Accounting Transactions and Depreciation: Practice Questions

Question 1

Selected transactions for Myme Inc. one listed here.

1. Received $50,000 from stockholders.

2. Purchased equipment for $75,000, paying $15,000 in cash and giving a note payable for the remainder.

3. Paid $3,000 rent for the month.

4. Recorded $12,500 of services provided on account.

5. Paid wages of $9,500.

6. Received $7,000 in cash for services provided.

7. Collected $2,000 from customers on account.

Instructions Describe the effect of each transaction on the basic accounting equation. For example, the first answer is (1) Increase in assets $50,000 and increase in stockholders' equity $50,000.

Question 2

Legal Services Inc. was incorporated on July 1, 2017. During the first month of operations, the following transactions occurred. 1.Stockholders invested $10,000 in cash in exchange for common stock of Legal Services Inc.

2.Paid $800 for July rent on office space.

3.Purchased office equipment on account $3,000.

4.Performed legal services for clients for cash $1,500.

5.Borrowed $700 cash from a bank on a note payable.

6.Performed legal services for client on account $2,000.

7.Paid monthly expenses: salaries $500, utilities $300, and advertising $100. Prepare a tabular summary of the transactions.

Include margin explanations for any changes in revenues or expenses. ?

Question 3

Presented below is information related to Conan Real Estate Agency. Oct.

1 Arnold Conan begins business as a real estate agent with a cash investment of $18,000 in exchange for common stock.

2 Hires an administrative assistant.

3 Purchases office equipment for $1,700, on account. 6 Sells a house and lot for B. Clinton; bills B. Clinton $4,200 for realty services performed. 27 Pays $900 on the balance related to the transaction of October 3. 30 Pays the administrative assistant $2,800 in salary for October.

Prepare a tabular summary of the transactions. Include margin explanations for any changes in revenues or expenses.

Question 4

Phill Co. has equipment that cost $50,000 and has been depreciated $30,000. Indicate the accounts increased/decreased for the disposal under the following assumptions.

(a) It was scrapped as having no value.

(b) It was sold for $23,000.

(c) It was sold for $18,000.

Question 5

Presented below are selected transactions for the Tinker Company for 2018. Jan. 1 Retired a piece of equipment that was purchased on January 1, 2008. The equipment cost $75,000 on that date, and had a useful life of 10 years with no salvage value. April 30 Sold equipment for $38,000 that was purchased on January 1, 2015. The equipment cost $105,000, and had a useful life of 5 years with no salvage value. Dec. 31 Discarded equipment that was purchased on June 30, 2014. The equipment cost $42,000 and was depreciated on a 5-year useful life with a salvage value of $2,000. Indicate the accounts required to be increased/decreased as a result of the above transactions. Tinker Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2017.

Question 2

Question 6

Indicate the accounts to be increased/decreased to record the following transactions for Reese Company, which has a calendar year end and uses the straight-line method of depreciation.

(a) On September 30, 2017, the company sold old equipment for $46,000. The equipment was purchased on January 1, 2015, for $96,000 and was estimated to have a $16,000 salvage value at the end of its 5-year life. Depreciation on the equipment has been recorded through December 31, 2016.

(b) On June 30, 2017, the company sold old equipment for $24,000. The equipment originally cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.

Question 7

Mark’s Repair Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2016 July 1 Purchased equipment from the Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250. Nov. 3 Incurred ordinary repairs on computer of $240. Dec. 31 Recorded 2016 depreciation on the basis of a four-year life and estimated salvage value of $455 2017 Dec. 31 Recorded 2017 depreciation. 2018 Jan. 1 Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment. Instructions Identify the accounts to be increased/decreased and the amount of the increase/decrease.

Question 8

Diamond Company is considering investing in new equipment that will cost $1,400,000 with a 10-year useful life. The new equipment is expected to produce annual net income of $90,000 over its useful life. Depreciation expense, using the straight-line rate, is $140,000 per year. Instructions Compute the cash payback period.

Question 9

LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects to use the dock for 5 years, after which it will be sold for $300,000. LakeFront anticipates annual cash flows of $110,000 resulting from the new dock. The company’s borrowing rate is 8%, while its cost of capital is 10%. Instructions Calculate the net present value of the dock and indicate whether LakeFront should make the investment.

Question 10

Mobil Company has hired a consultant to propose a way to increase the company’s revenues. The consultant has evaluated two mutually exclusive projects with the following information provided for each project: Project Turtle Project Snake Capital investment $1,105,000 $625,000 Annual cash flows 180,000 105,000 Estimated useful life 10 years 10 years Mobil Company uses a discount rate of 9% to evaluate both projects. Instructions

(a) Calculate the net present value of both projects.

(b) Calculate the profitability index for each project.

(c) Which project should Mobil accept?