If cash has been collected from a customer, recognizing estimated sales returns results
in recognizing a refund liability.
If a long-term noninterest-bearing note is received in exchange for merchandise sold,
the amount of sales revenue recognized will be greater than the amount of the note.
MACRS (modified accelerated cost recovery system) depreciation is equivalent to
sum-of-the-years’ digits depreciation.
When accounting for multiple-element arrangements, GAAP indicates that sellers can
separately record revenue for part of an arrangement even if the part does not have
value to the customer on a stand-alone basis.
The company’s credit-adjusted risk-free rate of interest is used when computing present
value applying the expected cash flow approach.
The direct and indirect methods of reporting the statement of cash flows present
different information for investing and financing activities.
Treasury stock transactions never increase retained earnings or net income.
The cost of promotional offers should be recorded as expenses in the accounting period
when the offers are redeemed by customers.
Interest payments on debt are classified as cash outflows from financing activities.
International Financial Reporting Standards (IFRS) require goodwill to be tested for
impairment at least annually.
The primary responsibility for properly applying GAAP when communicating with
investors and creditors through financial statements lies with a firm’s auditors.
Stock designated as preferred usually has preferential rights over other classes of stock
relative to dividends and liquidating distributions.
An upward revision of inflation and compensation trends would likely cause a gain in
the pension benefit obligation.
If the quantity of goods held in inventory decreased during the period, the dollar
amount of ending inventory can’t exceed the dollar amount of beginning inventory.
A transfer of goods or services is complete when the customer has control over the
goods or services.
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.
Sweeney most likely should recognize revenue when:
a. He paints the painting, because the painting is produced while he works.
b. When he transfers the painting to a barbershop.
c. When the barbershop sells the painting.
d. When the barbershop’s right of return expires.
For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting
income. This included warranty expense of $6 and $20 in depreciation expense. Two
million of warranty costs were incurred, and MACRS depreciation amounted to $35. In
the absence of other temporary or permanent differences, what was Centipede’s income
tax payable currently, assuming a tax rate of 40%?
a. 19.6 million.
b. 25.2 million.
c. 27.6 million.
d. 29.2 million.
Which of the following is not true about revenue recognition with respect to long-term
construction contracts?
a. Long-term construction contracts often are viewed as having a single performance
obligation, because goods and services fail the ‘separately identifiable” criterion.
b. Long-term construction contracts often satisfy the criteria for recognizing revenue
over time.
c. Long-term construction contracts require accounting for construction in progress as
well as billings to customers.
d. Long-term construction contracts typically include multiple performance obligations
because of all the different types of goods and services included for each project.
Mammoth Publishing, Inc. owns a weekly magazine called “Nova Health,” and sells
annual subscriptions for $96. Customers prepay their subscription fee and receive 52
issues starting in the following month. The company also offers new subscribers a 25%
discount coupon on its other weekly magazine called “Fishing & Camping,” which has
a list price of $84 for an annual subscription. Mammoth estimates that approximately
10% of the discount coupons will be redeemed. Required:
(a) How many performance obligations are in a single subscription contract? Explain
the reasons for your answer.
(b) Prepare the journal entry to account for one new subscription of “Nova Health,”
clearly identifying the revenue or deferred revenue associated with each performance
obligation.
When the investor’s level of influence changes, it may be necessary to change to the
equity method from another method. When the level of ownership rises from less than
20% to a range of 20% to 50%, the equity method typically would become appropriate
and the investment account balance should be:
a. Retrospectively adjusted to the balance that would have existed if the equity method
had been in effect for prior years.
b. Carried over as is with no adjustment necessary.
c. Carried over at fair value on date of transfer.
d. Adjusted to reflect amortized cost.
A company’s defined benefit pension plan had a PBO of $265,000 on January 1, 2016.
During 2016, pension benefits paid were $40,000. The discount rate for the plan for this
year was 10%. Service cost for 2016 was $80,000. Plan assets (fair value) increased
during the year by $45,000. The amount of the PBO at December 31, 2016, was:
a. $225,000.
b. $305,000.
c. $331,500.
d. None of these answer choices is correct.
Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book
depreciation of $2,000, and accrued warranty expense of $400 on the books although no
warranty work was performed. What is Bumble Bee’s pretax accounting income?
a. $4,400.
b. $3,600.
c. $9,600.
d. $2,600.
Tropical Tours reported revenue of $400,000 for its year ended December 31, 2016.
Accounts receivable at December 31, 2015 and 2016, were $35,000 and $32,000,
respectively. Using the direct method for reporting cash flows from operating activities,
Tropical Tours would report cash collected from customers of:
a. $400,000.
b. $397,000.
c. $403,000.
d. $365,000.
The Guitar World (TGW) holds an investment that increased in fair value over 2016,
and accounts for that investment as available for sale. When considering taxes, TGW
would:
a. Recognize tax expense on the income statement, and probably increase taxes payable.
b. Recognize tax expense on the income statement, and probably increase its deferred
tax liability.
c. Reduce accumulated other comprehensive income (AOCI) for tax expense, and
probably increase taxes payable.
d. Reduce accumulated other comprehensive income (AOCI) for tax expense, and
probably increase its deferred tax liability.
Listed below are several terms and phrases associated with long-term debt. Pair each
item from List A (by letter) with the item from List B that is most appropriately
associated with it.
List A
List B
____ Materiality concept A. Bond price
____ Convertible bonds B. Discount
____ Present value of interest plus C. Liquidation payments after otherpresent value of
principal
claims satisfied
____ Call feature D. Name of owner not registered
____ Debt issue costs E. Premium
____ Market rate higher than stated rate F. Checks are mailed directly
____ Coupon bonds G. No specific assets pledged
____ Promises made to bondholders H. Bond indenture
____ Stated rate higher than market rate I. Backed by a lien
____ Face amount times stated rate J. Interest expense
____ Registered bonds K. May become stock
____ Debenture bond L. Legal, accounting, printing
____ Mortgage bond M. Protection against falling rates
____ Balance times effective rate N. Periodic cash payments
____ Subordinated debenture O. Straight-line method
Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements
are presented below:
Under the realization principle, revenue should not be recognized until the earnings
process is deemed virtually complete and:
a. Revenue is realized.
b. Any receivable is collected.
c. Collection is reasonably certain.
d. Collection is absolutely assured.
Compared to the ABO, the PBO usually is:
a. Less material.
b. Less representationally faithful.
c. Less relevant.
d. Less reliable.
B Co. reported a deferred tax liability of $24 million for the year ended December 31,
2015, related to a temporary difference of $60 million. The tax rate was 40%. The
temporary difference is expected to reverse in 2017 at which time the deferred tax
liability will become payable. There are no other temporary differences in 2015-2017.
Assume a new tax law is enacted in 2016 that causes the tax rate to change from 40% to
30% beginning in 2017. (The rate remains 40% for 2016 taxes.) Taxable income in
2016 is $90 million.
Required:
Determine the effect of the change and prepare the appropriate journal entry to record
B’s income tax expense in 2016. What adjustment, if any, is needed to revise retained
earnings as a result of the change?
Indicate by letter whether each of the terms or phrases listed below is more associated
with financial statements prepared in accordance with U.S. GAAP (U) or International
Financial Reporting Standards (I).
Terms and phrases
Preferred stock
Investment revaluation reserve
Liabilities listed after Equity in the balance sheet (statement of financial position)
Accumulated other comprehensive income
Asset revaluation reserve
Share premium
Equity listed after Liabilities in the balance sheet (statement of financial position)
Share premium
Net gains (losses) on investments’”-AOCI
Paid-in capital’”-excess of par
Ordinary shares
Preference shares
Common stock
The balance sheet for Altoid Co. is shown below.
Selected 2016 income statement information for Altoid Co. includes:
Required: Compute the following financial statement ratios for 2016: Altoid Co.’s debt
to equity ratio. Round your answer to two decimal places.
Billingsly Products uses the conventional retail method to estimate its ending
inventories. The following data has been summarized for the year 2016:
Required:
Estimate the ending inventory as of December 31, 2016.
How are management’s responsibility and the auditors’ opinion on internal controls
represented in the standard auditor’s report?
Listed below are 5 terms followed by a list of phrases that describe or characterize each
of the terms. Match each phrase with the number for the correct term.
Last year, Simpson Company had a receivables turnover ratio of 12. Homer, Simpson’s
president, was delighted when the ratio went to 18 for this year. This year, Simpson’s
long-standing credit terms of net 30 were changed to net 10. Should Homer be happy?
Explain.