6. The X Company has the following stock outstanding: 6% Preferred stock, $100 p

Question

6. The X Company has the following stock outstanding:

6% Preferred stock, $100 par value, cumulative $400,000
Common stock, $50 par value $600,000

Preferred stock dividends are in arrears for 2005 and 2004. If the company declares and pays $75,000 in dividends in 2006, the amount received by the preferred stockholders would be
a. $24,000.
b. $48,000.
c. $72,000.
d. $75,000.


7. On July 1, 2007, Tow Enterprises sold equipment with an original cost of $95,000 for $50,000. The equipment was purchased January 1, 2006, and was depreciated using the straight-line method assuming a five year useful life and $5,000 salvage value. The necessary entries for 2007 include a
a. debit to Accumulated Depreciation—Equipment for $18,000.
b. credit to Gain on Sale of Equipment for $18,000.
c. credit to Cash for $50,000.
d. debit to Depreciation Expense for $9,000.


8. Equipment was purchased for $17,000. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $3,940.
b. $3,340.
c. $2,860.
d. $2,800.

Explanation / Answer

6. b) $48,000 is the correct answer. 6% preferred stock ,$100 par value ,cumulative $400,000 Dividend= $400,000*6/100= $24,000 Two years dividends of 2004 and 2005 arrears are paid in 2006 Hence, the dividends are $24,000*2= $48,000 7. d) debit to Depreciation Expense for $9,000 is the correct answer. Depreciation = Cost of Asset-Salvage/Estimated life period of the asset Depreciation = $95,000-5,000/5=18,000 per year For the year 2007 Depreciation expenses for six months $9,000 8. b) 3,340 is the correct answer. Depreciation=17,000+700+2,000-3,000/5 Depreciation=19,700-3,000/5 Depreciation=16,700/5 Depreciation=$3,340

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