PA MT HW 3 – MULTIPLE CHOICE AND T/F (All 100 Questions Solved)

Question
PA MT HW 3 – MULTIPLE CHOICE AND T/F
100 QUESTIONS T/F AND M/C

I-TRUE/FALSE. Write, on the answer sheet above, ‘T’ if the statement is true and ‘F’ if the statement is false.

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II- For the Multiple choice questions, please select the letter that better answers the question and write it

answer sheet.

1) The cost of razing a building on a parcel of land to build a new building is added to the cost of the

land.

2) Treating a cost which should be an expense as a capital expenditure will make a company’s net

income higher.

3) Expenditures which extend the life of an asset or increase its productive capacity should be

expensed.

4) Normal expenditures for repairs and maintenance should be capitalized.

5) Which of the following is included in the cost of land?

A) The cost of paving B) The cost of fencing C) The cost of outdoor lighting D) The cost of clearing the land

6) The cost of excavating a basement for a new building is added to the price of the land.

7) The cost of land includes the cost of removing unwanted buildings.

8) An asset impairment will be reflected by an increase in the book value of an asset, as shown on the

balance sheet.

9) A loss on the sale of a plant asset is recorded when the sales price exceeds the book value.

10) Which of the following items should be depleted?

A) Intangible property B) Natural resources C) Land D) Tangible property, plant, and equipment, other than land

11) Which of the following is the expense resulting from a decline in the utility of a natural resource?

A) Obsolescence B) Depreciation C) Depletion D) Amortization

12) Which of the following accounting methods is the method used to compute depletion?

A) Units-of-production B) Straight-line C) First-In, First-Out D) Declining-balance

13) Navajo Mining Company purchased a mine in 2013 for $3,400,000. It was estimated that the mine

contained 200,000 tons of ore and that the mine would be worthless after all of the ore was

extracted. The company extracted 25,000 tons of ore in 2013 and 30,000 tons of ore in 2014.

What is depletion expense for 2013?

A) $425,000 B) $510,000 C) $340,000 D) $680,000

14) Which would NOT be accounted for by the depletion method?

A) Oil reserves B) Coal reserves C) Land D) Timber reserves

15) A mine is purchased for $4,000,000. There will be a salvage value of $300,000 when the land is

restored after mining is completed. The mine has an estimated 250,000 tons of coal. What is the

depletable cost per ton of coal?

A) $13.33

B) $14.80

C) $16.00

D) Cannot be determined from given information

16) Depletion would be used for all of the following EXCEPT:

A) oil and gas. B) timber. C) merchandise inventory. D) minerals.

17) If assets are junked before being fully depreciated, there is a loss equal to the book value of the

asset.

18) A loss occurs on the exchange of a plant asset if the market value of the new asset received is

greater than the total amount given up in the exchange.

19) A gain on disposal of an asset is recorded when cash received is less than book value.

20) When an asset is fully depreciated, the salvage value must be written off.

21) When an asset is fully depreciated, no further depreciation expense is recorded.

22) Which of the following is NOT considered a plant asset?

A) Building B) Land C) Equipment D) Copyright

23) Which of the following is the amount capitalized as goodwill?

A) The excess of the cost of an acquired company over the sum of the book value of its assets

B) The excess of the cost of an acquired company over the sum of the market value of its assets

C) The excess of the cost of an acquired company over the sum of the book value of its net assets

D) The excess of the cost of an acquired company over the sum of the market value of its net

assets

24) Which of the following types of expenses result from a decline in the utility of an intangible asset?

A) Depreciation B) Obsolescence C) Amortization D) Depletion

25) Azimuth Company purchases a small business for $500,000. The market value of the business’s

assets are $850,000, and the market value of the liabilities are $400,000. How much goodwill

should Azimuth record?

A) $50,000 B) None C) $450,000 D) $500,000

26) If a company incurs an expense, but treats it as an asset, net income would be understated.

27) If a note payable has installments due within a year, the entire note is treated as a current liability.

28) Amounts owed for products or services purchased on account are contingent liabilities.

29) Unearned revenue is an obligation to provide goods or services to the customer.

30) Notes payable are considered short-term if they are due within the current operating cycle.

