ACC 802

1) The Accounts Receivable, Gross amount less the Allowance for
Uncollectibles yields Accounts Receivable, Net, which reflects the
amount of cash the firm expects to collect.

Answer:

2) The total amount of cash that the employer contributes to the firms
pension plan over time is the total amount of pension expense that
the employer must recognize in measuring net income.

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3) When do firms recognize revenue?

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4) Using the information in the following tables, determine the amount
of revenue and expense reported in years 1-4 and the totals
reported for all 4 years under both the percentage-of-completion
method and the installment method.

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5) A balance sheet prepared according to U.S. GAAP lists assets from
most liquid to least liquid, where liquid refers to the ease of
converting the asset into cash.

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6) Three measures of profitability for a firm engaging in operations
selling merchandise in its stores, to generate net income are: (1)
Rate of return on assets, (2) Rate of return on common shareholders
equity, and (3) Earnings per share of common stock.

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7) Both U.S. GAAP and IFRS require firms to report certain information
about each of their operating segments.

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8) The accountants definition of working capital is the same as the
definition often used in finance.

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9) Most publicly traded firms operate as corporations. Discuss three
advantages of the corporate form.
Most publicly traded firms operate as corporations. The corporate
form has at least three advantages:

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10) What are the cost-flow assumptions used in inventory measurement?

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11) Discuss the factors a firm considers when choosing among the
alternative depreciation and amortization methods.

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12) Why might inventories increase in market value subsequent to
acquisition?
A.a shortage of a key raw material
B.a competitor may introduce a technologically superior product
C.a product may include materials found to contain a health
hazard
D.the introduction of a lower-cost raw material
E.all of the above

Answer:

13) The formats used to present the items that are included in Other
Comprehensive Income include which of the following?
A.A two-statement presentation that includes a balance sheet and a
separate statement of comprehensive income
B.A single statement that reconciles changes between the balance
sheet and the statement of retained earnings
C.A single statement of comprehensive income that shows all the
changes in net assets. This statement includes both Net Income and
Other Comprehensive Income
D.A two-statement presentation that includes a statement of cash
flows and a separate statement of comprehensive income
E.None of these answer choices is correct

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14) In assessing the debt ratios, analysts customarily vary the
standard in relation to the stability of the firms earnings and
cash flows from operations. Public utilities have liabilities to
assets ratios frequently on the order of
A.0% to 10%
B.10% to 20%
C.30% to 40%
D.60% to 70%
E.90% to 100%

Answer:

15) Firms account for leases using either the operating lease method or
the capital (finance) lease method. Which of the following is not
true?
A.The capital, or finance, lease method treats leases equivalent to
installment purchases or sales, where the lessor borrows funds from
the lessee to purchase the asset and the lessee recognizes profit
at the time of sale
B.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
C.The lessee amortizes the leased asset, similar to recognizing
depreciation on buildings and equipment
D.The lessee recognizes interest expense on the lease liability,
similar to recognizing interest expense on long-term notes or
bonds
E.The lessor records the signing of a capital lease the same as if
the lessor sold the leased asset for an installment note receivable

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16) In estimating the amount of uncollectible accounts the accountant
(1) estimates the amount of uncollectible accounts that will likely
occur over time in connection with sales of each period and (2)
makes an entry debiting Bad Debt expense and crediting Allowance
for Uncollectible Accounts. The name of this procedure is/are
the
A.percentage-of-sales
B.aging-of-accounts-receivable
C.direct write-off
D.indirect write-off
E.tax accounting

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17) The value of common stock investments will likely change between
the time the shares are purchased and the time in the future when
they are sold. The difference between the eventual selling price
and the purchase price, is often called
A.speculative returns
B.enrichment
C.inflation
D.price appreciation (or price depreciation, if negative)
E.deflation

