1) Financial information for Price Company at December 31, 2014, and
for the year then ended, are presented below:
| Balance Sheet | ||||||
| December 31, | ||||||
| 2014 | 2013 | |||||
| Cash | $ 31,000 | $ 15,000 | ||||
| Accounts receivable | 28,500 | 30,000 | ||||
| Allowance for doubtful accounts | (2,000) | (1,500) | ||||
| Inventory | 15,000 | 10,000 | ||||
| Prepaid insurance | 1,400 | 2,400 | ||||
| Property, plant, and equipment | 81,000 | 80,000 | ||||
| Accumulated depreciation | (16,000) | (20,000) | ||||
| Land | 81,100 | 40,100 | ||||
| Total assets | $ 220,000 | $ 156,000 | ||||
| Accounts payable | $ 11,000 | $ 10,000 | ||||
| Wages payable | 1,000 | 2,000 | ||||
| Interest payable | 1,000 | – | ||||
| Notes payable, long-term | 46,000 | 20,000 | ||||
| Common stock, nopar | 136,000 | 100,000 | ||||
| Retained earnings | 25,000 | 24,000 | ||||
| Total liabilities and | ||||||
| stockholders’ equity | $ 220,000 | $ 156,000 | ||||
| Income Statement | ||||||
| Sales revenue | $ 80,000 | |||||
| Cost of goods sold | (35,000) | |||||
| Depreciation expense | (5,000) | |||||
| Bad debt expense | (1,000) | |||||
| Insurance expense | (1,000) | |||||
| Interest expense | (2,000) | |||||
| Salaries and wages expense | (12,000) | |||||
| Income tax expense | (3,000) | |||||
| Remaining expenses | (13,000) | |||||
| Loss on sale of operational assets | (2,000) | |||||
| Net income | $ 6,000 | |||||
Additional information:
| 1> | Wrote off $500 accounts receivable as uncollectible. |
| 2> |
Sold an operational asset for $4,000 cash (cost, $15,000, accumulated depreciation, $9,000). |
| 3> | Issued common stock for $5,000 cash. |
| 4> | Declared and paid a cash dividend of $5,000. |
| 5> | Purchased land for $20,000 cash. |
| 6> |
Acquired land for $21,000, and issued common stock as payment in full. |
| 7> |
Acquired operational assets, cost $16,000; issued a $16,000, three-year, interest-bearing note payable. |
| 8> |
Paid a $10,000 long-term note installment by issuing common stock to the creditor. |
| 9> | Borrowed cash on a long-term note, $20,000. |
Required:
Prepare the statement of cash flows using the indirect method.
Answer:
2) Most firms want to extend their payables as long as they can, but
they also want to maintain their relations with suppliers.
Businesses, therefore, negotiate hard for favorable payment terms
and then delay paying until just before the last agreed moment.
Answer:
3) Both U.S. GAAP and IFRS do not require firms to recognize the fair
value of employee stock options in the accounting records.
Answer:
4) The T-account looks like the letter T, with a horizontal line
bisected by a vertical line. Increases in liabilities appear on the
right side, and decreases in liabilities appear on the left side of
T-accounts.
Answer:
5) Describe the accounting and reporting of investments in common
stock.
Answer:
6) A measure of profitability for a firm engaging in operations
selling merchandise in its stores to generate net income includes
the rate of return on assets. Discuss the rate of return on assets.
Answer:
7) U.S. GAAP provides several approaches to the accounting for
treasury shares which include cost, par value, and constructive
retirement methods.
Answer:
8) Shareholders equity is a residual interest or claimthat is, the
owners (shareholders) of a firm have a claim on assets not required
to meet the claims of creditors.
Answer:
9) Calcas Corporation, a Portuguese company, has an adjusted trial
balance that contained the following asset accounts at December 31,
2013: Cash 7,000; Land 40,000; Patents 12,500; Accounts Receivable
90,000; Prepaid Insurance 5,200; Inventory 30,000; Allowance for
Doubtful Accounts 4,000; Trading Securities 11,000.
Required: Prepare the current assets section of the statement of
financial position, using most common IFRS sequence of accounts.
Answer:
10) The term financial leverage describes financing with debt and
preferred stock to increase the potential return to the residual
common shareholders equity.
Answer:
11) The amount of goodwill represents the excess of the total purchase
price over the fair value of identifiable tangible and intangible
net assets.
Answer:
12) The percentage-of-sales procedure arises from the idea that
uncollectible amounts will vary with the volume of credit business.
The firm estimates the appropriate percentage by studying its own
experience or by inquiring into the experience of similar firms.
Default rates generally fall within the range of .01% to .02% of
credit sales.
Answer:
13) Retained earnings measures the cumulative excess of net income over
dividends for the life of a firm. Cumulative means that retained
earnings aggregates all undistributed earnings.
Answer:
14) Expenses measure the outflow of net assets consumed in the process
of generating revenues.
Answer:
15) Four measures for assessing short-term liquidity risk are (1)
Current ratio, (2) Quick ratio, (3) Cash flow from operations to
current liabilities ratio, and (4) Working capital turnover ratios.
Answer:
16) U.S. GAAP defines the primary measurement of the pension liability
of the pension plan as the projected benefit obligation (PBO)the
future value of the amount the pension plan expects to pay to
employees during retirement based on accumulated service but using
the level of salary expected to serve as a basis for computing
pension benefits.
Answer:
17) A quick ratio approximately one-half of the current ratio is
typical, although this varies by industry.
Answer:
18) IFRS prohibits use of the LIFO cost-flow assumption.
Answer:
19) The mix of liabilities plus shareholders equity reflects a firms
investing decisions, each measured at the balance sheet date.
Answer:
20) U.S. GAAP and IFRS provide criteria for distinguishing operating
leases from capital leases. Which of the following is not true?
A.The criteria attempt to identify the entity, whether lessor or
lessee, that enjoys the benefits and incurs the risk of the leased
asset
B.When the lessor enjoys the benefits and bears the risk, the lease
is an operating lease
C.When the lessee enjoys the benefits and bears the risk, the lease
is a capital lease
D.IFRS provides more specific criteria for identifying the entity
enjoying the rewards and incurring the risk
E.Firms cannot currently apply the fair value option to capital
leases
Answer:
21) U.S. GAAP classifies all of the following as investing activities
on the statement of cash flows except for
A.cash inflows from selling manufacturing equipment
B.cash outflows from purchasing bonds (intended to be held to
maturity) of other entities
C.cash outflows to lender for interest
D.cash inflows from selling a (long-term) portfolio of equity
securities of other entities
E.cash outflows from buying manufacturing equipment
Answer:
22) A firm records debt securities purchases at the acquisition cost.
The firm must use the _____ method to amortize any difference
between acquisition cost and maturity value over the life of the
debt as an adjustment to _____
A.market value, interest revenue
B.market value, interest expense
C.effective interest; interest revenue
D.effective interest; interest expense
E.maturity value; interest expense
Answer:
23) Which of the following is/are not true?
A.Common terminology refers to the financial contract underlying
bank loans as a note
B.Financial contracts underlying bank loans usually appear on the
balance sheet under the title Notes Payable
C.Notes of business firms generally have maturity dates less than
approximately ten years
D.A public market for Notes Payable exists, so the borrower will be
able to disengage from the borrowing arrangement prior to
maturity
E.all of the above
Answer:
24) U.S. GAAP requires that the completed contract method be used
A.when uncertainty obscures the total costs the contractor will
incur in carrying out the project
B.in situations when a firm has not found a specific buyer while
construction progresses
C.always to recognize income during construction projects
D.in both circumstances a and b
E.in none of the above situations
Answer:
25) Most publicly traded firms operate as corporations. The corporate
form has which of the following advantage(s)?
A. The corporate form provides the owner (shareholder) with limited
liability
B.The corporate form allows the firm to raise funds by issuing
shares to investors in varying amounts
C.The corporate form facilitates the transfer of ownership
interests because owners can sell their shares without affecting
the ongoing operations of the firm
D.The corporation has legal status separate from its owners
E.all of the above
Answer:
26) Which of the following is/are not true?
A.U.S. GAAP and IFRS 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 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:
27) Certain merchandise that a firm may acquire may be inventory or
supplies. Accounting treats them differently as to the matching
criteria used.
Required:
| a. |
Describe the situation where merchandise would be considered inventory. How would the firm account for the costs of the merchandise? |
| b. |
Describe the situation where merchandise would be considered supplies. How would the firm account for the costs of the merchandise? |
Answer:
28) Other (nonoperating) items follow operating expenses or the
subtotal for operating profit. Most firms reporting under U.S. GAAP
separately report financing costs, such as
A.principal payments
B.interest revenue
C.interest expense
D.principal receipts
E.none of the above
Answer:
29) Manley Company
Information concerning Manley 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 Manley during
June, Year 5 . Prior to June, Year 5, Manley had no investments in
debt or equity securities.
| As of May 31, Year 6 | Amortized Cost | Fair Value |
| Camp Company bonds | $164,526 | $168,300 |
| Box Industry bonds | 204,964 | 205,200 |
| Messenger Inc. bonds | 305,785 | 285,200 |
| $675,275 | $658,700 | |
| As of May 31, Year 7 | Amortized Cost | Fair Value |
| Camp Company bonds | $152,565 | $147,600 |
| Box Industry bonds | 193,800 | 204,500 |
| Messenger Inc. bonds | 289,130 | 291,400 |
| $635,495 | $643,500 | |
(CMA adapted, Jun 97 #11) Refer to the Manley Company example.
Assuming that the above securities are properly classified as
available-for-sale securities under U.S. GAAP, the unrealized
holding gain or loss as of May 31, Year 7, would be
A.recognized as a $8,005 unrealized holding gain on the income
statement
B.recognized as other comprehensive income with a year-end credit
balance of $8,005 in the Unrealized Holding Gain/Loss account
C.recognized as a $24,580 unrealized holding loss on the income
statement
D.recognized as a $24,580 unrealized holding loss in retained
earnings
E.recognized as other comprehensive income with a year-end credit
balance of $8,005 in retained earnings
Answer:
30) U.S. GAAP and IFRS require firms to account for debt securities
designated as held to maturity at _____ except that they are also
subject to _____. That is, firms do not recognize increases in fair
value (unrealized gains) but might recognize decreases in fair
value(unrealized losses).
A.amortized cost; impairment
B.present value; depreciation
C.net realizable value; impairment
D.amortized cost; destruction
E.net realizable value; depreciation
Answer:
31) An initial issue price equal to the face value of the bonds means
that the implicit interest rate equals the _____.
A.fair interest rate
B.average interest rate
C.future interest rate
D.yield to maturity
E.past interest rate
Answer:
32) Using U.S. GAAP and IFRS requirements for income tax accounting for
financial reporting purposes, permanent differences
A.reverse, affect cash outflows for income taxes, and therefore
affect income tax expense
B.reverse, affect cash outflows for income taxes, and therefore
never affect income tax expense for any period
C.reverse, never affect cash outflows for income taxes, and
therefore never affect income tax expense for any period
D.never reverse, affect cash outflows for income taxes, and
therefore never affect income tax expense for any period
E.never reverse, never affect cash outflows for income taxes, and
therefore never affect income tax expense for any period
Answer:
33) In determining cash flows from operations under the indirect
method, the adjustments to convert net income to cash flow from
operations generally involve _____ the amount by which an expense
exceeds the related cash expenditure for the period (for
depreciation, the entire amount).
A.subtracting
B.multiplying
C.adding
D.dividing
E.cannot be determined from the information provided
Answer:
34) Which of the following is/are true regarding the acquisition method
for a business combination?
A.Measure the identifiable tangible and intangible assets and
liabilities of the acquired company at their fair values
B.The acquirer compares the fair value of the cash, common stock,
or other consideration given with the fair value of the
identifiable assets less liabilities acquired
C.The excess of the fair value of the consideration over the fair
value of the acquired firms identifiable assets net of identifiable
liabilities is goodwill
D.If the fair value of the identifiable assets less liabilities
exceeds the fair value of the consideration, the excess is a gain
from a bargain purchase, which the purchaser immediately includes
in net income
E.all of the above
Answer:
35) The accounting system uses a device called an account. An
account
A.is created each time a transaction takes place
B.accumulates the increases and decreases that occur during the
period for a single item
C.is created only for income statement items
D.is created only for balance sheet items
E.None of these answer choices is correct
Answer:
36) Potion Corporation acquires 30% of the outstanding voting common
shares of the Formula Corporation for $600,000. Potion Corporation
acquires the investment in Formula Corporation by buying previously
issued shares of Formula Corporation from other investors.
Between the time of the acquisition and the end of Potion
Corporations next accounting period, Formula Corporation reports
earnings of $80,000; and pays a dividend of $30,000 to holders of
its common stock.
Formula Corporation reports earnings of $100,000 and pays dividends
of $40,000 during the subsequent accounting period.
During the next accounting period, Potion Corporation sells
one-fourth of its investment in Formula Corporation for
$165,000.
After the sale, the balance in the Investment in Stock of Formula
Corporation account is:
A.$462,750
B.$465,750
C.$474,750
D.$481,750
E.$486,750
Answer:
37) In periods of falling purchase prices and increasing inventory
quantities, LIFO results in a _____ than either FIFO or the
weighted-average cost-flow assumption.
A.higher cost of goods sold; lower reported periodic income; lower
current income taxes
B.lower cost of goods sold; lower reported periodic income; lower
current income taxes
C.higher cost of goods sold; higher reported periodic income; lower
current income taxes
D.higher cost of goods sold; higher reported periodic income;
higher current income taxes
E.a lower cost of goods sold; higher reported periodic income;
higher current income taxes
Answer:
38) Assume the following long-term debt structure for Parton
Stores:
Construction Loan at 5% on Building Under Construction . . . . . .
. ..$2,000,000
Other Borrowings at 6% Average Rate . . . . . . . . . . . . . . . .
. . . . . . . . .7,200,000
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . $9,200,000
The account Building Under Construction has an average balance
during the year of $6,000,000. Parton Stores bases the amount of
interest capitalized on the new construction-related borrowing,
$2,000,000, and enough of the other borrowing to bring the total to
$6,000,000.
How much does Parton Stores capitalize interest on the new
construction?
A.$240,000
B.$300,000
C.$320,000
D.$340,000
E.$360,000
Answer:
39) Devlin Company
|
Devlin Company Statement of Financial Positionas of May 31 (in thousands) |
||
| Assets | Year 7 | Year 6 |
| Current assets | ||
| Cash | $45 | $38 |
| Trading securities | 30 | 20 |
| Accounts receivable (net) | 68 | 48 |
| Inventories | 90 | 80 |
| Prepaid expenses | 22 | 30 |
| Total current assets | $255 | $216 |
| Investments, at equity | 38 | 30 |
| Property, plant, and equipment (net) | 375 | 400 |
| Intangible assets (net) | 80 | 45 |
| Total assets | $748 | $691 |
| Liabilities and shareholders’ equity | ||
| Current liabilities | ||
| Notes payable | $35 | $18 |
| Accounts payable | 70 | 42 |
| Accrued expenses | 5 | 4 |
| Income taxes payable | 15 | 16 |
| Total current liabilities | 125 | 80 |
| Long-term debt | 35 | 35 |
| Deferred taxes | 3 | 2 |
| Total liabilities | $163 | $117 |
| Shareholders’ equity | ||
| Preferred stock, 6%, $100 par value, cumulative | 150 | 150 |
| Common stock, $10 par value | 225 | 195 |
| Additional paid-in capital-common stock | 114 | 100 |
| Retained earnings | 96 | 129 |
| Total shareholders’ equity | $585 | $574 |
| Total liabilities and shareholders’ equity | $748 | $691 |
|
Devlin Company Income StatementFor the year ended May 31 (in thousands) |
||
| Year 7 | Year 6 | |
| Net sales | $480 | $460 |
| Costs and expenses | ||
| Cost of goods sold | 330 | 315 |
| Selling, general, and administrative | 52 | 51 |
| Interest expense | 8 | 9 |
| Income before taxes | $90 | $85 |
| Income taxes | 36 | 34 |
| Net income | $54 | $51 |
(CMA adapted, Jun 97 #13) Refer to the Devlin Company example.
Devlin Company’s acid-test ratio at May 31, Year 7, was
A.0.60 to 1
B.0.90 to 1
C.1.14 to 1
D.1.86 to 1
E.2.14 to 1
Answer:
40) Divine Paper, a United States-based company, processes wood pulp
into paper products in fixed-asset intensive facilities. It has a
large ratio of property, plant, and equipment to total assets and a
high debt-equity ratios. Which of the following is/are true?
A.Divine Paper carries higher levels of risk than an electrical
utility
B.Divine Paper does not have the regulated, monopoly status of an
electrical utility
C.Sales of Divine Paper are more sensitive to changes in the level
of business activity than those of an electric utility
D.The higher risk of Divine Paper, relative to an electric utility,
raises its borrowing costs and decreases its reliance on debt
financing
E.all of the above
Answer:
41) The statement of cash flows explains the reasons for the change in
cash and cash equivalents during a period. This statement
classifies the reasons as relating to
A.operating decisions, only
B.investing decisions, only
C.financing decisions, only
D.operating, investing, or financing decisions
E.operating, investing, financing, or exchange decisions
Answer:
42) U.S. GAAP and IFRS require firms to account for correction of
errors, if material, by
A.restating net income of prior periods and adjusting the beginning
balance in Retained Earnings for the current period
B.restating net income of prior periods and adjusting the ending
balance in Retained Earnings for the current period
C.restating net income of the current period and adjusting the
beginning balance in Retained Earnings for the current period
D.restating net income of the current period and adjusting the
ending balance in Retained Earnings for the current period
E.restating net income of the current period, only
Answer:
43) Who under the oversight of the firms governing board, prepares the
financial statements?
A.independent auditor
B.Securities and Exchange Commission
C.Public Companies Accounting Oversight Board
D.general counsel
E.management
Answer:
44) Henson Manufacturing Company signed a 3-year contract for the use
of certain manufacturing equipment with an estimated life of three
years. Henson Manufacturing Company cannot cancel the contract.
What entry is made to record the contract?
A.Rent Expense XX
Cash XX
B.Manufacturing Equipment XX
Cash XX
C.Leased Asset–Manufacturing Equipment XX
Lease Liability XX
D.Lease Liability XX
Leased Asset–Manufacturing Equipment XX
E.Rent Expense XX
Leased Asset–Manufacturing Equipment XX
Answer:
45) Baldwin Corporation
Excerpts from the Statement of Financial Position for Baldwin
Corporation as of September 30, Year 5, are presented
below.
| Cash | $950,000 |
| Accounts receivable (net) | 1,675,000 |
| Inventories | 2,806,000 |
| Total current assets | $5,431,000 |
| Accounts payable | $1,004,000 |
| Accrued liabilities | 785,000 |
| Total current liabilities | $1,789,000 |
The Board of directors of Baldwin Corporation met on
October 4, Year 5, and declared regular quarterly cash dividends
amounting to $750,000 ($0.60 per share). The dividend is payable on
October 25, Year 5, to all shareholders of record as of October 12,
Year 5.
Assume that the only transactions to affect Baldwin Corporation
during October Year 5 are the dividend transactions and that the
closing entries have been made.
(CMA adapted, Dec 89 #16) Refer to the Baldwin Corporation example.
If the dividend declared by Baldwin Corporation had been a 10
percent stock dividend instead of a cash dividend, Baldwins current
liabilities would have been
A.decreased by the dividend declaration and increased by the
dividend distribution
B.unchanged by the dividend declaration and increased by the
dividend distribution
C.unchanged by the dividend declaration and decreased by the
dividend distribution
D.unchanged by either the dividend declaration or the dividend
distribution
E.none of the above
Answer:
46) U.S. GAAP treatment of a defined benefit pension plan requires
employers to recognize the funded status as
A.an asset, if the pension plan(s) is/are overfunded
B.a liability, if the pension plan(s) is/are underfunded
C.both an asset [for the net overfunded plan(s)] and a liability
[for the net underfunded plan(s)]
D.an adjustment to Other Comprehensive Income, a shareholders
equity account that is not part of net income, for the offsetting
amount
E.all of the above
Answer:
47) Lager Company sells merchandise with a one year warranty. In 2013,
sales consisted of 1,600 units. It is estimated that warranty
repairs will average $10 per unit sold, and 30% of the repairs will
be made in 2013 and 70% in 2014. In the 2013 income statement,
Lager should show warranty expense of
A.$4,800
B.$11,200
C.$16,000
D.$0
E.$8,000
Answer:
48) For manufacturing firms, the cost of completed products remains on
the balance sheet as __________ assets until the firm sells the
products; upon sale, the cost of the assets becomes a cost of goods
sold expense.
A.Direct Materials Inventory
B.Work-in Progress Inventory
C.Finished Goods Inventory
D.Cost of Products Ready for Sale
E.none of the above
Answer:
49) Pareto Corporation owns 40% of Spring Corporation. During Year 3,
Spring has net income of $60,000. What entry should Pareto record
related to its investment in Spring during Year 3?
A.Investment in Spring Corp.24,000
Equity in Earnings of Affiliate24,000
B.Dividend Receivable24,000
Dividend Income 24,000
C.Investment Receivable24,000
Investment Income 24,000
D.Investment in Spring Corp.24,000
Investment Income 24,000
E.Investment in Spring Corp.24,000
Cash 24,000
Answer:
50) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. During the growth
phase
A.cash inflow exceeds cash outflow for operations
B.cash outflow exceeds cash inflow for operations
C.cash inflow exceeds cash outflow for investing activities
D.cash outflow exceeds cash inflow for financing activities
E.cash inflow exceeds cash outflow for financing activities
Answer:
51) IFRS uses the idea of a disposal group, a group of assets and
directly associated liabilities that a firm will dispose of as a
group in a single transaction. The disposal group notion of IFRS
envisions a larger unit than the component notion of U.S. GAAP. In
the year that a firm decides to sell or otherwise dispose of a unit
that qualifies as a(n) _____ it aggregates the assets and
liabilities of that unit on the balance sheet into four groups:
current assets, noncurrent assets, current liabilities, and
noncurrent liabilities.
A.continuing operation
B.discontinued operation
C.extraordinary gain or loss
D.impaired operation
E.paid-in-capital
Answer:
52) In a time of rising prices, unrealized holding gains on ending
inventory are
A.higher under LIFO than FIFO
B.higher under FIFO than LIFO
C.reported on the income statement
D.required to be reported in notes to the financial statements
E.none of the above
Answer:
53) Which of the following is/are not true regarding the classification
of redeemable preferred shares on the balance sheet?
A.The classification of redeemable preferred shares on the balance
sheet depends on the conditions for redemption
B.If only the issuing firm has the option to redeem, then the
preferred shares are part of its shareholders equity
C.If the issuing firm must redeem the preferred shares (so-called
mandatory redemption), either at a specified time or upon a
specified condition certain to occur, the issuing firm treats the
preferred shares as its shareholders equity
D.If the preferred shareholders have the option to require
redemption, then the preferred shares appear between liabilities
and shareholders equity under U.S. GAAP
E.If the preferred shareholders have the option to require
redemption, then the preferred shares appear between liabilities
and shareholders equity under IFRS
Answer: