ACC 250 Test 1

1) Describe the accounting for derivatives.

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2) The accounting for transfers of receivables has come under the
scrutiny of standard setters, as has the accounting for transfers
involving inventories and research and development

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3) Both U.S. GAAP and IFRS often refer to ownership of a majority of
the voting stock of another entity as indicating control, unless
evidence indicates that the majority owner cannot exercise control.

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4) Retained earnings on the balance sheet provides a measure of the
cumulative net assets generated by earnings in excess of dividends
declared.

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5) Accounting for the impairment of long-lived assets is complex
because U.S. GAAP and IFRS requirements differ for various assets.

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6) The income statement typically provides information about the
operating results of business segments.

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7) The more long-term debt in a firms capital structure, the less the
risk that the firm will experience difficulty making the required
payments when due.

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8) The transfer of a held-to-maturity investment in debt securities to
either trading securities or securities available-for-sale would
call into question the original designation of that investment.

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9) Under the accrual method, the timing of revenue recognition is
influenced by when the services or product are provided.

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10) Explain the order of assets and liabilities in the balance sheet
under U.S. GAAP and IFRS.

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11) Operating leases are economically similar to purchasing assets with
funds obtained from issuing long-term bonds and result in similar
accounting.

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12) One can analyze the financial health of a business from a single
financial statement considered in isolation such as the balance
sheet.

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13) Describe the effect of the operating and capital lease methods on
the financial statements of the lessee.

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14) Laymans Fine Jewelry uses the LIFO cost flow assumption and has a
beginning inventory which includes four LIFO layers as
follows:

During Year 5, Layman purchased 4,000 units and sold 4,250.
Layman has to decide whether to purchase 250 additional units now
at a price of $140 per unit or wait until February and pay $120 per
unit due to an off-season discount promotion by the supplier.

What is the cash cost to Laymans Fine Jewelry under each
alternative? Assume that the tax rate is a flat 30%.

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15) The annual reports to shareholders must explain the changes in all
shareholders equity accounts.

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16) If the firm offers terms of net 45 days, a days receivable
outstanding of 45 days indicates that the firm handles accounts
receivable well.

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17) Discuss how investors base their investment decisions on the return
anticipated from each investment and the risk associated with that
return.

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18) Other (nonoperating) items follow operating expenses or the
subtotal for operating profit. Most firms reporting under U.S. GAAP
separately report financing costs, such as
A.principal payments
B.interest revenue
C.interest expense
D.principal receipts
E.none of the above

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19) To prepare the statement of cash flows requires analyzing changes
in balance sheet accounts during the accounting period. As an
outcome of correct double-entry recording of all transactions, the
net change in cash will be _____ the net change in all noncash
accounts.
A.greater than
B.less than
C.equal to
D.greater than or be less than
E.greater than or be equal to

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20) U.S. GAAP and IFRS require complex procedures in accounting for
income taxes. A deferred tax asset arises when
A.a firm recognizes an expense earlier for financial reporting than
for tax reporting
B.a firm recognizes an expense earlier for tax reporting than for
financial reporting
C.a firm recognizes a revenue earlier for financial reporting than
for tax reporting
D.a firm recognizes a revenue earlier for tax reporting than for
financial reporting
E.none of the above

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21) U.S. GAAP and IFRS require firms to classify marketable securities
that are neither debt securities held to maturity nor trading
securities as _____.
A.derivative securities
B.noncurrent securities
C.securities not available-for-sale
D.securities available-for-sale
E.marketing making securities

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22) Wheaton Company

Wheaton Company owns an apartment building that originally cost $40
million and by the end of the current period has accumulated
depreciation of $10 million, with net carrying value of $30
million. Wheaton Company had originally expected to collect rentals
of $3.34 million each year for 30 years before selling the building
for $16 million. Unanticipated placement of a new shopping center
has caused Wheaton Company to reassess the future rentals. Wheaton
Company expects the building to provide rentals for only 15 more
years before Wheaton will sell it. Wheaton Company uses a discount
rate of 8% per year in discounting expected rentals from the
building.

Wheaton now expects to receive annual rentals of $1,200,000 per
year for 15 years and to sell the building for $6.0 million after
15 years; these payments, in total, have a present value of $12.2
million when discounted at 8% per year. The buildings fair value is
$11.0 million today and costs to sell are $600,000.

Under U.S. GAAP, Wheaton would record the following entry
A.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 11,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . .10,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 19,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
B.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . .10,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 20,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
C.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . 11,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 19,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
D.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . 12,000,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 18,000,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000
E.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . 10,000,000
Apartment Building (New Valuation) . . . . . . . . . . . . . . . .
. . . 12,200,000
Loss on Impairment. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 17,800,000
Apartment Building (Acquisition Cost) . . . . . . . . . . . . . . .
. . . . . . . . . . 40,000,000

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23) Composite, Inc., a firm specializing in building materials, engaged
in the following transaction during 2013: issued 2,000 shares of
common stock for $7,500 million in cash. Indicate the effects of
the transaction on the balance sheet equation. (Composite Inc.
applies U.S. GAAP financial reporting standards, and reports its
results in millions of dollars.)
A.Liabilities +$7,500 million; Shareholders Equity -$7,500
million
B.Liabilities +$7,500 million; Shareholders Equity +$7,500
million
C.Assets +$7,500 million ; Liabilities +$7,500 million
D.Assets +$7,500 million ; Shareholders Equity +$7,500 million
E.Assets -$7,500 million ; Liabilities -$7,500 million

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24) Marco Insurance

Marco Insurance acquired shares of Penny Systems common stock on
December 28, 2013, for $400,000 and classified them as trading
securities. The fair value of these securities on December 31,
2013, was $402,000. Marco Insurance sold these shares on January 3,
2014, for $405,000.

(Refer to Marco Insurance.) The total income from the purchase and
sale of these securities is
A.$5,000
B.$4,000
C.$3,000
D.$2,000
E.$1,000

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25) Gains and losses on speculative securities, fair value hedges, and
the ineffective portion of cash flow hedges are included in
A.accumulated other comprehensive income each period
B.contributed capital each period
C.net income each period
D.an adjustment to the beginning balance of retained earnings
E.an adjustment to the ending balance of retained earnings

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26) Which of the following are not an example of adjusting entries?
A.recognition of depreciation on equipment purchased during the
year
B.recording the expiration of a portion of the cost of prepaid
insurance that was purchased during the previous year
C.recognition of income tax expense on the net income before income
taxes earned during the period
D.recording of collections received from customers during the
period
E.all of the above

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27) Which of the following is/are not true concerning accumulated other
comprehensive income?
A.Firms measure marketable equity securities classified as
available for sale at fair value and record the unrealized changes
in fair value as an element of other comprehensive income
B.Firms remeasure derivatives designated as cash flow hedges to
fair value at the end of each period and report the unrealized gain
or loss in other comprehensive income
C.Firms translate the reported results of their foreign operations
from local currencies into U.S. dollars in order to prepare
consolidated financial statements
D.Firms must include gains and losses from changes in actuarial
assumptions, actuarial performance, and prior service cost in other
comprehensive income prior to their amortization as an adjustment
to pension expense
E.none of the above

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28) Assume that a firm uses the accrual basis of accounting. For each
of the following independent cases, indicate the amount of revenue
the firm recognizes for the month of August.


a. Collects $2,000 in July for merchandise to be delivered in
August.
b. Collects $1,200 in May for subscriptions that will be delivered
during the next twelve months (beginning in May).
c. Collects $800 in August for merchandise sold and delivered in
July.
d. Collects $2,400 interest on a 6-month certificate of deposit,
which matures on August 15th.
e. Sells $3,000 of merchandise on account in August. The firm
allows a 2% discount for payment prior to 30 days and customers
take the discount.

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29) U.S. GAAP
A.permits firms to report cash flow from operations using the
direct or indirect method
B.prefers the direct method of reporting cash flow from operations
over the indirect method
C.states that the direct method must show a reconciliation between
net income and cash flow from operations either at the bottom of
the statement of cash flows or in a separate note
D.includes all of the above
E.includes none of the above

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30) Which of the following is not true regarding the Work-in-Process
Inventory account?
A.The Work-in-Process Inventory account accumulates the cost of raw
materials transferred to the factory floor
B.The Work-in-Process Inventory account accumulates the cost of
direct labor used in production
C.The Work-in-Process Inventory account accumulates the
manufacturing overhead costs
D.The Work-in-Process Inventory account accumulates the
administrative costs
E.The Work-in-Process Inventory account is credited for the
manufacturing costs assigned to the finished units transferred to
the finished goods storeroom

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31) Prepaid assets are valued on the balance sheet at
A.cost paid to acquire the asset
B.acquisition cost less accumulated depreciation
C.cost less expired portion
D.replacement cost
E.present value of future cash flows

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32) The accounting system uses a device called an account. An
account
A.is created each time a transaction takes place
B.accumulates the increases and decreases that occur during the
period for a single item
C.is created only for income statement items
D.is created only for balance sheet items
E.is created only for statement of cash flows items

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33) Investors in bonds might exercise a _____ option if interest rates
increase, and investors can reinvest the cash proceeds in debt
securities with a higher yield.
A.convertible
B.call
C.put
D.serial
E.short-term

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34) Alex Corporation acquires securities classified as marketable
securities for $10,000. The entry is as follows:
A.Cash………………………………………………………….10,000

Marketable
Securities………………………………………….10,000

B.Marketable
Securities………………………………….10,000
Bonds
Payable………………………………………………..10,000

C.Marketable
Securities………………………………….10,000
Common
Stock……………………………………………….10,000

D.Marketable
Securities………………………………….10,000
Cash………………………………………………………………10,000

E.Bonds
Payable……………………………………………10,000
Marketable
Securities…………………………………………10,000

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35) Ethical issues may arise when management dips into LIFO layers
A.when some LIFO liquidations are unavoidable due to shortages of
raw materials
B.due to improved inventory control systems that reduce the amount
of inventory needed
C.in order to manage earnings in a particular year rather than
replenish inventories
D.all of the above
E.none of the above

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36) In any given accounting period, the amount a firm reports as income
before income taxes for financial reporting in comparison to the
amount of taxable income that appears on its income tax return may
differ due to
A.permanent differences, only
B.temporary differences, only
C.nominal differences, only
D.permanent and temporary differences, only
E.permanent, temporary, and nominal differences

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37) Prepare journal entries for the following transactions related to a
manufacturing operation.


a. The firm acquires manufacturing equipment for $45,000 cash.
b. The firm purchases raw materials costing $36,000 on account.
c. The firm issues raw materials costing $15,000 to the production
department.
d. Payroll of $35,000 is paid: $20,000 to direct factory workers
and $15,000 to sales personnel.
e. Utilities of $1,000 are paid: $300 for manufacturing equipment,
$500 for factory building, and $200 for the administrative
offices.
f. Depreciation on the building and equipment is as follows:
Factory building $4,550, manufacturing equipment $500, and sales
and administration building $1,000.
g. Units completed and transferred to finished goods total
$37,000.
h. Cost of goods sold for the period is $40,000.

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38) Which of the following is not true?
A.Under U.S. GAAP, firms must test property, plant, and equipment
for possible asset impairment when conditions indicate that a
significant decrease in fair value has occurred
B.Under U.S. GAAP, firms initially compare the undiscounted cash
flows expected from the asset to the assets carrying value
C.Under U.S. GAAP, a fixed asset impairment occurs when the assets
carrying value exceeds the undiscounted cash flows
D.Under U.S. GAAP, the amount of the recognized impairment loss is
the excess of the carrying value over the fair value of the
asset
E.Under U.S. GAAP, firms recognize an impairment loss when the
carrying value of a fixed asset exceeds its recoverable amount, the
higher of (1) the fair value less cost to sell, and (2) value in
use

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39) IFRS _____ firms to remeasure property, plant, and equipment upward
for increases in fair value under certain conditions. U.S. GAAP
_____ such upward remeasurements.
A.permits; permits
B.permits; does not permit
C.does not permit: does not permit
D.does not permit: permits
E.none of the above

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40) The statement of cash flows reports the effects of a firms
operating, investing, and financing activities on cash flows.
Information in the statement helps in understanding which of the
following concept(s)?
A.The effect of operations on the liquidity of a firm
B.The level of capital expenditures needed to support ongoing and
growing levels of activity
C.The major changes in the financing of a firm
D.all of the above
E.none of the above

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41) Some employers promise to contribute a certain amount to the
pension plan each period for each employee, usually based on an
employee’s salary, without specifying the benefits the employee
will receive during retirement. The amounts employees eventually
receive depend on the investment performance of the pension plan.
Such plans are referred to as
A.defined benefit pension plans
B.defined contribution pension plans
C.deferred compensation plans
D.529 Plans
E.individual retirement accounts

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42) Which of the following is/are true regarding setting goals and
strategies for a charitable organization?
A.obtain sufficient resources to fund operations
B.not pursue profits or wealth increases as goals
C.direct efforts toward providing services to constituencies
D.all of the above are true
E.none of the above are true

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43) Prepare journal entries to record each of the following
transactions for Freight Co.


a. Freight Co. issues stock warrants for $20,000 cash. The warrants
allow holders to purchase 5,000 common shares (par value $5) for
$50 each.
b. One-half of the warrants are exercised.
c. The remaining warrants expire.

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44) Why is depreciation expense added back to net income in the
operating section of the indirect cash flow statement?
A.Depreciation expense represents cash outflows for a firm
B.Depreciation expense represents cash inflows for a firm
C.Depreciation expense represents a noncash expense that must be
moved to the investing section of the cash flow statement
D.Depreciation expense represents a noncash expense that must be
added to net income to cancel its affect within the net income
calculation
E.Depreciation expense represents a cash expense that must be added
to net income to cancel its affect within the net income
calculation

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45) Firms with tangible long-term assets and less predictable cash
flows, such as auto manufacturers and steel companies, whose sales
vary with changes in economic conditions, tend to use
A.a more nearly equal mix of long-term debt and shareholders equity
financing
B.a greater amount of long-term debt [80%] than shareholders equity
financing [20%]
C.a smaller amount of long-term debt [20%] than shareholders equity
financing [80%]
D.a greater amount of long-term debt [80%] than assets [20%]
E.a greater amount of shareholders equity [80%] than assets [20%]

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46) Walnut Queen Corporation and Pine King Company (forest products
companies) need additional pulp-processing capacity. Each firm
could borrow the needed funds and build its own manufacturing
plant. Instead, they form a joint venture to build a
pulp-processing plant. Each firm agrees to use half of the new
plants capacity each year for 20 years and to pay half of all
operating and debt service costs. The joint venture uses the
purchase commitments of Walnut Queen Corporation and Pine King
Company to obtain a loan to build the facility. The firms structure
the arrangement so that neither firm controls the joint venture.
Which of the following is not true?
A.Accounting views the purchase commitments as executory
contracts
B.Neither firm will recognize a liability for its portion of the
loan
C.The loan will appear as a liability on the balance sheet of the
joint venture
D.Each firm obtains financing for the services of the plant without
showing a liability on its balance sheet
E.The loan will appear as a liability on the balance sheet of
Walnut Queen Corporation and Pine King Company, half of the loan
amount allocated to each

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47) The following ratio relates the results of operating performance to
the investments (assets) of a firm without regard to how the firm
financed those investments.

Net Income + Interest Expense Net of Income Tax Savings
———————————————————————–

Average Total Assets

The ratio is called a rate of return on:
A.assets
B.long-term investments
C.shareholders equity
D.net income
E.net income and interest expense net of income tax savings

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48) Which of the following is not true regarding shareholders equity
for a corporation?
A.Shareholders equity is the residual interest of owners in the
assets of an entity, after subtracting liabilities
B.Shareholders equity includes assets exchanged by owners in return
for an ownership interest
C.Shareholders equity includes net assets generated by earnings
activities in excess of net assets distributed to owners as
dividends
D.Shareholders equity is increased by repurchases by the firm of
its ownership interests
E.all of the above

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