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Financial Accounting 2 midterm revision

ACC112 Midterm Revision

Choose the best alternative for the following questions: 1.Book value is equal to the cost of the asset less its residual (or salvage) value: A. True B. False 2. The straight-line method of depreciation assumes that an asset's usage is constant. Thus, an equal amount of the asset's cost is allocated to expense every period A. True B. False 3. Depreciation expense is a very precise calculation that involves no estimates A. True B. False 4. The accelerated methods of depreciation cause more depreciation expense to be recorded over the life of the asset than do the straight-line methods A. True B. False 5. The cost of natural resources such as coal or timber that is allocated to expense is known as depreciation A. True B. False 6. Land is one of the few noncurrent assets that is not depreciated A. True B. False

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7. Which of the following costs would become part of the cost of a noncurrent asset as listed on the balance sheet (i.e., be capitalized)? A. Freight or shipping B. Storage C. Taxes, tariffs, and duties D. All of the above would become part of the cost of the asset 8. A company purchased a used asset for $250,000. This asset had already been used by the previous owner for 2 years. The current owner plans to use the asset for 6 more years and then sell it to another business. The current owner believes that at the time of the future sale, the asset will still have about 3 more years of use in it. The current owner plans to depreciate the asset using the straight-line method. What is the useful life that the accountant should use in determining the annual depreciation expense? A. 11 years B. 9 years C. 8 years D. 6 years 9. Which of the following is the correct journal entry to record depreciation expense? A. Depreciation Expense Noncurrent Asset B. Depreciation Expense Accumulated Depreciation C. Noncurrent Asset Depreciation Expense D. Accumulated Depreciation Depreciation Expense 10. The estimated cash value of an asset that is expected to exist when an asset is taken out of service whether to be retired (i.e., scrapped) or sold to another party is known as: A. Salvage value B. Residual value C. Depreciable cost D. A and b are correct.

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Financial Accounting 2 midterm revision

11. A company expects to use an asset with a cost of $100,000 for a total of 50,000 service hours. It expects to use the asset 20,000 hours in Year 1; 18,000 hours in Year 2; and 12,000 hours in Year 3. If the company uses the units of production method to calculate depreciation, what would the accountant record as depreciation expense in Year 1 A. $5,000 B. $20,000 C. $33,333 D. $40,000 12. Which one of the following depreciation methods will always generate the largest amount of depreciation expense in the first year of use? A. Straight-line. B. Units of Production. C. Double-declining-balance method D. All have equal depreciation Expense.

13. A company expects to use an asset that cost $100,000 for a total of 10 years. The asset is expected to have a residual value of $2,000 at the end of the ten-year period. If the company uses the double-declining balance method, what would the accountant record for depreciation expense in Year 2? A. $20,000 B. $19,600 C. $16,000 D. $15,680 14. ABC Company sold equipment with a cost of $10,000 and accumulated depreciation of $2,000 for $7,500. Which of the following journal entries would the accountant make to record this transaction? A. Cash 7,500 Accumulated Depreciation 2,000 Loss on Sale 500 Equipment 10,000 B. Cash 7,500 Loss on Sale 500 Equipment 8,000 C. Cash 8,000 Equipment 8,000
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D. Cash Loss on Sale Equipment

7,500 2,500 10,000

15. ABC Company sold equipment with a cost of $20,000 and accumulated depreciation of $15,000 for $6,000 cash. How much gain or loss would the accountant record? A. $14,000 loss B. $6,000 gain C. $1,000 gain D. $9,000 loss 16. Which of the following is NOT an intangible asset? A. Goodwill B. Patent C. Mineral deposits D. Trademark 17. When a 2-month, 12%, note payable is issued on March 15, no adjusting entry is required at the end of March or April if the accounting period ends June 30. A. True B. False 18. The proceeds (amount received) from an interest-bearing note payable will be equal to the principal or the face value of the note. A. True B. False 19. A product warranty is an example of a definite liability. A. True B. False 20. A product warranty is an example of a contingent liability. A. True B. False 21. In a loan transaction, the bank or lender collects the interest when the loan is repaid. A. True B. False
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22. On December 31, the accrued interest for a $10,000, 12%, 2-month note payable dated December 16 will total $200. A. True B. False 23. The accrued interest on December 31 for a $10,000, 12%, 2-month note payable dated December 1 totals $100. The interest expense recorded on January 30, when the note is paid in full, will total $100 A. True B. False 24. On the balance sheet the current portion of the long-term debt is listed as an asset. A. True B. False 25. Which of the following is created by the adjusting entry to recognize interest expense incurred but not yet paid? A. Prepaid asset B. Accrued expense C. Deferred expense D. Accrued asset 26. A $40,000, interest-bearing note payable is signed on December 26, 2002. If the note is a 120-day note, what is the maturity date for this shortterm liability? A. March 25 B. March 26 C. April 25 D. April 26 27. $20,000 cash is borrowed on a 2-month note payable. If the interest cost to borrow is $400, what is the actual interest rate on this note? A. 10.00% B. 12.00% C. 20.00% D. 22.50%

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28. Obligations of a company with little uncertainty; set by agreements, contracts or laws; also called definitely determinable liabilities is: A. Contingent Liability B. Estimated Liability C. Known Liability D. Liability For the following questions, fill in the blanks with the appropriate words given: *Notes Payable *Current portion of long term liability. *Contingent Liability * Estimated Liability *Warranty * Long term Liability * Liability * Short term Liability 29. A potential liability that depends on a future event arising out of a past transaction; is not an existing liability is __________ 30. The portion of long-term debt that is due within one year; reported under current liabilities on the balance sheet is _______ 31. Obligation of an uncertain amount that can be reasonably estimated is _______ 32. A probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events is _______ 33. Current obligation in the form of a written promissory note is _______ 34. Obligations of a company not requiring payment within one year or a longer operating cycle is _______. 35. An agreement that obligates the seller or manufacturer to repair or replace a product when it breaks or otherwise fails to perform properly within a specified period is _______. 36. When a business constructs a new building, the cost of the building should include the insurance on the building during the period of construction A. True B. False
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37. The cost to have a second-hand machine assembled at the time it is purchased would be charged to an expense account since the machine is not new. A. True B. False 38. Land improvements are assets that increase the usefulness of land but that have a limited useful life and are subject to amortization A. True B. False 39 An amortizable asset that is purchased on March 18 would be amortized for nine months of the first year, if the fiscal year ends on December 31. A. True B. False 40. Major repairs that extend the useful life of a plant asset beyond the time period originally estimated may be referred to as betterments A. True B. False 41. At the time a plant asset is being discarded or sold, it may be necessary to update the accumulated depreciation of the plant asset A. True B. False 42. The book value of the asset is equal to the market value of the asset. A. True B. False 43. An asset that cost $5,000 has a current book value of $2,000. A revision of the useful life of the asset estimates the asset will last four years and will have a salvage value of $400. Using the straight-line method, the revised depreciation will be $500 per year A. True B. False

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Financial Accounting 2 midterm revision

44. The periodic allocation of the cost of a patent is called amortization. A. True B. False 45. An exclusive right granted by the federal government or by international agreement to publish and sell a musical, literary, or artistic work for a period of years is called a copyright A. True B. False 46. An asset having a four-year service life and a salvage value of $5,000 was acquired for $45,000 cash on June 28. The depreciation expense at the end of the first year, December 31, will be: A. $11,250, using the double declining-balance method B. $10,000, using the straight-line method C. $22,500, using the double declining-balance method D. $7,000, using the straight-line method 47. An asset having a four-year service life and a salvage value of $5,000 was acquired for $45,000 cash on January 2 of Year One. The depreciation expense for Year 2, ending December 31, will be: A. $11,250, using the double declining-balance method B. $10,000, using the straight-line method C. $22,500, using the double declining-balance method D. $7,000, using the straight-line method 48. An asset having a four-year service life and a salvage value of $5,000 was acquired for $45,000 cash on January 2 of Year One. The depreciation expense for Year 2, ending December 31, will be a. $5,000, under the straight-line method b. $11,250, under the double declining-balance method c. $11,250, under the straight-line method d. $22,500, under the double declining-balance method 49. A(n) ______________________ is an expenditure that produces economic benefits that do not fully expire before the end of the current period. a. revenue expenditure b. capital expenditure

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Financial Accounting 2 midterm revision

c. operating expense d. ordinary repair expense 50. Failure to record the year-end adjustment for depreciation will result in a. an overstatement of income and an understatement of capital b. an overstatement of income and an understatement of assets c. an overstatement of income and an overstatement of assets d. an understatement of income and an overstatement of capital 51. An asset having a four-year service life and a salvage value of $5,000 was acquired for $45,000 cash on April 5. Using straight-line depreciation, the depreciation expense at the end of the first year, December 31, will be a. $10,000 b. $7,500 c. $5,000 d. $11,250 52. The Ophir Mining Company acquired an iron ore deposit for $2,000,000. The company's geologist estimated the deposit to contain 1,500,000 tons of iron ore. At the end of the first year, 60,000 tons had been extracted. The end-of-year journal entry to record the depletion of the iron ore would: a. require a credit to Iron Ore Deposit of $45,000 b. require a credit to Accumulated Depletion of $80,000 c. require a debit to Depletion Expense of $50,000 d. require a debit to Accumulated Depletion of $80,000 53. The Ophir Mining Company acquired an iron ore deposit for $2,000,000. The company's geologist estimated the deposit to contain 1,500,000 tons of iron ore. Extracting equipment with a 10-year service life and costing $450,000 was installed in the mine. At the end of the first year, 60,000 tons had been extracted. The end-of-year journal entry to record the depreciation of the extracting equipment would: a. require a credit to Accumulated depreciation of $45,000 b. require a credit to Accumulated Depletion of $90,000 c. require a credit to Accumulated depreciation of $18,000 d. be delayed until all of the ore is extracted 54. Equipment is purchased for $50,000 and is expected to last 10 years with no salvage value. After using the asset for 4 years, the company

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estimates that at the end of its useful life, the salvage value will be $6,000. In the 5th year of owning the asset, amortization expense will be: a. $5,000 b. $4,400 c. $4,000 d. $9,000 55. An asset that cost $65,000 has accumulated depreciation of $23,000 is sold for $50,000. The journal entry to record the sale of the asset would include a. a debit to Gain on Disposal of Asset of $8,000 b. a credit to Gain on Disposal of Asset of $8,000 c. a debit to Gain on Disposal of Asset of $15,000 d. a credit to Gain on Disposal of Asset of $15,000 For the following five questions, use the words below to fill in the blank: * Book Value *Amortization *Copyright *Patent * Salvage *Betterment 56. A process of systematically allocating the cost of a patent to expense over its estimated useful life is called _______ 57. The cost of replacing a motor on a printing press to increase the printed pages per minute is an example of a _______ expenditure 58. If an asset cost $45,000, and has been depreciated $35,000, the $10,000 undepreciated value of the asset is the asset's _______ 59. The publisher of this chapter review program has an exclusive right to publish and sell this program. This exclusive right is granted the publisher through an intangible asset called a_______. 60. Another term for residual value or scrap value is_______. 61. A partnership is an incorporated association of two or more persons to pursue a business for profit as co-owners A. True B. False

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62. A written contract is necessary for the legal formation of a partnership. A. True B. False Note. Read the definition of a partnership well, one word will change the entire definition. In addition, written contracts can be replaced with oral contracts) 63. Partnerships are subject to income taxes A. True B. False Note: Remember that a partnership has NO double taxation 64. If Partner A contributes cash of $20,000 to the partnership of A and B, and Partner B contributes a building valued at $30,000 to the partnership, the investments become joint property of both partners A. True B. False 65. A general partnership may consist of limited partners and general partners A. True B. False 66. Limited partners are liable for any debt that cannot be paid through the resources of the partnership. A. True B. False 67. General partners are included in limited partnerships A. True B. False 68. If Partner A invested twice as much as Partner B, and there are only two partners, the income must be divided in a ratio of 2:1, respectively. A. True B. False

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69. If partners agree to a method of sharing net income, but say nothing about net losses, losses are shared in the same way as net income A. True B. False 70. In the purchase of partnership interest, the capital accounts of the exiting partner(s) will be reduced. A. True B. False 71. The capital of an existing partnership is $160,000 after Keith invested $40,000 in the partnership. Keith is entitled to 25% (1/4) of the income or loss of the partnership. A. True B. False 72. The withdrawal of a partner from a partnership may result in an increase in the capital accounts of the remaining partners A. True B. False 73. Partners will share gains and losses on liquidation in their capital investment ratio. A. True B. False 74. A capital deficiency occurs when a partner has insufficient equity to cover his or her share of losses resulting from liquidation A. True B. False 75. The legal characteristic of a partnership whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the normal scope of the partnership business is known as a. unlimited liability b. partnership accounting c. a partnership contract d. mutual agency 76. Which of the following is not true regarding a partnership?
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a. A partnership is a voluntary association. b. Partnerships pay income taxes. c. Partnerships have limited life. d. Partners in general partnerships have unlimited liability. 77. Which is NOT a condition of a limited partnership? a. Limited partners are expected to have an active role in management. b. A limited partner's liability will be limited to his/her investment. c. One partner of the limited partnership must be a general partner. d. Limited partnerships will have more than one class of partner. 78. The partnership agreement provided for a salary allowance of $6,000 per month to partner X, and the balance to be divided equally between partners X and Y. X made no additional partnership investments during the year, but withdrew $7,000 per month. Net income for the year was $120,000. The net change in X's capital account was a a. $12,000 increase b. $60,000 increase c. $54,000 decrease d. $12,000 decrease 79. A and B are partners who share profits and losses on a 2:1 basis, respectively, after a salary allowance of $12,000 is allocated to partner B. Earnings for the period total $39,000. What will be the amount credited to the Capital account of partner A when the books are closed? a. $7,000 b. $9,000 c. $18,000 d. $19,500 80. C and D are partners who share profits and losses on a 3:1 basis, respectively, after a salary allowance of $15,000 is allocated to partner C. Earnings for the period total $51,000. What will be the total amount credited to the Capital account of partner C when the Income Summary account is closed? a. $15,000 b. $20,000 c. $42,000 d. $32,000

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Financial Accounting 2 midterm revision

81. In the partnership of Maxwell and Slade, Maxwell's capital balance is $40,000 and Slade's capital balance is $60,000. Maxwell sold 50% of his partnership interest to Norton, who paid $24,000 for the 50% interest. The journal entry on the partnership books related to this transaction would include a. a debit to Cash for $24,000 b. a debit to Cash for $20,000 c. a debit to Maxwell, Capital for $24,000 d. a debit to Maxwell, Capital for $20,000 82. Norton invested $30,000 in the partnership of Maxwell and Slade. The capital balance of Maxwell and Slade were $30,000 and $60,000, respectively. Norton was to receive a 25% interest in the new partnership. The journal entry to record this transaction would NOT include a. a debit to cash for $30,000 b. a credit to Norton's capital account for $30,000 c. a credit to Slade's capital account for $7,500 d. a credit to Slade's capital account for $37,500 83. Norton invested $20,000 in the partnership of Maxwell and Slade. The capital balance of Maxwell and Slade were $40,000 and $60,000, respectively. Income and loss is shared according to the ratio of equity balances. Norton was to receive 25% interest in the new partnership. The journal entry to record this transaction would include: a. a credit to cash for $20,000 b. a credit to Maxwell's capital account for $4,000 c. a credit to Slade's capital account for $6,000 d. a credit to Norton's capital account for $30,000 84. Norton invested $40,000 in the partnership of Maxwell and Slade. The capital balance of Maxwell and Slade were $40,000 and $60,000, respectively. Income and loss is shared according to the ratio of equity balances. Norton was to receive 25% interest in the new partnership. The journal entry to record this transaction would NOT include a. a debit to cash for $40,000 b. a credit to Maxwell's capital account for $2,000 c. a credit to Slade's capital account for $3,000 d. a credit to Norton's capital account for $30,000

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85. Norton was paid $25,000 from the partnership cash account for his withdrawal from the partnership of Maxwell, Slade, and Norton. Their capital balances were $40,000, $60,000, and $35,000, respectively. Income and loss is shared according to the ratio of equity balances. The journal entry to record the withdrawal of Norton would NOT include: a. a credit to cash for $25,000 b. a debit to Maxwell's capital account for $2,000 c. a credit to Slade's capital account for $6,000 d. a debit to Norton's capital account for $35,000 86. Norton was paid $40,000 from the partnership cash account for his withdrawal from the partnership of Maxwell, Slade, and Norton. Their capital balance were $40,000, $60,000, and $35,000, respectively. The journal entry to record the withdrawal of Norton would include: a. a debit to cash for $40,000 b. a debit to Maxwell's capital account for $5,000 c. a debit to Slade's capital account for $5,000 d. a debit to Norton's capital account for $35,000

87. Given the following information: Cash 20,000 Other Assets $81,000 Liabilities $20,000 Maxwell Capital $30,000 Slade Capital $40,000 Norton Capital $11,000 The other assets were sold for $60,000, and the liabilities were paid, in preparation to liquidating the partnership. Income and loss was shared evenly. Which of the following is NOT true? a. The loss on liquidation was $21,000. b. Maxwell's share of the ending cash balance was $23,000 c. Slade's share of the ending cash balance was $33,000 d. Norton's share of the ending cash balance was $7,000 88. Given the following information: Cash 10,000 Other Assets $71,000 Liabilities $20,000 Maxwell Capital $30,000
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Slade Capital $26,000 Norton Capital $5,000 The other assets were sold for $50,000, and the liabilities were paid, in preparation to liquidating the partnership. Income and loss was shared evenly. Any deficient partner will be unable to pay the deficiency. Which of the following is NOT true? a. The loss on liquidation was $21,000. b. The cash balance before final distribution was $40,000. c. Maxwell's share of the ending cash balance was $22,000 d. Slade's share of the ending cash balance was $19,000 Match the following terms to the questions from 89 to 98: Limited partners Mutual agency Partnership liquidation General partner Limited partnership Partnership Unlimited liability of partners Statement of partners' equity Partnership contract General partnership 89. A partner who assumes unlimited liability for the debts of the partnership;
also, the general partner in a limited partnership responsible for its management.

90. A partnership in which all partners have mutual agency and unlimited liability
for partnership debts.

91. Partners who have no personal liability for debts of the partnership beyond
the amounts they have invested in the partnership.

92. A partnership that has two classes of partners, limited partners and general
partners.

93. The legal relationship among the partners whereby each partner is an agent
of the partnership and is able to bind the partnership to contracts within the apparent scope of the partnership's business.

94. An unincorporated association of two or more persons to pursue a business

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Financial Accounting 2 midterm revision

95. The agreement between partners that sets forth the terms under which the
affairs of the partnership will be conducted.

96. The dissolution of a business partnership by 1) selling noncash assets for

cash and allocating the gain or loss according to partners' income- and-loss ratio 2) paying liabilities 3) distributing remaining cash to partners based on capital balances.

97. Shows the capital balances at the beginning of the period, any additional
investments made by partners, the income or loss of the partnership, withdrawals by partners, and the capital balances.

98. The legal relationship among general partners that makes each of them
responsible for paying all the debts of the partnership if the other partners are unable to pay their shares.

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