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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Li Feng believes a current liability is a debt that can be expected to be paid in one year. Is Li correct? Explain.
Rio Grande Company obtains \(\$ 25,000\) in cash by signing a \(9 \%, 6\)-month \(\$ 25,000\) note payable to First Bank on July 1.Rio Grande's fiscal year ends on September 30.What information
(a) Your roommate says, "Sales taxes are reported as an expense in the income statement." Do you agree? Explain.(b) Hard Walk Cafe has cash proceeds from sales of \(\$ 10,400\). This amount includes
Aurora University sold 10,000 season football tickets at \(\$ 90\) each for its five-game home schedule. What entries should be made (a) when the tickets were sold and (b) after each game?
6. Identify three taxes commonly paid by employers on employee's salaries and wages. Where in the financial statements does the employer report taxes withheld from employee's pay?
Assume that Stoney Inc. sold bonds with a par value of \(\$ 100,000\) for \(\$ 104,000\). Was the market interest rate equal to, less than, or greater than the bonds' contractual interest rate?
Barbara Secord and Jack Dalton are discussing how the market price of a bond is determined. Barbara believes that the market price of a bond is solely a function of the amount of the principal
If a \(10 \%, 10\)-year, \(\$ 600,000\) bond is issued at par and interest is paid semiannually, what is the amount of the interest payment at the end of the first semiannual period?
Jennifer Brent Corporation issues \(\$ 200,000\) of \(8 \%\), 5 -year bonds on January 1, 1998, at 104.Assuming that the straight-line method is used to amortize the premium, what is the total amount
Li Su Corporation is considering issuing a convertible bond. What is a convertible bond? Discuss the advantages of a convertible bond from the standpoint of (a) the bondholders and (b) the issuing
Doug Wisdom, a friend of yours, has recently purchased a home for \(\$ 125,000\), paying \(\$ 25,000\) down and the remainder financed by a \(10.5 \%, 20\)-year mortgage, payable at \(\$ 998.38\) per
Julia Amant is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Julia is saying?
Summit Corporation issues \(\$ 400,000\) of \(9 \%, 5\)-year bonds on January 1, 1998, at 104.If Summit uses the effective-interest method in amortizing the premium, will the annual interest expense
Fresno Company has the following obligations at December 31: (a) a note payable for \(\$ 100,000\) due in 2 years, (b) a 10 -year mortgage payable of \(\$ 200,000\) payable in \(10 \$ 20,000\) annual
Romez Company borrows \(\$ 60,000\) on July 1 from the bank by signing a \(\$ 60,00010 \%\), one-year note payable. Prepare the journal entries to record (a) the proceeds of the note and (b) accrued
Grandy Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is \(\$ 9,975\). All sales are subject to a \(5 \%\) sales tax. Compute sales taxes
Outstanding University sells 3,000 season basketball tickets at \(\$ 60\) each for its 12game home schedule. Give the entry to record (a) the sale of the season tickets and (b) the revenue earned by
Olga Inc. is considering two alternatives to finance its construction of a new \(\$ 2\) million plant:(a) Issuance of 200,000 shares of common stock at the market price of \(\$ 10\) per share.(b)
Keystone Corporation issued 1,000, \(9 \%, 5\)-year, \(\$ 1,000\) bonds dated January 1, 1996, at 100. (a) Prepare the journal entry to record the sale of these bonds on January 1, 1996. (b) Prepare
Dominic Company issues \(\$ 2\) million, 10 year, \(9 \%\) bonds at 98 , with interest payable on July 1 and January 1. The straight-line method is used to amortize bond discount. (a) Prepare the
Hercules Inc. issues \(\$ 5\) million, 5 -year, \(10 \%\) bonds at 103 , with interest payable on July 1 and January 1. The straight-line method is used to amortize bond premium. (a) Prepare the
Goodland Inc. has outstanding \(\$ 1\) million, 10 -year, \(12 \%\) bonds with interest payable on July 1 and January 1. The bonds were dated January 1, 1996, but were issued on May 1, 1996, at face
The balance sheet for Hathaway Company reports the following information on July 1, 1996:Hathaway decides to redeem these bonds at 102 after paying semiannual interest. Prepare the journal entry to
Cairo Company on June 1 borrows \(\$ 50,000\) from First Bank on a 6 -month, \(\$ 50,000\), \(12 \%\) note.\section*{Instructions}(a) Prepare the entry on June 1.(b) Prepare the adjusting entry on
In providing accounting services to small businesses, you encounter the following situations pertaining to cash sales:1. Nash Company rings up sales and sales taxes separately on its cash register.