31) Which of the following is an amount for products or services purchased on account?

A) Accrued expense B) Estimated warranty payable C) Unearned revenue D) Accounts payable

32) Which of the following is a characteristic of a current liability?

A) A current liability is a liability that is due within one year or one operating cycle, whichever is

longer.

B) A current liability is a liability that is due within 30 days.

C) A current liability is a liability that is due within 10 days.

D) A current liability is a liability that is due in longer than a one-year period, or one operating

cycle.

33) Which of the following occurs when a company records accrued interest expense on a note

payable?

A) Note payable is credited. B) Cash is debited. C) Interest payable is credited. D) Interest expense is credited.

34) In which of the following periods should the estimated warranty liability be debited?

A) The period when the product is shipped to the customer

B) The period when the product is sold

C) The period when cash is collected for the sale of the product

D) The period when cash is paid to repair or replace the product

35) Which of the following is the proper treatment for a liability that exists, but the exact amount of

which is not known?

A) The liability should be ignored.

B) The liability should be reported in the notes to the financial statements.

C) The liability should be treated as a contingent liability.

D) The amount of the liability should be estimated and recorded.

36) Tractor World offers warranties on all their tractors. They estimate warranty expense at 2.4% of

sales. At the beginning of 2013, the Estimated warranty payable account had a credit balance of

$900. During the year, Tractor World had $285,000 of sales, and had to pay out $5,100 in warranty

payments. At the end of the year, how much Warranty expense was reported on the income

statement?

A) $6,840 B) $5,100 C) $4,200 D) $2,640

37) A certain contingent liability was evaluated at year-end, and considered to have a reasonable

possibility of becoming an actual liability. If the accountant decided NOT to report it on the

balance sheet or in the notes to the financial statement, what effect would this have on the financial

reporting of the company?

A) The net income of the company would be understated.

B) The information about the transaction would be inadequately disclosed in the notes.

C) The liabilities on the balance sheet would be understated.

D) There would be no effect.

38) Which of the following is NOT an exact liability?

A) Accounts payable B) Income tax payable C) Warranty payable D) FICA tax payable

39) Gross pay is the total amount of salary, wages, commissions, and bonuses earned by an employee

during a pay period.

40) The old age, survivors, and disability insurance portion of FICA taxes is imposed on all of an

individual employee’s earnings.

41) Payroll tax expense includes the employer’s portion of FICA taxes, state unemployment taxes, and

federal unemployment taxes.

42) FICA tax is a tax which is paid by the employer only and is not deducted from the employee’s pay.

43) The Statewide Sales Company has gross pay for March of $45,000. The first journal entry in the

payroll cycle to record salary expense would include a credit to Cash for $45,000.

44) Which of the following is included in the entry to record the employer’s payroll taxes?

A) A credit to Payroll tax expense

B) A credit to FICA tax payable

C) A debit to State unemployment tax payable

D) A credit to Salary payable to employees

45) Dan Jones and Pat Smith are the only two employees of Lone Star Company. In January, 2012,

Dan’s gross pay was $4,400 and Pat’s gross pay was $5,200. All earnings are subject to FICA taxes

of 7.65%.

Which of the following would be included in the entry to record the salary expense for January?

A) A credit to Salary expense for $734.40

B) A credit to FICA tax payable for $734.40

C) A debit to FICA tax payable for $734.40

D) A debit to Salary payable to employees for $734.40

46) The Statewide Sales Company has gross pay for March of $45,000. Which of the following would

be included in the first journal entry in the payroll cycle to record salary expense?

A) Debit Cash B) Debit Salary payable C) Debit Salary expense D) Credit Salary expense

47) Art Parrish, the sole employee of Parrish Sales, has gross salary for March of $4,000. The entire

amount is under the OASDI limit of $106,800, and thus subject to FICA. He is also subject to federal

income tax at a rate of 18%. Art has a deduction of $320 for health insurance and $80 for United

Way. The second entry in the payroll cycle to record the disbursement of his net pay should

include which of the following?

A) Debit Cash B) Credit to Payable to the United Way C) Credit to Salary payable D) Debit FICA tax payable

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

48) The current portion of notes payable is the principal amount that will be paid within one year of

the balance sheet date.

49) Installment payments for mortgages are normally paid once per year.

50) Bonds are long-term liabilities issued to multiple lenders, usually in increments of $1,000.

51) The company will repay the principal amount of the bond on the maturity date.

52) If a bond is issued at a discount, it will sell for more than face value.

53) Installment payments for mortgages typically contain both an amount for principal repayment and

an amount for interest.

54) The current portion of notes payable must be reported on the balance sheet combined with the

long-term portion under long-term liabilities.

55) The balance in the Bonds payable account is a credit of $50,000. The balance in the Discount on

bonds payable account is a debit of $1,500. The bond carrying amount is $51,500.

56) Interest payable would normally be shown on the balance sheet in current liabilities.

57) The time value of money is based on the concept that money earns interest over time.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

58) Using the present value tables, please compute the present value of an annuity which pays $2,000

per year for 10 years, discounted at 7%.

A) $14,048 B) $19,240 C) $16,440 D) $18,180

59) On January 1, 2014, Partridge Company issued $50,000 of 6-year bonds with a stated rate of 3%.

The market rate at time of issue was 4%, so the bonds were discounted and sold for $47,331.

Partridge uses the effective-interest rate of amortization for bond discount. Semiannual interest

payments are made on June 30 and December 31 of each year. How much interest expense will be

recorded when the first interest payment is made? (Please round to the nearest whole dollar.)

A) $750 B) $2,000 C) $947 D) $167

60) The main reason companies retire bonds prior to their maturity date is to relieve the pressure of

paying semiannual interest payments.

61) If a company wishes to retire bonds early, they may call the bonds if the bonds are callable, but

they may not purchase them on the open market.

62) Compute the present value of a bond:

The principal amount is $50,000, the stated rate is 3%, and the term of the bond is 6 years. The

bond pays interest semiannually. At the time of issue, the market rate is 4%. Please compute the

present value of the bond at market rate using the present value tables.

A) $7,931 B) $39,400 C) $47,331 D) $59,000

63) The formation of a corporation is generally less complicated than the formation of a partnership.

64) Different classes and types of stock carry different degrees of risk for the shareholder.

65) When a company records the year-end closing entries, the first step is to close the Revenues to

Retained earnings.

66) Declaring and paying dividends causes a decrease in both assets and equity.

67) If a company has a strong rate of return on common stockholders’ equity, that is an indication of

strong profitability.

68) The rate of return on total assets and the rate of return on common stockholders’ equity are used to

evaluate the:

A) ability to pay current liabilities with current assets.

B) profitability of the business.

C) cash flow of the business.

D) liquidity of the business.

69) Reed Company reports the following information for the year 2013:

Net income $46,000

Preferred dividends 12,000

Common equity, Jan 1 800,000

Common equity, Dec 31 900,000

Please calculate the rate of return on common stockholders’ equity. Please round to 3 decimal

places.

A) 0.014 B) 0.054 C) 0.040 D) 0.043

70) Normally, a company’s book income and tax income should be the same.

71) Which one of the following describes financial leverage?

A) To earn more income on borrowed money than the related interest expense

B) To finance with equity capital

C) To pay off all long-term debt in order to reduce interest expense

D) To offer discounts to customers for early payment of invoices

72) Origami Company is considering a new project and needs to raise $800,000 of capital. Their

after-tax net income would be $75,000 if they do not implement the new project. If the new project

is implemented, it will add an additional $50,000 of profits before tax and interest. Origami’s

income tax rate is 40%. If they use debt financing, the interest will be at 5%. Origami has 25,000

shares of common stock outstanding and no preferred stock.

If Origami decides to implement the project using debt financing, what will be the earnings per

share amount? (Please round to the nearest cent.)

A) $3.24 B) $3.40 C) $4.14 D) $4.20

73) Origami Company is considering a new project and needs to raise $800,000 of capital. Their

after-tax net income would be $75,000 if they do not implement the new project. If the new project

is implemented, it will add an additional $50,000 of profits before tax and interest. Origami’s

income tax rate is 40%. If they use debt financing, the interest will be at 5%. Origami has 25,000

shares of common stock outstanding, and no preferred stock. They would have to issue an

additional 10,000 shares of common stock to finance the project with equity capital.

If Origami decides to implement the project using equity financing, what will be the earnings per

share amount? (Please round to the nearest cent.)

A) $3.00 B) $3.24 C) $4.14 D) $3.40

74) Deferred tax can either be an asset or a liability.

75) Origami Company is considering a new project and needs to raise $800,000 of capital. Their

after-tax net income would be $75,000 if they do not implement the new project. If the new project

is implemented, it will add an additional $50,000 of profits before tax and interest. Origami’s

income tax rate is 40%. If they use debt financing, the interest will be at 5%. Origami has 25,000

shares of common stock outstanding and no preferred stock. They would have to issue an

additional 10,000 shares of common stock to finance the project with equity capital.

If Origami decides to use equity financing, their earnings per share will be higher than if they use

debt.

76) A company’s income tax expense is calculated on the basis of book income, but the income tax

payable amount is based on the:

A) amount of dividends paid to shareholders.

B) amount of payroll tax that has not been paid yet.

C) sales tax rate applied to sales revenues.

D) amount of taxable income, as calculated on the income tax return.

77) Which of the following factors may cause a difference between book income and taxable income?

A) The company has a deposit in transit at year-end.

B) The company uses straight-line depreciation for books and accelerated depreciation for tax.

C) The company sells stock right before the end of the year.

D) The company pays its federal income taxes quarterly as opposed to annually.

78) If a company has a strong rate of return on total assets, that shows that they can easily pay off their

current liabilities with their current assets.

79) If a company has a strong rate of return on common stockholders’ equity, that is an indication of

good cash flow.

80) Which of the following measures a company’s success in using assets to earn income?

A) Days sales in receivables B) The rate of return on stockholders’ equity C) Inventory turnover D) The rate of return on total assets

81) Paying dividends causes a decrease in total paid-in capital.

82) If preferred stock is non-cumulative, then the company does NOT need to pay dividends that were

passed in previous years.

83) If preferred stock is cumulative, then the company does NOT need to pay dividends that were

passed in previous years.

84) A dividend’s declaration date is the date the board of directors announces the intention to pay the

dividend.

85) When a company records the year-end closing entries, the Income summary balance, before it is

closed to Retained earnings, should be equal to the Net income or Net loss for the year.

86) A net loss for the year increases the balance in Retained earnings.

87) Ajax Company was founded in 2009. Its yearly earnings are shown here:

2012: Net income of $4,000

2013: Net income of $23,000

2014: Net income of $2,000

2015: Net loss of $30,000

No dividends were paid. At the end of the year 2015, Ajax would have a Retained earnings deficit

of $1,000.

88) Corporations must issue common stock, but may or may not decide to issue preferred stock.

89) All forms and classes of stock carry voting rights.

90) Every corporation issues preferred stock.

91) A corporation is a separate legal entity formed under the laws of a particular state.

92) Stockholders of a corporation have unlimited liability for the corporation’s debt.

93) Rules of GAAP require that bond premiums or discounts be amortized using the straight-line

method.

94) If the difference between the effective-interest method of amortizing bond discount and the

straight-line method is immaterial, then GAAP permits use of the straight-line method.

95) The time value of money is related to which of the following concepts?

A) Money loses value over time as it is spent.

B) Money can buy extra time.

C) Money earns interest over time and grows in value.

D) Money loses its purchasing power because of inflation.

96) FICA tax payable would normally be shown on the balance sheet in long-term liabilities.

97) Accounts payable is always shown on the balance sheet in current liabilities.

98) The balance in the Bonds payable account is a credit of $50,000. The balance in the Discount on

bonds payable is a debit of $1,500. The balance sheet will report the bond balance as $48,500.

99) The balance in the Bonds payable account is a credit of $50,000. The balance in the Premium on

bonds payable account is a credit of $900. The bond carrying amount is $50,900.

100) Deferred tax would normally arise from which of the following situations?

A) When a company makes a different choice for its tax return versus its book net income

B) When a company pays income tax quarterly versus yearly

C) When a company withholds income tax from its employees’ payroll

D) When a company pays off all of its debts at the end of the year

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