Principles of Accounting – Quiz 4 Study Guide: Step-by-Step Guidance

Q1. Which characteristic of a corporation is a disadvantage?

Background

Topic: Corporate Structure and Characteristics

This question tests your understanding of the advantages and disadvantages of the corporate form of business organization.

Key Terms:

• Mutual agency: The ability of each partner to act as an agent of the partnership.

• Double taxation: Corporate profits are taxed at the corporate level and again as shareholder dividends.

• Limited liability: Shareholders are not personally liable for corporate debts.

Step-by-Step Guidance

1. Review the definitions of each characteristic listed in the options.

2. Recall which characteristics are typically considered advantages (e.g., limited liability) and which are disadvantages (e.g., double taxation).

3. Identify which characteristic is unique to corporations and is generally viewed as a disadvantage compared to other business forms.

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Q2. The two basic sources of stockholders’ equity are:

Background

Topic: Stockholders’ Equity

This question tests your knowledge of the components that make up stockholders’ equity on the balance sheet.

Key Terms:

• Paid-in capital: Amounts invested by shareholders.

• Retained earnings: Cumulative net income not distributed as dividends.

Step-by-Step Guidance

1. Recall the definition of stockholders’ equity and its main components.

2. Review the difference between paid-in capital and retained earnings.

3. Eliminate options that do not represent sources of equity (e.g., assets, dividends).

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Q3. A company’s own stock that it has issued and repurchased is called:

Background

Topic: Treasury Stock

This question tests your understanding of the terminology related to a corporation’s equity transactions.

Key Terms:

• Treasury stock: Shares issued and later reacquired by the issuing corporation.

• Outstanding stock: Shares currently held by shareholders.

Step-by-Step Guidance

1. Review the definitions of treasury stock, outstanding stock, and issued stock.

2. Consider what happens when a company buys back its own shares.

3. Match the correct term to the definition provided in the question.

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Q4. Assume that a company paid $6 per share to purchase 1,100 shares of its $3 par common stock as treasury stock. The purchase of treasury stock:

Background

Topic: Treasury Stock Transactions

This question tests your ability to analyze the effect of treasury stock transactions on total equity.

Key Formula:

$\text{Treasury Stock Purchase} = \text{Number of Shares} \times \text{Purchase Price per Share}$

Step-by-Step Guidance

1. Calculate the total cost of the treasury stock purchase ($1,100 \times $6).

2. Recall how treasury stock transactions affect total equity (they reduce it).

3. Compare the calculated amount to the answer choices to determine the effect on equity.

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Q5. Winston Corporation has 9,000 shares of 4%, $10 par cumulative preferred stock and 47,000 shares of common stock outstanding. Winston Corporation declared no dividends in 2024 and had no dividends in arrears prior to 2024. In 2025, Winston Corporation declares a total dividend of $54,000. How much of the dividends go to the common stockholders?

Background

Topic: Preferred and Common Stock Dividends

This question tests your ability to allocate dividends between preferred and common shareholders, especially with cumulative preferred stock.

Key Formula:

$\text{Preferred Dividend per Year} = \text{Number of Shares} \times \text{Par Value} \times \text{Dividend Rate}$

Step-by-Step Guidance

1. Calculate the annual preferred dividend: $9,000 \times $10 \times 4\%$.

2. Since no dividends were paid in 2024, determine the total preferred dividends owed for both 2024 and 2025.

3. Subtract the total preferred dividends from the $54,000 declared to find the amount available for common shareholders.

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Q6. Par value of a stock refers to the ________.

Background

Topic: Stock Terminology

This question tests your understanding of the meaning of par value in corporate stock.

Key Terms:

• Par value: The nominal value assigned to shares by the corporate charter.

Step-by-Step Guidance

1. Review the definition of par value and how it differs from market value or issue price.

2. Eliminate options that do not match the definition of par value.

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Q7. Stockholders’ equity consists of which of the following?

Background

Topic: Stockholders’ Equity Components

This question tests your knowledge of what makes up stockholders’ equity on the balance sheet.

Key Terms:

• Retained earnings: Accumulated net income not distributed as dividends.

• Paid-in capital: Amounts invested by shareholders.

Step-by-Step Guidance

1. Recall the two main components of stockholders’ equity.

2. Eliminate options that include liabilities or non-equity accounts.

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Q8. Swell Company has a lawsuit pending from a customer claiming damages of $100,000. Swell Company’s attorney advises that the likelihood the customer will win is remote. GAAP requires at a minimum that this contingent liability be:

Background

Topic: Contingent Liabilities and GAAP Disclosure

This question tests your understanding of how to account for and disclose contingent liabilities under GAAP.

Key Terms:

• Contingent liability: A potential obligation dependent on a future event.

• Remote likelihood: The chance of the event occurring is very low.

Step-by-Step Guidance

1. Recall the three likelihood categories for contingent liabilities: probable, reasonably possible, and remote.

2. Review GAAP requirements for disclosure or recognition based on likelihood.

3. Determine the minimum disclosure required for a remote likelihood.

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Q9. What is a stock split?

Background

Topic: Stock Splits

This question tests your understanding of what happens during a stock split and how it affects shares and value.

Key Terms:

• Stock split: An increase in the number of shares with a proportional decrease in par value per share.

Step-by-Step Guidance

1. Review the definition and purpose of a stock split.

2. Eliminate options that describe dividends or changes in total value rather than share quantity.

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Q10. What is the correct entry for the sale of 500 shares of $5 par common stock for $3,000?

Background

Topic: Journal Entries for Stock Issuance

This question tests your ability to prepare the correct journal entry for issuing stock above par value.

Key Formula:

$\text{Paid-in Capital in Excess of Par} = \text{Cash Received} - (\text{Number of Shares} \times \text{Par Value})$

Step-by-Step Guidance

1. Calculate the total par value: $500 \times $5$.

2. Calculate the cash received: $3,000.

3. Determine if there is any paid-in capital in excess of par.

4. Match the correct journal entry format to the calculations above.

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Q11. Which of the following is not a required payroll deduction?

Background

Topic: Payroll Accounting

This question tests your understanding of mandatory versus voluntary payroll deductions.

Key Terms:

• Required deductions: Social Security, Medicare, federal income tax.

• Voluntary deductions: Retirement plan contributions, health insurance, etc.

Step-by-Step Guidance

1. Review which payroll deductions are required by law.

2. Identify which deduction in the list is typically voluntary.

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Q12. The board of directors of Company XYZ declared a cash dividend of $3 for its 10,000 shares of outstanding common stock. The correct journal entry to be recorded is:

Background

Topic: Dividends and Journal Entries

This question tests your ability to prepare the correct journal entry for a cash dividend declaration.

Key Formula:

$\text{Total Dividend} = \text{Dividend per Share} \times \text{Number of Shares}$

Step-by-Step Guidance

1. Calculate the total dividend: $3 \times 10,000$.

2. Recall the accounts affected when a dividend is declared (Cash Dividends and Dividends Payable).

3. Match the correct journal entry format to the calculation above.

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Q13. Corrieten Company purchased equipment and incurred these costs: Cash price $24,000, Sales taxes $1,200, Insurance during transit $200, Installation and testing $400. What amount should be recorded as the cost of the equipment?

Background

Topic: Acquisition Cost of Equipment

This question tests your understanding of what costs should be capitalized as part of the equipment’s cost.

Key Formula:

$\text{Total Equipment Cost} = \text{Cash Price} + \text{Sales Taxes} + \text{Insurance During Transit} + \text{Installation and Testing}$

Step-by-Step Guidance

1. Add all costs that are necessary to acquire the equipment and prepare it for use.

2. Sum the cash price, sales taxes, insurance during transit, and installation/testing costs.

3. Compare your total to the answer choices.

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Q14. Which method almost always produces the most depreciation in the first year?

Background

Topic: Depreciation Methods

This question tests your understanding of different depreciation methods and their effects on expense recognition.

Key Terms:

• Straight-line: Spreads cost evenly over useful life.

• Units-of-production: Based on usage.

• Double-declining-balance: Accelerated method, higher expense in early years.

Step-by-Step Guidance

1. Recall how each method calculates depreciation expense.

2. Identify which method is considered an accelerated depreciation method.

3. Determine which method results in the highest first-year expense.

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Q15. After a 2-for-1 split, a share trading at $150 would now trade at:

Background

Topic: Stock Splits and Market Price

This question tests your understanding of how a stock split affects the market price per share.

Key Formula:

$\text{New Price per Share} = \frac{\text{Old Price per Share}}{\text{Split Ratio}}$

Step-by-Step Guidance

1. Identify the split ratio (2-for-1 means each share becomes two shares).

2. Divide the old price by the split ratio to find the new price per share.

3. Compare your result to the answer choices.

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Q16. Which of the following items should be included in the cost of a newly purchased machine?

Background

Topic: Capitalization of Asset Costs

This question tests your understanding of which costs are capitalized as part of an asset’s cost.

Key Terms:

• Capitalized costs: All costs necessary to acquire and prepare the asset for use.

Step-by-Step Guidance

1. Review which costs are included in the acquisition cost of equipment (purchase price, shipping, installation).

2. Eliminate costs that are not capitalized (e.g., annual maintenance fees).

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Q17. A company constructs a new office building with the following costs: Architect fees: $30,000; Building permits: $5,000; Construction materials and labor: $800,000; Interest expense on loan to construct the building: $4,000; Removing old buildings and debris: $15,000; Annual insurance after occupancy: $6,000. What is the total cost that should be capitalized as part of the building?

Background

Topic: Capitalization of Building Costs

This question tests your ability to determine which costs should be included in the cost of a constructed asset.

Key Formula:

$\text{Total Capitalized Cost} = \text{Sum of all costs necessary to construct and prepare the building for use}$

Step-by-Step Guidance

1. Add all costs incurred before the building is ready for use (architect fees, permits, materials, labor, interest during construction, removal of old buildings).

2. Exclude costs incurred after the building is in use (annual insurance after occupancy).

3. Sum the included costs and compare to the answer choices.

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Q19. A company purchases a plot of land for $150,000. It incurs the following additional costs: Legal fees for title: $3,000; Cost of demolishing an old building: $12,000; Grading and leveling: $5,000; Installing a parking lot: $25,000; Planting decorative shrubs: $4,000. What amount should be recorded as the cost of the land (not including land improvements)?

Background

Topic: Land and Land Improvements

This question tests your understanding of which costs are included in the cost of land versus land improvements.

Key Formula:

$\text{Land Cost} = \text{Purchase Price} + \text{Legal Fees} + \text{Demolition} + \text{Grading and Leveling}$

Step-by-Step Guidance

1. Add all costs necessary to prepare the land for its intended use (purchase price, legal fees, demolition, grading).

2. Exclude costs that are considered land improvements (parking lot, decorative shrubs).

3. Sum the included costs and compare to the answer choices.

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Problem 1: Rags-to-Riches Payroll Calculations

Background

Topic: Payroll Accounting and Payroll Tax Calculations

This problem tests your ability to calculate gross pay, payroll deductions, net pay, and employer payroll tax accruals for an employee with overtime and various deductions.

Key Formulas:

• $\text{Gross Pay} = (\text{Regular Hours} \times \text{Hourly Rate}) + (\text{Overtime Hours} \times \text{Overtime Rate})$

• $\text{Overtime Rate} = 1.5 \times \text{Hourly Rate}$

• $\text{FICA-OASDI} = \text{Gross Pay} \times 6.2\%$

• $\text{FICA-Medicare} = \text{Gross Pay} \times 1.45\%$

• $\text{Income Tax} = \text{Gross Pay} \times 20\%$

• $\text{Health Insurance} = \text{Gross Pay} \times 3\%$

• $\text{Net Pay} = \text{Gross Pay} - \text{Total Deductions}$

Step-by-Step Guidance

1. Calculate regular and overtime hours worked (regular = 40, overtime = 10).

2. Compute gross pay using the hourly and overtime rates.

3. Calculate each deduction (FICA-OASDI, FICA-Medicare, income tax, charitable contribution, health insurance).

4. Sum all deductions to find total deductions.

5. Subtract total deductions from gross pay to find net pay.

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Problem 1 (continued): Employer Payroll Taxes Accrual

Background

Topic: Employer Payroll Tax Accounting

This part tests your ability to calculate the employer’s payroll tax and benefit accruals related to the employee’s gross pay.

Key Formulas:

• $\text{Employer FICA-OASDI} = \text{Gross Pay} \times 6.2\%$

• $\text{Employer FICA-Medicare} = \text{Gross Pay} \times 1.45\%$

• $\text{State Unemployment} = \text{Gross Pay up to first $7,000} \times 5.4\%$

• $\text{Federal Unemployment} = \text{Gross Pay up to first $7,000} \times 0.6\%$

• $\text{Employer Health Insurance} = \text{Gross Pay} \times 3\%$

Step-by-Step Guidance

1. Calculate each employer payroll tax and benefit based on gross pay and the applicable rates.

2. Sum all employer payroll taxes and benefits to find the total employer payment.

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Problem 1 (continued): Payroll Journal Entries

Background

Topic: Payroll Journal Entries

This part tests your ability to record the payroll expense, withholdings, and employer payroll tax accruals in the accounting records.

Key Steps:

1. Prepare the journal entry to accrue salaries and wages expense, showing gross pay, deductions, and net pay.

2. Prepare the journal entry for the employer’s payroll tax expense, showing the breakdown of each tax and benefit.

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Problem 2: ABC Company Stock and Dividend Transactions

Background

Topic: Stock Issuance and Dividend Journal Entries

This problem tests your ability to journalize stock issuances, dividend declarations, and non-cash asset acquisitions.

Key Formulas:

• $\text{Cash from Stock Issuance} = \text{Number of Shares} \times \text{Issue Price}$

• $\text{Paid-in Capital in Excess of Par} = \text{Cash Received} - (\text{Number of Shares} \times \text{Par Value})$

• $\text{Dividend Declaration Entry:}$ Debit Cash Dividends, Credit Dividends Payable

Step-by-Step Guidance

1. For each transaction, identify the accounts affected and the amounts based on the details provided.

2. Prepare the journal entry for each transaction, showing debits and credits for cash, stock, paid-in capital, dividends, and equipment as appropriate.

3. For non-cash transactions (e.g., issuing stock for equipment), use the fair value of the asset received.

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Problem 3: Depreciation Schedules for Machines A and B

Background

Topic: Depreciation Methods and Schedules

This problem tests your ability to calculate depreciation expense, accumulated depreciation, and book value using both the double-declining-balance and straight-line methods.

Key Formulas:

• Double-Declining-Balance (DDB): $\text{Depreciation Expense} = \text{Book Value at Beginning of Year} \times \frac{2}{\text{Useful Life}}$

• Straight-Line: $\text{Depreciation Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}$

Step-by-Step Guidance

1. For Machine A, calculate the DDB depreciation expense for each year, update accumulated depreciation and book value.

2. For Machine B, calculate the straight-line depreciation expense for each year, update accumulated depreciation and book value.

3. Prepare the journal entry for Machine A’s depreciation expense for 2020.

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