Question 1

On October 1, Year 1, Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank. The note had an 8% discount rate and had a one-year term to maturity. On December 31, Year 1, Harrison should accrue interest expense in the amount of $1,920.

Accepted Answer

Discount = $24,000 × 8% = $1,920
Interest expense = $1,920 ÷ 12 months × 3 months (Oct.1-Dec.31)= $480

Question 2

Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions. Based on this information alone, what amount of cash flow from operating activities would appear on the Year 2 statement of cash flows?

Accepted Answer

The answer of Riley Company borrowed $36,000 on April 1,...

Question 3

Which of the following is a claims exchange transaction?

Accepted Answer

The accrual of interest on a note payable is a claims exchange transaction because the stockholders' equity account Retained Earnings decreases (because Interest Expense increases)and the liability account Interest Payable increases.Issuing the note is an asset source transaction because the asset account Cash increases and the liability account Notes Payable increases.Repaying the principal (or interest)on a note payable is an asset use transaction since the asset account Cash decreases and the liability account Notes Payable (or Interest Payable)decreases.

Question 4

What is (are)the term(s)used to describe the party who borrows money as evidenced by a note payable?

Accepted Answer

The party who borrows money as evidenced by a note payable is called the issuer. The lender is the party who gives the money to the issuer, while the payee is the party who receives the money from the issuer when the note is paid. Therefore, options A) Lender and B) Payee are incorrect. Option D) Issuer and lender is partially correct but does not accurately describe the specific party who is borrowing the money.

Question 5

The current ratio is calculated as total current assets divided by total assets.

Accepted Answer

The current ratio equals current assets divided by current liabilities.

Question 6

Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions. Based on this information alone, what are the amounts of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively?

Accepted Answer

The total liability on December 31, Year 1, is the principal amount of $36,000 plus the accrued interest for 9 months (April to December) which is $36,000 * 7% * (9/12) = $1,890, totaling $37,890. By December 31, Year 2, the note is paid off, so the liability is $0.

Question 7

Madison Company issued an interest-bearing note payable with a face value of $24,000 and a stated interest rate of 8% to Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, what is the amount of cash flow from operating activities reported on Madison's Year 1 statement of cash flows?

Accepted Answer

The payment of interest on the note does not affect cash flow from operations, as it is classified as a financing activity. Therefore, there is no cash flow from operating activities to report.

Question 8

On September 1, Year 1, West Company borrowed $10,000 from Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. West Company has a calendar year-end. What is the amount of interest expense that will be reported on West's income statement for Year 1?

Accepted Answer

Interest expense (September 1 through December 31)= $10,000 × 6% × (4 ÷ 12)= $200
The fact that it was an 18-month note does not affect the Year 1 interest expense.

Question 9

On October 1, Year 1, Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank. The note had an 8% discount rate and had a one-year term to maturity. The amount of cash that Harrison received on that date was $22,080.

Accepted Answer

The discount amount can be calculated as $24,000 x 8% = $1,920. Therefore, the amount of cash received by Harrison would be $24,000 - $1,920 = $22,080. The amount of cash that Harrison received is equal to the face value of the note minus the discount. Therefore, the discount amount can be calculated as $24,000 x 8% = $1,920. The cash received would then be $24,000 - $1,920 = $22,080.

Question 10

Houston Company borrowed $20,000 from Dallas Company on March 1, Year 1. Houston issued a note payable that had a one-year term and the annual interest rate is 8%. How will the necessary adjustment, dated December 31, Year 1, affect the Year 1 financial statements?

Accepted Answer

At the end of the year, Houston will need to accrue interest expense for the nine months that have passed since the note was issued. The amount of interest expense will be calculated as follows: $20,000 x 8% x 9/12 = $1,200. This adjustment will increase Houston's liabilities (due to the accrual of interest payable) and increase expenses (due to the recognition of interest expense). Therefore, choice A is the correct answer.

Question 11

The current ratio is a measure of a company's liquidity.

Accepted Answer

The current ratio is a common measure of liquidity and is calculated by dividing current assets by current liabilities. It indicates a company's ability to meet its short-term obligations using its current assets. The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or debts due within one year using its current assets. Therefore, it is a measure of a company's liquidity.

Question 12

Which of the following happens as a result of selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%?

Accepted Answer

- The cash flow from operating activities increases by $208 because the $200 cash received is included in the cash inflow from operating activities, and the sales tax of $8 collected from the customer is included in the cash outflow for taxes paid, resulting in a net increase of $208.
- Total assets increase by $78 because the merchandise sold for $130 is now replaced by $130 cash (the net amount received after deducting sales tax), and the additional $70 ($200-$130) cash received increases the cash balance, which is an asset.
- Stockholders' equity increases by $70 only if the company has no liabilities or uses the cash received to pay off its liabilities. Otherwise, the increase in cash may increase both assets and liabilities, resulting in no change or decrease in stockholders' equity.

Question 13

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the financial statements?

Accepted Answer

The interest expense for five months (August to December) is $2,000 ($40,000 * 12% * 5/12). This increases liabilities (interest payable) and decreases stockholders' equity (retained earnings) by $2,000.

Question 14

A classified balance sheet is necessary for calculating a company's current ratio.

Accepted Answer

A classified balance sheet separates a company's assets, liabilities, and equity into current and non-current categories, making it easier to calculate the current ratio which measures a company's ability to pay its short-term debts. A classified balance sheet separates assets, liabilities, and equity into current and non-current categories, which is necessary for calculating a company's current ratio. The current ratio is calculated by dividing current assets by current liabilities, which are both classified on a classified balance sheet.

Question 15

Receivables are normally reported on the balance sheet at net realizable value. In contrast, payables are carried at face value. Which accounting principle requires this treatment of payables?

Accepted Answer

Unless there is evidence to the contrary,companies are assumed to be going concerns that will continue to operate.Under this going concern assumption,companies expect to pay their obligations in full.Notes payable are therefore reported at face value.In contrast,companies need to estimate the net realizable value of receivables,which is the amount of receivables a company expects to actually collect.

Question 16

Yang Company sold merchandise for $4,000. The event is subject to a state sales tax of 9%. Based on this information, Yang would be required to

Accepted Answer

Yang Company would recognize a sales tax liability of $360, which is 9% of the $4,000 sales amount. The sales tax is collected from the customer and is not part of the company's revenue.

Question 17

Madison Company issued an interest-bearing note payable with a face value of $24,000 and a stated interest rate of 8% to Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, what is the amount of total liabilities appearing on Madison's balance sheet as of December 31, Year 1?

Accepted Answer

The note payable has a face value of $24,000 and an interest rate of 8%, which means that Madison Company will owe $24,000 + ($24,000 x 8%) = $24,800 to Metropolitan Bank at the end of the one-year term. Therefore, the amount of total liabilities on Madison's balance sheet as of December 31, Year 1 would be $24,800.

Question 18

A company with a high current ratio should be concerned that it is not maximizing its earnings potential.

Accepted Answer

A high current ratio may indicate that the company has an excess of cash,which could be put to better use,or an excess of receivables or inventory.Any of these may prevent a company from maximizing its earnings potential.

Question 19

Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions. Based on this information alone, what is the amount of net income (loss)that will be reported on the Year 2 income statement?

Accepted Answer