Westland Company publishes a monthly sports magazine, Fishing Preview. Subscriptions to the magazine cost \(\$ 24\) per year. During November 1996, Westwood sells 6,000 subscriptions beginning with
Sundown Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:1. Issue 60,000 shares of common stock at \(\$ 45\) per share.
On January 1, Laramie Company issued \(\$ 90,000,10 \%, 10\)-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Interest is not accrued on June
Pueblo Company issued \(\$ 240,000,9 \%, 20\)-year bonds on January 1, 1996, at 103 . Interest is payable semiannually on July 1 and January 1. Pueblo uses straight-line amortization for bond premium
Cotter Company issued \(\$ 180,000,11 \%, 10\)-year bonds on December 31, 1995, for \(\$ 172,000\). Interest is payable semiannually on June 30 and December 31. Cotter uses the straight-line method
On April 1, Virginia Company issued \(\$ 72,000,10 \%, 10\)-year bonds dated January 1 at face value plus accrued interest. Interest is payable semiannually on July 1 and January
Presented below are three independent situations:1. Ernst Corporation retired \(\$ 120,000\) face value, \(12 \%\) bonds on June 30,1996 , at 102 . The carrying value of the bonds at the redemption
Peyton Co. receives \(\$ 110,000\) when it issues a \(\$ 110,000,10 \%\), mortgage note payable to finance the construction of a building at December 31, 1996. The terms provide for semiannual
The adjusted trial balance for Viola Corporation at the end of the current year contained the following accounts:\section*{Instructions}(a) Prepare the long-term liabilities section of the balance
Quebec Corporation issued \(\$ 260,000,9 \%, 10\)-year bonds on January 1, 1996, for \(\$ 243,799\). This price resulted in an effective interest rate of \(10 \%\) on the bonds. Interest is payable
Cleveland Company issued \(\$ 180,000,11 \%, 10\)-year bonds on January 1, 1996, for \(\$ 191,216\). This price resulted in an effective interest rate of \(10 \%\) on the bonds. Interest is payable
On January 1, 1996, the ledger of Calcutta Company contains the following liability accounts.During January the following selected transactions occurred:Jan. 1 Borrowed \(\$ 15,000\) in cash from
The following are selected transactions of Eldorado Company. Eldorado prepares financial statements quarterly.Jan. 2 Purchased merchandise on account from McCoy Company, \(\$ 15,000\), terms 2/10,
Moriarity Company sold \(\$ 4,000,000,9 \%, 20\)-year bonds on January 1, 1996. The bonds were dated January 1, 1996, and pay interest on January 1 and July 1. Moriarity Company uses the
Beatrice Corporation sold \(\$ 1,500,000,8 \%, 10\)-year bonds on January 1, 1996. The bonds were dated January 1, 1996, and pay interest on July 1 and January 1. Beatrice Corporation uses the
The following is taken from Bermuda Corp. balance sheet at December 31, 1996:Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual interest date. Bermuda
Nankin Electronics issues a \(\$ 900,000,10 \%, 10\)-year mortgage note on December 31, 1995 , to help finance a plant expansion program. The terms provide for semiannual installment payments, not
On July 1, 1996, Global Satellites issued \(\$ 1,200,000\) face value, \(9 \%, 10\)-year bonds at \(\$ 1,125,227\). This price resulted in an effective-interest rate of \(10 \%\) on the bonds. Global
On July 1, 1996, Saudi Chemical Company issued \(\$ 2,000,000\) face value, \(12 \%, 10\)-year bonds at \(\$ 2,249,245\). This price resulted in a \(10 \%\) effective-interest rate on the bonds.
On January 1, 1996, the ledger of El Paso Company contains the following liability accounts:During January the following selected transactions occurred:Jan. 5 Sold merchandise for cash totaling \(\$
Montego Electric sold \(\$ 3,000,000,10 \%, 10\)-year bonds on January 1, 1996. The bonds were dated January 1 and pay interest July 1 and January 1. Montego Electric uses the straightline method to
San Diego Company sold \(\$ 1,500,000,12 \%, 10\)-year bonds on July 1, 1996. The bonds were dated July 1, 1996, and pay interest July 1 and January 1. San Diego Company uses the straight-line method
The following is taken from the Walenda Oil Company balance sheet at December \(31,1996: \square\)Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual
Elite Electronics issues an \(\$ 800,000,12 \%, 10\)-year mortgage note on December 31 , 1995. The proceeds from the note are to be used in financing a new research laboratory. The terms of the note
On July 1, 1996, Mt. Vernon Corporation issued \(\$ 1,500,000\) face value, \(12 \%, 10\)-year bonds at \(\$ 1,686,934\). This price resulted in an effective-interest rate of \(10 \%\) on the bonds.
On July 1, 1996, Cherokee Company issued \(\$ 2,200,000\) face value, \(10 \%, 10\)-year bonds at \(\$ 1,947,651\). This price resulted in an effective-interest rate of \(12 \%\) on the bonds
\(\mathrm{XYZ}\), Inc., sells 100 shares of \(\$ 5\) par value treasury stock at \(\$ 13\) per share. If the cost of acquiring the shares was \(\$ 10\) per share, the entry for the sale should
Preferred stock may have priority over common stock except in:a. dividends.b. assets in the event of liquidation.c. conversion.d. voting.(SO 5)
Which of the following statements about small stock dividends is true?a. A debit to Retained Earnings for the par value of the shares issued should be made.b. Market value per share should be
Pat Kabza, a student, asks your help in understanding the following characteristics of a corporation: (a) separate legal existence, (b) limited liability of stockholders, and (c) transferable
(a) Your friend T.R. Cedras cannot understand how the characteristic of corporation management is both an advantage and a disadvantage. Clarify this problem for T.R.(b) Identify and explain two other
Cary Brant believes a corporation must be incorporated in the state in which its headquarters office is located. Is Cary correct? Explain.
The corporate charter of Letterman Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first two years of operations, Letterman sold 60,000 shares to
Wilmor, Inc., purchases 1,000 shares of its own previously issued \(\$ 5\) par common stock for \(\$ 11,000\). Assuming the shares are held in the treasury, what effect does this transaction have on
The treasury stock purchased in question 14, above, is resold by Wilmor, Inc., for \(\$ 12,500\). What effect does this transaction have on (a) net income,(b) total assets, (c) total paid-in capital,
What are the three conditions that must exist before a cash dividend is paid?
Three dates associated with Galena Company's cash dividend are May 1, May 15, and May 31.Discuss the significance of each date and give the entry at each date.
Jill Sims asks, "Since stock dividends don't change anything, why declare them?" What is your answer to Jill?
The Bella Corporation has 10,000 shares of \(\$ 15\) par value common stock outstanding when they announce a 2 for 1 split. Before the split, the stock had a market price of \(\$ 140\) per share.
The board of directors is considering a stock split or a stock dividend. They understand that total stockholders' equity will remain the same under either action. However, they are not sure of the
WAT, Inc.'s common stock has a par value of \(\$ 1\), a book value of \(\$ 29\), and a current market value of \(\$ 15\). Explain why these amounts are all different.
Tracy Bono is studying for her accounting midterm examination. Identify for Tracy the advantages and disadvantages of the corporate form of business organization.
On May 10, Armada Corporation issues 1,000 shares of \(\$ 10\) par value common stock for cash at \(\$ 14\) per share. Journalize the issuance of the stock.
On June 1, Eagle Inc. issues 2,000 shares of no-par common stock at a cash price of \(\$ 7\) per share. Journalize the issuance of the shares assuming the stock has a stated value of \(\$ 1\) per
Spiro Inc.'s \(\$ 10\) par value common stock is actively traded at a market value of \(\$ 14\) per share. Spiro issues 5,000 shares to purchase land advertised for sale at \(\$ 80,000\). Journalize
On July 1, ARB Corporation purchases 500 shares of its \(\$ 5\) par value common stock for the treasury at a cash price of \(\$ 7\) per share. On September 1 , it sells 300 shares of the treasury
Ozark Inc. issues 5,000 shares of \(\$ 100\) par value preferred stock for cash at \(\$ 112\) per share. Journalize the issuance of the preferred stock.
The Seabee Corporation has 10,000 shares of common stock outstanding. It declares a \(\$ 1\) per share cash dividend on November 1 to stockholders of record on December 1. The dividend is paid on
Satina Corporation has 100,000 shares of \(\$ 10\) par value common stock outstanding. It declares a \(10 \%\) stock dividend on December 1 when the market value per share is \(\$ 12\). The dividend
The stockholders' equity section of the Desi Corporation consists of common stock ( \(\$ 10\) par) \(\$ 1,000,000\) and retained earnings \(\$ 400,000\). A \(10 \%\) stock dividend ( 10,000 shares)
For the year ending December 31, 1996, Maddy Inc. reports net income \(\$ 182,000\) and dividends \(\$ 85,000\). Prepare the retained earnings statement for the year assuming the balance in retained
During its first year of operations, the Bevis Corporation had the following transactions pertaining to its common stock.Jan. 10 Issued 80,000 shares for cash at \(\$ 5\) per share.July 1 Issued
Santiago Co. had the following transactions during the current period:Mar. 2 Issued 5,000 shares of \(\$ 1\) par value common stock to attorneys in payment of a bill for \(\$ 27,000\) for services
As an auditor for the CPA firm of Bell and Heft, you encounter the following situations in auditing different clients 1. The Ruth Corporation is a closely held corporation whose stock is not publicly
On January 1, 1996, the stockholders' equity section of the Margo Corporation shows: Common stock ( \(\$ 5\) par value) \(\$ 1,500,000\); Paid-in capital in excess of par value \(\$ 1,000,000\); and
Talley Corporation is authorized to issue both preferred and common stock. The par value of the preferred is \(\$ 50\). During the first year of operations, the company had the following events and
The stockholders' equity section of Kimbria Shumway Corporation at December 31 is as follows:\section*{Instructions}From a review of the stockholders' equity section, answer the following questions
Anita Ferreri Corporation recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he
On January 1, Tarow Corporation had 75,000 shares of no-par common stock issued and outstanding. The stock has a stated value of \(\$ 5\) per share. During the year, the following occurred:Apr. 1
On January 1, 1997, the Keyes Corporation had \(\$ 1,500,000\) of common stock outstanding that was issued at par and retained earnings of \(\$ 750,000\). The company issued 50,000 shares of common
On October 31, the stockholders' equity section of the Sarah Lane Company consists of common stock \(\$ 800,000\) and retained earnings \(\$ 400,000\). Sarah is considering the following two courses
Before preparing financial statements for the current year, the chief accountant for Phil, Chris, and Caroline Company discovered the following errors in the accounts:1. The declaration and payment
On January 1, 1996, Waikiki Corporation had Retained Earnings of \(\$ 580,000\). During the year, Waikiki had the following selected transactions:Prepare a retained earnings 1. Declared cash
The ledger of Mintur Corporation contains the following accounts: Common Stock, Preferred Stock, Treasury Stock-Common, Paid-in Capital in Excess of Par Value-Preferred Stock, Paid-in Capital in
The following accounts appear in the ledger of Ozabal Inc. after the books are closed at December 31.\section*{Instructions}Prepare stockholders' equity section at December 31, assuming retained
In a recent year, the stockholders' equity section of the Aluminum Company of America (Alcoa) showed the following (in alphabetical order): Additional (paid-in) Capital \(\$ 680.5\), Common stock
At December 31, Kilgora Corporation has total stockholders' equity of \(\$ 3,000,000\). Included in this total are Preferred stock \(\$ 500,000\) and Paid-in capital in excess of par valuePreferred
On October 1, 1997, Valentine Corporation's stockholders' equity is as follows:On October 1, Valentine declares and distributes a \(10 \%\) stock dividend when the market value of the stock is \(\$
Jackie Remmers Corporation was organized on January 1, 1996. It is authorized to issue 20,000 shares of \(6 \%, \$ 50\) par value preferred stock, and 500,000 shares of no-par common during the first
Cole William Sondgeroth Corporation had the following stockholders' equity accounts on January 1, 1996: Common Stock (\$1 par) \(\$ 400,000\), Paid-in Capital in Excess of Par Value \(\$ 500,000\),
The stockholders' equity accounts of Chung Corporation on January 1, 1996, were as follows:During 1996, the corporation had the following transactions and events pertaining to its stockholders'
On December 31, 1996, V. Conway Company had 1,500,000 shares of \(\$ 10\) par common stock issued and outstanding. The stockholders' equity accounts at December 31, 1996 have the following
The ledger of Reno Corporation at December 31, 1996, after the books have been closed, contains the following stockholders' equity accounts:A review of the accounting records reveals the following:1.
Largent Corporation has been authorized to issue 20,000 shares of \(\$ 100\) par value, \(10 \%\), noncumulative preferred stock and \(1,000,000\) shares of no-par common stock. The corporation
On January 1, 1997, Wirth Corporation had the following stockholders' equity accounts:During the year, the following transactions occurred:Jan. 15 Declared a \(\$ 1\) cash dividend per share to

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