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survey of accounting
Questions and Answers of
Survey of Accounting
=+Assuming that income before depreciation and income tax is estimated to be $300 000 uni formly per year and that the income tax rate is 30%, compute the net income for each ofthe years 2006, 2007,
=+What factors would you present for Tom’s consideration in the selection of a depreciation method? K
=+A7-4 Shopping for a delivery truck You are planning to acquire a delivery truck for use in your business for three years. In groups of three or four, explore a local dealer’s purchase and leasing
=+A7-5 Ethics and professional conduct in business ETHICS The following is an excerpt from a conversation between the chief executive officer, Harry Balmer, and the chieffinancial officer, Connie
=+Connie (CFO): Yeah right. We had to shut the old Robert Company operations down this year because those products were no longer selling. Thus, our auditor is going to insist that we write offthe
=+How should Connie respond to the CEO?
=+A7-6 Applying for patents, copyrights, and trademarks Go to the Internet and review the procedures for applying for a patent, a copyright, and a trade¬mark. One Internet site that is useful for
=+Prepare a written summary ofthese procedures.
=+2. Which ofthe following taxes are employers usually not required to withhold from employees?A. Federal income tax B. Federal unemployment compensation tax C. FICA tax D. State and local income tax
=+3. Employers do not incur an expense for which ofthe following payroll taxes?A. FICA tax B. Federal unemployment compensation tax C. State unemployment compensation tax D. Employees’ federal
=+4. If a corporation plans to issue $1,000,000 of 12% bonds when the market rate for similar bonds is 10%, the bonds can be expected to sell at:A. Their face amount B. A premium C. A discount D. A
=+2. When are short-term notes payable issued?
=+5. Delta Air Lines’ SkyMiles program allows frequent fly¬ers to earn credit toward free tickets and other ameni¬ties. (a) Does Delta Air Lines have a contingent liability for award redemption
=+(b) When should a contingent liability be recorded?
=+6. For each ofthe following payroll-related taxes, indicate whether it generally applies to (1) employees only,
=+(2) employers only, or (3) both employees and employers:a. Federal income tax
=+b. Federal unemployment compensation taxc. Medicare taxd. Social security taxe. State unemployment compensation tax
=+9. A corporation issues $18,000,000 of 6% bonds to yield an effective interest rate of 7%.
=+a. Was the amount of cash received from the sale of the bonds more or less than $18,000,000?
=+b. Identify the following amounts related to the bond issue: (1) face amount, (2) market rate ofinterest,
=+(3) contract rate ofinterest, and (4) maturity amount.
=+10. The following data relate to a $2,000,000, 8% bond is¬sue for a selected semiannual interest period:Bond carrying amount at beginning of period $2,125,000
=+Interest paid at end of period 160,000 Interest expense allocable to the period 148,750
=+(a) Were the bonds issued at a discount or at a pre¬mium?
=+(b) What expense account was decreased to amortize the discount or premium?
=+V11. Oftwo corporations organized at approximately the same time and engaged in competing businesses, one issued $50 par common stock, and the other issued$1 par common stock. Do the par
=+12. When a corporation issues stock at a premium, is the premium income? Explain.
=+13.a. In what respect does treasury stock differ from unissued stock?
=+b. How should treasury stock be presented on the balance sheet?
=+14. A corporation reacquires 10,000 shares ofits own $75 par common stock for $800,000, recording it at cost.
=+(a) What effect does this transaction have on revenue or expense ofthe period? (b) What effect does it have on stockholders’ equity?
=+15. The treasury stock in Question 14 is resold for$900,000. (a) What is the effect on the corporations Exercises
=+revenue ofthe period? (b) What is the effect on stock¬holders’ equity?
=+16. A corporation with preferred stock and common stock outstanding has a substantial balance in its retained earnings account at the beginning of the current fiscal year. Although net income for
=+17. An owner of 100 shares ofMountain Spring Company common stock receives a stock dividend of 6 shares.(a) What is the effect ofthe stock dividend on the stockholder’s proportionate interest
=+18. What is the primary purpose of a stock split?
=+A business issued a 60-day, 7% note for $15,000 to a creditor on account. Illustrate the effects on the accounts and financial statements ofrecording (a) the issuance ofthe note and (b) the
=+Apr. 15. Paid the first installment ofthe estimated income tax for the current fiscal year ending December 31, $90,000. No entry had been made to record the liability.Dec. 31. Recorded the
=+Assume that the June 15 and September 15 installments of $90,000 were also paid.Storage Systems Inc. recognized service revenue of $420,000 on its financial statements in 2007.Assume, however, that
=+Illustrate the effects on the accounts and financial statements ofthe tax expense, deferred taxes, and taxes payable for 2007 and 2008, respectively.E8-5 Accrued product warranty Obj 2
=+Digital Audio Works, Inc. warrants its products for 1 year. The estimated product warranty is 114%ofsales. Assume that sales were $975,000 for January. In February, a customer received warranty
=+a. Determine the warranty liability at January 31, the end ofthe first month ofthe current year.
=+b. What accounts are decreased for the warranty work provided in February?E8-6
=+Accrued product warranty Obj 2 Ford Motor Company disclosed estimated product warranty payable for 2006 and 2005 as follows.December 31 2006 2005(in millions)
=+Product warranty payable $6,032 $6,243 Ford’s sales were $153,474 million in 2005 and decreased to $143,307 million in 2006. Assume that the total paid on warranty claims during 2006 was $4,106
=+a. Illustrate the effects on the accounts and financial statements for the 2006 product warranty expense.
=+b. Assuming $4,106 million in warranty claims paid during 2006, explain the $211 million decrease in the total warranty liability from 2005 to 2006.
=+E8-7 Contingent liabilities Obj 2 Several months ago, Northwest Cover Paint Company experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency
=+Northwest Cover’s legal counsel believes that it is probable that the EPA fine will stand.In addition, counsel indicates that an out-of-court settlement of $300,000 has recently been reached with
=+a. Illustrate the effects ofthe contingent liabilities associated with the hazardous materials spill on the accounts and financial statements.
=+b. Prepare a note disclosure relating to this incident.
=+E8-8 Contingent liabilities Obj 2 The following note accompanied recent financial statements for Goodyear Tire and Rubber Company:Goodyear is a defendant in numerous lawsuits involving
=+The portion ofthe recorded liabilities for potential product liability and other tort claims relating to asbestos claims is based on pending claims. The amount recorded reflects an estimate ofthe
=+a. Illustrate the effects on the accounts and financial statements ofrecording the contingent liability of $229,100,000.
=+b. Why was the contingent liability recorded?
=+E8-9 Calculate payroll Qbj 2/b. Net pay, $883.25 An employee earns $22 per hour and 1 Vi times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 50 hours
=+E8-10 Summary payroll data Ohj 2 y/ (3) Total earnings,$260,000 In the following summary ofdata for a payroll period, some amounts have been intentionally omitted:Earnings:1. At regular rate ?2. At
=+4. Social security tax 15,250 5. Medicare tax 3,900 6. Income tax withheld 46,590
=+7. Medical insurance 7,775
=+8. Union dues ?
=+9. Total deductions 76,000
=+10. Net amount paid 184,000 Wages and Salaries Expense Accounts:
=+11. Factory Wages 138,900
=+12. Sales Salaries ?
=+13. Office Salaries 59,200
=+Calculate the amounts omitted in lines (1), (3), (8), and (12).
=+E8-11 According to a summary ofthe payroll ofMatrix Publishing Co., $380,000 was subject to the Recording payroll taxes 7.5% FICA tax. Also, $16,000 was subject to state and federal unemployment
=+a. Calculate the employer’s payroll taxes, using the following rates: state unemployment, 4.3%;federal unemployment, 0.8%.
=+b. Illustrate the effects on the accounts and financial statements ofrecording the accrual of payroll taxes.
=+E8-12 Accrued vacation pay Obj 2 E8-13 Bond price Obj 3
=+Walt Disney 2.125% bonds due in 2023 were reported in The Wall Street Journal as selling for 103.536. Were the bonds selling at a premium or at a discount? Explain.294 Chapter 8 E8-14 Issuing bonds
=+Heritage Optics Inc. produces and distributes fiber optic cable for use by telecommunications companies. Heritage Optics Inc. issued $30,000,000 of 15-year, 6% bonds on May 1 ofthe cur¬rent year,
=+E8-15 Dividends per share Objs 4, 5/ Preferred stock, 1st year:$0.80 Electro-Rad Inc., a developer ofradiology equipment, has stock outstanding as follows:50,000 shares of 2%, preferred stock of
=+E8-16 Dividends per share Objs 4, 5/ Preferred stock, 3rd year:$0.10 CompuLead Inc., a software development firm, has stock outstanding as follows: 40,000 shares of 1%, preferred stock of $25 par,
=+E8-17 Issuing par stock Obj 4 On February 4, Cinderella Rocks Inc., a marble contractor, issued for cash 30,000 shares of $20 par common stock at $64, and on March 31, it issued for cash 18,000
=+a. Illustrate the effects on the accounts and financial statements ofthe February 4 and March 31 transactions.
=+b. What is the total amount invested (total paid-in capital) by all stockholders as ofMarch 31?
=+E8-18 Issuing stock for assets other than cash Obj 4 On November 10, Craddock’s Corporation, a wholesaler ofhydraulic lifts, acquired land in ex¬change for 15,000 shares of $8 par common stock
=+E8-19 Treasury stock transactions Obj 4 Mountain Springs Inc. bottles and distributes spring water. On May 2 ofthe current year, Mountain Springs reacquired 3,000 shares ofits common stock at $72
=+a. What is the balance ofTreasury Stock on December 31 ofthe current year?
=+b. Where will the balance ofTreasury Stock be reported on the balance sheet?
=+c. For what reasons might Mountain Springs have purchased the treasury stock?
=+E8-20 Treasury stock transactions Obj 4 Azalea Gardens Inc. develops and produces spraying equipment for lawn maintenance and in¬dustrial uses. On September 9 ofthe current year, Azalea Gardens
=+a. What is the balance ofTreasury Stock on December 31 ofthe current year?
=+b. How will the balance in Treasury Stock be reported on the balance sheet?E8-21
=+Treasury stock transactions Obj 4 Tacoma Inc. bottles and distributes spring water. On June 12 ofthe current year, Tacoma Inc.reacquired 15,000 shares ofits common stock at $48 per share.
=+a. What is the balance ofTreasury Stock on December 31 ofthe current year?
=+b. Where will the balance ofTreasury Stock be reported on the balance sheet?
=+c. For what reasons might Tacoma Inc. have purchased the treasury stock?Liabilities and Stockholders’ Equity 295
=+E8-22 Cash dividends Ghj 5 The dates ofimportance in connection with a cash dividend of $95,000 on a corporation’s com¬mon stock are April 9, May 9, and June 8. Illustrate the effects on the
=+E8-23 Effect ofcash dividend and stock split°bjs 5, 6 c\\V\dcrvfe P^aSp\0
=+Indicate whether the following actions would ( +) increase, (—) decrease, or (0) not affect Indigo Inc.s total assets, liabilities, and stockholders’ equity:Stockholders’(3) ex evenA
=+E8-24 Effect ofstock split Obj 6 Assets Liabilities Equity Declaring a cash dividend o -F —Paying the cash dividend declared in (1) — 0 Authorizing and issuing stock certificates in a stock
=+6p 114- ]Rolling Pin Corporation wholesales ovens and ranges to restaurants throughout the Midwest.Rolling Pin Corporation, which had 50,000 shares of common stock outstanding, declared a 3-for-l
=+a. What will be the number ofshares outstanding after the split? 6 0 ^
=+b. Ifthe common stock had a market price of $ 180 per share before the stock split, what would be an approximate market price per share after the split?
=+E8-25 Stockholders’ equity section ofbalance sheet Obj 7/ Total stockholders’equity, $4,020,000 The following accounts and their balances appear in the ledger ofHeart and Saul Inc. on April 30
=+Prepare the Stockholders’ Equity section ofthe balance sheet as ofApril 30. Twenty-five thousand shares of common stock are authorized, and 3,500 shares have been reacquired.
=+E8-26 Stockholders’ equity section ofbalance sheet Obj 7 S Total stockholders’equity, $4,726,500 Sports Car Inc. retails racing products for BMWs, Porsches, and Ferraris. The following accounts
=+Twenty thousand shares of preferred and 400,000 shares of common stock are authorized. There are 22,000 shares of common stock held as treasury stock.
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