1) When a contractor determines that a contract will result in an overall loss, when
should that loss be recognized within the completed-contract and
percentage-of-completion methods?
Completed-Contract Percentage-of-Completion
a. Immediately Over the remainder of the contract
b. At the completion of the contract At the completion of the contract
c. At the completion of the contract Immediately
d. Immediately Immediately
2) Which of the following is true of accrued interest on bonds that are sold between
interest dates?
a. It is computed at the effective market rate
b. It will be paid to the seller when the bonds mature
c. It is extra income to the buyer
d. None of these is true
3) The only significant difference between the provisions of international accounting
standards as promulgated by IAS 39 and U.S. accounting standards under FASB ASC
Topic 860 (Transfers and Servicing is
a. IAS 39 requires accounting for all investments in debt securities to be on a fair value
basis while ASC 860 does not
b. IAS 39 allows all unrealized gains and losses on securities valued at fair value to be
reported in net income for the period while ASC 860 does not
c. IAS 39 requires trading securities to be reported on a fair value basis but not
securities available for sale
d. IAS 39 does not permit the reporting of unrealized gains and losses on securities
other than trading securities to be recorded as part of equity
4) At December 31, 2013, Grandin Corporation had 500 shares of common stock
outstanding. On October 1, 2014, an additional 200 shares of common stock were
issued. In addition, Grandin Corp. had $40,000 of 8 percent convertible bonds
outstanding at December 31, 2013, which are convertible into 225 shares of common
stock. No bonds were converted into common stock in 2014. Net income for the year
ending December 31, 2014, was $14,000. Assuming the income tax rate was 50 percent,
the diluted earnings per share for the year ended December 31, 2014, should be
a. $15.67
b. $20.13
c. $25.45
d. $28.36
5) During 2014, Epsilon Company had pretax accounting income of $620. Epsilons
only temporary difference for 2014 was the collection of a receivable that resulted in
$220 of income under the installment sales method of revenue recognition that Epsilon
uses for tax purposes. The sale was originally made in 2012 and recognized for
accounting purposes at that time. Epsilons taxable income for 2014 would be
a. $400
b. $640
c. $660
d. $840
6) Which of the following is the most likely item to result in a deferred tax asset?
a. Using accelerated depreciation for tax purposes but straight-line depreciation for
accounting purposes
b. Using the completed-contract method of recognizing construction revenue tax
purposes, but using percentage-of-completion method for financial reporting purposes
c. Prepaid expenses
d. Unearned revenues
7) Patrol, Inc., leased a machine from Ravel Company. The lease term was for a
five-year period beginning January 1, 2014. Equal annual lease payments of $3,000 are
due on December 31 of each year. The implicit rate of the lease is 10% and is known to
Patrol. Patrol has properly applied the lease capitalization criteria and as a result,
accounts for the lease as a capital lease. The first payment under the lease was made on
December 31, 2014 as scheduled.
How much should Patrol classify as the current portion of the lease liability at
December 31, 2014?
a. $2,049
b. $7,460
c. $3,000
d. $9,509
8) In preparing a statement of cash flows, which of the following transactions would be
considered an investing activity?
a. Sale of a business segment
b. Issuance of bonds payable at a discount
c. Purchase of treasury stock
d. Sale of capital stock
9) See Laramie Corporation information above. The amount reported on Laramie
Corporation’s December 31, 2015, balance sheet as additional paid-in capital was
a. $400,000
b. $550,000
c. $563,000
d. $950,000
10) Which of the following is true regarding the application of lower-of-cost-or-market
method under international accounting standards?
a. No lower-of-cost-or-market rule for inventory exists under international accounting
standards
b. Inventory is recorded at the lower-of-cost-or-market value (defined as replacement
cost of the inventory)
c. Inventory is recorded at the lower-of-cost-or-market value defined as net-realizable
value
d. Inventory is recorded at the lower-of-cost-or-market value defined as net-realizable
value, minus the normal profit margin
11) Which statement is true about the gross profit method?
a. It may not be used to estimate inventories for annual statements
b. It may not be used to estimate inventories for interim statements
c. It may not be used by insurers of inventory
d. It may not be used for internal estimates of inventory
12) A change from an accelerated depreciation method to the straight-line depreciation
method should be accounted for as a
a. change in accounting estimate
b. change in accounting estimate effected by a change in accounting principle
c. correction of an error
d. a prior period adjustment
13) Sandy Corporation uses the allowance method of accounting for uncollectible
accounts. During 2014, Sandy had charged $80,000 to Bad Debt Expense, and wrote off
accounts receivable of $90,000 as uncollectible. What was the amount of the decrease
in working capital as a result of these entries?
a. $0
b. $90,000
c. $80,000
d. $10,000
14) Goodwill should be recorded in the accounting records only when
a. it is purchased from another company
b. it can be established that a definite benefit or advantage has resulted to a firm from
some item such as a good name, capable staff, or reputation
c. it is acquired through the purchase of another business entity
d. a firm reports above normal earnings for five or more consecutive years
15) Which of the following is an internal user of a company’s financial information?
a. Board of directors
b. Stockholders in the company
c. Holders of the company’s bonds
d. Creditors with long-term contracts with the company
16) On September 20, 2014, Shunt Corporation declared the distribution of the
following dividend to its stockholders of record as of September 30, 2014:
The entry to record the declaration of the property dividend would include a debit to
Retained Earnings of
a. $1,575,000
b. $1,450,000
c. $850,000
d. $600,000
17) Choose the combination that best reflects the appropriate classification of cash
received from operating, investing and financing activities.
Operating Investing Financing
a. Cash paid by customers Sale of operational assets Issuance of bonds payable
b. Dividends received Cash paid by customers Issuance of bonds payable
c. Sale of operational assets Dividends received Cash paid by customers
d. Issuance of bonds payable Sale of operational assets Dividends received
18) Bowman Company reported assets totaling $870,000 as of December 31, 2014. The
following information relates to those assets:
(a) Tristan Labs, a rival company, recently offered to give a $100,000 signing bonus to
the head of Bowman’s fabrication department if she would leave Bowman and join
Breakstone. She declined. Bowman has consequently recorded a long-term asset,
“Employees Under Contract,” for $100,000.
(b) Bowman purchased a patent from a small research firm for $75,000. Subsequent
research has shown that the patented technology doesn’t work as well as originally
thought and the technology actually has no economic use. Bowman reports the patent at
its amortized cost of $60,000.
(c) An independent appraiser recently set Bowman’s market value at $500,000. This
exceeded the book value of equity by $120,000. Accordingly, Bowman recorded
Goodwill totaling $120,000.
(d) Near the end of the year, Bowman paid $30,000 for the exclusive right to market
electronic equipment to be imported from abroad. Bowman reported this as a $30,000
“Intangible Asset.”
(e) When Bowman started business three years ago, it was required to deposit $5,000
with the local electric utility. The deposit is refundable if Bowman cancels its electric
service. Bowman earns no interest on the deposit. The deposit is recorded as an “Other
Long-Term Asset.”
After considering the items above, what should be the total of Bowman’s reported
assets?
19) Interest cost relating to defined-benefit pension plans represents the
a. increase in projected benefit obligation as a result of recomputing the firms pension
obligation when estimated turnover and other relevant factors related to the pension are
reassessed
b. increase in the projected benefit obligation during the year resulting from all factors
affecting the projected benefit obligation
c. increase in the projected benefit obligation from the beginning of the year to the end
of the year solely due to the passage of time
d. expected return on the plan assets for the year
20) Which of the following is NOT a function of a financial analyst?
a. Providing buy recommendations on a companys stock
b. Providing sell recommendations on a companys stock
c. Generating forecasts of company earnings
d. Serving as an investment banker for a company for which the analyst is providing
research coverage
21) Stratosphere Manufacturing Company sold plant assets at a gain of $205,000 less
related taxes of $62,500. Assuming the gain is not considered unusual or infrequent,
Stratosphere’s income statement for the period should report
a. a prior period adjustment net of applicable taxes, $142,500.
b. an extraordinary item net of applicable taxes, $142,500.
c. a gain of $205,000 and an increase in income tax expense of $62,500.
d. operating income net of applicable taxes, $142,500.
22) If the bonds were issued at 97 on April 1, 2014, plus accrued interest, the amount of
cash received by Romer Corporation would be
a. $200,000
b. $194,000
c. $199,000
d. none of these
23) In accounting for sales on consignment, sales revenue and the related cost of goods
sold should be recognized by the
a. consignor when the goods are shipped to the consignee
b. consignee when the goods are shipped to the third party
c. consignor when notification is received the consignee has sold the goods
d. consignee when cash is received from the customer
24) Torlin Inc. neglected to amortize the discount on outstanding ten-year bonds
payable. What is the effect of the failure to record discount amortization on interest
expense and bond carrying value, respectively?
a. Understate; understate
b. Understate; overstate
c. Overstate; overstate
d. Overstate; understate
25) See information for Alana’s Clothing Store above. Using this information, periodic
LIFO cost of goods sold is
a. $360
b. $300
c. $330
d. $430
26) The records of McGarrett Corp. show the following information:
(a) Purchased Machine B used in the factory for $450,000 on July 1, 2010. Machine B
has an estimated useful life of 12 years and a residual value of $30,000. McGarrett uses
straight-line depreciation.
(b) Sales for 2013 amounted to $4,000,000, including $600,000 of sales on credit. Bad
debt losses are estimated based on actual experience to be .25% of credit sales.
(c) The dollar value of office supplies inventory at the beginning of 2013 equaled $600.
During 2013, office supplies costing $8,800 were purchased. This amount was debited
to office supplies expense. The dollar value of the ending inventory was determined to
be $400. The January 1 balance of $600 still appears as the balance in the office
supplies inventory account.
(d) On July 1, 2013, the company paid a three-year insurance premium in the amount of
$2,160. This amount was debited to insurance expense.
(e) On October 1, 2013, the company paid rent on some leased office space. The
payment of $7,200 cash was for the following six months. The $7,200 payment was
debited to rent expense
Prepare journal entries to adjust the books of McGarrett Corp. at December 31, 2013.
27) Athletes Sporting Goods began operations February 1, 20 Athletes sells baseball
bats to high schools and colleges throughout the country. The company uses a periodic
system. A summary of inventory records for the month of February appears below:
All bats are sold for $47.50. Athletes takes all discounts that are offered and uses the net
method for recording purchases. On February 28, there were 470 bats on hand.
28) The FASB has been struggling with the issue of determining the difference between
debt and equity financing for nearly twenty years. The Board is concerned that many
provisions of U.S. GAAP conflict with the definition of a liability given in the
Conceptual Framework. As a result, the Board is considering a new approach, called the
basic ownership approach, to distinguishing between debt and equity financing.
As part of this new approach, the FASB has suggested that all share-based
compensation instruments should be classified as liabilities.
Required:
Explain the FASBs rationale for classifying share-based compensation instruments as
liabilities.
29) Recent accounting scandals have raised concerns over the quality and transparency
of financial accounting and reporting in the United States. Critics of what is termed the
“rules-based” system currently used in the U.S. cite the increasingly detailed and
complex nature of rule-driven accounting pronouncements. These critics suggest that
the United States should adopt a principles-based system similar to that of the
International Accounting Standards Board.
Explain what is meant by a principles-based system and the advantages and
disadvantages of such a system.
30) Cornwall Co. made the following errors in counting its year-end physical
inventories:
31) On January 1, 2013, Delgado Company establishes a stock option plan that grants
100 qualified managers options for a computed number of shares of $20 par-value
common stock at a computed option price per share. The exercise price is $40, the
market price of the companys common stock on the grant date. Computation of the
number of options awarded will be made three years after the option is granted and is
based on the increase in net income over the three-year period using the following
formula:
The options are nontransferable and must be exercised not earlier than three years, nor
later than five years, from the grant date. Employment with the company is required
through the exercise date. For simplicity, it is assumed that all the vested options are
exercised near the end of 2017, when the price of the stock was $70.
Management estimates that earnings growth over the three-year period will be
approximately 25 percent. Forfeitures are estimated to be approximately 2 percent per
year from the grant date to the vesting date. Use of an option pricing model yields a fair
value for the options of $10 per option.
At December 31, 2013, earnings per share have grown 10 percent over the 2012 EPS.
Management, however, continues to believe that the 25 percent growth amount over the
three-year period is accurate. Two of the grantees have left the firm. The stock price has
increased to $44 per share.
At December 31, 2014, no changes in estimates are made, even though earnings growth
for the two-year period is only 15 percent. Market price per share has increased to $51
per share. An additional three grantees have left the company.
At December 31, 2015, the three-year growth in earnings is only 20 percent. Only 90 of
the grantees are still with the company, and these individuals vest with their options.
The stock price is now $48 per share.
All vested options are exercised on December 28, 2017, when the market price of the
companys stock is $70 per share.
Required:
Prepare all journal entries necessary to account for this stock compensation plan.
32) The skeleton of the basic retail inventory calculation is presented below:
Required:
Explain how the following items would affect the computation of ending inventory
using the retail inventory method:
33) Corrington Metalworks, Inc., purchased Scotia Metal Products, a Scotia company,
on January 4, 2014. On the date of purchase, the exchange rate for 1 Scotia dollar was
U.S. $0.7 Scotia Metal Products balance sheet on the date of purchase is shown below:
Required:
Prepare a translated balance sheet as of January 4, 2014.
34) Eva Designs, Inc., a corporation organized on January 1, 2005, reported the
following incomes (losses) for the ten-year period, 2005-2014:
Applying the carryback provisions in the tax law, compute the net amount of taxes paid
(amounts paid less refunds) for the ten-year period ending December 31, 2014