ACT 431 Midterm

1) Current assets, typically held and used for several years, include
land, buildings,
equipment, patents; and long-term investments in securities.

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2) U.S. GAAP and IFRS require firms to retrospectively apply any
changes in accounting principle by recalculating the income for
prior periods under the new accounting principle, if it at all
feasible.

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3) Describe the following concepts: (1) going concern, (2) recognition
and realization, and (3) relevance and reliability,

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4) The write-off of specific customers accounts has no effect on
Accounts Receivable, Net, because the write-off amount decreases
Accounts Receivable, Gross, and its contra account, the Allowance
for Uncollectibles, by exactly the same amount.

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5) Garvin, a consumer foods company reports the following information
related to its only pension plan for 2013 (amounts in
millions).

Give a single journal entry for the Garvin to recognize
pension expense, the pension plan contribution, and the change in
the net pension asset or net pension liability for 2009. Be sure to
consider needed entries in Other Comprehensive Income, supporting
the entry in this account with amounts from the disclosures above.
Ignore income taxes.

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6) U.S. GAAP permits firms to use the installment method or the cost
recovery method only when receivables is/are collectible over an
extended period and the seller has no reasonable basis for
estimating the amount of cash that it will collect.

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7) The return from investing in the shares of common stock has two
components: cash dividends and the change in the market price of
the common stock.

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8) How are period expenses recognized and measured?

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9) Describe U.S. GAAP and IFRS requirements in accounting for the
business combination.

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10) Under U.S. GAAP, a discontinued operation is a component of an
entity, comprising operations and cash flows that clearly differ
from the rest of the entity, both operationally and for financial
reporting. Segments, divisions, subsidiaries, and groups of assets
can qualify as a component of an entity.

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11) How do firms account for expenditures to maintain or improve
long-lived assets?

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12) How does one assess the impact of asset and liability recognition
and their measurement?

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13) IFRS requires that firms accrue the warranty expense and the
related warranty liability when they can reasonably estimate the
amount, while U.S. GAAP does not.

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14) The Sarbanes-Oxley Act of 2002 requires the PCAOB to register firms conducting independent audits.

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15) Explain the accounting for intercorporate investments in common
stock.

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16) U.S. GAAP and IFRS require firms to treat expenditures for
maintenance and repairs as expenses of the period as incurred but
treat expenditures for improvements as assets (which firms
subsequently depreciate or amortize).

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17) To prepare the statement of cash flows requires analyzing changes
in balance sheet accounts during the accounting period, as
represented by the Cash Change Equation.

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18) U.S. GAAP and IFRS require firms in some instances to change the
carrying value of certain
assets and liabilities. Both sets of accounting standards preclude
the recognition of these
changes in net income, and therefore in retained earnings.

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19) The entry to record patent amortization of $4,500 embedded in a
product is as follows:
A.Work-in-Process Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . 4,500
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 4,500
B.Finished Goods Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 4,500
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 4,500
C.Work-in-Process Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . 4,500
Allowance for Amortization of Patent . . . . . . . . . . . . . . .
. . . . . . . . . . 4,500
D.Finished Goods Inventory . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 4,500
Allowance for Amortization of Patent . . . . . . . . . . . . . . .
. . . . . . . . . . 4,500
E.none of the above

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20) Sellers of merchandise offer sales discount or cash discounts in
order to
A.provide an interest allowance on funds paid before the payment is
due
B.induce prompt payment so that it can reduce bookkeeping costs
C.induce prompt payment so that it can reduce collection costs
D.all of the above
E.none of the above

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21) The sales, all on account, of Marla Company in Year 6, its first
year of operations, were $700,000. Collections totaled $500,000. On
December 31, Year 6, Marla Company estimated that 2 percent of all
sales would probably be uncollectible. On that date, Marla Company
wrote off specific accounts in the amount of $8,000.

