimberwerecutand sold.
(2)Costsof$8,000wereincurredonJanuary1toobtainapatent.Shortlythereafter,$22,000 wasspentinlegalcoststosuccessfullydefendthepatentagainstcompetitors.Thepatent has anestimatedlegallifeof12years.
Ex.250
Duringthecurrentyear,LymonCompanyincurredseveralexpenditures.Brieflyexplainwhether theexpenditureslistedbelowshouldberecordedasanoperatingexpenseorasanintangible asset.Ifyouview theexpenditure asanintangibleasset,indicatethenumberofyearsoverwhich theassetshouldbe amortized.Explainyouranswer.
(a)Spent$30,000inlegalcostsinapatentdefensesuit.Thepatentwasunsuccessfully defended.
(b)Purchased atrademark fromanothercompany.Thetrademarkcanberenewedindefinitely. LymonCompanyexpectsthetrademarkto contributetorevenueindefinitely.
(c)LymonCompanyacquiresapatentfor$2,000,000.Thecompanysellingthepatenthas spent$1,000,000ontheresearchanddevelopmentofit.Thepatenthasaremaininglifeof 15years.
(d)LymonCompanyisspendingconsiderabletimeandmoneyindevelopingadifferentpatent foranotherproduct.Sofar$3,000,000hasbeenspentthisyearonresearchand development.LymonCompanyisveryconfidenttheywillobtainthispatentinthenextfew years.
Ex.251
Presentedbelowisinformationrelatedtoplantassets,naturalresources,andintangiblesatyear end on December31,2008,forNortenCompany:
Buildings Goodwill Patents CoalMine
AccumulatedDepreciation AccumulatedDepletion
$1,080,000 350,000 480,000 440,000 670,000 275,000
Instructions
Prepareapartialbalancesheetfor NortenCompanythat showshowtheabovelisted itemswould be presented.
Ex.252
Computetheassetturnover ratiobasedonthefollowing:
Beginningtotal assets Endingtotal assetsNetincome
Netsales
$800,000 1,200,000 300,000 2,200,000
Ex.253
Indicateinthe blank spaces below,thesectionof the balancesheetwherethefollowingitems are reported. Usethefollowingcodeto identifyyour answer:
PPE Property,Plant, andEquipment I Intangibles
O Other
N/A Not onthebalancesheet
1. Goodwill
2.LandImprovements 3.Buildings
4.AccumulatedDepreciation 5.Trademarks
6.Researchand developmentcosts
7.Timberlands 8.Franchises9.Licenses
10.Equipment 11.OilDeposits
12.Land
*Ex.254
Presentedbelowaretwoindependentsituations:
(a)RileyCompanyexchangedanoldmachine(cost$100,000less$60,000accumulated depreciation)plus$7,000cashforanewmachine.Theoldmachinehadafairmarketvalue of$36,000.Preparetheentrytorecordtheexchangeof assets byRileyCompany.
(b)CarlinCompanytradesoldequipment(cost$90,000less$54,000accumulateddeprecia-tion)fornewequipment.Carlinpaid$36,000cashinthetrade.Theoldequipmentthatwas tradedhadafairmarketvalueof$54,000.Preparetheentrytorecordtheexchangeof assetsbyCarlinCompany.
*Ex.255
AglerCompanyexchangesequipmentwithEatonCompanyandPetersCompanyexchanges equipmentwithFieroCompany.Thefollowinginformationpertainstotheexchanges:
Equipment(cost) Accumulateddepreciation
Fairmarketvalueof theequipment Cashpaid
Agler Company $114,000
50,000 75,000 45,000
Peters Company $96,000
45,000 42,000
-0-
Instructions
Prepare thejournalentriestorecordtheexchangesonthebooksofAglerCompanyandPeters Company.
Ex.256
FarrDeliveryCompanyandBellDeliveryCompanyexchangeddeliverytrucksonJanuary1, 2008.Farr'struckcost$84,000,hadaccumulateddepreciationof$69,000,andhasafairmarket valueof$9,000.Bell'struckcost$63,000,hadaccumulateddepreciationof$54,000,andhasa fair marketvalueof$9,000.
Instructions
(a) Journalizetheexchangefor FarrDeliveryCompany. (b) Journalizetheexchangefor BellDeliveryCompany.
Ex.257
Prepare thejournalentriestorecordthefollowingtransactionsforBryantCompanywhichhasa calendaryearendandusesthe straight-linemethodofdepreciation.
a) OnSeptember30,2008,thecompanyexchangedolddeliveryequipmentand$24,000for newdeliveryequipment.The olddeliveryequipmentwas purchasedon January1,2006,for $84,000andwasestimatedtohavea$12,000salvagevalueattheendofits5-yearlife. Depreciationonthedelivery equipmenthasbeenrecordedthroughDecember31,2007.Itis estimatedthatthefairmarketvalueoftheolddeliveryequipmentis$36,000onSeptember 30,2008.
(b)OnJune30,2008,thecompany exchangedoldofficeequipmentand$40,000fornewoffice equipment.Theoldofficeequipmentoriginallycost$80,000andhadaccumulated depreciationtothedateofdisposalof$35,000.Itisestimatedthatthefairmarketvalueof theold officeequipmentonJune30was$60,000.
COMPLETIONSTATEMENTS
258.Withtheexceptionofland,plantassetsexperiencea inservice potentialovertheirusefullives.
259.Whenvacantlandisacquired,expendituresforclearing,draining,filling,andgrading should bechargedtothe account.
260.Thecostofdemolishinganoldbuildingonlandthathasbeenacquiredsothatanew buildingcanbeconstructedshouldbechargedtothe account.
261.Thecostofpaving,fencing,andlightinganewcompanyparkinglotischargedtoa
account.
262.Equipmentwithaninvoicepriceof$20,000waspurchasedandfreightcostswere$900. Thecostofthe equipmentwouldbe$ .
263. istheprocessofallocatingthecostofaplantassettoexpense overits service lifeinarationalandsystematicmanner.
264.Thebookvalueofaplantassetisobtainedbysubtracting fromthe
of theplantasset.
265.Threefactorsthataffectthecomputationofperiodicdepreciationexpenseare(1)
, (2) ,and(3) .
266.The methodofcomputingdepreciationexpenseresultsinanequal amountofperiodicdepreciationthroughouttheservicelife oftheplantasset.
267.Thedeclining-balancemethodofcomputingdepreciationexpenseinvolvesmultiplyinga
bookvaluebya percentage.
268.Thedeclining-balancemethodofcomputingdepreciationisknownasan
depreciationmethod.
269.Ordinaryrepairswhichmaintainoperatingefficiencyandexpectedproductivelifeare called .
270.Additionsandimprovementsarecostsincurredtoincreasetheoperatingefficiency, productive capacity,or expectedusefullife andare referredtoas .
271.Ifdisposalofaplantassetoccursatany timeduringtheyear, for the fractionoftheyeartothedate ofdisposalmustberecorded.
272.Iffullydepreciatedequipmentthatcost$10,000withnosalvagevalueisretired,theentry torecordtheretirementrequiresadebittothe account and acredittothe account.
273.Iftheproceedsfromthesaleofaplantassetexceedits ,againon disposalwilloccur.
274.Aplantassetoriginally cost$48,000andwasestimatedtohavea$3,000salvagevalueat theendofits5-yearusefullife.Ifattheendofthreeyears,theassetwassoldfor$9,000, andhadaccumulateddepreciationrecordedof$27,000,thecompanyshouldrecognizea
ondisposalintheamountof $ .
275.Naturalresourceshavetwodistinguishingcharacteristics(1)theyarephysically
inoperations,and(2)theyare onlybyanactof nature.
276.Inrecordingthepurchaseofabusiness,goodwillshouldberecordedfortheexcessof
overthe of thenet assetsacquired.
277.Theallocationofthecostofanassettoexpenseoveritsusefullifeiscalled
fortangibleplantassets, fornaturalresources, and for intangibleassets.
278.Thecostofapatentshouldbeamortizedoverits lifeorits
life,whicheverisshorter.
279.The ratioiscalculatedbydividingnetsalesbyaveragetotal assets.
a280.Inthecaseofanexchangeofplantassetsresultinginalossondisposal,thecostofthe newassetacquiredisequaltothe oftheassetgivenupplusanycash paid bythepurchaser.
a281.Acompanyexchangedanoldmachine,whichoriginallycost$22,000andhas accumulateddepreciationtodateof$12,000,foranewmachine.Theoldmachinehada fairmarketvalueof$14,000.Thecostofthenewmachineshouldberecordedat$ .
10-63
MATCHING
Set1
282.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Plantassets B.Depreciation C.Bookvalue
D.Salvagevalue
E.Straight-linemethod
F. Units-of-activitymethod
G.Double-declining-balancemethod H.MACRS
I. Revenueexpenditure J. Capitalexpenditure
1.Smallexpenditureswhichprimarilybenefitthecurrent period.
2.Costlessaccumulateddepreciation.
3.Anaccelerateddepreciationmethodusedforfinancialstatementpurposes.
4.Tangibleresourcesthatareusedinoperationsand arenotintendedforresale.
5.Equalamountof depreciationeachperiod.
6.Expectedcashvalueof theassetattheendof itsusefullife.
7.Allocationof thecostofaplant assetto expenseoverits usefullife.
8.Materialexpenditureswhichincreaseanasset'soperatingefficiency,productive capacity,orusefullife.
9.Anaccelerateddepreciationmethodusedfortaxpurposes.
10.Usefullifeisexpressedintermsof units ofproductionor expecteduse.
Set2
283.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Gainondisposal B.Lossondisposal C.Trademark
D.Depletion E.Usefullife
F. Assetturnoverratio G.Goodwill
H.Amortization
I. Intangibleasset
J. Researchanddevelopmentcosts
1.Processofallocating thecost of anintangibleassettoexpenseoverits useful life.
2.Isonlyrecorded whenanexchangehascommercialsubstance.
3.Examplesarefranchisesand licenses.
4.Theallocationofthecost ofanaturalresourcetoexpenseoverits usefullife.
5.Canbeidentifiedonlywitha businessasawhole.
6.Asymbolthat identifiesaparticularenterpriseorproduct.
7.Whenbookvalue of assetisgreaterthantheproceedsreceivedfromitssale.
8.Mustbe expensedwhen incurred.
9.Indicateshowefficientlya companyisabletogenerate saleswithits assets.
10.Anestimateoftheexpectedproductivelife ofanasset.
SHORT-ANSWERESSAYQUESTIONS
S-AE284
Thedeclining-balancemethodisanacceleratedmethodofdepreciation.Brieflyexplainwhatis meantbyanacceleratedmethodofdepreciationandjustifythechoosingofanaccelerated method.
S-AE285
Identifythefactorsthatareconsideredinclassifyinganexpenditureasacapitalorarevenue expenditure.Arethereinstanceswhereitmaybedifficulttoclassifyanexpenditureasoneorthe other(e.g.,thepurchaseofawastebasketthathasausefullifeof5yearsandcost$10)?What basis wouldbe usedin adecision?
S-AE286
Ingeneral,howdoesonedeterminewhetherornotanexpenditureshouldbeincludedinthe acquisitioncostof property,plant,andequipment?
S-AE287
Commentonthevalidityofthefollowingstatements:―Asanassetlosesitsabilitytoprovide services,cashneedstobesetasidetoreplaceit.Depreciationaccomplishesthisgoal.‖
S-AE288
Goodwillisanunusualassetinthatitcannotbesoldindividuallyapartfromabusinessasa whole.Ifgoodwillisanintangibleasset,whycan'titbesoldlikeotherintangibleassetssuchas copyrights andpatents?Brieflyexplainwhatmakesgoodwilldifferent.
S-AE289(Ethics)
PhysicianReferenceService(PRS)providesservicestophysiciansincludingresearch assistance,diagnosiscodingandmedicalpracticesoftwareincludinganadvancedmedical recordcross-referencingsystem.PRSisaggressiveinmonitoringotherfirms'offeringsand ensuring thatits servicesarecomparabletoallothers.
Becauseofitsneedtostayabreastofnewproductofferings,PRSspends alotofmoneysending professionalstotradeshows.Inaddition,PRShasagreementswithseveralclientswherebythe clientrequestsapresentationofacompetitor's services.APRSemployeeposesasanemployee oftheclient'sofficeandattends thepresentation, obtainingasmuchdataandsampleinformation aspossible.ThecostofthetravelandattendingpresentationsischargedtoProduct Developmentandexpensedduring thecurrentyear.
S-AE289(cont.)
InAprilofthisyear,PRSbegansellingasoftwareproductsubstitutebeforethecompetitor's softwarewasreleased.Thecompetitor,Compu-Med,suedforcopyrightinfringementandwon. PRShadtowithdrawitsproductfromthemarketandpay$1.5millionindamages.PRS immediatelynegotiatedanagreementwithCompu-MedtosellCompu-Med'sproduct(sinceit wasprohibitedfromofferingitsownversionforfiveyears.)Thisagreementcostanadditional $1.3million,but itallowedPRStocontinuetooffer afulllineofservices.
PRS'saccountant,JuneBianco,initiallyrecordedthecashpaymentsas"LossfromLawsuit"and "ProductDevelopment,"respectively.However,FredNance,thecontroller,instructedJuneto createanintangibleasset,named"Goodwill"andchargebothcoststothisaccount."We're protectedfromanotherlawsuitaslongasthisagreementisineffect,"hesays."It'saboutas closetogoodwillaswe'llevergetfromourcompetitors.We mightaswellamortizethecostrather thantakethefullhitto income,anyway."
Required:
1.Whataretheethicalissues? 2.WhatshouldJunedo?
S-AE290(Communication)
TheRestor-Itisacompanyspecializingintherestorationofoldhomes.Toshowcaseitswork, thecompanypurchasedanoldVictorianhomeindowntown Pittsburg,Kansas.Theoriginalhome waspurchasedfor$125,000.Anewheatingandair-conditioningsystemwasaddedfor$30,000. Thehousewascompletelyrewiredandre-plumbedatacostof$50,000.Customcabinetswere added,andthefloorsand trimwererefurbishedto theiroriginalcondition,at acostof $75,000.
Theprojectwassuchasuccess, thatRestor-Itdecidedtopurchaseanotherverylargehome,this timeinnearbyJoplin,Missouri.ArealtorofferedtopurchasethehomeinPittsburgfor$175,000. Heplanstoleaseitasluxuryshort-termapartmentsforvisitingdignitaries.Restor-Itdecidedthat amodestreturnwasallthatwasrequired,andsotheyagreedtosell.Onlyafterwarddidthey learnthattheyhada$10,000lossonthesale.Thepresidentofthecompany,JimHerman,does notbelievethatalossispossible."Wesoldthathouseformorethanwepaidforit,"hesaid."I knowweputsomemoneyinit,butwehaddepreciateditforthreeyears.Howintheworldcan we havea loss?"
S-AE290(cont.)
Required:
Writeashort memotoMr.Herman explaining how itwouldbepossibletohavealoss.Do nottry tousespecificnumbersfor costordepreciation.
CHAPTER11
CURRENTLIABILITIESANDPAYROLLACCOUNTING
CHAPTERSTUDYOBJECTIVES
1.Explainacurrentliability,andidentifythemajortypesofcurrentliabilities.
2.Describetheaccountingfornotespayable.
3.Explaintheaccountingforothercurrentliabilities.
4.Explainthefinancialstatementpresentationandanalysisofcurrentliabilities.
5.Describetheaccountinganddisclosurerequirementsforcontingentliabilities.
6.Computeandrecordthepayrollforapayperiod.
7.Describeandrecordemployerpayrolltaxes.
8.Discusstheobjectivesofinternalcontrolforpayroll.
9.Identifyadditionalfringebenefitsassociatedwithemployeecompensation.
TRUE-FALSESTATEMENTS
1. A currentliability must bepaidoutof currentearnings.
2. Currentliabilitiesareexpectedtobepaidwithinoneyearortheoperatingcycle, whichever islonger.
3. Therelationshipbetweencurrentliabilitiesandcurrentassetsisimportantinevaluatinga company'sabilityto payoffits long-termdebt.
4. Acompanywhosecurrentliabilitiesexceeditscurrentassetsmayhavealiquidity problem.
5. Notespayableusuallyrequiretheborrowerto payinterest.
6. Notespayableare oftenusedinsteadofaccountspayable.
7. A notepayablemustalwaysbepaidbeforeanaccountpayable.
8. A $30,000,8%,9-monthnotepayablerequiresaninterestpayment of$1,800 atmaturity.
9. Mostnotesarenotinterest bearing.
10. Withaninterest-bearingnote,theamountofcashreceiveduponissuanceofthenote generallyexceedsthenote'sfacevalue.
11. Interestexpenseonanote payableis onlyrecordedatmaturity.
12. Interestexpenseis reportedunderOtherExpensesandLossesinthe incomestatement.
13. UnearnedrevenuesshouldbeclassifiedasOtherRevenuesandGainsontheIncome Statement.
14. Thehigherthesalestaxrate,themoreprofitaretailercanearn.
15. MetropolitanSymphonysells200seasonticketsfor$60,000thatincludesafiveconcert season. TheamountofUnearnedTicketRevenueafterthesecondconcertis$24,000.
16. Duringthemonth,acompanysellsgoodsforatotalof$108,000,whichincludessales taxesof$8,000;therefore,thecompanyshouldrecognize$100,000inSalesRevenues and $8,000in SalesTaxExpense.
17. Current maturitiesoflong-termdebtreferstotheamountofinterestonanotepayable that must be paidinthecurrent year.
18. Thecurrentratiopermitsanalyststocomparethe liquidityofdifferent sizedcompanies.
19. Workingcapital is currentassetsdivided bycurrentliabilities.
20. Contingentliabilitiesshouldberecordedintheaccountsifthereisaremotepossibility that thecontingencywillactuallyoccur.
21. A contingentliabilityisa liabilitythatmayoccur ifsomefutureeventtakesplace.
22. Inconcept,theestimatingofWarrantyExpensewhenproductsaresoldunderwarrantyis similar to theestimatingofBadDebtsExpensebasedon creditsales.
23. FICAtaxesandfederalincometaxesare leviedonemployees'earningswithoutlimit.
24. FICAtaxeswithheldandfederalincometaxes withheldaremandatorypayrolldeductions.
25. Theemployerincursapayrolltaxexpenseequaltotheamountwithheldfromthe employees'wagesforfederalincometaxes.
26. Internalcontroloverpayrollisnotnecessarybecauseemployeeswillcomplainiftheydo not receivethecorrectamount ontheirpayrollchecks.
27. Thetimekeepingfunctionincludessupervisorsmonitoringhoursworkedthroughtime cardsandtimereports.
28. Thehumanresourcesdepartmentdocumentsandauthorizesemploymentofnew employees.
29. Payrollactivitiesinvolvethreefunctions:hiringemployees,preparingthepayroll,and payingthepayroll.
a30. Post-retirementbenefitsconsistofpaymentsbyemployerstoretiredemployees forhealth care, life insurance,andpensions.
Additional True-FalseQuestions
31. A debt that isexpectedto be paidwithinone yearthroughthecreationof long-termdebt is a current liability.
32. Notespayableusuallyareissuedtomeet long-termfinancingneeds.
33. Currentmaturitiesoflong-termdebtareoftenidentifiedaslong-termdebtduewithinone yearon thebalancesheet.
34. Inagivenyear,totalwarrantyexpenseisthesumofactualwarrantycostsincurredon unitssoldplustheestimatedcostofservicingthose unitsinthefuture.
35. FICAtaxesarea voluntarydeductionfromemployeeearnings.
36. FICAtaxesareadeductionfromemployeeearningsandarealsoimposedupon employersas an expense.
37. Theobjectivesofinternalaccountingcontrolforpayrollsare(a)tosafeguardcompany assetsfromunauthorizedpaymentsofpayrollsand(b)toassureaccuracyandreliability oftheaccountingrecordspertainingto payroll.
a38. Whenacompanygivesemployeesrightstoreceivecompensationforabsencesandthe paymentforsuchabsencesisprobableandtheamountcanbereasonablyestimated, the companyshould accruea liability.
MULTIPLECHOICEQUESTIONS
39. Allof thefollowingarereportedascurrent liabilitiesexcept a.accountspayable.
b.bonds payable. c.notespayable.
d.unearnedrevenues.
40. Therelationshipbetweencurrentliabilitiesandcurrentassets is a.usefulindetermining income.
b.usefulinevaluatinga company'sliquidity. c.calledthematchingprinciple.
d.usefulindeterminingtheamountof acompany'slong-termdebt.
41. Mostcompaniespaycurrent liabilities a.outof currentassets.
b.by issuinginterest-bearing notespayable. c.byissuingstock.
d.bycreatinglong-term liabilities.
42. A currentliability isadebt thatcanreasonably beexpectedtobepaid a.withinoneyear.
b.between6monthsand 18months.
c.outof currentlyrecognizedrevenues. d.outof cashcurrentlyonhand.
43. Liabilitiesare classifiedon thebalancesheetascurrentor a.deferred.
b.unearned. c.long-term. d.accrued.
44. Froma liquiditystandpoint,itismoredesirablefora companytohavecurrent a.assetsequalcurrentliabilities.
b.liabilitiesexceedcurrentassets. c.assetsexceedcurrentliabilities.
d.liabilitiesexceed long-termliabilities.
45. Therelationshipof current assetstocurrentliabilitiesisusedinevaluatinga company's a.operatingcycle.
b.revenue-producingability.
c.short-termdebtpayingability. d.long-rangesolvency.
46. Whichofthefollowingisusuallynotan accruedliability? a.Interestpayable
b.Wagespayable c.Taxespayable d.Notespayable
47. Inmostcompanies,current liabilitiesarepaidwithin
a.oneyearthroughthecreationof othercurrentliabilities.
b.theoperatingcyclethroughthecreationof othercurrentliabilities. c.oneyearout of currentassets.
d.theoperatingcycle out of currentassets.
48. Theentrytorecord theissuance ofaninterest-bearingnotecreditsNotesPayable forthe note's
a.maturityvalue. b.marketvalue. c.facevalue.
d.cashrealizablevalue.
49. Withaninterest-bearingnote,theamountofassets receiveduponissuanceofthenoteis generally
a.equaltothenote'sface value.
b.greaterthanthe note'sface value. c.lessthanthenote'sfacevalue.
d.equaltothenote'smaturityvalue.
11-8
50. A notepayableis intheformof
a.a contingencythat isreasonablylikelyto occur. b.awrittenpromissorynote.
c.anoralagreement.
d.a standingagreement.
51. Theentrytorecordthe proceedsuponissuinganinterest-bearingnoteis a.InterestExpense
Cash
NotesPayable b.Cash
NotesPayable c.NotesPayable
Cash d.Cash
NotesPayable InterestPayable
Usethefollowing informationforquestions52–54.
CoffeyCounty Bank agrees tolend Adcock BrickCompany$200,000on January1.Adcock Brick Companysignsa$200,000,8%,9-monthnote.
52. TheentrymadebyAdcockBrickCompanyonJanuary1torecordtheproceedsand issuance ofthenote is
a.InterestExpense.................................................................. 12,000 Cash.................................................................................... 188,000
NotesPayable............................................................ 200,000 b.Cash.................................................................................... 200,000
NotesPayable............................................................ 200,000 c.Cash.................................................................................... 200,000
InterestExpense.................................................................. 12,000
NotesPayable............................................................ 212,000 d.Cash.................................................................................... 200,000
InterestExpense.................................................................. 12,000
NotesPayable............................................................ 200,000 InterestPayable.......................................................... 12,000
53. WhatistheadjustingentryrequiredifAdcockBrickCompanypreparesfinancial statements onJune30?
a.InterestExpense.................................................................. 8,000
InterestPayable.......................................................... 8,000 b.InterestExpense.................................................................. 8,000
Cash........................................................................... 8,000 c.InterestPayable................................................................... 8,000
Cash........................................................................... 8,000 d.InterestPayable................................................................... 8,000
InterestExpense......................................................... 8,000
CurrentLiabilitiesandPayroll Accounting 11-9
54. WhatentrywillAdcockBrickCompanymaketopayoffthenoteandinterestatmaturity assumingthat interesthas beenaccruedtoSeptember30?
a.NotesPayable...................................................................... 212,000 Cash............................................................................ 212,000
b.NotesPayable...................................................................... 200,000 InterestPayable................................................................... 12,000
Cash............................................................................ 212,000 c.InterestExpense.................................................................. 12,000
NotesPayable...................................................................... 200,000 Cash............................................................................ 212,000
d.InterestPayable................................................................... 8,000 NotesPayable...................................................................... 200,000 InterestExpense.................................................................. 4,000
Cash............................................................................ 212,000
55. As interestisrecordedon an interest-bearingnote, theInterestExpenseaccountis a.increased;the NotesPayableaccountis increased.
b.increased;the NotesPayableaccountisdecreased.c. increased;theInterestPayableaccountisincreased.d. decreased;theInterestPayableaccountis increased.
56. Whenaninterest-bearing notematures,thebalance intheNotes Payableaccountis a.lessthanthetotalamountrepaidbythe borrower.
b.thedifferencebetweenthematurityvalueof thenoteandthefacevalueof thenote. c.equal to thetotalamountrepaidbytheborrower.
d.greaterthanthetotalamountrepaidbytheborrower.
Usethefollowing informationforquestions57–58.
OnOctober1,Jerry'sCarpetServiceborrows$250,000fromFirstNationalBankona3-month, $250,000,8% note.
57. WhatentrymustJerry'sCarpetServicemakeonDecember31beforefinancial statements are prepared?
a.InterestPayable................................................................... 5,000
InterestExpense.......................................................... 5,000
b.InterestExpense.................................................................. 20,000
InterestPayable........................................................... 20,000
c.InterestExpense.................................................................. 5,000
InterestPayable........................................................... 5,000
d.InterestExpense.................................................................. 5,000
NotesPayable............................................................. 5,000
58. Theentry by Jerry's Carpet Serviceto recordpaymentof thenoteandaccrued intereston January1 is
a.NotesPayable...................................................................... Cash............................................................................
b.NotesPayable...................................................................... InterestPayable...................................................................
Cash............................................................................
255,000
250,000 5,000
255,000
255,000
11-10
58. (cont.)
c.NotesPayable..................................................................... InterestPayable................................................................... Cash...........................................................................
d.NotesPayable..................................................................... InterestExpense.................................................................. Cash...........................................................................
250,000 20,000
250,000 5,000
270,000
255,000
59. Interestexpenseonaninterest-bearingnoteis a.alwaysequaltozero.
b.accruedoverthelifeof thenote.
c.onlyrecordedatthetimethenoteisissued.
d.onlyrecordedatmaturitywhenthenoteispaid.
60. Theentrytorecordthepaymentofaninterest-bearingnoteatmaturityafterallinterest expense has beenrecognizedis
a.NotesPayable InterestPayable
Cash
b.NotesPayable Interest Expense Cash
c.NotesPayable Cash
d.NotesPayable Cash
InterestPayable
61. Salestaxescollectedbya retailerarerecordedby a.creditingSalesTaxesRevenue.
b.debitingSalesTaxesExpense. c.creditingSales TaxesPayable. d.debitingSalesTaxesPayable.
62. UnearnedRentalRevenueis
a.a contraaccounttoRentalRevenue. b.a revenueaccount.
c.reportedasacurrentliability.
d.debitedwhenrentis receivedinadvance.
63. Salestaxescollectedbytheretailerare recordedasa(n) a.revenue.
b.liability.c.expense. d.asset.
Usethefollowing informationforquestions64–65.
OnSeptember1,Ken'sPaintingServiceborrows$50,000fromNationalBankona4-month, $50,000,6%note.
CurrentLiabilitiesandPayroll Accounting 11-11
64. WhatentrymustKen'sPaintingServicemakeonDecember31before statements are prepared?
a.InterestPayable................................................................... 1,000 InterestExpense..........................................................
b.InterestExpense.................................................................. 3,000 InterestPayable...........................................................
c.InterestExpense.................................................................. 1,000 InterestPayable...........................................................
d.InterestExpense.................................................................. 1,000 NotesPayable.............................................................
financial
1,000
3,000
1,000
1,000
65. The entrybyKen'sPainting Serviceto recordpayment of thenoteandaccrued intereston January1 is
a.NotesPayable...................................................................... 51,000 Cash............................................................................ 51,000
b.NotesPayable...................................................................... 50,000 InterestPayable................................................................... 1,000
Cash............................................................................ 51,000 c.NotesPayable...................................................................... 50,000
InterestPayable................................................................... 3,000 Cash............................................................................ 53,000
d.NotesPayable...................................................................... 50,000 InterestExpense.................................................................. 1,000
Cash............................................................................ 51,000
66. Theinterestchargedona$100,000notepayable,attherateof8%,ona90-daynote would be
a.$8,000. b.$4,444. c.$2,000. d.$667.
67. Theinterestchargedona$100,000notepayable,attherateof6%,ona60-daynote would be
a.$6,000. b.$3,333. c.$1,500. d.$1,000.
68. Theinterestchargedona$50,000notepayable,attherateof8%,ona3-monthnote would be
a.$4,000. b.$2,000. c.$1,000. d.$667.
69. Theinterestchargedona$50,000notepayable,attherateof6%,ona2-monthnote would be
a.$3,000. b.$1,500. c.$750.d.$500.
11-12
70. Acompanyreceives$132,ofwhich$12isforsalestax.Thejournalentrytorecordthe sale wouldincludea
a.debittoSales TaxExpensefor$12. b.credit toSales TaxPayable for$12. c.debit to Salesfor $132.
d.debitto Cashfor $120.
71. Acompanyreceives$174,ofwhich$14isforsalestax.Thejournalentrytorecordthe sale wouldincludea
adebittoSalesTaxExpensefor$14. b.debittoSalesTaxPayablefor$14. c.debit to Salesfor $174.
d.debitto Cashfor $174.
72. A retailstore creditedtheSalesaccountforthesales priceandtheamount ofsalestaxon sales.Ifthesalestaxrateis5%andthebalanceintheSalesaccountamountedto $315,000,whatisthe amount of thesalestaxesowedto thetaxingagency?
a.$300,000 b.$315,000 c.$15,750 d.$15,000
73. OnJanuary1,2008,DunnonCompany,acalendar-yearcompany,issued$600,000of notespayable, ofwhich$150,000 isdueonJanuary 1foreachofthenextfouryears. The properbalancesheetpresentation on December31,2008,is
a.CurrentLiabilities,$600,000. b.Long-termDebt,$600,000.
c.CurrentLiabilities,$300,000;Long-termDebt,$300,000. d.CurrentLiabilities,$150,000;Long-termDebt,$450,000.
74. OnJanuary1,2008,BrunsonCompany,acalendar-yearcompany,issued$400,000of notespayable, ofwhich$100,000 isdueonJanuary1foreachofthenextfouryears. The properbalancesheetpresentation on December31,2008,is
a.CurrentLiabilities,$400,000. b.Long-termDebt, $400,000.
c.CurrentLiabilities,$100,000;Long-termDebt,$300,000. d.CurrentLiabilities,$300,000;Long-termDebt,$100,000.
75. Acashregistertapeshowscashsalesof$1,500andsalestaxesof$120.Thejournal entry torecordthis information is
a.Cash.................................................................................... 1,620 Sales........................................................................... 1,620
b.Cash.................................................................................... 1,620
SalesTaxPayable...................................................... 120 Sales........................................................................... 1,500
c.Cash.................................................................................... 1,500 SalesTaxExpense.............................................................. 120
Sales........................................................................... 1,620 d.Cash.................................................................................... 1,620
Sales........................................................................... 1,500 SalesTaxesRevenue................................................. 120
CurrentLiabilitiesandPayroll Accounting 11-13
76. Jo’sBookstorehascollected$750insalestaxesduringApril.Ifsalestaxesmustbe remittedtothestategovernmentmonthly,whatentrywillJo'sBookstoremaketoshow theAprilremittance?
a.SalesTaxesPayable............................................................ 750 Cash............................................................................ 750
b.SalesTaxExpense............................................................. 750 Cash............................................................................ 750
c.SalesTaxExpense.............................................................. 750
SalesTaxesPayable................................................... 750 d.Noentryrequired.
77. JordonCompanydoesnotringupsalestaxesseparatelyonthecashregister.Total receiptsforOctoberamountedto$18,900.Ifthesalestaxrateis5%,whatamountmust be remittedtothestateforOctober'ssalestaxes?
a.$900 b.$945 c.$45
d.Itcannotbedetermined.
78. Enrique'sSalonhastotalreceiptsforthemonthof$16,430includingsalestaxes.Ifthe sales taxrateis 6%,whatareEnrique'ssalesfor themonth?
a.$15,444.20 b.$17,415.80 c.$15,500.00
d.Itcannotbedetermined.
79. Theamountof salestaxcollectedbyaretailstore whenmakingsalesis a.amiscellaneousrevenuefor thestore.
b.a currentliability.
c.notrecordedbecauseit isataxpaidbythecustomer. d.recordedasanoperatingexpense.
80. Aretailstorecredited theSalesaccount forthesalesprice andtheamountofsales taxon sales.Ifthesalestaxrateis5%andthebalanceintheSalesaccountamountedto $189,000,whatisthe amount of thesalestaxesowedto thetaxingagency?
a.$180,000 b.$189,000 c.$9,450d.$9,000
81. Advancesfromcustomersareclassifiedasa(n) a.revenue.
b.expense.
c.currentasset.d.currentliability.
82. Thecurrentportionof long-term debtshould a.bepaidimmediately.
b.be reclassifiedasa currentliability. c.beclassifiedasa long-termliability.
d.notbeseparatedfromthelong-termportionof debt.
11-14
83. Salestaxescollectedbya retailerareexpenses a.of theretailer.
b.of thecustomers.c.ofthegovernment.
d.that arenotrecognizedbythe retaileruntiltheyaresubmittedtothegovernment.
84. Salestaxescollectedbya retailerarereportedas a.contingentliabilities.
b.revenues. c.expenses.
d.currentliabilities.
85. Linda'sBoutiquehastotalreceiptsforthemonthof$29,295includingsalestaxes.Ifthe sales taxrateis 5%,whatareLinda'ssalesforthemonth?
a.$27,831 b.$27,900 c.$29,295
d.Itcannotbedetermined.
86. A cashregistertapeshowscashsalesof$1,500and salestaxesof $90.Thejournalentry to recordthisinformationis
a.Cash.................................................................................... 1,500 Sales........................................................................... 1,500
b.Cash.................................................................................... 1,590
SalesTaxRevenue..................................................... 90 Sales........................................................................... 1,500
c.Cash.................................................................................... 1,500 SalesTaxExpense.............................................................. 90
Sales........................................................................... 1,590
d.Cash.................................................................................... 1,590 Sales........................................................................... 1,500 SalesTaxesPayable.................................................. 90
87. Tim'sPharmacyhascollected$600insalestaxesduringMarch.Ifsalestaxesmustbe remittedtothestategovernmentmonthly,whatentrywillTim'sPharmacymaketoshow theMarch remittance?
a.SalesTaxExpense.............................................................. 600
Cash........................................................................... 600 b.SalesTaxesPayable........................................................... 600
Cash........................................................................... 600 c.SalesTaxExpense.............................................................. 600
SalesTaxesPayable.................................................. 600 d.Noentryrequired.
88. LangerCompanydoesnotringupsalestaxesseparatelyonthecashregister.Total receiptsforFebruaryamountedto$28,600.Ifthesalestaxrateis4%,whatamountmust be remittedtothestatefor February'ssalestaxes?
a.$1,144 b.$1,100 c.$1,716
d.Itcannotbedetermined.
CurrentLiabilitiesandPayroll Accounting 11-15
89. Anybalanceinanunearnedrevenueaccountisreportedasa(n) a.currentliability.
b.long-termdebt. c.revenue.
d.unearnedliability.
90. StanleyCompany typicallysellssubscriptionsonanannualbasis,andpublishessixtimes ayear.Themagazinesells60,000subscriptionsinJanuaryat$15each.Whatentryis made inJanuary torecordthesaleof thesubscriptions?
a.SubscriptionsReceivable..................................................... SubscriptionRevenue.................................................
b.Cash..................................................................................... UnearnedSubscriptionRevenue.................................
c.SubscriptionsReceivable..................................................... UnearnedSubscriptionRevenue.................................
d.PrepaidSubscriptions.......................................................... Cash............................................................................
900,000
900,000
150,000
900,000
900,000
900,000
150,000
900,000
91. Milton Companyissuedafour-year interest-bearingnotepayablefor$300,000on January 1,2007.EachJanuarythecompany isrequiredtopay$75,000onthenote.Howwillthis note be reportedontheDecember31,2008balancesheet?
a.Long-termdebt,$300,000. b.Long-termdebt,$225,000.
c.Long-termdebt,$150,000;Long-termdebtduewithinone year,$75,000. d.Long-termdebt,$225,000;Long-termdebtduewithinone year,$75,000.
92. JanisKnothasalargeconsultingpractice.Newclientsarerequiredtopayone-halfofthe consultingfeesupfront.Thebalanceispaidattheconclusionoftheconsultation.How does Knotaccountforthe cashreceivedattheend of theengagement?
a.Cash
UnearnedConsultingRevenue b.Cash
EarnedConsultingRevenue c.PrepaidConsultingFees
EarnedConsultingRevenue
d.Noentryisrequiredwhentheengagementisconcluded.
93. Whichoneofthefollowingisshownfirstundercurrentliabilitiesbymanycompaniesasa matter ofcustom?
a.Accruedexpenses
b.Currentmaturities of long-term debt c.Salestaxespayable
d.Notespayableandaccountspayable
94. Workingcapital is
a.currentassetspluscurrentliabilities.b.currentassetsminuscurrent liabilities.
c.currentassetsdividedbycurrentliabilities.d.currentassetsmultipliedbycurrentliabilities.
11-16
95. Thecurrentratiois
a.currentassetspluscurrentliabilities.b.currentassetsminuscurrent liabilities.
c.currentassetsdividedbycurrentliabilities.d.currentassetsmultipliedbycurrentliabilities.
96. Acontingentliabilityneedonlybedisclosedinthefinancialstatementnoteswhenthe likelihood of thecontingencyis
a.reasonablypossible. b.probable.
c.remote. d.unlikely.
97. Ifacontingentliabilityisreasonablyestimableanditisreasonablypossiblethatthe contingencywilloccur,thecontingentliability
a.shouldberecorded intheaccounts.
b.shouldbedisclosedin the notesaccompanyingthefinancialstatements.
c.shouldnotberecordedordisclosedinthenotesuntilthecontingencyactually happens.
d.mustbepaidforthe amountestimated.
98. Theaccountingforwarrantycostisbasedonthematchingprinciple,whichrequiresthat theestimatedcost of honoring warrantycontractsshouldberecognizedasanexpense
a.whenthe productisbrought inforrepairs.b.intheperiodinwhichtheproductwassold. c.attheendofthewarrantyperiod.
d.onlyif therepairsareexpectedtobemadewithinone year.
99. Ifa liabilityis dependentonafutureevent,it iscalleda a.potentialliability.
b.hypotheticalliability. c.probabilisticliability. d.contingentliability.
100. Currentmaturities of long-termdebt a.requireanadjustingentry.
b.areoptionallyreportedonthebalancesheet.
c.canbeproperlyclassifiedduringbalancesheetpreparation,withnoadjustingentry required.
d.arenotconsideredtobecurrentliabilities.
101. A contingencythatisremote
a.shouldbedisclosedinthefinancialstatements. b.mustbeaccruedasa loss.
c.doesnotneedto bedisclosed.
d.isrecordedasacontingentliability.
102. Theaccountingfor warrantycostsisbasedonthe a.goingconcernprinciple.
b.matchingprinciple.
c.conservatismprinciple. d.objectivityprinciple.
CurrentLiabilitiesandPayroll Accounting 11-17
103. Warrantyexpensesarereported ontheincomestatementas a.administrativeexpenses.
b.part of costofgoodssold. c.contra-revenues.
d.sellingexpenses.
Usethefollowing informationforquestions104–105.
NeerCompanysells2,000unitsofitsproductfor$500each.Thesellingpriceincludesaone-yearwarrantyonparts.Itisexpectedthat3%oftheunitswillbedefectiveandthatrepaircosts willaverage$50perunit.Intheyearofsale,warrantycontractsarehonoredon40unitsfora totalcostof$2,000.
104. WhatamountshouldNeerCompanyaccrueonDecember31forestimatedwarranty costs?
a.$3,000 b.$2,000 c.$1,000 d.$15,000
105. WhatamountwillbereportedonNeerCompany'sbalancesheetasEstimatedWarranty Liabilityon December31,2008?
a.$2,000 b.$3,000 c.$1,000
d.Itcannotbedetermined.
106. Whichofthefollowingitemswouldnotbeidentifiedifacontingentliabilityweredisclosed in a financialstatementfootnote?
a.Thenatureof theitem
b.Theexpectedoutcomeof thefutureeventc.Anumericalprobabilityof theexpectedloss d.Theamountofthecontingency,if known
107. Disclosureofa contingentliabilityisusuallymade
a.parenthetically,inthebodyofthebalancesheet.
b.parenthetically,inthebodyoftheincomestatement. c.in anotetothefinancialstatements.
d.inthemanagementdiscussionsectionofthefinancial statement.
108. Currentliabilitiesgenerallyappear
a.after long-termdebtonthebalancesheet.
b.indecreasingorderofmagnitudeonthebalancesheet. c.in orderofmaturityonthebalancesheet.
d.in increasingorderofmagnitudeonthe balancesheet.
109. Whichofthefollowingemployees wouldlikelyreceivea salaryinsteadofwages? a.Storeclerk
b.Factoryemployee c.Salesmanager
d.Manuallaborer
11-18
110. Thetotalcompensationearnedbyanemployeeis called a.take-homepay.
b.netpay.
c.netearnings.d.grossearnings.
111. Whichoneofthefollowingpayrolltaxesdoesnotresultinapayrolltaxexpenseforthe employer?
a.FICAtax
b.Federalincometax
c.Federalunemployment tax d.Stateunemploymenttax
112. SueStein'sregularrateofpayis$12perhourwithoneandone-halftimesherregular rateforanyhourswhichexceed40hoursperweek.Sheworked48hourslastweek. Therefore, hergross wageswere
a.$576. b.$480. c.$624. d.$864.
113. AssumingaFICAtaxrateof8%onthefirst$90,000inwages,andafederalincometax rateof20%onallwages,whatwouldbeanemployee'snetpay fortheyearifheearned $100,000for theyear?
a.$92,800 b.$72,000 c.$80,000 d.$72,800
114. Mostcompaniesinvolvedin interstatecommercearerequiredtocomputeovertimeat a.theworker'sregularhourlywage.
b.1.25timestheworker'sregularhourlywage. c.1.5timestheworker'sregularhourlywage. d.2.5timesthe worker'sregularhourlywage.
115. SueRicehasworked44hoursthisweek.Sheworkedinexcessof8hourseachday.Her regularhourlywageis$15perhour.WhatareSue'sgrosswagesfortheweek?(The company Sue worksfor is incompliancewiththeFair LaborStandardsAct.)
a.$660 b.$690 c.$990 d.$720
116. FICAtaxesdonotprovideworkerswith a.lifeinsurance.
b.supplementalretirement. c.employmentdisability.d.medicalbenefits.
CurrentLiabilitiesandPayroll Accounting 11-19
117. Employeepayroll deductionsincludeeachofthefollowingexcept a.federalunemployment taxes.
b.federalincometaxes. c.FICAtaxes.
d.insurance,pension plans,anduniondues.
118. ThejournalentrytorecordthepayrollforaperiodwillincludeacredittoWagesand SalariesPayableforthegross
a.amountlessallpayrolldeductions. b.amountof allpaychecksissued.c.paylesstaxespayable.
d.paylessvoluntarydeductions.
119. Theamountofincometaxeswithheldfromemployeesisdependentoneachofthe followingexceptthe
a.employee'sgrossearnings. b.employee'snetpay.
c.length ofthepayperiod.
d.numberof allowancesclaimedbytheemployee.
Use thefollowing informationforquestions120–123.
Thefollowingtotalsforthemonthof Aprilweretakenfromthepayrollregisterof MainCompany.
Salaries
FICAtaxeswithheld IncometaxeswithheldMedicalinsurancedeductions Federalunemploymenttaxes Stateunemploymenttaxes
$24,000 1,100 5,000 900
64 432
120. Thejournalentrytorecordthemonthlypayrollon April30wouldincludea a.debit toSalariesExpensefor $24,000.
b.credittoSalariesPayablefor$24,000. c.debittoSalariesPayablefor$24,000. d.debit to Salaries Expensefor $17,000.
121. Theentrytorecordthe paymentofnetpayroll wouldincludea a.debit toSalariesPayablefor$16,504.
b.debittoSalariesPayable for$17,000. c.debittoSalariesPayablefor$15,900. d.credit to Cashfor $18,100.
122. TheentrytorecordaccrualofMainCompany’spayrolltaxeswouldincludea a.debit toPayrollTaxExpensefor$496.
b.debittoPayrollTaxExpensefor$1,596. c.credit toFICA Taxes Payablefor$2,200. d.credit to PayrollTaxExpensefor $496.
11-20
123. Theentrytorecordthe accrualof federal unemploymenttaxeswouldincludea a.credit to FederalUnemploymentTaxes Payablefor $64.
b.debitto Federal UnemploymentTaxes Expensefor $64. c.creditto PayrollTaxExpensefor$64.
d.debitto Federal UnemploymentTaxes Payablefor $64
Usethefollowing informationforquestions124–127.
Thefollowingtotalsforthemonthof June weretakenfromthepayrollregisterof LaneCompany.
Salaries
FICAtaxeswithheld IncometaxeswithheldMedicalinsurancedeductions Federalunemploymenttaxes Stateunemploymenttaxes
$20,000 1,533 4,400 800
160 1,000
124. Thejournalentrytorecordthemonthlypayrollon June30wouldincludea a.debit toSalariesExpensefor $20,000.
b.credittoSalariesPayablefor$20,000. c.debittoSalariesPayablefor$20,000. d.debit to Salaries Expensefor $13,267
125. Theentrytorecordthe paymentofnetpayroll wouldincludea a.debitto SalariesPayablefor$12,107.
b.debittoSalariesPayable for$13,267. c.debittoSalariesPayablefor$12,267. d.credit to Cashfor $12,267.
126. TheentrytorecordaccrualofLaneCompany’spayrolltaxeswouldincludea a.debit toPayrollTaxExpensefor$2,693
b.credittoPayrollTaxExpensefor$2,693 c.credit toFICA TaxesPayablefor$1,160. d.credit to PayrollTaxExpensefor $1,160.
127. Theentrytorecordthe accrualof federal unemploymenttaxeswouldincludea a.credit to FederalUnemploymentTaxes Payablefor $160.
b.creditto Federal UnemploymentTaxes Expensefor $160. c.creditto PayrollTaxExpensefor$160.
d.debitto Federal UnemploymentTaxes Payablefor $160.
128. Whichoneofthefollowingpayrolltaxesisnotwithheldfromanemployee'swages because it is notleviedontheemployee?
a.Federalincometax
b.Federalunemployment tax c.State incometax
d.FICAtax
CurrentLiabilitiesandPayroll Accounting 11-21
129. ByJanuary31followingtheendofacalendaryear,anemployerisrequiredtoprovide each employeewitha(n)
a.stateunemploymenttaxform.
b.federalunemployment taxform940. c.wageandtaxstatementformW-2.
d.employee'swithholdingallowancecertificateformW-4.
130. Whichofthefollowingpayroll taxesareusuallyfiledandremittedannually? a.Federalunemployment taxes
b.FICAtaxes
c.Stateunemploymenttaxes
d.Federalandstateunemploymenttaxes
131. Thetaxthatispaidequallybytheemployerand employeeis the a.federalincometax.
b.federalunemployment tax. c.stateunemploymenttax.d.FICAtax.
132. The effectivefederalunemploymenttaxrateisusually a.6.2%.
b.0.8%. c.5.4%. d.8.0%.
133. Thetreasurer'sdepartmentisresponsiblefor a.approvingthepayroll.
b.maintainingpayrollrecords.c.preparingpayroll taxreturns. d.signingpayrollchecks.
134. Thepayrollis paidbythea.personneldepartment. b.payrolldepartment.
c.cashier.
d.treasurer'sdepartment.
a135.Post-retirementbenefitsconsistof payments byemployerstoretiredemployeesfor a.healthcareand lifeinsuranceonly.
b.healthcareandpensionsonly.c.lifeinsuranceandpensionsonly.
d.healthcare,lifeinsurance,andpensions.
a136.Thepaidabsencethat ismostcommonlyaccruedis a.votingleave.
b.vacationtime.c.maternityleave. d.disabilityleave.
11-22
a137.BlakeCompanyhastenemployeeswhoeachearn$160perday.Iftheyaccumulate vacationtimeattherateof1.5vacationdaysforeachmonthworked,theamountof vacation benefitsthatshouldbeaccruedatthe end of themonthis
a.$160.b.$1,600. c.$2,400. d.$240.
a138.Anemployer'sestimatedcostfor post-retirement benefitsforitsemployeesshouldbe a.recognizedas anexpensewhenpaid.
b.recognizedasanexpenseduringtheemployees'workyears.
c.recognizedas an expenseduringtheemployees'retirementyears.
d.chargedto thegoodwillaccount because providingemployees with benefits generates employee goodwill.
Additional MultipleChoiceQuestions
139. Acurrentliabilityisadebtthecompanyreasonablyexpectstopayfromexistingcurrent assetswithin
a.oneyear.
b.theoperatingcycle.
c.one yearor theoperatingcycle, whicheverislonger. d.oneyearor theoperatingcycle, whicheveris shorter.
140. Whichofthefollowingstatements concerningcurrent liabilitiesis incorrect? a.Currentliabilitiesincludeunearnedrevenues.
b.Acompanythat hasmore currentliabilities thancurrentassets is usuallythesubjectof someconcern.
c.Currentliabilitiesincludeprepaidexpenses.
d.Acurrentliabilityisadebtthatcanreasonablybeexpectedtobepaidoutofexisting currentassetsorresult inthecreationof other currentliabilities.
141. OnAugust1,2008,acompanyborrowedcashandsignedaone-yearinterest-bearing noteonwhichboththefacevalueandinterestarepayableonAugust1,2009.Howwill thenotepayableandtherelatedinterestbeclassifiedintheDecember31,2008,balance sheet?
NotePayable Interest Payablea.Currentliability Noncurrentliability b.Noncurrentliability Currentliability
c.Currentliability Currentliability d.Noncurrentliability Notshown
142. Companiesreportcurrentliabilitiesonthebalancesheetin a.alphabeticalorder.
b.order ofmaturity. c.randomorder.
d.order ofmagnitude.
CurrentLiabilitiesandPayroll Accounting 11-23
143. A contingencyneednotberecordednordisclosedwhen
a.itisprobablethecontingencywillhappenandtheamountcanbereasonably estimated.
b.itisprobablethecontingencywillhappenbuttheamountcannotbereasonably estimated.
c.itisreasonablypossiblethecontingencywillhappenandtheamountcanbe reasonablyestimated.
d.thepossibilityof the contingencyhappeningisremote.
144. A contingentliabilityis recordedwhenthe likelihoodof thecontingency is a.remote.
b.reasonablypossible. c.probable.
d.nil or zero.
145. MikeKohl,anemployeeofSpottswoodCompany,hasgrossearningsforthemonthof Octoberof$6,000.FICAtaxesare8%ofgrossearnings, federalincometaxesamount to $952forthemonth,stateincometaxesare2%ofgrossearnings,andMikeauthorizes voluntarydeductionsof$15permonthtotheUnitedFund.WhatisthenetpayforMike Kohl?
a.$4,442 b.$4,433 c.$4,448 d.$4,452
146. Apayrollrecordthataccumulatesthegrossearnings,deductions,andnetpayby employeefor eachpayperiodis the
a.withholdingtaxtable.
b.employeeearningsrecord. c.payrollregister.
d.WageandTaxStatement.
147. ThejournalentrytorecordthepayrollforMarcusGarveyCompanyfortheweekending January8,wouldprobablyincludea
a.creditto OfficeSalaries.b.credittoWages Expense.
c.debittoFederalIncomeTaxesPayable. d.creditto FICATaxesPayable.
148. Employerpayroll taxesincludeallofthefollowingexcept a.FICAtaxes.
b.federalunemployment taxes. c.stateunemploymenttaxes.d.federalincometaxes.
149. Therecordthatprovidesacumulativesummaryofeachemployee’sgrossearnings, payrolldeductions, and netpayduring theyearandisrequiredtobemaintainedtocomply with stateandlocalfederallawisthe
a.register.
b.employeeearningsrecord. c.statementofearnings.
d.wageandtaxstatement.
11-24
a150.Post-retirementbenefitsincludeallofthefollowingexcept a.healthcare.
b.lifeinsurance. c.pensions.
d.vacationbenefits.
BRIEFEXERCISES
BE151
SaldanaSalesCompanyhasthefollowingselectedaccountsafterpostingadjustingentries:
AccountsPayableNotesPayable,3-month
AccumulatedDepreciation—Equipment NotesPayable,5-year,6%
PayrollTax Expense InterestPayable MortgagePayable SalesTaxPayable
$62,000 50,000 14,000 80,000 4,000 3,000 120,000 38,000
Instructions
PreparethecurrentliabilitysectionofSaldanaSalesCompany'sbalancesheet,assuming $20,000of themortgageispayablenextyear.
BE152
Identifywhichof thefollowingwouldbeclassifiedas currentliabilitiesasof December31,2008: 1.WagesPayable
2.BondsPayable, maturingin 2013 3.InterestPayable,dueJuly1,2009 4.TaxesPayable
5.NotesPayable, dueJanuary30,2010
BE153
OnDecember1,DestinCorporationborrowed$5,000ona90-day,6%note.Preparetheentries torecordtheissuanceofthenote,theaccrualofinterestatyearend,andthepaymentofthe note.
BE154
DuringDecember2008,FashionVixenPublishingsold2,50012-monthannualmagazine subscriptionsatarateof$30each.ThefirstissuesweremailedinFebruary2009.Preparethe entriesonFashionVixen’sbookstorecordthesaleofthesubscriptionsandthemailingofthe first issues.
BE155
Landen Companyhadcashsalesof$54,250(includingtaxes)forthemonthofJune.Salesare subjectto8.5%salestax.Preparetheentryto recordthesale.
BE156
OnDecember1, WynnCompanyintroducesanewproductthatincludesaone-yearwarrantyon parts.InDecember,500unitsaresold.Managementbelievesthat5%oftheunitswillbe defectiveandthattheaveragewarrantycostswillbe$60perunit.Preparetheadjustingentryat December31toaccruethe estimatedwarrantycost.
BE157
MaryStine’sregularhourlywagerateis$12,andshereceivesanhourlyrateof$18forworkin excessof40hours.DuringaMarchpayperiod,Maryworks47hours.Mary’sfederalincometax withholdingis$70,andshehasnovoluntarydeductions.ComputeMaryStine’sgrossearnings and netpayforthepayperiod.
BE158
Data forMaryStinearepresentedinBE157.PreparethejournalentrytorecordMary’spayfor theperiod.Use March15fortheendof thepayperiod.
BE159
InFebruary,grossearningsinZennCompanytotaled$50,000.Allearningsaresubjectto8% FICAtaxes,5.4%stateunemploymenttaxes,and0.8%federalunemploymenttaxes.Prepare theentrytorecordJanuarypayrolltaxexpense.
*BE160
WeaverCompanyemployeesareentitledtooneday’svacationforeachmonthworked.In February,60employeesworkedthefullmonth.RecordthevacationpayliabilityforFebruary assuming theaveragedailypayfor eachemployeeis$90.
EXERCISES
Ex.161
StinerCompanyhasthefollowingselectedaccounts afterpostingadjustingentries:
AccountsPayableNotesPayable,3-month
AccumulatedDepreciation—Equipment PayrollandBenefitsPayable
NotesPayable,5-year,8% EstimatedWarrantyLiability PayrollTax ExpenseInterestPayable MortgagePayable
SalesTaxPayable
$45,000 80,000 14,000 27,000 30,000 34,000 6,000 3,000 200,000 16,000
Instructions
(a)PreparethecurrentliabilitysectionofStinerCompany'sbalancesheet,assuming$25,000 of themortgageispayablenextyear. (Listliabilities inmagnitudeorder,withlargestfirst.)
(b)Commenton Stiner's liquidity,assumingtotalcurrentassetsare$450,000.
Ex.162
Preparethenecessaryjournalentriesforthefollowingtransactions:
(a)On September1,LoreCompanyborrowed$150,000fromNationalBankona6-month,8% note.
(b)On December31, LoreCompanyaccruedinterest(assumeadjustingentries areonlymade at theendoftheyear).
CurrentLiabilitiesandPayroll Accounting 11-29
Ex.163
OnMarch1,FeltonCompanyborrows$90,000fromOttawaStateBankbysigninga6-month, 8%,interest-bearingnote.
Instructions
PreparethenecessaryentriesbelowassociatedwiththenotepayableonthebooksofFelton Company.
(a)Preparetheentryon March 1whenthe notewasissued.
(b)PrepareanyadjustingentriesnecessaryonJune30inordertopreparethesemi-annual financialstatements. Assumenootherinterestaccrualentrieshavebeenmade.
(c)Preparetheadjustingentry at August31to accrueinterest. (d)Preparetheentryto recordpaymentof thenote atmaturity.
Ex.164
TomByerssellstelevisionswitha2-yearwarranty.Pastexperienceindicatesthat2%oftheunits soldwillbereturnedduringthewarrantyperiodforrepairs.Theaveragecostofrepairsunder warrantyisestimatedtobe$50perunit.During2008,7,000unitsweresoldatanaverageprice of$400.Duringtheyear,repairsweremadeon55unitsatacost of $2,400.
Instructions
Preparejournalentriestorecordtherepairsmadeunderwarrantyandestimatedwarranty expense fortheyear.
Ex.165
SommersCompanybilleditscustomersatotalof$1,575,000forthemonthofNovember.The totalincludesa 5% statesalestax.
Instructions
(a)Determinetheproperamountof revenuetoreportforthemonth.
(b)Preparethegeneraljournalentrytorecordtherevenue andrelatedliabilitiesforthemonth.
Ex.166
StevensCompany does notsegregatesales andsales taxes onitscashregister.Its registertotal for themonthis$259,700, whichincludesa 6%salestax.
Instructions
Computesalestaxespayable,andmaketheentrytorecordsalesandsalestaxespayable.
Ex.167
SuttonCoatCompany,whichpreparesannualfinancialstatements,ispreparingadjustingentries on December31. Analysisindicatesthefollowing:
1.Thecompanyisthedefendantinanemployeediscriminationlawsuitinvolving$50,000of damages.Legalcounselbelievesitisunlikelythatthecompanywillhavetopayany damages.
2.December31stisaFriday.TheemployeesofthecompanyhavebeenpaidonMonday, December27thforthepreviousweekwhichendedonFriday,December24th.Thecompany employs30peoplewhoearn$100perdayand15peoplewhoearn$150perday.All employees work5-day weeks.
3.Thecompany isadefendantina$500,000productliability lawsuit.Legal counsel believesthe companyprobablywill havetopaytheamountrequested.
a4.Employeesareentitledtooneday'svacationforeachmonthworked.Allemployees describedabove in(2.) workedthemonthof December.
Instructions
Prepareanyadjustingentriesnecessaryattheendof theyear.
Ex.168
Basedonthefollowinginformation,computethe(1) currentratioand(2) workingcapital.
Currentassets Totalassets Currentliabilities Totalliabilities
$240,000 900,000 80,000 500,000
Ex.169
LindaEstessellsexercisemachinesforhomeuse.Themachinescarrya2-yearwarranty.Past experienceindicatesthat6%oftheunitssoldwillbereturnedduringthewarrantyperiodfor repairs.Theaveragecostofrepairsunderwarrantyis$60forlaborand$90forpartsperunit. During2008,2,500exercise machines weresoldatanaverageprice of$800.Duringtheyear,60 of themachinesthat weresold wererepairedattheaveragepriceper unit.
Instructions
(a) Preparethejournalentrytorecordtherepairsmadeunderwarranty.
(b) Preparethejournalentrytorecordtheestimatedwarrantyexpense fortheyear.
Ex.170
GolfWorldPublicationspublishesagolfmagazineforwomen.Themagazinesellsfor$3acopy onthenewsstand.Yearlysubscriptionstothemagazinecost$24peryear(12issues).During December2008,GolfWorldPublicationssells9,000copiesofthegolfmagazineatnewsstands andreceivespaymentfor15,000subscriptionsfor2009.Financialstatementsareprepared monthly.
Instructions
(a)Preparethe December2008journalentriesto record the newsstandsales and subscriptions received.
(b)PreparethenecessaryadjustingentryonJanuary31,2009.TheJanuary2009issuehas been mailedto subscribers.
CurrentLiabilitiesandPayroll Accounting 11-33
Ex.171
PresleyCompanysellsaproduct thatincludesaone-yearwarrantyonpartsandlabor.During the year,10,000unitsaresold.Presleyexpectsthat3%oftheunitswillbedefectiveandthatthe averagewarrantycostwillbe$50perunit.Actualwarrantycostsincurredduringtheyearwere $14,000.
Instructions
Preparethejournalentriestorecord(a)theestimatedwarrantycostsand(b) theactualcosts incurred.
Ex.172
DobsonCompanyispreparingadjustingentriesatDecember31.Ananalysisrevealsthe following:
1.DuringDecember,DobsonCompanysold2,000unitsofaproductthatcarriesa60-day warranty.Thesalesforthisproducttotaled$100,000.Thecompanyexpects4%oftheunits toneedrepairunderthe warrantyanditestimates thattheaveragerepaircostperunitwillbe $15.
2.Thecompanyhasbeensuedbyadisgruntledemployee.Legalcounselbelievesthatitis reasonablypossiblethatthecompanywillhaveto pay$200,000indamages.
3.Thecompanyhasbeennamedasoneofseveraldefendantsina$400,000damagesuit. Legalcounselbelievesit is unlikelythatthecompanywillhavetopayanydamages.
a4.Employeesearnvacationpayatarateof1daypermonth.DuringDecember,tenemployees qualifyforvacationpay.Theiraveragedailywageis $90per employee.
Instructions
Prepareadjustingentries,if required,for eachofthefouritems.
Ex.173
Matchthecodesassignedtothefollowingpayrollfunctionstotheprocedureslistedbelow:
H HiringEmployees T Timekeeping
PRE PreparingthePayroll PAY Payingthe Payroll
1.Distributionof checksbythetreasurer 2.Supervisorapproveshoursworked
3.Documentationof employeehiring 4.Maintenanceofpayrollrecords
5.Verificationof payrollcalculations
6.Screeningand interviewingofjobapplicants 7.Useofatimeclock
8.Signingprenumberedpayrollchecks
Ex.174
SueWiebe'sregularhourlywageis$14anhour.Shereceivesovertimepayattherateoftime andahalf.TheFICAtaxrateis8%.Sueispaideverytwoweeks.Forthefirstpayperiodin January,Sueworked86hoursofwhich6wereovertimehours.Sue'sfederalincometax withholdingis$300andherstateincometaxwithholding is$100.Suehasauthorizedthat$50be withheldfrom hercheckeachpayperiodforsavingsbonds.
Instructions
ComputeSueWiebe'sgrossearningsandnetpayforthepayperiodshowingeachpayroll deductioninarrivingatnet pay.
Ex.175
StacyCooper'sregularhourlywagerateis$12,andshereceivesawageof11/2timesher regularrateforworkinexcessof40hours.DuringaJunepayperiod,Stacyworked46hours. Stacy'sfederalincometaxwithholdingis$58,andheronlyvoluntarydeductionis$25forgroup hospitalization insurance.
Instructions
ComputeStacy's(a)grossearningsand(b) net payforthepayperiod.
Ex.176
OatesCompany'spayrollfortheweekendingJanuary15amountedto$95,000forOffice Salariesand$150,000forStoreWages.Noneoftheemployeeshasreachedtheearningslimits specifiedforfederalorstateemployerpayrolltaxes.Thefollowingdeductionswerewithheldfrom employees'salaries andwages:
FederalIncomeTax StateIncomeTax FICATaxes
UnionDues UnitedFund
$50,000 9,000 19,600 2,700 1,800
Federalunemploymenttax(FUTA)rateis6.2%lessacreditequaltotheratepaidforstate unemployment taxes.Thestateunemploymenttax(SUTA)rateis5.4%.
Instructions
Preparethe journal entrytorecord theweeklypayroll endingJanuary 15 andalsothe employer’s payroll taxexpenseonthe payroll.
Ex.177
AnnFinleyhadearned(accumulated)salaryof$86,000throughNovember30.HerDecember salaryamounted to$7,800.JimLanebeganemploymentonDecember1andwillbepaidhisfirst month'ssalaryof$5,000onDecember31.IncometaxwithholdingforDecemberforeach employee isasfollows:
Ann Finley JimLane FederalIncomeTax $2,180 $990 StateIncomeTax 390 180
CurrentLiabilitiesandPayroll Accounting 11-37
Ex.177 (cont.)
Thefollowingpayrolltaxratesareapplicable:
FICAtaxonfirst $90,000 8% FUTAtaxonfirst $7,000 6.2%* SUTAtaxonfirst$7,000 5.4%
*Lessacredit equaltothe stateunemploymentcontribution
Instructions
RecordthepayrollforthetwoemployeesatDecember31andrecordtheemployer'sshareof payroll taxexpenseforthe December31payroll.
Ex.178
AssumethatthepayrollrecordsofGibbsOilCompanyprovidedthefollowinginformationforthe weeklypayrollendedNovember30, 2008.
Year-to-Date Hourly Federal EarningsThrough
Employee HoursWorked PayRate Income Tax Union Dues PreviousWeek
C.White 44 J.Ward 46 K.Hurt 39 M.King 42
$45 $362 10 65 20 118 22 169
$9 $91,000 5 23,200 — 5,700 7 49,500
Ex.178 (cont.)
Additionalinformation:Allemployeesarepaidovertimeattimeandahalfforhoursworkedin excessof40perweek.TheFICAtaxrateis8%forthefirst$90,000ofeachemployee'sannual earnings.Theemployerpaysunemploymenttaxesof6.2%(5.4%forstateand.8%forfederal) on thefirst $7,000ofeachemployee'sannualearnings.
Instructions
(a) Preparethepayrollregisterforthepayperiod.
(b) Preparegeneraljournalentriestorecordthepayrollandpayrolltaxes.
Ex.179
DianeJenksearnsasalaryof$8,000permonthduringtheyear.FICAtaxesare8%onthefirst $90,000ofgrossearnings.Federalunemploymentinsurancetaxesare6.2%ofthefirst$7,000; however,acreditisallowedequaltothestateunemploymentinsurancetaxesof5.4%onthe $7,000.During the year, $27,300waswithheldfor federal incometaxesand$5,700was withheld for state incometaxes.
CurrentLiabilitiesandPayroll Accounting 11-39
Ex.179 (cont.)
Instructions
(a)PrepareajournalentrysummarizingthepaymentofJenks’total salaryduringthe year.
(b)PrepareajournalentrysummarizingtheemployerpayrolltaxexpenseonJenks’salaryfor theyear.
(c)Determinethecostof employing Jenksfor theyear.
Ex.180
TolanCompanyhadthefollowingpayroll datafortheyear:
Grossearningsof employees Employeeearnings notsubjectto FICAtax
Employeeearnings notsubjecttoFUTAor SUTAtax
$640,000 140,000 490,000
Assumingthefollowing: FICAtaxrate
StateUnemploymenttaxrate Federal Unemploymenttaxrate
8%
5.4%(SUTA) .8%(FUTA)
Instructions
ComputeTolan'spayrolltaxexpensefortheyear.Makeasummaryjournalentrytorecordthe payroll taxexpense.
Ex.181
InMarch,grossearningsofMilnerCompanytotaled$150,000.AllearningsaresubjecttoFICA taxes,5.4%stateunemploymenttaxes,and0.8%federalunemployment taxes.
Instructions
(a)Computetheemployer'spayrolltaxexpense. (b)Preparetheentrytorecordpayrolltaxes.
Ex.182
ThefollowingpayrollliabilityaccountsareincludedintheledgerofClementsCompanyon January1,2008:
FICATaxes Payable $1,750 FederalIncomeTaxesPayable 4,000 StateIncomeTaxesPayable 665 FederalUnemploymentTaxesPayable 175 StateUnemploymentTaxes Payable 1,190 UnionDuesPayable 400 HealthInsurancePremiumPayable 5,000 ChristmasClubSavingsPayable 1,500
InJanuary,thefollowingtransactionsoccurred:
Jan.9 Sentacheckfor $5,000toBlueCrossandBlueShield.
11 Depositedacheckfor$5,750inFederalReserveBankforFICAtaxesandfederal incometaxeswithheld.
14 Sentacheckfor $400totheuniontreasurerforuniondues. 18 Paidstateincometaxeswithheldfromemployees.
21 Paidstateandfederalunemployment taxes.
22 Senta$1,500checktoaSavingsandLoanforthe ChristmasClubwithholdings.
Instructions
JournalizetheJanuarytransactions
COMPLETIONSTATEMENTS
183.Acurrentliabilityisadebtthatcanbeexpectedtobepaidwithin year or the ,whicheveris longer.
184.Liabilitiesareclassifiedonthebalancesheetasbeing liabilitiesor
liabilities.
185.Obligationsinwrittenformarecalled andusuallyrequiretheborrower topayinterest.
186.Withaninterest-bearingnote,aborrowermustpaythe ofthenote plus atmaturity.
187.Salestaxescollectedfromcustomersarea ofthebusinessuntilthey areremittedtothetaxing agency.
188.Thecurrentratioiscurrent assetsdivided by .
189.Acontingentliabilityshouldberecordedintheaccountsifitis thatthe contingencywilloccurand theamountis .
190.Twofederaltaxeswhichareleviedagainstemployees'wagesthatmustbedeductedin arrivingatnetpay are(1) taxesand(2) taxes.
191.Theemployerincursapayrolltaxexpenseequaltotheamountcontributedbyeach employeefor taxes.
192.Apayrolltaxexpensewhichisborneentirelybytheemployeristhefederal
tax.
MATCHING
193.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Currentliability B.NotesPayable
C.WageandTaxStatement D.Currentratio
E.Contingentliabilities
F. Federalincometaxes G.FICAtaxes
H.Federalunemploymenttaxes aI. Post-retirementbenefits
aJ.Pensionplan
1.Leviedagainstemployees'wageswithoutlimit.
2.Anobligationintheformofa writtenpromissorynote.
3.Anagreementwherebyanemployerprovidesbenefitsto employeesaftertheyretire.
4.Apayrolltaxexpenseleviedonlyagainstthe employerbasedonemployees'wages.
5.Ameasureofacompany’sliquidity.
6.Adebtthancanreasonablybeexpected tobepaidfromcurrentassets.
7.Aformshowinggrossearnings andincometaxeswithheld.
8.Leviedagainstemployees'wageswithamaximumlimit.
9.Paymentsbyemployerstoretiredemployees.
10.Apotentialliabilitythat maybecome anactualliability inthefuture.
SHORT-ANSWERESSAYQUESTIONS
S-AE194
Acompanywillincurproductrepaircostsinthefutureifproductsthatitsellscurrentlyunder warrantyarebroughtinforrepairduringthewarrantyperiod.Thecompanywillalsoincurbad debtsexpenseinthefutureifcustomerswhobuyoncreditcurrentlyareunabletopaytheir accounts.Aretheaccountingproceduresforthesetwocontingentcosts(warrantyexpenseand bad debtexpense)relatedorguidedbythesameaccountingprinciple?Brieflyexplain.
S-AE195
Anemployee'snetpayconsistsofgrosspaylessmandatoryandvoluntarypayrolldeductions. Identifythemandatorypayrolldeductionsandgivetwoorthreeexamplesofcommonvoluntary deductions.Arethesedeductionsrecognizedaspayrollexpensesbytheemployer? Whattypeof payroll expensesdoesthe employerincurrelatedto havingapayroll?
S-AE196(Ethics)
Quaney Companymaintainstwoseparateaccountspayablecomputersystems.Oneisknownto alltheusers,andisusedtoprocesspaymentstovendors.Employeesenterthevendorcode,or thenameandaddressofnewvendors,theamount,theaccount,andsoon.Theothersystemis asecretone.Itisusedtocross-checkthevendorsagainstanapprovedvendorlist.Ifavendoris notlistedasapproved, thepaymentprocessishalted.Internalauditemployeesseektoverifythe existenceofabonafideclaimbythevendor.Allinquiriesaremadeatthetopmanagement level, andverydiscreetly.Noonebuttopmanagement,theinternalauditstaff,andtheBoardof Directorsofthecompanyis evenawareof thesecondsystem.
Required:
Isit ethicalforacompanytohavea secretsystemliketheonedescribed?Explain.
S-AE197(Communication)
Al-Fabisamanufacturingcompanythatmakesvariousindustrialcomponentsoutofaluminum. Al-FabislocatedinalargecityinthenortheasternUnitedStates.Variouslabordisputeshave occurredinthecity,somewithacrimoniouspublicdebateconcerningthehonestyof management.DuringoneofAl-Fab'sroutineemployeemeetings,JackGrant,aproduction worker, broughtuptheissueof thecostof aworkerasreportedinthecompany'sannualreport.
Thecostwasgivenas$32,000peryear.Jackpointsoutthattheaveragewagerateof$12per hourisatmostaround$25,000ingrosswages.Heaskswhetherthecompanyisaddingin overtime,becauseifso,thefiguresaremisleadingbecausetheemployeesarenotallowedto workovertime.
Required:
PrepareanoteexplainingtoMr.GranthowAl-Fabmightcalculateacostperemployeethatis greater thangross wages.Explainingeneraltermsonly.Do notuseanycalculations.
CHAPTER12
ACCOUNTINGFORPARTNERSHIPS
CHAPTERSTUDYOBJECTIVES
1.Identifythecharacteristicsofthepartnershipformofbusinessorganization.
2.Explaintheaccountingentriesfortheformationofapartnership.
3.Identifythebasesfordividingnetincomeornetloss.
4.Describetheformandcontentofpartnershipfinancialstatements.
5.Explaintheeffectsoftheentriestorecordtheliquidationofapartnership.
6.Explaintheeffectsoftheentrieswhenanewpartnerisadmitted.
7.Describetheeffectsoftheentrieswhenapartnerwithdrawsfromthefirm.
TRUE-FALSESTATEMENTS
1. Thepersonalassets,liabilities,andpersonaltransactionsofpartnersareexcludedfrom theaccountingrecordsofthepartnership.
2. Theactofanypartnerisbindingonallotherpartnersiftheactappearstobeappropriate forthepartnership.
3. Amajoradvantageofthepartnershipformoforganizationisthatthepartnershave unlimitedliability.
4. Partnershipcreditorsmayhaveaclaimonthepersonalassetsofanyofthepartnersifthe partnershipassetsarenotsufficienttosettleclaims.
5. Thepartnershipagreementbetweenpartnersmustbeinwriting.
6. Ifapartnerinvestsnoncashassetsinapartnership,theyshouldberecordedbythe partnershipattheirfairmarketvalue.
7. L.Hillinveststhefollowingassetsinanewpartnership:$15,000incash,andequipment thatcost$30,000buthasabookvalueof$17,000andfairmarketvalueof$20,000.Hill, Capitalwillbecreditedfor$32,000.
8. Twoproprietorshipscannotcombineandformapartnership.
9. Ifapartner'sinvestmentinapartnershipconsistsofequipmentthathasaccumulated depreciationof$8,000,itwouldnotbeappropriateforthepartnershiptorecordthe accumulateddepreciation.
10. Ifapartner'sinvestmentinapartnershipconsistsofAccountsReceivableof$25,000and anAllowanceforDoubtfulAccountsof$7,000,itwouldnotbeappropriateforthe partnershiptorecordthe AllowanceforDoubtfulAccounts.
11. Unlessstatedotherwiseinthepartnershipcontract,profitsandlossesaresharedamong thepartnersintheratiooftheircapitalequitybalances.
12. Ifsalaryallowancesandinterestoncapitalarestipulatedinthepartnershipprofitandloss sharingagreement,theyareimplementedonlyifincomeissufficienttocovertheamounts requiredbythesefeatures.
13. Unlessthepartnershipagreementspecificallyindicatesanincomeratio,partnershipnet incomeorlossisnotallocatedtothepartners.
AccountingforPartnerships 12-5
14. Partnershipincomeorlossneednotbeclosedtopartners'capitalaccountseachperiod becauseoftheunlimitedlifecharacteristicofpartnerships.
15. Ifapartnershiphasalossfortheperiod,theclosingentrytotransferthelosstothe partnerswillrequireacredittotheIncomeSummaryaccount.
16. Thepartners'drawingaccountsareclosedeachperiodintotheIncomeSummary account.
17. Salaryallowancestopartnersareamajorexpenseonmostpartnershipincome statements.
18. Aninterestallowanceinsharingpartnershipnetincome(ornetloss)isrelatedtothe amountofpartners'investedcapital duringtheperiod.
19. Thefinancialstatementsofapartnershiparesimilartothoseofaproprietorship.
20. Theincomeearnedbyapartnershipwillalwaysbegreaterthantheincomeearnedbya proprietorshipbecauseinapartnershipthereismorethanoneownercontributingtothe successofthebusiness.
21. ThefunctionofthePartners'CapitalStatementistoexplainthechangesinpartners' capitalaccountbalancesduringaperiod.
22. Adetailedlistingofalltheassetsinvestedbyapartnerinapartnershipappearsonthe Partners'CapitalStatement.
23. Totalpartners'equityofapartnershipisequaltothesumofallpartners'capitalaccount balances.
24. Thedistributionofcashtopartnersinapartnershipliquidationisalwaysmadebasedon thepartners'incomesharingratio.
25. Theliquidationofapartnershipmeansthatanewpartnerhasbeenadmittedtothe partnership.
a26. Theadmissionofanewpartnerresultsinthelegaldissolutionoftheexistingpartnership andthebeginningofanewpartnership.
a27. Ifanewpartnerisadmittedintoapartnershipbyinvestment,thetotalassetsandtotal capitalwillchange.
a28. Abonustooldpartnersresultswhenthenewpartner'scapitalcreditonthedateof admittanceisgreaterthanhisorherinvestmentinthefirm.
a29. Ifanewpartnerinvestsinapartnershipatbookvalueandacquiresa1/4interestintotal partnershipcapital,itindicatesthatabonuswaspaidtotheoriginalpartners.
a30. Abonustotheremainingpartnersresultswhenaretiringpartnerreceivespartnership assetswhicharelessthanhisorhercapitalbalanceonthedateofwithdrawal.
AdditionalTrue-FalseQuestions
31. Apartnershipisanassociationofnomorethantwopersonstocarryonasco-ownersofa businessforprofit.
32. Onceassetshavebeeninvestedinthepartnership,theyareownedjointlybyallpartners.
33. Eachpartner'sinitialinvestmentinapartnershipshouldberecordedatbookvalue.
34. Partnershipincomeissharedinproportiontoeachpartner'scapitalequityinterestunless thepartnershipcontractspecificallyindicatesthemannerinwhichnetincomeornetloss istobedivided.
35. Inaliquidation,thefinaldistributionofcashtopartnersshouldbeonthebasisoftheir incomeratios.
a36. Inanadmissionofapartnerbyinvestmentofassets,thetotalnetassetsandtotalcapital ofthepartnershipdonotchange.
a37. Thewithdrawalofapartnerlegallydissolvesthepartnership.
MULTIPLECHOICEQUESTIONS
38. Ahybridformofbusinessorganizationwithcertainfeatureslikeacorporationisa(n) a.limitedliabilitypartnership.
b.limitedliabilitycompany. c."S"corporation.
d.sub-chapter"S"corporation.
39. Apartnership
a.hasonlyoneowner.
b.paystaxesonpartnershipincome. c.mustfileaninformationtaxreturn.
d.isnotanaccountingentityforfinancialreporting purposes.
40. Ageneralpartnerinapartnership
a.hasunlimitedliabilityforallpartnershipdebts. b.isalwaysthegeneralmanagerofthefirm.
c.isthepartnerwholacksaspecialization.
d.isliableforpartnershipliabilitiesonlytotheextentofthatpartner'scapitalequity.
AccountingforPartnerships 12-7
41. Theindividualassetsinvestedbyapartnerinapartnership a.revertbacktothatpartnerifthepartnershipliquidates.
b.determinethatpartner'sshareofnetincomeorlossfortheyear. c.arejointlyownedbyallpartners.
d.determinethescopeofauthorityofthatpartner.
42. Whichoneofthefollowingwouldnotbeconsideredadisadvantageofthepartnership formoforganization?
a.Limitedlife
b.Unlimitedliability c.Mutualagency
d.Easeofformation
43. Thepartnershipformofbusinessis
a.restrictedtolawandmedicalpractices.
b.restrictedtofirmshavingfewerthan10partners. c.notrestrictedtoanyparticulartypeofbusiness. d.mostoftenusedinrelativelylargecompanies.
44. Whichofthefollowingisnotaprincipalcharacteristicofthepartnershipformofbusiness organization?
a.Mutualagency
b.Associationofindividuals c.Limitedliability
d.Limitedlife
45. Thepartnershipagreementshouldincludeeachofthefollowingexceptthe a.dateofthepartnershipinception.
b.principallocationofthefirm.
c.survivingfamilymembersintheeventofapartner'sdeath. d.Eachoftheseshouldbeincluded.
46. Whichofthefollowingstatementsistrueregardingtheformofalegallybinding partnershipcontract?
a.Thepartnershipcontractmustbeinwriting.
b.Thepartnershipcontractmaybebasedonahandshake. c.Thepartnershipcontractmaybeimplied.
d.Thepartnershipcontractcannotbe oral.
47. Whichofthefollowingstatementsaboutapartnershipiscorrect?
a.Thepersonalassetsofapartnerareincludedinthepartnershipaccountingrecords. b.Apartnershipisnotrequiredtofileaninformationtaxreturn.
c.Eachpartner'sshareofincomeistaxabletothepartnership.
d.Apartnershiprepresentsanaccountingentityforfinancialreportingpurposes.
48. Inapartnership,mutualagencymeans
a.eachpartneractsonhisownbehalfwhenengaginginpartnershipbusiness.
b.theactofanypartnerisbindingonallotherpartners,onlyifpartnersactwithintheir copeofauthority.
c.anactbyapartnerisjudgedasbindingonotherpartnersdependingonwhetherthe actappearstobeappropriateforthepartnership.
d.thatpartnersmustpaytaxesonamutualorcombinedbasis.
12-8 TestBankforAccountingPrinciples,EighthEdition
49. Apartnership
a.isdissolvedonlybythewithdrawalofapartner.
b.isdissolvedupontheacceptanceofanewpartner. c.dissolutionmeansthebusinessmustliquidate.
d.hasunlimitedlife.
50. Thepartnerinalimitedpartnershipthathasunlimitedliabilityisreferredtoasthe a.leadpartner.
b.headpartner.
c.generalpartner.d.unlimitedpartner.
51. Limitedpartnerships
a.musthaveatleastonegeneralpartner.
b.guaranteethatapartnerwillreceiveareturn.
c.guaranteethatapartnerwillgetbackhisoriginalinvestment. d.arelimitedtoonlythreepartners.
52. TheMaris-Cranepartnershipisterminatedwhencreditorclaimsexceedpartnership assetsby$40,000.CraneisamillionaireandMarishasnopersonalassets.Maris' partnershipinterestis75%andCrane'sis25%.Creditors
a.mustcollecttheirclaimsequallyfromMarisandCrane. b.maycollecttheentire$40,000fromCrane.
c.mustcollecttheirclaims75%fromMarisand25%fromCrane.
d.maynotrequireCranetousehispersonalassetstosatisfythe$40,000inclaims.
53. Whichofthefollowingstatementsaboutpartnershipsisincorrect? a.Partnershipassetsareco-ownedbypartners.
b.Ifa partnership isterminated,the assets do not legallyrevert totheoriginal contributor.c.Ifthepartnershipagreementdoesnotspecifythemannerinwhichnetincomeistobe
shared,itisdistributedaccordingtocapitalcontributions.
d.Eachpartnerhasaclaimonassetsequaltothebalanceinthepartner'scapital account.
54. Whichofthefollowingisnotanadvantageofthepartnershipformofbusiness? a.Mutualagency
b.Easeofformation
c.Easeofdecisionmaking
d.Freedomfromgovernmentalregulationsandrestrictions
55. ThelargestcompaniesintheUnitedStatesareprimarilyorganizedas a.limitedpartnerships.
b.partnerships. c.corporations.
d.proprietorships.
56. Thebasisfordividingpartnershipnetincomeornetlossisreferredtoasanyofthe followingexceptthe
a.incomeratio.
b.incomeandlossratio. c.profitandlossratio.d.incomesharingratio.
AccountingforPartnerships 12-9
57. Whichofthefollowingstatementsisincorrectregardingpartnershipagreements? a.Itmaybereferredtoasthe“articlesofco-partnership.”
b.Oralagreementsarepreferabletowrittenarticles.
c.Itshouldspecifythedifferentrelationshipsthataretoexistamongthepartners. d.Itshouldstateproceduresforsubmittingdisputestoarbitration.
58. Nortoninvestspersonallyownedequipment,whichoriginallycost$110,000andhas accumulateddepreciationof$30,000intheNortonandKennettpartnership.Bothpartners agreethatthefairmarketvalueoftheequipmentwas$60,000.Theentrymadebythe partnershiptorecordNorton'sinvestmentshouldbe
a.Equipment............................................................................ 110,000AccumulatedDepreciation—Equipment...................... 30,000 Norton,Capital............................................................. 80,000
b.Equipment............................................................................ 80,000
Norton,Capital............................................................. 80,000 c.Equipment............................................................................ 60,000
LossonPurchaseofEquipment.......................................... 20,000 AccumulatedDepreciation—Equipment............................... 30,000
Norton,Capital............................................................. 110,000 d.Equipment............................................................................ 60,000
Norton,Capital............................................................. 60,000
59. PartnerBisinvestinginapartnershipwithPartnerA.Bcontributesaspartofhisinitial investment,AccountsReceivableof$80,000;anAllowanceforDoubtfulAccountsof $12,000;and$8,000cash.TheentrythatthepartnershipmakestorecordB'sinitial contributionincludesa
a.credittoB,Capitalfor$88,000.
b.debittoAccountsReceivablefor$68,000. c.credittoB,Capitalfor$76,000.
d.debittoAllowanceforDoubtfulAccountsfor$12,000.
60. Whichofthefollowingwouldnotberecordedintheentryfortheformationofa partnership?
a.Accumulateddepreciation
b.Allowancefordoubtfulaccounts c.Accountsreceivable
d.Allofthesewouldberecorded.
61. BobisinvestinginapartnershipwithJerry.Bobcontributesequipmentthatoriginallycost $63,000,hasabookvalueof$30,000,andafairmarketvalueof$39,000.Theentrythat thepartnershipmakestorecordBob'sinitialcontributionincludesa
a.debittoEquipmentfor$33,000. b.debittoEquipmentfor$63,000. c.debittoEquipmentfor$39,000.
d.credittoAccumulatedDepreciationfor$33,000.
62. Apartnercontributes,aspartofherinitialinvestment,accountsreceivablewithan allowancefordoubtfulaccounts.Whichofthefollowingreflectsapropertreatment?
12-10TestBankforAccountingPrinciples,EighthEdition
a.Thebalanceoftheaccountsreceivableaccountshouldberecordedonthebooksof thepartnershipatitsnetrealizablevalue.
b.Theallowanceaccountmaybesetuponthebooksofthepartnershipbecauseit relatestotheexistingaccountsthatarebeingcontributed.
c.Theallowanceaccountshouldnotbecarriedontothebooksofthepartnership.
d.Theaccountsreceivableandallowanceshouldnotberecordedonthebooksofthe partnershipbecauseapartnermustinvestcashinthebusiness.
63. Whichoneofthefollowingwouldnotbeconsideredanexpenseofapartnershipin determiningincomefortheperiod?
a.Expiredinsurance
b.Salaryallowancetopartners c.Suppliesused
d.Freight-out
64. Apartnerinvestsintoapartnershipabuildingwithanoriginalcostof$90,000and accumulateddepreciationof$40,000.Thisbuildinghasa$70,000fairmarketvalue.Asa resultoftheinvestment,thepartner’scapitalaccountwillbecreditedfor
a.$70,000. b.$50,000. c.$90,000. d.$120,000.
Usethefollowinginformationforquestions65–67.
JamesandLauraareformingapartnership.Jameswillinvestatruckwithabookvalueof $10,000andafairmarketvalueof$14,000.Laurawillinvestabuildingwithabookvalueof $30,000andafairmarketvalueof$42,000withamortgageof$15,000.
65. Atwhatamountshouldthebuildingberecorded? a.$30,000
b.$27,000 c.$42,000 d.$45,000
66. WhatamountshouldberecordedinLaura’scapitalaccount? a.$30,000
b.$27,000 c.$42,000 d.$14,000
67. WhatamountshouldberecordedinJames’capitalaccount? a.$30,000
b.$27,000 c.$42,000 d.$14,000
68. SpeirandPablodecidetoorganizeapartnership.Speirinvests$15,000cash,andPablo contributes$12,000cashandequipmenthavingabookvalueof$6,000.Choosetheentry torecordPablo’sinvestmentinthepartnershipassumingtheequipmenthasafairmarket valueof$9,000.
AccountingforPartnerships 12-11
a.Cash..................................................................................... 12,000 Equipment........................................................................... 6,000
Pablo,Capital............................................................. 18,000 b.Equipment........................................................................... 6,000
Pablo,Capital............................................................. 6,000 c.Cash..................................................................................... 12,000
Pablo,Capital............................................................. 12,000 d.Cash..................................................................................... 12,000
Equipment........................................................................... 9,000
Pablo,Capital............................................................. 21,000
Usethefollowinginformationforquestions69–71.
PartnersAbelandCainhavecapitalbalancesinapartnershipof$40,000and$60,000, respectively.Theyagreetoshareprofitsandlossesasfollows:
Abel Cain
Assalaries $10,000 $12,000 Asinterestoncapitalatthebeginningoftheyear 10% 10% Remainingprofitsorlosses 50% 50%
69. Ifincomefortheyearwas$50,000,whatwillbethedistributionofincometoCain? a.$23,000
b.$27,000 c.$20,000 d.$10,000
70. Ifincomefortheyearwas$30,000,whatwillbethedistributionofincometoAbel? a.$13,000
b.$77,000 c.$10,000 d.$14,000
71. Ifnetlossfortheyearwas$2,000,whatwillbethedistributiontoCain? a.$12,000income
b.$1,000income c.$1,000loss
d.$2,000loss
72. PartnersJimandJoehaveagreedtoshareprofitsandlossesinan80:20ratio respectively,afterJimisallowedasalaryallowanceof$140,000andJoeisalloweda salaryallowanceof$70,000.Ifthepartnershiphadnetincomeof$140,000for2008, Joe’sshareoftheincomewouldbe
a.$70,000. b.$56,000. c.$84,000. d.$14,000.
12-12TestBankforAccountingPrinciples,EighthEdition
73. Themostappropriatebasisfordividingpartnershipnetincomewhenthepartnersdonot plantotakeanactiveroleindailyoperationsis
a.onafixedratio.
b.interestoncapitalbalancesandsalariestothepartners. c.onaratiobasedaveragecapitalbalances.
d.salariestothepartnersandtheremainderonafixedratio.
74. TheSmithandJonespartnershipagreementstipulatesthatprofitsandlosseswillbe sharedequallyaftersalaryallowancesof$160,000forSmithand$80,000forJones.At thebeginningoftheyear,Smith'sCapitalaccounthadabalanceof$320,000,whileJones' Capitalaccounthadabalanceof$280,000.Netincomefortheyearwas$200,000.The balanceofJones'Capitalaccountattheendoftheyearafterclosingis
a.$380,000. b.$80,000.c.$340,000. d.$360,000.
75. Apartner'sshareofnetincomeisrecognizedintheaccountsthrough a.adjustingentries.
b.closingentries.
c.correctingentries. d.accrualentries.
76. ThepartnershipofNottandReesereportsnetincomeof$60,000.Thepartnersshare equallyinincomeandlosses.Theentrytorecordthepartners'shareofnetincomewill includea
a.credittoIncomeSummaryfor$60,000. b.credittoNott,Capitalfor$30,000.
c.debittoReese,Capitalfor$30,000.d.credittoReese,Drawingfor$30,000.
77. PartnerAreceives$210,000andPartnerBreceives$140,000inasplitof$350,000net income.Whichexpressiondoesnotreflecttheincomesplittingarrangement?
a.3:2
b.3/5&2/5 c.6:4
d.2:1
78. Anincomeratiobasedoncapitalbalancesmightbeappropriatewhen a.serviceisa primaryconsideration.
b.some,butnotall,partnersplantoworkinthebusiness.
c.fundsinvestedinthepartnershipareconsideredthecriticalfactor. d.littlenetincomeisexpected.
79. Ifthepartnershipagreementspecifiessalariestopartners,interestonpartners'capital, andtheremainderonafixedratio,andpartnershipnetincomeisnotsufficienttocover bothsalariesandinterest,
a.onlysalariesareallocatedtothepartners. b.onlyinterestisallocatedtothepartners.
c.theentirenetincomeissharedonafixedratio.
d.bothsalariesandinterestareallocatedtothepartners.
AccountingforPartnerships 12-13
80. Whichofthefollowingwouldnotbeconsideredanexpenseofapartnershipin determiningincomefortheperiod?
a.Expiredinsuranceb.Incometaxexpense c.Rentexpense
d.Utilitiesexpense
Usethefollowinginformationforquestions81–82.
ThenetincomeofthePineandMilespartnershipis$180,000.Thepartnershipagreement specifiesthatPineandMileshaveasalaryallowanceof$48,000and$72,000,respectively.The partnershipagreementalsospecifiesaninterestallowanceof10%oncapitalbalancesatthe beginningoftheyear.Eachpartnerhadabeginningcapitalbalanceof$120,000.Anyremaining netincomeornetlossissharedequally.
81. WhatisPine'sshareofthe$180,000netincome? a.$48,000
b.$60,000 c.$66,000 d.$78,000
82. WhatisthebalanceofMiles'Capitalaccountattheendoftheyearafternetincomehas beendistributed?
a.$204,000 b.$192,000 c.$222,000 d.$210,000
83. ThenetincomeoftheTorreyandGorepartnershipis$250,000.Thepartnership agreementspecifiesthatprofitsandlosseswillbesharedequallyaftersalaryallowances of$200,000(Torrey)and$150,000(Gore)havebeenallocated.Atthebeginningofthe year,Torrey'sCapitalaccounthadabalanceof$500,000andGore'sCapitalaccounthad abalanceof$650,000.WhatisthebalanceofGore'sCapitalaccountattheendofthe yearafterprofitsandlosseshavebeendistributed?
a.$650,000 b.$100,000 c.$750,000 d.$775,000
84. Apartners'capitalstatementexplains
a.theamountoflegalliabilityofeachofthepartners.
b.thetypesofassetsinvestedinthebusinessbyeachpartner.
c.howthepartnershipwillbecapitalizedifanewpartnerisadmittedtothepartnership.d.thechangesineachpartner'scapitalaccountandintotalpartnershipcapitalduringa
period.
85. Eachofthefollowingisusedinpreparingthepartners’capitalstatementexceptthe a.balancesheet.
b.incomestatement.
c.partners’capitalaccounts.d.partners’drawingaccounts.
12-14TestBankforAccountingPrinciples,EighthEdition
86. Theowners'equitystatementforapartnershipiscalledthe a.partners'proportionalstatement.
b.partners'capitalstatement.
c.statementofshareholders'equity. d.capitalanddrawingstatement.
87. Whichofthefollowingwouldnotcauseanincreaseinpartnershipcapital? a.Drawings
b.Netincome
c.Additionalcapitalinvestmentbythepartners d.Initialcapitalinvestmentbythepartners
88. JillGrier'scapitalstatementrevealsthatherdrawingsduringtheyearwere$50,000.She madeanadditionalcapitalinvestmentof$25,000andhershareofthenetlossforthe yearwas$10,000.Herendingcapitalbalancewas$200,000.WhatwasJillGrier's beginningcapitalbalance?
a.$225,000 b.$185,000 c.$235,000 d.$260,000
89. BillWrenstartedtheyearwithacapitalbalanceof$180,000.Duringtheyear,hisshareof partnershipnetincomewas$160,000andhewithdrew$30,000fromthepartnershipfor personaluse.Hemadeanadditionalcapitalcontributionof$50,000duringtheyear.The amountofBillWren'scapitalbalancethatwillbereportedontheyear-endbalancesheet willbe
a.$160,000. b.$390,000. c.$300,000. d.$360,000.
90. ThePartners'CapitalStatementfortheUnitedCenterreportedthefollowinginformationin total:
Capital,January1..................................................$120,000 Additionalinvestment............................................. 40,000 Drawings................................................................ 80,000 Netincome............................................................. 100,000
Thepartnershiphasthreepartners:Moon,Garr,andRicewithendingcapitalbalancesin aratio40:20:40.Whataretherespectiveendingbalancesof thethreepartners?
a.Moon,$80,000;Garr,$40,000;Rice, $80,000. b.Moon,$72,000:Garr,$36,000;Rice, $72,000.
c.Moon,$136,000;Garr,$68,000;Rice,$136,000. d.Moon,$90,000;Garr,$48,000;Rice, $90,000.
AccountingforPartnerships 12-15
91. ThetotalcolumnofthePartners'CapitalStatementforNorth Companyis asfollows:
Capital,January1................................................. Additionalinvestment............................................ Drawings............................................................... Netincome............................................................
$150,000 60,000 90,000 180,000
Thepartnershiphasthreepartners.Thefirsttwopartnershaveendingcapitalbalances thatareequal.Theendingbalanceofthethirdpartnerishalfoftheendingbalanceofthe firstpartner. Whatistheendingcapitalbalanceofthethirdpartner?
a.$72,000 b.$48,000 c.$60,000 d.$66,000
92. Thepartners'drawingaccountsare
a.reportedontheincomestatement. b.reportedonthebalancesheet.
c.closedtoIncomeSummary.
d.closedtothepartners'capitalaccounts.
93. TheUniformPartnershipActprovidesthat
a.apurchaserofapartnershipinterestisnotapartneruntilheorsheisacceptedinto thefirmbythecontinuingpartners.
b.apartnermustobtaintheapprovalofotherpartnersbeforesellinghisorherinterest.c.thepricepaidinapurchaseofpartner'sinterestmustbeequaltothecapitalequity
acquired.
d.thepricepaidinapurchaseofpartner'sinterestmustbegreaterthanthecapital equityacquired.
94. Thebalancesheetofapartnershipwill
a.reportretainedearningsbelowthepartnershipcapitalaccounts. b.showaseparatecapitalaccountforeachpartner.
c.showaseparatedrawingaccountforeachpartner.
d.showtheamountofincomethatwasdistributedtoeachpartner.
95. Theliquidationofapartnershipmayresultfromeachofthefollowingexceptthe a.bankruptcyofthepartnership.
b.deathofapartner.
c.retirementofapartner.
d.saleofthebusinessbythepartners.
96. Intheliquidationofapartnership,anygainorlossontherealizationofnoncashassets shouldbeallocated
a.firsttocreditorsandtheremaindertopartners.
b.tothepartnersonthebasisoftheircapitalbalances.
c.tothepartnersonthebasisoftheir income-sharingratio. d.onlyafterallcreditorshavebeenpaid.
97. Intheliquidationofapartnership,anypartnerwhohasacapitaldeficiency a.hasapersonaldebttothepartnershipfortheamountofthedeficiency. b.isautomaticallyterminatedasapartner.
c.willreceiveacashdistributiononlyonthebasisofhisorherincome-sharingratio. d.isnotobligatedtomakeupthecapitaldeficiency.
12-16TestBankforAccountingPrinciples,EighthEdition
98. PartnersA,B,andChavecapitalaccountbalancesof$120,000each.Theincomeand lossratiois5:2:3,respectively.Intheprocessofliquidatingthepartnership,noncash assetswithabookvalueof$100,000aresoldfor$40,000.ThebalanceofPartnerB's Capitalaccountafterthesaleis
a.$90,000. b.$102,000. c.$108,000. d.$132,000.
Usethefollowinginformationforquestions99–101.
Thepartners'incomeandlosssharingratiois2:3:5,respectively.
D,E,ANDFPARTNERSHIP BalanceSheetDecember31,2008
Assets LiabilitiesandOwners'Equity
Cash
Noncashassets
Total
$90,000 570,000
$660,000
Liabilities D,Capital E,Capital F,Capital
Total
$300,000 120,000 180,000
60,000$660,000
99. IftheD,E,andFPartnershipisliquidatedbysellingthenoncashassetsfor$390,000and creditorsarepaidinfull,whatistheamountofcashthatcanbesafelydistributedtoeach partner?
a.D,$72,000;E,$108,000;F,$0.
b.D,$84,000;E,$126,000;F,$30,000. c.D,$69,000;E,$111,000;F,$0.
d.D,$66,000;E,$114,000;F,$0.
100. IftheD,E,andFPartnershipisliquidatedbysellingthenoncashassetsfor$750,000, andcreditorsarepaidinfull,whatisthetotalamountofcashthatPartnerDwillreceivein thedistributionofcashtopartners?
a.$36,000 b.$234,000 c.$156,000 d.$150,000
101. IftheD,E,andFPartnershipisliquidatedandthenoncashassetsareworthless,the creditorswilllooktowhatpartner'spersonalassetsforsettlementofthecreditors'claims? a.ThepersonalassetsofPartnerE.
b.ThepersonalassetsofPartnersDandF.
c.ThepersonalassetsofPartnersD,E,andF.
d.Thepersonalassetsofthepartnersarenotavailableforpartnershipdebts.
AccountingforPartnerships 12-17
102. Ifapartnerhasacapitaldeficiencyanddoesnothavethepersonalresourcestoeliminate it,
a.thecreditorswillhavetoabsorbthecapitaldeficiency.
b.theotherpartnerswillabsorbthecapitaldeficiencyonthebasisoftheirrespective capitalbalances.
c.theotherpartnerswillhavetoabsorbthecapitaldeficiencyonthebasisoftheir respectiveincomesharingratios.
d.neitherthecreditorsnortheotherpartnerswillhavetoabsorbthecapitaldeficiency.
103. Whenapartnershipterminatesbusiness,thesaleofnoncashassetsiscalled a.liquidation.
b.realization. c.recognition. d.disposition.
104. Theliquidationofapartnership
a.cannotbeavoluntaryactofthepartners. b.terminatesthebusiness.
c.eliminatesthosepartnerswithacapitaldeficiency. d.cannotoccurunlessallpartnersapprove.
105. Theliquidationofapartnershipisaprocesscontainingthefollowingsteps:
1.Paypartnershipliabilitiesincash.
2.Allocatethegainorlossonrealizationtothepartnersontheirincomeratios. 3.Sellnoncashassetsforcashandrecognizeagainorlossonrealization.
4.Distributeremainingcashtopartnersonthebasisoftheirremainingcapitalbalances.
Identifythepropersequencingofthestepsintheliquidationprocess. a.3,2,4,1.
b.3,2,1,4. c.1,3,2,4. d.1,4,3,2.
106. Inthefinalstepoftheliquidationprocess,remainingcashisdistributedtopartners a.onanequalbasis.
b.onthebasisoftheincomeratios.
c.onthebasisoftheremainingcapitalbalances. d.regardlessofcapitaldeficiencies.
107. Intheliquidationprocess,ifacapitalaccountshowsadeficiency
a.thepartnerwithadeficiencyhasanobligationtothepartnershipfortheamountofthe deficiency.
b.itmaybewrittenofftoa"Loss"account.
c.itisdisregardeduntilafterthepartnershipbooksareclosed. d.itcanbewrittenofftoa"Gain"account.
108. Beforedistributinganyremainingcashtopartnersinapartnershipliquidation,itis necessarytodoeachof thefollowingexcept
a.sellnoncashassetsforcash.
b.recognizeagainorlossonrealization.
c.allocatethegainorlosstothepartnersbasedontheircapitalbalances. d.paypartnershipliabilitiesincash.
12-18TestBankforAccountingPrinciples,EighthEdition
109. Kate,Sue,andTinaformedapartnershipwithincome-sharingratiosof50%,30%,and 20%,respectively.Cashof$180,000wasavailableafterthepartnership’sassetswere liquidated.Priortothefinaldistributionofcash,Kate’scapitalbalancewas$200,000, Sue’scapitalbalancewas$150,000,andTinahadacapitaldeficiencyof$50,000.Based uponacashpaymentsschedule,Kateshouldreceive
a.$175,000. b.$168,750. c.$131,250. d.$200,000.
110. A,BandCarepartners,sharingincome2:1:2.Aftersellingalloftheassetsforcash, dividinggainsandlossesonrealization,andpayingliabilities,thebalancesinthecapital accountsareasfollows:A,$10,000Cr;B,$10,000Cr;andC,$30,000Cr.Howmuch cashshouldbedistributedtoA?
a.$6,000 b.$20,000 c.$10,000 d.$16,667
111. Inliquidation,balancespriortothedistributionofcashtothepartnersare:Cash$300,000; Moorman,Capital$140,000;Simpson,Capital$130,000,andKelton,Capital$30,000. Theincomeratiois6:2:2,respectively.Howmuchcashshouldbedistributedto Moorman?
a.$125,000 b.$136,250 c.$140,000 d.$150,000
112. Assumethesamefactsinquestion111above,exceptthatthereisonly$255,000incash andKeltonhasacapitaldeficiencyof$15,000.Howmuchcashshouldbedistributedto SimpsonifKeltondoes notpayhisdeficiency?
a.$122,500 b.$126,250 c.$118,750 d.$130,000
a113. D.Givenspurchasesa25%interestfor$30,000whentheSuppan,Porter,James partnershiphastotalcapitalof$270,000.PriortotheadmissionofGivens,eachpartner hasacapitalbalanceof$90,000.Eachpartnerrelinquishesanequalamountofhiscapital balancetoGivens.TheamounttoberelinquishedbyJamesis
a.$15,000. b.$19,000. c.$22,500. d.$37,500.
a114.Bryantisadmittedtoapartnershipwitha25%capitalinterestbyacashinvestmentof $90,000.Iftotalcapitalofthepartnershipis$390,000beforeadmittingBryant,thebonus toBryantis
a.$30,000. b.$15,000. c.$45,000. d.$60,000.
AccountingforPartnerships 12-19
Usethefollowinginformationforquestions115–116.
CarleyandKingmanarepartnerswhoshareincomeandlossesintheratioof3:2,respectively. OnAugust31,theircapitalbalanceswere:Carley,$175,000andKingman,$150,000.Onthat date,theyagreetoadmitLernerasapartnerwithaone-thirdcapital interest.
a115.IfLernerinvests$125,000inthepartnership,whatisCarley'scapitalbalanceafter Lerner'sadmittance?
a.$150,000 b.$158,333 c.$160,000 d.$175,000
a116.IfLernerinvests$200,000inthepartnership,whatisKingman'scapitalbalanceafter Lerner'sadmittance?
a.$175,000 b.$160,000 c.$157,500 d.$150,000
a117.KingandNottarepartnerswhoshareprofitsandlossesequallyandhavecapital balancesof$560,000and$490,000,respectively.Starrisadmittedintothepartnership byinvesting$490,000for30%capitalinterest.TheaccountbalanceofNott,Capitalafter theadmissionofStarrwouldbe
a.$462,000. b.$476,000. c.$504,000. d.$490,000.
a118.StineandWatsonhavepartnershipcapitalbalancesof$320,000and$240,000, respectively.WatsonnegotiatestosellhispartnershipinteresttoLearyfor$280,000. StineagreestoacceptLearyasanewpartner.Thepartnershipentrytorecordthis transactionis
a.Cash..................................................................................... 280,000
Leary,Capital.............................................................. 280,000 b.Watson,Capital.................................................................... 280,000
Leary,Capital.............................................................. 280,000 c.Cash..................................................................................... 40,000
Watson,Capital.................................................................... 240,000
Leary,Capital.............................................................. 280,000 d.Watson,Capital.................................................................... 240,000
Leary,Capital.............................................................. 240,000
a119.HillandEddysharepartnershipprofitsandlossesintheratioof6:4.Hill'sCapitalaccount balanceis$320,000andEddy’sCapitalaccountbalanceis$200,000.Porterisadmittedto thepartnershipbyinvesting$360,000andistoreceiveaone-fourthownershipinterest.Hill, Eddy andPorter's capitalbalancesafter Porter'sinvestment will be
Hill Eddy Porter
a.$320,000 $200,000 $360,000 b.$404,000 $256,000 $220,000 c.$396,000 $264,000 $220,000 d.$390,000 $270,000 $220,000
12-20TestBankforAccountingPrinciples,EighthEdition
a120.JudyandDebhavepartnershipcapitalaccountbalancesof$600,000and$450,000, respectivelyandshareprofitsandlossesequally.Anneisadmittedtothepartnershipby investing$250,000foraone-fourthownershipinterest.ThebalanceofDeb'sCapital accountafterAnneisadmittedis
a.$412,500. b.$450,000. c.$487,500. d.$325,000.
a121.Theadmissionofanewpartnertoanexistingpartnership
a.maybeaccomplishedonlybyinvestingassetsinthepartnership. b.requirespurchasingtheinterestofoneormoreexistingpartners. c.causesalegaldissolutionoftheexistingpartnership.
d.isalmostalwaysaccompaniedbytheliquidationofthebusiness.
a122.Whenapartnershipinterestispurchased
a.everypartner’scapitalaccountisaffected.
b.thetransactionisapersonaltransactionbetweenthepurchaserandtheselling partner(s).
c.thebuyerreceivesequityequaltotheamountofcashpaid. d.allpartnerswillreceivesomepartofthepurchaseprice.
a123.AdlerandLynneachsell1/3oftheirpartnershipinteresttoSele,receiving$140,000each. Atthetimeoftheadmission,eachpartnerhasa$420,000capitalbalance.Theentryto recordtheadmissionofSelewillshowa
a.debittoCashfor$280,000.
b.credittoSele,Capitalfor$420,000. c.debittoLynn,Capitalfor$420,000. d.debittoAdler,Capitalfor$140,000.
a124.BallandGantsell1/4oftheirpartnershipinteresttoIvesreceiving$200,000each.Atthe timeofadmission,BallandGanteachhada$350,000capitalbalance.Theadmissionof Iveswillcausethenetpartnershipassetsto
a.increaseby$400,000. b.remainat$700,000.
c.decreaseby$400,000. d.remainat$1,100,000.
a125.ColeandGlennselltoNabba1/3interestintheCole-Glennpartnership.Nabbwillpay ColeandGlenneach$70,000foradmissionintotheorganization.Beforethistransaction, ColeandGlennshowcapitalbalancesof$105,000each.Thejournalentrytorecordthe admissionofNabbwill
a.showadebittoCashfor$140,000. b.notshowadebittoCash.
c.showadebittoGlenn,Capitalfor$70,000. d.showacredittoNabb,Capitalfor$140,000.
AccountingforPartnerships 12-21
a126.Foxxinvests$20,000incash(admissionbyinvestment)intheMassey-Dixpartnershipto acquirea1/4interest.Inthiscase
a.theaccountingwillbethesameasapurchaseofaninterest.
b.thetotalnet assets of thenewpartnershipareunchanged fromthepreviouspartnership. c.thetotalcapitalofthenewpartnershipisgreaterthanthetotalcapitaloftheold
partnership.
d.Foxx'sincomeratiowillautomaticallybe1/4.
a127.Whichofthefollowingiscorrectwhenadmittinganewpartnerintoanexisting partnership?
PurchaseofanInterest AdmissionbyInvestment a.Totalnetassets unchanged unchanged
b.Totalcapital increased unchanged c.Totalnetassets unchanged increasedd.Totalcapital unchanged unchanged
a128.Whenadmittinganewpartnerbyinvestment,abonustooldpartners
a.isusuallyunjustifiedbecausebookvaluesclearlyreflectpartnershipnetworth.
b.issometimes justifiedbecause goodwill may exist andit isnot reflected in theaccounts. c.resultsifthedebittocashislessthanthenewpartner'scapitalcredit.
d.resultsifthedebittocashisequaltothenewpartner'scapitalcredit.
a129.Whenadmittinganewpartnerbyinvestment,abonustooldpartnersisallocatedon a.thebasisofcapitalbalances.
b.thebasisoftheoriginalinvestmentoftheoldpartners.
c.thebasisofincomeratiosbeforetheadmissionofthenewpartner. d.asenioritybasis.
a130.Abonustoanewpartner a.isprohibitedbyGAAP.
b.resultswhenthenewpartner'scapitalcreditislessthanhisorherinvestmentof assetsinthefirm.
c.mayoccurwhenrecordedbookvaluesarelowerthanmarketvalues.
d.resultswhenthenewpartner'scapitalcreditisgreaterthanhisorherinvestmentof assetsinthefirm.
a131.Abonustoanewpartnerwill
a.increasethecapitalbalancesofexistingpartnersbasedontheirincomeratiosbefore theadmissionofthenewpartner.
b.increasethecapitalbalancesofexistingpartnersbasedontheirincomeratiosafter theadmissionofthenewpartner.
c.decreasethecapitalbalancesofexistingpartnersbasedontheirincomeratiosbefore theadmissionofthenewpartner.
d.decreasethecapitalbalancesofexistingpartnersbasedontheircapitalbalances beforetheadmissionofthenewpartner.
a132.Jane,Ken,andMarkhavepartnershipcapitalaccountbalancesof$225,000,$450,000 and$105,000,respectively.TheincomesharingratioisJane,50%;Ken,40%;andMark, 10%.Janedesirestowithdrawfromthepartnershipanditisagreedthatpartnership assetsof$195,000willbeusedtopayJaneforherpartnershipinterest.Thebalancesof Ken'sandMark'sCapitalaccountsafterJane'swithdrawalwouldbe
12-22TestBankforAccountingPrinciples,EighthEdition
a.Ken,$450,000;Mark,$105,000. b.Ken,$474,000;Mark,$111,000. c.Ken,$426,000;Mark,$99,000. d.Ken,$435,000;Mark,$90,000.
a133.Ace,Bell,andColehavepartnershipcapitalaccountbalancesof$400,000each.Income andlossesaresharedequally.Coleagreestosellthree-fourthsofhisownershipinterest toAcefor$350,000andone-fourthtoBellfor$125,000.AceandBellwillusepersonal assetstopurchaseCole'sinterest.Thepartnership'sentrytorecordCole'swithdrawal fromthepartnershipwouldbe
a.Cole,Capital....................................................................... 475,000
Cash.......................................................................... 475,000 b.Cole,Capital....................................................................... 475,000
Ace,Capital............................................................... 350,000 Bell,Capital................................................................ 125,000
c.Cole,Capital....................................................................... 400,000
Ace,Capital............................................................... 300,000 Bell,Capital................................................................ 100,000
d.Ace,Capital........................................................................ 356,250 Bell,Capital......................................................................... 118,750
Cole,Capital............................................................. 475,000
a134.Whenapartnerwithdrawsfromthefirm,whichofthefollowingreflectsthecorrect partnershipeffects?
Paymentfrom Paymentfrom Partners'PersonalAssetsPartnershipAssets
a.Totalnetassets decreased decreased b.Totalcapital decreased decreased c.Totalnetassets unchanged decreased d.Totalcapital unchanged unchanged
a135.Whichofthefollowingisnotanecessaryactionthatthepartnershipmusttakeuponthe deathofapartner?
a.Determinethenetincomeornetlossfortheyeartodate. b.Discontinuebusinessoperations.
c.Closethebooks.
d.Preparefinancialstatements.
Usethefollowinginformationforquestions136–138.
OnNovember30,capitalbalancesareGray$90,000,Carr$75,000andMelton$75,000.The incomeratiosare20%,20%and60%,respectively.Graydecidestoretirefromthepartnership.
a136.ThepartnershippaysGray$105,000cashforherpartnershipinterest.AfterGray's retirement,whatisthebalanceof Carr'scapitalaccount?
a.$71,250 b.$72,000 c.$75,000 d.$97,500
AccountingforPartnerships 12-23
a137.ThepartnershippaysGray$75,000cashforherpartnershipinterest.AfterGray's retirement,whatisthebalanceofMelton'scapitalaccount?
a.$66,000 b.$75,000 c.$84,000 d.$86,250
a138.InorderforCarrandMeltontohaveequalcapitalinterestsaftertheretirementofGray, howmuchpartnershipcashwouldhavetobepaidtoGrayforherpartnershipinterest?
a.$0
b.$80,000 c.$90,000
d.AnyamountpaidtoGraywillcauseCarrandMeltontostillhaveequalcapital balances.
AdditionalMultipleChoiceQuestions
139. Allofthefollowingarecharacteristicsofpartnershipsexcept a.co-ownershipofproperty.
b.mutualagency. c.unlimitedlife.
d.association ofindividuals.
140. TheButkus,Sayers,andHalaspartnershipisterminatedwhentheclaimsofcompany creditorsexceedpartnershipassetsby$50,000.ThecapitalbalancesforButkus,Sayers, andHalasare$35,000,$5,000,and$0,respectively.Theoriginalclaimsofthecreditors werenegotiatedbySayersandHalas.Whichpartner(s)is(are)personallyandindividually liableforallpartnershipliabilities?
a.Butkus b.Sayers
c.SayersandHalas
d.Butkus,Sayers,andHalas
141. Whenapartnerinvestsnoncashassetsinapartnership,theassetsshouldberecordedat their
a.bookvalue.
b.carryingvalue.
c.fairmarketvalue. d.originalcost.
142. ThepartnershipagreementofRossiandPetryprovidesforsalaryallowancesof$45,000 toRossiand$35,000toPetry,withtheremainingincomeorlosstobedividedequally. Duringtheyear,RossiandPetryeachwithdrawcashequalto80%oftheirsalary allowances.Ifpartnershipnetincomeis$100,000,Rossi'sequityinthepartnershipwould a.increasemorethanPetry’s.
b.decreasemorethanPetry's.c.increasethesameasPetry's. d.decreasethesameasPetry's.
12-24TestBankforAccountingPrinciples,EighthEdition
143. Whichofthefollowingstatementsiscorrect?
a.Salariestopartnersandinterestonpartners'capitalareexpensesofthepartnership.b.Salariestopartnersareexpensesofthepartnershipbutnotinterestonpartners'
capital.
c.Interestonpartners'capitalisanexpenseofthepartnershipbutnotsalariesto partners.
d.Neithersalariestopartnersnorinterestonpartners'capitalareexpensesofthe partnership.
144. Intheliquidationofapartnership,thegainsandlossesfromassetssoldare a.dividedequallyamongthepartners.
b.dividedamongthepartnersinthestatedincomeratio.
c.dividedamongthepartnersinproportiontotheircapitalequityinterests. d.ignored.
145. Ifapartnerwithacapitaldeficiencyisunabletopaytheamountowedtothepartnership, thedeficiencyisallocatedtothepartnerswithcreditbalances
a.equally.
b.onthebasisoftheirincomeratios.
c.onthebasisoftheircapitalbalances.
d.onthebasisoftheiroriginalinvestments.
146. Anentryisnotrequiredintheliquidationofapartnershiptorecordthe a.paymentofcashtocreditors.
b.distributionofcashtothepartners. c.saleofnoncashassets.
d.allocationofacapitaldeficiencytopartnerswithcreditbalanceswhenthedeficient partnerisexpectedtopaythedeficiency.
147. Thefirststepintheliquidationofapartnershipisto
a.allocateagainorlossonrealizationtothepartners. b.distributeremainingcashtothepartners.
c.paypartnershipliabilities.
d.sellnoncash assetsandrecognizeagainorlossonrealization.
148. BakerjoinsthepartnershipofKubekandMusialbypaying$30,000incash.Ifthenet assetsofthepartnershiparestillthesameamountafterBakerhasbeenadmittedasa partner,thenBaker
a.musthavebeenadmittedbyinvestmentofassets.
b.musthavebeenadmittedbypurchaseofapartner'sinterest. c.musthavereceivedabonusuponbeingadmitted.
d.couldhavebeenadmittedbyaninvestmentofassetsorbyapurchaseofapartner's interest.
149. Loweisadmittedtoapartnershipwitha25%capitalinterestbyacashinvestmentof $120,000.Iftotalcapitalofthepartnershipis$520,000beforeadmittingLowe,thebonus toLoweis
a.$40,000. b.$20,000. c.$60,000. d.$80,000.
BRIEFEXERCISES
BE150
BrandyandJohnsondecidetoorganizeapartnership.Brandyinvests$25,000cash,and Johnsoncontributes$5,000andequipmenthavingabookvalueof$3,500andafairmarket valueof$10,000.
Instructions
Preparetheentrytorecordeachpartner’sinvestment.
BE151
TontoCompanyandRangerCompanydecidetomergetheirproprietorshipsintoapartnership calledWestwardHoCompany.ThebalancesheetofRangerCompanyshows:
AccountsReceivable
Less:Allowancefordoubtfulaccounts
Equipment
Less:Accumulateddepreciation
$15,000
1,500
$20,000
10,000
$13,500
$10,000
Thepartnersagreethatthenetrealizablevalueofthereceivablesis$12,500andthatthefair marketvalueoftheequipmentis$15,000.
Instructions
Indicatehowthefouraccountsshouldappearintheopeningbalancesheetofthepartnership.
BE152
TheJill&FrillCo.reportsnetincomeof$28,000.InterestallowancesareJill$3,000andFrill $5,000;partnersalaryallowancesareJill$18,000andFrill$10,000andtheremainderisshared equally.
Instructions
Indicatethedivisionofnetincometoeachpartner,andpreparetheentrytodistributethenet income.
BE153
DebaugeCo.hadbeginningcapitalbalancesonJanuary1,2008,asfollows:NickFoley$30,000 andTomWenger$25,000.Duringtheyear,drawingswereFoley$15,000andWenger$8,000. Netincomewas$50,000,andthepartnersshareincomeequally.
Instructions
Preparethepartners’capitalstatementfortheyear.
BE154
Afterliquidatingnoncashassetsandpayingcreditors,accountbalancesintheMainCo.areCash $29,000,ACapital(Cr.)$11,000,BCapital(Cr,)$8,000andCCapital(Cr.)$10,000.The partnersshareincomeequally.
Instructions
Journalizethefinaldistributionofcashtothepartners.
BE155
BarnesCompanyatDecember31hascash$40,000,noncashassets$200,000,liabilities $110,000,andthefollowingcapitalbalances:Carpenter$90,000andPendleton$40,000.The firmisliquidated,and$240,000incashisreceivedforthenoncashassets.Carpenterand Pendletonincomeratiosare60%and40%,respectively.
Instructions
Prepareacashdistributionschedule.
BE156
InNelsonCo.,capitalbalancesareOzzie$60,000andHarriet$75,000.Thepartnersshare incomeequally.Dennyisadmittedtothefirmwitha40%interestbyaninvestmentofcashof $65,000.JournalizetheadmissionofDenny.
BE157
BobandKathyarepartnerswhoshareprofits60%and40%.Theircapitalbalanceswereboth $90,000beforeBettywasadmittedtothepartnership.Bettycontributed$120,000incashtothe partnershipfora30%interest.
Instructions
ComputethecapitalbalancesofBobandKathyafterBettyisadmittedtothepartnership.
AccountingforPartnerships 12-29
BE158
CapitalbalancesinJetsonCo.areGeorge$50,000,Jane$38,000,andFrank$25,000.The partnersshareincomeequally.Frankreceives$35,000frompartnershipassetsinwithdrawing fromthefirm.
Instructions
JournalizethewithdrawalofFrank.
BE159
Mike,Andy,andJoearepartnerswhoshareprofits40%,20%,and40%.Theircapitalbalances were$630,000,$420,000,and$210,000,respectively,beforeJoe’sretirement.Joewaspaid $270,000frompartnershipassetstobuyhisinterest.
Instructions
ComputethecapitalbalancesofMikeandAndyafterJoehaswithdrawn.
EXERCISES
Ex.160
DickAcerandGeorgeDooleydecidetoformapartnership.Acerinvests$25,000cashand accountsreceivableof$30,000lessallowancefordoubtfulaccountsof$2,000.Dooley contributes$20,000cashandequipmenthavinga$6,000bookvalue.Itisagreedthatthe allowanceaccountshouldbe$3,000andthefairmarketvalueoftheequipmentis$10,000.
Instructions
Preparethenecessaryjournalentrytorecordtheformationofthepartnership.
Ex.161
KenLottandJimStineoperateseparateautorepairshops.OnJanuary1,2008,theydecideto combinetheirseparatebusinesseswhichwereoperatedasproprietorshipstoformL&SAuto Repair,apartnership.Informationfromtheirseparatebalancesheetsispresentedbelow:
Cash
Accountsreceivable
Allowancefordoubtfulaccounts Accountspayable
Notespayable Salariespayable Equipment
Accumulatedamortization—Equipment
LottAutoRepair $10,000
9,000 1,000 5,000
— 1,000
12,000 2,000
StineAutoRepair $12,000
10,000 500 6,000 3,000 1,500 24,000 4,000
ItisagreedthattheexpectedrealizablevalueofLott'saccountsreceivableis$8,000andStine's receivablesis$7,000.ThefairmarketvalueofLott'sequipmentis$13,000andthevalueof Stine'sequipmentis$20,000.Itisfurtheragreedthatthenewpartnershipwillassumeall liabilitiesoftheproprietorshipswiththeexceptionofthenotespayableonStine'sbalancesheet whichhewillpayhimself.
Instructions
Preparethejournalentriesnecessarytorecordtheformationofthepartnership.
AccountingforPartnerships 12-31
Ex.162
TheSmithandWilsonpartnershipreportsnetincomeof$45,000.Partnersalaryallowancesare Smith$18,000andWilson$12,000.Anyremainingincomeisshared60:40.
Instructions
Determinetheamountofnetincomeallocatedtoeachpartner.
Ex.163
Bass,Ellis,andGorenformedapartnershiponJanuary1,2008.Bassinvested$60,000,Ellis $60,000andGoren$140,000.Basswillmanagethestoreandwork40hoursperweekinthe store.Elliswillwork20hoursperweekinthestore,andGorenwillnotwork.Eachpartner withdrew30percentofhisincomedistributionduring2008.Iftherewasnoincomedistributionto apartner,therewerenowithdrawalsofcash.
Instructions
Computethepartners'capitalbalancesattheendof2008underthefollowingindependent conditions:(Hint:useTaccountstodetermineeachpartner'scapitalbalances.)
Ex.163 (cont.)
(1) Netincomeis$120,000 andtheincomeratioisBass40%,Ellis35%,andGoren25%.
(2) Netincomeis$140,000andthepartnershipagreementonlyspecifiesasalaryof$50,000to Bassand$30,000toEllis.
(3) Netincomeis$86,000andthepartnershipagreementprovidesfor(a)asalaryof$40,000to Bassand$40,000toEllis,(b)interestonbeginningcapitalbalancesattherateof10%,and (c)anyremainingincomeorlossistobesharedbyBass40%,Ellis35%,andGoren25%.
Ex.164
CarlinandLarvehaveapartnershipagreementwhichincludesthefollowingprovisionsregarding sharingnetincomeornetloss:
1.Asalaryallowanceof$54,000toCarlinand$36,000toLarve.
2.Aninterestallowanceof10%oncapitalbalancesatthebeginningoftheyear. 3.Theremaindertobedivided60%toCarlinand40%toLarve.
ThecapitalbalanceonJanuary1,2008,forCarlinandLarvewas$90,000and$120,000, respectively.During2008,theCarlinandLarvePartnershiphadsalesof$495,000,costofgoods soldof$290,000,andoperatingexpensesof$75,000.
Instructions
PrepareanincomestatementfortheCarlinandLarvePartnershipfortheyearendedDecember 31,2008.Asapartoftheincomestatement,includeaDivisionofNetIncometoeachofthe partners.
Ex.165
Hope&CrosbyCo.reportsnetincomeof$34,000.Thepartnershipagreementprovidesfor annualsalariesof$24,000forHopeand$15,000forCrosbyandinterestallowancesof$4,000to Hopeand$6,000toCrosby.Anyremainingincomeorlossistobeshared70%byHopeand 30%byCrosby.
Instructions
Computetheamountofnetincomedistributedtoeachpartner.
Ex.166
TheadjustedtrialbalanceoftheKarrisandWattsPartnershipfortheyearendedDecember31, 2008,appearsbelow:
KARRISANDWATTSPARTNERSHIP AdjustedTrialBalance
FortheYearEndedDecember31,2008
CurrentAssets....................................................................................... PlantAssets.......................................................................................... CurrentLiabilities................................................................................... Long-termDebt..................................................................................... Karris,Capital........................................................................................ Karris,Drawing...................................................................................... Watts,Capital........................................................................................ Watts,Drawing...................................................................................... Sales..................................................................................................... CostofGoodsSold............................................................................... OperatingExpenses..............................................................................
Debit
19,000 80,000
4,000
7,000
62,000
23,000195,000
Credit
7,000 50,000 20,000
18,000
100,000
195,000
Thepartnershipagreementstipulatesthatadivisionofpartnershipnetincomeornetlossistobe madeasfollows:
1.Asalaryallowanceof$12,000toKarrisand$23,000toWatts. 2.Theremainderistobedividedequally.
Instructions
(a) Prepareaschedulewhichshowsthedivisionofnetincometoeachpartner.
(b) Preparetheclosingentriesforthedivisionofnetincomeandforthedrawingaccountsat December31,2008.
Ex.167
KimCareyandMaryHallhaveformedtheCHPartnership,andhavecapitalbalancesof $130,000and$100,000,respectively,onJanuary1,2008.OnJune1,2008,Hallinvestedan additional$30,000.Alsoduringtheyear,Careywithdrew$60,000andHallwithdrew$48,000. Salesfortheyearamountedto$360,000andexpenseswere$260,000.CareyandHallshare incomeandlossesona3:1basis.
Instructions
(a) PreparetheclosingentriesatDecember31,2008,fortheCHPartnership. (b) Prepareapartners'capitalstatementfor2008.
Ex.168
Prepareapartners'capitalstatementforCrestwoodCompanybasedonthefollowinginformation.
Crest Wood
Beginningcapital $30,000 $27,000 Drawingsduringyear 15,000 8,000
Netincomewas$35,000,andthepartnersshareincome60%toCrestand40%toWood.
Ex.169
OnDecember31,ThompsonCompanyhascash$30,000,noncashassets$150,000,and liabilities$80,000.CapitalbalanceswereTerry$55,000andNott$45,000.Thefirmisliquidated, andthenoncashassetsaresoldfor$125,000.TerryandNottshareincomeina60:40ratio.
Instructions
Prepareentriestorecord(a)thesaleofnoncashassetsand(b)theallocationofthegain(loss) onliquidationtothepartners.
AccountingforPartnerships 12-37
Ex.170
TheABCPartnershipistobeliquidatedandyouhavebeenhiredtoprepareaScheduleofCash Paymentsforthepartnership.PartnersA,B,andCshareincomeandlossesintheratioof4:3:3, respectively.Assumethefollowing:
1.Thenoncashassetsweresoldfor$75,000. 2.Liabilitieswerepaidinfull.
3.Theremainingcashwasdistributedtothepartners.(Ifanypartnerhasacapital deficiency,assumethatthepartnerisunabletomakeupthecapitaldeficiency.)
Instructions
Usingtheaboveinformation,completetheScheduleofCashPaymentsbelow:
ABCPARTNERSHIP ScheduleofCashPayments
Item Cash+ Balancesbefore
liquidation 25,000+
Noncash
Assets=
150,000=
Liabilities+
50,000 +
A Capital+
25,000+
B Capital+
35,000+
C Capital
65,000
Ex.171
TheODSPartnershipistobeliquidatedwhentheledgershowsthefollowing:
Cash
NoncashAssets Liabilities
Oslo,Capital Decker,Capital Silas,Capital
$50,000 200,000 50,000 75,000 100,000 25,000
Oslo,Decker,andSilas'incomeratiosare6:3:1,respectively.
Instructions
Prepareseparateentriestorecordtheliquidationofthepartnershipassumingthatthenoncash assetsare soldfor$150,000incash.
Ex.172
Priortothedistributionofcashtothepartners,theaccountsofABCCompanyare:Cash $30,000,AltCapital(Dr.)$10,000,BellCapital(Cr.)$25,000,andColeCapital(Cr.)$15,000. Theyshareincomeona5:3:2basis.
Instructions
Prepareentriestorecord(a)theabsorptionofAlt'scapitaldeficiencybytheotherpartnersand (b)thedistributionofcashtothepartnerswithcreditbalances.
AccountingforPartnerships 12-39
Ex.173
TheGFPartnershipisliquidatedwhentheledgershows:
Cash
NoncashAssets Liabilities
Grant,Capital Fleming,Capital
$60,000 90,000 44,000 100,000 6,000
GrantandFleming'sincomeratiosare3:2,respectively.
Instructions
Prepareascheduleofcashpayments,assumingthatthenoncashassetsweresoldfor$70,000. Assumethatanypartner’scapitaldeficienciescannotbepaidtothepartnership.
Ex.174
TheHowellandParksPartnershiphaspartnercapitalaccountbalancesasfollows:
Howell,Capital Parks,Capital
$550,000 250,000
Thepartnersshareincomeandlossesintheratioof60%toHowelland40%toParks.
Instructions
PreparethejournalentryonthebooksofthepartnershiptorecordtheadmissionofTylerasa newpartnerunderthefollowingthreeindependentcircumstances.
1.Tylerpays$350,000toHowelland$150,000toParksforone-halfofeachoftheirownership interestinapersonaltransaction.
2.Tylerinvests$850,000inthepartnershipforaone-thirdinterestinpartnershipcapital. 3.Tylerinvests$175,000inthepartnershipforaone-thirdinterestinpartnershipcapital.
Ex.175
Key,Riser,andStoneshareincomeona6:3:1basis.Theyhavecapitalbalancesof$80,000, $60,000,and$45,000,respectively,whenHortonisadmittedtothepartnership.
Instructions
PreparethejournalentrytorecordtheadmissionofHortonintothepartnershipifHorton purchasesone-halfofKey'sequityfor$45,000;one-halfofRiser'sequityfor$22,000;andone-thirdofStone'sequityfor$18,000.
Ex.176
TomRosenandJoeFinneysharepartnershipincomeona3:2basis.Theyhavecapitalbalances of$560,000and$280,000,respectively,whenEdVannisadmittedtothepartnership.
Instructions
PreparethejournalentrytorecordtheadmissionofVannundereachofthefollowing assumptions:
(a)Vanninvests$340,000fora25%ownershipinterest. (b)Vanninvests$200,000fora25%ownershipinterest.
(c)Vanninvestsanamountthatgiveshima25%ownershipinterest.
Ex.177
CindyMillsandAmyPetershavecapitalaccountsof$480,000and$420,000,respectively.Bill DennyandMarkMorganaretojointhepartnership.Dennyinvests$450,000inthepartnership forwhichhereceivesacapitalcreditof$450,000.Morganpurchasesaone-halfinterestfrom Millsfor$300,000andaone-fourthinterestfromPetersfor$90,000.
Instructions
(a) PreparethejournalentriestorecordtheadmissionofDennyandMorgantothepartnership.
(b) DeterminethecapitalbalancesofthepartnersaftertheadmissionofDennyandMorgan.
AccountingforPartnerships 12-43
Ex.178
Adel,Gaines,andYockeyshareincomeandlossesinaratioof3:2:5,respectively.Thecapital accountbalancesofthepartnersareasfollows:
Adel,Capital Gaines,Capital Yockey,Capital
$600,000 360,000 240,000
Instructions
PreparethejournalentryonthebooksofthepartnershiptorecordthewithdrawalofYockey underthefollowingindependentcircumstances:
1.ThepartnersagreethatYockeyshouldbepaid$280,000bythepartnershipforhisinterest. 2.ThepartnersagreethatYockeyshouldbepaid$180,000bythepartnershipforhisinterest.
3.AdelagreestopayYockey$180,000forone-halfofhiscapitalinterestandGainesagreesto payYockey$180,000forone-halfofhiscapitalinterestinapersonaltransactionamongthe partners.
Ex.179
Dixon,Larsen,andPolleyhavecapitalbalancesof$150,000,$100,000,and$75,000, respectively,andtheirincomeratiosare4:2:4.
Instructions
RecordthewithdrawalofPolleyfromthepartnershipundereachofthefollowingassumptions: 1.Polleyispaid$75,000frompartnershipassets.
2.Polleyispaid$90,000frompartnershipassets. 3.Polleyispaid$55,000frompartnershipassets.
COMPLETIONSTATEMENTS
180.The______________Actprovidesthebasicrulesfortheformationandoperationof partnershipsinmorethan90%ofthestates.
181.Apartnershipcharacteristicwhichenableseachpartnertoactonbehalfofthepartnership whenengaginginpartnershipbusinessiscalled______________.
182.Amajordisadvantageofthepartnershipformoforganizationis______________,which makeseach partnerpersonallyandindividuallyliableforallpartnershipliabilities.
183.Thecapitalaccountsindicateeachpartner's______________investment,whilethe partner'sdrawingaccountsare______________owner'sequityaccounts.
184.The______________ratiospecifiesthebasisforsharingincomeandlosses.
185.Anincomeratiobasedon______________balancesmaybeappropriatewhenthe amountoffundsinvestedinthepartnershipiscriticaltothepartnership.
186.A______________allowanceor______________onpartners'capitalaccountsarenot expensesofthepartnershipwhentheyarespecifiedasthebasisforsharingincomeand losses.
187.Inliquidatingapartnership,itisnecessarytoconvert______________intocashandto allocateany______________or______________tothepartnersbasedontheirincome ratios.
188.Adebitbalanceinapartner'scapitalaccountiscalleda_____________.
a189.Anewpartnermaybeadmittedtothepartnershipby______________theinterestofan existingpartner,orby______________assetsinthepartnership.
a190.Whenanewpartner'scapitalinterestonthedateofadmittanceislessthanhisorher investmentinthefirm,a______________resultsforthe______________partner(s).
a191.Ifabonusisgiventoanewpartner,theoldpartners'capitalaccountsaredecreased basedontheir______________ratiopriortotheadmissionofthenewpartner.
MATCHING
192.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A. MutualagencyB. Unlimitedliability
C.Partnershipagreement D.Incomeratio
E. Partners'capitalstatement F. Admissionbyinvestment
G. Purchaseofaninterest H. Partnershipliquidation
I. Capitaldeficiency
J. Distributionofcashtopartnersin liquidationofapartnership.
____ 1.Eachpartnerispersonallyandindividuallyliableforpartnershipdebts.
____ 2.Madeonbasisofpartners'capitalbalances.
____ 3.Explainschangesinindividualpartner'scapitalaccountsduringaperiod.
____ 4.Eachpartnercanbindthepartnershipsolongastheactionappearstobeappropriate forthepartnership.
____ 5.Businessterminates.
____a6.Resultsinanincreaseintotalnetassetsandtotalcapitalofthepartnership.
____ 7.Capitalaccountwithadebitbalance.
____ 8.Thebasisforsharingincomeandlosses.
____a9.Totalnetassetsandtotalcapitalofthepartnershipdonotchange.
____10.Writtenorverbalcontractestablishingdutiesandresponsibilitiesofpartners.
SHORT-ANSWERESSAYQUESTIONS
S-AE193
Identifyandexplaintheprincipal characteristicsofthepartnershipformofbusinessorganization.
S-AE194
Apartnershipisliquidatedbysellingthenon-cashassets,payingthecreditorsinfull,and distributingtheremainingassetstothepartners.Explainwhygainsandlossesontherealization ofnon-cashassetsaredistributedtothepartnersbasedontheirincomeratios,whereascashis distributedtothepartnersbasedontheirequityasshownintheircapitalaccounts.Whateffects doesthepaymentornonpaymentofacapitaldeficiencyhaveonthedistributionofcashtothe partners?
S-AE195(Ethics)
Threedoctors,FrankWhite,MarkRosen,andSteveJenner,openedafamilymedicineclinic.All threedoctorshadbeenlifelongfriends.Allbelongedtothesamereligiousfaith.Allwerevery activeinchurchaffairs,andtriedtomoldtheirprofessionalbehaviortotheirreligiousbeliefs.
Aboutayearago,Dr.Whiteannouncedthathewasleavingthechurch.Theothersnoticedthat hispersonalityalsobegantochange.Hebegantodressinflamboyantstyles,andhestarted wearingexpensive-lookingjewelry.Histemperbecameunstable—oneminutehewascalm,and thenext,hemightbethrowingchartsdownthehallandscreaming.Hestartedcomingtothe officelate,andforgettingtoseesomeofhispatientsbeforeheleftagain.Theothertwoatfirst werestunnedatthechanges.Hiswifeaskedthemwhethertheythoughthemighthaveadrinking problem.Afterfinallydecidingtoinvestigate,theyfoundwhatlookedtothemlikealargeamount ofcocaine,(hundredsofplasticsacksofwhitepowder)tuckedawayinboxesofoldmedical equipment.
Frightened,Drs.RosenandJennerdecidedtoactquickly.Theirpartnershipagreementsaid nothingaboutdissolvingthepartnership—onlyaboutwhattodoifoneofthemdied.They thereforesecretlyrentedofficespaceacrosstownandbegantomovethemostnecessary equipmentandsuppliestothenewoffice.Amonthlater,theychangedthelocksontheoldoffice andbeganseeingpatientsinthenewofficewithoutanynoticetoDr.Whiteatall.Dr.White simplycameinataroundteno'clockasusual,andfoundhimselflockedoutofanemptyoffice.
Required:
DidDrs.RosenandJenneractethicallyintheirendingofthepartnership?Explain.
S-AE196(Communication)
MattJonesandJerryWatsonbegandetailworkonautomobilesasahobby.First,theyuseda mail-orderkittoadd"pinstriping"totheirowncars,a1968Mustanganda1970GTOJudge, respectively.ThenMattaddedmoreflourishes,includinghisname.Jerrypracticedpainting flamesonhisJudge.Gradually,theircarsbecamerecognizedaroundtownandothersbeganto askthemtoaddaflourishhereortheretotheircars.Theyweretalkedintoattendinga"muscle car"showinanearbylargecitytoshowofftheircars.Theyhadmorerequestsforworkthanthey couldhandle.Now,theyareconsideringquittingtheirotherjobsandmakingthisapermanent business.Jerry,forexample,turnsdownmorejobsthanheacceptsandstillgetsmorerequests everyweek.
S-AE196(cont.)
MattandJerryareunsurehowtoproceed.Theyliketheideaofapartnership,buttheyonlyknow theyworkwelltogether—thingslikehowtosplitpaymenthavejustbeensettledindividuallyfor eachjob,dependingonwhichonedidmorework.Matt'sfathersuggestsawrittenpartnership agreement.Mattdisagrees.Hebelievesthatitwillspoilthewholearrangementbyreducingitto words.
Required:
WriteabriefnotetoMattexplainingwhyheneedsapartnershipagreement.
CHAPTER13
CORPORATIONS:ORGANIZATIONANDCAPITALSTOCKTRANSACTIONS
CHAPTERSTUDYOBJECTIVES
1.Identifythemajorcharacteristicsofacorporation.
2.Differentiatebetweenpaid-incapitalandretainedearnings.
3.Recordtheissuanceofcommonstock.
4.Explaintheaccountingfortreasurystock.
5.Differentiatepreferredstockfromcommonstock.
6.Prepareastockholders'equitysection.
7.Computebookvaluepershare.
TRUE-FALSESTATEMENTS
1. A corporationisnotanentitywhichis separateand distinctfrom itsowners.
2. A corporationcanbeorganizedforthepurposeof makingaprofitor it maybenonprofit.
3. A corporationactsunderits ownname ratherthaninthename of its stockholders.
4. Ifacorporationpaystaxesonitsincome,thenstockholderswillnothavetopaytaxeson thedividendsreceivedfrom thatcorporation.
5. A corporationmust be incorporatedineachstateinwhichitdoesbusiness.
6. A stockholderhastherightto voteintheelectionof theboard ofdirectors.
7. Aproxyisalegaldocumentthatinstructsastockholder’sagenthowtovotesharesof stock for thestockholder.
8. Assoon as acorporationisauthorizedtosell stock,an accountingjournalentry shouldbe maderecordingthetotalvalueof thesharesauthorized.
9. Theparvalueofcommonstockmustalwaysbeequaltoitsmarketvalueonthedatethe stockisissued.
10. Whenno-parvaluestockdoesnothaveastatedvalue,theentireproceedsfromthe issuance ofthestock becomes legalcapital.
11. Acorporationcanissuemoresharesthanitisauthorizedinitscharter,iftheboardof directorsapprovesof anincreaseinthenumberof authorizedshares.
12. Themarketvalueofacorporation's stockisdeterminedbythenumberofsharesthatthe corporation has beenauthorized to issue.
13. Eachstockholderinacorporationhasaseparatecapitalaccountinthestockholders' equitysection of thebalancesheet.
14. Thestockholders'equitysectionofacorporation'sbalancesheetconsistsof(1)paid-in capital, (2)retainedearnings,and(3)drawings.
15. Dividendsaredeclaredout ofretainedearnings.
16. Whenacorporationhasonlyoneclass of capitalstock,it is identifiedaspreferredstock.
17. Retainedearningsare apartof stockholders'equity.
Corporations:OrganizationandCapitalStockTransactions 13-5
18. Retainedearningsaresubtractedfrompaid-incapitaltoarriveattotalstockholders' equity.
19. Stockcanbeissuedonly inexchangefor cash.
20. Theparvalueofstockissuedfornoncashassetsisneverafactorindeterminingthecost of the assetsreceived.
21. Theacquisitionoftreasurystockbyacorporationincreasestotalassetsandtotal stockholders' equity.
22. Treasurystockshouldnotbeclassifiedasacurrent asset.
23. Treasury stockpurchasedfor$25persharethatisreissued at$20pershare,resultsina Losson SaleofTreasuryStockbeingrecognizedontheincomestatement.
24. Treasurystockisacontrastockholders'equityaccount.
25. Thenumberofcommonsharesoutstandingcanneverbegreaterthanthenumberof shares issued.
26. Preferredstock hascontractualpreferenceover commonstockincertainareas.
27. Preferredstockholdersgenerallydo nothavetherighttovoteforthe board of directors.
28. Dividendsinarrearsoncumulativepreferredstockareconsidereda liability.
29. Inpublishedannualreports,subclassificationswithinthestockholders'equitysectionare seldompresented,butadditionalinformationisfrequentlyincludedinthefootnotestothe financialstatements.
30. Bookvaluepershareofcommonstockisthesameamountasthemarketvalueper share.
Additional True-FalseQuestions
31. A successfulcorporationcan haveacontinuousandperpetuallife.
32. OrganizationalcostsarecapitalizedbydebitinganintangibleassetentitledOrganization Costs.
33. Thecashproceedsfromissuingparvaluestockmaybeequaltoorgreaterthan,butnot less thanparvalue.
34. Thecostofanoncashassetacquiredinexchange forcommonstockshouldbeeitherthe fairmarketvalueoftheconsiderationgivenuportheconsiderationreceived,whicheveris more clearlydeterminable.
35. Underthecostmethod,TreasuryStockisdebitedatthepricepaidtoreacquirethe shares, andthesameamountiscreditedtoTreasuryStockwhenthe sharesaresold.
36. Bookvaluepershareis thesamethingas liquidationvalueper share.
MULTIPLECHOICEQUESTIONS
37. Whichoneof thefollowingisaprivatelyheldcorporation? a.Intel
b.GeneralElectric c.CaterpillarInc.d.CargillInc.
38. ThedominantformofbusinessorganizationintheUnitedStatesintermsofdollarsales volume,earnings,andemployees is
a.thesoleproprietorship. b.thepartnership.
c.thecorporation. d.notknown.
39. Underthecorporateformofbusinessorganization
a.a stockholderispersonallyliableforthedebtsof thecorporation.
b.stockholders'actscanbindthecorporationeventhoughthestockholdershavenot been appointedasagents of thecorporation.
c.thecorporation'slife isstipulated inits charter.
d.stockholderswishingtoselltheircorporationsharesmustgettheapprovalofother stockholders.
40. Stockholdersof acorporationdirectlyelect a.thepresidentof thecorporation.
b.theboardof directors.
c.thetreasurerofthecorporation.
d.allof theemployeesof thecorporation.
41. Thechief accountingofficerinacompanyisknownasthe a.controller.
b.treasurer.
c.vice-president. d.president.
42. Afactorwhichdistinguishesthecorporateformoforganizationfromasoleproprietorship orpartnershipisthata
a.corporationis organizedforthepurposeof makingaprofit.
b.corporationissubjecttonumerousfederalandstategovernmentregulations. c.corporationisanaccountingeconomicentity.
d.corporation’stemporaryaccountsareclosedattheend oftheaccountingperiod.
Corporations:OrganizationandCapitalStockTransactions 13-7
43. Whichoneof thefollowingwouldnotbeconsideredan advantage of the corporate form of organization?
a.Limitedliabilityofowners b.Separatelegalexistence c.Continuouslife
d.Governmentregulation
44. Theconceptof an"artificialbeing"referstowhichform of businessorganization? a.Partnership
b.Soleproprietorship c.Corporation
d.Limitedpartnership
45. Thetwowaysthatacorporationcanbeclassifiedbypurposeare a.generalandlimited.
b.profitandnonprofit. c.stateandfederal.
d.publiclyheldandprivatelyheld.
46. Thetwowaysthatacorporationcanbeclassifiedbyownershipare a.publiclyheldandprivatelyheld.
b.stockandnon-stock. c.insideandoutside.d.majorityandminority.
47. Whichofthefollowingwouldnotbetrue of aprivatelyheldcorporation? a.Itissometimescalleda closelyheldcorporation.
b.Its sharesareregularlytradedontheNewYork Stock Exchange. c.Itdoesnotofferitssharesfor saletothegeneralpublic.
d.Itisusuallysmallerthana publiclyheld company.
48. Whichofthefollowingisnottrueof acorporation? a.It maybuy,own,andsellproperty.
b.It maysueandbesued.
c.Theacts of itsownersbindthecorporation.
d.It mayenterintobindinglegalcontractsin its own name.
49. EdStonehasinvested$400,000inaprivatelyheldfamilycorporation.Thecorporation does not do wellandmustdeclarebankruptcy.WhatamountdoesStonestandto lose?a.Uptohistotal investmentof $400,000.
b.Zero.
c.The$400,000plusanypersonalassetsthecreditors demand. d.$200,000.
50. Whichofthefollowingstatementsreflectsthetransferabilityofownershiprightsina corporation?
a.Ifa shareholderdecidesto transferownership,hemust transferallofhisshares. b.Ashareholdermaydisposeof partor allof hisshares.
c.A shareholdermustobtainpermissionfromtheboardof directorsbeforesellingshares. d.Ashareholdermustobtainpermissionfromatleastthreeotherstockholdersbefore
sellingshares.
13-8
51. A corporateboardofdirectorsdoesnotgenerally a.selectofficers.
b.formulateoperatingpolicies. c.declaredividends.
d.executepolicy.
52. A typicalorganizationchart showingdelegationof authoritywouldshow a.stockholdersdelegatingtotheboard of directors.
b.theboardof directorsdelegatingtostockholders.
c.thechief executiveofficerdelegatingtotheboard of directors. d.thecontrollerdelegatingtothechiefexecutiveofficer.
53. Theofficerwhoisgenerallyresponsibleformaintainingthecashpositionofthe corporation is the
a.controller. b. treasurer. c.cashier.
d.internalauditor.
54. Thechief accountingofficerinacorporationis the a.treasurer.
b.president. c.controller.
d.vice-presidentoffinance.
55. Theabilityofacorporationtoobtaincapitalis
a.enhancedbecauseof limitedliabilityandeaseofsharetransferability. b.lessthanapartnership.
c.restrictedbecause ofthe limitedlifeof thecorporation. d.aboutthesame asapartnership.
56. Whichofthefollowingstatements concerningtaxationisaccurate?
a.Partnerships paystateincometaxesbutnotfederalincometaxes. b.Corporationspay federal income taxes butnotstateincome taxes. c.Corporationspayfederaland stateincometaxes.
d.Onlytheownersmustpaytaxesoncorporateincome.
57. Whichofthefollowingstatementsisnotconsideredadisadvantageofthecorporateform oforganization?
a.Additionaltaxes
b.Governmentregulations
c.Limitedliabilityofstockholders
d.Separationof ownershipandmanagement
58. Whatis ordinarilythefirststepintheformationofa corporation? a.Developmentofby-lawsforthecorporation
b.Issuanceof thecorporatecharter
c.Applicationfor incorporationtothe appropriate SecretaryofState d.RegistrationwiththeSEC
Corporations:OrganizationandCapitalStockTransactions 13-9
59. Whichoneof thefollowingisnotanownership right ofastockholderinacorporation? a.Tovoteintheelectionof directors
b.Todeclaredividends onthecommonstock c.Toshareinassetsuponliquidation
d.Toshareincorporateearnings
60. Ifno-parstock isissuedwithoutastatedvalue,then a.thepar valueis automatically$1 pershare.
b.theentire proceedsareconsideredto be legalcapital. c.thereis nolegalcapital.
d.thecorporationisautomaticallyin violationofits statecharter.
61. Ifastockholdercannotattendastockholder's meeting,hemaydelegatehisvotingrights bymeansof
a.an absenteeballot. b.aproxy.
c.a certifiedletter. d.atelegram.
62. Ifa corporationhasonlyoneclassof stock,itisreferredto as a.ClasslessStock.
b.PreferredStock. c.SolitaryStock.d.CommonStock.
63. Thetermresidualclaimreferstoashareholder'srightto a.receivedividends.
b.shareinassetsuponliquidation.
c.acquireadditionalshares whenoffered. d.exerciseaproxyvote.
64. Whichofthefollowingfactors doesnotaffecttheinitialmarketpriceofa stock? a.Thecompany'santicipatedfutureearnings
b.Theparvalueof thestock
c.Thecurrentstateof theeconomy
d.Theexpecteddividendratepershare
65. Ifan investmentfirm underwritesastockissue,the
a.riskof beingunabletoselltheshares stays withthe issuingcorporation. b.corporationobtainscash immediatelyfromtheinvestmentfirm.
c.investmentfirm hasguaranteedprofitsonthesaleofthestock. d.issuanceofstockis likelytobedirectlyto creditors.
66. Theparvalueofastock a.is legallysignificant.
b.reflectsthemostrecentmarket price. c.isselectedbythe SEC.
d.isindicativeof the worthof thestock.
13-10
67. Acorporation hasthefollowingaccountbalances:Commonstock,$1parvalue,$30,000; Paid-in CapitalinExcess ofParValue,$1,350,000.Basedonthisinformation,the
a.legalcapitalis$1,380,000.
b.numberof sharesissuedare30,000.
c.numberof sharesoutstanding are1,380,000. d.averagepricepershareissuedis$4.60.
68. Theauthorizedstock of acorporation
a.onlyreflectstheinitialcapital needsofthecompany. b.isindicatedinits by-laws.
c.is indicatedinitscharter.
d.mustberecordedinaformalaccountingentry.
69. Owners'equityfor acorporationis identified aseach ofthefollowingexcept a.corporatecapital.
b.paid-incapital.
c.shareholders'equity. d.stockholders'equity.
70. Retainedearnings
a.isuniquetothecorporateformofbusiness.
b.isanoptionalaccountinthepartnershipformofbusiness. c.reflectscashpaidinbyshareholderstodate.
d.isclosed attheendof the year.
71. Dividendsaredeclaredout of a.CapitalStock.
b.Paid-inCapitalinExcessofPar Value. c.RetainedEarnings.
d.TreasuryStock.
72. Retainedearningsis
a.alwaysequaltotheamountofcashthatthecorporationhasgeneratedfrom operations.
b.a part ofthepaid-incapitalof thecorporation.
c.a partofthestockholders'claimonthetotal assetsofthecorporation. d.closedat theendof eachaccountingperiod.
73. Whenstockisissuedforlegalservices,thetransactionisrecordedbydebiting OrganizationExpenseforthe
a.statedvalueofthestock. b.parvalueof thestock.
c.marketvalueof thestock. d.bookvalueof thestock.
74. IfVickersCompanyissues2,000sharesof $5par valuecommonstockfor$140,000, a.CommonStock willbe creditedfor$140,000.
b.Paid-InCapitalinExcessofPar Valuewillbecreditedfor $10,000.c.Paid-InCapitalin ExcessofPar Valuewillbecreditedfor $130,000. d.Cashwill bedebitedfor $130,000.
Corporations:OrganizationandCapitalStockTransactions 13-11
75. Ifcommonstockisissuedforanamountgreaterthanparvalue,theexcessshouldbe creditedto
a.Cash.
b.RetainedEarnings.
c.Paid-inCapitalinExcessofPar Value. d.LegalCapital.
76. Ifstockisissuedforanoncashasset,theassetshouldberecordedonthebooksofthe corporation at
a.fairmarketvalue. b.cost.
c.zero.
d.a nominalamount.
77. Ifstockis issuedforlessthanpar value,the accounta.Paid-InCapitalin ExcessofPar Valueis credited.
b.Paid-InCapitalinExcessofParValueisdebitedifadebitbalanceexistsinthe account.
c.Paid-InCapitalinExcessofParValueisdebitedifacreditbalanceexistsinthe account.
d.RetainedEarningsiscredited.
78. Thesaleof commonstockbelowpar
a.isacommonoccurrenceinmoststates. b.isnotpermittedinmost states.
c.isapracticethatmostshareholdersencourage.
d.requiresthataliabilityberecordedforthedifferencebetweenthesalespriceandthe parvalueof theshares.
79. Paid-InCapitalin ExcessofStatedValue
a.iscreditedwhenno-parstockdoesnothaveastatedvalue. b.isreportedaspart ofpaid-incapitalonthebalancesheet.c.representstheamountof legalcapital.
d.normallyhas a debitbalance.
80. Aseparatepaid-incapitalaccountisusedtorecordeachofthefollowingexceptthe issuance of
a.no-parstock.
b.par valuestock.
c.stated valuestock.
d.treasurystockabovecost.
81. BeckerCompany isapubliclyheldcorporation whose$1parvaluestockisactivelytraded at$20pershare.Thecompanyissued2,000sharesofstocktoacquirelandrecently advertised at$50,000.Whenrecordingthistransaction, Becker Companywill
a.debitLandfor $50,000.
b.creditCommonStockfor $40,000. c.debitLandfor $40,000.
d.creditPaid-InCapitalinExcessofParValuefor $48,000.
13-12
82. SimonCompanyissued6,000sharesofits$5parvaluecommonstockinpaymentofits attorney'sbillof$45,000.Thebillwasforservicesperformedinhelpingthecompany incorporate. Simonshouldrecordthistransactionbydebiting
a.LegalExpensefor $30,000. b.LegalExpensefor $45,000.
c.OrganizationExpensefor $30,000. d.OrganizationExpensefor $45,000.
83. Inthefinancialstatements,organizationcostsappears
a.immediatelybelowRetainedEarningsinthestockholders' equity section. b.intheincomestatement.
c.aspartof paid-in capitalinthe stockholders' equitysection. d.asanintangibleasset.
84. Whichofthefollowingrepresentsthelargestnumberof commonshares? a.Treasuryshares
b.Issuedshares
c.Outstandingshares d.Authorizedshares
85. NewCorp.issues1,000sharesof$10parvaluecommonstockat$14pershare.When the transactionisrecorded,creditsaremadeto
a.CommonStock$10,000andPaid-inCapitalin Excess of StatedValue$4,000. b.CommonStock$14,000.
c.CommonStock $10,000andPaid-inCapitalinExcess of Par Value$4,000. d.CommonStock$10,000andRetainedEarnings$4,000.
86. IfKinerCompanyissues1,000sharesof$5parvaluecommonstockfor$70,000,the account
a.CommonStockwillbe creditedfor$5,000.
b.Paid-inCapitalinExcessofPar Valuewill becreditedfor $5,000.c.Paid-inCapitalin ExcessofParValuewillbecreditedfor $70,000. d.Cashwill bedebitedfor $65,000.
87. JansenPackagingCorporationbeganbusinessin2008byissuing40,000sharesof$5 parcommonstockfor$8pershareand10,000sharesof6%,$10parpreferredstockfor par.Atyearend,thecommonstockhadamarket value of$10.OnitsDecember31,2008 balance sheet, JansenPackagingwould report
a.CommonStockof$400,000. b.CommonStockof$200,000. c.Common Stockof$320,000. d.Paid-InCapitalof $300,000.
88. Kim,Inc.issued5,000sharesofstockatastatedvalueof$10/share.Thetotalissueof stock soldfor $15/share.Thejournalentrytorecordthistransactionwouldincludea
a.debitto Cashfor $50,000.
b.creditto Common Stockfor $50,000.
c.credittoPaid-inCapitalinExcessofParValuefor $25,000. d.creditto CommonStockfor $75,000.
Corporations:OrganizationandCapitalStockTransactions 13-13
89. FoleyManufacturingCorporationpurchased3,000sharesofitsownpreviouslyissued $10parcommonstockfor $69,000.Asaresultofthisevent,
a.Foley’sCommonStockaccountdecreased$30,000. b.Foley’stotalstockholders’equitydecreased$69,000.
c.Foley’sPaid-inCapitalin Excessof ParValueaccountdecreased $39,000. d.All of theabove.
90. Acorporationpurchases20,000sharesofitsown$20parcommonstockfor$35per share, recordingit atcost.Whatwill bethe effectontotalstockholders’equity?
a.Increaseby$700,000 b.Decreaseby$400,000 c.Decreaseby$700,000 d.Increaseby$400,000
91. Acorporationpurchases10,000sharesofitsown$10parcommonstockfor$25per share, recordingit atcost.Whatwill bethe effectontotalstockholders’equity?
a.Increaseby$100,000 b.Decreaseby$250,000 c.Increaseby$250,000 d.Decreaseby$100,000
92. BeckhamCompanyhas1,000sharesof4%,$100parcumulativepreferredstock outstandingatDecember31, 2008.No dividendshave been paid on thisstockfor2007 or 2008.Dividendsinarrearsat December31,2008total
a.$0.b.$400.
c.$4,000. d.$8,000.
93. EphramCompanyhas2,000sharesof5%,$100parnon-cumulativepreferredstock outstandingatDecember31, 2008.No dividendshave been paid on thisstockfor2007 or 2008.Dividendsinarrearsat December31,2008total
a.$0.
b.$1,000.c.$10,000. d.$20,000.
94. RebelInc.issued2,000sharesofno-parcommonstockwithastatedvalueof$3per share.The marketpriceofthestockonthedate ofissuancewas$12pershare. Theentry to recordthistransactionincludesa
a.debitto Cashfor $6,000.
b.creditto Common Stockfor $24,000. c.creditto CommonStockfor $6,000.
d.debitto Paid-inCapitalin Excessof ParValuefor $24,000.
95. RanchoCorporationsold100sharesoftreasurystockfor$40pershare.Thecostforthe shares was$30.Theentry torecordthesalewillincludea
a.credittoGainon SaleofTreasuryStockfor $3,000.
b.creditto Paid-inCapitalfromTreasuryStockfor $1,000.c.debittoPaid-in Capitalin Excessof ParValuefor $1,000. d.credittoTreasuryStockfor $4,000.
13-14
96. Eachof thefollowingiscorrectregardingtreasurystockexceptthatit has been a.issued.
b.fullypaidfor. c.reacquired. d.retired.
97. Treasurystockis
a.stockissuedbytheU.S.TreasuryDepartment.
b.stockpurchased byacorporationandheldasan investmentin itstreasury. c.corporatestockissuedbythetreasurerof acompany.
d.a corporation'sownstockwhichhasbeenreacquiredbutnotcanceled.
98. Theacquisitionoftreasurystock byacorporation
a.increasesitstotalassetsandtotal stockholders' equity. b.decreasesitstotalassetsandtotal stockholders'equity.
c.hasnoeffectontotalassetsandtotalstockholders'equity.
d.requiresthatagain or lossberecognizedontheincomestatement.
99. Treasurystockshouldbereportedinthefinancialstatementsof acorporationasa(n) a.investment.
b.liability.
c.deductionfromtotalpaid-incapital.
d.deductionfromtotal paid-incapitalandretainedearnings.
100. A companywouldnot acquiretreasurystock a.inordertoreissuesharesto officers.
b.as anassetinvestment.
c.inordertoincreasetrading of thecompany's stock.
d.tohaveadditionalsharesavailabletouseinacquisitions of othercompanies.
101. Accountingfor treasurystock isdonebythe a.FIFOmethod.
b.LIFOmethod. c.costmethod.
d.lower ofcostormarketmethod.
102. Treasurystockisgenerallyaccountedfor bythe a.costmethod.
b.marketvaluemethod. c.parvaluemethod.
d.statedvaluemethod.
103. TreasuryStockis a(n)
a.contra assetaccount.
b.retainedearningsaccount. c.assetaccount.
d.contrastockholders’equityaccount.
Corporations:OrganizationandCapitalStockTransactions 13-15
104. FourthousandsharesoftreasurystockofMeyer,Inc.,previouslyacquiredat$12per share, aresoldat $18per share.Theentrytorecordthistransactionwill includea
a.credittoTreasuryStockfor $72,000.
b.debitto Paid-In CapitalfromTreasuryStockfor $24,000. c.debittoTreasuryStockfor $48,000.
d.creditto Paid-InCapitalfromTreasuryStockfor $24,000.
105. ReevesCompanyoriginallyissued2,000sharesof$10parvaluecommonstockfor $60,000($30pershare).Reevessubsequentlypurchases200sharesoftreasurystock for$27pershareandresellsthe200sharesoftreasurystockfor$29pershare.Inthe entry torecordthesaleof thetreasurystock,therewill bea
a.creditto Common Stockfor $5,400. b.credittoTreasuryStockfor $2,000.
c.debittoPaid-In CapitalinExcessofParValueof$6,000. d.creditto Paid-InCapitalfromTreasuryStockfor$400.
106. Whenpreferredstockiscumulative,preferreddividendsnotdeclaredinaperiodare a.consideredaliability.
b.calleddividendsinarrears. c.distributionsof earnings.d.neverpaid.
107. Whichofthefollowingisnot aright or preferenceassociatedwith preferredstock? a.Therighttovote
b.Firstclaimtodividends
c.Preferencetocorporateassetsincase of liquidation
d.Toreceivedividendsin arrears beforecommonstockholdersreceivedividends
Usethefollowing informationforquestions108and 109.
ColeCorporationissues15,000sharesof$50parvaluepreferredstockforcashat$60per share.
108. Theentrytorecordthetransactionwill consistofadebitto Cashfor $900,000 anda credit or credits to
a.PreferredStockfor $900,000.
b.PreferredStockfor$750,000andPaid-inCapitalinExcessofParValue—Preferred Stockfor $150,000.
c.PreferredStockfor $750,000andPaid-inCapitalfromPreferredStockfor$150,000. d.Paid-inCapitalfromPreferredStockfor$900,000.
109. Inthe stockholders'equitysection,theeffectsofthe transactionabove will bereported a.entirelywithinthecapitalstocksection.
b.entirelywithinthe additionalpaid-incapitalsection.
c.underboththecapitalstock andadditionalpaid-incapitalsections. d.entirelyundertheretainedearningssection.
110. Dividendsinarrearsoncumulativepreferredstock a.neverhavetobepaid.
b.mustbepaidbeforecommonstockholderscanreceivea dividend. c.shouldberecordedasacurrentliabilityuntiltheyarepaid.
d.enablethepreferredstockholderstoshareequallyincorporateearningswiththe commonstockholders.
13-16
111. Dividendsinarrearsoncumulativepreferredstock a.areconsideredtobea non-current liability.
b.areconsideredto bea currentliability.
c.onlyoccurwhenpreferreddividendshavebeendeclared.d.shouldbedisclosedinthenotestothefinancialstatements.
112. Ifpreferredstockiscumulative, the
a.preferreddividendsnot declaredinagivenyeararecalleddividendsinarrears. b.preferredshareholders andthecommonshareholdersreceiveequaldividends.
c.preferredshareholdersandthecommonshareholdersreceivethesametotaldollar amount of dividends.
d.commonshareholders willshareinthe preferreddividends.
113. TheNiceCorporationissues10,000sharesof$100parvaluepreferredstockforcashat $110pershare.TheentrytorecordthetransactionwillconsistofadebittoCashfor $1,100,000andacreditor creditsto
a.PreferredStockfor $1,100,000.
b.Paid-inCapitalfromPreferredStockfor$1,100,000.
c.PreferredStockfor $1,000,000 andRetainedEarningsfor $100,000.
d.PreferredStockfor$1,000,000andPaid-inCapitalinExcessofParValue—Preferred Stockfor $100,000.
Usethefollowing informationforquestions114–116.
TriadCorporation’sDecember31,2008balancesheetshowedthefollowing:
8%preferredstock,$20par value,cumulative,10,000sharesauthorized; 5,000sharesissued
Commonstock,$10parvalue,1,000,000sharesauthorized;650,000 sharesissued,640,000sharesoutstanding
Paid-incapitalinexcessofparvalue—preferredstock Paid-incapitalinexcessofparvalue—commonstock Retainedearnings
Treasurystock(10,000shares)
$100,000
6,500,000 20,000 9,000,000 2,500,000 210,000
114. Triaddeclaredandpaida$25,000 cashdividendonDecember 15,2008.Ifthecompany’s dividendsinarrearspriortothatdatewere$6,000,Triad’scommonstockholdersreceived a.$19,000.
b.$9,000.c.$11,000.
d.no dividend.
115. Triad’stotalpaid-incapital was a.$15,620,000.
b.$15,830,000. c.$15,410,000. d.$9,020,000.
116. Triad’stotalstockholders’equitywas a.$18,380,000.
b.$15,620,000. c.$18,170,000. d.$17,910,000.
Corporations:OrganizationandCapitalStockTransactions 13-17
117. BurgessCorporationbeganbusinessbyissuing100,000sharesof$5parvaluecommon stockfor$24pershare.Duringitsfirstyear,thecorporationsustainedanetlossof $20,000.Theyear-endbalancesheet wouldshow
a.Commonstock of $500,000.b.Commonstockof $2,400,000.
c.Totalpaid-incapitalof $2,380,000. d.Totalpaid-incapitalof $1,900,000.
Usethefollowing informationforquestions118–119.
StarrCorporation’sDecember31,2008BalanceSheetshowedthefollowing:
8%preferredstock,$20par value,cumulative,20,000shares authorized;10,000shares issued
Commonstock,$10parvalue,2,000,000sharesauthorized; 1,300,000sharesissued,1,280,000sharesoutstanding
Paid-incapitalinexcessofparvalue–preferredstock Paid-incapitalinexcessofparvalue–commonstock Retainedearnings
Treasurystock(10,000shares)
$ 200,000
13,000,000 40,000 18,000,000 5,100,000 420,000
118. Starr’stotalpaid-incapitalwas a.$31,240,000.
b.$31,660,000. c.$30,820,000. d.$18,040,000.
119. Starr’stotalstockholders’equitywas a.$36,760,000.
b.$31,240,000. c.$36,340,000. d.$35,920,000.
120. AdcockCorporationbeganbusinessbyissuing150,000sharesof$5parvaluecommon stockfor$24pershare.Duringitsfirstyear,thecorporationsustainedanetlossof $30,000.Theyear-endbalancesheet wouldshow
a.Commonstock of $750,000.b.Commonstockof $3,600,000.
c.Totalpaid-incapitalof $3,570,000. d.Totalpaid-incapitalof $2,850,000.
121. ThetrialbalanceofHackmanInc.includesthefollowingbalances:CommonStock, $39,000;Paid-inCapitalinExcessofPar,$96,000;TreasuryStock,$9,000;Preferred Stock,$30,000.Capitalstocktotals
a.$69,000. b.$126,000. c.$165,000. d.$174,000.
13-18
122. Eachof thefollowingisreportedforcommonstock exceptthe a.parvalue.
b.sharesissued.
c.sharesoutstanding. d.liquidationvalue.
123. Paid-incapitalfromtreasurystock wouldappearon abalancesheetunderthecategory a.capitalstock.
b.treasurystock.
c.additionalpaid-incapital. d.contratoowners'equity.
124. Twoclassificationsappearing inthepaid-incapitalsectionof thebalancesheetare a.preferredstockandcommonstock.
b.paid-incapitalandretainedearnings.
c.capitalstockandadditionalpaid-incapital. d.capitalstockandtreasurystock.
125. Informationthatis notgenerallyreportedfor eachclassof stockonthe balancesheetis a.the marketvalue.
b.theparvalue.
c.sharesauthorized. d.sharesissued.
126. Inpublishedannualreports
a.subclassificationswithinthestockholders’equitysectionareroutinelyreportedin detail.
b.capitalsurplusisused inplaceofretained earnings.
c.theindividualsourcesofadditionalpaid-incapitalareoftencombined. d.retainedearnings isoftennotshownseparately.
127. Additionalpaid-in capitalincludesallof thefollowingexcept a.paid-incapitalfromtreasurystock.
b.paid-incapitalin excessof par.
c.paid-incapitalinexcessof statedvalue. d.paid-incapitalin excessof bookvalue.
128. Bookvaluepershareiscomputedbydividingtotal
a.paid-incapitalbythenumberofcommonsharesoutstanding. b.paid-incapitalbythenumberof commonsharesissued.
c.stockholders'equitybythenumberof commonsharesoutstanding. d.stockholders'equitybythe numberofcommonsharesissued.
129. Bookvaluepershareisusually
a.equaltothemarketvalueper share. b.lessthanthemarketvaluepershare.
c.greaterthanthemarketvaluepershare. d.equaltothepar valuepershare.
Corporations:OrganizationandCapitalStockTransactions 13-19
130. Bookvaluepershareis
a.theequityacommonstockholderhasinthenetassetsofthecorporationfromowning one share ofstock.
b.theequityacommonstockholderhasinthetotalassetsofthecorporationfrom owningoneshareof stock.
c.alwaysequaltothemarketvalueofthestock. d.computedonlyforpreferredstockholders.
131. Thebookvaluepershare
a.isusuallya closeapproximationofthemarketpricepershare. b.isthesameastheparvaluepershare.
c.maybeusefulindeterminingthetrendofastockholder'spershareequityina corporation.
d.alwaysfalls withintheannualrangeof acompany'smarketvaluepershare.
132. Barr,Inc.reports$3,000,000ofcommonstock,and$4,500,000ofadditionalpaid-in capitalonitsbalancesheet.Thenumberofcommonsharesissuedandoutstandingis 500,000shares.Thebook valuepershareis
a.$15. b.$9.c.$6.
d.notdeterminable.
Additional MultipleChoiceQuestions
133. Whichofthefollowingisan incorrectstatementaboutacorporation? a.Acorporationis anentityseparateanddistinctfrom its owners.
b.Creditorsordinarilyhaverecourseonlytocorporateassetsinsatisfactionoftheir claims.
c.Acorporationmaybeformedinwriting,orally,or implied.
d.Acorporationis subjecttonumerousstateandfederalregulations.
134. Capitalstockto whichthe charterhasassignedavalueper shareiscalled a.parvaluestock.
b.no-parvaluestock. c.statedvaluestock.
d.assignedvaluestock.
135. Legalcapitalpersharecannotbeequaltothe a.parvaluepershareofpar valuestock.
b.totalproceedsfromthesaleof parvaluestockabove parvalue. c.statedvaluepershareof no-parvaluestock.
d.totalproceedsfromthesaleof no-parvaluestock.
136. Whencommonstockisissuedforservicesor non-cashassets,costshouldbe a.onlythefairmarketvalueoftheconsiderationgivenup.
b.onlythefairmarket valueoftheconsiderationreceived. c.thebookvalue of thecommonstockissued.
d.eitherthefairmarketvalueoftheconsiderationgivenuportheconsideration received,whicheverismoreclearlyevident.
13-20
137. Whenthesellingpriceoftreasurystockisgreaterthanitscost,thecompanycreditsthe differenceto
a.GainonSaleof TreasuryStock.
b.Paid-inCapitalfromTreasuryStock.
c.Paid-inCapitalin ExcessofPar Value. d.TreasuryStock.
138. RobersonCorporationwasorganizedonJanuary1,2008,withauthorizedcapitalof 750,000sharesof$10parvaluecommonstock.During2008,Robersonissued30,000 sharesat$12pershare,purchased3,000sharesoftreasurystockat$13pershare,and sold3,000sharesoftreasurystockat$14pershare.Whatistheamountofadditional paid-in capitalat December31,2008?
a.$0
b.$3,000c.$60,000 d.$63,000
139. Thepurchaseof treasurystock
a.decreasescommonstockauthorized. b.decreasescommonstock issued.
c.decreasescommonstockoutstanding.
d.hasnoeffectoncommonstockoutstanding.
140. Preferredstockholdershavea priorityovercommonstockholdersasto a.dividendsonly.
b.assetsin theeventofliquidationonly. c.votingrights.
d.bothdividendsand assetsintheeventof liquidation.
141. OnJanuary2,2005,RileyCorporationissued20,000sharesof6%cumulativepreferred stockat$100parvalue.OnDecember31,2008,RileyCorporationdeclaredandpaidits firstdividend.Whatdividendsarethepreferredstockholdersentitledtoreceiveinthe currentyearbeforeanydistributionismadetocommonstockholders?
a.$0
b.$120,000 c.$360,000 d.$480,000
142. Additionalpaid-in capitalincludesallof thefollowingexceptthe amountspaidin a.overpar value.
b.overstated value.c.fromtreasurystock.
d.fortheparvalueofcommonstock.
143. Inthestockholders'equitysectionofthebalancesheet,theclassificationofcapitalstock consistsof
a.additionalpaid-in capital andcommonstock. b.commonstockandtreasurystock.
c.commonstock,preferredstock,andtreasurystock. d.commonstockandpreferredstock.
Corporations:OrganizationandCapitalStockTransactions 13-21
144. AtDecember31,thestockholders’equitysectionshows:
Commonstock,$5parvalue;1,320,000sharesissued
and1,200,000sharesoutstanding.................................................. Additionalpaid-in capital....................................................................... Retainedearnings................................................................................. Treasurystock,(120,000shares).......................................................... Totalstockholders’equity......................................................................
Thebookvaluepershare ofcommonstockis a.$5.91.
b.$6.50. c.$7.08. d.$6.44.
$6,600,000 1,400,000 500,000
(700,000) $7,800,000
BRIEFEXERCISES
BE145
Identify(by letter) each of the followingcharacteristicsasbeing anadvantage,adisadvantage, or notapplicabletothecorporateformof businessorganization.
A= Advantage
D= Disadvantage N= NotApplicable
Characteristics
1.Separatelegalentity
2.Taxableentityresultinginadditionaltaxes
3.Continuouslife
4.Unlimitedliability of owners
5.Governmentregulation
6.Separationof ownershipandmanagement
7.Abilitytoacquirecapital
8.Easeoftransferof ownership
BE146
OnJuly6,XOTCorporationissued2,300sharesofits$1.50parcommonstock.Themarket price of thestockonthatdate was$17 pershare.Journalizethe issuanceof thestock.
BE147
BennettCorporationisauthorizedtoissue1,000,000sharesof$1parvaluecommonstock. During2008,thecompanyhasthefollowingstocktransactions.
Jan.15 Issued500,000sharesof stockat$7per share.
Sept.5 Purchased20,000sharesofcommonstockforthetreasuryat $8pershare.
Instructions
Journalizethetransactionsfor BennettCorporation.
BE148
AninexperiencedaccountantforDuranCorporationmadethefollowingentries.
July1 Cash..................................................................................... 170,000 CommonStock............................................................ 170,000
(Issued20,000sharesof commonstock, parvalue$6pershare)
Sept.1 CommonStock..................................................................... 36,000 RetainedEarnings................................................................ 24,000
Cash............................................................................ 60,000 (Purchased4,000sharesissuedonJuly1forthe
treasuryat$15pershare)
Instructions
Onthebasis oftheexplanation foreachentry,preparetheentry thatshouldhavebeenmadefor the transactions.
BE149
OnSeptember5,BertolliCorporationacquired2,500sharesofitsown$1parcommonstockfor $23pershare.OnOctober 15,1,000sharesofthetreasurystock is soldfor $25pershare.
Instructions
Journalizethepurchaseandsaleofthetreasurystockassumingthatthecompanyusesthecost method.
BE150
WarrenCompanyhadthefollowingtransactions.
1.Issued6,000sharesofcommonstockwithastatedvalueof$10for $110,000. 2.Issued3,000sharesof$100parpreferredstockat$107forcash.
Instructions
Preparethejournalentriestorecordtheabove stocktransactions.
BE151
OnFebruary1,BurchessCorporationissued4,000 sharesofits$20par valuepreferredstockfor $24pershare.
Instructions Journalizethetransaction.
Corporations:OrganizationandCapitalStockTransactions 13-25
BE152
BellinghamCorporationhasthefollowing stockholders’ equitybalancesatDecember31,2008:
CommonStock,$1par
Paid-inCapitalin ExcessofPar RetainedEarnings
Total
$3,500 24,500
62,500$90,500
Calculatebookvaluepershare.
EXERCISES
Ex.153
Thefollowingselectedtransactionspertainto LintonCorporation:
Jan. 3 Issued150,000shares,$10parvalue,commonstockfor $22 pershare.
Feb.10 Issued8,000shares,$10parvalue,commonstockinexchangeforspecialpurpose equipment.LintonCorporation'scommonstockhasbeenactivelytradedonthestock exchange at $25pershare.
InstructionsJournalizethetransactions.
Ex.154
ThecorporatecharterofHunterCorporationallowstheissuanceofamaximumof2,500,000 sharesof$1parvaluecommonstock.Duringitsfirstthreeyearsofoperation,Hunterissued 1,500,000sharesat$15pershare.Itlateracquired30,000ofthesesharesastreasurystockfor $25pershare.
Instructions
Basedonthe aboveinformation,answerthefollowingquestions: (a)Howmanyshareswereauthorized?
(b)Howmanyshareswereissued?
(c)Howmanyshares areoutstanding?
(d)Whatisthebalanceof the CommonStockaccount? (e)Whatisthebalanceof theTreasuryStockaccount?
Ex.155
GarnerCorporationisauthorizedtoissue1,000,000sharesof$5parvaluecommonstock. During2008,itsfirst yearofoperation,thecompanyhasthefollowingstock transactions.
Jan. 1 Paidthe state$2,000forincorporationfees.Jan.15 Issued500,000sharesofstock at$7 pershare.
Jan.30 Attorneysforthecompanyaccepted500sharesofcommonstockaspaymentfor legalservicesrenderedinhelpingthecompanyincorporate.Thelegalservicesare estimatedtohavea valueof $8,000.
July 2 Issued100,000sharesofstockforland.Thelandhadanaskingpriceof$900,000. Thestockiscurrentlyselling onanational exchangeat $8pershare.
Sept.5 Purchased15,000sharesofcommonstockforthetreasuryat $10pershare. Dec.6 Sold11,000sharesofthe treasurystockat$11per share.
Instructions
JournalizethetransactionsforGarnerCorporation.
Ex.156
Preparethenecessaryjournalentryfor eachofthefollowingtransactionsfor Starr Corporation.
(a)Issued2,000sharesofits$5par valuecommonstockfor $16pershare.
(b)Issued5,000sharesofitsstockforlandadvertisedforsaleat$80,000.Starr'sstockis activelytradedat amarketpriceof $15pershare.
Solution156 (5 min.)
(a)Cash(2,000× $16,000).................................................................. 32,000 CommonStock..................................................................... 10,000 Paid-inCapitalin Excess ofParValue................................. 22,000
(b)Land(5,000×$15)......................................................................... 75,000 CommonStock..................................................................... 25,000 Paid-inCapitalin Excess ofParValue................................. 50,000
Ex.157
1.Nameatleastthreefactorsthat influencethemarketvalueofstock.
2.Corporationsacquiretreasurystockforavarietyofpurposes.Namethreereasonswhy treasurystockmaybeacquiredbyacorporation.
13-28
Ex.158
ThefollowingitemswereshownonthebalancesheetofHermanCorporationonDecember31, 2008:
Stockholders’Equity Paid-InCapital
CapitalStock
Commonstock,$5parvalue,360,000shares
authorized; sharesissuedand outstanding...................
Additionalpaid-in capital
Inexcessof par value.............................................................................. Totalpaid-incapital............................................................................
RetainedEarnings............................................................................................... Totalpaid-incapitalandretainedearnings..............................................
Less:Treasurystock(15,000shares)................................................................ Totalstockholders' equity........................................................................
$1,650,000
165,000 1,815,000
750,000 2,565,000
(180,000) $2,385,000
Instructions
Completethefollowingstatementsandshowyourcomputations.
(a)Thenumberofsharesof commonstockissuedwas . (b)Thenumberofsharesof commonstockoutstandingwas. (c)Thesalespriceof thecommonstockwhenissuedwas$ . (d)Thecostpershareof thetreasurystock was$ .
(e)Theaverageissuepriceof thecommonstockwas$ .
(f)Assumingthat25%ofthetreasurystockissoldat$20pershare,thebalanceinthe TreasuryStockaccountwouldbe$ .
Ex.159
OnMay1,Hite Corporationpurchased1,000shares ofits$10par value commonstockat acash price of$13/share.OnJuly15, 600sharesof thetreasurystockweresoldforcashat$15/share.
Instructions
Journalizethetwotransactions.
Ex.160
WernerCorporationhasthefollowingstockholders'equityaccountsonJanuary1, 2008:
CommonStock,$10parvalue............................................ Paid-inCapitalinExcess ofPar........................................... RetainedEarnings................................................................ TotalStockholders'Equity..............................................
$1,500,000 200,000
500,000$2,200,000
Thecompanyusesthecostmethodtoaccountfortreasurystocktransactions.During2008,the followingtreasurystocktransactionsoccurred:
April 1 August 1 October 1
Purchased9,000sharesat $16pershare. Sold3,000sharesat $18pershare.
Sold3,000sharesat $15pershare.
Instructions
(a)Journalizethetreasurystocktransactionsfor 2008.
(b)PreparetheStockholders'EquitysectionofthebalancesheetforWernerCorporationat December31, 2008.Assumenet incomewas$110,000for2008.
Ex.161
BatesCorporationpurchased2,000sharesofits$5parvaluecommonstockforacashpriceof $12pershare.Twomonths later,Bates soldthetreasurystockfor acashpriceof$10pershare.
Instructions
Preparethejournalentrytorecordthesaleofthetreasurystockassuming (a)Nobalancein Paid-inCapitalfromTreasuryStock.
(b)A$3,000balanceinPaid-inCapitalfromTreasuryStock.
Ex.162
AninexperiencedaccountantforMoonCorporationmadethefollowingentries.
July1 Cash..................................................................................... 210,000 CommonStock............................................................ 210,000
(Issued15,000sharesof no-parcommonstock, statedvalue$10pershare)
Sept.1 CommonStock..................................................................... 28,000 RetainedEarnings................................................................ 6,000
Cash............................................................................ 34,000 (Purchased2,000sharesissuedonJuly1forthe
treasuryat$17pershare)
Dec.1 Cash..................................................................................... 18,000 CommonStock............................................................ 14,000 Gainon Sale of Stock.................................................. 4,000
(Sold 1,000sharesof the treasurystockat$18per share)
Instructions
(a)Onthebasisoftheexplanationforeachentry,preparetheentrythatshouldhavebeen madefor thetransactions.(Omitexplanations.)
(b)PreparethecorrectingentriesthatshouldbemadetocorrecttheaccountsofMoon Corporation.(Donotreversetheoriginalentry.)
13-32
Ex.163
OnJanuary1,2008,EdmondCompanyissued30,000sharesof$2parvaluecommonstockfor $150,000.OnMarch1,2008,thecompanypurchased4,000sharesofitscommonstockfor$8 pershareforthetreasury.OnJune1,2008,1,000ofthetreasurysharesaresoldfor$10per share.On September1,2008,2,000treasurysharesaresold at $6pershare.
Instructions
Journalizethestocktransactionsof EdmondCompanyin2008.
Ex.164
WixenCompanyoriginallyissued30,000sharesof$5parcommonstockfor$180,000on January3,2008.Wixenpurchased1,500sharesoftreasurystockfor$12,000onNovember2, 2008.OnDecember6,2008,600sharesof thetreasurystockaresoldfor$6,000.
Instructions
Preparejournalentriesto recordthesestocktransactions.
Ex.165
Thestockholders'equitysectionofPalmerCorporation'sbalancesheetatDecember31,2007, appearsbelow:
Stockholders'equity Paid-incapital
Commonstock,$10 parvalue,400,000sharesauthorized; 250,000issuedandoutstanding
Paid-incapitalinexcessofpar Totalpaid-incapital
Retainedearnings
Totalstockholders'equity
$2,500,000
1,200,000 3,700,000
600,000$4,300,000
During2008,thefollowingstocktransactionsoccurred:
Jan.18 Issued50,000sharesofcommonstock at $30per share.
Aug.20 Purchased25,000shares ofPalmer Corporation'scommonstockat$24pershareto be held inthe treasury.
Nov. 5 Reissued9,000 sharesof treasurystockfor $28per share.
Instructions
(a)Preparethejournalentriestorecordtheabovestocktransactions.
(b)Preparethestockholders'equitysectionofthebalancesheetforPalmerCorporationat December31,2008.Assumethatnetincomefortheyearwas$100,000andthatno dividends weredeclared.
13-34
Ex.166
TylerCorporationhas100,000sharesof$40parvaluepreferredstockauthorized.Duringthe year,ithadthefollowingtransactionsrelatedto its preferredstock.
(a)Issued30,000sharesat$55pershare.
(b)Issued10,000sharesfor equipmenthavinga$700,000askingprice.Thestockhadamarket value of$60pershare
InstructionsJournalizethetransactions.
Ex.167
CarsonCorporationhasthefollowingcapitalstockoutstandingat December31,2008:
9%Preferredstock,$100parvalue,cumulative
15,000sharesissuedand outstanding....................................................
Commonstock,nopar,$10 statedvalue,500,000sharesauthorized, 350,000shares issuedand outstanding..................................................
$1,500,000
3,500,000
Thepreferredstock wasissued at$110pershare.Thecommonstockwas issuedatanaverage persharepriceof$16.
Instructions
Preparethepaid-incapitalsection ofthebalancesheetat December31,2008.
Ex.168
Initsfirstyearofoperations, WebberCorporationhadthefollowingtransactionspertainingtoits $30parvaluepreferredstock.
Feb.1 Issued6,000sharesforcashat $41pershare. Nov.1 Issued3,000sharesforcashat $44pershare.
Instructions
(a)Journalizethetransactions.
(b)Indicatetheamounttobe reportedfor (1)preferredstock, and (2)paid-incapital in excess of parvalue—preferredstock attheend oftheyear.
13-36
Ex.169
BoswellCorporationhasthefollowingstockholders'equityaccounts:
Preferred Stock
Paid-inCapitalinExcess ofParValue—PreferredStock CommonStock
Paid-inCapitalinExcess ofStatedValue—CommonStock Paid-inCapitalfromTreasuryStock—Common RetainedEarnings
TreasuryStock—Common
Instructions
Classifyeach accountusing thefollowingtabularalignment.
Paid-inCapital Retained
Account CapitalStock Additional Earnings Other
Ex.170
Thefollowinginformationis availableforStewartCorporation:
CommonStock($10par)
Paid-inCapitalin ExcessofParValue—Preferred Paid-inCapitalin ExcessofStatedValue—Common PreferredStock
RetainedEarnings TreasuryStock—Common
$1,000,000 180,000 600,000 550,000 750,000 50,000
Instructions
Basedonthe precedinginformation,calculateeach of thefollowing: (a)Totalpaid-incapital.
(b)Totalstockholders'equity.
Ex.171
Placeeachoftheitemslistedbelowintheappropriatesubdivisionofthestockholders'equity section ofabalancesheet.
Commonstock,$10statedvalue Retainedearnings
8%Preferredstock,$100parvaluePaid-in capitalinexcessofparvalue Paid-in capital inexcessofstatedvalue Treasury stock
Paid-incapitalfromtreasurystock
Stockholders'equity Paid-incapital
Capitalstock
Additionalpaid-in capital
Totaladditionalpaid-incapital
Totalpaid-incapital Retainedearnings
13-38
Ex.171 (cont.)
Totalpaid-incapitalandretainedearnings
Totalstockholders' equity
Ex.172
ThefollowinginformationisavailableforGordonCorporation:
Commonstock($5par)
Paid-incapitalinexcessofpar—common Retainedearnings
Treasurystock Commonsharesissued Commonsharesoutstanding
$500,000 200,000 360,00070,000100,000shares 90,000shares
Instructions
Basedonthe precedinginformation,calculatethebookvaluepershare.
Ex.173
OnDecember 31,2008,ColawCompanyreportsthe following amountsinitsstockholders'equity section:
Commonstock $2,400,000 Paid-incapitalinexcessofstatedvalue—common 900,000 Retainedearnings 1,180,000 Treasurystock—common 180,000
Thecommon stockhasastated value of$10 per share.Onemillion shares ofcommonstock are authorizedand 40,000sharesareheld inthetreasury.
Instructions
Computethebookvalueper shareof commonstock.
COMPLETIONSTATEMENTS
174.Acorporationhasaseparate apartfromitsowners.
175.Themajoradvantagesofthecorporateformoforganizationinclude(1)limited
ofowners,(2)continuous and(3)easeof transferring.
176.Stockholderselectthe ,whointurnhirethe ofthe companywhohavedaytodayresponsibilityforrunningthecorporation.
177.Ifacorporation'sstockistradedonthemajorstockexchanges,thecorporationmust generallyreportperiodicallyto afederalagencyknownasthe .
178.Stockholdersgenerallyhavetherighttoshareincorporate andin
uponliquidation.
179.Parvalueofstockrepresentsthe persharethatmustberetained in thebusinessforthe protection ofcorporate.
180.Thestockholders'equitysectionofacorporation'sbalancesheetisgenerallydividedin two majorsections:(1) and(2) .
181.Ifstockisissuedinexchangefornoncashassets,theassetsshouldbevaluedatthe
oftheconsideration ortheassets
,whicheveris moreclearlyevident.
182.Acorporation'sownstockthathasbeenreacquiredbythecorporationbutnotcanceledis called andisdeductedfromtotal on thebalancesheet.
183.The featureofpreferredstockgivesthepreferredstockholdersthe righttoreceivecurrent-yeardividendsandunpaidprior-yeardividendsbeforecommon stockholders receiveanydividends.
184.Preferredstockhascontractualprovisionsthat giveitapreferenceovercommonstockas to andtoin the eventof liquidation.
185.Thepaid-incapitalsectionofthebalancesheetconsistsoftwoclassifications:
and .
186.Bookvaluepersharerepresentstheequityacommonstockholderhasinthe
ofthecorporationfromowningone shareof stock.
MATCHING
187.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Limitedliability B.Capitalstock
C.Board of directors D.Paid-incapital
E.Retainedearnings
F. Preemptiveright G.Par value
H.Legalcapital
I. Treasurystock
J. Cumulativefeature
1. Net incomeretainedinthecorporation.
2. Theamountthatmustberetainedinthebusinessfortheprotectionof creditors.
3. Preferredstockholders havearighttoreceivecurrentandunpaidprior-year dividends before commonstockholdersreceiveanydividends.
4. Creditorsonlyhavecorporateassetstosatisfytheirclaims.
5. Responsibleto stockholdersfor corporateactivity.
6. Theamountassignedtoeachshareof stockinthecorporatecharter.
7. Unitofownershipinacorporation.
8. Enablesstockholderstomaintaintheirsamepercentageownershipwhennewshares areissued.
9. Corporation'sownstockthat has beenreacquiredbythe corporationbutnot retired.
10. Totalamountpaid-inoncapitalstock.
SHORT-ANSWERESSAYQUESTIONS
S-AE188
Identifyatleastsixcharacteristicsofthecorporate formofbusinessorganization.Contrasteach one with thepartnershipformof organization.
S-AE189
Companiesfrequentlyissuebothpreferredstockandcommonstock.Whatarethemajor differences intherightsof stockholdersbetweenthesetwoclassesof stock?
S-AE190
Definepar value,anddiscussitssignificanceinaccounting.
S-AE191(Ethics)
JeffMadden,thepresidentandCEOofEarthSystems,Inc.,awastemanagementfirm,was recentlyhospitalized,sufferingfromexhaustionandaheartailment.Immediatelypriortohis hospitalization,EarthSystemshadexperiencedasharpdeclineinitsstockprice,andtrading activitybecamealmostnonexistent.Theprimaryreasonforthiswasconcernexpressedinthe mediaoveranewuntestedwastemanagementsystemimplementedbythecompany.Mr. Maddenhadbeenunwillingtosubmittheproceduretotestingbeforeimplementation,buthe reluctantlyagreedtolimitedtestsafterthesystemwasoperational.Noproblemshavebeen identifiedbytheteststodate.
Theothermembersofmanagementcalledameetingtodeterminewhattheyshoulddo.Rick Farrell,themarketingmanager,suggestedthatthecompanypurchasealargenumberofshares oftreasurystock.Inthat way,investors mightnoticethatactivityhadpicked up,and mightdecide tobuysomemoreshares.Thisplanwoulduseupmostofthecompany'savailablecash,sothat therewillbenomoneyavailableforacashdividend.EarthSystemshaspaidcashdividends everyquarterfor overtenyears.
Required:
1.IsMr. Farrell'ssuggestionethical?Explain.
2.Isitethicaltodiscontinuethecashdividend?Explain.
S-AE192(Communication)
AspartofaCareersinAccountingprogramsponsoredbyaccountingorganizationsand supportedbyyourcompany,youwillbetakingagroupofhighschoolstudentsthroughthe accountingdepartmentinyourcompany.Youwillalsoprovidethemwithvariousmaterialsto explaintheworkofanaccountant.OneofthematerialsyouwillprovideistheStockholders’ Equity sectionofarecent balancesheet.
Required:
Prepareasentenceortwoexplainingeachmajorsection:CommonStock,AdditionalPaid-in Capital,andRetainedEarnings.Youshouldtrytobebriefbut clear.
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