1) The accounting for investments in common stock depends on (1) the
expected holding period, and (2) the purpose of the investment, as
determined by both the percentage held and management intent.
Answer:
2) The second section of the statement of cash flows shows the amount
of cash flow from investing activities.
Answer:
3) What factors affect the risk of business firms?
Answer:
4) Describe the conceptual framework used by FASB and the IASB to
guide their standard-setting decisions.
Answer:
5) The longer a firm uses LIFO, the greater will be the difference
between inventories based on LIFO and FIFO cost-flow assumptions.
Answer:
6) Corporations often sell, or exchange for goods and services,
various call options on their shares. The excess of the exercise
price over the market price is the options intrinsic value.
Answer:
7) Using the accrual basis of accounting to measure net income creates
the need for a separate financial statement that reports the impact
of operations on cash flows.
Answer:
8) All transactions that increase net assets affect income.
Answer:
9) What is a noncontrolling interest in a consolidated subsidiary?
Answer:
10) Both U.S. GAAP and IFRS distinguish the same three categories of
long-lived assets for impairment analysis, and have the same
procedures for assessing an asset for impairment and measuring the
impairment loss.
Answer:
11) On January 1, Year 1, Plano Co. purchased for $180,000, 90% of
Santa Fe Co. at a time when Santa Fe had a book value of $200,000.
There were no intercompany transactions during year 4 .
| CONDENSED BALANCE SHEETS As of December 31, Year 4 | ||
| Assets | Plano | Santa Fe |
| Accounts receivable | $50,000 | $40,000 |
| Investment in Santa Fe (equity) | 270,000 | – |
| Other assets | 1,680,000 | 710,000 |
| Total assets | $2,000,000 | $750,000 |
| Liabilities and Equity | ||
| Accounts payable | $40,000 | $50,000 |
| Other liabilities | 1,360,000 | 400,000 |
| Common stock | 200,000 | 200,000 |
| Retained earnings | 400,000 | 100,000 |
| Total liabilities and equity | $2,000,000 | $750,000 |
| CONDENSED INCOME STATEMENT for Current Year | ||
| Plano | Santa Fe | |
| Sales | $800,000 | $200,000 |
| Equity in earnings of Santa Fe | 18,000 | – |
| Total revenues | $818,000 | $200,000 |
| Cost of goods sold | 500,000 | $120,000 |
| Depreciation | 100,000 | 30,000 |
| Other expenses | 78,000 | 20,000 |
| Tax expense | 40,000 | 10,000 |
| Total expenses | $718,000 | $180,000 |
| Net income | $100,000 | $20,000 |
Required:
Prepare the appropriate elimination and reclassification entries
necessary to prepare a consolidated balance sheet and income
statement.
Answer:
12) Baltimore Corporation purchases a new machine for $50,000 on
January 1, 2008. The machine has a four-year estimated service life
and an estimated salvage value of zero. After paying the cost of
running and maintaining the machine, the firm enjoys a
$25,000-per-year excess of revenues over expenses (except
depreciation and taxes). In addition to the $25,000 from the
machine, other pre-tax income each year is $35,000. Baltimore uses
straight-line depreciation for financial reporting and depreciates
the machine for tax reporting using the following percentages: 33%
in the first year, 44% in the second, 15% in the third, and 8% in
the fourth. Depreciation is Baltimores only temporary difference.
Baltimore pays combined federal and local income taxes at a rate of
40% of taxable income.
a. Compute the amount of income taxes currently payable for each of
the four years.
b. Compute the carrying value of the machine for financial
reporting and the tax basis of the machine for tax reporting at the
end of each of the four years. The tax basis is the amortized cost
for income tax purposes.
c. Compute the amount of income tax expense for each of the four
years.
d. Give the journal entries to record income tax expense and income
tax payable for 2008 through 2011.
Answer:
13) The computation of the pension liability for a defined benefit plan
uses actuarial estimates or actuarial assumptions of
A.actual interest rates
B.estimated employee mortality, only
C.actual employee turnover, only
D.estimated employee turnover, mortality, and interest rates
E.actual employee turnover, mortality, and interest rates
Answer:
14) An impairment loss on a trademark arises when
A.the book value of the trademark exceeds the undiscounted cash
flows
B.the book value of the trademark exceeds the market value
C.the market value of the trademark exceeds the undiscounted cash
flows
D.the book value of the trademark exceeds the discounted cash
flows
E.the book value of the trademark exceeds the net realizable value
Answer:
15) _____ firms transform raw materials, purchased parts, and
components into finished products in their factories.
A.Merchandising
B.Manufacturing
C.Consulting
D.Staffing
E.Health Care
Answer:
16) A firm that transfers its receivables in exchange for cash can
A.use its accounts receivable as collateral for a loan from a bank
or other financial institution
B.factor its accounts receivable to a bank or other financial
institution in exchange for cash
C.transfer the accounts receivable to a legally separate entity
that issues debt securities to investors
D.use all of the above
E.use none of the above
Answer:
17) Bonds whose indentures contain a provision which requires the
issuing firm to make a provision for partial early retirement of
the bond issue are sinking fund bonds and _____ bonds.
A.callable bonds
B.refunded bonds
C.serial bonds
D.convertible bonds
E.zero coupon bonds
Answer:
18) Credit Company
Information concerning Credit Company’s portfolio of debt
securities at May 31, Year 6, and May 31, Year 7, is presented
below. All of the debt securities were purchased by Credit Co.
during June, Year 5. Prior to June, Year 5, Credit Co. had no
investments in debt or equity securities.
| As of May 31, Year 6 | Amortized Cost | Fair Value |
| CZ Company bonds | $164,526 | $168,300 |
| Jerry Industry bonds | 204,964 | 205,200 |
| Barley Inc. bonds | 305,785 | 285,200 |
| $675,275 | $658,700 | |
| As of May 31, Year 7 | Amortized Cost | Fair Value |
| CZ Company bonds | $152,565 | $147,600 |
| Jerry Industry bonds | 193,800 | 204,500 |
| Barley Inc. bonds | 289,130 | 291,400 |
| $635,495 | $643,500 | |
a. Assuming that the above securities are properly
classified as available-for-sale securities under U.S. GAAP, how
would the unrealized holding gain or loss as of May 31, Year 7, be
recognized?
b. Assuming that the above securities are properly classified as
held-to-maturity securities under U.S. GAAP, how, if at all, would
the unrealized holding gain or loss as of May 31, Year 7, be
recognized?
Answer:
19) 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 lessee borrows funds from
the lessor to purchase the asset and the lessor 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 differently
than if the lessor sold the leased asset for an installment note
receivable
Answer:
20) 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. Firms that
grow or diversify by acquiring minority ownership positions in
other businesses will often show a
A.addition to retained earnings for distributed earnings
B.addition to net income for distributed earnings
C.subtraction from net income for equity in undistributed
earnings
D.addition to net income for equity in undistributed earnings
E.subtraction from net income for distributed earnings
Answer:
21) Management, under the oversight of the firms governing board (or
boards), sets the firms strategies. Such strategies might
include:
A.determining the firms lines of business
B.determining the firms geographic locations
C.degree to which a given business unit will engage in new product
development
D.all of the above
E.none of the above
Answer:
22) Accountants sometimes refer to the equity method as a one-line
consolidation because
A.the revenues less the expenses of the subsidiary appear in the
one account, Equity in Earnings of Subsidiary
B.the assets and liabilities of the subsidiary appear on one line,
Investment in Subsidiary
C.the application of the equity method therefore rests on the
guiding principle to treat the items in such a way that the parents
net income equals the same amount that it would report if it
consolidated the investee firm instead of using the equity
method
D.all of the above
E.none of the above
Answer:
23) The acquisition cost of manufactured inventories does not include
which category of costs?
A.Administrative
B.Manufacturing Overhead
C.Raw Materials
D.Direct Materials
E.Direct Labor
Answer:
24) Consider a firm that recently issued bonds. Further, consider that
the firm also set up a bond sinking fund.
Required:
a. Why would a firm create a long-term liability?
b. Why would a firm set up a bond sinking fund?
c. If a firm paid $10,000 into its bond sinking fund at the end of
the year, how would this transaction be journalized?
Answer:
25) 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 operating lease method treats leases as executory
contracts
B.The operating lease method recognizes a leased asset on the
lessees balance sheet
C.The operating lease method does not recognize a lease liability
on the lessees balance sheet
D.The lessor recognizes rent revenue as the lessee uses the leased
asset over time
E.The lessee recognizes rent expense as the lessee uses the leased
asset over time
Answer:
26) Which of the following is not 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.Firms engage in transactions involving derivatives and for the
most part, the complex parts of these transactions occur before the
firm has acquired the derivative
Answer:
27) A firm records debt securities purchased at the acquisition cost.
The acquisition cost will differ from the _______ of the debt if
the __________on the bonds differs from the required ________ on
the bonds at the time the firm acquired them.
A.market value; coupon rate; market yield
B.market value; discount rate; coupon yield
C.maturity value; coupon rate; market yield
D.maturity value; discount rate; market yield
E.maturity value; discount rate; coupon yield
Answer:
28) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. The beginning of
the decline phase can produce
A.negative cash flow from operations
B.sales of unneeded property, plant, and equipment can result in
negative cash flow from investing activities
C.excess cash flow to repay remaining debt or diversify into other
areas of business
D.all of the above
E.none of the above
Answer:
29) A firm using FIFO had a beginning inventory of $48,000, an ending
inventory of $56,000, and a pretax income of $400,000. If it had
used LIFO, its beginning inventory would have been $20,000, its
ending inventory would have been $16,000, and its pretax income
would have been:
A.$374,000
B.$388,000
C.$396,000
D.$404,000
E.$412,000
Answer:
30) The schedule that follows shows trial balances for Twain Company at
the end of Year 1 and Year 2. Note that the two trial balances
shown for Year 1 are the Adjusted, Preclosing Trial Balance (after
making all adjusting entries) and the final Post-Closing Trial
Balance, from which the firm constructs the balance sheet. The
trial balance shown for the end of Year 2 is taken before adjusting
entries of any kind, although the firm has periodically written off
specific customers’ Accounts Receivable during the year as those
customers’ accounts become obviously uncollectible.
Twain Company closes its books annually and makes all of its sales
on account. At the end of Year 2, the management of Twain Company,
along with the independent auditor, analyzes the currently
outstanding Accounts Receivable. The aging schedule classifies
accounts as “not yet due,” “overdue less than 30 days,” “overdue 30
days or more.” Twain Company estimates that one-half of one percent
of current accounts will become uncollectible, 5 percent of
accounts overdue less than 30 days will become uncollectible, and
40 percent of accounts overdue 30 days or more will become
uncollectible. From this aging of accounts receivable, the firm
estimated that it will not collect $30,000 of the accounts. The
auditor will use this information in making adjusting entries for
Year 2.
Required:
See the requirements below. If there is insufficient information
for a given question, state just that.
a. What was the dollar amount of Accounts Receivable written off
during Year 2 as obviously uncollectible?
b. What was the total amount of cash collected from customers
during Year 2?
c. What is the dollar amount of net Accounts Receivable shown on
the balance sheet at the end of Year 1?
d. What is the dollar amount of the Bad Debt Expense for Year
2?
e. What is the dollar amount of the net Accounts Receivable shown
on the balance sheet for the end of Year 2?
Twain Company
Trial Balances
| End of Year 1 | End of Year 2 | |||||
| Adjusted Preclosing | Post-Closing | Unadjusted Trial Balance | ||||
| Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | |
| Accts Receivable | $300,000 | $300,000 | $360,000 | |||
| Allow. for Uncollect. Accts | $18,000 | $18,000 | 84,000 | |||
| Sales | 4,800,000 | $6,000,000 | ||||
| Bad Debt Exp. | 100,800 | |||||
| All other accts | 5,599,200 | 1,182,000 | 960,000 | 1,242,000 | 6,156,000 | 600,000 |
| Totals | $6,000,000 | $6,000,000 | $1,260,000 | $1,260,000 | $6,600,000 | $6,600,000 |
Answer:
31) Cash includes:
A.currency
B.money orders
C.bank checks
D.checking accounts and time deposits
E.all of the above
Answer:
32) The statement of cash flows
A.helps the reader judge a firms cash flow needs and how a firm has
dealt with them
B.reflect the cash flows for the period
C.reports the impact of operations on cash flows
D.reports the impact of investing activities on cash flows
E.accomplishes all of the above
Answer:
33) The shareholders equity section of the balance sheet reports the
sources of financing provided by preferred and common shareholders
and their claims on the net assets of the firm. Which of the
following is/are true?
A.The equity of the preferred shareholders usually approximates the
liquidation value of the preferred shares
B.The equity of the preferred shareholders equals the sum of the
amounts appearing in the Preferred Stock, Additional Paid-In
Capital, Retained Earnings, Accumulated Other Comprehensive Income,
Treasury Stock, and other preferred shares equity accounts
C.The equity of the preferred shareholders equals the sum of the
amounts appearing in the Preferred Stock, Additional Paid-In
Capital, and Retained Earnings accounts, only
D.The equity of the preferred shareholders equals the sum of the
amounts appearing in the Preferred Stock and Additional Paid-In
Capital accounts, only
E.The equity of the preferred shareholders equals the amounts
appearing in the Preferred Stock account, only
Answer:
34) _____ means that the information is pertinent to the decisions of
users of financial reports, in the sense that the information can
make a difference in those decisions.
A.Conservatism
B.Realization
C.Recognition
D.Relevance
E.Reliability
Answer:
35) During Year 4, Adams Company had a net increase in accounts payable
for purchases on account. Accounting classifies this source of cash
in the _____ section of the statement of cash flows.
A.Investing
B.Operations
C.Financing
D.Exchange
E.Funds Flow
Answer:
36) The temporary difference associated with accelerated depreciation
for tax purposes and straight-line depreciation for financial
reporting purposes means that a firm will pay _____ income taxes in
the early years of the assets life, but this temporary difference
will reverse over the entire asset life, resulting in _____ taxes
in later years.
A.higher; higher
B.lower; higher
C.higher; lower
D.lower; lower
E.average; average
Answer:
37) Which of the following is not true regarding expenditures for
improvements?
A.Improvements are sometimes called betterments
B.Improvements may increase an assets performance by increasing the
service life
C.Improvements may increase an assets performance by reducing the
operating costs
D.Improvements may increase an assets performance by increasing the
rate of output
E.When the firm makes the expenditure for improvements, it
recognizes the cost of the improvement by debiting the Improvement
Expense account
Answer:
38) A firm owns 1,000 treasury shares which it acquired for $15 per
share (par value $1). The firm sells 500 of the treasury shares for
$20 per share. Using the cost method, what is the entry to record
the sale of the treasury stock using the cost method?
A.Cash10,000
Common Stock-Treasury Shares10,000
B.Cash10,000
Common Stock-Treasury Shares 7,500
Add’l Paid-in Capital-Treasury Stock2,500
C.Cash10,000
Common Stock-Treasury Shares500
Add’l Paid-in Capital-Treasury Stock9,500
D.Cash10,000
Common Stock-Par1,000
Common Stock-Treasury Shares11,000
E.Common Stock-Treasury Shares11,000
Cash 10,000
Common Stock-Par 1,000
Answer:
39) 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.
If the Chen Company sells the equipment for $3,000 cash, the entry
to record the sale would be as follows:
A.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 3,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .6,000
Loss on Sale of Equipment . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .1,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 10,000
B.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 3,000
Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 6,000
Loss on Sale of Equipment . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 1,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 10,000
C.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 3,000
Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .6,000
Loss on Sale of Equipment . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 1,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 10,000
D.Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 3,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .6,000
Loss on Sale of Equipment . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1,000
E.Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 3,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .6,000
Loss on Sale of Equipment . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1,000
Answer:
40) Which of the following is/are true?
A.Subsequent to the acquisition of a derivative, the firm may
report changes in fair value of derivatives in Other Comprehensive
Income
B.Subsequent to the acquisition of a derivative, the firm may
report changes in fair value of derivatives but they have no effect
on any lines of the statement of cash flows
C.As the derivative transaction settles, some of the settlements
involve net cash flow
D.As the derivative transaction settles, derivatives with cash
settlement can involve cash flows even when the firm uses them as a
hedge; often, however, the cash inflow or outflow from the
derivative usually offsets another cash outflow or inflow from the
other side of the hedge
E.all of the above
Answer:
41) The economic value of a tangible asset may decline below its book
value but an impairment loss would not be recognized when the
A.undiscounted future cash flows exceed its book value
B.undiscounted future cash flows exceed its market value
C.discounted future cash flows exceed its book value
D.discounted future cash flows exceed its market value
E.discounted future cash flows exceed its liquidation value
Answer:
42) The term _____ describes financing with debt and preferred stock to
increase the potential return to the residual common shareholders
equity.
A.trading on the debt
B.trading on the equity
C.financial leverage
D.equity financing
E.none of the above
Answer:
43) Concerning the analysis of financial data to emphasize the
comparative and relative importance of data presented and to
evaluate the position of the firm, it is important to take into
consideration
A.the nature of the general business environment
B.direct competition in a company’s geographical area
C.special situations not encountered throughout the industry
D.all of the above
E.none of the above
Answer:
44) A firm may use its accounts receivable as collateral for a loan
from a bank or other financial institution. Which of the following
is/are true?
A.The firm physically maintains control of the accounts receivable,
collects cash from customers, and repays the loan
B.If the firm fails to repay the loan, the lender can claim the
receivables
C.If the firm has used its accounts receivable as collateral for a
loan, the firm will continue to show those receivables as an asset
(and there will also be a loan payable liability)
D.The firm should disclose the lending arrangement in its financial
reports
E.all of the above
Answer:
45) An impairment loss on a brand name arises when
A.the book value of the brand name exceeds the undiscounted cash
flows
B.the book value of the brand name exceeds the market value
C.the market value of the brand name exceeds the undiscounted cash
flows
D.the book value of the brand name exceeds the discounted cash
flows
E.the book value of the brand name exceeds the liquidation value
Answer:
46) The shareholders’ equity section of the balance sheet for a
corporation generally does not include
A.dividends paid
B.retained earnings
C.par or stated value of common stock
D.amounts contributed in excess of par or stated value
E.None of these answer choices is correct
Answer:
47) Ignoring income tax effects, which of the following is correct
concerning depreciation?
A.Depreciation provides additional cash flow from operating
activities than would have been available without the
depreciation
B.Depreciation builds a cash reserve to fund the replacement of
plant, property, and equipment
C.Depreciation reduces net income but does not usually require a
cash expenditure during the period
D.Depreciation is a systematic and rational method for allocating
the cost of intangible assets over their useful lives
E.Depreciation provides less cash flow from operating activities
than would have been available without the depreciation
Answer:
48) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations among cash flows from
operating, investing, and financing activities. Biotechnology firms
are in their _____ phase, consumer foods companies are in their
_____ phase, and U.S. auto manufacturers are in the _____
phase.
A.introduction; late maturity or the decline; growth
B.growth; mature; late maturity or the decline
C.mature; late maturity or the decline; growth
D.late maturity or the decline; growth; introduction
E.introduction; late maturity or the decline; mature
Answer:
49) Inventory by specific identification would not be practical for
A.a large-volume automobile dealer
B.a rare coin dealer
C.a TV and stereo superstore
D.a high cost jeweler
E.all of the above
Answer:
50) A prefabricated steel storage shed is purchased for $20,000 cash
and a $80,000 interest-bearing note payable over a 5-year period at
an annual interest rate of 10 percent per annum. The cost to be
recorded as an asset (in addition to the $100,000 purchase price)
should include all of the following except
A.shipping and handling charges
B.insurance while in transit
C.interest on the note payable
D.reassembly and installation costs
E.All of these answer choices are costs to be recorded as assets
Answer: