1) Companies should consider both positive and negative evidence to determine
whether it needs to record a valuation allowance to reduce a deferred tax asset.
2) Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease
as production increases.
3) Intangible development costs and restoration costs are part of the depletion base.
4) The percentage-of-receivables approach of estimating uncollectible accounts
emphasizes matching over valuation of accounts receivable.
5) An indirect effect of an accounting change is any change to current or future cash
flows of a company that result from making a change in accounting principle that is
applied retrospectively.
6) Under IFRS, convertible bonds are bifurcated separated into the equity component
(the value of the conversion option) of the bond issue and the debt component.
7) In general, debits refer to increases in account balances, and credits refer to
decreases.
8) Under IFRS the required procedure for amortization of a discount or premium is the
effective-interest method.
9) Application of the lower-of-cost-or-market rule results in inconsistency because a
company may value inventory at cost in one year and at market in the next year.
10) Barber Company will receive $900,000 in 7 years. If the appropriate interest rate is
10%, the present value of the $900,000 receipt is
a.$459,000
b.$461,844
c.$1,359,000
d.$1,753,848
11) Transactions for the month of June were:
PurchasesSales
June 1(balance) 1,600 @ $3.20June 21,200 @ $5.50
34,400 @ 3.1063,200 @ 5.50
72,400 @ 3.3092,000 @ 5.50
153,600 @ 3.4010800 @ 6.00
221,000 @ 3.50182,800 @ 6.00
25400 @ 6.00
Assuming that perpetual inventory records are kept in dollars, the ending inventory on a
FIFO basis is
a.$8,220
b.$8,320
c.$8,580
d.$8,940
12) Wellington Corp. has outstanding accounts receivable totaling $5 million as of
December 31 and sales on credit during the year of $25 million. There is also a debit
balance of $20,000 in the allowance for doubtful accounts. If the company estimates
that 8% of its outstanding receivables will be uncollectible, what will be the balance in
the allowance for doubtful accounts after the year-end adjustment to record bad debt
expense?
a.$2,000,000
b.$ 380,000
c.$ 400,000
d.$ 420,000
13) Briefly explain the following terms:
(a)Service cost
(b)Interest cost
(c)Prior service cost
(d)Vested benefits
14) A soundly developed conceptual framework of concepts and objectives should
a.increase financial statement users’ understanding of and confidence in financial
reporting
b.enhance comparability among companies’ financial statements
c.allow new and emerging practical problems to be more quickly solved
d.All of these answer choices are correct
15) A mining company declared a liquidating dividend. The journal entry to record the
declaration must include a debit to
a.Retained Earnings
b.a paid-in capital account
c.Accumulated Depletion
d.Accumulated Depreciation
16) The primary IFRS related to intangible assets and impairments is found in
a.IAS 38 and IAS 10
b.IAS 16 and IAS 36
c.IAS 1 and IAS 34
d.IAS 38 and IAS 36
17) A general description of the depreciation methods applicable to major classes of
depreci-able assets
a.is not a current practice in financial reporting
b.is not essential to a fair presentation of financial position
c.is needed in financial reporting when company policy differs from income tax policy
d.should be included in corporate financial statements or notes thereto
18) The following information pertains to Wamser Company:
Cash$ 20,000
Accounts receivable125,000
Inventory75,000
Plant assets (net) 380,000
Total assets$600,000
Accounts payable$ 75,000
Accrued taxes and expenses payable25,000
Long-term debt50,000
Common stock ($10 par)160,000
Paid-in capital in excess of par90,000
Retained earnings 200,000
Total equities$600,000
Net sales (all on credit)$800,000
Cost of goods sold600,000
Net income81,000
Instructions
Compute the following: (It is not necessary to use averages for any balance sheet
figures involved.)
(a)Current ratio
(b)Inventory turnover
(c)Accounts receivable turnover
(d)Book value per share
(e)Earnings per share
(f)Debt to assets
(g)Profit margin on sales
(h)Return on common stock equity
19) Excom manufactures high-end whole home electronic systems. The company
provides a one-year warranty for all products sold. The company estimates that the
warranty cost is $225 per unit sold and reported a liability for estimated warranty costs
$7.8 million at the beginning of this year. If during the current year, the company sold
60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on
current and prior year sales, what amount of liability would the company report on its
balance sheet at the end of the current year? (assume accrual method)
a.$2,800,000
b.$4,500,000
c.$12,300,000
d.$13,500,000
20) Bates Company has entered into two lease agreements. In each case the cash
equivalent purchase price of the asset acquired is known and you wish to find the
interest rate which is applicable to the lease payments.
Instructions
Calculate the implied interest rate for the lease payments.
Lease A Lease A covers office equipment which could be purchased for $126,168.
Bates Company has, however, chosen to lease the equipment for $35,000 per year,
payable at the end of each of the next 5 years.
Lease B Lease B applies to a machine which can be purchased for $134,141. Bates
Company has chosen to lease the machine for $28,000 per year on a 6-year lease.
Payments are due at the start of each year.
21) The expectations gap is due to the difference between what the public thinks
accountants should do and what accountants think they can do.
22) Listed below in scrambled order are 13 income statement categories. Use the
numerals 1 through 13 to indicate the order in which these categories should appear on
a multiple-step income statement.
Discontinued operations.
Cost of goods sold.
Other revenues and gains.
Net income.
Income taxes.
Sales revenue.
Gross profit on sales.
Income from operations.
Income from continuing operations before income taxes.
Operating expenses.
Extraordinary item.
Income before extraordinary items.
Income from continuing operations.
23) In the space provided at right, write the word or phrase that is defined or indicated.
1>Obligations expected to be liquidated
through use of current assets.
2>Statement showing financial condition at a
point in time.
3>Events that depend upon future outcomes.
4>Probable future sacrifices of economic
benefits.
5>Resources expected to be converted to
cash in one year or the operating cycle,
whichever is longer.
6>Resources of a durable nature used in
operations.
7>Economic rights or competitive advantages
which lack physical substance.
8>Probable future economic benefits.
9>Residual interest in the net assets of an
entity.
24) At the financial statement date of December 31, 2014, the liabilities outstanding of
Pollard Corporation included the following:
1>Cash dividends on common stock, $40,000, payable on January 15, 2015 .
2>Note payable to Wabaso State Bank, $470,000, due January 20, 2015 .
3>Serial bonds, $1,400,000, of which $350,000 mature during 2015 .
4>Note payable to Orlando National Bank, $300,000, due January 27, 2015 .
The following transactions occurred early in 2015:
January 15:The cash dividends on common stock were paid.
January 20:The note payable to Wabaso State Bank was paid.
January 25:The corporation entered into a financing agreement with Wabaso State
Bank, enabling it to borrow up to $500,000 at any time through the end of 2017.
Amounts borrowed under the agreement would bear interest at 1% above the bank’s
prime rate and would mature 3 years from the date of the loan. The corporation
immediately borrowed $400,000 to replace the cash used in paying its January 20 note
to the bank.
January 26:40,000 shares of common stock were issued for $350,000. $300,000 of the
proceeds was used to liquidate the note payable to Orlando National Bank.
February 1:The financial statements for 2014 were issued.
Instructions
Prepare a partial balance sheet for Pollard Corporation, showing the manner in which
the above liabilities should be presented at December 31, 2014 . The liabilities should
be properly classified between current and long-term, and appropriate note disclosure
should be included.
25) Dill Co. records purchases at net amounts and uses periodic inventories. Prepare
entries for the following:
June11Purchased merchandise on account, $9,000, terms 2/10, n/30.
15Returned part of June 11 purchase, $500, and received credit on account.
30Prepared the adjusting entry required for financial statements.
26) Hunt Incorporated sold $200,000 of accounts receivable to Gannon Factors Inc. on
a with recourse basis. Gannon assesses a 2% finance charge of the amount of accounts
receivable and retains an amount equal to 6% of accounts receivable for possible
adjustments. Prepare the journal entries for Hunt Incorporated and Gannon Factors to
record the sale of the accounts receivable to Gannon assuming that the recourse liability
has a fair value of $10,000.
27) Compare the direct method and the indirect method by explaining each method.