Study Guide for Exam 3 (Chapter 7 & 8)
Study Guide for Exam 3 (Chapter 7 & 8) ACCT 2810 - 001
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This 7 page Study Guide was uploaded by Seon Notetaker on Monday March 21, 2016. The Study Guide belongs to ACCT 2810 - 001 at Auburn University taught by Jennifer Norheim Cornett in Fall 2015. Since its upload, it has received 183 views. For similar materials see Fundamentals Of Accounting in Accounting at Auburn University.
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Date Created: 03/21/16
FUNDAMENTALS OF ACCOUNTING STUDY GUIDE EXAM 3 (CHAPTER 7 & 8) CHAPTER 7 1. A company acquired some land for $80,000 to construct a new office complex. Legal Fees paid were $2,300, delinquent taxes assumed were $3,400, and $5,850 was paid to remove an old building. Materials salvaged from the demolition of the building were sold for $1950. Determine the cost of the land to be reported on the balance sheet. a. $91,550 b. $85,700 c. $89,600 d. $93,500 Justification: The land was bought for $80,000 + Legal fees $2,300 + delinquent taxes $3,400 + $5,850. In all the company spent $91,550 on the cost of the land but the Materials salvaged from the building was sold for $1,950 2. What method of depreciation considers residual value in computing the normal periodic depreciation? a. Straight-line method b. MACRS c. Double Declining Method d. None of the above Justification: Straight-line method is the same amount of depreciation expense for each year of the asset’s useful life. =Cost-Residual value/useful life 3. Book Value of an asset is calculated by: a. Adding residual value from the assets cost b. Adding residual value from current market value c. Subtracting accumulated depreciation from the asset’s cost d. Subtracting accumulated depreciation from the current market value of the asset Justification: Book value formula= Cost- Accumulated depreciation 4. A machine was purchased for $60,000. It has a useful life of 5 years and a residual value of $6,000. Under the straight-line method, what is annual depreciation expense? a. $10,800 b. $46,000 c. $18,000 d. $8,100 Justification: Annual Depreciation Formula= cost-residual value/useful life=$60,000-$6,000/5 years = $10,800 5. A gain is recorded on the sale of fixed assets when: a. The asset is sold for a price less than its book value b. Accumulated depreciation on the asset is less than its selling price c. The asset is sold for a price more than its book value d. Accumulated depreciation on the asset is more than its selling price Justification: Net Book Value < BOOT= Gain, Net Book Value>BOOT= Loss, Net Book Value=BOOT= No Gain or Loss. *BOOT- account you get in exchange for the asset 6. Recording Depreciation: a. Decreases net income but has no effect on fixed assets and cash flows b. Increases net income but has no effect on cash flows c. Decreases net income but has no effect on fixed assets and cash flows d. Decreases net income but has no effect on cash flows Justification: Depreciation is an allocation of a fixed asset’s cost to expense over the asset’s useful life. Depreciation does not provide cash to replace fixed assets and does not require an outlay of cash when it is recorded thus recording depreciation has no effect on cash flows (operating, investing, financing activities). 7. Which of the following is NOT a fixed asset? a. Equipment b. Land held for investment c. Machinery d. None of the above Justification: Fixed Assets are long term or relatively permanent assets such as equipment, machinery, buildings, and land. 8. Which of the following is an example of an intangible asset? a. Patents b. Goodwill c. Copyrights d. All of the above Justification: Patents, goodwill, and copyrights are long-lived assets, intangible assets that are useful in operations, and not held for sale, and without physical qualities. 9. An example of an accelerated depreciation method is: a. Straight-line b. Double-declining balance c. Units-of-production d. Depletion Balance Justification: Accelerated Depreciation is another word for Double-declining method. It is the declining periodic expenses over the expected useful life of the asset. 10. True or False: Residual value is ignored under double-declining-balance depreciation expect for the final year Justification: Residual value is a fixed asset at the end of its useful life. CHAPTER 8 1. When the market rate of interest on bonds is equal to the contract rate, the bonds will sell at: a. A discount or a premium b. A premium c. Their face value d. A discount Justification: A bong requires interest payments, with the face amount payable at the maturity date. 2. A business issued a $5,000, 60-day, 12% note to the bank. The amount due at maturity is: a. $4,900 b. $5,000 c. $5,100 d. $5,600 Justification: $5,000 x 60/360 x 12%= 100= $5,100 3. A current liability is a debt that is reasonably expected to be paid: a. Within one year b. By the end of the day c. Within six months d. Within five years Justification: Current Liability: due within one year, Long-term Liabilities: due beyond one year, Contingent Liability: potential liabilities if certain events occur in the future. 4. For the year that just ended, a company reports net income of $1,500,000. There are 500,000 shares authorized, 300,000 shares issued, and 250,000 shares of common stock outstanding. Based on this information, what is the earnings per share? a. $3.00 b. $5.00 c. $6.00 d. $2.50 Justification: $1,500,000/250,000= $6.00 5. Employers do not incur an expense for which of the following payroll taxes? a. FICA taxes b. Federal unemployment compensation tax c. State unemployment compensation tax d. Employees’ federal income tax Justification: There is an expense for FICA taxes, Federal unemployment compensation tax, and State unemployment compensation tax. Employees Federal Income tax are withheld 6. Most employers are levied a tax on payrolls for: a. Federal unemployment compensation tax b. FICA taxes c. State unemployment compensation d. Employees’ federal income tax Justification: Unemployment tax provide for payments to unemployed workers. the amounts paid as benefits are obtained, for the most part, from a tax on employers only 7. When the contract rate of interest on bonds is less than the market rate of interest, the bonds sell at: a. Discount b. Premium c. Ratio of stockholder’s equity to total assets d. Ratio of liabilities to stockholder’s equity Justification: Bonds sell at discount because buyers are only willing to pay less than the face amount for bonds whose contract rate is less than the market rate 8. When the contract rate of interest on bonds is higher than the market rate of Interest, the bonds sell at a. Discount b. Premium c. Ratio of stockholder’s equity to total assets d. Ratio of liabilities to stockholder’s equity Justification: Bonds sell at premium because buyers are willing to pay more than the face amount for bonds whose contract rate is higher than the market rate 9. If a corporation issues only one class of stock, it is called a. No-par stock b. Outstanding stock c. Preferred Stock d. Common Stock Justification: Common stock is one class of stock that is issued 10. True or False: Bonds payable is an account that is reported in the noncurrent liabilities section of the corporate balance sheet? Justification: A bond is interest-bearing note that is a liability
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