Question 1

A corporation issues $500,000 in 20-year cash bonds that have an 8% interest rate, payable annually. The current market rate is 7%. The corporation uses the straight-line method to amortize the bond discount or premium. Which of the following is true?
A)The carrying amount increases from its amount at issuance to $500,000 at maturity.
B)The carrying amount decreases from its amount at issuance to $500,000 at maturity.
C)The annual interest paid to the bondholders increases over the next 20 years.
D)The annual interest paid to the bondholders decreases as the bonds reach maturity.
E)The bonds were sold at a discount.

Accepted Answer

The carrying amount decreases from its amount at issuance to $500,000 at maturity, since the bonds were issued at 8% when the market rate was 7%
Key Takeaway: Bonds with a stated rate of 8% sold at a time when the market rate is 7% are sold at a premium. The carrying amount of the bonds is the face value plus the balance in the premium account. The premium is amortized over the life of the bonds until its balance is zero, thus the carrying amount is decreasing over the life of the bond.

Question 2

Ken's Canaries shows the following balances in the books:
Common Stock $200,000
Paid in Capital
In Excess of Par $20,000
Retained Earnings $95,000
Treasury Stock $10,000
What is the total stockholder's equity?
A)$335,000
B)$220,000
C)$305,000
D)$295,000
E)$210,000

Accepted Answer

The total stockholder's equity is $305,000:
Common Stock: 200,000 +
Paid in Capital
In Excess of Par 20,000 +
Ret. Earnings 95,000
Total 315,000
Less
Treasury Stock 10,000
Total 305,000
Key Takeaway: Stockholder's Equity is the sum of Common Stock, Paid-in Capital in Excess of Par, and Retained Earnings, less Treasury Stock. Treasury stock is subtracted from the total because treasury stock is stock that has been purchased back by the Corporation, but it has not been retired.

Question 3

Which of the following choices would appear first under the assets category in a balance sheet?
A)Cash
B)Accounts receivable
C)Vehicles
D)Land
E)It depends. Accounts are usually listed alphabetically.

Accepted Answer

Cash would appear first under the assets in a balance sheet.
Key Takeaway: When preparing a balance sheet, assets are normally listed in order of their liquidity, meaning how easily the asset is converted to cash. Obviously, cash is the most liquid of any of the assets.

Question 4

Equipment that was purchased for $30,000 has accumulated depreciation of $27,000. It is sold to the scrap yard for $3,500. What is the gain or loss on the disposal of this fixed asset?
A)Gain of $3,500
B)Loss of $3,500
C)Loss of $500
D)Gain of $500
E)Loss of $26,500

Accepted Answer

The disposal of the fixed asset will result in a gain of $500:
Book Value = Cost ? Accumulated depr.
Book value = 30,000 ? 27,000 or 3,000
Selling price was $3,500
If selling price is over book = gain; under book = loss
Key Takeaway: The first step to determine a gain or loss is to determine the current book value of the asset. The book value is the original cost of the asset, less the accumulated depreciation. If the selling price of the fixed asset is higher than the current book value, a gain is recognized, if lower, than a loss is recognized.

Question 5

Ken's Canaries shows current assets of $150,000 and current liabilities of $75,000. If Ken uses cash to purchase canaries that will be resold, which is true of his working capital and current ratio?
A)Current ratio increases; working capital does not change.
B)Both remain unchanged.
C)Current ratio increases; working capital decreases.
D)Current ratio does not change; working capital decreases.
E)Both will increase.

Accepted Answer

Both the working capital and current ration remain unchanged if cash is used to purchase inventory.
Key Takeaway: The current ratio is the ratio of current assets to liabilities and is used to determine the likelihood of a business being able to pay its debts over the next year. In the transaction of cash for inventory, one asset is being traded for another, so the current ratio remains unchanged and the working capital remains unchanged, as well.

Question 6

Which of the following appears as a category in the balance sheet?
A)Expenses
B)Gains
C)Liabilities
D)Net profit
E)Cost of goods sold

Accepted Answer

Liabilities appear as a category in the balance sheet.
Key Takeaway: The three basic elements of a balance sheet are: assets, liabilities, and owner's equity.

Question 7

If Ken's Canaries, which is not publicly traded, issues common stock in exchange for a new delivery truck, how should the transaction be recorded?
A)At the par value of the common stock.
B)At the stated value of the common stock.
C)At the fair market value of the common stock.
D)At the fair market value of the delivery truck.
E)At the fair market value of the delivery truck or the fair market value of the common stock, whichever can be determined more objectively.

Accepted Answer

If common stock is issued in exchange for a new delivery truck, the transaction is recorded with either the fair market value of the truck or the fair market value of the common stock, whichever can be valued more objectively.
Key Takeaway: Non-cash assets should be recorded at the fair market value of the asset received or the common stock given up, whichever can be valued more objectively. In the example, the fair market value of the truck would have a more objective value, as it can be checked through a "blue book," while the stock would have a more subjective value, since it is not publicly traded.

Question 8

If an 8% $200,000 bond with a date of March 1, 2010 is sold on March 31, 2010, the buyer of the bond will pay the seller how much in interest on the selling date?
A)$16,000
B)$1,333
C)$3,000
D)$4,000
E)$2,000

Accepted Answer

If an 8% $200,000 bond is sold one month after its date, the buyer of the bond will pay the seller one month in interest. In this case $200,000 x .08 / 12 = $1,333.
Key Takeaway: A bond's interest payments typically occur semiannually. This means that the corporation will pay to the bondholders one-half of the annual interest at the end of each six-month period while the bond is outstanding. The formula for calculating the semiannual interest payments is:
Face Amount of the Bond x Stated Annual Interest Rate x 6/12 of a Year
To calculate monthly or quarterly interest, simply replace the 6/12 with the appropriate number.

Question 9

The purchase of treasury stock would be shown under which section on the statement of cash flows?
A)Operating
B)Investing
C)Financing
D)Supplemental
E)It is not reported on the statement of cash flows.

Accepted Answer

The purchase of treasury stock would be reported under the financing section on the statement of cash flows.
Key Takeaway: Treasury stock is the corporation's own stock that it is reacquiring, thus it is a financing activity. Changes in stockholder's equity and long term liabilities are both shown in the financing portion of the statement.

Question 10

Which of the following is true regarding the difference between book value and shareholder's equity?
A)There is no difference; these terms are synonymous.
B)Book value excludes intangibles such as goodwill.
C)Shareholder's equity measures net assets.
D)Shareholder's equity is an asset; book value is a liability.
E)Book value is an asset; shareholder's equity is a liability.

Accepted Answer

Book value differs from shareholder's equity in that book value excludes intangibles, such as goodwill.
Key Takeaway: Shareholder's equity is Total Assets ? Total Liabilities. Book value is the net tangible assets of a corporation and does not include items such as goodwill, patents, etc., that are considered intangible. The terms are not synonymous.

Question 11

Which of the following entries would be made to close a dividends account?
A)Credit retained earnings
B)Debit retained earnings
C)Debit revenue
D)Debit depreciation expense
E)Debit cash

Accepted Answer

To close a dividends account, a debit entry would be made to retained earnings.
Key Takeaway: Paying dividends will reduce retained earnings. Because retained earnings carries a credit balance, the debit entry will reduce the account.

Question 12

If Aaron the Architect operates as a sole proprietor and he withdraws cash from his business to pay himself, how does this affect the balance sheet?
A)Assets decrease; owner's equity decreases
B)Assets Increase; liabilities decrease
C)Assets decrease; owner's equity increases
D)There is no effect on the assets, liabilities, or on the owner's equity.
E)Assets decrease; liabilities decrease

Accepted Answer

A withdrawal of cash by the owner of sole proprietorship will result in a decrease to assets and a decrease to owner's equity.
Key Takeaway: Cash is an asset. If taken out of the business, it is decreasing an asset. A withdrawal will decrease the owner's equity account. Remember the accounting equation for this type of questions: Assets = Liabilities + owner's equity.
Consider the effect of the transaction on the balance of the equation. Another trick is to remember that when creating a journal entry for this transaction, the credits and debits must equal, so if you remember that cash has a debit balance and decreases with a credit and owner's equity has a credit balance and decreases with a debit, you will see debits = credits. When in doubt, try drawing T-Accounts to help visualize the transaction.

Question 13

A corporation purchased 20% of the outstanding shares of common stock of Ken's Canaries as an investment. Ken's Canaries had a banner year with profits and paid cash dividends. What would the corporation that holds the stock do to record the transaction?
A)Debit Cash; credit Dividend Revenue
B)Debit Investment, Ken's Canaries; credit cash
C)Debit Cash; credit Unearned Income
D)Debit Investment, Ken's Canaries; credit Income, Ken's Canaries
E)Debit Cash; Credit Investment, Ken's Canaries

Accepted Answer

The corporation holding the stock would debit their Cash account and credit the Investment, Ken's Canaries account.
Key Takeaway: An investor's share of a corporation's net income or net loss is recorded as a revenue or a loss for the period. In this case, the cash dividend increased the Cash account with a debit, and decreased the investment account with a credit.

Question 14

Unearned revenue is considered a/an:
A)Asset
B)Liability
C)Revenue
D)Owner's equity
E)Profit

Accepted Answer

Unearned revenue is a liability.
Key Takeaway: Unearned revenue is a transaction in which payment was received, but services not yet rendered. It is considered a liability, as the business has an obligation to perform the service in the future.

Question 15

Big Bertha's Birds decided to purchase Ken's Canaries. Ken's Canaries has a book value of $550,000. Big Bertha paid $655,000 in stock and cash under the purchase method. How much goodwill would Big Bertha be required to put on its balance sheet?
A)$550,000
B)$655,000
C)$155,000
D)$105,000
E)$100,000

Accepted Answer

The goodwill that Big Bertha's Birds would recognize on its balance sheet is $105,000.
Key Takeaway: Goodwill is the premium paid above book value for another business. Ken's Canaries had a book value of $550,000 and the purchase price was $655,000. $655,000 ? $550,000 = $105,000.

Question 16

Big Bertha's Birds purchased Finkel's Finches for $100,000 and the book value was $50,000. If Big Bertha's amortized the goodwill off its balance sheet for the maximum time period allowed, what would the annual charge against earnings be?
A)$50,000
B)$1,000
C)$1,500
D).8%
E)$1,250

Accepted Answer

$1,250 would be amortized annually off the balance sheet for the maximum time period allowed, which is 40 years. The Goodwill was $50,000 ($100,000 ? $50,000) divided by 40 = $1,250.
Key Takeaway: The maximum time period allowed for amortization is 40 years. The goodwill total is divided by the number of years for amortization to produce the annual charge against earnings.

Question 17

If Big Bertha's Birds purchases a family owned canary breeding farm for $150,000 and the family retained 12.21%, what is the minority interest that is put on the balance sheet?
A)$21,581
B)$18,315
C)$150,000
D)$131,685
E)$12,210

Accepted Answer

The minority interest on the balance sheet is $18,315, based on the simple calculation of .1221 x 150,000.
Key Takeaway: Minority interest refers to ownership of a company that is less than 50% and is usually expressed in a percentage.

Question 18

The following widgets were available in inventory for sale during the year. As you can see, the cost was rising throughout the year:
Beginning Inventory: 5 units at $51
Purchase 1: 12 units at $53
Purchase 2: 15 units at $54
Purchase 3: 10 units at $63
The ending inventory was 10 units. Assuming the company uses the periodic system for inventory, what is the value of the inventory at year end using the average cost method?
A)$500
B)$510
C)$630
D)$540
E)$555

Accepted Answer

The value of the inventory at year end, using the average cost method, is $555. This is found by finding the average cost per unit:
(5 x $51) + (12 x $53) + (15 x $54) + (10 x $63) x 10 = $??
5 + 12 + 15 + 10
255 + 636 + 810 + 630 x 10 x 10 = $??
42
(2331/42) x 10 = $55.50 (average unit cost) x 10 (number on hand at year end) = $555.00.
Key Takeaway: Under the average cost method, the cost flows are averaged for the period. The cost of the beginning inventory is added to the total cost of the purchases made during the period. The sum is divided by the number of units in beginning inventory and purchases to arrive at an average per unit cost. This per unit cost is multiplied by the number of units in ending inventory to determine the amount of ending inventory.

Question 19

With all her recent acquisitions, Big Bertha needs to take a good look at her debt to equity ratio. If she owes $100,000 in long term debt, $50,000 in short term loans, and has $1,000,000 in shareholder equity, what is her debt to equity ratio?
A).15
B).10
C).05
D).50
E).20

Accepted Answer

The debt to equity ratio is .15. This is calculated by taking total debt and dividing it by shareholder equity. In this case: 150,000 / 1,000,000.
Key Takeaway: The debt to equity ratio is a formula: Total Debt / Shareholder Equity. It is a measurement of a company's financial leverage.

Question 20

If $5,000,000 in 7% bonds are issued at 104 ½, how much cash is generated from the sale?
A)$1,040,000
B)$1,000,000
C)$5,000,000
D)$5,225,000
E)$3,500,000

Accepted Answer

The cash generated by the sale of the bond is $5,225,000.
$5,225,000 x 1.045 = $5,225,000
Key Takeaway: The bonds being issued at 104 ½ means that the bonds sold for 4.5% more than the face value.

Quiz 1: Accounting

A corporation issues $500,000 in 20-year cash bonds that have an 8% interest rate, payable annually. The current market rate is 7%. The corporation uses the straight-line method to amortize the bond discount or premium. Which of the following is true?

Ken's Canaries shows the following balances in the books: Common Stock $200,000 Paid in Capital In Excess of Par $20,000 Retained Earnings $95,000 Treasury Stock $10,000 What is the total stockholder's equity?

Which of the following choices would appear first under the assets category in a balance sheet?

Equipment that was purchased for $30,000 has accumulated depreciation of $27,000. It is sold to the scrap yard for $3,500. What is the gain or loss on the disposal of this fixed asset?

Ken's Canaries shows current assets of $150,000 and current liabilities of $75,000. If Ken uses cash to purchase canaries that will be resold, which is true of his working capital and current ratio?

Which of the following appears as a category in the balance sheet?

If Ken's Canaries, which is not publicly traded, issues common stock in exchange for a new delivery truck, how should the transaction be recorded?

If an 8% $200,000 bond with a date of March 1, 2010 is sold on March 31, 2010, the buyer of the bond will pay the seller how much in interest on the selling date?

The purchase of treasury stock would be shown under which section on the statement of cash flows?

Which of the following is true regarding the difference between book value and shareholder's equity?

Which of the following entries would be made to close a dividends account?

If Aaron the Architect operates as a sole proprietor and he withdraws cash from his business to pay himself, how does this affect the balance sheet?

A corporation purchased 20% of the outstanding shares of common stock of Ken's Canaries as an investment. Ken's Canaries had a banner year with profits and paid cash dividends. What would the corporation that holds the stock do to record the transaction?

Unearned revenue is considered a/an:

Big Bertha's Birds decided to purchase Ken's Canaries. Ken's Canaries has a book value of $550,000. Big Bertha paid $655,000 in stock and cash under the purchase method. How much goodwill would Big Bertha be required to put on its balance sheet?

Big Bertha's Birds purchased Finkel's Finches for $100,000 and the book value was $50,000. If Big Bertha's amortized the goodwill off its balance sheet for the maximum time period allowed, what would the annual charge against earnings be?

If Big Bertha's Birds purchases a family owned canary breeding farm for $150,000 and the family retained 12.21%, what is the minority interest that is put on the balance sheet?

With all her recent acquisitions, Big Bertha needs to take a good look at her debt to equity ratio. If she owes $100,000 in long term debt, $50,000 in short term loans, and has $1,000,000 in shareholder equity, what is her debt to equity ratio?

If $5,000,000 in 7% bonds are issued at 104 ½, how much cash is generated from the sale?