Chapter 5, The Balance Sheet: A Closer Examination Video Solutions, Financial Statements Demystified

Problem 1

According to the matching principle, bad debts expense should appear in the income statement in the time period in which the:
a. Sales revenue was earned
b. Specific customer account balance was written off as uncollectible

Puneet Prajapati

Numerade Educator

Problem 2

Customers owe a company $$\$ 100,000$$. If the company reports accounts receivable (net) of $$\$ 94,000$$ on its balance sheet:
a. The estimated amount the company expects to collect from its receivables is $$\$ 94,000$$.
b. The company has established an allowance for doubtful accounts of $$\$ 6,000$$
c. The company included an estimate of uncollectible accounts in the operating expenses reported in its income statement.
d. All of the above are true.
e. None of the above are true.

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Problem 3

On November 1 , year 1 , a company accepts a $$\$ 2,000,12$$ percent, six-month note receivable from a customer. When preparing its financial statements at December 31, year 1, which of the following is true?
a. $$\$ 40$$ of interest income will be reported in the income statement.
b. $$\$ 40$$ will be included in the accrued receivables in the balance sheet.
c. When the note matures, the company is entitled to collect $$\$ 2,000$$ and $$\$ 120$$ interest.
d. All of the above.
e. None of the above.

Puneet Prajapati

Numerade Educator

Problem 4

Using FIFO, the amounts would be:
a. Cost of goods sold $$\$ 4,400$$ and ending inventory $$\$ 2,500$$
b. Cost of goods sold $$\$ 4,900$$ and ending inventory $$\$ 2,000$$
c. Cost of goods sold $$\$ 4,600$$ and ending inventory $$\$ 2,300$$

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Problem 5

Using LIFO, the amounts would be:
a. Cost of goods sold $$\$ 4,400$$ and ending inventory $$\$ 2,500$$
b. Cost of goods sold $$\$ 4,900$$ and ending inventory $$\$ 2,000$$
c. Cost of goods sold $$\$ 4,600$$ and ending inventory $$\$ 2,300$$

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Problem 6

A cost that is capitalized rather than being expensed immediately is:
a. Included in the cost of a plant asset and will be reflected in depreciation expense later
b. The cost of an addition made to an existing asset, such as a new wing to an office building
c. Significant improvements or substantial repairs/replacements made to an existing asset which are expected to extend its useful life
d. All of the above
e. None of the above

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Problem 7

Equipment was purchased at an original cost of $$\$ 200,000$$. Its useful life is estimated to be 5 years or 600,000 units, and its salvage value is estimated to be $$\$ 50,000$$. Using the straight-line method, year 2 depreciation expense will be:
a. $$\$ 30,000$$
b. $$\$ 40,000$$
c. $$\$ 60,000$$
d. $$\$ 80,000$$

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Problem 8

A company incurred $$\$ 2$$ million of research and development costs which ultimately led to a patent on a new cancer treatment medication, and the patent was registered at a cost of $$\$ 100,000$$. The balance sheet value of the patent will be:
a. $$\$ 2,100,000$$
b. $$\$ 2,000,000$$
c. $$\$ 100,000$$

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Problem 9

All but which of the following are true pertaining to corporate bonds?
a. The issuing corporation must rely on a single lender to raise the money it needs.
b. The principal or maturity value of the bonds will be repaid on a specified future date.
c. The issuing corporation promises to pay a stated amount of interest on the bonds, usually twice a year.
d. The amount the corporation receives at the time of borrowing can be greater or less than the amount it must repay at maturity to adjust for differences in the stated interest rate and the market rates of interest.
e. All of the above are true.

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Problem 10

Which of the following is true regarding a partnership?
a. The partnership entity pays income tax on its profits.
b. Partners can be held personally liable for business debts.
c. Ownership is limited to individual persons only; a partnership cannot be owned by other companies or parties.
d. All of the above are true.
e. None of the above are true.

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