Harvey’s Junk Jewelry started business January 1, 2016, and uses the LIFO retail
method to estimate ending inventory. Listed below is data accumulated for the year
ended December 31, 2016:
The estimated ending inventory at retail is:
a. $27,300.
b. $25,000.
c. $26,600.
d. $26,400.
Short-term obligations can be reported as long-term liabilities if:
a. The firm has a long-term line of credit.
b. The firm has tentative plans to issue long-term bonds.
c. The firm intends to and has the ability to refinance as long-term.
d. The firm has the ability to refinance on a long-term basis.
In a defined benefit pension plan, the journal entry to record the employer’s annual cash
contribution to plan assets:
a. reduces the employer’s obligation to pay benefits
b. includes a credit to plan assets
c. might reduce next period’s pension expense
d. a debit to cash
On October 31, 2016, Simeon Builders borrowed $16 million cash and issued a
7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated
discount rate is 8%. Sky’s effective interest rate on this loan is:
a. More than the stated discount rate of 8%.
b. Less than the stated discount rate of 8%.
c. Equal to the stated discount rate of 8%.
d. Unrelated to the stated discount rate of 8%.
Which of the following is not true about the “fair value through profit and loss”
approach for accounting for investments under IFRS?
a. Allowed under both IAS No. 39 and IFRS No. 9.
b. Includes unrealized gains in earnings.
c. Requires reclassification of realized gains from other comprehensive income.
d. Not vulnerable to other-than-temporary impairments.
Todd Sweeney is an artist who sells his work under consignment (he displays his work
in local barbershops, and customers purchase his work there). Sweeney recently
transferred a painting on consignment to a local barbershop.
After Sweeney has transferred a painting to a barbershop, the painting:
a. Should be counted in Sweeney’s inventory until the barbershop sells it.
b. Should be counted in the barbershop’s inventory, as the barbershop now possesses it.
c. Should be counted in either Sweeney’s or the barbershop’s inventory, depending on
which incurred the cost of preparing the painting for display.
d. We lack sufficient information to know who should carry the painting in inventory.
In each succeeding payment on an installment note:
a. The amount of interest paid increases.
b. The amount of principal paid increases.
c. The amount of principal paid decreases.
d. The amounts paid for both interest and principal increase proportionately.
Which of the following is not a potential benefit of accrual accounting, compared to
cash-basis accounting?
a. Timeliness.
b. Better reflecting economic activity.
c. Periodicity.
d. Better matching of revenues and expenses.
In January 2016, Despot recorded a transaction with this journal entry:
The 12/31/2016 balance sheet of Despot Inc. included the following:
The transaction was for the:
a. Issue of 2 million shares of common stock at par value.
b. Issue of common stock for $150 million in cash.
c. Receipt of $20 per share for a new stock issue.
d. All of these answer choices are correct.
Ending inventory is equal to the cost of items on hand plus:
a. Items in transit sold f.o.b. shipping point.
b. Purchases in transit f.o.b. destination.
c. Items in transit sold f.o.b. destination.
d. None of these answer choices is correct.
The statement of cash flows reports cash flows from the activities of:
a. Operating, purchasing, and investing.
b. Borrowing, paying, and investing.
c. Financing, investing, and operating.
d. Using, investing, and financing.
Using the direct method, cash received from customers is calculated as sales:
a. On account.
b. On account plus cash sales.
c. Plus an increase in accounts receivable.
d. Plus a decrease in accounts receivable.
Which of the following is not an indicator that the customer is likely to have control
over a good?
a. Asset warehoused by seller-affiliated third party
b. Accepted the asset
c. Legal title to the asset
d. Physical possession of the asset
A firm reported ($ in millions) net cash inflows (outflows) as follows: operating $75,
investing ($200), and financing $350. The beginning cash balance was $250. What was
the ending cash balance?
a. $875.
b. $ 25.
c. $475.
d. $125.
On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese
Inc. for $80 million. The sale was completed on December 31, 2016. The following
additional facts pertain to the transaction:
– The Footwear Division qualifies as a component of the entity according to GAAP
regarding discontinued operations.
– The book value of Footwear’s assets totaled $48 million on the date of the sale.
– Footwear’s operating income was a pre-tax loss of $10 million in 2016.
– Foxtrot’s income tax rate is 40%.
Suppose that the Footwear Division’s assets had not been sold by December 31, 2016,
but were considered held for sale. Assume that the fair value of these assets at
December 31 was $40 million. In the 2016 income statement for FoxtrotCo., it would
report a loss from discontinued operations of:
a. $ 3 million loss.
b. $ 10 million loss.
c. $10.8 million loss.
d. $ 18 million loss.
Marilee’s Electronics uses a periodic inventory system and the average cost retail
method to estimate ending inventory and cost of goods sold. The following data is
available from the company records for the month of June 2016:
The average cost-to-retail percentage is:
a. 52.2%.
b. 61.5%.
c. 56.8%
d. 55%.
In deciding whether financing with receivables is a secured borrowing or a sale under
U.S. GAAP, the critical element is the extent to which:
a. The transferee has received substantially all the risks and rewards of ownership.
b. The age of the receivables transferred differs from the average age of the receivables.
c. The transferor of the receivable surrenders control over the assets transferred.
d. The transferee relies on funds from the transferor to maintain operations.
Koko Company pays $10 million at the beginning of each year for 10 years to Mocha
Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning
on financing this land sale?
a. Between 13% and 14%.
b. Between 7% and 8%.
c. Between 5.5% and 6%.
d. Cannot be determined from the given information.
Refer to the following lease amortization schedule. The five payments are made
annually starting with the inception of the lease. A $2,000 bargain purchase option is
exercisable at the end of the five-year lease. The asset has an expected economic life of
eight years.
What is the effective annual interest rate?
a. 9%.
b. 10%.
c. 11%.
d. 20%.
Top Foods has an underfunded pension plan. The pension expense is $58 million. This
amount includes a $60 million service cost, a $40 million interest cost, a $45 million
reduction for the expected return on plan assets, and a $3 million amortization of a prior
service cost.
Required:
Prepare the appropriate journal entry to record Top’s pension expense.
Slinky Company purchased merchandise on June 10, 2016, at a price of $20,000,
subject to credit terms of 2/10, n/30. Slinky uses the net method for recording purchases
and uses a perpetual inventory system.
Required:
1> Prepare the journal entry to record the purchase.
2> Prepare the journal entry to record the appropriate payment if the entire invoice is
paid on June 18, 2016.
3> Prepare the journal entry to record the appropriate payment if the entire invoice is
paid on July 8, 2016.
Terra Bus Transportation provides on-campus bus services for universities. On January
1, it enters into a one-year contract with Moose University to operate five bus lines
traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the
last day of each month. In addition, Terra will receive an additional $120,000 at the end
of each six-month period, provided it remains free of accidents. – On January 1, based
on historical experience, Terra estimated that there is a 75% chance that it will remain
free of accidents for the entire year.
– On March 20, three of the most senior drivers at Terra abruptly left. As a result, Terra
had to hire inexperienced drivers to fill the vacant positions. Consequently, Terra
revised its estimate to a 30% chance that it would earn the semiannual bonus.
– On June 30, Moose confirmed that there was no accident between January and June,
so Terra would be entitled to the semiannual bonus. Terra bases estimates of variable
consideration on the expected value it expects to receive. Prepare Terra’s March 31
journal entry to record the revenue earned from March 1 – March 31, as well as any
appropriate adjustments to the revenue presumed already recorded as earned from
January 1 – February 28.
On January 1, 2016, for $18 million, Monument Company purchased 10% bonds, dated
January 1, 2016, with a face amount of $20 million. For bonds of similar risk and
maturity, the market yield is 12%. Interest is paid semiannually on June 30 and
December 31.
Required:
1> Prepare the journal entry to record interest on June 30, 2016, using the straight-line
method.
2> Prepare the journal entry to record interest on December 31, 2016, using the
straight-line method.
What is the difference between permanent accounts and temporary accounts, and why
does an accounting system have both types of accounts?
On November 10 of the current year, Cherokee Industries sold materials to a customer
for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for
cash discounts. What entry would Cherokee make on November 10?
Briefly outline the steps in the gross profit method of estimating ending inventory and
indicate when the method might be used.
Listed below are several transactions that typically produce either an increase or a
decrease in cash. Indicate by letter whether the cash effect of each transaction is
reported on a statement of cash flows as an operating (O), investing (I), or financing (F)
activity.
Transactions
_ Sale of preferred stock
____ Sale of equipment
____ Purchase of treasury stock
____ Merchandise sales
____ Issuance of a short-term note payable
____ Purchase of inventory
____ Repayment of note payable
____ Employee salaries
____ Sale of land
____ Issuance of bonds
____ Acquisition of bonds of another corporation
____ Payment of semiannual interest on bonds payable
____ Payment of a cash dividend
____ Purchase of an office building
____ Collection of nontrade note receivable (principal amount)
____ Loan to another firm
____ Retirement of common stock
____ Payment of income taxes
____ Issuance of a long-term note payable
____ Sale of a patent
On July 5, 2016, a fire destroyed the entire inventory of Kinard Music Mart. The
following information is available from its accounting records:
Required:
Compute the estimated cost of inventory lost in the fire.
