Question

Hello, please answer these 4 questions as I have an exam and am trying to review thoroughly! Please explain to the best of detail too! Thank you!

1)

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be

	a.	Disclosed and reported as a liability.
	b.	Reported as a liability, but not disclosed.
	c.	Disclosed, but not reported as a liability.
	d.	Neither disclosed nor reported as a liability.

2)

A company uses the aging method and has the following receivables and estimates of uncollectible accounts at the end of the year before any adjusting entries:

Due date Receivable Estimate of Uncollectible

Not yet due $9,000 7%

Less than 30 days past due $1,600 15%

Greater than 30 days past due $1,600 40%

What amount will be reported in the balance sheet for the allowance for uncollectible accounts, assuming the balance of this account is $400 (credit) before adjustment?

	a.	$1,910.
	b.	$1,510.
	c.	$400.
	d.	$1,110.
	e.	$480.

3)

A company purchased equipment for $80,000 on January 1, 2015. The equipment is expected to have a ten-year life, with a residual value of $8,000 at the end of ten years. Using the straight-line method, depreciation expense for 2016 would be:

	a.	$7,200
	b.	$8,000
	c.	$12,000
	d.	$16,000
	e.	$14,400

4)

The balance sheet of Company 1 shows book value of assets of $85,400 and liabilities of $14,200. The fair value of the assets is $89,200, and the fair value of its liabilities is $14,200. Company 2 paid Company 1 $83,620 to acquire it. Company 2 should record goodwill on this purchase of:

	a.	$0.
	b.	$1,780
	c.	$5,300
	d.	$8,620
	e.	$12,420

Answer 1

1) As the loss contingency is reasonably possible, it is disclosed but not accrued. The only loss contingency that is accrued is probable and reasonably estimable.

The answer is C.

2) Allowance for uncollectible for the year = ($9,000 * 7%) + ($1,600 * 15%) + ($1,600 * 40%)

= $630 + $240 + $640

= $1,510

Ending allowance for uncollectible accounts(reported in the balance sheet) = Balance before adjustment + Allowance for uncollectible for the year

= $1,510 + $400

= $1,910

The answer is A.

3) Depreciation each year under the Straight line method = (Cost - Residual value) / Estimated useful life

= ($80,000 - $8,000) / 10

= $7,200

The answer is A.

4) Fair value of Assets less Liabilities

= $89,200 - $14,200

= $75,000

Goodwill = Amount paid - Fair value of assets less liabilities

= $83,620 - $75,000

= $8,620

The answer is D.