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business
accounting principles

Questions and Answers of Accounting Principles

When are short-term notes payable issued? LO2
When should the liability associated with a product warranty be recorded? Discuss. LO2
Compaq Computer Corporation reported $752 million of product warranties in the current liabilities section of a recent balance sheet. How would costs of repairing a defective product be recorded? LO2
What programs are funded by the FICA (Federal Insurance Contributions Act) tax? LO2
a. Identify the federal taxes that most employers are required to withhold from employees,b. Give the titles of the accounts to which the amounts withheld are credited. LO2
For each of the following payroll-related taxes, indicate whether there is a ceiling on the annual earnings subject to the tax: (a) social security tax, (b) Medicare tax,(c) federal income tax, (d)
Why are deductions from employees' earnings classified as liabilities for the employer? LO2
Do payroll taxes levied against employers become liabilities at the time the liabilities for wages are incurred or at the time the wages are paid? LO2
Taylor Company, with 20 employees, is expanding operations. It is trying to decide whether to hire one employee full-time for $25,000 or two employees part-time for a total of $25,000. Would any of
For each of the following payroll-related taxes, indicate whether they generally apply to (a) employees only, (b) employers only, (c) both employees and employers: LO2 1. Social security tax 2.
What are the principal reasons for using a special payroll checking account? LO2
In a payroll system, what type of input data are referred to as (a ) constants,
To strengthen internal controls, what department should provide written authoriza- tions for the addition of names to the payroll? LO2
Identify several factors that influence the future pension obligation of an employer under a defined benefit pension plan. LO2
Where should the unfunded pension liability from a defined benefit pension plan be reported on the balance sheet? LO2
What are some examples of postretirement benefits other than pensions that employees may earn for themselves and their dependents? LO2
If a corporation has outstanding 1,000 shares of $9 cumulative preferred stock of $100 par and dividends have been passed for the preceding three years, what is the amount of preferred dividends that
Paid-in capital for a corporation may arise from which of the following sources? LO5 A. Issuing cumulative preferred stock B. Receiving donations of real estate C. Selling the corporation's treasury
The Stockholders' Equity section of the balance sheet may include: LO5 A. Common Stock B. Donated Capital C. Preferred Stock D. All of the above
A corporation has issued 25,000 shares of $100 par common stock and holds 3,000 of these shares as treasury stock. If the corporation declares a $2 per share cash dividend, what amount will be
Contrast the owners' liability to creditors of (a) a partnership (partners) and (b) a corporation (stockholders). LO5
Why is it said that the earnings of a corporation are subject to double taxation?Discuss. LO5
Why are most large businesses organized as corporations? LO5
a. What type of expenditure is charged to the organization costs account?b. Give examples of such expenditures. LO5
Distinguish between paid-in capital and retained earnings of a corporation. LO5
The retained earnings account of a corporation at the beginning of the year had a credit balance of $65,000. The only other entry in the account during the year was a debit of $150,000 transferred
What are the three basic rights that accompany ownership of a share of common stock? LO5
a. Differentiate between common stock and preferred stock.b. Describe briefly ( 1 ) nonparticipating preferred stock and (2) cumulative preferred stock. LO5
A stockbroker advises a client to "buy cumulative preferred stock. . . . With that type of stock, . . . [you] will never have to worry about losing the dividends." Is the broker right? LO5
What are some sources of paid-in capital other than the issuance of stock? LO5
If a corporation is given land as an inducement to locate in a particular community,(a) how should the amount of the debit to the land account be determined, and (b)what is the title of the account
If common stock of $100 par is sold for $130, what is the $30 difference between the issue price and par called? LO5
What are some of the factors that influence the market price of a corporation's stock? LO5
When a corporation issues stock at a premium, is the premium income? Explain. LO5
Land is acquired by a corporation for 15,000 shares of its $25 par common stock, which is currently selling for $70 per share on a national stock exchange. What accounts should be credited to record
Indicate which of the following accounts would be reported as part of paid-in capital on the balance sheet: LO5a. Retained Earningsb. Common Stockc. Donated Capitald. Preferred Stock
a. In what respect does treasury stock differ from unissued stock?b. How should treasury stock be presented on the balance sheet? LO5
The treasury stock in Question 19 is resold for $400,000. (a) What is the effect on the corporation's revenue of the period? (b) What is the effect on stockholders' equity? LO5
What is the primary purpose of a stock split? LO5
What are the three conditions for the declaration and the payment of a cash dividend? LO5
The dates in connection with the declaration of a cash dividend are October 1, November 15, and December 30. Identify each date. LO5
A corporation with both cumulative preferred stock and common stock outstanding has a substantial credit balance in its retained earnings account at the beginning of the current fiscal year. Although
An owner of 200 shares of Dunston Company common stock receives a stock dividend of 4 shares. ( a ) What is the effect of the stock dividend on the stockholder's proportionate interest (equity) in
a. Where should a declared but unpaid cash dividend be reported on the balance sheet?b, Where should a declared but unissued stock dividend be reported on the balance sheet? LO5
During its first year of operations, a corporation elected to use the straight-line method of depreciation for financial reporting purposes and MACRS in determining taxable income. If the income tax
A material gain resulting from condemning land for public use would be reported on the income state- ment as: LO3 A. an extraordinary item B. an other income item C. revenue from sales D. a change in
Parker Corporation. which owns 100% of Sweeney Company. sold merchandise costing $50,000 to Sweeney Company for $75,000. Sweeney then sold the merchandise to a customer for $100,000. Before con-
Cisneros Corporation owns 75% of Harrell Inc. Dur- ing the current year. Harrell Inc. reported net income of $150,000 and declared dividends of $40,000. How much would Cisneros Corporation increase
A corporation has paid estimated federal income tax during the year on the basis of its estimated income. Indicate the accounts that would be debited and credited at the end of the year if the
How- would the amount of deferred income tax payable be reported in the balance sheet if (a) it is payable within one year and (b) it is payable beyond one year? LO3
What two criteria must be met to classify an item as an extraordinary item on the income statement? LO3
During the current year, -rO acres of land that cost $200,000 were condemned for construction of an interstate highway. Assuming that an award of $350,000 in cash was received and that the applicable
Corporation X realized a material gain when its facilities at a designated floodwav were acquired by the urban renewal agency. How should the gain be reported in the income statement? LO3
An annual report of Sears, Roebuck and Co. disclosed the discontinuance of sct eral business segments, including Coldwell Banker Residential Services. The estimated loss on disposal of these
If significant changes are made in the accounting principles applied from one period to the next, why should the effect of these changes be disclosed in the financial statements? LO3
A corporation reports earnings per share of SI. 38 for the most recent year and SI. 10 for the preceding year. The $1.38 includes a $0.-r5-per-share gain from insurance proceeds related to a fully
What is the primary advantage of combining the retained earnings statement with the income statement? LO3
What are the three classifications of appropriations and how are appropriations nor- mally reported in the financial statements? LO3
Indicate how prior period adjustments would be reported on the financial statements presented only for the current period. LO3
Describe the format of the statement of stockholders' equity. LO3
How is comprehensive income determined? LO3
a. List some examples of other comprehensive income items.b. Does the reporting of comprehensive income affect the determination of net income and retained earnings? LO3
Why might a business invest in another company's stock? LO3
How are temporary investments in marketable securities reported on the balance sheet? LO3
How are unrealized gains and losses on temporary investments in marketable securi- ties reported on the statement of income and comprehensive income? LO3
a. What are two methods of accounting for long-term investments in stock?b. Under what caption are long-term investments in stock reported on the balance sheet? LO3
Plaster Inc. received a $0.15-per-share cash dividend on 50,000 shares of Gestalt Cor- poration common stock, which Plaster Inc. carries as a long-term investment. (a) As- suming that Plaster In uses
Which method of accounting for long-term investments in stock (cost or equity) should be used by the parent company in accounting for its investments in stock of subsidiaries? LO3
What are the two methods of accounting for the creation of a parent-subsidiary relationship? LO3
Polska Company purchases the entire common stock of Strabo Corporation for $30,000,000. What accounts are eliminated on Strabo's balance sheet and Polska's balance sheet upon consolidation? LO3
Parent Corporation owns 90% of the outstanding common stock of Subsidiary Cor- poration, which has no preferred stock. (a) What is the term applied to the remain- ing 10% interest? (b) On the
If the inventory shrinkage at the end of the year is overstated by $7,500. the error will cause an: LO1A. understatement of cost of merchandise sold for the year by $7,500. B. overstatement of gross
The inventory costing method that is based on the as- sumption that costs should be charged against rev- enue in the order in which they were incurred is: LO1 A. fifo B. lifo C. average cost D.
The following units of a particular item were pur- chased and sold during the period: Beginning inventory First purchase Second purchase First sale Third purchase 40 units at $20 50 units at $21 50
The following units of a particular item were available for sale during the period: Beginning inventory First purchase Second purchase Third purchase 40 units at $20 50 units at $21 50 units at $22
If merchandise inventory is being valued at cost and the price level is steadily rising, the method of cost- ing that will yield the highest net income is: LO1A. lifo B. fifo C. average D. periodic
What security measures may be used by retailers to protect merchandise inventory from customer theft? LO1
Which inventory system provides the more effective means of controlling inventories(perpetual or periodic)? Why? LO1
Before inventory purchases are recorded, the receiving report should be reconciled to what documents? LO1
What document should be presented by an employee requesting inventory items to be released from the company's warehouse? LO1
Why is it important to periodically take a physical inventory if the perpetual system is used? LO1
The inventory shrinkage at the end of the year was understated by $15,000. (a) Did the error cause an overstatement or an understatement of the gross profit for the year? (b) Which items on the
Bray Co sold merchandise to Mansfield Company on December 31, FOB shipping point. If the merchandise is in transit on December 31. the end of the fiscal year, which company would repon it in its
Do the terms fifo and lifo refer to techniques used in determining quantities of the various classes of merchandise on hand? Explain. LO1
Does the term last-in in the lifo method mean that the items in the inventory are assumed to be the most recent (last) acquisitions? Explain. LO1
Which of the three methods of inventory costing-fifo, lifo, or average cost-will in general yield an inventory cost most nearly approximating current replacement cost? LO1
Can a company change its method of costing inventory? Explain. LO1
Because of imperfections, an item of merchandise cannot be sold at its normal sell- ing price. How should this item be valued for financial statement purposes? LO1
How is the method of determining the cost of the inventory and the method of valu- ing it disclosed in the financial statements? LO1
What uses can be made of the estimate of the cost of inventory determined by the gross profit method? LO1
Which of the following accounts in the Adjusted Trial Balance columns of the work sheet would be extended to the Balance Sheet columns? LO5 A. Utilities Expense C. M. E. Jones, Drawing B. Rent
Which of the following accounts would be classified as a current asset on the balance sheet? LO5 A. Office Equipment B. Land C. Accumulated Depreciation D. Accounts Receivable
Which of the following entries closes the owner's drawing account at the end of the period? LO5 A. Debit the drawing account, credit the income summars-account.B. Debit the owner's capital account,
Which of the following accounts would not be closed to die income summary account at the end of a period? LO5 A. Fees Earned B. Wages Expense C. Rent Expense D. Accumulated Depreciation
Which of the following accounts would not be included in a post-closing trial balance? LO5 A. Cash B. Fees Earned C. Accumulated Depreciation D. J. C. Smith. Capital
Is the work sheet a substitute for the financial statements? Discuss. LO5
Describe the nature of the assets that compose the following sections of a balance sheet: (a) current assets, (b) property, plant, and equipment. LO5
What is the difference between a current liability and a long-term liability? LO5
What types of accounts are referred to as temporary accounts? LO5
Why are closing entries required at the end of an accounting period? LO5

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