Marla Company’s unadjusted trial balance (after all nonadjusting
entries were made and after all write-offs of specific accounts
receivable identified during Year 7 as being uncollectible) on
December 31, Year 7, includes the following accounts and
balances:

On December 31, Year 7, Marla Company carried out an aging
of its accounts receivable balances and estimated that the Year 7
ending balance of accounts receivable contained $9,000 of probable
uncollectibles. It made adjusting entries appropriate for this
estimate. Some of the $800,000 sales during Year 7 were for cash
and some were on account; the omission is purposeful.

Required:


a. What was the balance in the Accounts Receivable account at the
end of Year 6? Give the amount and whether debit or credit.
b. What was the balance in the Allowance for Uncollectible Accounts
account at the end of Year 6? Give the amount and whether debit or
credit.
c. What was bad debt expense for Year 7?
d. What was the amount of specific accounts receivable written off
as being uncollectible during Year 7?
e. What were total cash collections in Year 7 from customers (for
cash sales and collections from customers who had purchased on
account in either Year 6 or Year 7)?
f. What was the net balance of accounts receivable included in the
balance sheet asset total for December 31, Year 7?

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22) Which of the following is/are not true?
A.Securities available-for-sale that a firm intends to sell within
one year appear in marketable securities in the current assets
section of the balance sheet
B.Securities not available-for-sale appear in investments in
securities in noncurrent assets
C.Acquisition and disposition of securities available-for-sale are
usually investing activities on the statement of cash flows
D.U.S. GAAP and IFRS require firms to report these securities at
fair value on the balance sheet
E.none of the above

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23) Subtracting nonoperating expenses from operating income yields:
A.income tax expense
B.profit before income taxes
C.net income
D.gross profit
E.none of the above

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24) Marco Insurance

Marco Insurance acquired shares of Penny Systems common stock on
December 28, 2013, for $400,000 and classified them as trading
securities. The fair value of these securities on December 31,
2013, was $402,000. Marco Insurance sold these shares on January 3,
2014, for $405,000.

(Refer to the Marco Insurance) The journal entries to record the
sale of trading securities at a gain on January 3, 2014.
A.Cash………………………………………………………..405,000

Marketable
Securities………………………………………….402,000

Realized Gain on Sale of Trading
Securities……………..3,000
B.Marketable Securities………………………………
402,000
Realized Gain on Sale of Trading Securities…… 3,000
Cash………………………………………………………………..
405,000
C.Cash……………………………………………………..
405,000
Marketable
Securities…………………………………………
402,000
Unrealized Gain on Sale of Trading Securities………….
3,000
D.Marketable
Securities…………………………………402,000
Unrealized Gain on Sale of Trading Securities….3,000
Cash……………………………………………………………….
405,000
E.Cash……………………………………………………….
405,000
Marketable
Securities………………………………………….402,000

Realized Gain on Sale of
Securities Held to Maturity………………………………….
3,000

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25) 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 a revenue
exceeds the related cash receipt for the period (such as equity
method earnings exceeding dividends).
A.adding
B.subtracting
C.multiplying
D.dividing
E.cannot be determined from the information provided

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26) Clarion Realty

Clarion Realty has decided to construct its own office building.
The construction will be partially financed through a construction
loan and any remainder will be financed from internally generated
funds. The internal accountants have collected the following
information concerning the construction.

The amount, if any, of capitalized interest cost for Year 1 is
A.$0
B.$50,000
C.$60,000
D.$110,000
E.$170,000

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27) The investor recognizes dividends on equity securities as revenue
when the
A.dividend amounts are received in cash, only
B.firms board of directors declares dividends, only
C.dividend accrues over time, only
D.dividend accrues over time and the dividend amounts are received
in cash, only
E.none of the above

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28) Which of the following is true regarding asset abandonment?
A.Firms will sometimes abandon assets if there is no market for the
asset
B.The firm eliminates the carrying value of the asset and
recognizes a loss in an amount equal to the carrying value
C.Firms will sometimes abandon assets if an automobile is severely
damaged in an accident
D.Firms will sometimes abandon assets if a machine requires an
overhaul that is not cost effective
E.all of the above

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29) The amortization of bond discount related to long-term debt should
be presented in a statement of cash flows prepared using the
indirect method as a(n)
A.inflow and outflow of cash
B.outflow of cash
C.deduction from net income in the adjustments to reconcile net
income to cash from operating activities
D.addition to net income in the adjustments to reconcile net income
to cash from operating activities
E.None of these is correct

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30) U.S. GAAP permits firms to measure the cost of goods sold and the
amount of ending inventories for a period using the
A.specific identification method
B.first-in, first-out (FIFO) cost-flow assumption
C.weighted-average cost-flow assumption
D.last-in, first-out (LIFO) cost-flow assumption
E.all of the above

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31) Which of the following is/are true?
A.Firms sometimes issue bonds with stock warrants attached and
allocate the amount received between the bonds and the warrants
based on their respective fair values
B.When firms issue convertible bonds U.S. GAAP requires firms to
allocate the full issue price to the bonds and none to the
conversion feature
C.IFRS requires firms to allocate the issue price between the bonds
and the conversion feature
D.Under IFRS, the firm allocates the issue price of bonds with
terms similar to those issued but without the conversion feature to
the bonds and the remainder of the issue price to the conversion
option
E.all of the above

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32) The second step of completing the T-account work sheet for
generating the statement of cash flows is to prepare a T-account
for each balance sheet account other than _____ and enter the
beginning and the ending balances.
A.cash and cash equivalents
B.working capital
C.cash, only
D.cash and marketable securities
E.exchanges

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33) The firms purpose for holding certain securities may change,
requiring it to transfer securities from one category to another.
The firm transfers the securities at _____ at the time of the
transfer.
A.future value
B.net realizable value
C.amortized cost
D.fair value
E.present value of future cash flows

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34) Which of the following is/are true regarding measuring changes in
the fair values of long-lived assets?
A.U.S. GAAP requires firms to recognize decreases in fair values as
an impairment loss, and to recognize unrealized increases in fair
values
B.IFRS requires firms to recognize decreases in fair values as an
impairment loss, and to never recognize unrealized increases in
fair value
C.U.S. GAAP requires firms to not recognize decreases in fair
values, but to recognize unrealized increases in fair value
D.IFRS requires firms to not recognize decreases in fair values,
but to recognize unrealized increases in fair value
E.U.S. GAAP and IFRS requires firms to recognize decreases in fair
values as an impairment loss, and differ as to the recognition of
unrealized increases in fair values

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35) When using the allowance method
A.the write-off of specific customers’ accounts does not affect
income
B.the income effect occurs in the year of sale, when the firm
provides for estimated uncollectible accounts
C.the write-off of specific customers’ accounts does not affect
(net) accounts receivable
D.all of the above
E.none of the above

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36) In European countries, terminology on financial statements
sometimes differs from terminology commonly used in the United
States. Match the European terms to commonly used United States
counterparts.


Common European Term Common U.S. Term
a. Tangible Fixed Asset 1. Property, Plant, and Equipment
b. Financial Assets 2. Common Stock
c. Trade Receivables 3. Additional Paid-in Capital
d. Liquid Funds 4. Investment in Securities
e. Subscribed Capital 5. Retained Earnings
f. Capital Reserve 6. Accounts Payable
g. Profit Reserves, Net Income 7. Accounts Receivable
Available for Distributions 8. Notes Payable to Banks
h. Bonds 9. Bonds Payable
i. Due to Banks 10. Cash
j. Trade Payables

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37) The _____ is the government agency that enforces the securities
laws of the U.S., including those that apply to financial
reporting.
A.Government Accountability Office (GAO)
B.Public Company Accounting Oversight Board (PCAOB)
C.International Accounting Standards Board (IASB)
D.Financial Accounting Standards Board (FASB)
E.U.S. Securities and Exchange Commission (SEC)

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38) A separate section of the income statement reporting information
about discontinued operations is included
A.only if the sale resulted in a loss
B.in every income statement prepared in accordance with the
GAAP
C.any time a major business asset is sold
D.if a firm sells, during the period, or plans to sell, during the
next period, a major division or segment of its business
E.if a firm has sold during the previous period, or plans to sell
during the next period, a major division or segment of its business

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39) Exxon Corporation declared and paid $90,000 of dividends to its
shareholders during Year 3. The statement of cash flows classifies
the transaction as a(n)
A.investing activity
B.financing activity
C.operating activity
D.exchange transaction
E.equity activity

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40) _____ reports information about cash generated from (or used by)
operating, investing, and financing activities during specified
time periods.
A.Statement of sources and uses of cash
B.Statement of cash flows
C.Statement of cash receipts and disbursements
D.Funds flow statement
E.Balance sheet

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41) If the rate of return on assets for the year is 15%, a general
interpretation of the ratio would be
A.the assets generated $0.15 cash per dollar of cash invested
B.15% of the assets produced income while the remainder were at
break-even for the year
C.before payment for use of capital, $0.15 was earned for each
dollar of assets used by the company
D.dividends of $0.15 per share were paid
E.before payment for use of capital, $0.15 was earned for each
dollar of cash used by the company

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42) The product life-cycle concept from microeconomics and marketing
provides useful insights into the relations between cash flows from
operating, investing, and financing activities. At the beginning of
the decline phase,
A.profitability increases
B.accounts receivable decline
C.inventories increase
D.all of the above
E.none of the above

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43) Flair and Glory incorporate as FG Designs, Inc. on January 1, Year
FG Designs creates custom wall finishes and sells painting
products. The following transactions occur during
January.


a. Glory contributes cash of $85,000 and receives 15,000 shares of
$1 par value stock.
b. Flair contributes $45,000 cash, office furniture with a value of
$5,000, and computer equipment with a value of $10,000 and receives
15,000 shares of $1 par value stock. The furniture and equipment is
expected to last 5 years and has no salvage value.
c. On January 2, $12,000 of painting products were purchased. FG
paid $8,000 cash with the remaining amount on account.
d. During January, painting products are sold for $10,000 cash. The
cost of the products is $3,000.
e. Additional painting products with a value of $6,500 are sold,
with a cost of $2,500, but the cash is not collected as of January
31st. It is expected that the $6,500 will be collected in full by
February 15th.
f. Glory is paid a salary of $3,300.
g. FG paid $1,800 for January and February rent.
Required:
Prepare appropriate accrual basis journal
entries.

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44) Failure to record depreciation expense at the end of an accounting
period results in
A.understated income
B.understated assets
C.overstated expenses
D.overstated assets
E.All of these choices are correct

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45) Parton Corporation acquires 30% of the outstanding voting common
shares of the Investee Corporation for $600,000. Parton Corporation
acquires the investment in Import Corporation by buying previously
issued shares of Import Corporation from other investors.
When Parton Corporation acquired 30% of Import Corporations common
shares for $600,000, Import Corporations total shareholders equity
was $1.5 million. Parton Corporations cost exceeds the carrying
value of the net assets acquired by $150,000 [ $600,000 – (0.30 x
$1,500,000)]. Parton Corporation may pay this premium because
A.the fair values of Imports net assets differ from their carrying
values, only
B.of unrecorded assets (for example, trade secrets), only
C.the fair values of Imports net assets differ from their carrying
values and/or unrecorded assets (for example, trade secrets)
D.the liquidation values of Imports net assets differ from their
carrying values, only
E.of unrecorded liabilities (for example, contingent liabilities),
only

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