1) Changes in estimates are handled prospectively by dividing the assets book value
less any salvage value by the remaining estimated life.
2) A company excludes from the current assets section, the amount of cash restricted for
purposes other than payment of current obligations or for use in current operations.
3) If the compounding period is less than one year, the annual interest rate must be
converted to the compounding period interest rate by dividing the annual rate by the
number of compounding periods per year.
4) Assets classified as Property, Plant, and Equipment can be either acquired for use in
operations, or acquired for resale.
5) Due to the broader range of options available under U.S. GAAP compared to IFRS,
note disclosures are generally more expansive under U.S. GAAP than under IFRS.
6) Chen Company’s account balances at December 31, 2014 for Accounts Receivable
and the Allowance for Doubtful Accounts are $480,000 debit and $900 credit. Sales
during 2014 were $1,650,000. It is estimated that 1% of sales will be uncollectible. The
adjusting entry would include a credit to the allowance account for
a.$17,400
b.$16,500
c.$15,600
d.$4,800
7) What is a contingency?
a.An existing situation where certainty exists as to a gain or loss that will be resolved
when one or more future events occur or fail to occur
b.An existing situation where uncertainty exists as to possible loss that will be resolved
when one or more future events occur
c.An existing situation where uncertainty exists as to possible gain or loss that will not
be resolved in the foreseeable future
d.An existing situation where uncertainty exists as to possible gain or loss that will be
resolved when one or more future events occur or fail to occur
8) Which of the following statements about materiality is correct?
a.An item must make a difference or it need not be disclosed
b.Materiality is a matter of relative size or importance
c.An item is material if its inclusion or omission would influence or change the
judgment of a reasonable person
d.All of these answers are correct
9) Which of the following items is a current liability?
a.Bonds due in three months (for which there is an adequate sinking fund classified as a
long-term investment)
b.Bonds due in three years
c.Bonds (for which there is an adequate appropriation of retained earnings) due in
eleven months
d.Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue
10) Gibson Company paid $12,000 on June 1, 2014 for a two-year insurance policy and
recorded the entire amount as Insurance Expense. The December 31, 2014 adjusting
entry is
a.debit Insurance Expense and credit Prepaid Insurance, $3,500
b.debit Insurance Expense and credit Prepaid Insurance, $8,500
c.debit Prepaid Insurance and credit Insurance Expense, $3,500
d.debit Prepaid Insurance and credit Insurance Expense, $8,500
11) With regard to contracts that can be settled in either cash or shares
a.IFRS requires that share settlement must be used
b.IFRS gives companies a choice of either cash or shares
c.U.S. GAAP requires that share settlement must be used
d.the FASB project proposes that the IASB adopt the U.S. GAAP approach, requiring
that share settlement must be used
12) Hiser Builders, Inc. is using the completed-contract method for a $9,800,000
contract that will take two years to complete. Data at December 31, 2015, the end of the
first year, are as follows:
Costs incurred to date$4,480,000
Estimated costs to complete5,740,000
Billings to date4,200,000
Collections to date3,500,000
The gross profit or loss that should be recognized for 2015 is
a.$0
b.a $420,000 loss
c.a $210,000 loss
d.a $184,800 loss
13) Finney Company’s condensed income statement is presented below:
Revenues$900,000
Expenses
Cost of goods sold$400,000
Operating and administrative expenses200,000
Depreciation expense 40,000640,000
Income before taxes260,000
Income tax expenses 78,000
Net income$182,000
Earnings per share (100,000 shares)$1.82
The following data is compiled relative to Finney’s operating segments:
Percent Identified with Segment
HotelsGrainsCandy
Revenues42%50%8%
Cost of goods sold48493
Operating and administrative expense355015
Depreciation expense464212
Included in the amounts allocated to each segment on the above percentages are the
following expenses which relate to general corporate activities:
Operating Segment
Hotels Grains Candy Totals
Operating and administrative expense$12,000$9,000$3,000$24,000
Depreciation expense3,5004,0002,50010,000
Instructions
(a)Prepare a schedule showing the amounts distributed to each segment.
(b)Based only on the above information, which segments must be reported and why?
14) Which of the following costs are capitalized for self-constructed assets?
a.Materials and labor only
b.Labor and overhead only
c.Materials and overhead only
d.Materials, labor, and overhead
15) At December 31, 2014, Tatum Company had 2,000,000 shares of common stock
outstanding. On January 1, 2015, Tatum issued 500,000 shares of preferred stock which
were convertible into 1,000,000 shares of common stock. During 2015, Tatum declared
and paid $1,200,000 cash dividends on the common stock and $400,000 cash dividends
on the preferred stock. Net income for the year ended December 31, 2015, was
$4,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per
share for the year ended December 31, 2015? (Round to the nearest penny.)
a.$1.20
b.$1.33
c.$2.00
d.$1.66
16) Earnings per share should always be shown separately for
a.net income and gross margin
b.net income and pretax income
c.income before extraordinary items
d.extraordinary items and prior period adjustments
17) On January 1, 2015, Doty Co. redeemed its 15-year bonds of $5,000,000 par value
for 102. They were originally issued on January 1, 2003 at 98 with a maturity date of
January 1, 2018 . The bond issue costs relating to this transaction were $300,000. Doty
amortizes discounts, premiums, and bond issue costs using the straight-line method.
What amount of loss should Doty recognize on the redemption of these bonds (ignore
taxes)?
a.$180,000
b.$120,000
c.$100,000
d.$0
18) In comparing and contrasting FIFO vs. LIFO inventory procedures, the following
listing was developed. You are to complete the tabulation with an answer of “YES” or
“NO” as demonstrated by the first item. Any combination of yes-no answers is possible
in each situation.
FIFO LIFO
0>Usually matches the actual physical flow of goods. Yes No
1>Emphasizes the income statement in that it matches the more
recent costs with revenue.
2>Defers tax payments in times of rising prices.
3>Possibility of liquidating the base may be a significant negative
aspect.
4>Will probably not be adopted if prices are expected to decline.
5>Emphasizes the balance sheet in that the more recent costs
are contained in the inventory account.
6>Can use price indexes to cost layers.
7>Switching to this method could cause problems in the equity
markets, with loan covenants, etc.
8>Income figure more accurately reflects cash available for
dividends, investments, etc.
9>Tends to smooth income in periods of fluctuating prices.
10>Income figure is more “real” in that it doesn’t contain “paper
profits.”
11>A change to this method must be justified (i.e., to the auditor)
other than solely on the basis of the tax effect.
12>Perpetual inventory results may be different from periodic
inventory results.
13>Is acceptable to the IRS (i.e., for income tax purposes).
14>Gives lower profits when prices rise.
15>In a period of rising prices has an adverse effect on assets,
working capital, and stockholders’ equity.
16>Quick inventory turnover may have somewhat of a mitigating
effect on some of the method’s claimed disadvantages.
17>Improves cash flow in periods of rising prices.
18>If used for tax purposes, it must be used for financial reporting
purposes.
19>Somewhat opens door for profit manipulation and may cause
poor purchase decisions.
20>Is a current value, rather than a historical cost, valuation method.
19) (All sales and purchases are on credit.)
Indicate in each of the spaces provided the effect of the described errors on the various
elements of a company’s financial statements. Use the following codes: O = amount is
overstated; U = amount is understated; NE = no effect. Assume a periodic inventory
system.
AccountsAccountsCost of
ReceivableInventoryPayableSalesGoods Sold
EXAMPLE: Excluded goods in rented
warehouse from inventory NEUNENEO
count.
1>Goods in transit shipped “f.o.b. destination” by supplier were recorded as a purchase
but were excluded from ending inventory.
2>Goods held on consignment were included in inventory count and recorded as a
purchase.
3>Goods in transit shipped “f.o.b. shipping point” were not recorded as a sale and were
included in ending inventory.
4>Goods were shipped and appro-priately excluded from ending inventory but sale was
not recorded.
20) If $9,000 is deposited annually starting on January 1, 2014 and it earns 9%, how
much will accumulate by December 31, 2023?
21) Joseph Co. began operations on January 1, 2014 . Financial statements for 2014 and
2015 contained the following errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory$80,000 too high$104,000 too high
Depreciation expense48,000 too low
Accumulated depreciation48,000 too low48,000 too low
Insurance expense42,000 too high42,000 too low
Prepaid insurance36,000 too low
In addition, on December 26, 2015 fully depreciated equipment was sold for $48,000,
but the sale was not recorded until 2016 . No corrections have been made for any of the
errors.
Instructions
Ignoring income taxes, show your calculation of the total effect of the errors on 2015
net income.
22) Accounting standards are now less likely to require the recording or disclosure of
fair value information.
23) For numerous reasons, a corporation may reacquire shares of its own capital stock.
When a company purchases treasury stock, it usually accounts for the stock using the
cost method.
Instructions
Explain how a company would account for each of the following:
1>Purchase of treasury shares at a price less than par value.
2>Subsequent resale of treasury shares at a price less than purchase price, but more than
par value.
3>Subsequent resale of treasury shares at a price greater than both purchase price and
par value.
4>Effect on net income.