D104 Intermediate Accounting II - Set 2 - Part 3

Correct Answer: Debit bonds payable, credit cash and gain on bond redemption

When bonds are redeemed at a discount, the company debits bonds payable for the face value and credits both cash and gain on bond redemption for the discount.

Correct Answer: Recorded as a non-operating item

Extraordinary gains are recorded as non-operating items on the income statement, reflecting their unusual and infrequent nature.

Correct Answer: 20%

The payout ratio is calculated by dividing dividends by net income, giving a payout ratio of 20% ($200,000 $1,000,000).

Correct Answer: Assigning a pro rata portion of all overhead to the asset

Self-constructed assets are assigned a portion of indirect costs, including overhead, based on a pro rata allocation to the asset.

Correct Answer: Debit paid-in capital, credit dividends payable

Liquidating dividends are recorded as a reduction in paid-in capital, rather than retained earnings, as they represent a return of capital to shareholders.

Correct Answer: Patent

Intangible assets, such as patents, lack physical substance but provide future economic benefits to the company.

Correct Answer: Activity method

The activity method ties depreciation to the asset's actual usage, making it ideal for assets with variable usage patterns over time.

Correct Answer: The premium increases the carrying amount of the bonds

When bonds are issued at a premium, the premium is added to the face value, increasing the carrying amount of the bonds.

Correct Answer: Recorded as a liability until remitted

Sales tax collected is not considered revenue; it is recorded as a liability until the company remits the funds to the government.

Correct Answer: Do not amortize, but test for impairment annually

Intangible assets with indefinite lives are not amortized, but they must be tested annually for impairment to ensure their carrying value is recoverable.