Test #3 Ch. 8

Flashcard maker : Lily Taylor
Liabilities that are due and payable beyond one year or paid out of noncurrent assets are termed long-term liabilities.
True
During the first year of operations, a company granted warranties on its products. The estimated cost of the product warranty liability at the end of the year is $12,750. The product warranty expense of $12,750 should be recorded in the year the related product sale is made.
True
Obligations that depend on future events and are based on past transactions are contingent liabilities.
True
Obligations that depend on past events and that are based on future transactions are contingent liabilities.
False
In order to record a contingent liability, the liability must be probable and reasonably estimated.
True
The total earnings of an employee for a payroll period is referred to as the net pay.
False
The total earnings of an employee for a payroll period is referred to as gross pay
True
Most employers are required to withhold a portion of the earnings of each employee for FICA tax
True
If prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are $75,200, earnings subject to social security tax are $106,800, and the tax rate is 7.5%, the employer’s social security tax on the $800 gross earnings paid on the last day of the year is $60
True
Most employers are required to withhold federal unemployment taxes from employee earnings
False
FICA tax is a payroll tax that is paid by both the employee and the employer.
True
FICA tax is a payroll tax that is paid only by employers.
False
Federal unemployment compensation tax is a tax that is paid only by employers.
True
Medicare taxes are withheld from an employee’s pay only until the employee has earned a specific amount each year.
False
Medicare taxes are paid by both the employee and the employer.
True
Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs.
True
Federal unemployment compensation tax becomes an employer’s liability at the time the employee is paid.
True
FICA tax becomes a liability to the federal government at the time the employees are paid.
True
For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits.
True
During the first year of operations, employees earned vacation pay of $50,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the first year of operations.
True
A bond is simply a form of an interest-bearing note.
True
The prices of bonds are quoted as a percentage of the bonds’ face value.
True
When a corporation issues bonds, it executes a contract with the bondholders known as a bond indenture.
True
When a corporation issues bonds, it executes a contract with the bondholders known as a bond debenture.
False
When the market rate of interest is less than the contract rate for a bond, the bond will sell for a discount.
False
If the market rate of interest is 6% and a corporation’s bonds bear interest at 7%, the bonds will sell at a discount.
False
If the market rate of interest is 8% and a corporation’s bonds bear interest at 7%, the bonds will sell at a premium.
False
If the market rate of interest is 7% and a corporation’s bonds bear interest at 8%, the bonds will sell at a premium.
True
If the market rate of interest is 9% and a corporation’s bonds bear interest at 7%, the bonds will sell at a premium.
False
Bonds are sold at face value when the contract rate is equal to the market rate of interest.
True
The two main sources of stockholders’ equity are investments contributed by stockholders and net income retained in the business.
True
Paid-in capital and retained earnings are the two major categories of stockholders’ equity for a corporation.
True
The par value of common stock is rarely equal to its market value on the date the stock is issued.
True
For accounting purposes, stated value is treated the same way as par value.
True
The issuance of common stock affects both paid-in capital and retained earnings.
False
Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends.
True
The main source of paid-in-capital is from issuing stock.
True
The amount of capital paid in by the stockholders of the corporation is called legal capital.
False
If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 35,000.
True
If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are reacquired, the number of outstanding shares is 19,500.
False
If 50,000 shares are authorized, 35,000 shares are issued, and 1,000 shares are reacquired, the number of outstanding shares is 36,000.
False
If 50,000 shares are authorized, 35,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 33,000.
True
Treasury stock is a contra-equity account.
True
Cash dividends are not paid on shares of treasury stock.
True
The declaration of a cash dividend decreases a corporation’s stockholders’ equity and decreases its assets.
False
The declaration of a cash dividend decreases a corporation’s stockholders’ equity and increases its liabilities.
True
One of the prerequisites usually required to pay a cash dividend is sufficient retained earnings.
True
One of the prerequisites required to pay a cash dividend is formal action by the board of directors.
True
If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $13,500.
True
A 10% stock dividend will increase the number of shares outstanding and the book value per share.
False
The declaration and issuance of a stock dividend does NOT affect the total amount of a corporation’s assets, liabilities, or stockholders’ equity.
True
The declaration of a stock dividend decreases a corporation’s stockholders’ equity and decreases its liabilities.
False
Before a stock dividend can be declared or paid, there must be sufficient cash.
False
A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be 40,000.
True
A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 2,000.
False
The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company’s shares.
False
The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of additional shares, is called a stock split.
True
A corporation has 10,000 shares of $100 par value stock outstanding that has a current market value of $160. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $32.
False
A corporation has 10,000 shares of $25 par value stock outstanding that has a current market value of $100. If the corporation issues a 5-for-1 stock split, the market value of the stock will fall to approximately $20.
True
Bonds payable due in 2020 are reported on the balance sheet as long-term liabilities.
True
If paid-in capital in excess of par–preferred stock is $80,000, preferred stock is $500,000, paid-in capital in excess of par–common stock is $50,000, common stock is $1,000,000, and retained earnings is $230,000, the total stockholders’ equity is $1,860,000.
True
Earnings per common share is one factor that influences the decision to use debt financing or equity financing.
True
What options does a business have when financing operations?
Both debt financing and equity financing
Current liabilities are
due and payable within one year.
Current liabilities are
due and to be paid out of current assets within one year.
Which of the following would most likely be classified as a current liability?
Unearned rent
A current liability is a debt that can reasonably be expected to be paid
within one year.
On June 5 Glover Co. issued a $60,000, 6%, 120-day note payable to Jones Co. How much will Glover Co. have to pay at maturity?
$61,200
Where is interest expense listed on the income statement?
Other expense section
As interest is recorded on an interest-bearing note, the Interest Expense account is
increased; the Interest Payable account is increased
Income tax based on taxable income may differ from the income tax based on “Income before Taxes” on the income statement. Which of the following could be a reason for this difference?
A business may use accelerated depreciation for tax reporting and straight-line for financial reporting purposes.
Which of the following is characteristic of deferred income tax payable?
-Deferred income tax payable is often generated due to timing differences.
-Deferred income tax payable may be either a current or long-term liability
-Deferred income tax payable represents the deferred payment of taxes to later years through tax planning techniques.
The cost of a product warranty should be included as an expense in the
period of the sale of the product.
When are contingent liabilities required to be recorded?
Both the liability must be probable and the amount must be reasonably estimable before the contingent liability is recorded.
The total earnings of an employee for a payroll period are referred to
gross pay.
Gross earnings for a payroll period less payroll deductions are referred to as
net pay.
An employee receives an hourly rate of $27, with time and a half for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; cumulative earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the gross pay for the employee?
$1,323.00
An employee receives an hourly rate of $27, with time and a half for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; cumulative earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the net pay for the employee?
$873.77
An employee receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $300; cumulative earnings for year prior to current week, $90,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the net pay for the employee?
$1,059.75
Prior to the last weekly payroll period of the calendar year, the cumulative earnings of employees A and B are $106,150 and $91,000, respectively. Their earnings for the last completed payroll period of the year are $850 each. The amount of earnings subject to social security tax at 6% is $106,800. All earnings are subject to Medicare tax of 1.5%. Assuming that the payroll will be paid on December 29, what will be the employer’s total FICA tax for this payroll period on the two salary amounts of $850 each?
$115.50
Payroll taxes levied against employees become liabilities
at the time the liability for the employee’s wages is paid.
The par value per share of common stock represents
the monetary amount assigned to each share of stock in the articles of incorporation.
Most employers are required to withhold from employees for
only federal income tax.
Most employers are levied a tax on payrolls for
federal unemployment compensation tax
A bond indenture is
a contract between the corporation issuing the bonds and the bondholders.
The market interest rate related to a bond is also called the
effective interest rate.
When the contract rate of interest on bonds is less than the market rate of interest, the bonds sell at
a discount.
If bonds are issued at a premium, the stated interest rate is
higher than the market rate of interest.
When the contract rate of interest on bonds is higher than the market rate of interest, the bonds sell at
a premium.
If the market rate of interest is greater than the contractual rate of interest, bonds will sell
at a discount.
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount
greater than face value.
When the market rate of interest on bonds is equal to the contract rate, the bonds will sell at
their face value.
The interest rate specified in the bond indenture is called the
contract rate.
If $1,000,000 of 8% bonds are issued at 102, the amount of cash received from the sale is
$1,020,000.
If $1,000,000 of 10% bonds are issued at 98 3/4, the amount of cash received from the sale is
$987,500.
If $4,000,000 of 12% bonds are issued at 103 1/4, the amount of cash received from the sale is
$4,130,000.
Stockholders’ equity
includes retained earnings and paid-in capital.
The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
55,000
The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 75,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
70,000
If a corporation issues only one class of stock, it is called
common stock.
The excess of issue price over par of common stock is termed a(n)
premium.
A company sold 200 shares of common stock with a par vale of $5 at a price of $12 per share. Which section of the statement of cash flows will contain this transaction?
Financing activities
A company sold 200 shares of common stock with a par value of $5 at a price of $13 per share. What is the effect on the accounts of this transaction?
Increase cash $2,600; increase common stock $1,000 and increase paid-in capital $1,600
The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
35,000
Which statement below is NOT a reason for a corporation to buy back its own stock?
To increase the shares outstanding
How is treasury stock shown on the balance sheet?
As a decrease in stockholders’ equity
In which section of the balance sheet would treasury stock be reported?
Stockholders’ equity
A corporation purchases 5,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders’ equity?
Decrease $175,000
Which one of the following is usually NOT necessary in order for a corporation to pay a cash dividend?
Declared dividends
Which of the following is usually NOT a prerequisite to paying a cash dividend?
Market value in excess of par value per share
The liability for a dividend is recorded on which of the following dates?
The date of declaration
What is the effect of a stock dividend on the balance sheet?
No effect on total assets, total liabilities, or total stockholders’ equity
The reduction of par or stated value of stock by issuance of a proportionate number of additional shares is termed a
stock split.
A corporation has 50,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be
200,000 shares.
A corporation has 50,000 shares of $100 par value stock outstanding that has a current market value of $180. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately
$45
The primary purpose of a stock split is to
reduce the market price of the stock per share.
What is one reason to undergo a REVERSE stock split?
To increase the market value of the stock per share.
The major subdivisions of the Stockholders’ Equity section of the balance sheet are
Paid-in Capital and Retained Earnings.
Which of the following accounts is reported in the noncurrent liabilities section of the corporate balance sheet?
Bonds Payable
Significant changes in stockholders’ equity are reported in the
statement of stockholders’ equity
Based on the following information, what is earnings per share?
Common shares outstanding 115,000
Preferred stock dividend declared and paid $40,000
Net income $350,000
$2.70
For the year that just ended, a company reports net income of $1,500,000. There are 500,000 shares authorized, 300,000 shares issued, and 250,000 shares of common stock outstanding. What is the earnings per share?
$6.00

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