ACG 201 – Financial Accounting – Final Exam – Graded A+ solutions
Answer the following questions using the Test #3 Answer Sheet.
True or False: Please indicate whether each statement is true or false. (2 points per question)
1. The initial owners of stock of a newly formed corporation are called directors.
2. The paid-in capital from sale of treasury stock account is debited if the sales price of the treasury stock sold is greater than its cost.
3. Bonds of major corporations are traded on bond exchanges.
4. An equal stream of periodic payments is called an annuity.
5. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.
6. There is a loss on redemption of bonds when bonds are redeemed above carrying value.
7. Income tax expense reported on the income statement is the total taxes to be paid.
8. Cash, as the term is used for the statement of cash flows, could indicate either cash or cash equivalents.
9. Using the indirect method, if land costing $85,000 was sold for $145,000, the amount reported in the financing activities section of the statement of cash flows would be $85,000.
10. One of the prerequisites to paying a cash dividend is sufficient retained earnings.
11. Cash paid to acquire treasury stock should be shown on the statement of cash flows from investing activities.
12. In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.
13. If a company’s rate of return on common stockholders’ equity is greater than its rate of return on total assets, the company is effectively using leverage.
14. Generally, all deductions made from an employee’s gross pay are required by law.
15. The main source of paid-in-capital is from issuing stock.
Multiple Choice (2 points per question):
16. The journal entry a company uses to record the payment of a discounted note is
a. debit Notes Payable and Interest Expense; credit Cash
b. debit Notes Payable; credit Cash
c. debit Cash; credit Notes Payable
d. debit Accounts Payable; credit Cash
17. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $120; cumulative earnings for the year prior to this week, $24,500; Social security tax rate, 6% on maximum of $100,000; and Medicare tax rate, 1.5% on all earnings; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, .8% on the first $7,000. What is the net amount to be paid the employee?
a. $568.74
b. $601.50
c. $660.00
d. $574.90
18. The following totals for the month of April were taken from the payroll register of Magnum Company.
Salaries $12,000
FICA taxes withheld 550
Income taxes withheld 2,500
Medical insurance deductions 450
Federal Unemployment Taxes 32
State Unemployment Taxes 216
The journal entry to record the monthly payroll on April 30 would include a
a. credit to Salaries Payable for $8,500.
b. debit to Salaries Expense for $8,500.
c. debit to Salaries Payable for $8,500.
d. debit to Salaries Payable for $8,252.
19. Elgin Company sells merchandise with a one year warranty. In 2009, sales consisted of 2,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2009 and 70% in 2010. In the 2009 income statement, Elgin should show warranty expense of
a. $7,500
b. $17,500
c. $25,000
d. $0
20. The excess of issue price over par of common stock is termed a(n)
a. discount
b. income
c. deficit
d. premium
21. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $1 per share dividend is declared?
a. $60,000
b. $5,000
c. $100,000
d. $55,000
22. The liability for a dividend is recorded on which of the following dates?
a. the date of record
b. the date of payment
c. the date of announcement
d. the date of declaration
23. When the market rate of interest was 11%, Munson Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was
a. $1,052,310
b. $1,154387
c. $1,000,000
d. $ 720,495
24. A $300,000 bond was redeemed at 103 when the carrying value of the bond was $315,000. The entry to record the redemption would include a
a. loss on bond redemption of $6,000.
b. gain on bond redemption of $6,000.
c. gain on bond redemption of $9,000.
d. loss on bond redemption of $9,000.
25. When the effective-interest method is used, the amortization of the bond premium
a. increases interest expense each period
b. decreases interest expense each period
c. increases interest expense in some periods and decreases interest expense in other periods
d. has no effect on the interest expense in any period
26. Long-term investments are held for all of the listed reasons below except
a. their income
b. long-term gain potential
c. influence over another business entity
d. meet current cash needs
27. On the statement of cash flows, the cash flows from financing activities section would include
a. receipts from the sale of investments
b. payments for the acquisition of investments
c. receipts from a note receivable
d. receipts from the issuance of capital stock
28. A company had net income of $252,000. Depreciation expense is $26,000. During the year, Accounts Receivable and Inventory increased $15,000 and $40,000, respectively. Prepaid Expenses and Accounts Payable decreased $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much cash was provided by operating activities?
a. $217,000.
b. $224,000.
c. $284,000.
d. $305,000.
29. One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to
a. judge the relative potential of two companies of similar size in different industries.
b. determine which companies in a single industry are of the same value.
c. determine which companies in a single industry are of the same size.
d. make a better comparison of two companies of different sizes in the same industry.
30. The balance sheets at the end of each of the first two years of operations indicate the following:
2007 2006
Total current assets $250,000 $225,000
Total investments 50,000 25,000
Total fixed assets 450,000 300,000
Total current liabilities 100,000 37,500
Total long-term liabilities 200,000 112,500
Preferred 9% stock, $100 par 50,000 50,000
Common stock, $10 par 250,000 250,000
Paid-in capital in excess of par-
common stock 25,000 25,000
Retained earnings 125,000 125,000
If net income is $50,000 and interest expense is $20,000 for 2007, what are the earnings per share on common stock for 2007?
a. $1.82
b. $2.00
c. $2.80
d. $1.20
Problems:
31. On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. Present the entries to record the following transactions for the current year (7 points):
(a) Issuance of the bonds.
(b) Accrual of interest and amortization of bond discount for the year, on December 31, using the straight-line method.
32. Excel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31 indicated the following (10 points):
Salary expense $120,000
Federal income tax withheld 20,000
Of the payroll, $40,000 is subject to social security tax of 6%; $120,000 is subject to Medicare tax of 1.5%; $10,000 is subject to state unemployment tax of 4.3% and federal unemployment tax of 0.8%. Present the journal entries for payroll tax expense if the employees are paid (a) December 31 of the current year, (b) January 2 of the following year.
33. State the section(s) of the statement of cash flows prepared by the indirect method (operating activities, investing activities, financing activities, or not reported) and the amount that would be reported for each of the following transactions (9 points):
(a) Received $145,000 from the sale of land costing $70,000.
(b) Purchased investments for $50,000.
(c) Declared $35,000 cash dividends on stock. $5,000 dividends were payable at the beginning of the year, and $6,000 were payable at the end of the year.
(d) Acquired equipment for $32,000 cash.
(e) Declared and issued 100 shares of $20 par common stock as a stock dividend, when the market price of the stock was $32 a share.
(f) Recognized by an adjusting entry depreciation for the year, $48,000.
(g) Issued 85,000 shares of $10 par common stock for $25 a share, receiving cash.
(h) Issued $500,000 of 20-year, 10% bonds payable at 99.
(i) Borrowed $43,000 from Regional Bank, issuing a 5-year, 8% note for that amount.
34. The following information has been condensed from the December 31 balance sheets of Hanson Co. (5 points):
2010 2009
Assets:
Current assets $ 825,500 $ 674,300
Fixed assets (net) 1,473,600 1,275,300
Total assets $2,299,100 $1,949,600
Liabilities:
Current liabilities $ 313,500 $ 309,600
Long-term liabilities 703,000 545,000
Total liabilities $1,016,500 $ 854,600
Stockholders’ equity $1,282,600 $1,095,000
Total liabilities and
stockholders’ equity $2,299,100 $1,949,600
(a) Determine the ratio of fixed assets to long-term liabilities for 2010 and 2009.
(b) Determine the ratio of liabilities to stockholders’ equity for 2010 and 2009.
(c) Comment on the year-to-year changes for both ratios.
35. Journalize the following selected transactions completed during the current fiscal year (9 points):
Jan. 3 The board of directors reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 400,000.
22 Declared a dividend of $1.50 per share on the outstanding shares of common stock.
Feb. 8 Paid the dividend declared on January 22.
Sep. 1 Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $30).
Oct. 1 Issued the certificates for the common stock dividend declared on September
