ACC 206 Week 5 Mid-Term Exam – Strayer

ACC/206 Week 5 Quiz – Mid-Term Exam – Strayer

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CHAPTER 10

PLANTASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS

CHAPTERSTUDY OBJECTIVES

1. Describe how the cost principle applies to plant assets.

2. Explain the concept of depreciation..

3. Compute periodic depreciation using different methods.

4. Describe the procedure for revising periodic depreciation.

5. Distinguish between revenue and capital expenditures, and explain the entries for each.

6. Explain how to account for the disposal of a plant asset.

7. Compute periodic depletion of natural resources.

8. Explain the basic issues related to accounting for intangible assets.

9. Indicate how plant assets, natural resources, and intangible assets are reported.

10. Explain how to account for the exchange of plant assets.

TRUE-FALSESTATEMENTS

1. All plant assets (fixed assets) must be depreciated for accounting purposes.

2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.

4. Land improvementsare generally charged to the Land account.

5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

6. The book value of a plant asset is always equal to its fair market value.

7. Recording depreciation on plant assets affects the balance sheet and the income statement.

8. The depreciable cost of a plant asset is its original cost minus obsolescence.

9. Recording depreciationeach period is an application of the matching principle.

10. The Accumulated Depreciation account represents a cash fund available to replace plant assets.

11. In calculating depreciation, both plant asset cost and useful life are based on estimates.

12. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

13. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

14. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset’s useful life.

15. Under the double-declining-balance method, the depreciation rate used each year remains constant.

16. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

17. A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.

18. A change in the estimated salvage value of a plant asset requires a restatement of prior years’ depreciation.

19. To determine a new depreciation amount after a change in estimate of a plant asset’s useful life, the asset’s remaining depreciable cost is divided by its remaining useful life.

20. Additions and improvements to a plant asset that increase the asset’s operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

21. Capital expenditures are expenditures that increase the company’s investment in productive facilities.

22. Ordinary repairs should be recognized when incurred as revenue expenditures.

23. A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

24. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

25. The fair market value of a plant asset is always the same as its book value.

26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

27. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset’s book value.

28. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.

29. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.

30. A plant asset must be fully depreciated before it can be removed from the books.

31. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

32. Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.

33. The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet.

34. Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.

35. Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.

36. The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature.

37. Conceptually, the cost allocation procedures for natural resources parallels that of plant assets.

38. Natural resources include standing timber and underground deposits of oil, gas, and minerals.

39. If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.

40. When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

41. Research and development costs which result in a successful product which is patentable are charged to the Patent account.

42. The cost of a patent must be amortized over a 20-year period.

43. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

44. The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes.

45. The asset turnover ratio is calculated as total sales divided by ending total assets.

46. Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset.

a47. An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.

a48. Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.

a49. When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.

Additional True-False Questions

50. When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project.

51. Recognition of depreciation permits the accumulation of cash for the replacement of the asset.

52. When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.

53. Depletion expense is reported in the income statement as an operating expense.

54. Goodwill is not recognized in accounting unless it is acquired from another business enterprise.

55. Research and development costs should be charged to expense when incurred.

56. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.

MULTIPLECHOICE QUESTIONS

57. The cost of a purchasedbuilding includes all of the following except a. closing costs.
b. real estate broker’s commission. c. remodeling costs.
d. All of these are included.

58. A company purchased land for $90,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at
a. $97,000. b. $90,000. c. $95,000. d. $102,000.

59. Which one of the following items is not considered a part of the cost of a truck purchased for business use?
a. Sales tax
b. Truck license c. Freight charges
d. Cost of lettering on side of truck

60. Which of the following assets does not decline in service potential over the course of its useful life?
a. Equipment b. Furnishings c. Land
d. Fixtures

61. The four subdivisions for plant assets are
a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.

62. The cost of land does not include
a. real estate brokers’ commission. b. annual property taxes.
c. accrued property taxes assumed by the purchaser. d. title fees.

63. Feeney Clinic purchases land for $130,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Feeney Clinic record as the cost for the land?
a. $132,200 b. $130,000 c. $134,700 d. $132,500

64. Belle Company buys land for $50,000 on 12/31/07. As of 3/31/08, the land has appreciated in value to $50,700. On 12/31/08, the land has an appraised value of $51,800.By what amount should the Land account be increased in 2008?
a. $0 b. $700
c. $1,100 d. $1,800

65. Pine Company acquires land for $86,000 cash. Additional costs are as follows:

Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560

Pine will record the acquisition cost of the land as a. $86,000.
b. $87,690. c. $89,610. d. $89,370.

66. Shawnee Hospital installs a new parking lot. The paving cost $30,000 and the lights to illuminate the new parking area cost $15,000. Which of the following statements is true with respect to these additions?
a. $30,000 should be debited to the Land account.
b. $15,000 should be debited to Land Improvements. c. $45,000 should be debited to the Land account. d. $45,000 should be debited to Land Improvements.
10 – 10

67. Land improvementsshould be depreciated over the useful life of the a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer. d. land improvements.

68. General Molding is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?
a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

69. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?
a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.

70. Carley Company purchases a new delivery truck for $45,000. The sales taxes are $3,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Carley record as the cost of the new truck?
a. $49,540 b. $49,420 c. $48,000 d. $47,420

71. All of the following factors in computing depreciation are estimates except a. cost.
b. residual value. c. salvage value. d. useful life.

72. Stories Company purchased equipment and these costs were incurred:

Cash price Sales taxes
Insuranceduring transit Installationand testing Total costs
$22,500 1,800 320
430 $25,050
Plant Assets, Natural Resources, and Intangible Assets 10 – 11

Stories will record the acquisition cost of the equipment as a. $22,500.
b. $24,300. c. $24,620. d. $25,050.

73. Becky’s Blooms purchased a delivery van for $20,000. The company was given a $2,000 cash discount by the dealer, and paid $1,000 sales tax. Annual insurance on the van is $500. As a result of the purchase, by how much will Becky’s Blooms increase its van account?
a. $20,000 b. $18,000 c. $19,500 d. $19,000

74. Upton Company purchased equipment on January 1 at a list price of $50,000, with credit terms 2/10, n/30. Payment was made within the discount period and Upton was given a $1,000 cash discount. Upton paid $2,500 sales tax on the equipment, and paid installation charges of $880. Prior to installation, Upton paid $2,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?
a. $52,380 b. $54,380 c. $55,380 d. $50,500

75. Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase.

76. The balance in the Accumulated Depreciationaccount represents the a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the plant asset to arrive at its fair market value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the plant asset.

77. Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?
a. Salvage value
b. Estimated useful life
c. Cash needed to replace the plant asset d. Cost

78. Depreciation is the process of allocating the cost of a plant asset over its service life in a. an equal and equitable manner.
b. an accelerated and accurate manner. c. a systematic and rational manner.
d. a conservative market-based manner.
10 – 12

79. The book value of an asset is equal to the
a. asset’s market value less its historical cost.
b. blue book value relied on by secondarymarkets. c. replacement cost of the asset.
d. asset’s cost less accumulated depreciation.

80. Accountants do not attempt to measure the change in a plant asset’s market value during ownership because
a. the assets are not held for resale. b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management’s responsibilityto determine fair values.

81. Depreciation is a process of a. asset devaluation.
b. cost accumulation. c. cost allocation.
d. asset valuation.

82. Recording depreciationeach period is necessary in accordance with the a. going concern principle.
b. cost principle.
c. matching principle.
d. asset valuation principle.

83. In computing depreciation, salvage value is
a. the fair market value of a plant asset on the date of acquisition.
b. subtracted from accumulated depreciation to determine the plant asset’s depreciable cost.
c. an estimate of a plant asset’s value at the end of its useful life. d. ignored in all the depreciation methods.

84. When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life.
b. obsolescence factors.
c. expected repairs and maintenance. d. the intended use of the asset.

85. Useful life is expressed in terms of use expected from the asset under the a. declining-balance method.
b. straight-line method.
c. units-of-activitymethod. d. none of these.

86. Equipment was purchased for $75,000. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $17,700. b. $14,700. c. $12,300. d. $12,000.
Plant Assets, Natural Resources, and Intangible Assets 10 – 13

87. A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded using the straight-line method. The annual depreciation rate is
a. 20%. b. 2%. c. 8%. d. 25%.

88. A company purchased factory equipment on April 1, 2008 for $64,000. It is estimated that the equipment will have an $8,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2008 is
a. $6,400. b. $5,600. c. $4,200. d. $4,800.

89. A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is
a. 20%. b. 25%. c. 40%. d. 4%.

90. The declining-balance method of depreciation produces a. a decreasing depreciation expense each period.
b. an increasing depreciation expense each period. c. a declining percentage rate each period.
d. a constant amount of depreciation expense each period.

91. A company purchased factory equipment for $250,000. It is estimated that the equipment will have a $25,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
a. $100,000. b. $60,000. c. $90,000. d. $43,200.

92. The units-of-activity method is generally not suitable for a. airplanes.
b. buildings.
c. delivery equipment. d. factory machinery.

93. A plant asset cost $144,000 and is estimated to have an $18,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be
a. $12,060. b. $20,250. c. $17,718. d. $13,785.
10 – 14

94. A factory machine was purchased for $75,000 on January 1, 2008. It was estimated that it would have a $15,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2008. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2008 would be
a. $7,500. b. $12,000. c. $15,000. d. $6,000.

95. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which
a. is used for tax purposes.
b. must be used for financial statement purposes. c. is required by the SEC.
d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

96. Which of the following methods of computing depreciation is production based? a. Straight-line
b. Declining-balance c. Units-of-activity d. None of these

97. Management should select the depreciation method that a. is easiest to apply.
b. best measures the plant asset’s market value over its useful life.
c. best measures the plant asset’s contribution to revenue over its useful life. d. has been used most often in the past by the company.

98. The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is
a. straight-line.
b. units-of-activity.
c. declining-balance. d. none of these.

Use the following information for questions 99–100.

On October 1, 2008, Dole Company places a new asset into service. The cost of the asset is $60,000with an estimated 5-year life and $15,000 salvage value at the end of its useful life.

99. What is the depreciation expense for 2008 if Dole Company uses the straight-line method of depreciation?
a. $2,250 b. $12,000 c. $3,000 d. $6,000
Plant Assets, Natural Resources, and Intangible Assets 10 – 15

100. What is the book value of the plant asset on the December 31, 2008, balance sheet assuming that Dole Company uses the double-declining-balance method of depreciation? a. $39,000
b. $45,000 c. $54,000 d. $57,000

101. Which depreciation method is most frequently used in businesses today? a. Straight-line
b. Declining-balance c. Units-of-activity
d. Double-declining-balance

102. Wine Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $24,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $2,000. What is the depreciation cost per unit?
a. $2.20 b. $2.40 c. $.22 d. $.24

103. Units-of-activityis an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset.
b. the asset’s use will be constant over its useful life.
c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturingcompany.

104. The calculation of depreciation using the declining balance method,
a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year’s depreciationexpense.
c. yields an increasing depreciation expense each period.
d. multiplies a declining percentage times a constant book value.

Use the following information for questions 105–106.

Grey Company purchased a new van for floral deliveries on January 1, 2008. The van cost $36,000 with an estimated life of 5 years and $9,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used.

105. What is the depreciationexpense for 2008? a. $7,200
b. $5,400 c. $10,800 d. $14,400

106. What is the balance of the AccumulatedDepreciation account at the end of 2009? a. $5,760
b. $17,280 c. $23,040 d. $8,640
10 – 16

107. Porter Company purchased equipment for $450,000 on January 1, 2007, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $20,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2009 will be
a. $50,000. b. $30,000. c. $54,440. d. $34,440.

108. A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of $10,000 at the end of its useful life. The current year’s Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is
a. 10 years. b. 8 years. c. 5 years. d. 3 years.

109. Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $14,160. b. $11,760. c. $9,840. d. $9,600.

110. Equipment was purchased for $17,000 on January 1, 2008. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2009, if the straight-line method of depreciation is used?
a. $6,680 b. $3,340 c. $2,860 d. $5,720

111. A company purchased factory equipment on June 1, 2008, for $48,000. It is estimated that the equipment will have a $3,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2008, is
a. $4,500. b. $2,625. c. $2,250. d. $1,875.

112. A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year’s Depreciation Expense is $4,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is
Plant Assets, Natural Resources, and Intangible Assets 10 – 17

a. 10 years. b. 8 years. c. 5 years. d. 3 years.

Use the following information for questions 113–115.

Brinkman Corporation bought equipment on January 1, 2008. The equipment cost $90,000 and had an expected salvage value of $15,000. The life of the equipment was estimated to be 6 years.

113. The depreciable cost of the equipment is a. $90,000.
b. $75,000. c. $50,000. d. $12,500.

114. The depreciation expense using the straight-line method of depreciation is a. $17,500.
b. $18,000. c. $12,500.
d. none of the above.

115. The book value of the equipment at the beginning of the third year would be a. $90,000.
b. $75,000. c. $65,000. d. $25,000.

116. Baden Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Baden estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Baden uses straight-line depreciation, annual depreciationwill be
a. $2,050. b. $2,036. d. $3,050. d. $1,880.

117. Bates Company purchased equipment on January 1, 2008, at a total invoice cost of $600,000. The equipment has an estimated salvage value of $15,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2009, if the straight-line method of depreciation is used?
a. $120,000 b. $240,000 c. $117,000 d. $234,000
10 – 18

118. On January 1, a machine with a useful life of five years and a residual value of $15,000 was purchased for $45,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation?
a. $10,800 b. $18,000 c. $14,400 d. $8,640

119. A machine with a cost of $160,000 has an estimated salvage value of $10,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
a. $50,000 b. $30,000 c. $43,333 d. $53,333

120. Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?
a. $60,000 b. $67,800 c. $49,500 d. $56,250

121. Larime Company purchased equipment for $40,000 on January 1, 2007, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $2,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2009 will be
a. $5,760. b. $9,120. c. $9,600. d. $5,472.

122. Interline Trucking purchased a tractor trailer for $98,000. Interline uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $14,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Interline record?
a. $7,000 b. $8,820 c. $7,560 d. $8,167

123. An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be
a. $18,000. b. $13,200. c. $9,000. d. $12,600.
Plant Assets, Natural Resources, and Intangible Assets 10 – 19

124. Equipment costing $30,000 with a salvage value of $6,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be
a. $3,600. b. $8,000. c. $6,000. d. $4,800.

125. Joe’s Quik Shop bought machinery for $25,000 on January 1, 2008. Joe estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2009, Joe decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2009?
a. $4,000 b. $2,000 c. $3,333 d $5,000

126. Each of the following is used in computing revised annual depreciation for a change in estimate except
a. book value. b. cost.
c. depreciable cost.
d. remaining useful life.

127. A change in the estimated useful life of equipment requires
a. a retroactive change in the amount of periodic depreciation recognized in previous years.
b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
c. that the amount of periodic depreciation be changed in the current year and in future years.
d. that income for the current year be increased.

128. Hunt Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the IRS.
b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.

129. Jim’s Copy Shop bought equipment for $90,000 on January 1, 2007. Jim estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2008, Jim decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2008?
a. $30,000 b. $12,000 c. $15,000 d. $22,500
10 – 20

130. Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as
a. capital expenditures. b. expense expenditures. c. ordinary repairs.
d. revenue expenditures.

131. Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally
a. expensed when incurred.
b. capitalized as a part of the cost of the asset.
c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.

132. Which of the following is not true of ordinary repairs?
a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures.
c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.

133. The paneling of the body of an open pickup truck would be classified as a(n) a. revenue expenditure.
b. addition.
c. improvement. d. ordinary repair.

134. Additions and improvements
a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures.
c. increase the book value of plant assets when incurred. d. typically only benefit the current accounting period.

135. If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs.
b. a loss on disposal occurs.
c. either a gain or a loss can occur. d. neither a gain nor a loss occurs.

136. A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset’s original cost.
b. book value of the asset with the asset’s original cost.
c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.

137. The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost.
b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date.
d. proceeds received from the sale of the asset and its original cost.
Plant Assets, Natural Resources, and Intangible Assets 10 – 21

138. If a plant asset is sold before it is fully depreciated, a. only a gain on disposal can occur.
b. only a loss on disposal can occur. c. either a gain or a loss can occur. d. neither a gain nor a loss can occur.

139. If a plant asset is retired before it is fully depreciated, and the salvage value received is less than the asset’s book value,
a. a gain on disposal occurs. b. a loss on disposal occurs.
c. there is no gain or loss on disposal.
d. additional depreciation expense must be recorded.

140 A company sells a plant asset which originally cost $180,000 for $60,000 on December 31, 2008. The Accumulated Depreciation account had a balance of $72,000 after the current year’s depreciation of $18,000 had been recorded. The company should recognize a
a. $120,000 loss on disposal. b. $48,000 gain on disposal. c. $48,000 loss on disposal. d. $30,000 loss on disposal.

141. If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year.
b. recorded for the whole year.
c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.

142. If a fully depreciated plant asset is still used by a company, the
a. estimated remaining useful life must be revised to calculate the correct revised depreciation.
b. asset is removed from the books.
c. accumulated depreciation account is removed from the books but the asset account remains.
d. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.

143. Which of the following statements is not true when a fully depreciated plant asset is retired?
a. The plant asset’s book value is equal to its estimated salvage value. b. The accumulated depreciation account is debited.
c. The asset account is credited.
d. The plant asset’s original cost equals its book value.

144. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received,
a. a gain on disposal will be recorded.
b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded.
d. no gain or loss on disposal will be recorded.
10 – 22

145. The book value of an asset will equal its fair market value at the date of sale if a. a gain on disposal is recorded.
b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated.
d. a loss on disposal is recorded.

146. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $50,000. An insurance check for $125,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a
a. Gain on Disposal of $15,000.
b. credit to the Truck account of $60,000.
c. credit to the Accumulated Depreciation account for $50,000. d. Gain on Disposal of $65,000.

147. On July 1, 2008, Meed Kennels sells equipment for $66,000. The equipment originally cost $180,000, had an estimated 5-year life and an expected salvage value of $30,000. The accumulated depreciation account had a balance of $105,000 on January 1, 2008, using the straight-line method. The gain or loss on disposal is
a. $9,000 gain. b. $6,000 loss. c. $9,000 loss. d. $6,000 gain.

148. A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the capital account on the balance sheet.
d. as a direct decrease to the capital account on the balance sheet.

149. Wells Company’s delivery truck, which originally cost $70,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $47,500.The company received $40,000 reimbursementfrom its insurance company. The gain or loss as a result of the fire was
a. $30,000 loss. b. $17,500 loss. c. $30,000 gain. d. $17,500 gain.

150. A truck that cost $21,000 and on which $10,000 of accumulated depreciation has been recorded was disposed of for $9,000 cash. The entry to record this event would include a a. gain of $2,000.
b. loss of $2,000.
c. credit to the Truck account for $11,000.
d. credit to AccumulatedDepreciationfor $10,000.

151. A truck that cost $36,000 and on which $30,000 of accumulated depreciation has been recorded was disposed of for $9,000 cash. The entry to record this event would include a a. gain of $3,000.
b. loss of $3,000.
c. credit to the Truck account for $6,000.
d. credit to AccumulatedDepreciationfor $30,000.
Plant Assets, Natural Resources, and Intangible Assets 10 – 23

152. Ace Corporation sold equipment for $12,000. The equipment had an original cost of $36,000and accumulated depreciation of $18,000. As a result of the sale,
a. net income will increase $12,000. b. net income will increase $6,000. c. net income will decrease $6,000. d. net income will decrease $12,000.

153. Jarman’s Courier Service recorded a loss of $3,000 when it sold a van that originally cost $28,000for $5,000. Accumulated depreciation on the van must have been
a. $26,000. b. $8,000. c. $25,000. d. $20,000.

154. On a balance sheet, natural resources may be described more specifically as all of the following except
a. land improvements. b. mineral deposits.
c. oil reserves. d. timberlands.

155. Natural resources are
a. depreciated using the units-of-activity method.
b. physically extracted in operations and are replaceable only by an act of nature. c. reported at their market value.
d. amortized over a period no longer than 40 years.

156. Depletion is
a. a decrease in market value of natural resources.
b. the amount of spoilage that occurs when natural resources are extracted. c. the allocation of the cost of natural resources to expense.
d. the method used to record unsuccessful patents.

157. To qualify as natural resources in the accounting sense, assets must be a. underground.
b. replaceable.
c. of a mineral nature.
d. physically extracted in operations.

158. The method most commonly used to compute depletion is the a. straight-linemethod.
b. double-declining-balancemethod. c. units-of-activity method.
d. effective interest method.

159. In computing depletion, salvage value is a. always immaterial.
b. ignored.
c. impossible to estimate.
d. included in the calculation.
10 – 24

160. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons, a. total depletion on the mine is based on the 1,200,000 tons.
b. depletion expense is recognized on the 1,500,000 tons extracted.
c. depletion expense is recognized on the 1,200,000 tons extracted and sold.
d. a separate accumulated depletion account is set up to record depletion on the 300,000tons extracted but not sold.

161. A coal company invests $16 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year?
a. $800,000 b. $320,000 c. $80,000
d. Cannot be determined from the information provided.

162. AccumulatedDepletion
a. is used by all companies with natural resources. b. has a normal debit balance.
c. is a contra-asset account.
d. is never shown on the balance sheet.

163. On July 4, 2008, Montana Mining Company purchased the mineral rights to a granite deposit for $800,000. It is estimated that the recoverable granite will be 400,000 tons. During 2008, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2008 would be
a. $100,000. b. $60,000. c. $120,000. d. $200,000.

164. Depletion expense is computed by multiplying the depletion cost per unit by the a. total estimated units.
b. total actual units.
c. number of units extracted. d. number of units sold.

165. Intangible assets are the rights and privileges that result from ownership of long-lived assets that
a. must be generated internally.
b. are depletable natural resources. c. have been exchanged at a gain. d. do not have physical substance.

166. Identify the item below where the terms are not related. a. Equipment—depreciation
b. Franchise—depreciation c. Copyright—amortization d. Oil well—depletion
Plant Assets, Natural Resources, and Intangible Assets 10 – 25

167. A patent should
a. be amortized over a period of 20 years. b. not be amortized if it has an indefinite life.
c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.

168. The entry to record patent amortization usually includes a credit to a. Amortization Expense.
b. Accumulated Amortization. c. Accumulated Depreciation. d. Patents.

169. The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses.
b. deducted from the book value of the patent. c. added to the cost of the patent.
d. recognized as a loss in the current period.

170. An asset that cannot be sold individually in the market place is a. a patent.
b. goodwill.
c. a copyright. d. a trade name.

171. Goodwill can be recorded
a. when customers keep returning because they are satisfied with the company’s products.
b. when the company acquires a good location for its business. c. when the company has exceptional management.
d. only when there is an exchange transaction involving the purchase of an entire business.

172. On July 1, 2008, Marsh Company purchased the copyright to Parsons Computer tutorials for $162,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $12,000. The amount of Amortization Expense recognized for the year 2008 would be
a. $32,400. b. $15,000. c. $30,000. d. $16,200.

173. All of the following intangible assets are amortized except a. copyrights.
b. limited-life franchises. c. patents.
d. trademarks.

174. Which of the following is not an intangible asset arising from a government grant? a. Goodwill
b. Patent
c. Trademark d. Trade name
10 – 26

175. The amortization period for a patent cannot exceed a. 50 years.
b. 40 years. c. 20 years. d. 10 years.

176. Cost allocation of an intangible asset is referred to as a. amortization.
b. depletion. c. accretion.
d. capitalization.

177. A patent
a. has a legal life of 40 years. b. is nonrenewable.
c. can be renewed indefinitely.
d. is rarely subject to litigation because it is an exclusive right.

178. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting
a. Legal Expense.
b. an Intangible Loss account. c. the Patent account.
d. a revenue expenditure account.

179. Copyrights are granted by the federal government
a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years.
c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.

180. Goodwill
a. is only recorded when generated internally. b. can be subdivided and sold in parts.
c. can only be identified with the business as a whole.
d. can be defined as normal earnings less accumulated amortization.

181. In recording the acquisition cost of an entire business,
a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller’s book values.
c. goodwill, if it exists, is never recorded.
d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

182. Research and development costs
a. are classified as intangible assets.
b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to.
d. are capitalized and then amortized over a period not to exceed 40 years.
Plant Assets, Natural Resources, and Intangible Assets 10 – 27

183. A computer company has $2,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $1,600,000. What is the amount of net income or loss after these R & D costs are accounted for?
a. $400,000 loss
b. $1,600,000 net income c. $0
d. Cannot be determined from the information provided.

184. Denton Company incurred $300,000 of research and development costs in its laboratory to develop a new product. It spent $40,000 in legal fees for a patent granted on January 2, 2008. On July 31, 2008, Denton paid $30,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2008? a. $300,000
b. $70,000 c. $370,000
d. Some other amount

185. Given the following account balances at year end, compute the total intangible assets on the balance sheet of Anisha Enterprises.

Cash AccountsReceivable Trademarks Goodwill
Research& Development Costs

a. $11,500,000 b. $7,500,000 c. $5,500,000 d. $9,500,000
$1,500,000 4,000,000 1,000,000 4,500,000 2,000,000

186. During 2008, Sitter Corporation reported net sales of $2,000,000, net income of $1,200,000, and depreciation expense of $100,000. Sitter also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Sitter’s asset turnover ratio is
a. 2 times. b. 1.6 times. c. 1.3 times. d. .96 times.

187. During 2008, Tyler Corporation reported net sales of $3,000,000 and net income of $1,800,000. Tyler also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Tyler’s asset turnover ratio is
a. 3.0 times. b. 2.4 times. c. 2.0 times. d. 1.4 times.

188. Natural resources are generally shown on the balance sheet under a. Intangibles.
b. Investments.
c. Property, Plant, and Equipment. d. Owner’s Equity.
10 – 28

189. Which of the following statements concerning financial statement presentation is not a true statement?
a. Intangibles are reported separately under Intangible Assets.
b. The balances of major classes of assets may be disclosed in the footnotes.
c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.
d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

190. Intangible assets
a. should be reported under the heading Property, Plant, and Equipment.
b. are not reported on the balance sheet because they lack physical substance. c. should be reported as Current Assets on the balance sheet.
d. should be reported as a separate classification on the balance sheet.

191. A company has the following assets:

Buildingsand Equipment, less accumulated depreciation of $2,000,000 Copyrights
Patents
Timberlands,less accumulated depletion of $2,800,000

The total amount reported under Property, Plant, and Equipment would be a. $19,360,000.
b. $14,400,000. c. $18,400,000. d. $15,360,000.
$9,600,000 960,000 4,000,000 4,800,000

a192. A company decides to exchange its old machine and $77,000 cash for a new machine. The old machine has a book value of $63,000 and a fair market value of $70,000 on the date of the exchange. The cost of the new machine would be recorded at
a. $140,000. b. $147,000. c. $133,000.
d. cannot be determined.

a193. A company exchanges its old office equipment and $40,000 for new office equipment. The old office equipment has a book value of $28,000 and a fair market value of $20,000 on the date of the exchange. The cost of the new office equipment would be recorded at
a. $68,000. b. $60,000. c. $48,000.
d. cannot be determined.

a194. In an exchange of plant assets that has commercial substance, any difference between the fair market value and the book value of the old plant asset is
a. recorded as a gain or loss.
b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss.
Plant Assets, Natural Resources, and Intangible Assets 10 – 29

a195. Gains on an exchange of plant assets that has commercial substance are a. deducted from the cost of the new asset acquired.
b. deferred.
c. not possible.
d. recognized immediately.

a196. Losses on an exchange of plant assets that has commercial substance are a. not possible.
b. deferred.
c. recognized immediately.
d. deducted from the cost of the new asset acquired.

a197. The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the
a. book value of the old asset.
b. fair market value of the old asset. c. book value of the asset acquired. d. fair market value of the new asset.

Additional Multiple Choice Questions

198. The cost of land includes all of the following except a. real estate brokers’ commissions.
b. closing costs.
c. accrued property taxes. d. parking lots.

199. A term that is not synonymous with property, plant, and equipment is a. plant assets.
b. fixed assets.
c. intangible assets.
d. long-lived tangible assets.

200. The factor that is not relevant in computing depreciation is a. replacement value.
b. cost.
c. salvage value. d. useful life.

201. Depreciable cost is the
a. book value of an asset less its salvage value. b. cost of an asset less its salvage value.
c. cost of an asset less accumulated depreciation. d. book value of an asset.

202. Santayana Company purchased a machine on January 1, 2006, for $12,000 with an estimated salvage value of $3,000 and an estimated useful life of 8 years. On January 1, 2008, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $3,000. Using the straight-line method, the new annual depreciation will be
10 – 30

a. $675. b. $750. c. $900. d. $1,000.

203. Ordinary repairs are expendituresto maintain the operating efficiency of a plant asset and are referred to as
a. capital expenditures. b. expense expenditures. c. improvements.
d. revenue expenditures.

204. Improvements are
a. revenue expenditures.
b. debited to an appropriate asset account when they increase useful life.
c. debited to accumulated depreciation when they do not increase useful life.
d. debited to an appropriate asset account when they do not increase useful life.

205. A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the a. salvage value of the asset sold.
b. market value of the asset sold. c. book value of the asset sold.
d. accumulated depreciation on the asset sold.

206. The entry to record depletion expense
a. decreases owner’s equity and assets.
b. decreases net income and increases liabilities. c. decreases assets and liabilities.
d. decreases assets and increases liabilities.

207. All of the following are intangible assets except a. copyrights.
b. goodwill. c. patents.
d. research and development costs.

208. A purchased patent has a legal life of 20 years. It should be a. expensed in the year of acquisition.
b. amortized over 20 years regardless of its useful life. c. amortized over its useful life if less than 20 years. d. not amortized.

209. The asset turnover ratio is computed by dividing a. net income by average total assets.
b. net sales by average total assets. c. net income by ending total assets. d. net sales by ending total assets.
Plant Assets, Natural Resources, and Intangible Assets 10 – 31

a210. In an exchange of plant assets that has commercial substance a. neither gains nor losses are recognized immediately.
b. gains, but not losses, are recognized immediately. c. losses, but not gains, are recognized immediately. d. both gains and losses are recognized immediately.

BRIEFEXERCISES
BE 211
Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X).

1. Parking lots

2. Electricity used by a machine

3. Excavation costs

4. Interest on building construction loan

5. Cost of trial runs for machinery

6. Drainage costs

7. Cost to install a machine

8. Fences

9. Unpaid (past) property taxes assumed

10. Cost of tearing down a building when land and a building on it are purchased

BE 212

Seller Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $50,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account.

BE 213

Eastman Company purchased a delivery truck for $35,000 on January 1, 2008. The truck was assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute depreciation expense using the double-declining-balance method for the years 2008 and 2009.

BE 214

Eastman Company purchased a delivery truck for $35,000 on January 1, 2008. The truck was assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck was driven 18,000 miles in 2008 and 22,000 miles in 2009. Compute depreciation expense using the units-of-activity method for the years 2008 and 2009.

BE 215

Porika Company purchased a truck for $57,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $6,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided.

Units-of-activity $

Double-declining-balance $

BE 216

On January 1, 2006, Ecker Company purchased a computer system for $20,500. The system had an estimated useful life of 5 years and no salvage value. At January 1, 2008, the company revised the remaining useful life to two years. What amount of depreciation will be recorded for 2008 and 2009?

BE 217

Robot Enterprises sold equipment on January 1, 2008 for $5,000. The equipment had cost $24,000. The balance in Accumulated Depreciation at January 1 is $20,000. What entry would Robot make to record the sale of the equipment?

BE 218

On January 1, 2008, Freeport Enterprises purchased natural resources for $1,200,000. The company expects the resources to produce 12,000,000 units of product. (1) What is the depletion cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion expense for the month?

BE 219

On January 2, 2008, Elneer Company purchased a patent for $38,000. The patent has an estimated useful life of 25 years and a 20-year legal life. What entry would the company make at December 31, 2008 to record amortization expense on the patent?

BE 220

Using the following data for Rocky, Inc., compute its asset turnover ratio.

Rocky, Inc. Net Income 2008
Total Assets 12/31/08 Total Assets 12/31/07 Net Sales 2008

$ 123,000 2,443,000 1,880,000 2,135,000

$2,135,000

EXERCISES
Ex. 221
Hunt Company purchased factory equipment with an invoice price of $80,000. Other costs incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000 salvage value at the end of its 5-year useful service life.

Instructions

(a) Compute the acquisitioncost of the equipment. Clearly identify each element of cost.

(b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be .

Ex. 222

For each entry below make a correcting entry if necessary. If the entry given is correct, then state “No entry required.”

(a) The $60 cost of repairing a printer was charged to Computer Equipment.

(b) The $5,000 cost of a major engine overhaul was debited to Repair Expense. The overhaul is expected to increase the operating efficiency of the truck.

(c) The $6,000 closing costs associated with the acquisition of land were debited to Legal Expense.

(d) A $500 charge for transportation expenses on new equipment purchased was debited to Freight-In.

Ex. 223

Benedict Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land.

Debits
1. Cost of real estate purchased as a plant site (land and building).
2. Accruedreal estate taxes paid at the time of the purchase of the real estate. 3. Cost of demolishing building to make land suitable for construction of a new
building.
4. Architect’sfees on building plans. 5. Excavationcosts for new building. 6. Cost of filling and grading the land.
7. Insuranceand taxes during construction of building.
8. Cost of repairs to building under construction caused by a small fire.
9. Interest paid during the year, of which $54,000 pertains to the construction period.
10. Full payment to building contractor. 11. Cost of parking lots and driveways.
12. Real estate taxes paid for the current year on the land. Total Debits

Credits 13. Insuranceproceeds for fire damage.
14. Proceedsfrom salvage of demolished building Total Credits

$ 220,000 4,000

15,000 14,000 24,000 5,000 6,000 7,000

64,000 760,000 36,000
4,000 $1,159,000

$3,000
3,500 $6,500

Instructions

Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns.

Item Land Building Other Account Title

Ex. 224

Duncan Company purchased a machine at a cost of $90,000. The machine is expected to have a $5,000 salvage value at the end of its 5-year useful life.

Instructions
Computeannual depreciationfor the first and second years using the (a) straight-line method.
(b) double-declining-balancemethod.

Ex. 225

Reynolds Company purchased a new machine for $300,000. It is estimated that the machine will have a $30,000 salvage value at the end of its 5-year useful service life. The double-declining-balance method of depreciation will be used.

Instructions
Preparea depreciation schedule which shows the annual depreciation expense on the machine for its 5-year life.

Ex. 226

Tanner Company purchased equipment on January 1, 2007 for $70,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life.

Instructions

Answer the following independent questions.

1. Compute the amount of depreciation expense for the year ended December 31, 2007, using the straight-line method of depreciation.

2. If 16,000 units of product are produced in 2007 and 24,000 units are produced in 2008, what is the book value of the equipment at December 31, 2008? The company uses the units-of-activity depreciation method.

3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2009?

Ex. 227

A plant asset acquired on October 1, 2008, at a cost of $300,000 has an estimated useful life of 10 years. The salvage value is estimated to be $30,000 at the end of the asset’s useful life.

Instructions
Determinethe depreciation expense for the first two years using: (a) the straight-line method.
(b) the double-declining-balance method.
50,000 miles
60,000 miles
70,000 miles

Ex. 228

Tony’s, a popular pizza hang-out, has a thriving delivery business. Tony’s has a fleet of three delivery automobiles. Prior to making the entry for this year’s depreciation expense, the subsidiary ledger for the fleet is as follows:
Accumulated
Estimated Depr.—Beg. Miles Operated Car Cost Salvage Value Life in Miles of the Year During Year
1 $21,000 $3,000 50,000 $2,520 20,000 2 18,000 2,400 60,000 2,340 22,000 3 20,000 2,500 70,000 2,000 19,000

Instructions
(a) Determine the depreciation rates per mile for each car.
(b) Determine the Depreciation Expense for each car for the current year.
(c) Make one compound journal entry to record the annual Depreciation Expense for the fleet.

$21,000– $3,000

Ex. 229

The Barnett Clinic purchased a new surgical laser for $80,000. The estimated salvage value is $5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year 4; 2,000 hours in year 5.

Instructions
(a) Compute the annual depreciation for each of the five years under each of the following methods:
(1) straight-line. (2) units-of-activity.

(b) If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.

(c) Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?

Ex. 230

The December 31, 2007 balance sheet of Ritter Company showed Equipment of $64,000 and Accumulated Depreciation of $18,000. On January 1, 2008, the company decided that the equipment has a remaining useful life of 6 years with a $4,000 salvage value.

Instructions
Computethe (a) depreciable cost of the equipment and (b) revised annual depreciation.

Ex. 231

Southeast Airlines purchased a 747 aircraft on January 1, 2007, at a cost of $35,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On January 1, 2010 the airline revises the total estimated useful life to 15 years with a revised salvage value of $3,500,000.

Instructions

(a) Compute the depreciation and book value at December 31, 2009 using the straight-line method and the double-declining-balance method.

(b) Assuming the straight-line method is used, compute the depreciation expense for the year ended December 31, 2010.

Ex. 232

Seymor Company purchased a machine on January 1, 2008, at a cost of $80,000. It is expected to have an estimated salvage value of $5,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2008 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2008 was $55,000 as the result of depreciatingthe machine incorrectly.

Instructions

Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected net income. (Show computations.)

Ex. 233

Equipment was acquired on January 1, 2005, at a cost of $80,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2008, using the straight-line method. On January 1, 2009, the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8 years.

Instructions
Determinethe Depreciation Expense for 2009.

Ex. 234

Gantner Company purchased a machine on January 1, 2008. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) installation costs necessary to secure the machinery to the building flooring.

Instructions
Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue.

(a) (b) (c) (d)

(e) (f) (g) (h)

Ex. 235

Carey Word Processing Service uses the straight-line method of depreciation. The company’s fiscal year end is December 31. The following transactions and events occurred during the first three years.

2007 July 1

Nov. 3 Dec. 31

2008 Dec. 31
Purchased a computer from the Computer Center for $2,300 cash plus sales tax of $150, and shipping costs of $50.
Incurredordinary repairs on computer of $140.
Recorded 2007 depreciation on the basis of a four year life and estimated salvage value of $500.

Recorded2008 depreciation.

2009 Jan. 1 Paid $400 for an upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.

Instructions
Preparethe necessary entries. (Show computations.)

Ex. 236

Identifythe following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery.
(b) Construction of a new wing on an office building. (c) Painting the exterior of a building.
(d) Oil change on a company truck.

(e) Replacing a Pentium II computer chip with a Pentium IV chip, which increases productive capacity. No extension of useful life expected.

(f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10.
(h) Painting and lettering of a used truck upon acquisition of the truck.

Ex. 237

On January 1, 2006 Rosen Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2007 more telephone equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Rosen Company uses the straight-line method of depreciation.

Instructions
Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2007 through the useful life of the new equipment.

Telephone Expense Overstated
Year (Understated)
Depreciation Expense Overstated
(Understated)
Net Income Overstated
(Understated)

2007

2008

2009

2010

Ex. 238

Berman Company sold equipment on July 31, 2008 for $50,000. The equipment had cost $140,000 and had $80,000 of accumulated depreciation as of January 1, 2008. Depreciation for the first 6 months of 2008 was $8,000.

Instructions
Preparethe journal entry to record the sale of the equipment.

Ex. 239

(a) Watts Company purchased equipment in 2001 for $90,000 and estimated a $6,000 salvage value at the end of the equipment’s 10-year useful life. At December 31, 2007, there was $58,800 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2008, the equipment was sold for $24,000.

Prepare the appropriate journal entries to remove the equipment from the books of Watts Company on March 31, 2008.

(b) Gorman Company sold a machine for $15,000. The machine originally cost $35,000 in 2005 and $8,000 was spent on a major overhaul in 2008 (charged to Machine account). Accumulated Depreciation on the machine to the date of disposal was $28,000.

Preparethe appropriate journal entry to record the disposition of the machine.

(c) Klinger Company sold office equipment that had a book value of $6,000 for $8,000. The office equipment originally cost $20,000 and it is estimated that it would cost $25,000 to replace the office equipment.

Preparethe appropriate journal entry to record the disposition of the office equipment.

Ex. 240

Fleming’s Lumber Mill sold two machines in 2009. The following information pertains to the two machines:
Purchase Useful Salvage Depreciation Sales
Machine Cost Date Life Value Method Date Sold Price
#1 $66,000 7/1/05 5 yrs. $6,000 Straight-line 7/1/09 $15,000 #2 $40,000 7/1/08 5 yrs. $5,000 Double-declining- 12/31/09 $24,000
balance

Instructions
(a) Compute the depreciation on each machine to the date of disposal.

(b) Prepare the journal entries in 2009 to record 2009 depreciation and the sale of each machine.

Ex. 241

Presentedbelow are selected transactions for Milton Companyfor 2008.

Jan. 1 Received $9,000 scrap value on retirement of machinery that was purchased on January 1, 1998. The machine cost $90,000 on that date, and had a useful life of 10 years with no salvage value.

April 30

Dec. 31
Sold a machine for $28,000 that was purchased on January 1, 2005. The machine cost $75,000, and had a useful life of 5 years with no salvage value.

Discarded a business automobile that was purchased on October 1, 2003. The car cost $32,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

Instructions
Journalize all entries required as a result of the above transactions. Milton Company uses the straight-line method of depreciation and has recorded depreciationthrough December 31, 2007.

Ex. 242

WatsonCompany sold the following two machines in 2008:

Cost Purchasedate Useful life Salvage value
Depreciation method Date sold
Sales Price
Machine A
$68,000 7/1/04 8 years $4,000
Straight-line 7/1/08 $30,000
Machine B $80,000 1/1/05 5 years $4,000
Double-declining-balance 8/1/08 $16,000

Instructions
Journalize all entries required to update depreciation and record the sales of the two assets in 2008. The company has recorded depreciation on the machine through December 31, 2007.

Ex. 243

Girard Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no salvage value. During the first year, 200,000 tons of ore were mined and sold.

Instructions

Preparethe journal entry to record depletion expense.

Ex. 244

Eddy Mining Company purchased a mine for $70 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million.

(a) In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to record depletion expense for the first year.

(b) In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold. Preparethe journal entry to record depletion expense for the second year.

(c) What amount and in what account are the tons of ore not sold reported?

Ex. 245

Harper Mining Company purchased land containing an estimated 15 million tons of ore at a cost of $4,500,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 10 years. Buildings costing $600,000 are erected on the site and are expected to last for 25 years. Equipment costing $300,000 with an estimated life of 12 years is installed. The buildings and the equipment possess no salvage value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tons of ore.

Instructions
(a) Compute the depletion charge per ton.
(b) Compute the depletion expense for the first year.
(c) Compute the appropriate first year’s depreciation expense for the buildings. (d) Compute the appropriate first year’s depreciation expense for the equipment.
(e) Prepare journal entries to record depletion and depreciation expenses for the year.

Ex. 246

(a) A company purchased a patent on January 1, 2008, for $2,000,000. The patent’s legal life is 20 years but the company estimates that the patent’s useful life will only be 5 years from the date of acquisition. On June 30, 2008, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2008.

(b) Foley Company purchased a franchise from Yummie Food Company for $400,000 on January 1, 2008. The franchise is for an indefinite time period and gives Foley Company the exclusive rights to sell Yummie Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2008.

(c) Dryer Company incurred research and development costs of $500,000 in 2008 in developing a new product. Prepare the necessary journal entries during 2008 to record these events and any adjustmentsat year end on December 31, 2008.

Ex. 247

On January 2, 2008, Holmes Company purchased a patent for $200,000. The patent has an 8-year estimated useful life and a legal life of 20 years.

Instructions
Preparethe journal entry to record patent amortization.

Ex. 248

For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer:

A—Amortization

D—Depreciation
P—Depletion

N—None of these

1. Goodwill

2. Land

3. Buildings

4. Patents

5. Copyrights

6. Researchand development costs
7. Timberlands

8. Franchises(indefinite life)

9. Licenses(limited life)

10. Land Improvements

11. Oil Deposits

12. Equipment

Ex. 249

For each of the following unrelated transactions, (a) determine the amount of the amortization or depletion expense for the current year, and (b) present the adjusting entries required to record each expense at year end.

(1) Timber rights were purchased on a tract of land for $360,000. The timber is estimated at 1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and sold.

(2) Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

Ex. 250

During the current year, Lymon Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer.

(a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.

(b) Purchased a trademark from another company. The trademark can be renewed indefinitely. Lymon Company expects the trademark to contribute to revenue indefinitely.

(c) Lymon Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.

(d) Lymon Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. Lymon Company is very confident they will obtain this patent in the next few years.

Ex. 251

Presented below is information related to plant assets, natural resources, and intangibles at year end on December 31, 2008, for Norten Company:

Buildings Goodwill Patents Coal Mine
AccumulatedDepreciation AccumulatedDepletion
$1,080,000 350,000 480,000 440,000 670,000 275,000

Instructions

Preparea partial balance sheet for Norten Company that shows how the above listed items would be presented.

Ex. 252

Computethe asset turnover ratio based on the following:

Beginningtotal assets Ending total assets Net income
Net sales
$ 800,000 1,200,000 300,000 2,200,000

Ex. 253

Indicatein the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer:

PPE Property, Plant, and Equipment I Intangibles
O Other
N/A Not on the balance sheet

1. Goodwill

2. Land Improvements 3. Buildings
4. AccumulatedDepreciation 5. Trademarks
6. Researchand development costs
7. Timberlands 8. Franchises 9. Licenses
10. Equipment 11. Oil Deposits
12. Land

*Ex. 254

Presentedbelow are two independent situations:

(a) Riley Company exchanged an old machine (cost $100,000 less $60,000 accumulated depreciation) plus $7,000 cash for a new machine. The old machine had a fair market value of $36,000. Prepare the entry to record the exchange of assets by Riley Company.

(b) Carlin Company trades old equipment (cost $90,000 less $54,000 accumulated deprecia-tion) for new equipment. Carlin paid $36,000 cash in the trade. The old equipment that was traded had a fair market value of $54,000. Prepare the entry to record the exchange of assets by Carlin Company.

*Ex. 255

Agler Company exchanges equipment with Eaton Company and Peters Company exchanges equipment with Fiero Company. The following information pertains to the exchanges:

Equipment(cost) Accumulateddepreciation
Fair market value of the equipment Cash paid
Agler Company $114,000
50,000 75,000 45,000
Peters Company $96,000
45,000 42,000
-0-

Instructions
Prepare the journal entries to record the exchanges on the books of Agler Company and Peters Company.

Ex. 256

Farr Delivery Company and Bell Delivery Company exchanged delivery trucks on January 1, 2008. Farr’s truck cost $84,000, had accumulated depreciation of $69,000, and has a fair market value of $9,000. Bell’s truck cost $63,000, had accumulated depreciation of $54,000, and has a fair market value of $9,000.

Instructions
(a) Journalize the exchange for Farr Delivery Company. (b) Journalize the exchange for Bell Delivery Company.

Ex. 257

Prepare the journal entries to record the following transactions for Bryant Company which has a calendar year end and uses the straight-line method of depreciation.

a) On September 30, 2008, the company exchanged old delivery equipment and $24,000 for new delivery equipment. The old delivery equipment was purchased on January 1, 2006, for $84,000 and was estimated to have a $12,000 salvage value at the end of its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2007. It is estimated that the fair market value of the old delivery equipment is $36,000 on September 30, 2008.

(b) On June 30, 2008, the company exchanged old office equipment and $40,000 for new office equipment. The old office equipment originally cost $80,000 and had accumulated depreciation to the date of disposal of $35,000. It is estimated that the fair market value of the old office equipment on June 30 was $60,000.

COMPLETIONSTATEMENTS

258. With the exception of land, plant assets experience a in service potentialover their useful lives.

259. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the account.

260. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the account.

261. The cost of paving, fencing, and lighting a new company parking lot is charged to a

account.

262. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $ .

263. is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner.

264. The book value of a plant asset is obtained by subtracting from the

of the plant asset.

265. Three factors that affect the computation of periodic depreciation expense are (1)

, (2) , and (3) .

266. The method of computing depreciation expense results in an equal amount of periodic depreciation throughout the service life of the plant asset.

267. The declining-balance method of computing depreciation expense involves multiplying a

book value by a percentage.

268. The declining-balance method of computing depreciation is known as an

depreciationmethod.

269. Ordinary repairs which maintain operating efficiency and expected productive life are called .

270. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as .

271. If disposal of a plant asset occurs at any time during the year, for the fraction of the year to the date of disposal must be recorded.

272. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry to record the retirement requires a debit to the account and a credit to the account.

273. If the proceeds from the sale of a plant asset exceed its , a gain on disposal will occur.

274. A plant asset originally cost $48,000 and was estimated to have a $3,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $9,000, and had accumulated depreciation recorded of $27,000, the company should recognize a
on disposal in the amount of $ .

275. Natural resources have two distinguishing characteristics (1) they are physically

in operations, and (2) they are only by an act of nature.

276. In recording the purchase of a business, goodwill should be recorded for the excess of

over the of the net assets acquired.

277. The allocation of the cost of an asset to expense over its useful life is called

for tangible plant assets, for natural resources, and for intangible assets.

278. The cost of a patent should be amortized over its life or its

life, whichever is shorter.

279. The ratio is calculated by dividing net sales by average total assets.

a280. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the new asset acquired is equal to the of the asset given up plus any cash paid by the purchaser.

a281. A company exchanged an old machine, which originally cost $22,000 and has accumulated depreciation to date of $12,000, for a new machine. The old machine had a fair market value of $14,000. The cost of the new machine should be recorded at $ .

10 – 63

MATCHING

Set 1

282. Match the items below by entering the appropriate code letter in the space provided.

A. Plant assets B. Depreciation C. Book value
D. Salvage value
E. Straight-linemethod
F. Units-of-activitymethod
G. Double-declining-balance method H. MACRS
I. Revenueexpenditure J. Capital expenditure

1. Small expenditures which primarily benefit the current period.

2. Cost less accumulated depreciation.

3. An accelerated depreciation method used for financial statement purposes.

4. Tangibleresources that are used in operations and are not intended for resale.

5. Equal amount of depreciation each period.

6. Expectedcash value of the asset at the end of its useful life.

7. Allocationof the cost of a plant asset to expense over its useful life.

8. Material expenditures which increase an asset’s operating efficiency, productive capacity, or useful life.

9. An accelerated depreciation method used for tax purposes.

10. Useful life is expressed in terms of units of production or expected use.

Set 2

283. Match the items below by entering the appropriate code letter in the space provided.

A. Gain on disposal B. Loss on disposal C. Trademark
D. Depletion E. Useful life
F. Asset turnover ratio G. Goodwill
H. Amortization
I. Intangibleasset
J. Researchand development costs

1. Processof allocating the cost of an intangible asset to expense over its useful life.

2. Is only recorded when an exchange has commercial substance.

3. Examples are franchises and licenses.

4. The allocation of the cost of a natural resource to expense over its useful life.

5. Can be identified only with a business as a whole.

6. A symbol that identifies a particular enterprise or product.

7. When book value of asset is greater than the proceeds received from its sale.

8. Must be expensed when incurred.

9. Indicateshow efficiently a company is able to generate sales with its assets.

10. An estimate of the expected productive life of an asset.

SHORT-ANSWERESSAY QUESTIONS

S-AE 284

The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method.

S-AE 285

Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision?

S-AE 286

In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment?

S-AE 287

Comment on the validity of the following statements: ―As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.‖

S-AE 288

Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can’t it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different.

S-AE 289 (Ethics)

Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms’ offerings and ensuring that its services are comparable to all others.

Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor’s services. A PRS employee poses as an employee of the client’s office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year.

S-AE 289 (cont.)

In April of this year, PRS began selling a software product substitute before the competitor’s software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med’s product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.

PRS’s accountant, June Bianco, initially recorded the cash payments as “Loss from Lawsuit” and “Product Development,” respectively. However, Fred Nance, the controller, instructed June to create an intangible asset, named “Goodwill” and charge both costs to this account. “We’re protected from another lawsuit as long as this agreement is in effect,” he says. “It’s about as close to goodwill as we’ll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway.”

Required:

1. What are the ethical issues? 2. What should June do?

S-AE 290 (Communication)

The Restor-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbishedto their original condition, at a cost of $75,000.

The project was such a success, that Restor-It decided to purchase another very large home, this time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that a modest return was all that was required, and so they agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the company, Jim Herman, does not believe that a loss is possible. “We sold that house for more than we paid for it,” he said. “I know we put some money in it, but we had depreciated it for three years. How in the world can we have a loss?”

S-AE 290 (cont.)

Required:

Write a short memo to Mr. Herman explaining how it would be possible to have a loss. Do not try to use specific numbers for cost or depreciation.

CHAPTER 11

CURRENT LIABILITIES AND PAYROLL ACCOUNTING

CHAPTERSTUDY OBJECTIVES

1. Explain a current liability, and identify the major types of current liabilities.

2. Describe the accounting for notes payable.

3. Explain the accounting for other current liabilities.

4. Explain the financial statement presentation and analysis of current liabilities.

5. Describe the accounting and disclosure requirements for contingent liabilities.

6. Compute and record the payroll for a pay period.

7. Describe and record employer payroll taxes.

8. Discuss the objectives of internal control for payroll.

9. Identify additional fringe benefits associated with employee compensation.

TRUE-FALSESTATEMENTS

1. A current liability must be paid out of current earnings.

2. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

3. The relationship between current liabilities and current assets is important in evaluating a company’s ability to pay off its long-term debt.

4. A company whose current liabilities exceed its current assets may have a liquidity problem.

5. Notes payable usually require the borrower to pay interest.

6. Notes payable are often used instead of accounts payable.

7. A note payable must always be paid before an account payable.

8. A $30,000, 8%, 9-month note payable requires an interest payment of $1,800 at maturity.

9. Most notes are not interest bearing.

10. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note’s face value.

11. Interest expense on a note payable is only recorded at maturity.

12. Interest expense is reported under Other Expenses and Losses in the income statement.

13. Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.

14. The higher the sales tax rate, the more profit a retailer can earn.

15. Metropolitan Symphony sells 200 season tickets for $60,000 that includes a five concert season. The amount of Unearned Ticket Revenue after the second concert is $24,000.

16. During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.

17. Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

18. The current ratio permits analysts to compare the liquidity of different sized companies.

19. Working capital is current assets divided by current liabilities.

20. Contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will actually occur.

21. A contingent liability is a liability that may occur if some future event takes place.

22. In concept, the estimating of Warranty Expense when products are sold under warranty is similar to the estimating of Bad Debts Expense based on credit sales.

23. FICA taxes and federal income taxes are levied on employees’ earnings without limit.

24. FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

25. The employer incurs a payroll tax expense equal to the amount withheld from the employees’ wages for federal income taxes.

26. Internal control over payroll is not necessary because employees will complain if they do not receive the correct amount on their payroll checks.

27. The timekeeping function includes supervisors monitoring hours worked through time cards and time reports.

28. The human resources department documents and authorizes employment of new employees.

29. Payroll activities involve three functions: hiring employees, preparing the payroll, and paying the payroll.

a30. Post-retirement benefits consist of payments by employers to retired employees for health care, life insurance, and pensions.

Additional True-False Questions

31. A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.

32. Notes payable usually are issued to meet long-term financing needs.

33. Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet.

34. In a given year, total warranty expense is the sum of actual warranty costs incurred on units sold plus the estimated cost of servicing those units in the future.

35. FICA taxes are a voluntary deduction from employee earnings.

36. FICA taxes are a deduction from employee earnings and are also imposed upon employers as an expense.

37. The objectives of internal accounting control for payrolls are (a) to safeguard company assets from unauthorized payments of payrolls and (b) to assure accuracy and reliability of the accounting records pertaining to payroll.

a38. When a company gives employees rights to receive compensation for absences and the payment for such absences is probable and the amount can be reasonably estimated, the company should accrue a liability.

MULTIPLECHOICE QUESTIONS

39. All of the following are reported as current liabilities except a. accounts payable.
b. bonds payable. c. notes payable.
d. unearned revenues.

40. The relationship between current liabilities and current assets is a. useful in determining income.
b. useful in evaluating a company’s liquidity. c. called the matching principle.
d. useful in determining the amount of a company’s long-term debt.

41. Most companies pay current liabilities a. out of current assets.
b. by issuing interest-bearing notes payable. c. by issuing stock.
d. by creating long-term liabilities.

42. A current liability is a debt that can reasonably be expected to be paid a. within one year.
b. between 6 months and 18 months.
c. out of currently recognized revenues. d. out of cash currently on hand.

43. Liabilities are classified on the balance sheet as current or a. deferred.
b. unearned. c. long-term. d. accrued.

44. From a liquidity standpoint, it is more desirable for a company to have current a. assets equal current liabilities.
b. liabilities exceed current assets. c. assets exceed current liabilities.
d. liabilities exceed long-term liabilities.

45. The relationship of current assets to current liabilities is used in evaluating a company’s a. operating cycle.
b. revenue-producing ability.
c. short-term debt paying ability. d. long-range solvency.

46. Which of the following is usually not an accrued liability? a. Interest payable
b. Wages payable c. Taxes payable d. Notes payable

47. In most companies, current liabilities are paid within
a. one year through the creation of other current liabilities.
b. the operating cycle through the creation of other current liabilities. c. one year out of current assets.
d. the operating cycle out of current assets.

48. The entry to record the issuance of an interest-bearing note credits Notes Payable for the note’s
a. maturity value. b. market value. c. face value.
d. cash realizable value.

49. With an interest-bearing note, the amount of assets received upon issuance of the note is generally
a. equal to the note’s face value.
b. greater than the note’s face value. c. less than the note’s face value.
d. equal to the note’s maturity value.
11 – 8

50. A note payable is in the form of
a. a contingency that is reasonably likely to occur. b. a written promissory note.
c. an oral agreement.
d. a standing agreement.

51. The entry to record the proceeds upon issuing an interest-bearing note is a. Interest Expense
Cash
Notes Payable b. Cash
Notes Payable c. Notes Payable
Cash d. Cash
Notes Payable Interest Payable

Use the following information for questions 52–54.

Coffey County Bank agrees to lend Adcock Brick Company $200,000 on January 1. Adcock Brick Company signs a $200,000, 8%, 9-month note.

52. The entry made by Adcock Brick Company on January 1 to record the proceeds and issuance of the note is
a. Interest Expense………………………………………………………… 12,000 Cash………………………………………………………………………… 188,000
Notes Payable …………………………………………………… 200,000 b. Cash………………………………………………………………………… 200,000
Notes Payable …………………………………………………… 200,000 c. Cash………………………………………………………………………… 200,000
Interest Expense………………………………………………………… 12,000
Notes Payable …………………………………………………… 212,000 d. Cash………………………………………………………………………… 200,000
Interest Expense………………………………………………………… 12,000
Notes Payable …………………………………………………… 200,000 Interest Payable…………………………………………………. 12,000

53. What is the adjusting entry required if Adcock Brick Company prepares financial statements on June 30?
a. Interest Expense………………………………………………………… 8,000
Interest Payable…………………………………………………. 8,000 b. Interest Expense………………………………………………………… 8,000
Cash ………………………………………………………………… 8,000 c. Interest Payable…………………………………………………………. 8,000
Cash ………………………………………………………………… 8,000 d. Interest Payable…………………………………………………………. 8,000
Interest Expense………………………………………………… 8,000
Current Liabilities and Payroll Accounting 11 – 9

54. What entry will Adcock Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?
a. Notes Payable……………………………………………………………. 212,000 Cash…………………………………………………………………. 212,000
b. Notes Payable……………………………………………………………. 200,000 Interest Payable…………………………………………………………. 12,000
Cash…………………………………………………………………. 212,000 c. Interest Expense………………………………………………………… 12,000
Notes Payable……………………………………………………………. 200,000 Cash…………………………………………………………………. 212,000
d. Interest Payable…………………………………………………………. 8,000 Notes Payable……………………………………………………………. 200,000 Interest Expense………………………………………………………… 4,000
Cash…………………………………………………………………. 212,000

55. As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased.
b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.

56. When an interest-bearing note matures, the balance in the Notes Payable account is a. less than the total amount repaid by the borrower.
b. the difference between the maturity value of the note and the face value of the note. c. equal to the total amount repaid by the borrower.
d. greater than the total amount repaid by the borrower.

Use the following information for questions 57–58.

On October 1, Jerry’s Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000,8% note.

57. What entry must Jerry’s Carpet Service make on December 31 before financial statements are prepared?

a. Interest Payable…………………………………………………………. 5,000
Interest Expense…………………………………………………. 5,000

b. Interest Expense………………………………………………………… 20,000
Interest Payable………………………………………………….. 20,000

c. Interest Expense………………………………………………………… 5,000
Interest Payable………………………………………………….. 5,000

d. Interest Expense………………………………………………………… 5,000
Notes Payable……………………………………………………. 5,000

58. The entry by Jerry’s Carpet Service to record payment of the note and accrued interest on January1 is

a. Notes Payable……………………………………………………………. Cash………………………………………………………………….

b. Notes Payable……………………………………………………………. Interest Payable………………………………………………………….
Cash………………………………………………………………….
255,000

250,000 5,000

255,000

255,000
11 – 10

58. (cont.)

c. Notes Payable…………………………………………………………… Interest Payable…………………………………………………………. Cash …………………………………………………………………

d. Notes Payable…………………………………………………………… Interest Expense………………………………………………………… Cash …………………………………………………………………
250,000 20,000

250,000 5,000

270,000

255,000

59. Interest expense on an interest-bearing note is a. always equal to zero.
b. accrued over the life of the note.
c. only recorded at the time the note is issued.
d. only recorded at maturity when the note is paid.

60. The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is
a. Notes Payable Interest Payable
Cash
b. Notes Payable Interest Expense Cash
c. Notes Payable Cash

d. Notes Payable Cash
Interest Payable

61. Sales taxes collected by a retailer are recorded by a. crediting Sales Taxes Revenue.
b. debiting Sales Taxes Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.

62. Unearned Rental Revenue is
a. a contra account to Rental Revenue. b. a revenue account.
c. reported as a current liability.
d. debited when rent is received in advance.

63. Sales taxes collected by the retailer are recorded as a(n) a. revenue.
b. liability. c. expense. d. asset.

Use the following information for questions 64–65.

On September 1, Ken’s Painting Service borrows $50,000 from National Bank on a 4-month, $50,000,6% note.
Current Liabilities and Payroll Accounting 11 – 11

64. What entry must Ken’s Painting Service make on December 31 before statements are prepared?
a. Interest Payable…………………………………………………………. 1,000 Interest Expense………………………………………………….
b. Interest Expense………………………………………………………… 3,000 Interest Payable…………………………………………………..
c. Interest Expense………………………………………………………… 1,000 InterestPayable…………………………………………………..
d. Interest Expense………………………………………………………… 1,000 Notes Payable…………………………………………………….
financial

1,000

3,000

1,000

1,000

65. The entry by Ken’s Painting Service to record payment of the note and accrued interest on January1 is
a. Notes Payable……………………………………………………………. 51,000 Cash…………………………………………………………………. 51,000
b. Notes Payable……………………………………………………………. 50,000 Interest Payable…………………………………………………………. 1,000
Cash…………………………………………………………………. 51,000 c. Notes Payable……………………………………………………………. 50,000
Interest Payable…………………………………………………………. 3,000 Cash…………………………………………………………………. 53,000
d. Notes Payable……………………………………………………………. 50,000 Interest Expense………………………………………………………… 1,000
Cash…………………………………………………………………. 51,000

66. The interest charged on a $100,000 note payable, at the rate of 8%, on a 90-day note would be
a. $8,000. b. $4,444. c. $2,000. d. $667.

67. The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be
a. $6,000. b. $3,333. c. $1,500. d. $1,000.

68. The interest charged on a $50,000 note payable, at the rate of 8%, on a 3-month note would be
a. $4,000. b. $2,000. c. $1,000. d. $667.

69. The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be
a. $3,000. b. $1,500. c. $750. d. $500.
11 – 12

70. A company receives $132, of which $12 is for sales tax. The journal entry to record the sale would include a
a. debit to Sales Tax Expense for $12. b. credit to Sales Tax Payable for $12. c. debit to Sales for $132.
d. debit to Cash for $120.

71. A company receives $174, of which $14 is for sales tax. The journal entry to record the sale would include a
a debit to Sales Tax Expense for $14. b. debit to Sales Tax Payable for $14. c. debit to Sales for $174.
d. debit to Cash for $174.

72. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $315,000,what is the amount of the sales taxes owed to the taxing agency?
a. $300,000 b. $315,000 c. $15,750 d. $15,000

73. On January 1, 2008, Dunnon Company, a calendar-year company, issued $600,000 of notes payable, of which $150,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2008, is
a. Current Liabilities, $600,000. b. Long-term Debt, $600,000.
c. Current Liabilities, $300,000; Long-term Debt, $300,000. d. Current Liabilities, $150,000; Long-term Debt, $450,000.

74. On January 1, 2008, Brunson Company, a calendar-year company, issued $400,000 of notes payable, of which $100,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2008, is
a. Current Liabilities, $400,000. b. Long-term Debt , $400,000.
c. Current Liabilities, $100,000; Long-term Debt, $300,000. d. Current Liabilities, $300,000; Long-term Debt, $100,000.

75. A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record this information is
a. Cash………………………………………………………………………… 1,620 Sales………………………………………………………………… 1,620
b. Cash………………………………………………………………………… 1,620
Sales Tax Payable……………………………………………… 120 Sales………………………………………………………………… 1,500
c. Cash………………………………………………………………………… 1,500 Sales Tax Expense…………………………………………………….. 120
Sales………………………………………………………………… 1,620 d. Cash………………………………………………………………………… 1,620
Sales………………………………………………………………… 1,500 Sales Taxes Revenue…………………………………………. 120
Current Liabilities and Payroll Accounting 11 – 13

76. Jo’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Jo’s Bookstore make to show the April remittance?
a. Sales Taxes Payable…………………………………………………… 750 Cash…………………………………………………………………. 750
b. Sales Tax Expense……………………………………………………. 750 Cash…………………………………………………………………. 750
c. Sales Tax Expense…………………………………………………….. 750
Sales Taxes Payable…………………………………………… 750 d. No entry required.

77. Jordon Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $18,900. If the sales tax rate is 5%, what amount must be remitted to the state for October’s sales taxes?
a. $900 b. $945 c. $45
d. It cannot be determined.

78. Enrique’s Salon has total receipts for the month of $16,430 including sales taxes. If the sales tax rate is 6%, what are Enrique’s sales for the month?
a. $15,444.20 b. $17,415.80 c. $15,500.00
d. It cannot be determined.

79. The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store.
b. a current liability.
c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.

80. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $189,000,what is the amount of the sales taxes owed to the taxing agency?
a. $180,000 b. $189,000 c. $9,450 d. $9,000

81. Advances from customers are classified as a(n) a. revenue.
b. expense.
c. current asset. d. current liability.

82. The current portion of long-term debt should a. be paid immediately.
b. be reclassified as a current liability. c. be classified as a long-term liability.
d. not be separated from the long-term portion of debt.
11 – 14

83. Sales taxes collected by a retailer are expenses a. of the retailer.
b. of the customers. c. of the government.
d. that are not recognized by the retailer until they are submitted to the government.

84. Sales taxes collected by a retailer are reported as a. contingent liabilities.
b. revenues. c. expenses.
d. current liabilities.

85. Linda’s Boutique has total receipts for the month of $29,295 including sales taxes. If the sales tax rate is 5%, what are Linda’s sales for the month?
a. $27,831 b. $27,900 c. $29,295
d. It cannot be determined.

86. A cash register tape shows cash sales of $1,500 and sales taxes of $90. The journal entry to record this information is

a. Cash………………………………………………………………………… 1,500 Sales………………………………………………………………… 1,500

b. Cash………………………………………………………………………… 1,590
Sales Tax Revenue…………………………………………….. 90 Sales………………………………………………………………… 1,500

c. Cash………………………………………………………………………… 1,500 Sales Tax Expense…………………………………………………….. 90
Sales………………………………………………………………… 1,590

d. Cash………………………………………………………………………… 1,590 Sales………………………………………………………………… 1,500 Sales Taxes Payable………………………………………….. 90

87. Tim’s Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Tim’s Pharmacy make to show the March remittance?
a. Sales Tax Expense…………………………………………………….. 600
Cash ………………………………………………………………… 600 b. Sales Taxes Payable………………………………………………….. 600
Cash ………………………………………………………………… 600 c. Sales Tax Expense…………………………………………………….. 600
Sales Taxes Payable………………………………………….. 600 d. No entry required.

88. Langer Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $28,600. If the sales tax rate is 4%, what amount must be remitted to the state for February’s sales taxes?
a. $1,144 b. $1,100 c. $1,716
d. It cannot be determined.
Current Liabilities and Payroll Accounting 11 – 15

89. Any balance in an unearned revenue account is reported as a(n) a. current liability.
b. long-term debt. c. revenue.
d. unearned liability.

90. Stanley Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 60,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?

a. Subscriptions Receivable…………………………………………….. SubscriptionRevenue………………………………………….

b. Cash…………………………………………………………………………. UnearnedSubscriptionRevenue……………………………

c. Subscriptions Receivable…………………………………………….. UnearnedSubscriptionRevenue……………………………

d. Prepaid Subscriptions…………………………………………………. Cash………………………………………………………………….
900,000

900,000

150,000

900,000

900,000

900,000

150,000

900,000

91. Milton Company issued a four-year interest-bearing note payable for $300,000 on January 1, 2007. Each January the company is required to pay $75,000 on the note. How will this note be reported on the December 31, 2008 balance sheet?
a. Long-term debt, $300,000. b. Long-term debt, $225,000.
c. Long-term debt, $150,000; Long-term debt due within one year, $75,000. d. Long-term debt, $225,000; Long-term debt due within one year, $75,000.

92. Janis Knot has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Knot account for the cash received at the end of the engagement?
a. Cash
UnearnedConsulting Revenue b. Cash
Earned Consulting Revenue c. Prepaid Consulting Fees
Earned Consulting Revenue
d. No entry is required when the engagement is concluded.

93. Which one of the following is shown first under current liabilities by many companies as a matter of custom?
a. Accrued expenses
b. Current maturities of long-term debt c. Sales taxes payable
d. Notes payable and accounts payable

94. Working capital is
a. current assets plus current liabilities. b. current assets minus current liabilities.
c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.
11 – 16

95. The current ratio is
a. current assets plus current liabilities. b. current assets minus current liabilities.
c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.

96. A contingent liability need only be disclosed in the financial statement notes when the likelihood of the contingency is
a. reasonably possible. b. probable.
c. remote. d. unlikely.

97. If a contingent liability is reasonably estimable and it is reasonably possible that the contingency will occur, the contingent liability
a. should be recorded in the accounts.
b. should be disclosed in the notes accompanying the financial statements.
c. should not be recorded or disclosed in the notes until the contingency actually happens.
d. must be paid for the amount estimated.

98. The accounting for warranty cost is based on the matching principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense
a. when the product is brought in for repairs. b. in the period in which the product was sold. c. at the end of the warranty period.
d. only if the repairs are expected to be made within one year.

99. If a liability is dependent on a future event, it is called a a. potential liability.
b. hypothetical liability. c. probabilistic liability. d. contingent liability.

100. Current maturities of long-term debt a. require an adjusting entry.
b. are optionally reported on the balance sheet.
c. can be properly classified during balance sheet preparation, with no adjusting entry required.
d. are not considered to be current liabilities.

101. A contingency that is remote
a. should be disclosed in the financial statements. b. must be accrued as a loss.
c. does not need to be disclosed.
d. is recorded as a contingent liability.

102. The accounting for warranty costs is based on the a. going concern principle.
b. matching principle.
c. conservatismprinciple. d. objectivity principle.
Current Liabilities and Payroll Accounting 11 – 17

103. Warranty expenses are reported on the income statement as a. administrative expenses.
b. part of cost of goods sold. c. contra-revenues.
d. selling expenses.

Use the following information for questions 104–105.

Neer Company sells 2,000 units of its product for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 40 units for a total cost of $2,000.

104. What amount should Neer Company accrue on December 31 for estimated warranty costs?
a. $3,000 b. $2,000 c. $1,000 d. $15,000

105. What amount will be reported on Neer Company’s balance sheet as Estimated Warranty Liabilityon December 31, 2008?
a. $2,000 b. $3,000 c. $1,000
d. It cannot be determined.

106. Which of the following items would not be identified if a contingent liability were disclosed in a financial statement footnote?
a. The nature of the item
b. The expected outcome of the future event c. A numerical probability of the expected loss d. The amount of the contingency, if known

107. Disclosure of a contingent liability is usually made
a. parenthetically, in the body of the balance sheet.
b. parenthetically, in the body of the income statement. c. in a note to the financial statements.
d. in the management discussion section of the financial statement.

108. Current liabilities generally appear
a. after long-term debt on the balance sheet.
b. in decreasing order of magnitude on the balance sheet. c. in order of maturity on the balance sheet.
d. in increasing order of magnitude on the balance sheet.

109. Which of the following employees would likely receive a salary instead of wages? a. Store clerk
b. Factory employee c. Sales manager
d. Manual laborer
11 – 18

110. The total compensation earned by an employee is called a. take-home pay.
b. net pay.
c. net earnings. d. gross earnings.

111. Which one of the following payroll taxes does not result in a payroll tax expense for the employer?
a. FICA tax
b. Federal income tax
c. Federal unemployment tax d. State unemploymenttax

112. Sue Stein’s regular rate of pay is $12 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were
a. $576. b. $480. c. $624. d. $864.

113. Assuming a FICA tax rate of 8% on the first $90,000 in wages, and a federal income tax rate of 20% on all wages, what would be an employee’s net pay for the year if he earned $100,000for the year?
a. $92,800 b. $72,000 c. $80,000 d. $72,800

114. Most companies involved in interstate commerce are required to compute overtime at a. the worker’s regular hourly wage.
b. 1.25 times the worker’s regular hourly wage. c. 1.5 times the worker’s regular hourly wage. d. 2.5 times the worker’s regular hourly wage.

115. Sue Rice has worked 44 hours this week. She worked in excess of 8 hours each day. Her regular hourly wage is $15 per hour. What are Sue’s gross wages for the week? (The company Sue works for is in compliance with the Fair Labor Standards Act.)
a. $660 b. $690 c. $990 d. $720

116. FICA taxes do not provide workers with a. life insurance.
b. supplemental retirement. c. employment disability. d. medical benefits.
Current Liabilities and Payroll Accounting 11 – 19

117. Employee payroll deductions include each of the following except a. federal unemployment taxes.
b. federal income taxes. c. FICA taxes.
d. insurance, pension plans, and union dues.

118. The journal entry to record the payroll for a period will include a credit to Wages and Salaries Payable for the gross
a. amount less all payroll deductions. b. amount of all paychecks issued. c. pay less taxes payable.
d. pay less voluntary deductions.

119. The amount of income taxes withheld from employees is dependent on each of the following except the
a. employee’s gross earnings. b. employee’s net pay.
c. length of the pay period.
d. number of allowances claimed by the employee.

Use the following information for questions 120–123.

The following totals for the month of April were taken from the payroll register of Main Company.

Salaries
FICA taxes withheld Incometaxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes
$24,000 1,100 5,000 900
64 432

120. The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries Expense for $24,000.
b. credit to Salaries Payable for $24,000. c. debit to Salaries Payable for $24,000. d. debit to Salaries Expense for $17,000.

121. The entry to record the payment of net payroll would include a a. debit to Salaries Payable for $16,504.
b. debit to Salaries Payable for $17,000. c. debit to Salaries Payable for $15,900. d. credit to Cash for $18,100.

122. The entry to record accrual of Main Company’s payroll taxes would include a a. debit to Payroll Tax Expense for $496.
b. debit to Payroll Tax Expense for $1,596. c. credit to FICA Taxes Payable for $2,200. d. credit to Payroll Tax Expense for $496.
11 – 20

123. The entry to record the accrual of federal unemployment taxes would include a a. credit to Federal UnemploymentTaxes Payable for $64.
b. debit to Federal UnemploymentTaxes Expense for $64. c. credit to Payroll Tax Expense for $64.
d. debit to Federal UnemploymentTaxes Payable for $64

Use the following information for questions 124–127.

The following totals for the month of June were taken from the payroll register of Lane Company.

Salaries
FICA taxes withheld Incometaxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes
$20,000 1,533 4,400 800
160 1,000

124. The journal entry to record the monthly payroll on June 30 would include a a. debit to Salaries Expense for $20,000.
b. credit to Salaries Payable for $20,000. c. debit to Salaries Payable for $20,000. d. debit to Salaries Expense for $13,267

125. The entry to record the payment of net payroll would include a a. debit to Salaries Payable for $12,107.
b. debit to Salaries Payable for $13,267. c. debit to Salaries Payable for $12,267. d. credit to Cash for $12,267.

126. The entry to record accrual of Lane Company’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,693
b. credit to Payroll Tax Expense for $2,693 c. credit to FICA Taxes Payable for $1,160. d. credit to Payroll Tax Expense for $1,160.

127. The entry to record the accrual of federal unemployment taxes would include a a. credit to Federal UnemploymentTaxes Payable for $160.
b. credit to Federal UnemploymentTaxes Expense for $160. c. credit to Payroll Tax Expense for $160.
d. debit to Federal UnemploymentTaxes Payable for $160.

128. Which one of the following payroll taxes is not withheld from an employee’s wages because it is not levied on the employee?
a. Federal income tax
b. Federal unemployment tax c. State income tax
d. FICA tax
Current Liabilities and Payroll Accounting 11 – 21

129. By January 31 following the end of a calendar year, an employer is required to provide each employee with a(n)
a. state unemployment tax form.
b. federal unemployment tax form 940. c. wage and tax statement form W-2.
d. employee’s withholding allowance certificate form W-4.

130. Which of the following payroll taxes are usually filed and remitted annually? a. Federal unemployment taxes
b. FICA taxes
c. State unemploymenttaxes
d. Federal and state unemployment taxes

131. The tax that is paid equally by the employer and employee is the a. federal income tax.
b. federal unemployment tax. c. state unemployment tax. d. FICA tax.

132. The effective federal unemployment tax rate is usually a. 6.2%.
b. 0.8%. c. 5.4%. d. 8.0%.

133. The treasurer’s department is responsible for a. approving the payroll.
b. maintaining payroll records. c. preparing payroll tax returns. d. signing payroll checks.

134. The payroll is paid by the a. personnel department. b. payroll department.
c. cashier.
d. treasurer’s department.

a135. Post-retirementbenefits consist of payments by employers to retired employees for a. health care and life insurance only.
b. health care and pensions only. c. life insurance and pensions only.
d. health care, life insurance, and pensions.

a136. The paid absence that is most commonly accrued is a. voting leave.
b. vacation time. c. maternity leave. d. disability leave.
11 – 22

a137. Blake Company has ten employees who each earn $160 per day. If they accumulate vacation time at the rate of 1.5 vacation days for each month worked, the amount of vacation benefits that should be accrued at the end of the month is
a. $160. b. $1,600. c. $2,400. d. $240.

a138. An employer’s estimated cost for post-retirement benefits for its employees should be a. recognized as an expense when paid.
b. recognized as an expense during the employees’ work years.
c. recognized as an expense during the employees’ retirement years.
d. charged to the goodwill account because providing employees with benefits generates employee goodwill.

Additional Multiple Choice Questions

139. A current liability is a debt the company reasonably expects to pay from existing current assets within
a. one year.
b. the operating cycle.
c. one year or the operating cycle, whichever is longer. d. one year or the operating cycle, whichever is shorter.

140. Which of the following statements concerning current liabilities is incorrect? a. Current liabilities include unearned revenues.
b. A company that has more current liabilities than current assets is usually the subject of some concern.
c. Current liabilities include prepaid expenses.
d. A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities.

141. On August 1, 2008, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2009. How will the note payable and the related interest be classified in the December 31, 2008, balance sheet?
Note Payable Interest Payable a. Current liability Noncurrentliability b. Noncurrentliability Current liability
c. Current liability Current liability d. Noncurrentliability Not shown

142. Companies report current liabilities on the balance sheet in a. alphabetical order.
b. order of maturity. c. random order.
d. order of magnitude.
Current Liabilities and Payroll Accounting 11 – 23

143. A contingency need not be recorded nor disclosed when
a. it is probable the contingency will happen and the amount can be reasonably estimated.
b. it is probable the contingency will happen but the amount cannot be reasonably estimated.
c. it is reasonably possible the contingency will happen and the amount can be reasonably estimated.
d. the possibility of the contingencyhappening is remote.

144. A contingent liability is recorded when the likelihood of the contingency is a. remote.
b. reasonably possible. c. probable.
d. nil or zero.

145. Mike Kohl, an employee of Spottswood Company, has gross earnings for the month of October of $6,000. FICA taxes are 8% of gross earnings, federal income taxes amount to $952 for the month, state income taxes are 2% of gross earnings, and Mike authorizes voluntary deductions of $15 per month to the United Fund. What is the net pay for Mike Kohl?
a. $4,442 b. $4,433 c. $4,448 d. $4,452

146. A payroll record that accumulates the gross earnings, deductions, and net pay by employee for each pay period is the
a. withholding tax table.
b. employee earnings record. c. payroll register.
d. Wage and Tax Statement.

147. The journal entry to record the payroll for Marcus Garvey Company for the week ending January8, would probably include a
a. credit to Office Salaries. b. credit to Wages Expense.
c. debit to Federal Income Taxes Payable. d. credit to FICA Taxes Payable.

148. Employer payroll taxes include all of the following except a. FICA taxes.
b. federal unemployment taxes. c. state unemployment taxes. d. federal income taxes.

149. The record that provides a cumulative summary of each employee’s gross earnings, payroll deductions, and net pay during the year and is required to be maintained to comply with state and local federal law is the
a. register.
b. employee earnings record. c. statement of earnings.
d. wage and tax statement.
11 – 24

a150. Post-retirementbenefits include all of the following except a. health care.
b. life insurance. c. pensions.
d. vacation benefits.

BRIEFEXERCISES

BE 151

SaldanaSales Company has the following selected accounts after posting adjusting entries:

AccountsPayable Notes Payable, 3-month
AccumulatedDepreciation—Equipment Notes Payable, 5-year, 6%
Payroll Tax Expense Interest Payable MortgagePayable Sales Tax Payable
$ 62,000 50,000 14,000 80,000 4,000 3,000 120,000 38,000

Instructions
Prepare the current liability section of Saldana Sales Company’s balance sheet, assuming $20,000of the mortgage is payable next year.

BE 152

Identifywhich of the following would be classified as current liabilities as of December 31, 2008: 1. Wages Payable
2. Bonds Payable, maturing in 2013 3. Interest Payable, due July 1, 2009 4. Taxes Payable
5. Notes Payable, due January 30, 2010

BE 153

On December 1, Destin Corporation borrowed $5,000 on a 90-day, 6% note. Prepare the entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note.

BE 154
During December 2008, Fashion Vixen Publishing sold 2,500 12-month annual magazine subscriptions at a rate of $30 each. The first issues were mailed in February 2009. Prepare the entries on Fashion Vixen’s books to record the sale of the subscriptions and the mailing of the first issues.

BE 155

Landen Company had cash sales of $54,250 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale.

BE 156

On December 1, Wynn Company introduces a new product that includes a one-year warranty on parts. In December, 500 units are sold. Management believes that 5% of the units will be defective and that the average warranty costs will be $60 per unit. Prepare the adjusting entry at December 31 to accrue the estimated warranty cost.

BE 157

Mary Stine’s regular hourly wage rate is $12, and she receives an hourly rate of $18 for work in excess of 40 hours. During a March pay period, Mary works 47 hours. Mary’s federal income tax withholding is $70, and she has no voluntary deductions. Compute Mary Stine’s gross earnings and net pay for the pay period.

BE 158

Data for Mary Stine are presented in BE 157. Prepare the journal entry to record Mary’s pay for the period. Use March 15 for the end of the pay period.

BE 159

In February, gross earnings in Zenn Company totaled $50,000. All earnings are subject to 8% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Prepare the entry to record January payroll tax expense.

*BE 160

Weaver Company employees are entitled to one day’s vacation for each month worked. In February, 60 employees worked the full month. Record the vacation pay liability for February assuming the average daily pay for each employee is $90.

EXERCISES
Ex. 161
Stiner Company has the following selected accounts after posting adjusting entries:

AccountsPayable Notes Payable, 3-month
AccumulatedDepreciation—Equipment Payroll and Benefits Payable
Notes Payable, 5-year, 8% EstimatedWarranty Liability Payroll Tax Expense Interest Payable MortgagePayable
Sales Tax Payable
$ 45,000 80,000 14,000 27,000 30,000 34,000 6,000 3,000 200,000 16,000

Instructions
(a) Prepare the current liability section of Stiner Company’s balance sheet, assuming $25,000 of the mortgage is payable next year. (List liabilities in magnitude order, with largest first.)

(b) Comment on Stiner ‘s liquidity, assuming total current assets are $450,000.

Ex. 162

Preparethe necessary journal entries for the following transactions:
(a) On September 1, Lore Company borrowed $150,000 from National Bank on a 6-month, 8% note.
(b) On December 31, Lore Company accrued interest (assume adjusting entries are only made at the end of the year).
Current Liabilities and Payroll Accounting 11 – 29

Ex. 163

On March 1, Felton Company borrows $90,000 from Ottawa State Bank by signing a 6-month, 8%, interest-bearing note.

Instructions
Prepare the necessary entries below associated with the note payable on the books of Felton Company.
(a) Prepare the entry on March 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the adjusting entry at August 31 to accrue interest. (d) Prepare the entry to record payment of the note at maturity.

Ex. 164

Tom Byers sells televisions with a 2-year warranty. Past experience indicates that 2% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is estimated to be $50 per unit. During 2008, 7,000 units were sold at an average price of $400. During the year, repairs were made on 55 units at a cost of $2,400.

Instructions
Prepare journal entries to record the repairs made under warranty and estimated warranty expense for the year.

Ex. 165

Sommers Company billed its customers a total of $1,575,000 for the month of November. The total includes a 5% state sales tax.

Instructions
(a) Determine the proper amount of revenue to report for the month.
(b) Prepare the general journal entry to record the revenue and related liabilities for the month.

Ex. 166

Stevens Company does not segregate sales and sales taxes on its cash register. Its register total for the month is $259,700, which includes a 6% sales tax.

Instructions

Computesales taxes payable, and make the entry to record sales and sales taxes payable.

Ex. 167

Sutton Coat Company, which prepares annual financial statements, is preparing adjusting entries on December 31. Analysis indicates the following:

1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of damages. Legal counsel believes it is unlikely that the company will have to pay any damages.

2. December 31st is a Friday. The employees of the company have been paid on Monday, December 27th for the previous week which ended on Friday, December 24th. The company employs 30 people who earn $100 per day and 15 people who earn $150 per day. All employees work 5-day weeks.

3. The company is a defendant in a $500,000 product liability lawsuit. Legal counsel believes the company probably will have to pay the amount requested.

a4. Employees are entitled to one day’s vacation for each month worked. All employees described above in (2.) worked the month of December.

Instructions
Prepareany adjusting entries necessary at the end of the year.

Ex. 168

Based on the following information, compute the (1) current ratio and (2) working capital.

Current assets Total assets Current liabilities Total liabilities
$240,000 900,000 80,000 500,000

Ex. 169

Linda Estes sells exercise machines for home use. The machines carry a 2-year warranty. Past experience indicates that 6% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is $60 for labor and $90 for parts per unit. During 2008, 2,500 exercise machines were sold at an average price of $800. During the year, 60 of the machines that were sold were repaired at the average price per unit.

Instructions
(a) Prepare the journal entry to record the repairs made under warranty.
(b) Prepare the journal entry to record the estimated warranty expense for the year.

Ex. 170

Golf World Publications publishes a golf magazine for women. The magazine sells for $3 a copy on the newsstand. Yearly subscriptions to the magazine cost $24 per year (12 issues). During December 2008, Golf World Publications sells 9,000 copies of the golf magazine at newsstands and receives payment for 15,000 subscriptions for 2009. Financial statements are prepared monthly.

Instructions
(a) Prepare the December 2008 journal entries to record the newsstand sales and subscriptions received.

(b) Prepare the necessary adjusting entry on January 31, 2009. The January 2009 issue has been mailed to subscribers.
Current Liabilities and Payroll Accounting 11 – 33

Ex. 171

Presley Company sells a product that includes a one-year warranty on parts and labor. During the year, 10,000 units are sold. Presley expects that 3% of the units will be defective and that the average warranty cost will be $50 per unit. Actual warranty costs incurred during the year were $14,000.

Instructions

Preparethe journal entries to record (a) the estimated warranty costs and (b) the actual costs incurred.

Ex. 172

Dobson Company is preparing adjusting entries at December 31. An analysis reveals the following:

1. During December, Dobson Company sold 2,000 units of a product that carries a 60-day warranty. The sales for this product totaled $100,000. The company expects 4% of the units to need repair under the warranty and it estimates that the average repair cost per unit will be $15.

2. The company has been sued by a disgruntled employee. Legal counsel believes that it is reasonably possible that the company will have to pay $200,000 in damages.

3. The company has been named as one of several defendants in a $400,000 damage suit. Legal counsel believes it is unlikely that the company will have to pay any damages.

a4. Employees earn vacation pay at a rate of 1 day per month. During December, ten employees qualify for vacation pay. Their average daily wage is $90 per employee.

Instructions

Prepareadjusting entries, if required, for each of the four items.

Ex. 173

Match the codes assigned to the following payroll functions to the procedures listed below:

H Hiring Employees T Timekeeping
PRE Preparing the Payroll PAY Paying the Payroll

1. Distributionof checks by the treasurer 2. Supervisorapproves hours worked
3. Documentationof employee hiring 4. Maintenanceof payroll records
5. Verificationof payroll calculations

6. Screeningand interviewing of job applicants 7. Use of a timeclock
8. Signing prenumbered payroll checks

Ex. 174

Sue Wiebe’s regular hourly wage is $14 an hour. She receives overtime pay at the rate of time and a half. The FICA tax rate is 8%. Sue is paid every two weeks. For the first pay period in January, Sue worked 86 hours of which 6 were overtime hours. Sue’s federal income tax withholding is $300 and her state income tax withholding is $100. Sue has authorized that $50 be withheld from her check each pay period for savings bonds.

Instructions

Compute Sue Wiebe’s gross earnings and net pay for the pay period showing each payroll deduction in arriving at net pay.

Ex. 175

Stacy Cooper’s regular hourly wage rate is $12, and she receives a wage of 1 1/2 times her regular rate for work in excess of 40 hours. During a June pay period, Stacy worked 46 hours. Stacy’s federal income tax withholding is $58, and her only voluntary deduction is $25 for group hospitalization insurance.

Instructions
ComputeStacy’s (a) gross earnings and (b) net pay for the pay period.

Ex. 176

Oates Company’s payroll for the week ending January 15 amounted to $95,000 for Office Salaries and $150,000 for Store Wages. None of the employees has reached the earnings limits specified for federal or state employer payroll taxes. The following deductions were withheld from employees’ salaries and wages:

FederalIncome Tax StateIncome Tax FICA Taxes
Union Dues United Fund
$50,000 9,000 19,600 2,700 1,800

Federal unemployment tax (FUTA) rate is 6.2% less a credit equal to the rate paid for state unemployment taxes. The state unemployment tax (SUTA) rate is 5.4%.

Instructions

Prepare the journal entry to record the weekly payroll ending January 15 and also the employer’s payroll tax expense on the payroll.

Ex. 177

Ann Finley had earned (accumulated) salary of $86,000 through November 30. Her December salary amounted to $7,800. Jim Lane began employment on December 1 and will be paid his first month’s salary of $5,000 on December 31. Income tax withholding for December for each employee is as follows:
Ann Finley Jim Lane FederalIncome Tax $2,180 $990 StateIncome Tax 390 180
Current Liabilities and Payroll Accounting 11 – 37

Ex. 177 (cont.)

The following payroll tax rates are applicable:
FICA tax on first $90,000 8% FUTA tax on first $7,000 6.2%* SUTA tax on first $7,000 5.4%

*Less a credit equal to the state unemployment contribution

Instructions

Record the payroll for the two employees at December 31 and record the employer’s share of payroll tax expense for the December 31 payroll.

Ex. 178

Assume that the payroll records of Gibbs Oil Company provided the following information for the weekly payroll ended November 30, 2008.
Year-to-Date Hourly Federal EarningsThrough
Employee Hours Worked Pay Rate Income Tax Union Dues Previous Week

C. White 44 J. Ward 46 K. Hurt 39 M. King 42
$45 $362 10 65 20 118 22 169
$9 $91,000 5 23,200 — 5,700 7 49,500

Ex. 178 (cont.)

Additional information: All employees are paid overtime at time and a half for hours worked in excess of 40 per week. The FICA tax rate is 8% for the first $90,000 of each employee’s annual earnings. The employer pays unemployment taxes of 6.2% (5.4% for state and .8% for federal) on the first $7,000 of each employee’s annual earnings.

Instructions
(a) Prepare the payroll register for the pay period.
(b) Prepare general journal entries to record the payroll and payroll taxes.

Ex. 179

Diane Jenks earns a salary of $8,000 per month during the year. FICA taxes are 8% on the first $90,000 of gross earnings. Federal unemployment insurance taxes are 6.2% of the first $7,000; however, a credit is allowed equal to the state unemployment insurance taxes of 5.4% on the $7,000. During the year, $27,300 was withheld for federal income taxes and $5,700 was withheld for state income taxes.
Current Liabilities and Payroll Accounting 11 – 39

Ex. 179 (cont.)

Instructions
(a) Prepare a journal entry summarizing the payment of Jenks’ total salary during the year.

(b) Prepare a journal entry summarizing the employer payroll tax expense on Jenks’ salary for the year.

(c) Determine the cost of employing Jenks for the year.

Ex. 180

Tolan Company had the following payroll data for the year:

Gross earnings of employees Employeeearnings not subject to FICA tax
Employeeearnings not subject to FUTA or SUTA tax
$640,000 140,000 490,000

Assumingthe following: FICA tax rate
State Unemployment tax rate Federal Unemploymenttax rate

8%
5.4% (SUTA) .8% (FUTA)

Instructions
Compute Tolan’s payroll tax expense for the year. Make a summary journal entry to record the payroll tax expense.

Ex. 181

In March, gross earnings of Milner Company totaled $150,000. All earnings are subject to FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes.

Instructions

(a) Compute the employer’s payroll tax expense. (b) Prepare the entry to record payroll taxes.

Ex. 182

The following payroll liability accounts are included in the ledger of Clements Company on January1, 2008:

FICA Taxes Payable $1,750 FederalIncome Taxes Payable 4,000 StateIncome Taxes Payable 665 Federal Unemployment Taxes Payable 175 State Unemployment Taxes Payable 1,190 Union Dues Payable 400 Health Insurance Premium Payable 5,000 ChristmasClub Savings Payable 1,500

In January, the following transactions occurred:

Jan. 9 Sent a check for $5,000 to Blue Cross and Blue Shield.
11 Deposited a check for $5,750 in Federal Reserve Bank for FICA taxes and federal income taxes withheld.
14 Sent a check for $400 to the union treasurer for union dues. 18 Paid state income taxes withheld from employees.
21 Paid state and federal unemployment taxes.
22 Sent a $1,500 check to a Savings and Loan for the Christmas Club withholdings.

Instructions
Journalizethe January transactions

COMPLETION STATEMENTS

183. A current liability is a debt that can be expected to be paid within year or the , whichever is longer.

184. Liabilities are classified on the balance sheet as being liabilities or

liabilities.

185. Obligations in written form are called and usually require the borrower to pay interest.

186. With an interest-bearing note, a borrower must pay the of the note plus at maturity.

187. Sales taxes collected from customers are a of the business until they are remitted to the taxing agency.

188. The current ratio is current assets divided by .

189. A contingent liability should be recorded in the accounts if it is that the contingency will occur and the amount is .

190. Two federal taxes which are levied against employees’ wages that must be deducted in arriving at net pay are (1) taxes and (2) taxes.

191. The employer incurs a payroll tax expense equal to the amount contributed by each employee for taxes.

192. A payroll tax expense which is borne entirely by the employer is the federal

tax.

MATCHING

193. Match the items below by entering the appropriate code letter in the space provided.

A. Current liability B. Notes Payable
C. Wage and Tax Statement D. Currentratio
E. Contingentliabilities
F. Federal income taxes G. FICA taxes
H. Federal unemployment taxes aI. Post-retirementbenefits
aJ. Pension plan

1. Levied against employees’ wages without limit.

2. An obligation in the form of a written promissory note.

3. An agreement whereby an employer provides benefits to employees after they retire.

4. A payroll tax expense levied only against the employer based on employees’ wages.

5. A measure of a company’s liquidity.

6. A debt than can reasonably be expected to be paid from current assets.

7. A form showing gross earnings and income taxes withheld.

8. Levied against employees’ wages with a maximum limit.

9. Paymentsby employers to retired employees.

10. A potential liability that may become an actual liability in the future.

SHORT-ANSWERESSAY QUESTIONS
S-AE 194
A company will incur product repair costs in the future if products that it sells currently under warranty are brought in for repair during the warranty period. The company will also incur bad debts expense in the future if customers who buy on credit currently are unable to pay their accounts. Are the accounting procedures for these two contingent costs (warranty expense and bad debt expense) related or guided by the same accounting principle? Briefly explain.

S-AE 195

An employee’s net pay consists of gross pay less mandatory and voluntary payroll deductions. Identify the mandatory payroll deductions and give two or three examples of common voluntary deductions. Are these deductions recognized as payroll expenses by the employer? What type of payroll expenses does the employer incur related to having a payroll?

S-AE 196 (Ethics)

Quaney Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system.

Required:
Is it ethical for a company to have a secret system like the one described? Explain.

S-AE 197 (Communication)

Al-Fab is a manufacturing company that makes various industrial components out of aluminum. Al-Fab is located in a large city in the northeastern United States. Various labor disputes have occurred in the city, some with acrimonious public debate concerning the honesty of management. During one of Al-Fab’s routine employee meetings, Jack Grant, a production worker, brought up the issue of the cost of a worker as reported in the company’s annual report.

The cost was given as $32,000 per year. Jack points out that the average wage rate of $12 per hour is at most around $25,000 in gross wages. He asks whether the company is adding in overtime, because if so, the figures are misleading because the employees are not allowed to work overtime.

Required:

Prepare a note explaining to Mr. Grant how Al-Fab might calculate a cost per employee that is greater than gross wages. Explain in general terms only. Do not use any calculations.

CHAPTER 12

ACCOUNTING FOR PARTNERSHIPS

CHAPTER STUDY OBJECTIVES

1. Identify the characteristics of the partnership form of business organization.

2. Explain the accounting entries for the formation of a partnership.

3. Identify the bases for dividing net income or net loss.

4. Describe the form and content of partnership financial statements.

5. Explain the effects of the entries to record the liquidation of a partnership.

6. Explain the effects of the entries when a new partner is admitted.

7. Describe the effects of the entries when a partner withdraws from the firm.

TRUE-FALSE STATEMENTS

1. The personal assets, liabilities, and personal transactions of partners are excluded from the accounting records of the partnership.

2. The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.

3. A major advantage of the partnership form of organization is that the partners have unlimited liability.

4. Partnership creditors may have a claim on the personal assets of any of the partners if the partnership assets are not sufficient to settle claims.

5. The partnership agreement between partners must be in writing.

6. If a partner invests noncash assets in a partnership, they should be recorded by the partnership at their fair market value.

7. L. Hill invests the following assets in a new partnership: $15,000 in cash, and equipment that cost $30,000 but has a book value of $17,000 and fair market value of $20,000. Hill, Capital will be credited for $32,000.

8. Two proprietorships cannot combine and form a partnership.

9. If a partner’s investment in a partnership consists of equipment that has accumulated depreciation of $8,000, it would not be appropriate for the partnership to record the accumulated depreciation.

10. If a partner’s investment in a partnership consists of Accounts Receivable of $25,000 and an Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the partnership to record the Allowance for Doubtful Accounts.

11. Unless stated otherwise in the partnership contract, profits and losses are shared among the partners in the ratio of their capital equity balances.

12. If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.

13. Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners.
Accounting for Partnerships 12 – 5

14. Partnership income or loss need not be closed to partners’ capital accounts each period because of the unlimited life characteristic of partnerships.

15. If a partnership has a loss for the period, the closing entry to transfer the loss to the partners will require a credit to the Income Summary account.

16. The partners’ drawing accounts are closed each period into the Income Summary account.

17. Salary allowances to partners are a major expense on most partnership income statements.

18. An interest allowance in sharing partnership net income (or net loss) is related to the amount of partners’ invested capital during the period.

19. The financial statements of a partnership are similar to those of a proprietorship.

20. The income earned by a partnership will always be greater than the income earned by a proprietorship because in a partnership there is more than one owner contributing to the success of the business.

21. The function of the Partners’ Capital Statement is to explain the changes in partners’ capital account balances during a period.

22. A detailed listing of all the assets invested by a partner in a partnership appears on the Partners’ Capital Statement.

23. Total partners’ equity of a partnership is equal to the sum of all partners’ capital account balances.

24. The distribution of cash to partners in a partnership liquidation is always made based on the partners’ income sharing ratio.

25. The liquidation of a partnership means that a new partner has been admitted to the partnership.

a26. The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new partnership.

a27. If a new partner is admitted into a partnership by investment, the total assets and total capital will change.

a28. A bonus to old partners results when the new partner’s capital credit on the date of admittance is greater than his or her investment in the firm.

a29. If a new partner invests in a partnership at book value and acquires a 1/4 interest in total partnership capital, it indicates that a bonus was paid to the original partners.

a30. A bonus to the remaining partners results when a retiring partner receives partnership assets which are less than his or her capital balance on the date of withdrawal.

Additional True-False Questions

31. A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.

32. Once assets have been invested in the partnership, they are owned jointly by all partners.

33. Each partner’s initial investment in a partnership should be recorded at book value.

34. Partnership income is shared in proportion to each partner’s capital equity interest unless the partnership contract specifically indicates the manner in which net income or net loss is to be divided.

35. In a liquidation, the final distribution of cash to partners should be on the basis of their income ratios.

a36. In an admission of a partner by investment of assets, the total net assets and total capital of the partnership do not change.

a37. The withdrawal of a partner legally dissolves the partnership.

MULTIPLE CHOICE QUESTIONS

38. A hybrid form of business organization with certain features like a corporation is a(n) a. limited liability partnership.
b. limited liability company. c. “S” corporation.
d. sub-chapter “S” corporation.

39. A partnership

a. has only one owner.

b. pays taxes on partnership income. c. must file an information tax return.
d. is not an accounting entity for financial reporting purposes.

40. A general partner in a partnership

a. has unlimited liability for all partnership debts. b. is always the general manager of the firm.
c. is the partner who lacks a specialization.

d. is liable for partnership liabilities only to the extent of that partner’s capital equity.
Accounting for Partnerships 12 – 7

41. The individual assets invested by a partner in a partnership a. revert back to that partner if the partnership liquidates.
b. determine that partner’s share of net income or loss for the year. c. are jointly owned by all partners.
d. determine the scope of authority of that partner.

42. Which one of the following would not be considered a disadvantage of the partnership form of organization?
a. Limited life

b. Unlimited liability c. Mutual agency
d. Ease of formation

43. The partnership form of business is

a. restricted to law and medical practices.

b. restricted to firms having fewer than 10 partners. c. not restricted to any particular type of business. d. most often used in relatively large companies.

44. Which of the following is not a principal characteristic of the partnership form of business organization?
a. Mutual agency

b. Association of individuals c. Limited liability
d. Limited life

45. The partnership agreement should include each of the following except the a. date of the partnership inception.
b. principal location of the firm.

c. surviving family members in the event of a partner’s death. d. Each of these should be included.

46. Which of the following statements is true regarding the form of a legally binding partnership contract?
a. The partnership contract must be in writing.

b. The partnership contract may be based on a handshake. c. The partnership contract may be implied.
d. The partnership contract cannot be oral.

47. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting records. b. A partnership is not required to file an information tax return.
c. Each partner’s share of income is taxable to the partnership.

d. A partnership represents an accounting entity for financial reporting purposes.

48. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business.

b. the act of any partner is binding on all other partners, only if partners act within their cope of authority.
c. an act by a partner is judged as binding on other partners depending on whether the act appears to be appropriate for the partnership.
d. that partners must pay taxes on a mutual or combined basis.
12 – 8 Test Bank for Accounting Principles, Eighth Edition

49. A partnership

a. is dissolved only by the withdrawal of a partner.

b. is dissolved upon the acceptance of a new partner. c. dissolution means the business must liquidate.
d. has unlimited life.

50. The partner in a limited partnership that has unlimited liability is referred to as the a. lead partner.
b. head partner.

c. general partner. d. unlimited partner.

51. Limited partnerships

a. must have at least one general partner.

b. guarantee that a partner will receive a return.

c. guarantee that a partner will get back his original investment. d. are limited to only three partners.

52. The Maris-Crane partnership is terminated when creditor claims exceed partnership assets by $40,000. Crane is a millionaire and Maris has no personal assets. Maris’ partnership interest is 75% and Crane’s is 25%. Creditors
a. must collect their claims equally from Maris and Crane. b. may collect the entire $40,000 from Crane.
c. must collect their claims 75% from Maris and 25% from Crane.

d. may not require Crane to use his personal assets to satisfy the $40,000 in claims.

53. Which of the following statements about partnerships is incorrect? a. Partnership assets are co-owned by partners.
b. If a partnership is terminated, the assets do not legally revert to the original contributor. c. If the partnership agreement does not specify the manner in which net income is to be
shared, it is distributed according to capital contributions.

d. Each partner has a claim on assets equal to the balance in the partner’s capital account.

54. Which of the following is not an advantage of the partnership form of business? a. Mutual agency
b. Ease of formation

c. Ease of decision making

d. Freedom from governmental regulations and restrictions

55. The largest companies in the United States are primarily organized as a. limited partnerships.
b. partnerships. c. corporations.
d. proprietorships.

56. The basis for dividing partnership net income or net loss is referred to as any of the following except the
a. income ratio.

b. income and loss ratio. c. profit and loss ratio. d. income sharing ratio.
Accounting for Partnerships 12 – 9

57. Which of the following statements is incorrect regarding partnership agreements? a. It may be referred to as the “articles of co-partnership.”
b. Oral agreements are preferable to written articles.

c. It should specify the different relationships that are to exist among the partners. d. It should state procedures for submitting disputes to arbitration.

58. Norton invests personally owned equipment, which originally cost $110,000 and has accumulated depreciation of $30,000 in the Norton and Kennett partnership. Both partners agree that the fair market value of the equipment was $60,000. The entry made by the partnership to record Norton’s investment should be
a. Equipment…………………………………………………………………. 110,000 Accumulated Depreciation—Equipment…………………. 30,000 Norton, Capital……………………………………………………. 80,000
b. Equipment…………………………………………………………………. 80,000

Norton, Capital……………………………………………………. 80,000 c. Equipment…………………………………………………………………. 60,000
Loss on Purchase of Equipment …………………………………… 20,000 Accumulated Depreciation—Equipment…………………………. 30,000
Norton, Capital……………………………………………………. 110,000 d. Equipment…………………………………………………………………. 60,000
Norton, Capital……………………………………………………. 60,000

59. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investment, Accounts Receivable of $80,000; an Allowance for Doubtful Accounts of $12,000; and $8,000 cash. The entry that the partnership makes to record B’s initial contribution includes a
a. credit to B, Capital for $88,000.

b. debit to Accounts Receivable for $68,000. c. credit to B, Capital for $76,000.
d. debit to Allowance for Doubtful Accounts for $12,000.

60. Which of the following would not be recorded in the entry for the formation of a partnership?
a. Accumulated depreciation

b. Allowance for doubtful accounts c. Accounts receivable
d. All of these would be recorded.

61. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost $63,000, has a book value of $30,000, and a fair market value of $39,000. The entry that the partnership makes to record Bob’s initial contribution includes a
a. debit to Equipment for $33,000. b. debit to Equipment for $63,000. c. debit to Equipment for $39,000.
d. credit to Accumulated Depreciation for $33,000.

62. A partner contributes, as part of her initial investment, accounts receivable with an allowance for doubtful accounts. Which of the following reflects a proper treatment?
12 – 10 Test Bank for Accounting Principles, Eighth Edition

a. The balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value.
b. The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed.
c. The allowance account should not be carried onto the books of the partnership.

d. The accounts receivable and allowance should not be recorded on the books of the partnership because a partner must invest cash in the business.

63. Which one of the following would not be considered an expense of a partnership in determining income for the period?
a. Expired insurance

b. Salary allowance to partners c. Supplies used
d. Freight-out

64. A partner invests into a partnership a building with an original cost of $90,000 and accumulated depreciation of $40,000. This building has a $70,000 fair market value. As a result of the investment, the partner’s capital account will be credited for
a. $70,000. b. $50,000. c. $90,000. d. $120,000.

Use the following information for questions 65–67.

James and Laura are forming a partnership. James will invest a truck with a book value of $10,000 and a fair market value of $14,000. Laura will invest a building with a book value of $30,000 and a fair market value of $42,000 with a mortgage of $15,000.

65. At what amount should the building be recorded? a. $30,000
b. $27,000 c. $42,000 d. $45,000

66. What amount should be recorded in Laura’s capital account? a. $30,000
b. $27,000 c. $42,000 d. $14,000

67. What amount should be recorded in James’ capital account? a. $30,000
b. $27,000 c. $42,000 d. $14,000

68. Speir and Pablo decide to organize a partnership. Speir invests $15,000 cash, and Pablo contributes $12,000 cash and equipment having a book value of $6,000. Choose the entry to record Pablo’s investment in the partnership assuming the equipment has a fair market value of $9,000.
Accounting for Partnerships 12 – 11

a. Cash…………………………………………………………………………. 12,000 Equipment ………………………………………………………………… 6,000
Pablo, Capital ……………………………………………………. 18,000 b. Equipment ………………………………………………………………… 6,000
Pablo, Capital ……………………………………………………. 6,000 c. Cash…………………………………………………………………………. 12,000
Pablo, Capital ……………………………………………………. 12,000 d. Cash…………………………………………………………………………. 12,000
Equipment ………………………………………………………………… 9,000

Pablo, Capital ……………………………………………………. 21,000

Use the following information for questions 69–71.

Partners Abel and Cain have capital balances in a partnership of $40,000 and $60,000, respectively. They agree to share profits and losses as follows:
Abel Cain

As salaries $10,000 $12,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50%

69. If income for the year was $50,000, what will be the distribution of income to Cain? a. $23,000
b. $27,000 c. $20,000 d. $10,000

70. If income for the year was $30,000, what will be the distribution of income to Abel? a. $13,000
b. $77,000 c. $10,000 d. $14,000

71. If net loss for the year was $2,000, what will be the distribution to Cain? a. $12,000 income
b. $1,000 income c. $1,000 loss
d. $2,000 loss

72. Partners Jim and Joe have agreed to share profits and losses in an 80:20 ratio respectively, after Jim is allowed a salary allowance of $140,000 and Joe is allowed a salary allowance of $70,000. If the partnership had net income of $140,000 for 2008, Joe’s share of the income would be
a. $70,000. b. $56,000. c. $84,000. d. $14,000.
12 – 12 Test Bank for Accounting Principles, Eighth Edition

73. The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is
a. on a fixed ratio.

b. interest on capital balances and salaries to the partners. c. on a ratio based average capital balances.
d. salaries to the partners and the remainder on a fixed ratio.

74. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally after salary allowances of $160,000 for Smith and $80,000 for Jones. At the beginning of the year, Smith’s Capital account had a balance of $320,000, while Jones’ Capital account had a balance of $280,000. Net income for the year was $200,000. The balance of Jones’ Capital account at the end of the year after closing is
a. $380,000. b. $80,000. c. $340,000. d. $360,000.

75. A partner’s share of net income is recognized in the accounts through a. adjusting entries.
b. closing entries.

c. correcting entries. d. accrual entries.

76. The partnership of Nott and Reese reports net income of $60,000. The partners share equally in income and losses. The entry to record the partners’ share of net income will include a
a. credit to Income Summary for $60,000. b. credit to Nott, Capital for $30,000.
c. debit to Reese, Capital for $30,000. d. credit to Reese, Drawing for $30,000.

77. Partner A receives $210,000 and Partner B receives $140,000 in a split of $350,000 net income. Which expression does not reflect the income splitting arrangement?
a. 3:2

b. 3/5 & 2/5 c. 6:4
d. 2:1

78. An income ratio based on capital balances might be appropriate when a. service is a primary consideration.
b. some, but not all, partners plan to work in the business.

c. funds invested in the partnership are considered the critical factor. d. little net income is expected.

79. If the partnership agreement specifies salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio, and partnership net income is not sufficient to cover both salaries and interest,
a. only salaries are allocated to the partners. b. only interest is allocated to the partners.
c. the entire net income is shared on a fixed ratio.

d. both salaries and interest are allocated to the partners.
Accounting for Partnerships 12 – 13

80. Which of the following would not be considered an expense of a partnership in determining income for the period?
a. Expired insurance b. Income tax expense c. Rent expense
d. Utilities expense

Use the following information for questions 81–82.

The net income of the Pine and Miles partnership is $180,000. The partnership agreement specifies that Pine and Miles have a salary allowance of $48,000 and $72,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $120,000. Any remaining net income or net loss is shared equally.

81. What is Pine’s share of the $180,000 net income? a. $48,000
b. $60,000 c. $66,000 d. $78,000

82. What is the balance of Miles’ Capital account at the end of the year after net income has been distributed?
a. $204,000 b. $192,000 c. $222,000 d. $210,000

83. The net income of the Torrey and Gore partnership is $250,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $200,000 (Torrey) and $150,000 (Gore) have been allocated. At the beginning of the year, Torrey’s Capital account had a balance of $500,000 and Gore’s Capital account had a balance of $650,000. What is the balance of Gore’s Capital account at the end of the year after profits and losses have been distributed?
a. $650,000 b. $100,000 c. $750,000 d. $775,000

84. A partners’ capital statement explains

a. the amount of legal liability of each of the partners.

b. the types of assets invested in the business by each partner.

c. how the partnership will be capitalized if a new partner is admitted to the partnership. d. the changes in each partner’s capital account and in total partnership capital during a
period.

85. Each of the following is used in preparing the partners’ capital statement except the a. balance sheet.
b. income statement.

c. partners’ capital accounts. d. partners’ drawing accounts.
12 – 14 Test Bank for Accounting Principles, Eighth Edition

86. The owners’ equity statement for a partnership is called the a. partners’ proportional statement.
b. partners’ capital statement.

c. statement of shareholders’ equity. d. capital and drawing statement.

87. Which of the following would not cause an increase in partnership capital? a. Drawings
b. Net income

c. Additional capital investment by the partners d. Initial capital investment by the partners

88. Jill Grier’s capital statement reveals that her drawings during the year were $50,000. She made an additional capital investment of $25,000 and her share of the net loss for the year was $10,000. Her ending capital balance was $200,000. What was Jill Grier’s beginning capital balance?
a. $225,000 b. $185,000 c. $235,000 d. $260,000

89. Bill Wren started the year with a capital balance of $180,000. During the year, his share of partnership net income was $160,000 and he withdrew $30,000 from the partnership for personal use. He made an additional capital contribution of $50,000 during the year. The amount of Bill Wren’s capital balance that will be reported on the year-end balance sheet will be
a. $160,000. b. $390,000. c. $300,000. d. $360,000.

90. The Partners’ Capital Statement for the United Center reported the following information in total:
Capital, January 1………………………………………….. $120,000 Additional investment……………………………………… 40,000 Drawings………………………………………………………. 80,000 Net income……………………………………………………. 100,000

The partnership has three partners: Moon, Garr, and Rice with ending capital balances in a ratio 40:20:40. What are the respective ending balances of the three partners?
a. Moon, $80,000; Garr, $40,000; Rice, $80,000. b. Moon, $72,000: Garr, $36,000; Rice, $72,000.
c. Moon, $136,000; Garr, $68,000; Rice, $136,000. d. Moon, $90,000; Garr, $48,000; Rice, $90,000.
Accounting for Partnerships 12 – 15

91. The total column of the Partners’ Capital Statement for North Company is as follows:

Capital, January 1 …………………………………………. Additional investment…………………………………….. Drawings ……………………………………………………… Net income……………………………………………………
$150,000 60,000 90,000 180,000

The partnership has three partners. The first two partners have ending capital balances that are equal. The ending balance of the third partner is half of the ending balance of the first partner. What is the ending capital balance of the third partner?
a. $72,000 b. $48,000 c. $60,000 d. $66,000

92. The partners’ drawing accounts are

a. reported on the income statement. b. reported on the balance sheet.
c. closed to Income Summary.

d. closed to the partners’ capital accounts.

93. The Uniform Partnership Act provides that

a. a purchaser of a partnership interest is not a partner until he or she is accepted into the firm by the continuing partners.
b. a partner must obtain the approval of other partners before selling his or her interest. c. the price paid in a purchase of partner’s interest must be equal to the capital equity
acquired.

d. the price paid in a purchase of partner’s interest must be greater than the capital equity acquired.

94. The balance sheet of a partnership will

a. report retained earnings below the partnership capital accounts. b. show a separate capital account for each partner.
c. show a separate drawing account for each partner.

d. show the amount of income that was distributed to each partner.

95. The liquidation of a partnership may result from each of the following except the a. bankruptcy of the partnership.
b. death of a partner.

c. retirement of a partner.

d. sale of the business by the partners.

96. In the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated
a. first to creditors and the remainder to partners.

b. to the partners on the basis of their capital balances.

c. to the partners on the basis of their income-sharing ratio. d. only after all creditors have been paid.

97. In the liquidation of a partnership, any partner who has a capital deficiency a. has a personal debt to the partnership for the amount of the deficiency. b. is automatically terminated as a partner.
c. will receive a cash distribution only on the basis of his or her income-sharing ratio. d. is not obligated to make up the capital deficiency.
12 – 16 Test Bank for Accounting Principles, Eighth Edition

98. Partners A, B, and C have capital account balances of $120,000 each. The income and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash assets with a book value of $100,000 are sold for $40,000. The balance of Partner B’s Capital account after the sale is
a. $90,000. b. $102,000. c. $108,000. d. $132,000.

Use the following information for questions 99–101.

The partners’ income and loss sharing ratio is 2:3:5, respectively.

D, E, AND F PARTNERSHIP Balance Sheet December 31, 2008

Assets Liabilities and Owners’ Equity

Cash

Noncash assets

Total
$ 90,000 570,000

$660,000
Liabilities D, Capital E, Capital F, Capital
Total
$300,000 120,000 180,000
60,000 $660,000

99. If the D, E, and F Partnership is liquidated by selling the noncash assets for $390,000 and creditors are paid in full, what is the amount of cash that can be safely distributed to each partner?
a. D, $72,000; E, $108,000; F, $0.

b. D, $84,000; E, $126,000; F, $30,000. c. D, $69,000; E, $111,000; F, $0.
d. D, $66,000; E, $114,000; F, $0.

100. If the D, E, and F Partnership is liquidated by selling the noncash assets for $750,000, and creditors are paid in full, what is the total amount of cash that Partner D will receive in the distribution of cash to partners?
a. $36,000 b. $234,000 c. $156,000 d. $150,000

101. If the D, E, and F Partnership is liquidated and the noncash assets are worthless, the creditors will look to what partner’s personal assets for settlement of the creditors’ claims? a. The personal assets of Partner E.
b. The personal assets of Partners D and F.

c. The personal assets of Partners D, E, and F.

d. The personal assets of the partners are not available for partnership debts.
Accounting for Partnerships 12 – 17

102. If a partner has a capital deficiency and does not have the personal resources to eliminate it,
a. the creditors will have to absorb the capital deficiency.

b. the other partners will absorb the capital deficiency on the basis of their respective capital balances.
c. the other partners will have to absorb the capital deficiency on the basis of their respective income sharing ratios.
d. neither the creditors nor the other partners will have to absorb the capital deficiency.

103. When a partnership terminates business, the sale of noncash assets is called a. liquidation.
b. realization. c. recognition. d. disposition.

104. The liquidation of a partnership

a. cannot be a voluntary act of the partners. b. terminates the business.
c. eliminates those partners with a capital deficiency. d. cannot occur unless all partners approve.

105. The liquidation of a partnership is a process containing the following steps:

1. Pay partnership liabilities in cash.

2. Allocate the gain or loss on realization to the partners on their income ratios. 3. Sell noncash assets for cash and recognize a gain or loss on realization.
4. Distribute remaining cash to partners on the basis of their remaining capital balances.

Identify the proper sequencing of the steps in the liquidation process. a. 3, 2, 4, 1.
b. 3, 2, 1, 4. c. 1, 3, 2, 4. d. 1, 4, 3, 2.

106. In the final step of the liquidation process, remaining cash is distributed to partners a. on an equal basis.
b. on the basis of the income ratios.

c. on the basis of the remaining capital balances. d. regardless of capital deficiencies.

107. In the liquidation process, if a capital account shows a deficiency

a. the partner with a deficiency has an obligation to the partnership for the amount of the deficiency.
b. it may be written off to a “Loss” account.

c. it is disregarded until after the partnership books are closed. d. it can be written off to a “Gain” account.

108. Before distributing any remaining cash to partners in a partnership liquidation, it is necessary to do each of the following except
a. sell noncash assets for cash.

b. recognize a gain or loss on realization.

c. allocate the gain or loss to the partners based on their capital balances. d. pay partnership liabilities in cash.
12 – 18 Test Bank for Accounting Principles, Eighth Edition

109. Kate, Sue, and Tina formed a partnership with income-sharing ratios of 50%, 30%, and 20%, respectively. Cash of $180,000 was available after the partnership’s assets were liquidated. Prior to the final distribution of cash, Kate’s capital balance was $200,000, Sue’s capital balance was $150,000, and Tina had a capital deficiency of $50,000. Based upon a cash payments schedule, Kate should receive
a. $175,000. b. $168,750. c. $131,250. d. $200,000.

110. A, B and C are partners, sharing income 2:1:2. After selling all of the assets for cash, dividing gains and losses on realization, and paying liabilities, the balances in the capital accounts are as follows: A, $10,000 Cr; B, $10,000 Cr; and C, $30,000 Cr. How much cash should be distributed to A?
a. $6,000 b. $20,000 c. $10,000 d. $16,667

111. In liquidation, balances prior to the distribution of cash to the partners are: Cash $300,000; Moorman, Capital $140,000; Simpson, Capital $130,000, and Kelton, Capital $30,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Moorman?
a. $125,000 b. $136,250 c. $140,000 d. $150,000

112. Assume the same facts in question 111 above, except that there is only $255,000 in cash and Kelton has a capital deficiency of $15,000. How much cash should be distributed to Simpson if Kelton does not pay his deficiency?
a. $122,500 b. $126,250 c. $118,750 d. $130,000

a113. D. Givens purchases a 25% interest for $30,000 when the Suppan, Porter, James partnership has total capital of $270,000. Prior to the admission of Givens, each partner has a capital balance of $90,000. Each partner relinquishes an equal amount of his capital balance to Givens. The amount to be relinquished by James is
a. $15,000. b. $19,000. c. $22,500. d. $37,500.

a114. Bryant is admitted to a partnership with a 25% capital interest by a cash investment of $90,000. If total capital of the partnership is $390,000 before admitting Bryant, the bonus to Bryant is
a. $30,000. b. $15,000. c. $45,000. d. $60,000.
Accounting for Partnerships 12 – 19

Use the following information for questions 115–116.

Carley and Kingman are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Carley, $175,000 and Kingman, $150,000. On that date, they agree to admit Lerner as a partner with a one-third capital interest.

a115. If Lerner invests $125,000 in the partnership, what is Carley’s capital balance after Lerner’s admittance?
a. $150,000 b. $158,333 c. $160,000 d. $175,000

a116. If Lerner invests $200,000 in the partnership, what is Kingman’s capital balance after Lerner’s admittance?
a. $175,000 b. $160,000 c. $157,500 d. $150,000

a117. King and Nott are partners who share profits and losses equally and have capital balances of $560,000 and $490,000, respectively. Starr is admitted into the partnership by investing $490,000 for 30% capital interest. The account balance of Nott, Capital after the admission of Starr would be
a. $462,000. b. $476,000. c. $504,000. d. $490,000.

a118. Stine and Watson have partnership capital balances of $320,000 and $240,000, respectively. Watson negotiates to sell his partnership interest to Leary for $280,000. Stine agrees to accept Leary as a new partner. The partnership entry to record this transaction is
a. Cash…………………………………………………………………………. 280,000

Leary, Capital …………………………………………………….. 280,000 b. Watson, Capital………………………………………………………….. 280,000
Leary, Capital …………………………………………………….. 280,000 c. Cash…………………………………………………………………………. 40,000
Watson, Capital………………………………………………………….. 240,000

Leary, Capital …………………………………………………….. 280,000 d. Watson, Capital………………………………………………………….. 240,000
Leary, Capital …………………………………………………….. 240,000

a119. Hill and Eddy share partnership profits and losses in the ratio of 6:4. Hill’s Capital account balance is $320,000 and Eddy’s Capital account balance is $200,000. Porter is admitted to the partnership by investing $360,000 and is to receive a one-fourth ownership interest. Hill, Eddy and Porter’s capital balances after Porter’s investment will be
Hill Eddy Porter

a. $320,000 $200,000 $360,000 b. $404,000 $256,000 $220,000 c. $396,000 $264,000 $220,000 d. $390,000 $270,000 $220,000
12 – 20 Test Bank for Accounting Principles, Eighth Edition

a120. Judy and Deb have partnership capital account balances of $600,000 and $450,000, respectively and share profits and losses equally. Anne is admitted to the partnership by investing $250,000 for a one-fourth ownership interest. The balance of Deb’s Capital account after Anne is admitted is
a. $412,500. b. $450,000. c. $487,500. d. $325,000.

a121. The admission of a new partner to an existing partnership

a. may be accomplished only by investing assets in the partnership. b. requires purchasing the interest of one or more existing partners. c. causes a legal dissolution of the existing partnership.
d. is almost always accompanied by the liquidation of the business.

a122. When a partnership interest is purchased

a. every partner’s capital account is affected.

b. the transaction is a personal transaction between the purchaser and the selling partner(s).
c. the buyer receives equity equal to the amount of cash paid. d. all partners will receive some part of the purchase price.

a123. Adler and Lynn each sell 1/3 of their partnership interest to Sele, receiving $140,000 each. At the time of the admission, each partner has a $420,000 capital balance. The entry to record the admission of Sele will show a
a. debit to Cash for $280,000.

b. credit to Sele, Capital for $420,000. c. debit to Lynn, Capital for $420,000. d. debit to Adler, Capital for $140,000.

a124. Ball and Gant sell 1/4 of their partnership interest to Ives receiving $200,000 each. At the time of admission, Ball and Gant each had a $350,000 capital balance. The admission of Ives will cause the net partnership assets to
a. increase by $400,000. b. remain at $700,000.
c. decrease by $400,000. d. remain at $1,100,000.

a125. Cole and Glenn sell to Nabb a 1/3 interest in the Cole-Glenn partnership. Nabb will pay Cole and Glenn each $70,000 for admission into the organization. Before this transaction, Cole and Glenn show capital balances of $105,000 each. The journal entry to record the admission of Nabb will
a. show a debit to Cash for $140,000. b. not show a debit to Cash.
c. show a debit to Glenn, Capital for $70,000. d. show a credit to Nabb, Capital for $140,000.
Accounting for Partnerships 12 – 21

a126. Foxx invests $20,000 in cash (admission by investment) in the Massey-Dix partnership to acquire a 1/4 interest. In this case
a. the accounting will be the same as a purchase of an interest.

b. the total net assets of the new partnership are unchanged from the previous partnership. c. the total capital of the new partnership is greater than the total capital of the old
partnership.

d. Foxx’s income ratio will automatically be 1/4.

a127. Which of the following is correct when admitting a new partner into an existing partnership?
Purchase of an Interest Admission by Investment a. Total net assets unchanged unchanged
b. Total capital increased unchanged c. Total net assets unchanged increased d. Total capital unchanged unchanged

a128. When admitting a new partner by investment, a bonus to old partners

a. is usually unjustified because book values clearly reflect partnership net worth.

b. is sometimes justified because goodwill may exist and it is not reflected in the accounts. c. results if the debit to cash is less than the new partner’s capital credit.
d. results if the debit to cash is equal to the new partner’s capital credit.

a129. When admitting a new partner by investment, a bonus to old partners is allocated on a. the basis of capital balances.
b. the basis of the original investment of the old partners.

c. the basis of income ratios before the admission of the new partner. d. a seniority basis.

a130. A bonus to a new partner a. is prohibited by GAAP.
b. results when the new partner’s capital credit is less than his or her investment of assets in the firm.
c. may occur when recorded book values are lower than market values.

d. results when the new partner’s capital credit is greater than his or her investment of assets in the firm.

a131. A bonus to a new partner will

a. increase the capital balances of existing partners based on their income ratios before the admission of the new partner.
b. increase the capital balances of existing partners based on their income ratios after the admission of the new partner.
c. decrease the capital balances of existing partners based on their income ratios before the admission of the new partner.
d. decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.

a132. Jane, Ken, and Mark have partnership capital account balances of $225,000, $450,000 and $105,000, respectively. The income sharing ratio is Jane, 50%; Ken, 40%; and Mark, 10%. Jane desires to withdraw from the partnership and it is agreed that partnership assets of $195,000 will be used to pay Jane for her partnership interest. The balances of Ken’s and Mark’s Capital accounts after Jane’s withdrawal would be
12 – 22 Test Bank for Accounting Principles, Eighth Edition

a. Ken, $450,000; Mark, $105,000. b. Ken, $474,000; Mark, $111,000. c. Ken, $426,000; Mark, $99,000. d. Ken, $435,000; Mark, $90,000.

a133. Ace, Bell, and Cole have partnership capital account balances of $400,000 each. Income and losses are shared equally. Cole agrees to sell three-fourths of his ownership interest to Ace for $350,000 and one-fourth to Bell for $125,000. Ace and Bell will use personal assets to purchase Cole’s interest. The partnership’s entry to record Cole’s withdrawal from the partnership would be
a. Cole, Capital …………………………………………………………….. 475,000

Cash ……………………………………………………………….. 475,000 b. Cole, Capital …………………………………………………………….. 475,000
Ace, Capital ……………………………………………………… 350,000 Bell, Capital ………………………………………………………. 125,000
c. Cole, Capital …………………………………………………………….. 400,000

Ace, Capital ……………………………………………………… 300,000 Bell, Capital ………………………………………………………. 100,000
d. Ace, Capital ……………………………………………………………… 356,250 Bell, Capital ………………………………………………………………. 118,750
Cole, Capital ……………………………………………………. 475,000

a134. When a partner withdraws from the firm, which of the following reflects the correct partnership effects?
Payment from Payment from Partners’ Personal Assets Partnership Assets
a. Total net assets decreased decreased b. Total capital decreased decreased c. Total net assets unchanged decreased d. Total capital unchanged unchanged

a135. Which of the following is not a necessary action that the partnership must take upon the death of a partner?
a. Determine the net income or net loss for the year to date. b. Discontinue business operations.
c. Close the books.

d. Prepare financial statements.

Use the following information for questions 136–138.

On November 30, capital balances are Gray $90,000, Carr $75,000 and Melton $75,000. The income ratios are 20%, 20% and 60%, respectively. Gray decides to retire from the partnership.

a136. The partnership pays Gray $105,000 cash for her partnership interest. After Gray’s retirement, what is the balance of Carr’s capital account?
a. $71,250 b. $72,000 c. $75,000 d. $97,500
Accounting for Partnerships 12 – 23

a137. The partnership pays Gray $75,000 cash for her partnership interest. After Gray’s retirement, what is the balance of Melton’s capital account?
a. $66,000 b. $75,000 c. $84,000 d. $86,250

a138. In order for Carr and Melton to have equal capital interests after the retirement of Gray, how much partnership cash would have to be paid to Gray for her partnership interest?
a. $0

b. $80,000 c. $90,000
d. Any amount paid to Gray will cause Carr and Melton to still have equal capital balances.

Additional Multiple Choice Questions

139. All of the following are characteristics of partnerships except a. co-ownership of property.
b. mutual agency. c. unlimited life.
d. association of individuals.

140. The Butkus, Sayers, and Halas partnership is terminated when the claims of company creditors exceed partnership assets by $50,000. The capital balances for Butkus, Sayers, and Halas are $35,000, $5,000, and $0, respectively. The original claims of the creditors were negotiated by Sayers and Halas. Which partner(s) is(are) personally and individually liable for all partnership liabilities?
a. Butkus b. Sayers
c. Sayers and Halas

d. Butkus, Sayers, and Halas

141. When a partner invests noncash assets in a partnership, the assets should be recorded at their
a. book value.

b. carrying value.

c. fair market value. d. original cost.

142. The partnership agreement of Rossi and Petry provides for salary allowances of $45,000 to Rossi and $35,000 to Petry, with the remaining income or loss to be divided equally. During the year, Rossi and Petry each withdraw cash equal to 80% of their salary allowances. If partnership net income is $100,000, Rossi’s equity in the partnership would a. increase more than Petry’s.
b. decrease more than Petry’s. c. increase the same as Petry’s. d. decrease the same as Petry’s.
12 – 24 Test Bank for Accounting Principles, Eighth Edition

143. Which of the following statements is correct?

a. Salaries to partners and interest on partners’ capital are expenses of the partnership. b. Salaries to partners are expenses of the partnership but not interest on partners’
capital.

c. Interest on partners’ capital is an expense of the partnership but not salaries to partners.
d. Neither salaries to partners nor interest on partners’ capital are expenses of the partnership.

144. In the liquidation of a partnership, the gains and losses from assets sold are a. divided equally among the partners.
b. divided among the partners in the stated income ratio.

c. divided among the partners in proportion to their capital equity interests. d. ignored.

145. If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances
a. equally.

b. on the basis of their income ratios.

c. on the basis of their capital balances.

d. on the basis of their original investments.

146. An entry is not required in the liquidation of a partnership to record the a. payment of cash to creditors.
b. distribution of cash to the partners. c. sale of noncash assets.
d. allocation of a capital deficiency to partners with credit balances when the deficient partner is expected to pay the deficiency.

147. The first step in the liquidation of a partnership is to

a. allocate a gain or loss on realization to the partners. b. distribute remaining cash to the partners.
c. pay partnership liabilities.

d. sell noncash assets and recognize a gain or loss on realization.

148. Baker joins the partnership of Kubek and Musial by paying $30,000 in cash. If the net assets of the partnership are still the same amount after Baker has been admitted as a partner, then Baker
a. must have been admitted by investment of assets.

b. must have been admitted by purchase of a partner’s interest. c. must have received a bonus upon being admitted.
d. could have been admitted by an investment of assets or by a purchase of a partner’s interest.

149. Lowe is admitted to a partnership with a 25% capital interest by a cash investment of $120,000. If total capital of the partnership is $520,000 before admitting Lowe, the bonus to Lowe is
a. $40,000. b. $20,000. c. $60,000. d. $80,000.

BRIEF EXERCISES
BE 150
Brandy and Johnson decide to organize a partnership. Brandy invests $25,000 cash, and Johnson contributes $5,000 and equipment having a book value of $3,500 and a fair market value of $10,000.

Instructions

Prepare the entry to record each partner’s investment.

BE 151

Tonto Company and Ranger Company decide to merge their proprietorships into a partnership called Westward Ho Company. The balance sheet of Ranger Company shows:

Accounts Receivable

Less: Allowance for doubtful accounts

Equipment
Less: Accumulated depreciation
$15,000

1,500

$20,000
10,000

$13,500

$10,000

The partners agree that the net realizable value of the receivables is $12,500 and that the fair market value of the equipment is $15,000.

Instructions

Indicate how the four accounts should appear in the opening balance sheet of the partnership.

BE 152

The Jill & Frill Co. reports net income of $28,000. Interest allowances are Jill $3,000 and Frill $5,000; partner salary allowances are Jill $18,000 and Frill $10,000 and the remainder is shared equally.

Instructions

Indicate the division of net income to each partner, and prepare the entry to distribute the net income.

BE 153

Debauge Co. had beginning capital balances on January 1, 2008, as follows: Nick Foley $30,000 and Tom Wenger $25,000. During the year, drawings were Foley $15,000 and Wenger $8,000. Net income was $50,000, and the partners share income equally.

Instructions

Prepare the partners’ capital statement for the year.

BE 154

After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash $29,000, A Capital (Cr.) $11,000, B Capital (Cr,) $8,000 and C Capital (Cr.) $10,000. The partners share income equally.

Instructions

Journalize the final distribution of cash to the partners.

BE 155

Barnes Company at December 31 has cash $40,000, noncash assets $200,000, liabilities $110,000, and the following capital balances: Carpenter $90,000 and Pendleton $40,000. The firm is liquidated, and $240,000 in cash is received for the noncash assets. Carpenter and Pendleton income ratios are 60% and 40%, respectively.

Instructions

Prepare a cash distribution schedule.

BE 156

In Nelson Co., capital balances are Ozzie $60,000 and Harriet $75,000. The partners share income equally. Denny is admitted to the firm with a 40% interest by an investment of cash of $65,000. Journalize the admission of Denny.

BE 157

Bob and Kathy are partners who share profits 60% and 40%. Their capital balances were both $90,000 before Betty was admitted to the partnership. Betty contributed $120,000 in cash to the partnership for a 30% interest.

Instructions

Compute the capital balances of Bob and Kathy after Betty is admitted to the partnership.
Accounting for Partnerships 12 – 29

BE 158

Capital balances in Jetson Co. are George $50,000, Jane $38,000, and Frank $25,000. The partners share income equally. Frank receives $35,000 from partnership assets in withdrawing from the firm.

Instructions

Journalize the withdrawal of Frank.

BE 159

Mike, Andy, and Joe are partners who share profits 40%, 20%, and 40%. Their capital balances were $630,000, $420,000, and $210,000, respectively, before Joe’s retirement. Joe was paid $270,000 from partnership assets to buy his interest.

Instructions

Compute the capital balances of Mike and Andy after Joe has withdrawn.

EXERCISES
Ex. 160
Dick Acer and George Dooley decide to form a partnership. Acer invests $25,000 cash and accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Dooley contributes $20,000 cash and equipment having a $6,000 book value. It is agreed that the allowance account should be $3,000 and the fair market value of the equipment is $10,000.

Instructions

Prepare the necessary journal entry to record the formation of the partnership.

Ex. 161

Ken Lott and Jim Stine operate separate auto repair shops. On January 1, 2008, they decide to combine their separate businesses which were operated as proprietorships to form L & S Auto Repair, a partnership. Information from their separate balance sheets is presented below:

Cash
Accounts receivable
Allowance for doubtful accounts Accounts payable
Notes payable Salaries payable Equipment
Accumulated amortization—Equipment
Lott Auto Repair $10,000
9,000 1,000 5,000
— 1,000
12,000 2,000
Stine Auto Repair $12,000
10,000 500 6,000 3,000 1,500 24,000 4,000

It is agreed that the expected realizable value of Lott’s accounts receivable is $8,000 and Stine’s receivables is $7,000. The fair market value of Lott’s equipment is $13,000 and the value of Stine’s equipment is $20,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Stine’s balance sheet which he will pay himself.

Instructions

Prepare the journal entries necessary to record the formation of the partnership.
Accounting for Partnerships 12 – 31

Ex. 162

The Smith and Wilson partnership reports net income of $45,000. Partner salary allowances are Smith $18,000 and Wilson $12,000. Any remaining income is shared 60:40.

Instructions

Determine the amount of net income allocated to each partner.

Ex. 163

Bass, Ellis, and Goren formed a partnership on January 1, 2008. Bass invested $60,000, Ellis $60,000 and Goren $140,000. Bass will manage the store and work 40 hours per week in the store. Ellis will work 20 hours per week in the store, and Goren will not work. Each partner withdrew 30 percent of his income distribution during 2008. If there was no income distribution to a partner, there were no withdrawals of cash.

Instructions

Compute the partners’ capital balances at the end of 2008 under the following independent conditions: (Hint: use T accounts to determine each partner’s capital balances.)

Ex. 163 (cont.)

(1) Net income is $120,000 and the income ratio is Bass 40%, Ellis 35%, and Goren 25%.

(2) Net income is $140,000 and the partnership agreement only specifies a salary of $50,000 to Bass and $30,000 to Ellis.
(3) Net income is $86,000 and the partnership agreement provides for (a) a salary of $40,000 to Bass and $40,000 to Ellis, (b) interest on beginning capital balances at the rate of 10%, and (c) any remaining income or loss is to be shared by Bass 40%, Ellis 35%, and Goren 25%.

Ex. 164

Carlin and Larve have a partnership agreement which includes the following provisions regarding sharing net income or net loss:

1. A salary allowance of $54,000 to Carlin and $36,000 to Larve.

2. An interest allowance of 10% on capital balances at the beginning of the year. 3. The remainder to be divided 60% to Carlin and 40% to Larve.

The capital balance on January 1, 2008, for Carlin and Larve was $90,000 and $120,000, respectively. During 2008, the Carlin and Larve Partnership had sales of $495,000, cost of goods sold of $290,000, and operating expenses of $75,000.

Instructions

Prepare an income statement for the Carlin and Larve Partnership for the year ended December 31, 2008. As a part of the income statement, include a Division of Net Income to each of the partners.

Ex. 165

Hope & Crosby Co. reports net income of $34,000. The partnership agreement provides for annual salaries of $24,000 for Hope and $15,000 for Crosby and interest allowances of $4,000 to Hope and $6,000 to Crosby. Any remaining income or loss is to be shared 70% by Hope and 30% by Crosby.

Instructions

Compute the amount of net income distributed to each partner.

Ex. 166

The adjusted trial balance of the Karris and Watts Partnership for the year ended December 31, 2008, appears below:
KARRIS AND WATTS PARTNERSHIP Adjusted Trial Balance
For the Year Ended December 31, 2008

Current Assets…………………………………………………………………………… Plant Assets ……………………………………………………………………………… Current Liabilities……………………………………………………………………….. Long-term Debt …………………………………………………………………………. Karris, Capital……………………………………………………………………………. Karris, Drawing………………………………………………………………………….. Watts, Capital……………………………………………………………………………. Watts, Drawing………………………………………………………………………….. Sales ……………………………………………………………………………………….. Cost of Goods Sold……………………………………………………………………. Operating Expenses……………………………………………………………………
Debit

19,000 80,000

4,000

7,000

62,000
23,000 195,000
Credit

7,000 50,000 20,000

18,000

100,000

195,000

The partnership agreement stipulates that a division of partnership net income or net loss is to be made as follows:
1. A salary allowance of $12,000 to Karris and $23,000 to Watts. 2. The remainder is to be divided equally.

Instructions

(a) Prepare a schedule which shows the division of net income to each partner.

(b) Prepare the closing entries for the division of net income and for the drawing accounts at December 31, 2008.

Ex. 167

Kim Carey and Mary Hall have formed the CH Partnership, and have capital balances of $130,000 and $100,000, respectively, on January 1, 2008. On June 1, 2008, Hall invested an additional $30,000. Also during the year, Carey withdrew $60,000 and Hall withdrew $48,000. Sales for the year amounted to $360,000 and expenses were $260,000. Carey and Hall share income and losses on a 3:1 basis.

Instructions

(a) Prepare the closing entries at December 31, 2008, for the CH Partnership. (b) Prepare a partners’ capital statement for 2008.

Ex. 168

Prepare a partners’ capital statement for Crestwood Company based on the following information.

Crest Wood

Beginning capital $30,000 $27,000 Drawings during year 15,000 8,000

Net income was $35,000, and the partners share income 60% to Crest and 40% to Wood.

Ex. 169

On December 31, Thompson Company has cash $30,000, noncash assets $150,000, and liabilities $80,000. Capital balances were Terry $55,000 and Nott $45,000. The firm is liquidated, and the noncash assets are sold for $125,000. Terry and Nott share income in a 60:40 ratio.

Instructions

Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on liquidation to the partners.
Accounting for Partnerships 12 – 37

Ex. 170

The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash Payments for the partnership. Partners A, B, and C share income and losses in the ratio of 4:3:3, respectively. Assume the following:

1. The noncash assets were sold for $75,000. 2. Liabilities were paid in full.
3. The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.)

Instructions

Using the above information, complete the Schedule of Cash Payments below:

ABC PARTNERSHIP Schedule of Cash Payments

Item Cash + Balances before
liquidation 25,000 +
Noncash

Assets =

150,000 =

Liabilities +

50,000 +
A Capital +

25,000 +
B Capital +

35,000 +
C Capital

65,000

Ex. 171

The ODS Partnership is to be liquidated when the ledger shows the following:

Cash
Noncash Assets Liabilities
Oslo, Capital Decker, Capital Silas, Capital
$ 50,000 200,000 50,000 75,000 100,000 25,000

Oslo, Decker, and Silas’ income ratios are 6:3:1, respectively.

Instructions

Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $150,000 in cash.

Ex. 172

Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $30,000, Alt Capital (Dr.) $10,000, Bell Capital (Cr.) $25,000, and Cole Capital (Cr.) $15,000. They share income on a 5:3:2 basis.

Instructions

Prepare entries to record (a) the absorption of Alt’s capital deficiency by the other partners and (b) the distribution of cash to the partners with credit balances.
Accounting for Partnerships 12 – 39

Ex. 173

The GF Partnership is liquidated when the ledger shows:

Cash
Noncash Assets Liabilities
Grant, Capital Fleming, Capital
$60,000 90,000 44,000 100,000 6,000

Grant and Fleming’s income ratios are 3:2, respectively.

Instructions

Prepare a schedule of cash payments, assuming that the noncash assets were sold for $70,000. Assume that any partner’s capital deficiencies cannot be paid to the partnership.

Ex. 174

The Howell and Parks Partnership has partner capital account balances as follows:

Howell, Capital Parks, Capital
$550,000 250,000

The partners share income and losses in the ratio of 60% to Howell and 40% to Parks.

Instructions

Prepare the journal entry on the books of the partnership to record the admission of Tyler as a new partner under the following three independent circumstances.

1. Tyler pays $350,000 to Howell and $150,000 to Parks for one-half of each of their ownership interest in a personal transaction.

2. Tyler invests $850,000 in the partnership for a one-third interest in partnership capital. 3. Tyler invests $175,000 in the partnership for a one-third interest in partnership capital.

Ex. 175

Key, Riser, and Stone share income on a 6:3:1 basis. They have capital balances of $80,000, $60,000, and $45,000, respectively, when Horton is admitted to the partnership.

Instructions

Prepare the journal entry to record the admission of Horton into the partnership if Horton purchases one-half of Key’s equity for $45,000; one-half of Riser’s equity for $22,000; and one-third of Stone’s equity for $18,000.

Ex. 176

Tom Rosen and Joe Finney share partnership income on a 3:2 basis. They have capital balances of $560,000 and $280,000, respectively, when Ed Vann is admitted to the partnership.

Instructions

Prepare the journal entry to record the admission of Vann under each of the following assumptions:

(a) Vann invests $340,000 for a 25% ownership interest. (b) Vann invests $200,000 for a 25% ownership interest.
(c) Vann invests an amount that gives him a 25% ownership interest.

Ex. 177

Cindy Mills and Amy Peters have capital accounts of $480,000 and $420,000, respectively. Bill Denny and Mark Morgan are to join the partnership. Denny invests $450,000 in the partnership for which he receives a capital credit of $450,000. Morgan purchases a one-half interest from Mills for $300,000 and a one-fourth interest from Peters for $90,000.

Instructions

(a) Prepare the journal entries to record the admission of Denny and Morgan to the partnership.

(b) Determine the capital balances of the partners after the admission of Denny and Morgan.
Accounting for Partnerships 12 – 43

Ex. 178

Adel, Gaines, and Yockey share income and losses in a ratio of 3:2:5, respectively. The capital account balances of the partners are as follows:

Adel, Capital Gaines, Capital Yockey, Capital
$600,000 360,000 240,000

Instructions

Prepare the journal entry on the books of the partnership to record the withdrawal of Yockey under the following independent circumstances:

1. The partners agree that Yockey should be paid $280,000 by the partnership for his interest. 2. The partners agree that Yockey should be paid $180,000 by the partnership for his interest.
3. Adel agrees to pay Yockey $180,000 for one-half of his capital interest and Gaines agrees to pay Yockey $180,000 for one-half of his capital interest in a personal transaction among the partners.

Ex. 179

Dixon, Larsen, and Polley have capital balances of $150,000, $100,000, and $75,000, respectively, and their income ratios are 4:2:4.

Instructions

Record the withdrawal of Polley from the partnership under each of the following assumptions: 1. Polley is paid $75,000 from partnership assets.
2. Polley is paid $90,000 from partnership assets. 3. Polley is paid $55,000 from partnership assets.

COMPLETION STATEMENTS

180. The ______________ Act provides the basic rules for the formation and operation of partnerships in more than 90% of the states.

181. A partnership characteristic which enables each partner to act on behalf of the partnership when engaging in partnership business is called ______________.

182. A major disadvantage of the partnership form of organization is ______________, which makes each partner personally and individually liable for all partnership liabilities.

183. The capital accounts indicate each partner’s ______________ investment, while the partner’s drawing accounts are ______________ owner’s equity accounts.

184. The ______________ ratio specifies the basis for sharing income and losses.

185. An income ratio based on ______________ balances may be appropriate when the amount of funds invested in the partnership is critical to the partnership.

186. A ______________ allowance or ______________ on partners’ capital accounts are not expenses of the partnership when they are specified as the basis for sharing income and losses.

187. In liquidating a partnership, it is necessary to convert ______________ into cash and to allocate any ______________ or ______________ to the partners based on their income ratios.

188. A debit balance in a partner’s capital account is called a _____________.

a189. A new partner may be admitted to the partnership by ______________ the interest of an existing partner, or by ______________ assets in the partnership.

a190. When a new partner’s capital interest on the date of admittance is less than his or her investment in the firm, a ______________ results for the ______________ partner(s).

a191. If a bonus is given to a new partner, the old partners’ capital accounts are decreased based on their ______________ ratio prior to the admission of the new partner.

MATCHING

192. Match the items below by entering the appropriate code letter in the space provided.

A. Mutual agency B. Unlimited liability
C. Partnership agreement D. Income ratio
E. Partners’ capital statement F. Admission by investment
G. Purchase of an interest H. Partnership liquidation
I. Capital deficiency
J. Distribution of cash to partners in liquidation of a partnership.

____ 1. Each partner is personally and individually liable for partnership debts.

____ 2. Made on basis of partners’ capital balances.

____ 3. Explains changes in individual partner’s capital accounts during a period.

____ 4. Each partner can bind the partnership so long as the action appears to be appropriate for the partnership.

____ 5. Business terminates.

____ a6. Results in an increase in total net assets and total capital of the partnership.

____ 7. Capital account with a debit balance.

____ 8. The basis for sharing income and losses.

____ a9. Total net assets and total capital of the partnership do not change.

____ 10. Written or verbal contract establishing duties and responsibilities of partners.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 193
Identify and explain the principal characteristics of the partnership form of business organization.

S-A E 194

A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and distributing the remaining assets to the partners. Explain why gains and losses on the realization of non-cash assets are distributed to the partners based on their income ratios, whereas cash is distributed to the partners based on their equity as shown in their capital accounts. What effects does the payment or nonpayment of a capital deficiency have on the distribution of cash to the partners?

S-A E 195 (Ethics)

Three doctors, Frank White, Mark Rosen, and Steve Jenner, opened a family medicine clinic. All three doctors had been lifelong friends. All belonged to the same religious faith. All were very active in church affairs, and tried to mold their professional behavior to their religious beliefs.

About a year ago, Dr. White announced that he was leaving the church. The others noticed that his personality also began to change. He began to dress in flamboyant styles, and he started wearing expensive-looking jewelry. His temper became unstable—one minute he was calm, and the next, he might be throwing charts down the hall and screaming. He started coming to the office late, and forgetting to see some of his patients before he left again. The other two at first were stunned at the changes. His wife asked them whether they thought he might have a drinking problem. After finally deciding to investigate, they found what looked to them like a large amount of cocaine, (hundreds of plastic sacks of white powder) tucked away in boxes of old medical equipment.

Frightened, Drs. Rosen and Jenner decided to act quickly. Their partnership agreement said nothing about dissolving the partnership—only about what to do if one of them died. They therefore secretly rented office space across town and began to move the most necessary equipment and supplies to the new office. A month later, they changed the locks on the old office and began seeing patients in the new office without any notice to Dr. White at all. Dr. White simply came in at around ten o’clock as usual, and found himself locked out of an empty office.

Required:

Did Drs. Rosen and Jenner act ethically in their ending of the partnership? Explain.

S-A E 196 (Communication)

Matt Jones and Jerry Watson began detail work on automobiles as a hobby. First, they used a mail-order kit to add “pinstriping” to their own cars, a 1968 Mustang and a 1970 GTO Judge, respectively. Then Matt added more flourishes, including his name. Jerry practiced painting flames on his Judge. Gradually, their cars became recognized around town and others began to ask them to add a flourish here or there to their cars. They were talked into attending a “muscle car” show in a nearby large city to show off their cars. They had more requests for work than they could handle. Now, they are considering quitting their other jobs and making this a permanent business. Jerry, for example, turns down more jobs than he accepts and still gets more requests every week.

S-A E 196 (cont.)

Matt and Jerry are unsure how to proceed. They like the idea of a partnership, but they only know they work well together—things like how to split payment have just been settled individually for each job, depending on which one did more work. Matt’s father suggests a written partnership agreement. Matt disagrees. He believes that it will spoil the whole arrangement by reducing it to words.

Required:

Write a brief note to Matt explaining why he needs a partnership agreement.

CHAPTER 13

CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS

CHAPTERSTUDY OBJECTIVES

1. Identify the major characteristics of a corporation.

2. Differentiate between paid-in capital and retained earnings.

3. Record the issuance of common stock.

4. Explain the accounting for treasury stock.

5. Differentiate preferred stock from common stock.

6. Prepare a stockholders’ equity section.

7. Compute book value per share.

TRUE-FALSESTATEMENTS

1. A corporation is not an entity which is separate and distinct from its owners.

2. A corporation can be organized for the purpose of making a profit or it may be nonprofit.

3. A corporation acts under its own name rather than in the name of its stockholders.

4. If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.

5. A corporation must be incorporated in each state in which it does business.

6. A stockholder has the right to vote in the election of the board of directors.

7. A proxy is a legal document that instructs a stockholder’s agent how to vote shares of stock for the stockholder.

8. As soon as a corporation is authorized to sell stock, an accounting journal entry should be made recording the total value of the shares authorized.

9. The par value of common stock must always be equal to its market value on the date the stock is issued.

10. When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock becomes legal capital.

11. A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an increase in the number of authorized shares.

12. The market value of a corporation’s stock is determined by the number of shares that the corporation has been authorized to issue.

13. Each stockholder in a corporation has a separate capital account in the stockholders’ equity section of the balance sheet.

14. The stockholders’ equity section of a corporation’s balance sheet consists of (1) paid-in capital, (2) retained earnings, and (3) drawings.

15. Dividends are declared out of retained earnings.

16. When a corporation has only one class of capital stock, it is identified as preferred stock.

17. Retained earnings are a part of stockholders’ equity.
Corporations:Organization and Capital Stock Transactions 13 – 5

18. Retained earnings are subtracted from paid-in capital to arrive at total stockholders’ equity.

19. Stock can be issued only in exchangefor cash.

20. The par value of stock issued for noncash assets is never a factor in determining the cost of the assets received.

21. The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.

22. Treasury stock should not be classified as a current asset.

23. Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.

24. Treasury stock is a contra stockholders’ equity account.

25. The number of common shares outstanding can never be greater than the number of shares issued.

26. Preferred stock has contractual preference over common stock in certain areas.

27. Preferred stockholdersgenerally do not have the right to vote for the board of directors.

28. Dividends in arrears on cumulative preferred stock are considered a liability.

29. In published annual reports, subclassifications within the stockholders’ equity section are seldom presented, but additional information is frequently included in the footnotes to the financial statements.

30. Book value per share of common stock is the same amount as the market value per share.

Additional True-False Questions

31. A successful corporationcan have a continuous and perpetual life.

32. Organizational costs are capitalized by debiting an intangible asset entitled Organization Costs.

33. The cash proceeds from issuing par value stock may be equal to or greater than, but not less than par value.

34. The cost of a noncash asset acquired in exchange for common stock should be either the fair market value of the consideration given up or the consideration received, whichever is more clearly determinable.

35. Under the cost method, Treasury Stock is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Stock when the shares are sold.

36. Book value per share is the same thing as liquidation value per share.

MULTIPLECHOICE QUESTIONS

37. Which one of the following is a privately held corporation? a. Intel
b. General Electric c. Caterpillar Inc. d. Cargill Inc.

38. The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is
a. the sole proprietorship. b. the partnership.
c. the corporation. d. not known.

39. Under the corporate form of business organization
a. a stockholder is personally liable for the debts of the corporation.
b. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation.
c. the corporation’s life is stipulated in its charter.
d. stockholders wishing to sell their corporation shares must get the approval of other stockholders.

40. Stockholders of a corporation directly elect a. the president of the corporation.
b. the board of directors.
c. the treasurer of the corporation.
d. all of the employees of the corporation.

41. The chief accounting officer in a company is known as the a. controller.
b. treasurer.
c. vice-president. d. president.

42. A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a
a. corporation is organized for the purpose of making a profit.
b. corporation is subject to numerous federal and state government regulations. c. corporation is an accounting economic entity.
d. corporation’s temporary accounts are closed at the end of the accounting period.
Corporations:Organization and Capital Stock Transactions 13 – 7

43. Which one of the following would not be considered an advantage of the corporate form of organization?
a. Limited liability of owners b. Separate legal existence c. Continuous life
d. Government regulation

44. The concept of an “artificial being” refers to which form of business organization? a. Partnership
b. Sole proprietorship c. Corporation
d. Limited partnership

45. The two ways that a corporation can be classified by purpose are a. general and limited.
b. profit and nonprofit. c. state and federal.
d. publicly held and privately held.

46. The two ways that a corporation can be classified by ownership are a. publicly held and privately held.
b. stock and non-stock. c. inside and outside. d. majority and minority.

47. Which of the following would not be true of a privately held corporation? a. It is sometimes called a closely held corporation.
b. Its shares are regularly traded on the New York Stock Exchange. c. It does not offer its shares for sale to the general public.
d. It is usually smaller than a publicly held company.

48. Which of the following is not true of a corporation? a. It may buy, own, and sell property.
b. It may sue and be sued.
c. The acts of its owners bind the corporation.
d. It may enter into binding legal contracts in its own name.

49. Ed Stone has invested $400,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Stone stand to lose? a. Up to his total investment of $400,000.
b. Zero.
c. The $400,000 plus any personal assets the creditors demand. d. $200,000.

50. Which of the following statements reflects the transferability of ownership rights in a corporation?
a. If a shareholder decides to transfer ownership, he must transfer all of his shares. b. A shareholder may dispose of part or all of his shares.
c. A shareholder must obtain permission from the board of directors before selling shares. d. A shareholder must obtain permission from at least three other stockholders before
selling shares.
13 – 8

51. A corporate board of directors does not generally a. select officers.
b. formulate operating policies. c. declare dividends.
d. execute policy.

52. A typical organization chart showing delegation of authority would show a. stockholders delegating to the board of directors.
b. the board of directors delegating to stockholders.
c. the chief executive officer delegating to the board of directors. d. the controller delegating to the chief executive officer.

53. The officer who is generally responsible for maintaining the cash position of the corporation is the
a. controller. b. treasurer. c. cashier.
d. internal auditor.

54. The chief accounting officer in a corporation is the a. treasurer.
b. president. c. controller.
d. vice-president of finance.

55. The ability of a corporation to obtain capital is
a. enhanced because of limited liability and ease of share transferability. b. less than a partnership.
c. restricted because of the limited life of the corporation. d. about the same as a partnership.

56. Which of the following statements concerning taxation is accurate?
a. Partnerships pay state income taxes but not federal income taxes. b. Corporations pay federal income taxes but not state income taxes. c. Corporations pay federal and state income taxes.
d. Only the owners must pay taxes on corporate income.

57. Which of the following statements is not considered a disadvantage of the corporate form of organization?
a. Additional taxes
b. Government regulations
c. Limited liability of stockholders
d. Separation of ownership and management

58. What is ordinarily the first step in the formation of a corporation? a. Development of by-laws for the corporation
b. Issuance of the corporate charter
c. Applicationfor incorporation to the appropriate Secretary of State d. Registration with the SEC
Corporations:Organization and Capital Stock Transactions 13 – 9

59. Which one of the following is not an ownership right of a stockholder in a corporation? a. To vote in the election of directors
b. To declare dividends on the common stock c. To share in assets upon liquidation
d. To share in corporate earnings

60. If no-par stock is issued without a stated value, then a. the par value is automatically$1 per share.
b. the entire proceeds are consideredto be legal capital. c. there is no legal capital.
d. the corporation is automaticallyin violation of its state charter.

61. If a stockholder cannot attend a stockholder’s meeting, he may delegate his voting rights by means of
a. an absentee ballot. b. a proxy.
c. a certified letter. d. a telegram.

62. If a corporation has only one class of stock, it is referred to as a. Classless Stock.
b. Preferred Stock. c. Solitary Stock. d. Common Stock.

63. The term residual claim refers to a shareholder’sright to a. receive dividends.
b. share in assets upon liquidation.
c. acquire additional shares when offered. d. exercise a proxy vote.

64. Which of the following factors does not affect the initial market price of a stock? a. The company’s anticipated future earnings
b. The par value of the stock
c. The current state of the economy
d. The expected dividend rate per share

65. If an investment firm underwrites a stock issue, the
a. risk of being unable to sell the shares stays with the issuing corporation. b. corporation obtains cash immediately from the investment firm.
c. investment firm has guaranteed profits on the sale of the stock. d. issuance of stock is likely to be directly to creditors.

66. The par value of a stock a. is legally significant.
b. reflects the most recent market price. c. is selected by the SEC.
d. is indicative of the worth of the stock.
13 – 10

67. A corporation has the following account balances: Common stock, $1 par value, $30,000; Paid-in Capital in Excess of Par Value, $1,350,000. Based on this information, the
a. legal capital is $1,380,000.
b. number of shares issued are 30,000.
c. number of shares outstanding are 1,380,000. d. average price per share issued is $4.60.

68. The authorized stock of a corporation
a. only reflects the initial capital needs of the company. b. is indicated in its by-laws.
c. is indicated in its charter.
d. must be recorded in a formal accounting entry.

69. Owners’ equity for a corporation is identified as each of the following except a. corporate capital.
b. paid-in capital.
c. shareholders’ equity. d. stockholders’ equity.

70. Retained earnings
a. is unique to the corporate form of business.
b. is an optional account in the partnership form of business. c. reflects cash paid in by shareholders to date.
d. is closed at the end of the year.

71. Dividends are declared out of a. Capital Stock.
b. Paid-in Capital in Excess of Par Value. c. Retained Earnings.
d. Treasury Stock.

72. Retained earnings is
a. always equal to the amount of cash that the corporation has generated from operations.
b. a part of the paid-in capital of the corporation.
c. a part of the stockholders’ claim on the total assets of the corporation. d. closed at the end of each accounting period.

73. When stock is issued for legal services, the transaction is recorded by debiting Organization Expense for the
a. stated value of the stock. b. par value of the stock.
c. market value of the stock. d. book value of the stock.

74. If Vickers Company issues 2,000 shares of $5 par value common stock for $140,000, a. Common Stock will be credited for $140,000.
b. Paid-In Capital in Excess of Par Value will be credited for $10,000. c. Paid-In Capital in Excess of Par Value will be credited for $130,000. d. Cash will be debited for $130,000.
Corporations:Organization and Capital Stock Transactions 13 – 11

75. If common stock is issued for an amount greater than par value, the excess should be credited to
a. Cash.
b. Retained Earnings.
c. Paid-in Capital in Excess of Par Value. d. Legal Capital.

76. If stock is issued for a noncash asset, the asset should be recorded on the books of the corporation at
a. fair market value. b. cost.
c. zero.
d. a nominal amount.

77. If stock is issued for less than par value, the account a. Paid-In Capital in Excess of Par Value is credited.
b. Paid-In Capital in Excess of Par Value is debited if a debit balance exists in the account.
c. Paid-In Capital in Excess of Par Value is debited if a credit balance exists in the account.
d. Retained Earnings is credited.

78. The sale of common stock below par
a. is a common occurrence in most states. b. is not permitted in most states.
c. is a practice that most shareholdersencourage.
d. requires that a liability be recorded for the difference between the sales price and the par value of the shares.

79. Paid-In Capital in Excess of Stated Value
a. is credited when no-par stock does not have a stated value. b. is reported as part of paid-in capital on the balance sheet. c. represents the amount of legal capital.
d. normally has a debit balance.

80. A separate paid-in capital account is used to record each of the following except the issuance of
a. no-par stock.
b. par value stock.
c. stated value stock.
d. treasury stock above cost.

81. Becker Company is a publicly held corporation whose $1 par value stock is actively traded at $20 per share. The company issued 2,000 shares of stock to acquire land recently advertised at $50,000.When recording this transaction, Becker Companywill
a. debit Land for $50,000.
b. credit Common Stock for $40,000. c. debit Land for $40,000.
d. credit Paid-In Capital in Excess of Par Value for $48,000.
13 – 12

82. Simon Company issued 6,000 shares of its $5 par value common stock in payment of its attorney’s bill of $45,000. The bill was for services performed in helping the company incorporate. Simon should record this transactionby debiting
a. Legal Expense for $30,000. b. Legal Expense for $45,000.
c. Organization Expense for $30,000. d. Organization Expense for $45,000.

83. In the financial statements, organization costs appears
a. immediatelybelow Retained Earnings in the stockholders’ equity section. b. in the income statement.
c. as part of paid-in capital in the stockholders’ equity section. d. as an intangible asset.

84. Which of the following represents the largest number of common shares? a. Treasury shares
b. Issued shares
c. Outstanding shares d. Authorized shares

85. New Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to
a. Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $4,000. b. Common Stock $14,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $4,000. d. Common Stock $10,000 and Retained Earnings $4,000.

86. If Kiner Company issues 1,000 shares of $5 par value common stock for $70,000, the account
a. Common Stock will be credited for $5,000.
b. Paid-in Capital in Excess of Par Value will be credited for $5,000. c. Paid-in Capital in Excess of Par Value will be credited for $70,000. d. Cash will be debited for $65,000.

87. Jansen Packaging Corporation began business in 2008 by issuing 40,000 shares of $5 par common stock for $8 per share and 10,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2008 balance sheet, Jansen Packaging would report
a. Common Stock of $400,000. b. Common Stock of $200,000. c. Common Stock of $320,000. d. Paid-In Capital of $300,000.

88. Kim, Inc. issued 5,000 shares of stock at a stated value of $10/share. The total issue of stock sold for $15/share. The journal entry to record this transaction would include a
a. debit to Cash for $50,000.
b. credit to Common Stock for $50,000.
c. credit to Paid-in Capital in Excess of Par Value for $25,000. d. credit to Common Stock for $75,000.
Corporations:Organization and Capital Stock Transactions 13 – 13

89. Foley Manufacturing Corporation purchased 3,000 shares of its own previously issued $10 par common stock for $69,000. As a result of this event,
a. Foley’s Common Stock account decreased $30,000. b. Foley’s total stockholders’ equity decreased $69,000.
c. Foley’s Paid-in Capital in Excess of Par Value account decreased $39,000. d. All of the above.

90. A corporation purchases 20,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $700,000 b. Decrease by $400,000 c. Decrease by $700,000 d. Increase by $400,000

91. A corporation purchases 10,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $100,000 b. Decrease by $250,000 c. Increase by $250,000 d. Decrease by $100,000

92. Beckham Company has 1,000 shares of 4%, $100 par cumulative preferred stock outstanding at December 31, 2008. No dividends have been paid on this stock for 2007 or 2008. Dividends in arrears at December 31, 2008 total
a. $0. b. $400.
c. $4,000. d. $8,000.

93. Ephram Company has 2,000 shares of 5%, $100 par non-cumulative preferred stock outstanding at December 31, 2008. No dividends have been paid on this stock for 2007 or 2008. Dividends in arrears at December 31, 2008 total
a. $0.
b. $1,000. c. $10,000. d. $20,000.

94. Rebel Inc. issued 2,000 shares of no-par common stock with a stated value of $3 per share. The market price of the stock on the date of issuance was $12 per share. The entry to record this transaction includes a
a. debit to Cash for $6,000.
b. credit to Common Stock for $24,000. c. credit to Common Stock for $6,000.
d. debit to Paid-in Capital in Excess of Par Value for $24,000.

95. Rancho Corporation sold 100 shares of treasury stock for $40 per share. The cost for the shares was $30. The entry to record the sale will include a
a. credit to Gain on Sale of Treasury Stock for $3,000.
b. credit to Paid-in Capital from Treasury Stock for $1,000. c. debit to Paid-in Capital in Excess of Par Value for $1,000. d. credit to Treasury Stock for $4,000.
13 – 14

96. Each of the following is correct regarding treasury stock except that it has been a. issued.
b. fully paid for. c. reacquired. d. retired.

97. Treasury stock is
a. stock issued by the U.S. Treasury Department.
b. stock purchased by a corporation and held as an investment in its treasury. c. corporate stock issued by the treasurer of a company.
d. a corporation’s own stock which has been reacquired but not canceled.

98. The acquisition of treasury stock by a corporation
a. increases its total assets and total stockholders’ equity. b. decreases its total assets and total stockholders’ equity.
c. has no effect on total assets and total stockholders’ equity.
d. requires that a gain or loss be recognized on the income statement.

99. Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment.
b. liability.
c. deduction from total paid-in capital.
d. deduction from total paid-in capital and retained earnings.

100. A company would not acquire treasury stock a. in order to reissue shares to officers.
b. as an asset investment.
c. in order to increase trading of the company’s stock.
d. to have additional shares available to use in acquisitions of other companies.

101. Accounting for treasury stock is done by the a. FIFO method.
b. LIFO method. c. cost method.
d. lower of cost or market method.

102. Treasury stock is generally accounted for by the a. cost method.
b. market value method. c. par value method.
d. stated value method.

103. Treasury Stock is a(n)
a. contra asset account.
b. retained earnings account. c. asset account.
d. contra stockholders’equity account.
Corporations:Organization and Capital Stock Transactions 13 – 15

104. Four thousand shares of treasury stock of Meyer, Inc., previously acquired at $12 per share, are sold at $18 per share. The entry to record this transaction will include a
a. credit to Treasury Stock for $72,000.
b. debit to Paid-In Capital from Treasury Stock for $24,000. c. debit to Treasury Stock for $48,000.
d. credit to Paid-In Capital from Treasury Stock for $24,000.

105. Reeves Company originally issued 2,000 shares of $10 par value common stock for $60,000 ($30 per share). Reeves subsequently purchases 200 shares of treasury stock for $27 per share and resells the 200 shares of treasury stock for $29 per share. In the entry to record the sale of the treasury stock, there will be a
a. credit to Common Stock for $5,400. b. credit to Treasury Stock for $2,000.
c. debit to Paid-In Capital in Excess of Par Value of $6,000. d. credit to Paid-In Capital from Treasury Stock for $400.

106. When preferred stock is cumulative, preferred dividends not declared in a period are a. considered a liability.
b. called dividends in arrears. c. distributions of earnings. d. never paid.

107. Which of the following is not a right or preference associated with preferred stock? a. The right to vote
b. First claim to dividends
c. Preference to corporate assets in case of liquidation
d. To receive dividends in arrears before common stockholders receive dividends

Use the following information for questions 108 and 109.

Cole Corporation issues 15,000 shares of $50 par value preferred stock for cash at $60 per share.

108. The entry to record the transaction will consist of a debit to Cash for $900,000 and a credit or credits to
a. Preferred Stock for $900,000.
b. Preferred Stock for $750,000 and Paid-in Capital in Excess of Par Value—Preferred Stock for $150,000.
c. Preferred Stock for $750,000 and Paid-in Capital from Preferred Stock for $150,000. d. Paid-in Capital from Preferred Stock for $900,000.

109. In the stockholders’ equity section, the effects of the transaction above will be reported a. entirely within the capital stock section.
b. entirely within the additional paid-in capital section.
c. under both the capital stock and additional paid-in capital sections. d. entirely under the retained earnings section.

110. Dividends in arrears on cumulative preferred stock a. never have to be paid.
b. must be paid before common stockholders can receive a dividend. c. should be recorded as a current liability until they are paid.
d. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.
13 – 16

111. Dividends in arrears on cumulative preferred stock a. are considered to be a non-current liability.
b. are considered to be a current liability.
c. only occur when preferred dividends have been declared. d. should be disclosed in the notes to the financial statements.

112. If preferred stock is cumulative, the
a. preferred dividends not declared in a given year are called dividends in arrears. b. preferred shareholders and the common shareholders receive equal dividends.
c. preferred shareholders and the common shareholders receive the same total dollar amount of dividends.
d. common shareholders will share in the preferred dividends.

113. The Nice Corporation issues 10,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will consist of a debit to Cash for $1,100,000and a credit or credits to
a. Preferred Stock for $1,100,000.
b. Paid-in Capital from Preferred Stock for $1,100,000.
c. Preferred Stock for $1,000,000 and Retained Earnings for $100,000.
d. Preferred Stock for $1,000,000 and Paid-in Capital in Excess of Par Value—Preferred Stock for $100,000.

Use the following information for questions 114–116.

Triad Corporation’s December 31, 2008 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 10,000 shares authorized; 5,000 shares issued
Commonstock, $10 par value, 1,000,000 shares authorized; 650,000 shares issued, 640,000 shares outstanding
Paid-in capital in excess of par value—preferredstock Paid-in capital in excess of par value—commonstock Retainedearnings
Treasurystock (10,000 shares)

$ 100,000

6,500,000 20,000 9,000,000 2,500,000 210,000

114. Triad declared and paid a $25,000 cash dividend on December 15, 2008. If the company’s dividends in arrears prior to that date were $6,000, Triad’s common stockholders received a. $19,000.
b. $9,000. c. $11,000.
d. no dividend.

115. Triad’s total paid-in capital was a. $15,620,000.
b. $15,830,000. c. $15,410,000. d. $9,020,000.

116. Triad’s total stockholders’ equity was a. $18,380,000.
b. $15,620,000. c. $18,170,000. d. $17,910,000.
Corporations:Organization and Capital Stock Transactions 13 – 17

117. Burgess Corporation began business by issuing 100,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $20,000. The year-end balance sheet would show
a. Common stock of $500,000. b. Common stock of $2,400,000.
c. Total paid-in capital of $2,380,000. d. Total paid-in capital of $1,900,000.

Use the following information for questions 118–119.

Starr Corporation’s December 31, 2008 Balance Sheet showed the following:

8% preferred stock, $20 par value, cumulative, 20,000 shares authorized;10,000 shares issued
Commonstock, $10 par value, 2,000,000 shares authorized; 1,300,000shares issued, 1,280,000 shares outstanding
Paid-in capital in excess of par value – preferred stock Paid-in capital in excess of par value – common stock Retainedearnings
Treasurystock (10,000 shares)

$ 200,000

13,000,000 40,000 18,000,000 5,100,000 420,000

118. Starr’s total paid-in capital was a. $31,240,000.
b. $31,660,000. c. $30,820,000. d. $18,040,000.

119. Starr’s total stockholders’ equity was a. $36,760,000.
b. $31,240,000. c. $36,340,000. d. $35,920,000.

120. Adcock Corporation began business by issuing 150,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $30,000. The year-end balance sheet would show
a. Common stock of $750,000. b. Common stock of $3,600,000.
c. Total paid-in capital of $3,570,000. d. Total paid-in capital of $2,850,000.

121. The trial balance of Hackman Inc. includes the following balances: Common Stock, $39,000; Paid-in Capital in Excess of Par, $96,000; Treasury Stock, $9,000; Preferred Stock, $30,000. Capital stock totals
a. $69,000. b. $126,000. c. $165,000. d. $174,000.
13 – 18

122. Each of the following is reported for common stock except the a. par value.
b. shares issued.
c. shares outstanding. d. liquidation value.

123. Paid-in capital from treasury stock would appear on a balance sheet under the category a. capital stock.
b. treasury stock.
c. additional paid-in capital. d. contra to owners’ equity.

124. Two classifications appearing in the paid-in capital section of the balance sheet are a. preferred stock and common stock.
b. paid-in capital and retained earnings.
c. capital stock and additional paid-in capital. d. capital stock and treasury stock.

125. Information that is not generally reported for each class of stock on the balance sheet is a. the market value.
b. the par value.
c. shares authorized. d. shares issued.

126. In published annual reports
a. subclassifications within the stockholders’ equity section are routinely reported in detail.
b. capital surplus is used in place of retained earnings.
c. the individual sources of additional paid-in capital are often combined. d. retained earnings is often not shown separately.

127. Additional paid-in capital includes all of the following except a. paid-in capital from treasury stock.
b. paid-in capital in excess of par.
c. paid-in capital in excess of stated value. d. paid-in capital in excess of book value.

128. Book value per share is computed by dividing total
a. paid-in capital by the number of common shares outstanding. b. paid-in capital by the number of common shares issued.
c. stockholders’ equity by the number of common shares outstanding. d. stockholders’ equity by the number of common shares issued.

129. Book value per share is usually
a. equal to the market value per share. b. less than the market value per share.
c. greater than the market value per share. d. equal to the par value per share.
Corporations:Organization and Capital Stock Transactions 13 – 19

130. Book value per share is
a. the equity a common stockholder has in the net assets of the corporation from owning one share of stock.
b. the equity a common stockholder has in the total assets of the corporation from owning one share of stock.
c. always equal to the market value of the stock. d. computed only for preferred stockholders.

131. The book value per share
a. is usually a close approximation of the market price per share. b. is the same as the par value per share.
c. may be useful in determining the trend of a stockholder’s per share equity in a corporation.
d. always falls within the annual range of a company’s market value per share.

132. Barr, Inc. reports $3,000,000 of common stock, and $4,500,000 of additional paid-in capital on its balance sheet. The number of common shares issued and outstanding is 500,000shares. The book value per share is
a. $15. b. $9. c. $6.
d. not determinable.

Additional Multiple Choice Questions

133. Which of the following is an incorrect statement about a corporation? a. A corporation is an entity separate and distinct from its owners.
b. Creditors ordinarily have recourse only to corporate assets in satisfaction of their claims.
c. A corporation may be formed in writing, orally, or implied.
d. A corporation is subject to numerous state and federal regulations.

134. Capital stock to which the charter has assigned a value per share is called a. par value stock.
b. no-par value stock. c. stated value stock.
d. assigned value stock.

135. Legal capital per share cannot be equal to the a. par value per share of par value stock.
b. total proceeds from the sale of par value stock above par value. c. stated value per share of no-par value stock.
d. total proceeds from the sale of no-par value stock.

136. When common stock is issued for services or non-cash assets, cost should be a. only the fair market value of the consideration given up.
b. only the fair market value of the consideration received. c. the book value of the common stock issued.
d. either the fair market value of the consideration given up or the consideration received, whichever is more clearly evident.
13 – 20

137. When the selling price of treasury stock is greater than its cost, the company credits the difference to
a. Gain on Sale of Treasury Stock.
b. Paid-in Capital from Treasury Stock.
c. Paid-in Capital in Excess of Par Value. d. Treasury Stock.

138. Roberson Corporation was organized on January 1, 2008, with authorized capital of 750,000 shares of $10 par value common stock. During 2008, Roberson issued 30,000 shares at $12 per share, purchased 3,000 shares of treasury stock at $13 per share, and sold 3,000 shares of treasury stock at $14 per share. What is the amount of additional paid-in capital at December 31, 2008?
a. $0
b. $3,000 c. $60,000 d. $63,000

139. The purchase of treasury stock
a. decreases common stock authorized. b. decreases common stock issued.
c. decreases common stock outstanding.
d. has no effect on common stock outstanding.

140. Preferred stockholders have a priority over common stockholders as to a. dividends only.
b. assets in the event of liquidation only. c. voting rights.
d. both dividends and assets in the event of liquidation.

141. On January 2, 2005, Riley Corporation issued 20,000 shares of 6% cumulative preferred stock at $100 par value. On December 31, 2008, Riley Corporation declared and paid its first dividend. What dividends are the preferred stockholders entitled to receive in the current year before any distribution is made to common stockholders?
a. $0
b. $120,000 c. $360,000 d. $480,000

142. Additional paid-in capital includes all of the following except the amounts paid in a. over par value.
b. over stated value. c. from treasury stock.
d. for the par value of common stock.

143. In the stockholders’ equity section of the balance sheet, the classification of capital stock consists of
a. additional paid-in capital and common stock. b. common stock and treasury stock.
c. common stock, preferred stock, and treasury stock. d. common stock and preferred stock.
Corporations:Organization and Capital Stock Transactions 13 – 21

144. At December 31, the stockholders’ equity section shows:

Commonstock, $5 par value; 1,320,000 shares issued
and 1,200,000 shares outstanding………………………………………….. Additionalpaid-in capital…………………………………………………………….. Retainedearnings……………………………………………………………………… Treasurystock, (120,000 shares)…………………………………………………. Total stockholders’ equity…………………………………………………………….

The book value per share of common stock is a. $5.91.
b. $6.50. c. $7.08. d. $6.44.

$6,600,000 1,400,000 500,000
(700,000) $7,800,000

BRIEFEXERCISES

BE 145

Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or not applicable to the corporate form of business organization.

A = Advantage
D = Disadvantage N = Not Applicable

Characteristics

1. Separatelegal entity

2. Taxable entity resulting in additional taxes

3. Continuouslife

4. Unlimitedliability of owners

5. Government regulation

6. Separationof ownership and management

7. Abilityto acquire capital

8. Ease of transfer of ownership

BE 146

On July 6, XOT Corporation issued 2,300 shares of its $1.50 par common stock. The market price of the stock on that date was $17 per share. Journalize the issuance of the stock.

BE 147

Bennett Corporation is authorized to issue 1,000,000 shares of $1 par value common stock. During 2008, the company has the following stock transactions.

Jan. 15 Issued 500,000 shares of stock at $7 per share.

Sept. 5 Purchased 20,000 shares of common stock for the treasury at $8 per share.

Instructions
Journalizethe transactions for Bennett Corporation.

BE 148

An inexperienced accountant for Duran Corporation made the following entries.

July 1 Cash…………………………………………………………………………. 170,000 CommonStock…………………………………………………… 170,000
(Issued 20,000 shares of common stock, par value $6 per share)

Sept. 1 Common Stock…………………………………………………………… 36,000 RetainedEarnings………………………………………………………. 24,000
Cash…………………………………………………………………. 60,000 (Purchased 4,000 shares issued on July 1 for the
treasury at $15 per share)

Instructions

On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions.

BE 149

On September 5, Bertolli Corporation acquired 2,500 shares of its own $1 par common stock for $23 per share. On October 15, 1,000 shares of the treasury stock is sold for $25 per share.

Instructions

Journalize the purchase and sale of the treasury stock assuming that the company uses the cost method.

BE 150

WarrenCompany had the following transactions.
1. Issued 6,000 shares of common stock with a stated value of $10 for $110,000. 2. Issued 3,000 shares of $100 par preferred stock at $107 for cash.

Instructions

Preparethe journal entries to record the above stock transactions.

BE 151

On February 1, Burchess Corporation issued 4,000 shares of its $20 par value preferred stock for $24 per share.

Instructions Journalizethe transaction.
Corporations:Organization and Capital Stock Transactions 13 – 25

BE 152

BellinghamCorporation has the following stockholders’ equity balances at December 31, 2008:

CommonStock, $1 par
Paid-in Capital in Excess of Par RetainedEarnings
Total
$ 3,500 24,500
62,500 $90,500

Calculatebook value per share.

EXERCISES
Ex. 153
The following selected transactions pertain to Linton Corporation:

Jan. 3 Issued 150,000 shares, $10 par value, common stock for $22 per share.

Feb. 10 Issued 8,000 shares, $10 par value, common stock in exchange for special purpose equipment. Linton Corporation’s common stock has been actively traded on the stock exchange at $25 per share.

Instructions Journalizethe transactions.

Ex. 154

The corporate charter of Hunter Corporation allows the issuance of a maximum of 2,500,000 shares of $1 par value common stock. During its first three years of operation, Hunter issued 1,500,000 shares at $15 per share. It later acquired 30,000 of these shares as treasury stock for $25 per share.

Instructions
Based on the above information, answer the following questions: (a) How many shares were authorized?
(b) How many shares were issued?
(c) How many shares are outstanding?
(d) What is the balance of the Common Stock account? (e) What is the balance of the Treasury Stock account?

Ex. 155

Garner Corporation is authorized to issue 1,000,000 shares of $5 par value common stock. During 2008, its first year of operation, the company has the following stock transactions.

Jan. 1 Paid the state $2,000 for incorporationfees. Jan. 15 Issued 500,000 shares of stock at $7 per share.
Jan. 30 Attorneys for the company accepted 500 shares of common stock as payment for legal services rendered in helping the company incorporate. The legal services are estimated to have a value of $8,000.

July 2 Issued 100,000 shares of stock for land. The land had an asking price of $900,000. The stock is currently selling on a national exchange at $8 per share.

Sept. 5 Purchased 15,000 shares of common stock for the treasury at $10 per share. Dec. 6 Sold 11,000 shares of the treasury stock at $11 per share.

Instructions

Journalizethe transactions for Garner Corporation.

Ex. 156

Preparethe necessary journal entry for each of the following transactions for Starr Corporation.

(a) Issued 2,000 shares of its $5 par value common stock for $16 per share.
(b) Issued 5,000 shares of its stock for land advertised for sale at $80,000. Starr’s stock is activelytraded at a market price of $15 per share.

Solution156 (5 min.)

(a) Cash (2,000 × $16,000)………………………………………………………… 32,000 CommonStock…………………………………………………………… 10,000 Paid-in Capital in Excess of Par Value…………………………… 22,000

(b) Land (5,000 × $15)………………………………………………………………. 75,000 CommonStock…………………………………………………………… 25,000 Paid-in Capital in Excess of Par Value…………………………… 50,000

Ex. 157

1. Name at least three factors that influence the market value of stock.
2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why treasury stock may be acquired by a corporation.
13 – 28

Ex. 158

The following items were shown on the balance sheet of Herman Corporation on December 31, 2008:

Stockholders’ Equity Paid-In Capital
Capital Stock
Commonstock, $5 par value, 360,000 shares
authorized; shares issued and outstanding……………….

Additionalpaid-in capital
In excess of par value…………………………………………………………………… Total paid-in capital………………………………………………………………….

RetainedEarnings………………………………………………………………………………….. Total paid-in capital and retained earnings……………………………………….
Less: Treasury stock (15,000 shares)………………………………………………………. Total stockholders’ equity………………………………………………………………

$1,650,000

165,000 1,815,000

750,000 2,565,000
(180,000) $2,385,000

Instructions
Completethe following statements and show your computations.

(a) The number of shares of common stock issued was . (b) The number of shares of common stock outstanding was . (c) The sales price of the common stock when issued was $ . (d) The cost per share of the treasury stock was $ .
(e) The average issue price of the common stock was $ .

(f) Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the TreasuryStock account would be $ .

Ex. 159

On May 1, Hite Corporation purchased 1,000 shares of its $10 par value common stock at a cash price of $13/share. On July 15, 600 shares of the treasury stock were sold for cash at $15/share.

Instructions
Journalizethe two transactions.

Ex. 160

Werner Corporation has the following stockholders’ equity accounts on January 1, 2008:

CommonStock, $10 par value …………………………………….. Paid-in Capital in Excess of Par……………………………………. RetainedEarnings………………………………………………………. Total Stockholders’ Equity……………………………………….
$1,500,000 200,000
500,000 $2,200,000

The company uses the cost method to account for treasury stock transactions. During 2008, the following treasury stock transactions occurred:

April 1 August 1 October 1
Purchased9,000 shares at $16 per share. Sold 3,000 shares at $18 per share.
Sold 3,000 shares at $15 per share.

Instructions

(a) Journalize the treasury stock transactions for 2008.

(b) Prepare the Stockholders’ Equity section of the balance sheet for Werner Corporation at December31, 2008. Assume net income was $110,000 for 2008.

Ex. 161

Bates Corporation purchased 2,000 shares of its $5 par value common stock for a cash price of $12 per share. Two months later, Bates sold the treasury stock for a cash price of $10 per share.

Instructions
Preparethe journal entry to record the sale of the treasury stock assuming (a) No balance in Paid-in Capital from Treasury Stock.
(b) A $3,000 balance in Paid-in Capital from Treasury Stock.

Ex. 162

An inexperienced accountant for Moon Corporation made the following entries.

July 1 Cash…………………………………………………………………………. 210,000 CommonStock…………………………………………………… 210,000
(Issued 15,000 shares of no-par common stock, statedvalue $10 per share)

Sept. 1 Common Stock…………………………………………………………… 28,000 RetainedEarnings………………………………………………………. 6,000
Cash…………………………………………………………………. 34,000 (Purchased 2,000 shares issued on July 1 for the
treasury at $17 per share)

Dec. 1 Cash…………………………………………………………………………. 18,000 CommonStock…………………………………………………… 14,000 Gain on Sale of Stock………………………………………….. 4,000
(Sold 1,000 shares of the treasury stock at $18 per share)

Instructions
(a) On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.)

(b) Prepare the correcting entries that should be made to correct the accounts of Moon Corporation.(Do not reverse the original entry.)
13 – 32

Ex. 163

On January 1, 2008, Edmond Company issued 30,000 shares of $2 par value common stock for $150,000. On March 1, 2008, the company purchased 4,000 shares of its common stock for $8 per share for the treasury. On June 1, 2008, 1,000 of the treasury shares are sold for $10 per share. On September 1, 2008, 2,000 treasury shares are sold at $6 per share.

Instructions

Journalizethe stock transactions of Edmond Company in 2008.

Ex. 164

Wixen Company originally issued 30,000 shares of $5 par common stock for $180,000 on January 3, 2008. Wixen purchased 1,500 shares of treasury stock for $12,000 on November 2, 2008. On December 6, 2008, 600 shares of the treasury stock are sold for $6,000.

Instructions
Preparejournal entries to record these stock transactions.

Ex. 165

The stockholders’ equity section of Palmer Corporation’s balance sheet at December 31, 2007, appears below:

Stockholders’ equity Paid-in capital
Commonstock, $10 par value, 400,000 shares authorized; 250,000issued and outstanding
Paid-in capital in excess of par Total paid-in capital
Retainedearnings
Total stockholders’ equity

$2,500,000
1,200,000 3,700,000
600,000 $4,300,000

During 2008, the following stock transactions occurred:

Jan. 18 Issued 50,000 shares of common stock at $30 per share.

Aug. 20 Purchased25,000 shares of Palmer Corporation’s common stock at $24 per share to be held in the treasury.

Nov. 5 Reissued9,000 shares of treasury stock for $28 per share.

Instructions

(a) Prepare the journal entries to record the above stock transactions.

(b) Prepare the stockholders’ equity section of the balance sheet for Palmer Corporation at December 31, 2008. Assume that net income for the year was $100,000 and that no dividends were declared.
13 – 34

Ex. 166

Tyler Corporation has 100,000 shares of $40 par value preferred stock authorized. During the year, it had the following transactions related to its preferred stock.
(a) Issued 30,000 shares at $55 per share.
(b) Issued 10,000 shares for equipment having a $700,000 asking price. The stock had a market value of $60 per share

Instructions Journalizethe transactions.

Ex. 167

Carson Corporation has the following capital stock outstanding at December 31, 2008:

9% Preferred stock, $100 par value, cumulative
15,000 shares issued and outstanding …………………………………………….

Commonstock, no par, $10 stated value, 500,000 shares authorized, 350,000shares issued and outstanding …………………………………………..

$1,500,000

3,500,000

The preferred stock was issued at $110 per share. The common stock was issued at an average per share price of $16.

Instructions

Preparethe paid-in capital section of the balance sheet at December 31, 2008.

Ex. 168

In its first year of operations, Webber Corporation had the following transactions pertaining to its $30 par value preferred stock.

Feb. 1 Issued 6,000 shares for cash at $41 per share. Nov. 1 Issued 3,000 shares for cash at $44 per share.

Instructions

(a) Journalize the transactions.

(b) Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of par value—preferredstock at the end of the year.
13 – 36

Ex. 169

Boswell Corporation has the following stockholders’ equity accounts:

Preferred Stock
Paid-in Capital in Excess of Par Value—PreferredStock CommonStock
Paid-in Capital in Excess of Stated Value—Common Stock Paid-in Capital from Treasury Stock—Common RetainedEarnings
TreasuryStock—Common

Instructions
Classifyeach account using the following tabular alignment.

Paid-in Capital Retained

Account Capital Stock Additional Earnings Other

Ex. 170

The following information is available for Stewart Corporation:

CommonStock ($10 par)
Paid-in Capital in Excess of Par Value—Preferred Paid-in Capital in Excess of Stated Value—Common PreferredStock
RetainedEarnings TreasuryStock—Common
$1,000,000 180,000 600,000 550,000 750,000 50,000

Instructions
Based on the preceding information, calculate each of the following: (a) Total paid-in capital.
(b) Total stockholders’ equity.

Ex. 171

Place each of the items listed below in the appropriate subdivision of the stockholders’ equity section of a balance sheet.

Commonstock, $10 stated value Retainedearnings
8% Preferred stock, $100 par value Paid-in capital in excess of par value Paid-in capital in excess of stated value Treasury stock
Paid-in capital from treasury stock

Stockholders’ equity Paid-in capital
Capital stock

Additionalpaid-in capital

Total additional paid-in capital

Total paid-in capital Retainedearnings
13 – 38

Ex. 171 (cont.)

Total paid-in capital and retained earnings

Total stockholders’ equity

Ex. 172

The following information is available for Gordon Corporation:

Commonstock ($5 par)
Paid-in capital in excess of par—common Retainedearnings
Treasurystock Commonshares issued Commonshares outstanding
$500,000 200,000 360,000 70,000 100,000 shares 90,000 shares

Instructions
Based on the preceding information, calculate the book value per share.

Ex. 173

On December 31, 2008, Colaw Company reports the following amounts in its stockholders’ equity section:
Commonstock $2,400,000 Paid-in capital in excess of stated value—common 900,000 Retainedearnings 1,180,000 Treasurystock—common 180,000

The common stock has a stated value of $10 per share. One million shares of common stock are authorized and 40,000 shares are held in the treasury.

Instructions
Computethe book value per share of common stock.

COMPLETION STATEMENTS

174. A corporation has a separate apart from its owners.

175. The major advantages of the corporate form of organization include (1) limited

of owners, (2) continuous and (3) ease of transferring .

176. Stockholders elect the , who in turn hire the of the company who have day to day responsibility for running the corporation.

177. If a corporation’s stock is traded on the major stock exchanges, the corporation must generally report periodically to a federal agency known as the .

178. Stockholders generally have the right to share in corporate and in

upon liquidation.

179. Par value of stock represents the per share that must be retained in the business for the protection of corporate .

180. The stockholders’ equity section of a corporation’s balance sheet is generally divided in two major sections: (1) and (2) .

181. If stock is issued in exchange for noncash assets, the assets should be valued at the

of the consideration or the assets

, whichever is more clearly evident.

182. A corporation’s own stock that has been reacquired by the corporation but not canceled is called and is deducted from total on the balance sheet.

183. The feature of preferred stock gives the preferred stockholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends.

184. Preferred stock has contractual provisions that give it a preference over common stock as to and to in the event of liquidation.

185. The paid-in capital section of the balance sheet consists of two classifications:

and .

186. Book value per share represents the equity a common stockholder has in the

of the corporation from owning one share of stock.

MATCHING

187. Match the items below by entering the appropriate code letter in the space provided.

A. Limited liability B. Capital stock
C. Board of directors D. Paid-in capital
E. Retained earnings
F. Preemptive right G. Par value
H. Legal capital
I. Treasury stock
J. Cumulative feature

1. Net income retained in the corporation.

2. The amount that must be retained in the business for the protection of creditors.

3. Preferred stockholders have a right to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

4. Creditors only have corporate assets to satisfy their claims.

5. Responsible to stockholders for corporate activity.

6. The amount assigned to each share of stock in the corporate charter.

7. Unit of ownership in a corporation.

8. Enables stockholders to maintain their same percentage ownership when new shares are issued.

9. Corporation’s own stock that has been reacquiredby the corporation but not retired.

10. Total amount paid-in on capital stock.

SHORT-ANSWERESSAY QUESTIONS
S-AE 188
Identify at least six characteristics of the corporate form of business organization. Contrast each one with the partnershipform of organization.

S-AE 189

Companies frequently issue both preferred stock and common stock. What are the major differences in the rights of stockholders between these two classes of stock?

S-AE 190

Define par value, and discuss its significance in accounting.

S-AE 191 (Ethics)

Jeff Madden, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Madden had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date.

The other members of management called a meeting to determine what they should do. Rick Farrell, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years.

Required:
1. Is Mr. Farrell’s suggestion ethical? Explain.
2. Is it ethical to discontinue the cash dividend? Explain.

S-AE 192 (Communication)

As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders’ Equity section of a recent balance sheet.

Required:
Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear.