Acc 514 Test 1

1) Depreciation is the accounting term used to refer to the periodic
write-off of intangible assets.

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2) Nebraska Steakhouse opened a new restaurant on the site of an
existing building. It paid the owner $520,000 for the land and
building, of which it attributes $104,000 to the land and $416,000
to the building. Nebraska incurred legal costs of $25,200 to
conduct a title search and prepare the necessary legal documents
for the purchase. It then paid $71,800 to renovate the building to
make it suitable for Nebraskas use. Property and liability
insurance on the land and building for the first year was $24,000,
of which $8,000 applied to the period during renovation and $16,000
applied to the period after opening. Property taxes on the land and
building for the first year totaled $30,000, of which $10,000
applied to the period during renovation and $20,000 applied to the
period after opening. Calculate the amounts that Nebraska
Steakhouse should include in the Land account and in the Building
account.

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3) How do firms account for goodwill?

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4) The journal entry to record the cost of warranty repairs that were
incurred during the current period, but related to sales made in
prior years, includes a debit to Warranty Expense.

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5) When a company issues bonds, it must sometimes issue them at a
discount, while at other times it will issue them at a premium.

Required:

Discuss the economic circumstances that surround the situations
where bonds are issued at discounts or premiums. Use examples where
appropriate.

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6) Explain the accounting for income taxes.

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7) What are the cash flows patterns related to bonds?

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8) What are derivative instruments and how are they used?

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9) What is US GAAP?

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10) 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 equal the net change in all noncash
accounts.

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11) How does U.S. GAAP and IFRS require firms to classify marketable
securities?

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12) The following data relate to the manufacturing activities of
Friends Industries for the month of March:

Friends incurred the following manufacturing costs during
March:

(Note: Friends Industries treats all raw materials used in
production, as well as all wages incurred for production, as direct
in nature and such costs are not included in manufacturing
overhead.)

Compute Friends cost of goods sold for March.

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13) Cost is the economic sacrifice made to acquire goods or services.

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14) Forrest Industries warrants its products for one year. The
estimated product warranty is 3% of sales. Assume that sales were
$190,000 for June. In July, a customer received warranty repairs
requiring $185 of parts and $50 of labor.

Required:

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15) Klothing Company, a U.S. clothing designer, manufacturer, and
retailer, reported a balance in prepaid insurance of $90.7 million,
based on its financial reports dated March 31, 2013, the end of its
fiscal year. Assume that of this balance, $24 million relates to an
insurance policy with two remaining months of coverage. Select the
correct journal entries that Klothing would make on April 30, 2013
(Assume that the firm closes its books monthly. Klothing applies
U.S. GAAP, and reports its results in millions of U.S.
dollars.)
A.Insurance Expense $ 24 million
Prepaid Insurance $24 million
B.Prepaid Insurance $24 million
Insurance Expense $24 million
C.Insurance Expense $12 million
Prepaid Insurance $12 million
D.Prepaid Insurance $12 million
Insurance Expense $12 million
E.none of the above

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16) Which of the following is/are true?
A.After cost of sales, the income statement typically shows
deductions for other expenses associated with operations (other
operating expenses)
B.Many firms present a subtotal called operating income or
operating profit, the difference between revenues and expenses
associated with core operating activities
C.Two common types of operating expenses are selling, general, and
administrative expenses (SG&A) and research and development
expenses (R&D)
D.All of the above are true
E.None of the above are true

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17) The liability of the pension plan equals the
A.future value of the expected amounts payable to employees
B.present value of the expected amounts payable to employees
C.expected future amounts payable to employees
D.current amounts payable to employees during the next year or
operating cycle
E.employees current benefits

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18) The extent to which a firm adjusts net income for changes in
noncurrent assets and noncurrent liabilities in deriving cash flow
from operations depends on the nature of its operations. Some firms
use _____ to finance the working capital needs.
A.suppliers
B.equity financing
C.short-term borrowing
D.long-term borrowing
E.all of the above

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19) Based on the following information, determine how many shares of
common stock would be outstanding if all conversion features were
exercised.

Additional information:


a. Common stock was issued when the market price was $10 per
share
b. The treasury stock was acquired when the market value per share
was $15.
c. Current fair market value of the common stock is $18 per
share.
d. Each share of $1,000 par value preferred stock is convertible to
50 shares of common stock.
e. Each $1,000 face value bond can be converted to 40 shares of
common stock. The bonds were issued at par.

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20) What equals the income tax expense divided by financial reporting
income before income taxes?
A.marginal tax rate
B.effective tax rate
C.tax burden rate
D.statutory rate
E.average tax rate

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21) Manufacturing overhead includes:
A.costs that the firm cannot associate with particular products
B.expenditures for factory utilities, property taxes, insurance,
and depreciation on manufacturing plant and equipment
C.expenditures for supervisors salaries
D.costs that jointly benefit all goods produced during the period,
not any one particular item
E.all of the above

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22) The U.S. GAAP requires firms using LIFO to disclose in notes to the
financial statements
A.the amounts by which inventories based on FIFO or current cost
exceed their amounts as reported on a LIFO basis
B.the amounts by which inventories based on LIFO exceed their
amounts as reported on a FIFO or current cost basis
C.the amounts by which inventories based on LIFO exceed their
amounts as reported on a specific identification or current cost
basis
D.the amounts by which inventories based on specific identification
or current cost exceed their amounts as reported on a LIFO
basis
E.none of the above

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23) If the balance sheet shows the same beginning and ending balance
for depreciable assets, there
A.have been no financing activities during the year
B.have been no investing activities during the year
C.may have been investing activities
D.may have been financing activities
E.have been no investing and financing activities during the year

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24) An expenditure qualifies as an asset if it has which of the
following characteristics?
A.It embodies a probable future benefit
B.A particular entity can obtain the benefit and control others
access to it
C. The transaction or other event giving rise to the entitys right
to, or control of, the benefit has already occurred
D.The fair value of the item at the time of initial recognition can
be measured with sufficient reliability
E.all of the above

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25) When an investor owns less than a majority of the voting stock of
another corporation, the accountant must judge when the investor
can exert significant influence. For the sake of uniformity, U.S.
GAAP and IFRS presume that significant influence exists at
ownership of _____ or more of the voting stock of the investee.
(Assume that management does not have a contractual or other basis
to demonstrate that influence.)
A.5 percent
B.10 percent
C.15 percent
D.20 percent
E.30 percent

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26) An audit by an independent external auditor usually does not
involve which of the following?
A.an assessment of the capability of a firms accounting system to
accumulate, measure, and synthesize transactional data properly
B.an assessment of the operational effectiveness of the accounting
system
C.a determination of whether the financial report complies with the
requirements of the applicable authoritative guidance
D.an assessment of the operational economy, efficiency, and
effectiveness of the companys operations
E.an assessment of the effectiveness of a firms internal control
system for financial reporting

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27) U.S. GAAP and IFRS require firms to report trading securities at
_____.
A.net realizable value on the balance sheet
B.fair value on the balance sheet
C.present value on the balance sheet
D.fair value on the income statement
E.present value on the income statement

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28) _____ are part of the ongoing central operations of the firm, so
they are relatively persistent and sustainable.
A.Revenues
B.Expenses
C.Assets
D.Liabilities
E.Shareholders equity

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29) (CMA adapted, Dec 93 #17) Norton Inc. has a 2 to 1 current ratio.
This ratio would increase to more than 2 to 1 if
A.a previously declared stock dividend were distributed
B.the company wrote off an uncollectible receivable
C.the company sold merchandise on open account that earned a normal
gross margin
D.the company purchased inventory on open account
E.none of the above

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30) The current ratio equals
A.current assets plus current liabilities
B.current assets minus current liabilities
C.current assets multiplied by current liabilities
D.current assets divided by current liabilities
E.current liabilities minus current assets

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31) Which of the following is/are true?
A.Revenues from sales of goods or services to customers during a
particular period do not necessarily equal cash received from
customers during the same period
B.The receipt of cash can precede, coincide with, or follow the
recognition of revenue
C.Expenses incurred to generate revenues during a particular period
do not necessarily equal cash expended for the goods and services
consumed in operations during the same period
D.The expenditure of cash can precede, or coincide with, or follow
the recognition of expenses
E.all of the above

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32) Which of the following is/are true?
A.Interpreting the income statement involves studying the relations
among revenues, expenses, and net income both over time and across
firms
B.Comparisons are likely more valid for the same firm over time
than across firms because of the difficulty in identifying truly
similar firms
C.In evaluating over-time performance of a given firm, the user
must understand both current economic conditions and how those
conditions may have changed over the period of analysis
D.In evaluating across-firm performance, the user should control
for the underlying business model by selecting peer firms that are
similar, economically, to the firm being analyzed
E.All of the above are true

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33) Entries for the following items were either omitted or recorded
incorrectly in preparing the financial statements for Year 4.
Indicate the amount and nature [understatement (U), overstatement
(O), no effect (N)] of the effect of the omission on total assets,
total liabilities, and net income for Year 4. Ignore income tax
effects. Use the following format:

a. The company received a payment of $4,600 from a customer
for an order that the company has not yet produced. It credited the
$4,600 to sales revenue.
b. The company failed to record a dividend of $5,000 that was
declared but not yet paid.
c. The company repaid a loan of $5,000 to the bank. It recorded the
transaction in the appropriate accounts but in the amount of
$50,000. The company has accounted for all interest on the loan
correctly.
d. The ending balance of finished goods inventory was incorrectly
recorded at $4,000 more than its proper balance due to a mistake in
taking a physical inventory.
e. The company correctly entered a stock issue of $22,000 on
December 31, Year 4, in the cash account but mistakenly credited it
to Bonds Payable.
f. On the basis of an incorrect report from the company’s credit
collection agency, specific accounts receivable of $2,700 were
written off, but are actually expected to be collectible accounts.
The company correctly made a provision for estimated uncollectible
accounts for year 4.

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34) A bond that does not require a periodic cash payment, but instead
promises a single payment at maturity, is called a _____ bond.
A.sinking fund
B.zero coupon
C.debenture
D.perpetual
E.convertible

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35) A gain on the sale of a plant assets should be included in which of
the following sections of a statement of cash flows prepared using
the indirect method?
A.Investing activities
B.Operating activities
C.Financing activities
D.Non-cash investing and financing activities
E.None of these answers is correct

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36) In most cases, U.S. GAAP requires firms to allocate the full issue
price of Convertible Bonds or Convertible Preferred Stock
A.to the bonds or preferred stock and none of the price to the
conversion feature
B.to the bonds or preferred stock and the conversion feature based
on fair values
C.to the bonds or preferred stock and the conversion feature based
on the present value of future cash flows
D.to the bonds or preferred stock and the conversion feature based
on the future value of present cash flows
E.to the price to the conversion feature and none to the bonds or
preferred stock

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37) Over sufficiently long time periods, the amount of net income
equals
A.cash inflows minus cash outflows from operating activities
B.cash inflows minus cash outflows from operating and investing
activities
C.cash inflows minus cash outflows from operating, investing, and
debt servicing activities
D.cash inflows minus cash outflows from operating and debt
servicing activities
E.cash inflows minus cash outflows from investing and debt
servicing activities

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38) Net income that is not paid to shareholders as dividends increases
_____.
A.cash receipts
B.retained earnings
C.cash disbursements
D.long-term liabilities
E.current liabilities

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39) Which of the following is/are not true regarding inventory?
A.Inventory refers to goods and other items that a firm owns and
holds for sale or for further processing as part of its
operations
B.Inventory is called stock in some countries
C.When the firm sells inventory, the carrying amount of that
inventory becomes an expense
D.Inventories are a major asset for merchandising and manufacturing
firms
E.The following equation measures all quantities in physical units:
Beginning Inventory – Additions + Withdrawals = Ending Inventory

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40) Accumulated Other Comprehensive Income
A.is a shareholders equity account that acts for other
comprehensive income the way retained earnings acts for net
income
B.equals net income plus other comprehensive income
C.includes gains and losses from sales or exchanges of assets or
settlements of liabilities related incidentally or peripherally to
the firms core business
D.Firms close amounts in net income for a period to Accumulated
Other Comprehensive Income at the end of the period
E.all of the above

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41) Measurement of trading securities at _____ reflects income when it
occurs in the form of a change in _____, not when the investor
realizes a gain or loss _____.
A.fair value; fair value; at the time of sale
B.net realizable value; fair value; at the time of sale
C.net realizable value; future value; in Other Comprehensive
Income
D.realizable value; future value; in Other Comprehensive Income
E.future value; future value; in Other Comprehensive Income

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42) U.S. GAAP and IFRS require firms to recognize as assets
identifiable intangibles acquired in external market transactions.
Which of the following is/are not true?
A.The exchange between an independent buyer and seller provides
evidence of the existence of expected future benefits, and the
exchange price provides evidence of the fair value of those
benefits
B.In external market transactions, identifiable intangibles include
patents, trademarks, customer lists, and other economic resources
ready for use, as well as in-process technologies with uncertain
future benefits
C.In external market transactions, identifiable intangible assets
have either finite lives or indefinite lives
D.In external market transactions, firms must amortize intangible
assets with finite lives, generally using the straight-line
method
E.all of the above

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43) When a firm has securities outstanding that, if exchanged for
shares of common stock, would decrease basic earnings per share by
_____ or more, generally accepted accounting principles require a
dual presentation: basic earnings per share and diluted earnings
per share.
A.1 percent
B.3 percent
C.10 percent
D.20 percent
E.30 percent

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