1) “In-substance defeasance” is a term used to refer to an arrangement whereby
a.a company gets another company to cover its payments due on long-term debt
b.a governmental unit issues debt instruments to corporations
c.a company provides for the future repayment of a long-term debt by placing
purchased securities in an irrevocable trust
d.a company legally extinguishes debt before its due date
2) If a short-term obligation is excluded from current liabilities because of refinancing,
the footnote to the financial statements describing this event should include all of the
following information except
a.a general description of the financing arrangement
b.the terms of the new obligation incurred or to be incurred
c.the terms of any equity security issued or to be issued
d.the number of financing institutions that refused to refinance the debt, if any
3) Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015
for the purpose of leasing a machine to be used in its manufacturing operations. The
following data pertain to the agreement:
(a)The term of the noncancelable lease is 3 years with no renewal option. Payments of
$287,432 are due on January 1 of each year.
(b)The fair value of the machine on January 1, 2015, is $800,000. The machine has a
remaining economic life of 10 years, with no salvage value. The machine reverts to the
lessor upon the termination of the lease.
(c)Alt depreciates all machinery it owns on a straight-line basis.
(d)Alts incremental borrowing rate is 10% per year. Alt does not have knowledge of the
8% implicit rate used by Yates.
(e)Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in
a suit which is sufficiently material to make collectibility of future lease payments
doubtful.
Future Value of Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
11.000001.000001.000001.000001.00000
22.050002.060002.080002.100002.12000
33.152503.183603.246403.310003.37440
44.310134.374624.506114.641004.77933
55.525635.637095.866606.105106.35285
66.801916.975327.335927.715618.11519
78.142018.393848.922809.4871710.08901
89.549119.8974710.6366311.4358912.29969
911.0265611.4913212.4875613.5794814.77566
1012.5778913.1807914.4865615.9374317.54874
Present Value of an Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
1.95238.94340.92593.90909.89286
21.859411.833391.783261.735541.69005
32.723252.673012.577102.486852.40183
43.545953.465113.312133.169863.03735
54.329484.212363.992713.790793.60478
65.075694.917324.622884.355264.11141
75.786375.582385.206374.868424.56376
86.463216.209795.746645.334934.96764
97.107826.801696.246895.759025.32825
107.721737.360096.710086.144575.65022
If the present value of the future lease payments is $800,000 at January 1, 2015, what is
the amount of the reduction in the lease liability for Alt Corp. in the second full year of
the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest
dollar.)
a.$207,426
b.$223,426
c.$236,175
d.$228,175
4) The difference between the accounting process and the accounting cycle is
a.the accounting process results in the preparation of financial statements, whereas the
accounting cycle is concerned with recording business transactions
b.the accounting cycle represents the steps taken to accomplish the accounting process
c.the accounting process represents the steps taken to accomplish the accounting cycle
d.merely semantic, because both concepts refer to the same thing
5) Which of the following is true of healthcare benefits?
a.Healthcare benefit plans are generally not funded
b.Healthcare benefits are payable monthly
c.Variables in healthcare benefits are generally predictable
d.The benefits are well-defined in healthcare benefits
6) Bruner Constructors, Inc. has consistently used the percentage-of-completion method
of recognizing income. In 2014, Bruner started work on a $42,000,000 construction
contract that was completed in 2015 . The following information was taken from
Bruner’s 2014 accounting records:
Progress billings$13,200,000
Costs incurred12,600,000
Collections8,400,000
Estimated costs to complete25,200,000
What amount of gross profit should Bruner have recognized in 2014 on this contract?
a.$4,200,000
b.$2,800,000
c.$2,100,000
d.$1,400,000
7) Explain the following terms.
(a) LIFO layer (b) LIFO reserve(c) LIFO effect
8) Wilson Co. purchased land as a factory site for $900,000. Wilson paid $80,000 to
tear down two buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480
were paid for title investigation and making the purchase. Architect’s fees were $31,200.
Title insurance cost $2,400, and liability insurance during construction cost $2,600.
Excavation cost $10,440. The contractor was paid $2,800,000. An assessment made by
the city for pavement was $6,400. Interest costs during construction were $170,000.
The cost of the building that should be recorded by Wilson Co. is
a.$2,803,800
b.$2, 804,840
c.$2, 813,200
d.$3,014,240
9) The occurrence that most likely would have no effect on 2014 net income is the
a.sale in 2014 of an office building contributed by a stockholder in 1961
b.collection in 2014 of a dividend from an investment
c.correction of an error in the financial statements of a prior period discovered
subsequent to their issuance
d.stock purchased in 1996 deemed worthless in 2014
10) Included in Allen Corp.’s balance sheet at June 30, 2013 is a 10%, $3,000,000 note
payable. The note is dated October 1, 2013 and is payable in three equal annual
payments of $1,500,000 plus interest. The first interest and principal payment was made
on October 1, 2014 . In Allen’s June 30, 2015 balance sheet, what amount should be
reported as accrued interest payable for this note?
a.$337,500
b.$225,000
c.$112,500
d.$75,000
11) Worley Truck Rental uses the group depreciation method for its fleet of trucks.
When it retires one of its trucks and receives cash from a salvage company, the carrying
value of property, plant, and equipment will be decreased by the
a.original cost of the truck
b.original cost of the truck less the cash proceeds
c.cash proceeds received
d.cash proceeds received and original cost of the truck
12) Chess Top uses the periodic inventory system. For the current month, the beginning
inventory consisted of 360 units that cost $65 each. During the month, the company
made two purchases: 540 units at $68 each and 270 units at $70 each. Chess Top also
sold 900 units during the month. Using the FIFO method, what is the amount of cost of
goods sold for the month?
a.$60,786
b.$58,500
c.$61,470
d.$60,120
13) Which of the following legal fees should be capitalized?
Legal fees toLegal fees to successfully
obtain a copyrightdefend a trademark
a.NoNo
b.NoYes
c.YesYes
d.YesNo
14) Which of the following is not a required supplemental disclosure for the balance
sheet?
a.Contingencies
b.Financial forecasts
c.Accounting policies
d.Contractual situations
15) On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Sauder to make annual payments of
$150,000 at the beginning of each year for five years with the title passing to Sauder at
the end of this period. The equipment has an estimated useful life of 7 years and no
salvage value. Sauder uses the straight-line method of depreciation for all of its fixed
assets. Sauder accordingly accounts for this lease transaction as a capital lease. The
minimum lease payments were determined to have a present value of $625,479 at an
effective interest rate of 10%.
In 2014, Sauder should record interest expense of
a.$47,548
b.$87,453
c.$62,547
d.$102,453
16) Remington Construction Company uses the percentage-of-completion method.
During 2014, the company entered into a fixed-price contract to construct a building for
Sherman Company for $24,000,000. The following details pertain to the contract:
At December 31, 2014At December 31, 2015
Percentage of completion25%60%
Estimated total cost of contract$18,000,000$20,000,000
Gross profit recognized to date1,500,000 2,400,000
The amount of construction costs incurred during 2015 was
a.$12,000,000
b.$7,500,000
c.$4,500,000
d.$2,000,000