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18) The allowance method is used by a firm
A.to estimate for uncollectibles when it knows that at the time of
sale, it will experience some reduction in future cash flows and
this amount can be estimated with reasonable precision in order to
reduce reported earnings in the period of sale to the amount of the
expected net cash collections
B.when the customer has the right to return the product for a
refund and the firm can estimate with reasonable precision the
amount of returns at the time of sale
C.when the customer has the right to repairs or replacement under
warranty if the purchased product is defective, and the firm can
estimate with reasonable precision the amount of warranty costs at
the time of sale
D.all of the above
E.none of the above

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19) Which section includes income derived from a firms primary business
activities as well as from activities peripherally related to
operations? (The firm expects these sources of earnings to
continue.)
A.income from continuing operations
B.income, gains, and losses from discontinued operations
C.extraordinary gains and losses
D.retained earnings
E.paid-in-capital

Answer:

20) Gross Company purchased $50,000 worth of office supplies on January
1. Gross expects to use 60 percent of the supplies in the first
year and the remainder in the second year. After adjusting entries
(and before closing entries), how much should Gross show in its
Supplies Expense account?
A.$50,000
B.$30,000
C.$25,000
D.$20,000
E.$0

Answer:

21) The records of Horner Corp. show the following
information:


(a) Purchased a three-year insurance policy for $10,800 on
September 1, 2013, and recorded the premium payment in the asset
account.
(b) Borrowed $60,000 on a 1-year, 12% note on August 1, 2013.
Interest is payable at maturity.
(c) Collected $8,400 on September 1, 2013, to cover six months’
rent paid in advance, and recorded the receipt in a revenue
account.
(d) Machinery purchased on January 1, 2013, for $600,000 is to be
depreciated over four years, with no salvage value at the end of
this period.
Prepare journal entries to adjust the books of Horner Corp. at
December 31, 2013.

Answer:

22) Which of the following is true regarding the U.S. Internal Revenue
Service?
A.The IRS permits firms to use the allowance method to calculate
the tax deduction for bad debts
B.The IRS requires that firms recognize bad debt expense only when
they conclude an account is not collectible
C.The IRS permits firms to use the aging of accounts receivable
method to calculate the tax deduction for bad debts
D.The IRS permits firms to use the percentage of sales to calculate
the tax deduction for bad debts
E.The IRS permits firms to use the cost of goods sold method to
calculate the tax deduction for bad debts

Answer:

23) While no general principle describes the nature of items excluded
from net income and included in Other Comprehensive Income, they
tend to arise from remeasurements of assets and liabilities (often,
remeasurements at fair value) and not from transactions. For
example, IFRS permits but does not require firms to revalue certain
noncurrent assets upward to reflect increases in fair value in
excess of acquisition cost. Under IFRS, such a revaluation
remeasurement increases assets (because the firm now records an
existing asset on the balance sheet at a larger number) and
increases Other Comprehensive Income. These increases are
accumulated in a(n) _____ account, Revaluation Surplus.
A.liability
B.shareholders equity
C.revenue
D.asset
E.expense

Answer:

24) Which of the following is/are true about goodwill?
A.Goodwill reflects the value of knowledgeable employees
B.Goodwill reflects the value of a reputation for quality
products
C.Under both U.S. GAAP and IFRS, goodwill has an indefinite life,
and firms do not amortize the amount recognized as goodwill
D.Firms must test goodwill annually for a loss in value
E.all of the above

Answer:

25) The following information pertains to the Kathy Company for the
year ended December 31, Year 2:

The price-earnings ratio for Kathy’s common stock is
A.8 times
B.9 times
C.10 times
D.12 times
E.14 times

Answer:

26) Which of the following is/are true?
A.Trading securities can be classified as current or noncurrent
depending on management’s intent
B.Held-to-maturity securities should not be classified as current
under any circumstance
C.Trading securities should not be classified as current under any
circumstance
D.Available-for-sale securities can be classified as current or
noncurrent depending on management’s intent
E.None of these answer choices is correct

Answer:

27) U.S. GAAP requires that firms classify cash payments for interest
expense as a(n) _____ activity.
A.operating
B.financing
C.investing,
D.operating, investing, or financing
E.None of the above are correct

Answer:

28) ValleyView Company

ValleyView Company acquires common stock of Kansas Enterprises for
$400,000 on November 1, 2013, and designates this investment as
available-for-sale. The fair value of these shares is $435,000 on
December 31, 2013 . ValleyView sells these shares on August 15,
2014, for $480,000.

(Refer to ValleyView.) The journal entry to measure securities
available-for-sale on December 31, 2013 is:
A.Unrealized Holding Gain on
Securities Available-for-Sale…………….35,000
Marketable
Securities……………………………….35,000
B.Unrealized Holding Gain on
Securities Available-for-Sale…………….35,000
Common
Stock………………………………………..35,000
C.Common Stock………………………………… 35,000
Unrealized Holding Gain on
Securities Available-for-Sale…………………..35,000
D.Marketable Securities………………………. 35,000
Cash……………………………………………………..
35,000
E.Marketable Securities……………………… 35,000
Unrealized Holding Gain on
Securities Available-for-Sale………………….35,000

Answer:

29) Which of the following is/are true?
A.Most derivative acquisitions represent marketable securities held
as current assets
B.The cash flow from operations section shows a subtraction for the
increase in the current asset accounts in an amount equal to the
firms expenditure to acquire the derivative
C.If the firm classifies the derivative as a nonoperating asset,
then the cash outflow appears in the investing section of the
statement of cash flows
D.Subsequent to acquisition, the firm may report changes in the
fair value of the derivative in income
E.all of the above

Answer:

30) Prepare journal entries for the following transactions:


a. On November 1, Year 1, Slotkin Co. received a $1,000 note
receivable with a 90-day maturity and a 12% interest rate in
exchange for an outstanding account receivable of the same face
amount.
b. Assume Slotkin Co. closes its books on a monthly basis. Prepare
any adjusting journal entries necessary at November 30, Year 1.
c. Prepare any adjusting journal entries necessary at December 31,
Year 1.

Answer:

31) For financial reporting purposes, acquisition and disposition of
trading securities are usually _____ activities.
A.nonoperating
B.financing
C.investing
D.operating
E.exchange

Answer:

32) The _____ of an asset as defined in U.S. GAAP is an opportunity
cost in the sense that it reflects an amount that the firm could
receive if it sold the asset today. It is the amount the firm
forgoes by not selling the asset. In U.S. GAAP, it reflects a
market participant perspective, so that the intentions of managers
regarding how they plan to use the asset do not determine the
measurement.
A.Current Replacement Cost
B.Net Realizable Value
C.Fair Value
D.Present Value of Future Net Cash Flows
E.Acquisition cost

Answer:

33) Managers frequently cite which of the following reason(s) for using
off-balance sheet financing?
A.Some managers believe that it might lower the cost of
borrowing
B.Lower borrowing costs might result if lenders ignore
off-balance-sheet financing
C.Lower borrowing costs might result if lenders are unaware of
off-balance sheet financing: because borrowers do not disclose
it
D.Off-balance-sheet financing might lead lenders to set interest
rates for loans lower than the underlying risk levels warrant
E.all of the above

Answer:

34) All of the following statements are true except:
A.U.S. GAAP and IFRS define fair value as the price that would be
received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.
B.The fair value of an asset is an opportunity cost in the sense
that fair value reflects an
amount that the firm could receive if it sold the asset today
C.Current replacement cost is often used in U.S. GAAP to measure
inventories whose usefulness has declined below acquisition
cost
D.Net realizable value is similar, but not identical, to fair
value
E.Net realizable value is not allowed by IFRS

Answer:

35) In year 1, Northern Construction agrees to build a fire station
that will be completed in year 2. Construction starts in year 1.
The station will have costs of $2,000,000 in year 1 and $2,000,000
in year 2. Northern receives payment for the station of $5,000,000
in advance, in year 1. If Northern uses the completed contract
method, what net profit is recognized by Northern in each year?
Year 1Year 2
A.$0 $1,000,000
B.$1,000,000 $0
C.$3,000,000 ($2,000,000)
D.$500,000 $500,000
E.$250,000 $750,000

Answer:

36) What method starts with the total for net income and adjusts for
expenses and revenues not using or producing cash, then removes the
effects of nonoperating gains and losses or any balance sheet
changes involving non-cash operating accounts?
A.direct method for calculating the cash flows from investing
B.indirect method for calculating the cash flows from investing
C.indirect method for calculating the cash flows from financing
D.direct method for calculating the cash flows from operations
E.indirect method for calculating the cash flows from operations

Answer:

37) Which of the following is not true?
A.Owners of preferred stock have a claim on the assets of a firm
that is senior to the claim of common shareholders
B.Preferred shares carry special rights
C.The senior status and special rights may induce certain investors
to purchase preferred shares of a firm, even though they would be
unwilling to purchase common shares of the same firm
D.The senior status and special rights decrease the risks of
preferred shareholders relative to common shareholders
E.Jurisdictional laws dictate the rights and obligations of the
issuing firm and of the investor in the preferred shares

Answer:

38) The U.S. government will pay SB Amos $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. Assume that
at the time SB Amos purchases the bonds, the market prices these
bonds to yield SB Amos 6% annually (3% each six months). The bonds
are classified as held to maturity. SB Amos will pay an amount
equal to _____ for the bonds.
A.$95,734,898
B.100,000,000
C.105,567,432
D.110,987,012
E.116,802,503

Answer:

39) To calculate the amount of net income assignable to common
shareholders equity, the analyst does not
A.subtract all amounts required to compensate other providers of
financing for the use of their funds
B.make any further adjustment for interest
C.subtract from net income any earnings allocable to preferred
stock equity usually the dividends on preferred stock declared
during the period
D.subtract dividends on common stock
E.none of the above

Answer:

40) The extent to which a firm adjusts net income for changes in
noncurrent assets and noncurrent liabilities in deriving cash flow
from operations under the indirect method depends on the nature of
its operations. Firms that decrease in size will usually show
A.additions or subtractions for losses and gains on the disposal of
assets
B.additions, only for gains on the disposal of assets
C.subtractions, only for losses on the disposal of assets
D.no adjustment for losses and gains on the disposal of assets
E.none of the above

Answer:

41) You’ve been asked to review the following balance sheet which has
been prepared by a new staff member.

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42) If an expense has been incurred but not yet recorded, then the
end-of-period adjusting entry would involve
A.a liability account and an asset account
B.a liability account and a revenue account
C.a liability and an expense account
D.a receivable account and a revenue account
E.None of these answer choices is correct

Answer:

43) Bealls Department Store reports in millions of dollars on its
balance sheet for year-end Year 6 and Year 5 as follows:

It reports charge-offs [synonym for write-offs] of accounts
receivable during Year 6 of 4.5 percent of its average gross
receivables of $26,000 million and that Bad Debt Expense is 3.5
percent of credit card sales. What were Bealls credit card sales
for Year 6?

Answer:

44) What does it mean for a firm to reverse a portion of a previously
accrued charge, such as
the expense creating a warranty liability or a restructuring
liability? What is the effect of a
reversal on the firms income statement, balance sheet, and
statement of cash flows in the
period of the reversal?

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45) Why do accountants sometimes refer to the equity method as a
one-line consolidation?

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46) What role does management intent play in the accounting treatment
of marketable equity securities?

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47) The life of a construction contract is 4 years. The firm used the
percentage-of-completion method. Under this method, cash collected
and revenues recognized are shown below. Total cost of the project
was $800,000. What portion of the total cost was incurred each
year?

Answer:

48) Piu Co. owns 100% of Xu Co. Piu has owned Xu since Xu was
incorporated. At December 31, $15,000 of Xus accounts receivable
represent amounts payable by Piu. $10,000 of Pius accounts
receivable represent amounts payable by Xu. During the current
year, Xu sold $10,000 in merchandise to Piu (at cost its cost of
$10,000). Piu has sold all the merchandise purchased from
Xu.

Required:

Prepare the appropriate elimination entries necessary to prepare a
consolidated balance sheet and income statement.

Answer: