1) What is comprehensive income?
Answer:
2) Gains and losses on effective cash flow hedges initially affect
other comprehensive income, not net income.
Answer:
3) How does the statement of cash flows helps readers understanding?
Answer:
4) What are the criteria for revenue recognition?
Answer:
5) The write-off of specific customers accounts using the allowance
method has no effect on the income statement.
Answer:
6) Both U.S. GAAP and IFRS require reporting that results in the more
conservative measurement of earnings.
Answer:
7) U.S. GAAP and IFRS requires firms to use specific identification
for inventory valuation and cost-of-goods-sold whenever feasible.
Answer:
8) Explain how U.S. GAAP and IFRS distinguish the accounting for (1)
corrections of errors, (2) adjustments for changes in accounting
principles, and (3) adjustments for changes in accounting
estimates.
Answer:
9) Parson Services Corporation was organized on January 1, Year 8. The
unadjusted trial balance on December 31, Year 8 after recording
transactions that occurred during Year 8 is as follows.
|
Parson Services CorporationUnadjusted Trial BalanceDecember 31, Year 8 |
||
| Debit | Credit | |
| Cash | $125,000 | |
| Fees Receivable | 112,000 | |
| Notes Receivable | 115,000 | |
| Office Supplies Inventory | 11,800 | |
| Prepaid Insurance | 12,200 | |
| Furniture and Equipment | 155,000 | |
| Accumulated Depreciation | 0 | |
| Accounts Payable | $113,000 | |
| Common Stock | 365,000 | |
| Fee Revenues | 195,000 | |
| Rent Expense | 19,500 | |
| Office Salaries Expense | 122,500 | |
| $673,000 | $673,000 | |
Below is the income statement for Year 8 that was prepared
after making appropriate adjusting entries for Year 8 .
|
Parson Services Corporation Income StatementFor the Year Ended December 31, Year 8 |
|||
| 1> | Fee Revenues | $199,400 | |
| 2> | Interest Revenue on Notes Receivable | 11,500 | |
| Total Revenues | $210,900 | ||
| 3> | Depreciation Expense | (15,500) | |
| 4> | Rent Expense | (18,700) | |
| 5> | Insurance Expense | (11,800) | |
| 6> | Office Supplies Expense | (11,500) | |
| 7> | Office Salaries Expense | (124,000) | |
| Net Income | $29,400 | ||
Required:
Give the adjusting entries that Parson Services Corporation must
have made at the end of Year 8 for each of the seven income
statement accounts. You may express the adjusting entries either in
the form of journal entries or T accounts.
Answer:
10) Describe the accounting for income taxes for financial reporting
purposes.
Answer:
11) U.S. GAAP and IFRS require firms to account for correction of
errors, regardless of whether they are material or not, by
retrospectively restating net income of prior periods and adjusting
the beginning balance in Retained Earnings for the current period.
Answer:
12) Explain the accounting for derivative instruments.
Answer:
13) The depreciable or amortizable basis of long-lived assets is the
acquisition cost less salvage value.
Answer:
14) Shareholders equity is a residual interest. It represents the
shareholders claim on the assets of a firm after the firm satisfies
all higher-priority claims.
Answer:
15) Both U.S. GAAP and IFRS require firms to report balance sheet
accounts for the prior year in addition to the current year.
Answer:
16) How are securities measured after acquisition?
Answer:
17) Recording revenues and expenses directly in the Retained Earnings
account suppresses information about the causes of net income.
Answer:
18) Financial statement notes must disclose significant limitations on
dividend declarations.
Answer:
19) Sprinter Airlines (Sprinter) 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, Sprinter signs an lease agreement in which
it agrees to pay the owner of the aircraft certain amounts each
year for 12 years. The aircraft has an estimated service life of 18
years. Sprinter paints its name on the aircraft, uses the aircraft
in operations, and makes the required lease payments. Which of the
following is not true?
A.Sprinter receives benefits when it uses the aircraft, not when it
initially signs the lease
B.Sprinter has future benefits, not past or current benefits
C.Sprinter obtains financing for its flight equipment without
showing a liability on the balance sheet
D.Sprinter has entered into an operating lease that is an executory
contract
E.Sprinter has entered into an financing lease that is recorded as
an asset purchase and financing transaction
Answer:
20) When assets and income from operations that a firm has decided to
discontinue (and dispose of or abandon), separating the two income
components allows users to form better predictions of
A.past earnings
B.current earnings
C.future earnings
D.all of the above
E.none of the above
Answer:
21) Failure to record the expired amount of prepaid rent expense would
not
A.understate expense
B.overstate net income
C.overstate owners’ equity
D.understate liabilities
E.All of these choices would result from failure to record expired
prepaid rent
Answer:
22) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is/aretrue?
A.Under the capital, or finance, lease method, the lessor records
the signing of a capital lease the same as if the lessor sold the
leased asset for an installment note receivable
B.Under the capital, or finance, lease method, the lessee
recognizes interest expense on the lease liability, similar to
recognizing interest expense on long-term notes or bonds
C.Under the capital, or finance, lease method, the lessee amortizes
the leased asset, similar to recognizing depreciation on buildings
and equipment
D.Under the capital, or finance, lease method, the lessee records
the leased asset and the lease liability on the balance sheet at
the present value of the contractual cash flows at the time of
signing the lease
E.all of the above
Answer:
23) Which of the following is not a generally accepted basis for
inventory valuation?
A.net realizable value
B.variable manufacturing cost
C.replacement cost
D.acquisition cost
E.net realizable value reduced by a normal profit margin
Answer:
24) At the date of the financial statements, common stock shares issued
would exceed common stock shares outstanding as a result of the
A.declaration of a stock split
B.declaration of a stock dividend
C.purchase of treasury stock
D.payment in full of subscribed stock
E.None of these choices is correct
Answer:
25) On the statement of cash flows, the issuance of capital stock for
cash to be used for future expansion of a production facility is
treated as a/an
A.investing activity
B.financing activity
C.operating activity
D.exchange transaction
E.funds flow activity
Answer:
26) 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 the present value of future cash
flows; 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 realize 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:
27) Treasury stock or treasury shares are shares a firm has previously
issued and later reacquired. Which of the following is/are not
true?
A.Some firms believe that their own shares provide a good
investment
B.Evidence supports the notion that share prices often increase
after a firm announces a share repurchase program
C.Share repurchases reduce common shareholders equity and increase
the proportion of debt in the capital structure, making the firm
more risky and therefore less attractive to an unfriendly
bidder
D.Some firms even borrow cash to repurchase shares, which affects
the debt ratios even more than using already available cash to
reacquire shares
E.Share repurchases use up available cash and thereby increase the
attractiveness of the company to outsiders who believe that the
stock buy back makes the company an attractive target
Answer:
28) Which inventory cost flow assumption emphasizes the income
statement as opposed to the balance sheet?
A.LIFO method
B.FIFO method
C.weighted-average method
D.acquisition cost
E.specific identification method
Answer:
29) On December 31, 2012, Holland Group reported a balance in
Restructuring Provisions of 50.9 million, of which 12.5 million was
expected to be paid in 2013, with the remainder to be settled
during 20142015. The balance in this account at the start of the
year was 84.0 million. During 2012, assume that Holland accrued
restructuring charges of 14.2 million, and
reversed 7.3 million of previous charges.
REQUIRED:
a. Prepare all journal entries Holland made during 2012 related to
its restructuring
activities.
b. How will Holland report its Restructuring Provision on its
balance sheet for the year
ended December 31, 2012?
c. What is the effect of Holland’s 2012 restructuring activities on
its income statement?
How are these activities displayed on the statement of cash flows?
Ignore tax effects.
Answer:
30) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is not true?
A.Under the capital, or finance, lease method, the lessee records
the signing of a capital lease the same as if the lessee sold the
leased asset for an installment note receivable
B.Under the capital, or finance, lease method, the lessee
recognizes interest expense on the lease liability, similar to
recognizing interest expense on long-term notes or bonds
C.Under the capital, or finance, lease method, the lessee amortizes
the leased asset, similar to recognizing depreciation on buildings
and equipment
D.Under the capital, or finance, lease method, the lessee records
the leased asset and the lease liability on the balance sheet at
the present value of the contractual cash flows at the time of
signing the lease
E.The capital, or finance, lease method, treats leases equivalent
to installment purchases or sales, where the lessee borrows funds
from the lessor to purchase the asset and the lessor recognizes
profit at the time of sale
Answer:
31) Dividends and interest from Minority, Passive Investments become
income when the
A.dividends and interest are received
B.dividends and interest are earned
C.dividends are earned and the interest is declared
D.dividends are declared and the interest is earned
E.dividends are declared and the interest is received
Answer:
32) Which method of preparing the statement of cash flows starts with
the total for net income and removes the effects of gains and
losses from nonoperating transactions, and then adds or subtracts
balance sheet changes involving operating accounts?
A.direct method
B.fixed method
C.indirect method
D.funds flow method
E.variable method
Answer:
33) Which of the following would be reported in the operating,
investing, or financing sections of the statement of cash flows
prepared under the indirect method?
A.Declaration of an unpaid cash dividend
B.Acquisition of a factory warehouse by issuing long-term debt
C.Gain on the sale of cash equivalents
D.Write-off of an uncollectible account receivable
E.None of these answers is correct.
Answer:
34) Income statements prepared under IFRS contain which of the
following sections or categories, depending on the nature of a
firms earnings for the period?
A.income from continuing operations
B.income, gains, and losses from discontinued operations
C.separate disclosure of material income items
D.all of the above
E.none of the above
Answer:
35) The following was abstracted from the accounts of the Anderson
Corp. at year-end:
| Total income since incorporation …………………. | $420,000 |
| Total cash dividends paid ……………………….. | 130,000 |
| Proceeds from sale of donated stock ………………. | 45,000 |
| Total value of stock dividends distributed ………… | 30,000 |
| Excess of proceeds over cost of treasury stock sold … | 70,000 |
What should be the current balance of Retained
Earnings?
A.$260,000
B.$290,000
C.$305,000
D.$335,000
E.None of these answers is correct
Answer:
36) During Year 3, investors in bonds of Kline Corporation exercised
their option to convert their debt securities into shares of common
stock. The entry made in the accounting records to record the
conversion is as follows:
Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 3,000
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 1,000
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . .
. . . . . . . .2,000
The transaction requires
A.inclusion in the statement of cash flows as an operating
activity, only
B.inclusion in the statement of cash flows as an investing
activity, only
C.inclusion in the statement of cash flows as a financing activity,
only
D.disclosure in a supplementary schedule or notes to the financial
statements
E.disclosure in managements discussion and analysis
Answer:
37) The capitalization of interest in the acquisition cost of assets
during construction
A.reduces otherwise reportable interest expense
B.increases net income during periods of construction
C.results in higher depreciation charges, reducing net income
D.delays expense recognition from the times of borrowing to the
times of using the asset
E.all of the above
Answer:
38) During May, Claremore sold 500 portable CD players for $50 each.
Each CD player cost Claremore $25 to purchase and carried a
one-year warranty. If 10 percent typically need to be replaced over
the warranty period, what amount should Claremore debit Product
Warranty Expense for in May?
A.$2,500
B.$1,250
C.$250
D.$1,000
E.$3,000
Answer:
39) The final step in preparing the statement of cash flows is to use
the information provided in the master T-account for _____ to
prepare the formal statement.
A.Cash
B.Funds
C.Operations
D.Changes in accounts
E.none of the above
Answer:
40) Before preparing the balance sheet and income statement, an
accountant would use what accounting record to first record the
firm’s transactions?
A.the trial balance
B.the adjusting entry
C.the general ledger
D.the subsidiary ledger
E.the journal
Answer:
41) Which of the following is true?
A.Employees receive stock rights as a form of compensation
B.Employees in general may not transfer or sell stock rights to
others
C.Stock rights give shareholders the right to purchase shares of
common stock at half-price
D.Stock rights usually do not trade in public markets
E.Firms grant stock rights to current shareholders
Answer:
42) U.S. GAAP and IFRS require that some temporary differences create
deferred tax assets. The temporary differences include the
A.provision for estimated uncollectible accounts when they
recognize sales on account, only
B.provision for estimated warranty cost in the year the warranted
products are sold, only
C.recognition of tax-exempt interest income, only
D.payment of municipal penalties and fines, only
E.provision for estimated uncollectible accounts when they
recognize sales on account, and the provision for estimated
warranty cost in the year the warranted products are sold
Answer:
43) The U.S. government will pay Turner 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 Turner Company purchases the bonds, the market
prices these bonds to yield Turner Company 6% annually (3% each six
months). The bonds are classified as held to maturity. Because the
market requires a _____ than the _____ on the bonds, the bonds will
sell on the market for a _____
A.lower yield; stated interest rate; premium
B.lower yield; market interest rate; premium
C.higher yield; stated interest rate; discount
D.lower yield; stated interest rate; discount
E.market yield; stated interest rate; premium
Answer:
44) Assume that a firm uses the accrual basis of accounting. Indicate
the amount of expense the firm recognizes during the month of
November for each independent transaction.
a.Rent of $3,600 is paid on November 1 for the months November
through January.
b.Inventory costing $2,500 is ordered on account. The invoice is
received on November 25 and the goods are received on December
c.Insurance premium of $900 is paid for a full year of coverage
starting November 1.
d.On December 3, an invoice for November utilities of $325 is
received.
e.On November 1, supplies costing $2,200 are purchased. At November
30, $500 of supplies remained on hand.
Answer:
45) For various reasons, a single economic entity may exist in the form
of a parent and several legally separate subsidiaries, often
referred to as an affiliated group. Which of the following is/are
true?
A.A consolidation of the financial statements of the parent and
each of its subsidiaries presents the results of operations,
financial position, and cash flows of an affiliated group of
companies under the control of a parent as if the group of
companies composed a single entity
B.The parent and each subsidiary are legally separate entities that
operate as one centrally controlled economic entity
C.Consolidated financial statements generally provide more useful
information to the shareholders of the parent corporation than do
separate financial statements for the parent and each
subsidiary
D.all of the above
E.none of the above
Answer:
46) During Year 3, Carrington Company made the following expenditures
relating to plant machinery and equipment:
| Continuing, frequent, and low cost repairs | $46,000 | |
|
Special long-term protection devices were attached to ten machines |
11,000 | |
| A broken gear on a machine was replaced | 5,000 | |
How much should be charged to repairs and maintenance in
Year 3?
A.$46,000
B.$51,000
C.$57,000
D.$41,000
E.none of the above
Answer:
47) The _____ displays (lists) cash receipts and disbursements from
operating activities.
A.bottom-up method
B.top-down method
C.indirect method
D.direct method
E.cash method
Answer:
48) For cash flow hedges, which of the following is/aretrue?
A. U.S. GAAP and IFRS require firms to remeasure the derivative
instrument (the hedging instrument) to fair value each period but
to include gains and losses from changes in fair values in other
comprehensive income each period to the extent the hedging
instrument is highly effective in neutralizing the risk of the
hedged item
B.Firms must include the ineffective portion in net income
currently
C.At the end of the period, the firm closes the Other Comprehensive
Income account to the balance sheet account for Accumulated Other
Comprehensive Income
D.The firm removes the amount in Accumulated Other Comprehensive
Income related to a particular hedging instrument and transfers it
to net income either periodically during the life of the hedging
instrument or at the time of settlement, depending on the type of
derivative instrument used as a hedge
E.all of the above
Answer:
49) The equity method records the initial purchase of an investment in
voting common stock at _____. Each period, the investor treats as
revenue its share of the _____ of the investee. The investor treats
dividends declared by the investee as _____.
A.acquisition cost; dividends; income
B.acquisition cost; periodic earnings; a reduction of the investors
investment in stock of the investee account
C.present value of future cash flows; dividends; a reduction of the
investors investment in stock of the investee account
D.present value of future cash flows; periodic earnings; a
reduction of the investors investment in stock of the investee
account
E.future value of present cash flows; dividends; a reduction of the
investors investment in stock of the investee account
Answer:
50) Fassinos Wholesale Corporation
Fassino Wholesale Corporation (Fassinos) operates discount retail
stores. To shop in a Fassinos store, customers must pay a
nonrefundable, annual membership fee in advance, using either cash
or an American Express card. A customer purchases an annual
membership from Fassinos for $120, a 20-pack of paper towels for
$10.99, and four new tires for $480. The tire purchase includes
mounting and aligning by a Fassinos tire technician at the time of
initial installation and alignment and tire rotation services for
three years afterward. The customer pays with an American Express
card.
When should Fassinos recognize revenue from selling the paper
towels?
A.Fassinos will recognize $10.99 in revenue at the time it pays the
paper towel vendor the wholesale price of the paper towels
B.Fassinos will recognize $10.99 in revenue at the end of the month
of sale
C.Fassinos will recognize $10.99 in revenue at the end of the
quarter of sale
D.Fassinos will recognize $10.99 in revenue at the time of sale
E.Fassinos will recognize $10.99 in revenue at the end of the year
of sale
Answer:
51) The balance sheet of Old Gold Mines, a gold mining company, for the
year ended June 30, 20×1, showed current assets of $6 million,
noncurrent assets of $49 million, noncurrent liabilities of $14
million, and current liabilities of $4 million. Compute the amount
of shareholders equity on Old Gold Mines balance sheet at the end
of 20×1.
A.$14 million
B.$27 million
C.$33 million
D.$37 million
E.$41 million
Answer:
52) A _____ is a financial contract in which the borrower and the
lender agree to certain conditions about repayment, operating
policies, other borrowing activities while they are outstanding,
and other provisions.
A.preferred stock
B.common stock
C.paid-in-capital
D.bond
E.a restriction on retained earnings
Answer:
53) Earnings per share equals
A.net income attributable to bonds and common and preferred stock
divided by the weighted average number of common shares outstanding
during the period
B.net income attributable to common and preferred stock divided by
the weighted average number of common shares outstanding during the
period
C.net income attributable to common and preferred stock divided by
the end of period number of common shares outstanding
D.net income attributable to common stock divided by the weighted
average number of common shares outstanding during the period
E.net income attributable to common stock divided by the end of
period number of common shares outstanding
Answer:
54) Chen Company
Chen Company office equipment costs $10,000, has an expected life
of four years and a salvage value of $400. The firm has depreciated
this asset on a straight-line basis. The firm has recorded
depreciation for two years and then sells the equipment at midyear
in the third year.
What is the entry to record depreciation charges up to the date of
sale for Chen Company?
A.Depreciation Expense . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1,200
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 1,200
B.Depreciation Expense . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 2,400
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 2,400
C.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 1,200
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 1,200
D.Accumulated Depreciation . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 2,400
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 2,400
E.Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 1,200
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 1,200
Answer:
55) If permitted a choice of depreciation methods for tax reporting, a
firm should try to maximize the amount of the
A.reductions in tax payments from claiming depreciation
B.present value of the reductions in tax payments from claiming
depreciation
C.future value of the reductions in tax payments from claiming
depreciation
D.present value of the increase in tax payments from claiming
depreciation
E.amount of the increase in tax payments from claiming depreciation
Answer:
56) Firms receive cash inflows and disburse cash outflows for investing
activities such as to
A.pay dividends
B.build their productive capacity by acquiring property, plant, and
equipment
C.make debt service payments
D.all of the above
E.none of the above
Answer:
57) An accounting _____ arises when a firm incurs an obligation to make
a future sacrifice that, because of a past event or transaction, it
has little or no discretion to avoid.
A.asset
B.liability
C.shareholders equity
D.revenue
E.expense
Answer:
58) When a dividend is declared and paid in stock,
A.total stockholders’ equity does not change
B.total stockholders’ equity decreases
C.the current ratio increases
D.the amount of working capital decreases
E.None of these choices is correct
Answer: