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web.groovymark@gmail.com
- December 8, 2024
Question 41
How should a company account for the issuance of common stock above par value?
- A) Debit common stock, Credit cash
- B) Debit cash, Credit common stock and additional paid-in capital
- C) Debit additional paid-in capital, Credit common stock
- D) Debit cash, Credit retained earnings
Answer: B) Debit cash, Credit common stock and additional paid-in capital
Explanation: When common stock is issued above par value, the cash account is debited, and the common stock account is credited for the par value. The excess is credited to the additional paid-in capital account.
Question 42
Which of the following is a financing activity on the statement of cash flows?
- A) Paying employees
- B) Paying dividends
- C) Purchasing inventory
- D) Collecting accounts receivable
Answer: B) Paying dividends
Explanation: Financing activities include transactions related to borrowing, repaying loans, issuing shares, and paying dividends to shareholders.
Question 43
Which type of account is allowance for bad debts?
- A) Liability account
- B) Contra-revenue account
- C) Contra-asset account
- D) Expense account
Answer: C) Contra-asset account
Explanation: The allowance for bad debts is a contra-asset account used to offset accounts receivable by reflecting estimated uncollectible amounts.
Question 44
With a LIFO inventory cost flow assumption, what is assumed about the units that are sold and the units that remain in ending inventory?
- A) New units sold, old units in ending inventory
- B) Old units sold, new units in ending inventory
- C) New units sold, new units in ending inventory
- D) Old units sold, old units in ending inventory
Answer: A) New units sold, old units in ending inventory
Explanation: Under LIFO (Last In, First Out), the most recently purchased (new) units are assumed to be sold first, leaving the older units in inventory.
Question 45
The following are inventory purchase and sales data for a company:
Purchased on January 1: 500 units, $9 cost per unit
Purchased on January 16: 300 units, $8 cost per unit
Sold on January 31: 600 units, $10 selling price per unit
There was no inventory before the purchase made on January 1. Assume the company uses the LIFO method for inventory valuation.
What is the cost of goods sold for January?
- A) $5,000
- B) $5,100
- C) $5,200
- D) $5,300
Answer: B) $5,100
Explanation: Under LIFO, the last units purchased are the first to be sold. Therefore, the cost of the 600 units sold is (300 units × $8) + (300 units × $9) = $5,100.
Question 46
The following are inventory purchase and sales data for a company:
Purchased on January 1: 500 units, $8 cost per unit
Purchased on January 16: 100 units, $9 cost per unit
Sold on January 31: 200 units, $10 selling price per unit
There was no inventory before the purchase made on January 1. Assume the company uses the LIFO method for inventory valuation.
What is the reported cost of ending inventory at the end of January?
- A) $2,700
- B) $2,800
- C) $3,000
- D) $3,200
Answer: D) $3,200
Explanation: Under LIFO, the most recent purchases are sold first. Therefore, after selling 200 units, the remaining inventory consists of 400 units at $8 and 100 units at $9. The ending inventory is (400 units × $8) + (100 units × $9) = $3,200.
Question 47
When a machine is purchased, what is the proper accounting for the amount paid for sales tax on the purchase price?
- A) Expense it immediately
- B) As part of the cost of the machine
- C) Record it as a liability
- D) Record it as prepaid tax
Answer: B) As part of the cost of the machine
Explanation: Sales tax paid on the purchase of a machine is capitalized as part of the machine's cost because it is necessary to acquire the asset and prepare it for use.
Question 48
On January 1 of Year 1, a company purchased a machine for $20,000. The machine is expected to have a 10-year useful life and a salvage value of $1,000. The company uses straight-line depreciation.
What is the book value of this machine at the end of Year 6?
- A) $7,000
- B) $8,400
- C) $8,600
- D) $9,000
Answer: C) $8,600
Explanation: Using straight-line depreciation:
Annual depreciation = ($20,000 - $1,000) ÷ 10 = $1,900 per year.
After 6 years, accumulated depreciation is $1,900 × 6 = $11,400.
Book value = $20,000 - $11,400 = $8,600.
Question 49
On January 1 of Year 1, a company purchased a machine for $10,000. The machine is expected to have a five-year useful life and a salvage value of $2,000. The company uses double-declining balance depreciation.
What is the amount of depreciation expense on this machine for Year 2?
- A) $2,000
- B) $2,400
- C) $3,000
- D) $4,000
Answer: B) $2,400
Explanation: Double-declining balance rate = 2 ÷ 5 = 40%.
Year 1 depreciation = $10,000 × 40% = $4,000.
Year 2 depreciation = ($10,000 - $4,000) × 40% = $2,400.
Question 50
On January 1 of Year 1, a company purchased a patent for $400,000. The patent had an original legal life of 20 years, but only eight years remained on the date the patent was purchased. The patent is expected to have continuing economic value during these eight years. The patent is assumed to have zero salvage value at the end of its economic useful life. The company uses straight-line amortization.
What is the book value of this patent at the end of Year 3?
- A) $150,000
- B) $200,000
- C) $250,000
- D) $300,000
Answer: C) $250,000
Explanation: Annual amortization expense = $400,000 ÷ 8 = $50,000.
After 3 years, accumulated amortization = $50,000 × 3 = $150,000.
Book value = $400,000 - $150,000 = $250,000.
