Accounting Midterm Exam ACG-2011 Answers & Formulas

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An unincorporated association of two or more persons to carry on a business for profit as co-owners is a:

	Contractual company.
	Proprietorship.
	Partnership.
	Voluntary organization.
	Mutual agency.

A partnership in which all partners have mutual agency and unlimited liability is called:

	Limited liability company.
	S corporation.
	General partnership.
	Limited partnership.
	Limited liability partnership.

Web Services is organized as a limited partnership, with David White as one of its partners. David's capital account began the year with a balance of $45,000. During the year, David's share of the partnership income was $7,500, and David received $4,000 in distributions from the partnership. What is David's partner return on equity?

	7.8%
	16.7%
	15.4%
	8.9%
→	16.0%

Ending partnership equity = $45,000 + $7,500 - $4,000 = $48,500
Return on partnership equity = $7,500/(($45,000 + $48,500)/2) = 16.0%

The following information is available regarding John Smith's capital account in Technology Consulting Group, a general partnership, for a recent year:

Beginning of the year balance	$22,000
His share of partnership income	$8,500
Withdrawals made during the year	$6,000

What is Smith's partner return on equity during the year in question?

	55.7%
	11.4%
	34.7%
	10.8%
	36.6%

Ending partner equity = $22,000 + $8,500 - $6,000 = $24,500
$8,500 / (($22,000 + $24,500)/2) = 36.6%

Partnership accounting:

	Uses a capital account for each partner.
	Uses a withdrawals account for each partner.
	Allocates net income to each partner according to the partnership agreement.
	Allocates net loss to each partner according to the partnership agreement.
	All of these.

Chen and Wright are forming a partnership. Chen will invest a building that currently is being used by another business owned by Chen. The building has a market value of $90,000. Also, the partnership will assume responsibility for a $30,000 note secured by a mortgage on that building. Wright will invest $50,000 cash. For the partnership, the amounts to be recorded for the building and for Chen's Capital account are:

	Building, $60,000 and Chen, Capital, $90,000.
	Building, $90,000 and Chen, Capital, $90,000.
	Building, $60,000 and Chen, Capital, $60,000.
	Building, $90,000 and Chen, Capital, $60,000.
	Building, $60,000 and Chen, Capital, $50,000.

Collins and Farina are forming a partnership. Collins is investing a building that has a market value of $80,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership. Farina is investing $20,000 cash. The balance of Collins' Capital account will be:

	$44,000.
	$56,000.
	$24,000.
	$60,000.
	$80,000.

In the absence of a partnership agreement, the law says that income (and loss) should be allocated based on:

	The ratio of capital investments.
	Equal shares.
	Interest allowances.
	A fractional basis.
	Salary allowances.

In a partnership agreement, if the partners agreed to an interest allowance of 10% annually on each partner's investment, the interest allowance:

	Is ignored when earnings are not sufficient to pay interest.
	Legally becomes a liability of the general partner.
→	Can make up for unequal capital contributions.
	Must be paid because the partnership contract has unlimited life.
	Is an expense of the business.

Rice, Hepburn, and DiMarco formed a partnership with Rice contributing $60,000, Hepburn contributing $50,000 and DiMarco contributing $40,000. Their partnership agreement called for the income (loss) division to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of operation, what amount of income would be credited to DiMarco's capital account? (Do not round your intermediate calculations. Round your final answer to the nearest thousand.)

	$30,000.
	$75,000.
	$40,000.
	$25,000.
→	$20,000.

$75,000 x ($40,000/($60,000 + $50,000 + $40,000)) = $20,000

Shelby and Mortonson formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Shelby to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Shelby and Mortonson's respective shares are:

	$67,500; $67,500.
	$90,000; $40,000.
	$57,857; $77,143.
	$92,500; $42,500.
	$35,000; $100,000.

	Shelby	Mortonson	Total
Net income			$135,000
Salary allowance	$60,000		(60,000)
Interest allowance	30,000	$40,000	(70,000)
Balance of income			5,000
Balance divided equally	2,500	2,500	(5,000)
Total	$92,500	$42,500	$         0

Nguyen invested $100,000 and Hansen invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Nguyen and a $40,000 per year salary allowance to Hansen, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Under this agreement, the shares of the partners when the partnership earns $105,000 in income are:

	$70,000 to Nguyen; $60,000 to Hansen.
	$42,500 to Nguyen; $62,500 to Hansen.
	$52,500 to Nguyen; $52,500 to Hansen.
→	$57,500 to Nguyen; $47,500 to Hansen.
	$35,000 to Nguyen; $70,000 to Hansen.

	Nguyen	Hansen	Total
Net income			$105,000
Salary allowance	$60,000	$40,000	(100,000)
Interest allowance	10,000	20,000	(30,000)
Balance of income			(25,000)
Balance divided equally	(12,500)	(12,500)	25,000
Total	$57,500	$47,500	$          0

When a partner is added to a partnership:

	The partnership equity always increases.
	The underlying business operations end.
	The partnership must continue.
	The underlying business operations must close and then re-open.
→	The previous partnership ends.

Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes $150,000, and Krug contributes $270,000. Their partnership agreement calls for the income or loss division to be based on the ratio of capital invested. If the partnership reports income of $175,000 for its first year, what amount of income is credited to Smith's capital account? (Do not round your intermediate calculations.)

	$43,750.
	$52,500.
	$60,000.
	$58,333.
	$78,750.

$180,000/$600,000 = .30
.30 × $175,000 = $52,500

Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes $150,000, and Krug contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's capital balances with the remaining income or loss to be allocated equally. If the partnership reports income of $174,000 for its first year, what amount of income is credited to Krug's capital account?

	$61,500.
	$48,000.
	$58,000.
	$55,500.
	$57,000.

$600,000 x .05 = $30,000 for interest allowance
$174,000 - $30,000 = $144,000/3 = $48,000 remainder divided equally
$270,000 x .05 = $13,500 interest allowance for Krug
$13,500 + $48,000 = $61,500

Chase and Hatch are partners and share equally in income or loss. Chase's current capital balance is $135,000 and Hatch's is $120,000. Chase and Hatch agree to accept Flax with a 30% interest in the partnership. Flax invests $115,000 in the partnership. The balances in Chase's and Hatch's capital accounts after admission of the new partner equal:

	Chase $135,000; Hatch $120,000.
	Chase $135,000; Hatch $124,000.
	Chase $133,000; Hatch $118,000.
	Chase $137,000; Hatch $122,000
	Chase $139,000; Hatch $120,000.

$135,000 + $120,000 + $115,000 = $370,000 x .30 = $111,000
$115,000 - $111,000 = $4,000/2 = $2,000 bonus to each partner
$135,000 + $2,000 = $137,000
$120,000 + $2,000 = $122,000

Jane and Castle are partners and share equally in income or loss. Jane's current capital balance is $140,000 and Castle's is $130,000. Jane and Castle agree to accept Sean with a 30% interest in the partnership. Sean invests $108,000 in the partnership. The balances in Jane's and Castle's capital accounts after admission of the new partner equal:

	Jane $142,700; Castle $132,700.
	Jane $140,000; Castle $130,000.
	Jane $135,000; Castle $124,000.
	Jane $145,000; Castle $135,000.
	Jane $137,300; Castle $127,300.

$140,000 + $130,000 + $108,000 = $378,000 x .30 = $113,400
$113,400 - $108,000 = $5,400/2 = $2,700 bonus to new partner absorbed by each partner
$140,000 - $2,700 = $137,300
$130,000 - $2,700 = $127,300

Jane and Castle are partners and share equally in income or loss. Jane's current capital balance is $140,000 and Castle's is $130,000. Jane and Castle agree to accept Sean with a 30% interest in the partnership. Sean invests $108,000 in the partnership. The amount credited to Sean's capital account is:

	$113,400.
	$102,600.
	$115,000.
	$110,500.
	$108,000.

$140,000 + $130,000 + $108,000 = $378,000 x .30 = $113,400

Jane, Castle, and Sean are dissolving their partnership. Their partnership agreement allocates each partner an equal share of all income and losses. The current period's ending capital account balances are Jane, $54,000; Castle, $42,000; and Sean, $(6,000). After all assets are sold and liabilities are paid, there is $90,000 in cash to be distributed. Sean is unable to pay the deficiency. The journal entry to record the distribution should be:

	Debit Cash $90,000; credit Jane, Capital $30,000; credit Castle, Capital $30,000; credit Sean, Capital $30,000.
	Debit Jane, Capital $51,000; debit Castle, Capital $39,000; credit Cash $90,000.
	Debit Cash $90,000, debit Sean, Capital $6,000, credit Jane, Capital $54,000, credit Castle, Capital $42,000.
	Debit Jane, Capital $54,000; debit Castle, Capital $36,000; credit Cash $90,000.
	Debit Jane, Capital $54,000; debit Castle, Capital $42,000; credit Cash $96,000.

		Capital
	Cash	Jane	Castle	Sean
	$90,000	$54,000	$42,000	$(6,000)
Allocate deficiency		(3,000)	(3,000)	6,000
Allocate cash	(90,000)	(51,000)	(39,000)	0

Nee High and Low Jack are partners in an accounting firm and share net income and loss equally. High's beginning partnership capital balance for the current year is $285,000, and Jack's beginning partnership capital balance for the current year is $370,000. The partnership had net income of $250,000 for the year. High withdrew $90,000 during the year and Jack withdrew $100,000. What is High's return on equity?

	43.9%
	33.8%
	32.7%
	41.3%
	36.5%

$285,000 + $125,000 - $90,000 = $320,000 ending capital
$125,000/[($285,000 + $320,000)/2] = 41.3%

The board of directors of a corporation:

	Are elected by the corporate registrar.
	Are responsible for day-to-day operations of the business.
	Do not have the power to bind the corporation to contracts, due to lack of mutual agency.
	May not also be executive officers of the corporation, due to the separate entity principle.
	Are responsible for and have final authority for managing corporate activities.

Par value of a stock refers to the:

	Issue price of the stock.
	Value assigned per share of stock by the corporate charter.
	Market value of the stock on the date of the financial statements.
	Maximum selling price of the stock.

When all of the authorized shares have the same rights and characteristics, the stock is called

	Preferred stock.
	Common stock.
	Par value stock.
	Stated value stock.
	No-par value stock.

A corporation's minimum legal capital is established by recording the par or stated value of the number of shares:

→	Issued.
	Authorized.
	Subscribed.
	Outstanding.
	In treasury.

Owners of preferred stock often do not have:

	Ownership rights to assets of the corporation.
→	Voting rights.
	Preference to dividends.
	The right to sell their stock on the open market.
	Preference to assets at liquidation.

Prior period adjustments are reported in the:

	Multiple-step income statement.
	Balance sheet.
	Statement of retained earnings.
	Statement of cash flows.
	Single-step income statement.

A company has net income of $850,000. It has 125,000 weighted-average common shares outstanding, a market value per share of $115, and a book value of $100 per share. The company's price-earnings ratio equals:

	16.9.
	14.7.
	92.0.
	13.5.
	8.0.

$115/($850,000/125,000 shares) = 16.9

Stocks that pay relatively large cash dividends on a regular basis are called:

	Small capital stocks.
	Mid capital stocks.
	Growth stocks.
	Large capital stocks.
	Income stocks.

A company paid $0.75 in cash dividends per share. Its earnings per share is $3.50, and its market price per share is $37.50. Its dividend yield equals:

	4.7%.
	2.0%.
	9.3%.
	21.4%.
	46.7%.

$0.75/$37.50 = 2%

A company has 40,000 shares of common stock outstanding. The stockholders' equity applicable to common shares is $470,000, and the par value per common share is $10. The book value per share is:

	$0.09.
	$1.75.
	$10.00.
	$11.75.
	$47.50.

$470,000/40,000 shares = $11.75 per share

A company has 500 shares of $50 par value preferred stock outstanding, and the call price of its preferred stock is $60 per share. It also has 20,000 shares of common stock outstanding, and the total value of its stockholders' equity is $680,000. The company's book value per common share equals:

	$31.71.
→	$32.50.
	$32.75.
	$33.17.
	$60.00.

($680,000 - (500 preferred shares x $60))/20,000 common shares = $32.50/common share

A corporation sold 14,000 shares of its $10 par value common stock at a cash price of $13 per share. The entry to record this transaction would include:

	A debit to Paid-in Capital in Excess of Par Value, Common Stock for $42,000.
	A debit to Cash for $140,000.
	A credit to Common Stock for $182,000.
→	A credit to Common Stock for $140,000.
	A credit to Paid-in Capital in Excess of Par Value, Common Stock for $182,000.

A corporation issued 6,000 shares of its $10 par value common stock in exchange for land that has a market value of $84,000. The entry to record this transaction would include:

	A debit to Common Stock for $60,000.
	A debit to Land for $60,000.
	A credit to Land for $60,000.
	A credit to Paid-in Capital in Excess of Par Value, Common Stock for $24,000.
	A credit to Common Stock for $84,000.

A company issued 60 shares of $100 par value stock for $7,000 cash. The total amount of paid-in capital in excess of par is:

	$100.
	$600.
	$1,000.
	$6,000.
	$7,000.

A corporation issued 5,000 shares of $10 par value common stock in exchange for some land with a market value of $60,000. The entry to record this exchange is:

	Debit Land $60,000; credit Common Stock $50,000; credit Paid-In Capital in Excess of Par Value, Common Stock $10,000.
	Debit Land $60,000; credit Common Stock $60,000.
	Debit Land $50,000; credit Common Stock $50,000.
	Debit Common Stock $50,000; debit Paid-In Capital in Excess of Par Value, Common Stock $10,000; credit Land $60,000.
	Debit Common Stock $60,000; credit Land $60,000.

A company's board of directors votes to declare a cash dividend of $.75 per share. The company has 15,000 shares authorized, 10,000 issued, and 9,500 shares outstanding. The total amount of the cash dividend is:

	$10,250.
	$14,625.
	$7,125.
	$7,500.
	$11,250.

$0.75 x 9,500 shares = $7,125

A corporation had 50,000 shares of $20 par value common stock outstanding on July 1. Later that day the board of directors declared a 10% stock dividend when the market value of each share was $27. The entry to record this dividend is:

	Debit Retained Earnings $135,000; credit Common Stock Dividend Distributable $135,000.
	Debit Retained Earnings $135,000; credit Cash $135,000.
→	Debit Retained Earnings $135,000; credit Common Stock Dividend Distributable $100,000; credit Paid-In Capital in Excess of Par Value, Common Stock $35,000.
	Debit Retained Earnings $100,000; credit Common Stock Dividend Distributable $100,000.
	No entry is made until the stock is issued.

Retained earnings: 50,000 shares x 10% x $27 = $135,000
Common Stock Dividend Distributable: 50,000 shares x 10% x $20 = $100,000
Paid-in Capital in Excess of Par Value, Common Stock: 50,000 shares x 10% x $7 = $35,000

A corporation had 10,000 shares of $10 par value common stock outstanding when the board of directors declared a stock dividend of 3,000 shares. At the time of the stock dividend, the market value per share was $12. The entry to record this dividend is:

	Debit Retained Earnings $36,000; credit Common Stock Dividend Distributable $36,000.
	Debit Retained Earnings $36,000; credit Common Stock Dividend Distributable $30,000; credit Paid-In Capital in Excess of Par Value, Common Stock $6,000.
	Debit Common Stock Dividend Distributable $36,000; credit Retained Earnings $36,000.
→	Debit Retained Earnings $30,000; credit Common Stock Dividend Distributable $30,000.
	No entry is needed.

3,000/10,000 shares = large stock dividend of 30%. Large stock dividends are recorded at par value (3,000 shares x $10)

Corporations often buy back their own stock:

	To avoid a hostile take-over.
	To have shares available for a merger or acquisition.
	To have shares available for employee compensation.
	To maintain market value for the company stock.
	All of these.

A company declared a $0.55 per share cash dividend. The company has 200,000 shares authorized, 190,000 shares issued, and 8,000 shares in treasury stock. The journal entry to record the dividend declaration is:

	Debit Retained Earnings $104,500; credit Common Dividends Payable $104,500.
	Debit Common Dividends Payable $104,500; credit Cash $104,500.
	Debit Retained Earnings $100,100; credit Common Dividends Payable $100,100.
	Debit Common Dividends Payable $100,100; credit Cash $100,100.
	Debit Retained Earnings $110,000; credit Common Dividends Payable $110,000.

$0.55 x (190,000-8,000) shares = $100,100

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

	Convertible bonds.
	Sinking fund bonds.
	Callable bonds.
	Serial bonds.
	Junk bonds.

Secured bonds:

	Are called debentures.
	Have specific assets of the issuing company pledged as collateral.
	Are backed by the issuer's bank.
	Are subordinated to those of other unsecured liabilities.
	Are the same as sinking fund bonds.

The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n):

	Debenture.
	Bond indenture.
	Mortgage.
	Installment note.
	Mortgage contract.

Bonds that mature at different dates with the result that the entire principal amount is repaid gradually over a number of periods are known as:

	Registered bonds.
	Bearer bonds.
	Callable bonds.
	Sinking fund bonds.
	Serial bonds.

To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by:

	Safe deposit boxes.
→	Mortgages.
	Equity.
	The FASB.
	Debentures.

A pension plan

	Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
	Can be underfunded if the accumulated benefit obligation is more than the plan assets.
	Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients.
	Can be a defined benefit plan in which future benefits are set, but the employer's contributions vary depending on assumptions about future pension assets and liabilities.
	All of these.

An advantage of bond financing is:

	Bonds do not affect owners' control.
	Interest on bonds is tax deductible.
	Bonds can increase return on equity.
	It allows firms to trade on the equity.
→	All of these.

A bondholder that owns a $1,000, 10%, 10-year bond has:

	Ownership rights in the issuing company.
	The right to receive $10 per year until maturity.
	The right to receive $1,000 at maturity.
	The right to receive $10,000 at maturity.
	The right to receive dividends of $1,000 per year.

The debt-to-equity ratio:

	Is calculated by dividing book value of secured liabilities by book value of pledged assets.
	Is a means of assessing the risk of a company's financing structure.
	Is not relevant to secured creditors.
	Can always be calculated from information provided in a company's income statement.
	Must be calculated from the market values of assets and liabilities.

A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 8%. The amount of interest owed to the bondholders for each semiannual interest payment is:

	$60,000.
	$33,750.
	$67,500.
	$30,000.
	$375,000.

$750,000 x .09 x ½ year = $33,750

On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months.
The amount of interest expense recognized by Drum Line Airways on the bond issue in Year 1 would be:

	$132,500.
	$225,000.
→	$265,000.
	$245,000.
	$280,000.

Cash paid every six months = ($3,500,000 x 7% x 6/12) or $122,500.
Discount amortization every six months = $10,000.
($122,500 + $10,000) x 2 = $265,000.

A company issued 5-year, 7% bonds with a par value of $100,000. The company received $97,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is (closest to):

	$3,294.70.
	$3,500.00.
→	$3,705.30.
	$7,000.00.
	$7,410.60.

Cash interest paid: $100,000 x .07 x ½ year = $3,500
Discount amortization: ($100,000 - $97,947)/10 periods = $205.30
Interest expense = $3,500 + $205.30 = $3,705.30

A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is (closest to):

	$3,500.00.
	$3,673.01.
	$3,705.30.
	$7,000.00.
	$7,346.03.

$97,947 x .075 x ½ year = $3,673.01

Adidas issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is True?

	Adidas must pay $200,000 at maturity and no interest payments.
	Adidas must pay $206,948 at maturity and no interest payments.
	Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
	Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
	Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

If an issuer sells bonds at a date other than an interest payment date:

	This means the bonds sell at a premium.
	This means the bonds sell at a discount.
	The issuing company will report a loss on the sale of the bonds.
	The issuing company will report a gain on the sale of the bonds.
	The buyers normally pay the issuer the purchase price plus any interest accrued since the prior interest payment date.

A company issues at par 9% bonds with a par value of $100,000 on April 1, which is 4 months after the most recent interest date. The cash received for accrued interest on April 1 by the bond issuer is:

	$750.
	$5,250.
	$1,500.
	$3,000.
	$6,000.

$100,000 x .09 x 4/12 year = $3,000

Bonds that give the issuer an option of retiring them before they mature are:

	Debentures.
	Serial bonds.
	Sinking fund bonds.
	Registered bonds.
	Callable bonds.

A company retires its bonds at 105. The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745. The issuer's journal entry to record the retirement will include a:

	Debit to Premium on Bonds.
	Credit to Premium on Bonds.
	Debit to Discount on Bonds.
	Credit to Gain on Bond Retirement.
	Credit to Bonds Payable.

A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is:

	$0.
	$10,000 gain.
	$10,000 loss.
	$22,000 gain.
	$22,000 loss.

Par value	$1,000,000
Unamortized premium (20,000 x 60%)	12,000
Carrying value of bonds	$1,012,000
Retirement price	990,000
Gain on retirement	$   22,000

All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS are True except:

	Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
	Both U.S. GAAP and IFRS require companies to distinguish between operating leases and capital leases.
	The criteria for identifying a lease as a capital lease are more general under IFRS.
	Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.
→	Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS.