Question 1

Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2014. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2014 and continuing for a total of four more years (final payment December 31, 2018). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. After the first payment was made, the note and interest payable liability on December 31, 2014 is closest to:
A) $32,908,000.
B) $31,698,800.
C)$40,000,000.
D)$27,908,000.

Accepted Answer

We can use the present value formula to calculate the initial amount of the note:

PV = FV / (1 + r)n

where PV is the present value, FV is the future value (in this case, the amount financed), r is the interest rate, and n is the number of periods.

Plugging in the given values, we get:

PV = $37,908,000 / (1 + 0.10)1
PV = $34,461,818.18

This means that on January 1, 2014, Alden Trucking Company received $34,461,818.18, and that amount will be paid back over the next five years.

To calculate the interest expense for the first year (2014), we can multiply the outstanding balance at the end of the year by the interest rate:

Interest expense = $34,461,818.18 x 0.10
Interest expense = $3,446,181.82

This means that after the first payment is made, the remaining balance on the note will be:

Remaining balance = $34,461,818.18 - $10,000,000 - $3,446,181.82
Remaining balance = $20,015,636.36

Therefore, the note and interest payable liability on December 31, 2014 is:

Note and interest payable liability = $20,015,636.36 + $10,000,000
Note and interest payable liability = $30,015,636.36

This is closest to choice B) $31,698,800.

Question 2

Your goal is to be able to withdraw $5,000 for each of the next ten years beginning one year from today. The return on the investment is expected to be 12%. The amount that needs to be invested today is closest to:
A) $44,645.
B) $36,291.
C)$28,251.
D)$50,000.

Accepted Answer

The answer of Your goal is to be able to...

Question 3

Wolf Company borrowed $5,000 on an 8% note payable on April 1, 2014. The maturity date of the note (and payment of all interest) is July 1, 2015. The accounting period ends December 31. Assume no adjusting entries are made during the year.
Required:
Prepare the journal entry for each of the following dates:
A. April 1, 2014
B. December 31, 2014
C. July 1, 2015

Accepted Answer

The answer of Wolf Company borrowed $5,000 on an 8%...

Question 4

Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2014. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2014 and continuing for a total of four more years (final payment December 31, 2018). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. How much is the 2015 interest expense?
A) $3,169,880.
B) $3,290,800.
C)$4,000,000.
D)$2,790,800.

Accepted Answer

The interest expense for 2015 is calculated on the outstanding balance after the first payment. The initial loan amount is $37,908,000. After the first payment of $10 million at the end of 2014, the outstanding balance is $37,908,000 - $10,000,000 = $27,908,000. The interest expense for 2015 is 10% of this balance: $27,908,000 * 0.10 = $2,790,800.

Question 5

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2014, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How much is the 2015 interest expense, assuming that the December 31, 2014 adjusting entry was made?
A) $27,434.
B) $27,962.
C)$32,000.
D)$29,693.

Accepted Answer

The correct answer is A. The interest expense for 2015 is $27,434. This is calculated as follows:Interest expense = Present value of note x Market rate of interest= $317,520 x 8%= $27,434

Question 6

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2014, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight Industries' balance sheet for the year ended December 31, 2014, the book value of the liability for notes payable, including accrued interest would be closest to:
A) $342,922.
B) $349,520.
C)$345,013.
D)$347,213.

Accepted Answer

The correct answer is A. The book value of the liability for notes payable, including accrued interest would be closest to $342,922. The present value of the note is $317,520. The difference between the present value and the face value of the note is the amount of interest that will be paid over the life of the note. The amount of interest that will be paid in 2014 is $25,402 ($400,000 x 8% x 1/3). The book value of the liability for notes payable, including accrued interest would be $342,922 ($317,520 + $25,402).

Question 7

A company's income statement reported net income of $40,000 during 2014. The income tax return excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the $3,000 would not be reported for tax purposes until 2015. Which of the following statements is correct assuming a 35% tax rate?
A) A $3,000 deferred tax liability is reported as of December 31, 2014.
B) A $3,000 deferred tax asset is reported as of December 31, 2014.
C)A $1,050 deferred tax liability is reported as of December 31, 2014.
D)A $1,050 deferred tax asset is reported as of December 31, 2014

Accepted Answer

The $3,000 revenue item was not included in the income tax return for 2014 because tax laws dictate that it won't be reported until 2015. However, for financial reporting purposes, it was included in the company's net income for 2014. This creates a temporary difference between the book and tax basis of the revenue item. Since the item is expected to be taxed in the future, it creates a deferred tax liability. To calculate the deferred tax liability, we multiply the temporary difference ($3,000) by the income tax rate (35%). Therefore, the correct answer is (C) $1,050 deferred tax liability.

Question 8

Which of the following correctly describes the accounting for leases?
A) A capital lease is not reported on the balance sheet as a liability.
B) A capital lease reports an asset on the balance sheet.
C)An operating lease reports an operating asset on the balance sheet.
D)An operating lease reports a liability on the balance sheet.

Accepted Answer

A capital lease is reported on the balance sheet as an asset and a liability, while an operating lease is only disclosed in the footnotes to the financial statements and does not impact the balance sheet.

Question 9

If income tax expense reported on the income statement is $45,000 for 2014, and the tax return for 2014 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2014 will be which of the following? Assume a 40% tax rate.
A) A $3,000 liability.
B) A $3,000 asset.
C)A $7,500 liability.
D)A $7,500 asset.

Accepted Answer

The deferred income tax is the difference between the income tax expense and the income tax liability. Here, $45,000 (expense) - $42,000 (liability) = $3,000, which is a deferred tax liability.

Question 10

Which of the following questions is asked with respect to determining the accounting for leases?
A) Is the lease term greater than 90% of the asset's estimated life?
B) Is the present value of the payments greater than 75% of the asset's fair market value?
C)Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term at fair market value?
D)Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?

Accepted Answer

The answer of Which of the following questions is asked...

Question 11

A company's income statement reported net income of $80,000 during 2014. The income tax return excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws the $6,000 would not be reported for tax purposes until 2015. Which of the following statements is incorrect assuming a 35% tax rate?
A) Income tax expense on the income statement exceeds the tax liability to the IRS.
B) The $6,000 of revenue creates a deferred tax liability.
C)A $2,100 deferred tax liability is reported as of December 31, 2014.
D)Income tax expense on the income statement is $25,900.

Accepted Answer

The income tax expense on the income statement should be calculated as follows: $80,000 net income + $6,000 deferred revenue = $86,000 taxable income for accounting purposes. The tax expense would be 35% of $86,000, which is $30,100, not $25,900.

Question 12

Moore Company has the following partial list of account balances at year-end December 31, 2014: $$\begin{array} { l r } 
\text { Accounts payable } & \$ 1,800 \
\text { Accounts receivable } & 4,600 \
\text { Cost of goods sold } & 15,000 \
\text { Cash } & 23,000 \
\text { Taxes payable } & 10,000 \
\text { Land } & 25,000 \
\text { Notes payable (due in } 6 \text { months) } & 1,000 \
\text { Salaries payable } & 900 \
\text { Inventory } & 4,300
\end{array}$$ Additional information: The accounts payable balance at the end of the prior year was $3,000.
Required:
(All answers are for December 31, 2014.) 
A. Determine the following items:
1. Current assets
2. Current liabilities
3. Working capital
4. Accounts payable turnover ratio
5. Average age of accounts payable
B. Assume that cash is used at December 31, 2014 to pay the entire balance of accounts payable. Determine the revised amounts from part (A) above for the following items:
1. Current assets
2. Current liabilities
3. Working capital
4. Accounts payable turnover ratio
5. Average age of accounts payable
C. Comment on the effect of paying accounts payable at year-end with regard to working capital and accounts payable management.

Accepted Answer

The answer of Moore Company has the following partial list...

Question 13

Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every three months for the next two years. The first payment is due three months after the purchase date. Huck's incremental borrowing rate is 8%. Each of the payments is closest to:
A) $6,248.
B) $6,689.
C)$8,527.
D)$5,709.

Accepted Answer

To calculate the payment amount, we can use the formula for the present value of an annuity:

Payment = (Present Value * Interest Rate) / (1 - (1 + Interest Rate)^-n)

Where:
- Present Value = $49,000 (the cost of the truck)
- Interest Rate = 8% / 4 quarters = 2% per quarter
- n = 2 years * 4 quarters per year = 8 quarters

Plugging in the numbers, we get:

Payment = ($49,000 * 0.02) / (1 - (1 + 0.02)^-8)
Payment = $6,688.80

Rounding to the nearest dollar, the closest payment amount is $6,689, which corresponds to answer choice B.

Question 14

Sharp Company borrowed $500,000 on a 6% one-year, interest-bearing note dated November 1, 2014 with interest payable at maturity. The annual accounting period ends on December 31. Assume that adjusting entries are only made at December 31, the company's fiscal year-end.
Required:
Prepare journal entries for each of the following dates:
A. November 1, 2014.
B. December 31, 2014.
C. October 31, 2015.

Accepted Answer

The answer of Sharp Company borrowed $500,000 on a 6%...

Question 15

You have a goal of having $100,000 five years from today. The return on the investment is expected to be 10% and will be compounded semi-annually. The amount that needs to be invested today is closest to:
A) $61,390.
B) $62,090.
C)$78,350.
D)$38,550.

Accepted Answer

The answer of You have a goal of having $100,000...

Question 16

Which of the following questions is incorrect with respect to determining the accounting for leases?
A) Is the lease term greater than 75% of the asset's expected economic life?
B) Is the present value of the payments greater than 75% of the asset's fair market value?
C)Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price less than fair market value?
D)Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?

Accepted Answer

The answer of Which of the following questions is incorrect...

Question 17

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,520. On January 1, 2014, Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On December 31, 2014, Straight recorded an adjusting entry to account for interest that had accrued on the note. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2014 is closest to:
A) $25,402.
B) $32,000.
C)$29,693.
D)$27,493.

Accepted Answer

The answer of Straight Industries purchased a large piece of...

Question 18

Your goal is to be able to withdraw $10,000 for each of the next nine years beginning one year from today and also to withdraw $50,000 ten years from today. The return on the investment is expected to be 6%. The amount that needs to be invested today is closest to:
A) $68,017.
B) $95,937.
C)$78,176.
D)$132,075.

Accepted Answer

The present value of an annuity formula is used to calculate the amount that needs to be invested today in order to make a series of withdrawals in the future. Using this formula, we can calculate the present value needed to fund the nine annual withdrawals of $10,000 each and the one lump sum payment of $50,000 ten years from now:

PV = [($10,000 x (1 - (1/1.06)^9)) / 0.06] + ($50,000 / (1.06^10))
PV = [$73,545.76] + [$27,973.68]
PV = $101,519.44

Therefore, the amount that needs to be invested today at a 6% return in order to make the specified withdrawals is closest to $95,937, which is answer choice B.

Question 19

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?
A) Present value of a single amount.
B) Present value of an annuity.
C)Future value of a single amount.
D)Future value of an annuity.

Accepted Answer

The cash equivalent price of a machine, when payments are made in the future, requires calculating the present value of those future payments. Since the payments are unequal, each payment is treated as a single amount rather than as a series of equal payments (annuity). Therefore, the present value of a single amount table is used for each payment to find their total present value, which represents the cash equivalent price of the machine.

Question 20

A company's 2014 income tax return reported a $75,000 tax liability. During 2014, the deferred income tax liability account increased $9,000. Which of the following statements is correct?
A) Income tax expense on the 2014 income statement was $75,000.
B) Income tax expense on the 2014 income statement was $66,000.
C)Income tax expense on the 2014 income statement was $9,000.
D)Income tax expense on the 2014 income statement was $84,000.

Accepted Answer

The income tax liability reported on the tax return is the actual amount owed for the year based on taxable income calculated using tax laws and rates in effect for the year. Therefore, the income tax expense on the income statement should reflect the actual amount of taxes owed. The increase in deferred income tax liability account means that the company has recognized the tax effect of a future taxable event in the current year, which increases the tax liability on the balance sheet but does not affect the actual taxes owed for the year. Therefore, the income tax expense on the income statement should be the sum of actual taxes owed ($75,000) and the increase in the deferred tax liability ($9,000), which is $84,000 (D).

Quiz 9: Reporting and Interpreting Liabilities

Your goal is to be able to withdraw $5,000 for each of the next ten years beginning one year from today. The return on the investment is expected to be 12%. The amount that needs to be invested today is closest to:

Which of the following correctly describes the accounting for leases?

If income tax expense reported on the income statement is $45,000 for 2014, and the tax return for 2014 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2014 will be which of the following? Assume a 40% tax rate.

Which of the following questions is asked with respect to determining the accounting for leases?

Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every three months for the next two years. The first payment is due three months after the purchase date. Huck's incremental borrowing rate is 8%. Each of the payments is closest to:

You have a goal of having $100,000 five years from today. The return on the investment is expected to be 10% and will be compounded semi-annually. The amount that needs to be invested today is closest to:

Which of the following questions is incorrect with respect to determining the accounting for leases?

Your goal is to be able to withdraw $10,000 for each of the next nine years beginning one year from today and also to withdraw $50,000 ten years from today. The return on the investment is expected to be 6%. The amount that needs to be invested today is closest to:

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?

A company's 2014 income tax return reported a $75,000 tax liability. During 2014, the deferred income tax liability account increased $9,000. Which of the following statements is correct?