1) The following differences enter into the reconciliation of financial income and
taxable income of Abbott Company for the year ended December 31, 2014, its first year
of operations. The enacted income tax rate is 30% for all years.
Pretax accounting income$700,000
Excess tax depreciation(360,000)
Litigation accrual70,000
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income60,000
Interest income from New York municipal bonds (20,000)
Taxable income$450,000
1>Excess tax depreciation will reverse equally over a four-year period, 2015-2018.
2>It is estimated that the litigation liability will be paid in 2018 .
3>Rent revenue will be recognized during the last year of the lease, 2018 .
4>Interest revenue from the New York bonds is expected to be $20,000 each year until
their maturity at the end of 2018 .
Instructions
(a)Prepare a schedule of future taxable and (deductible) amounts.
(b)Prepare a schedule of the deferred tax (asset) and liability at the end of 2014 .
(c)Since this is the first year of operations, there is no beginning deferred tax asset or
liability. Compute the net deferred tax expense (benefit).
(d)Prepare the journal entry to record income tax expense, deferred taxes, and the
income taxes payable for 2014 .
2) In accordance with GAAP, the maximum period over which a patent can be
amortized is
a.20 years
b.28 years
c.40 years
d.50 years
3) The major distinction between the Financial Accounting Standards Board (FASB)
and its predecessor, the Accounting Principles Board (APB), is
a.the FASB issues exposure drafts of proposed standards
b.all members of the FASB are fully remunerated, serve full time, and are independent
of any companies or institutions
c.all members of the FASB possess extensive experience in financial reporting
d.a majority of the members of the FASB are CPAs drawn from public practice
4) Gains or losses on cash flow hedges are
a.ignored completely
b.recorded in equity, as part of other comprehensive income
c.reported directly in net income
d.reported directly in retained earnings
5) For Mortenson Company, the following information is available:
Cost of goods sold$130,000
Dividend revenue5,000
Income tax expense12,000
Operating expenses46,000
Sales revenue200,000
In Mortensons multiple-step income statement, gross profit
a.should not be reported
b.should be reported at $17,000
c.should be reported at $70,000
d.should be reported at $75,000
6) Baden Company is a diversified company which has developed the following
information about its five segments:
SEGMENTS
A B C D E
Total sales$ 800,000$1,700,000$ 300,000$ 320,000$ 580,000
Operating profit (loss)(270,000)480,00040,000(300,000)(10,000)
Identifiable assets2,600,0005,800,0001,200,0003,900,0005,600,000
Instructions
Identify which segments are significant enough to warrant disclosure in accordance
with FASB No. 131, “Reporting Disaggregated Information about a Business
Enterprise,” by applying the following quantitative tests:
a.Revenue test
b.Operating profit or loss test
c.Identifiable assets test
7) Fogel Co. has $3,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is
convertible into 30 shares of $30 par value common stock. The bonds pay interest on
January 31 and July 31 . On July 31, 2014, the holders of $960,000 bonds exercised the
conversion privilege. On that date the market price of the bonds was 105 and the market
price of the common stock was $36. The total unamortized bond premium at the date of
conversion was $210,000. Fogel should record, as a result of this conversion, a
a.credit of $163,200 to Paid-in Capital in Excess of Par
b.credit of $144,000 to Paid-in Capital in Excess of Par
c.credit of $67,200 to Premium on Bonds Payable
d.loss of $9,600
8) IFRS permits companies to carry assets at historical cost or use a revaluation model
for fixed assets. According to IAS 16, if revaluation is used:
1>it must be applied to all assets in a class of assets.
2>assets must be revalued on an annual basis.
3>assets must be depreciated on the straight-line basis.
4>salvage values must be zero.
a.1 is correct
b.2 is correct
c.1 and 2 are correct
d.All of these answers are correct
9) Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2014, Cosby
had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded
these transactions using the fair value method rather than the equity method of
accounting. What effect would this have on the investment account, net income, and
retained earnings, respectively?
a.Understate, overstate, overstate
b.Overstate, understate, understate
c.Overstate, overstate, overstate
d.Understate, understate, understate
10) On December 31, 2014, Hill Company, which sells only one product, adopted the
periodic last-in, first-out method of inventory valuation. The inventory was valued at
$40,000 on the December 31, 2014 balance sheet. The number of items in its inventory
remained constant during 2015 . The December 31, 2015 inventory valuation would be
a.less than $40,000 if prices were steadily decreasing
b.less than $40,000 if prices were steadily increasing
c.greater than $40,000 if prices were steadily increasing
d.$40,000 regardless of any price changes
11) Part A.Judd Company has a beginning inventory in year one of $700,000 and an
ending inventory of $847,000. The price level has increased from 100 at the beginning
of the year to 110 at the end of year one. Calculate the ending inventory under the
dollar-value LIFO method.
Part B.At the end of year two, Judd’s inventory is $943,000 in terms of a price level of
115 which exists at the end of year two. Calculate the inventory at the end of year two
continuing the use of the dollar-value LIFO method.
12) Presented below is information related to Jensen Inc. pension plan for 2015.
Service cost$1,020,000
Actual return on plan assets210,000
Interest on projected benefit obligation390,000
Amortization of net loss90,000
Amortization of prior service cost due to increase in benefits165,000
Expected return on plan assets180,000
What amount should be reported for pension expense in 2015?
a.$1,485,000
b.$1,455,000
c.$1,635,000
d.$1,275,000
13) Fultz Company had 300,000 shares of common stock issued and outstanding at
December 31, 2014 . During 2015, no additional common stock was issued. On January
1, 2015, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2015,
Fultz declared and paid $150,000 cash dividends on the common stock and $125,000 on
the nonconvertible preferred stock. Net income for the year ended December 31, 2015,
was $800,000. What should be Fultz’s 2015 earnings per common share, rounded to the
nearest penny?
a.$0.96
b.$1.75
c.$2.25
d.$2.67
14) Perry Corporation acquired land, buildings, and equipment from a bankrupt
company at a lump-sum price of $550,000. At the time of acquisition Perry paid
$20,000 to have the assets appraised. The appraisal disclosed the following values:
Land$320,000
Buildings 256,000
Equipment 64,000
What cost should be assigned to the land, buildings, and equipment, respectively?
a.$320,000, $256,000, and $64,000
b.$275,000, $220,000, and $55,000
c.$285,000, $228,000, and $57,000
d.$190,000, $190,000, and $190,000
15) One criticism not normally aimed at a balance sheet prepared using current
accounting and reporting standards is
a.failure to reflect current value information
b.the extensive use of separate classifications
c.an extensive use of estimates
d.failure to include items of financial value that cannot be recorded objectively
16) Hartz Co., which began operations on January 1, 2015, appropriately uses the
installment-sales method of accounting. The following information pertains to Hartz’s
operations for the year 2015:
Installment sales$2,400,000
Regular sales960,000
Cost of installment sales1,440,000
Cost of regular sales576,000
General and administrative expenses192,000
Collections on installment sales576,000
The deferred gross profit account in Hartz’s December 31, 2015 balance sheet should be
a.$230,400
b.$384,000
c.$729,600
d.$960,000
17) Checkers uses the periodic inventory system. For the current month, the beginning
inventory consisted of 4,800 units that cost $12 each. During the month, the company
made two purchases: 2,000 units at $13 each and 8,000 units at $13.50 each. Checkers
also sold 8,600 units during the month. Using the FIFO method, what is the ending
inventory?
a.$80,292
b.$74,400
c.$83,700
d.$75,800
18) Lucy and Fred want to begin saving for their baby’s college education. They
estimate that they will need $100,000 in eighteen years. If they are able to earn 5% per
annum, how much must be deposited at the end of each of the next eighteen years to
fund the education?
a.$3,873
b.$8,555
c.$8,274
d.$3,555
19) Described below are certain transactions of Lamar Company for 2014:
1>On May 10, the company purchased goods from Fox Company for $75,000, terms
2/10, n/30. Purchases and accounts payable are recorded at net amounts. The invoice
was paid on May 18 .
2>On June 1, the company purchased equipment for $90,000 from Rao Company,
paying $30,000 in cash and giving a one-year, 9% note for the balance.
3>On September 30, the company discounted at 10% its $200,000, one-year
zero-interest-bearing note at Virginia State Bank.
Instructions
(a)Prepare the journal entries necessary to record the transactions above using
appropriate dates.
(b)Prepare the adjusting entries necessary at December 31, 2014 in order to properly
report interest expense related to the above transactions. Assume straight-line
amortization of discounts.
(c)Indicate the manner in which the above transactions should be reflected in the
Current Liabilities section of Lamar Company’s December 31, 2014 balance sheet.
20) Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract
price of $14,400,000. Other details follow:
2014 2015
Costs incurred during the year$2,400,000$7,350,000
Estimated costs to complete, as of December 317,200,0000
Billings during the year2,700,00010,800,000
Collections during the year1,800,00011,700,000
Assume that Gomez uses the percentage-of-completion method of accounting. The
portion of the total gross profit to be recognized as income in 2014 is
a.$900,000
b.$1,200,000
c.$3,600,000
d.$4,800,000