1) In both U.S. GAAP and IFRS, hedge accounting is elective; firms
need not designate any derivatives as accounting hedges, regardless
of the degree to which the derivatives mitigate the volatility of
outcomes of other arrangements.
Answer:
2) Discuss the accounting for a firm paying dividends in cash, other
assets, or shares of its common stock.
Answer:
3) A major mining company owns a mining subsidiary in South America,
where the government enforces stringent control over cash payments
outside the country. The parent cannot control all the assets of
the subsidiary, despite owning a majority of the voting shares, but
should prepare consolidated statements with the subsidiary.
Answer:
4) Opportunity costs are forgone profits, and U.S. GAAP and IFRS
recognize this cost as part of an assets acquisition cost.
Answer:
5) To settle debts of general partnerships and sole proprietorships,
creditors have a claim on the owners business and personal assets.
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6) Explain the accounting for treasury shares.
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7) A balance sheet account with a debit balance requires a closing
entry that credits that account, because a credit closing entry
will result in a zero ending balance in the account.
Answer:
8) Current liabilities and shareholders equity are sources of funds
where the supplier of
funds does not expect to receive them all back within the next
year.
Answer:
9) Common shareholders have a residual claim on all income after
creditors and preferred shareholders receive amounts contractually
owed them.
Answer:
10) The first step in the accounting record-keeping process is
recording each transaction in a file or other record in the form of
a journal entry.
Answer:
11) Discuss the definition, recognition, and measurement of gains and
losses.
Answer:
12) Discuss how the rate of return on common shareholders equity is
calculated.
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13) The same asset can have different measurements for tax purposes,
for financial reporting purposes, and for internal managerial
decision-making purposes.
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14) Describe the concept of working capital.
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15) In the recognition criteria for liabilities with uncertain amount
and/or timing, probable is used in U.S. GAAP to refer to a
relatively high threshold of likelihooda rule of thumb used in
practice is approximately 80%.
Answer:
16) Securities that firms expect to sell within the next year appear as
investment securities in current assets on the balance sheet.
Answer:
17) What is the accounting treatment for securities available for sale?
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18) Rock Aerospace Company
Rock Aerospace Company signed a contract on April 1, Year 4, to
build a satellite for $28,000,000. Estimated costs for the contract
are:
| Year 4 | $5,600,000 |
| Year 5 | $11,200,000 |
| Year 6 | $5,600,000 |
Assume that actual costs incurred coincide with
expectations. Cash collections of the contract price are as
follows:
| Year 4 | $4,200,000 |
| Year 5 | $7,000,000 |
| Year 6 | $16,800,000 |
Refer to the Rock Aerospace Company example. Income from the
contract for Year 5 under the completed contract method is:
A.$1,000,000
B.$1,400,000
C.$2,800,000
D.$3,360,000
E.None of the above
Answer:
19) Which of the following is not true?
A.Gains (losses) are increases (decreases) in net assets from
peripheral or incidental transactions of an entity and from other
transactions and events affecting the entity except those that
result from revenues (expenses) or investments by (distributions
to) owners
B.Firms usually report gains and losses from sales of assets or
settlements of liabilities at a net amount; that is, equal to the
difference between the net asset received and the carrying value of
the asset sold or between the net asset given and the carrying
value of the liability settled
C.Gains and losses may arise from the remeasurement of assets and
liabilities
D.Firms recognize gains and losses when they sell or exchange
assets or settle liabilities in market transactions
E.Firms recognize gains and losses when those items enter the
measurement of net income or other comprehensive income
Answer:
20) Cookie and Clark incorporate as CC Designs, Inc. on January 1, Year
CC Designs creates custom wall finishes and sells painting
products. The following transactions occur during
January.
a. Clark contributes cash of $75,000 and receives 15,000 shares of
$1 par value stock.
b. Cookie contributes $35,000 cash, office furniture with a value
of $5,000, and computer equipment with a value of $10,000 and
receives 15,000 shares of $1 par value stock. The furniture and
equipment is expected to last 5 years and has no salvage value.
c. On January 2, $10,000 of painting products were purchased. CC
paid $8,000 cash with the remaining amount on account.
d. During January, painting products are sold for $8,000 cash. The
cost of the products is $2,000.
e. Additional painting products with a value of $5,000 are sold,
with a cost of $1,500, but the cash is not collected as of January
31st. It is expected that the $5,000 will be collected in full by
February 15th.
f. Clark is paid a salary of $2,000.
g. CC paid $1,200 for January and February rent.
Required:
Prepare appropriate accrual basis journal
entries.
Answer:
21) _____ measure the inflows of assets (or reductions in liabilities)
from selling goods and providing services to customers.
A.Revenues
B.Expenses
C.Cash inflows
D.Cash-outflows
E.Shareholder equity
Answer:
22) Fox Co., Inc.
On January 1, Year 1, Fox Co., Inc., issues $100,000 par value, 10%
bonds maturing in 10 years to yield 12% per year, compounded
semiannually on January 1 and July 1. Use the present value
tables.
Refer to the Fox Co., Inc. example. How much are the initial issue
proceeds to the nearest amount shown?
A.$32,197
B.$88,530
C.$100,000
D.$112,462
E.$102,462
Answer:
23) Permanent differences between pretax book income and taxable income
arises from
A.tax-exempt interest revenue, only
B.certain fines, only
C.depreciation on long-lived assets, only
D.bad debt expense, only
E.tax-exempt interest revenue and certain fines
Answer:
24) The _____ turnover ratio equals sales revenue divided by average
accounts receivable during the period.
A.cash
B.accounts receivable
C.sales receipts
D.sales revenue
E.asset
Answer:
25) Which of the following is/are not true?
A.U.S. GAAP and IFRS do not permit the employer to prepare
consolidated financial statements with the retirement trust
B.The employer must report the net funded status of each defined
benefit retirement plan (that is, the fair value of retirement
trust assets minus the retirement trust obligation) as either an
asset or a liability on its balance sheet
C.The employer must report the net funded status of each defined
benefit retirement plan and credit (for an overfunded plan) or
debit (for an underfunded plan) is to Other Comprehensive
Income
D.Notes to the financial statements do not provide information
about investments made by the retirement trust and how trust assets
and liabilities changed during a period
E.all of the above
Answer:
26) The FASBs conceptual framework does not include which of the
following as financial reporting objectives?
A.Provide information useful for making irrational investment and
credit decisions
B.Provide information to help current and potential investors and
creditors assess the amount, timing, and uncertainty of past cash
flows
C.Provide information about the economic resources of a firms
customers and the claims on those resources
D.Provide information about a firms expected operating performance
during the next period
E.all of the above
Answer:
27) The equation that describes the relationship between the balance
sheet and the income statement through the Retained Earnings
account is as follows:
A.Retained Earnings (beginning) – Net Income = Retained Earnings
(ending)
B.Retained Earnings (beginning) + Net Income + Dividends = Retained
Earnings (ending)
C.Retained Earnings (beginning) – Net Income – Dividends = Retained
Earnings (ending)
D.Retained Earnings (beginning) – Net Income + Dividends = Retained
Earnings (ending)
E.Retained Earnings (beginning) + Net Income – Dividends = Retained
Earnings (ending)
Answer:
28) The matching convention provides both the basis for hedge
accounting, as well as the logic for the treating gains and losses
from changes in fair value of fair value hedges differently from
cash flow hedges. Which of the following is/are not true?
A.In a fair value hedge of a recognized asset or liability, both
the hedged asset (or liability) and its related derivative (hedging
instrument) appear on the balance sheet
B.Remeasuring both the hedged asset (or liability) and its related
derivative to fair value each period and including the gain or loss
on the hedged asset (or liability) and the loss or gain on the
derivative in net income results in a net gain or loss that
indicates the effectiveness of the hedge in neutralizing the
risk
C.If the hedge is completely effective, there is a zero net effect
on income (the gain or loss on the hedged item exactly offsets the
loss or gain on the hedging instrument)
D.In a cash flow hedge of a forecasted transaction, the hedged cash
flow commitment does not appear on the balance sheet but the
derivative instrument does appear
E.Application of the matching convention results in classifying the
gain or loss on the derivative instrument in net income each period
Answer:
29) Firms with high proportions of intangibles, whether recognized as
assets on the balance sheet or not, tend to rely more on
A.equity financing than on long-term debt financing
B.long-term debt financing than on equity financing
C.short-term debt financing than on long-term debt financing
D.long-term debt financing than on short-term debt financing
E.None of these answer choices is correct
Answer:
30) The lower-of-cost-or-market basis for inventory valuation is a
conservative accounting policy because
A.it recognizes losses from decreases in market value before the
firm sells goods.
B.it does not record gains from increases in market value before a
sale takes place.
C.it reports inventories on the balance sheet at amounts that are
never greater, but may be less than acquisition cost.
D.all of the above
E.none of the above
Answer:
31) Unrealized holding gain denotes the difference between the
A.current replacement cost of the inventory and its acquisition
cost
B.selling price of the inventory and its original acquisition
cost
C.acquisition cost of the inventory and its net realizable
value
D.selling price of the inventory and its net realizable value
E.none of the above
Answer:
32) _____ often advise corporate borrowers on the sorts of financial
instruments the lending market appears to prefer at the time the
firm wants to borrow.
A.Stockbrokers
B.Investment bankers
C.Underwriters
D.Board of Directors
E.Chief Financial Officers
Answer:
33) Both U.S. GAAP and IFRS often refer to ownership of a(n) _____ of
the voting stock of another entity as indicating control, unless
evidence indicates that the owner cannot exercise control.
A.direct investment
B.indirect investment
C.majority
D.minority
E.effective control
Answer:
34) Firms sometimes acquire assets by exchanging an asset other than
cash or by issuing common stock. In these cases, acquisition cost
is
A.the fair value of the asset received, only
B.the fair value of the consideration given, only
C.either the fair value of the consideration given or the fair
value of the asset received, depending on which amount is lower
D.either the fair value of the consideration given or the fair
value of the asset received, depending on which the firms can more
reliably measure
E.either the fair value of the consideration given or the fair
value of the asset received, depending on which amount is higher
Answer:
35) The firm may transfer the accounts receivable to a legally separate
entity that issues debt securities to investors. Which of the
following is/are true?
A.The firm remits to investors the cash received from customers as
those cash receipts occur
B.The firm may be obligated to make payments to investors in
securities if the customers fail to make sufficient cash payments
to pay the principal and interest on the debt securities
C.The transfer is called securitization, a process that transforms
an asset (accounts receivable) into securities held by
investors
D.all of the above
E.none of the above
Answer:
36) Which of the following is/are limitations of ratio analysis?
A.use of acquisition cost for assets rather than current
replacement cost or net realizable value
B.latitude firms have in selecting from among various generally
accepted accounting principles
C.changes in many ratios correlate with each other
D.must recognize conditions that have changed between the periods
being compared when comparing the size of a ratio between periods
for the same firm
E.all of the above
Answer:
37) Which of the following is not true regarding the accounting for
defined contribution plans?
A.When pension assets equal pension liabilities and the expected
rate of return on pension investments equals the discount rate used
to compute the projected benefit obligation, the amounts offset
each other
B.When the interest cost exceeds the expected return on pension
investments, either employer contributions or future earnings on
pension plan investments must make up the difference
C.Computing pension expense (or credit) using the expected return
(not the actual return) rests on the view that pension plans should
take a long-term perspective and generate earnings from investments
based on a long-term expected rate of return
D.Annual deviations from the long-term expected rate of return
should flow through to net income as they occur
E.Recognizing service cost as an increase in the pension expense
parallels inclusion of wage and salary costs as an expense
Answer:
38) Jaymar Software Corporation sells SPAM BE GONE to customers, who
receive the software and have access to postdelivery telephone
support and the right to receive certain upgrades and enhancements
if and when Jaymar Software develops them. Jaymar Software sells
SPAM BE GONE for approximately $100; customers pay cash or with a
credit card. When should Jaymar Software recognize revenue from
selling SPAM BE GONE?
A.It recognizes revenue from sale of the software at the time of
delivery and revenue associated with future obligations over the
products life cycle
B.It recognizes revenue from sale of the software over the products
life cycle and revenue associated with future obligations at the
time of delivery
C.It recognizes revenue from sale of the software and the revenue
associated with future obligations over the products life cycle
D.It recognizes revenue from sale of the software and the revenue
associated with future obligations at the time of delivery
E.none of the above
Answer:
39) Universal Airlines (Universal) needs additional aircraft to expand
internationally, and it could borrow the needed funds and purchase
the aircraft. This arrangement places additional debt on the
balance sheet. Instead, Universal signs an lease agreement in which
it agrees to pay the owner of the aircraft certain amounts each
year for 18 years. The aircraft has an estimated service life of 18
years. Universal paints its name on the aircraft, uses the aircraft
in operations, and makes the required minimum lease payments that
compensates the lessor for the cost of the aircraft and provides a
reasonable return for the risk involved. Which of the following is
true?
A.Universal has entered into a contingent lease and does not show a
liability on the balance sheet
B.Universal recognizes lease expense on a straight-line basis
during the 18 year period
C.Universal obtains financing for its flight equipment without
showing a liability on the balance sheet
D.Universal has entered into an operating lease and recognizes a
lease liability on its balance sheet
E.Universal has entered into a capital lease and recognizes a lease
liability on its balance sheet
Answer:
40) The U.S. government will pay Simpson Company $2,500,000 each six
months, equal to 2.5% of the $100 million face amount of the
treasury bonds (5% annual coupon rate, paid in two installments
each year), and will repay the $100 million at the end of five
years. At the time Simpson Company purchases the bonds, the market
prices these bonds to yield Simpson Company 6% annually (3% each
six months). The bonds are classified as held to maturity and
Simpson Company would classify this investment as a(n) _____on its
_____ because it intends to hold the securities for _____.
A.current asset; balance sheet; less than one year
B.current asset; income statement; less than one year
C.noncurrent asset; balance sheet; more than one year
D.noncurrent asset; income statement; more than one year
E.current asset; statement of cash flows; less than one year
Answer:
41) Sparkle Industries began a period with 2,000 pounds of sugar and
purchased 4,500 pounds during the period. Sparkle used 5,300 pounds
during the period. How many pounds of sugar were available for sale
or use during the period?
A.5,000 pounds of sugar
B.5,500 pounds of sugar
C.6,500 pounds of sugar
D.7,000 pounds of sugar
E.7,500 pounds of sugar
Answer:
42) When the customer pays with a credit card
A.the retailer receives payment from the credit card issuer
promptly, typically within a few days
B.the retailer treats the transaction like a cash sale
C.the credit card issuer bears the risk of nonpayment by the
customer
D.the customer compensates the issuer by paying finance charges and
other fees
E.all of the above
Answer:
43) The balance sheet of Copper Industries, a producer of copper,
showed retained earnings of $26,000 million at March 31, 20×1. At
March 31, 20×2, the balance in retained earnings was $70,500
million . Copper declared dividends during the year ended March 31,
20×2, of $3,500 million. Compute Coppers net income for the year
ended March 31, 20×2 (fiscal 20×1).
A.$41.000 million
B.$44.500 million
C.$48.000 million
D.$53.500 million
E.$58.000 million
Answer:
44) In estimating the amount of uncollectible accounts the accountant
(1) estimates the amount of outstanding accounts receivable that
the firm does not expect to collect and (2) adjusts the balance in
the Allowance for Uncollectible Accounts so that, after the entry
to recognize estimated uncollectibles, the balance in the account
will equal the amount that the firm does not expect to collect. The
name of this procedure is/are:
A.the percentage-of-sales
B.aging-of-accounts-receivable
C.direct write-off
D.tax accounting
E.indirect write-off
Answer:
45) A T-account is a device or convention for organizing and
accumulating the accounting entries of transactions that affect an
individual account. Which of the following is/are true?
A.Increases in assets appear on the left side, and decreases in
assets appear on the right side of T-accounts
B.Increases in liabilities appear on the right side, and decreases
in liabilities appear on the left side of T-accounts
C.Increases in shareholders equity appear on the right side, and
decreases in shareholders equity appear on the left side of
T-accounts
D.all of the above are true
E.none of the above are true
Answer:
46) For financial reporting purposes, Structural Builders uses the
completed contract method of accounting for long-term contracts.
For tax purposes, Structural Builders uses the
percentage-of-completion or the installment method of accounting
for the same contract. The contract is completed in Year 3. The
terms of the contract, and Structural Builders’ estimate of costs
to be incurred are as follows:
| Cash Receipts | Cost Incurred | ||
| Year 1 | $1,000,000 | $1,500,000 | |
| Year 2 | 2,000,000 | 1,500,000 | |
| Year 3 | 3,000,000 | 1,500,000 | |
| Total | $6,000,000 | $4,500,000 | |
Required:
What amount of deferred tax asset/liability will be
reported by Structural Builders each year if:
| a. |
The percentage-of-completion method is used for tax reporting? |
| b. |
The installment method is used for tax reporting? Assume the tax rate is 35%. |
Answer:
47) An engineering firm has decided to construct its own office
building. The construction will be partially financed through a
construction loan and any remainder will be financed from
internally generated funds. The internal accountants have collected
the following information concerning the construction.
| Average Balance | Construction | Other | |
| Year | Construction Account | Debt @ 10% | Debt @ 12% |
| 1 | $1,000,000 | $1,000,000 | $500,000 |
| 2 | $1,500,000 | $1,000,000 | $250,000 |
| 3 | $2,000,000 | $800,000 | $200,000 |
Required:
Determine the amount, if any, of capitalized interest cost for each
year.
a. Year 1
b. Year 2
c. Year 3
Answer:
48) Which of the following is a characteristic of a derivative?
A.has one or more underlyings
B.has one or more notional amounts
C.exchanging of promises with a counterparty
D.all of the above
E.none of the above
Answer:
49) Which of the following is not true regarding a reverse stock
split?
A.Firms reduce the number of outstanding shares by increasing the
par value of the stock
B.Firms reduce the number of outstanding shares by canceling
outstanding shares
C.A reverse stock split usually increases the market value per
share in inverse proportion to the reverse split
D.Managers and governing boards might use reverse stock splits to
keep the market price per share within some target trading
range
E.Analysts use reverse stock splits to signal that the market price
per share will go up disproportionately
Answer: