Question

11-15

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

True

False

ABC, Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2010. What is the annual dividend on the preferred stock?

		$50 per share
		$5,000 in total
		$500 in total
		$0.50 per share

Equipment was purchased for $75,000. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

		$17,700
		$14,700
		$12,300
		$12,000

Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts.

True

False

Cash flows from investing activities are the cash flows from transactions that affect the debt and equity of the company.

True

False

Answer 1

Solution:

(1) True

Explanation : bond interest is charge against profit and dividend is appropriation of profit.

(2)$5,000 in total

Working : preferred dividends = $100 x 5% x 1000

= $5,000

(3)$14,700

Working:

Total cost = $75,000 + $3,500 + $10,000 = $88,500

Annual depreciation = ( Total cost - salvage value)/ useful life

= ( $88,500 - $15,000) / 5 = $14,700

(4) False

Explanation : Receivables are valued and reported in the balance sheet at their net amount after all sales returns and allowances and less any cash discounts.

(4)True

Explanation : if assets purchased on credit I affect debt if on cash then equity.