1) On January 17, 2014, an explosion occurred at an Boondocks Fireworks plant
causing extensive property damage to area buildings. Although no claims had yet been
asserted against Boondocks by March 10, 2014, Boondocks’ management and counsel
concluded that it is reasonably possible Boondocks will be responsible for damages and
that $2,500,000 would be a reasonable estimate of its liability. Boondocks’ $10,000,000
comprehensive public liability policy has a $500,000 deductible clause. In Boondocks’
December 31, 2014, financial statements, which were issued on March 25, 2015, how
should this item be reported?
a. As a footnote disclosure indicating the possible loss of $500,000
b. As an accrued liability of $500,000
c. As a footnote disclosure indicating the possible loss of $2,500,000
d. As an accrued liability of $2,500,000
2) Samba Company acquired 10,000 shares of the common stock of Pati Corp. in July
2014. The following January, Pati announced a $100,000 net income for 2014 and
declared a cash dividend of $.50 per share on its 100,000 shares of outstanding common
stock. The Samba Company dividend revenue from Pati Corp. in January 2014 would
be
a. $0
b. $2,500
c. $5,000
d. $10,000
3) Total net income over the life of an enterprise is
a. higher under the cash basis than under the accrual basis
b. lower under the cash basis than under the accrual basis
c. the same under the cash basis as under the accrual basis
d. not susceptible to measurement
4) On December 31, 2013, Overachiever, Inc. had 500,000 shares of common stock
issued and outstanding. Overachiever issued a 10 percent stock dividend on June 1,
2014. On November 1, 2014, Overachiever reacquired 30,000 shares of its common
stock and recorded the purchase using the cost method of accounting for treasury stock.
What number of shares should be used in computing basic earnings per share for the
year ended December 31, 2014?
a. 421,667
b. 470,000
c. 524,167
d. 530,000
5) See information for Pastel Corporation above. The amount that should be reported as
current liabilities on Pastel Corporation’s balance sheet is
a. $73,200
b. $91,800
c. $87,200
d. $238,800
6) Amortization of the premium on bonds payable is subtracted from net income in the
reconciliation of net income to cash flows from operations because
a. interest expense understates the cash paid for interest by the amount of the premium
amortization
b. it reduces income without causing a cash outflow
c. it increases income without causing a cash flow
d. it is a financing cash outflow
7) The term deficit refers to
a. an excess of current assets over current liabilities
b. an excess of current liabilities over current assets
c. a debit balance in Retained Earnings
d. a loss that is reported as a prior period adjustment
8) See Abe Company information above. What was the total cash received from Bee
during July?
a. $441
b. $450
c. $793
d. $800
9) During 2009, Cabot Machine Company spent $352,000 on research and development
costs for an invention. This invention was patented on January 2, 2010, at a nominal
cost that was expensed in 2010. The patent has a legal life of 17 years and an estimated
useful life of 8 years. In January 2014, Cabot paid $32,000 for legal fees in a successful
defense of the patent. Amortization for 2014 should be
a. $2,462
b. $8,000
c. $32,000
d. $52,000
10) On January 2, 2014, Wondrous Co. issued at par $50,000 of 4 percent bonds
convertible, in total, into 5,000 shares of Wondrous’s common stock. No bonds were
converted during 2014. Throughout 2014 Wondrous had 5,000 shares of common stock
outstanding. Wondrous’ 2014 net income was $5,000. Wondrous’ income tax rate is 40
percent. No potentially dilutive securities other than the convertible bonds were
outstanding during 2014. Wondrous’ diluted earnings per share for 2014 would be
a. $0.58
b. $0.62
c. $0.70
d. $1.16
11) How would the quick ratio be affected by a prepayment of $30,000 for fire and
liability insurance?
a. The quick ratio would decrease
b. The quick ratio would increase
c. The quick ratio would not change
d. The effect cannot be determined from the information given
12) Which of the following is most likely to require only a note disclosure as a
contingency?
a. Cash discounts given for early payment by customers (which are almost always
taken)
b. Remote chance of loss from a lawsuit in process
c. Probable claim for an income tax refund
d. Loss from an investment in equity securities that is certain
13) On January 1, 2014, Kimba Co. paid $500,000 for 20,000 shares of Flathead Co.’s
common stock and classified these shares as trading securities. Kimba does not have the
ability to exercise significant influence over Flathead. Flathead declared and paid a
dividend of $.50 a share to its stockholders during 2014. Flathead reported net income
of $260,000 for the year ended December 31, 2014. The fair value of Flathead Co.’s
stock at December 31, 2014, is $27 per share. What is the net asset amount (which
includes both investments and any related market adjustments) attributable to the
investment in Flathead that will be included on Kimba’s balance sheet at December 31,
2014?
a. $530,000
b. $540,000
c. $569,000
d. $579,000
14) Which of the following is NOT a difference between the percentage-of completion
and completed-contract methods of accounting for long-term construction contracts?
a. They report different amounts for inventory during the construction period
b. They report different amounts for progress billings during the construction period
c. They cause a different cash inflow during the construction period
d. They report different amounts for accounts receivable during the construction period
15) Which of the following would NOT be reported as inventory?
a. Land acquired for resale by a real estate firm
b. Stocks and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing company
d. Machinery acquired by a manufacturing company for use in the production process
16) Lexan Company reported the following for the year ended December 31, 2014 (all
items are net of income taxes):
Comprehensive income (loss) for the year ended December 31, 2014, would be
a. ($74)
b. $1,226
c. $1,426
d. $126
17) Bonds that were authorized on January 1, 2014, and that pay interest on January 1
and July 1 of each year were issued on October 1, 2014. If the issuer’s accounting year
ends on December 31, how many months would any discount or premium be amortized
in 2014?
a. 12 months
b. 9 months
c. 6 months
d. 3 months
18) The Supplies on Hand account balance at the beginning of the period was $6,600.
Supplies totaling $12,825 were purchased during the period and debited to Supplies on
Hand. A physical count shows $3,825 of Supplies on Hand at the end of the period. The
proper journal entry at the end of the period
a. debits Supplies on Hand and credits Supplies Expense for $9,000
b. debits Supplies Expense and credits Supplies on Hand for $12,825
c. debits Supplies on Hand and credits Supplies Expense for $15,600
d. debits Supplies Expense and credits Supplies on Hand for $15,600
19) The correct order to present current assets is
a. cash, inventories, prepaid items, accounts receivable
b. cash, inventories, accounts receivable, prepaid items
c. cash, accounts receivable, prepaid items, inventories
d. cash, accounts receivable, inventories, prepaid items
20) Corbin Company has two checking accounts. A special account is used for the
weekly payroll only, and the general account is used for all other disbursements. Every
week, a check in the amount of the net payroll is drawn on the general account and
deposited in the payroll account. The company maintains a $5,000 minimum balance in
the payroll account. On a monthly bank reconciliation, the payroll account should
a. reconcile to $5,000
b. show a zero balance per the bank statement
c. show a $5,000 balance per the bank statement
d. be reconciled jointly with the general account in a single reconciliation
21) The average cost method is applicable to which of the following inventory systems?
Periodic Perpetual
a. Yes Yes
b. Yes No
c. No Yes
d. No No
22) The purpose of an interperiod income tax allocation is to
a. allow reporting entities to fully utilize tax losses carried forward from a previous year
b. allow reporting entities whose tax liabilities vary significantly from year to year to
smooth payments to taxing agencies
c. recognize an asset or liability for the tax consequences of temporary differences that
exist at the balance sheet date
d. amortize the deferred tax liability shown on the balance sheet
23) If a company constructs a laboratory building to be used as a research and
development facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction
b. depreciation deducted as part of research and development costs
c. depreciation or immediate write-off depending on company policy
d. an expense at such time as productive research and development has been obtained
from the facility
24) All of the following would appear on a single-step income statement except
a. cost of goods sold
b. extraordinary items
c. gross profit
d. discontinued operations
25) If ending inventory on December 31, 2014, is overstated by $40,000, what is the
effect on net income for 2015?
a. Net income is overstated by $40,000
b. Net income is understated by $40,000
c. Net income is overstated by $80,000
d. The answer cannot be determined from the information given
26) See information for Paper Depot. above. If Paper Depot uses a LIFO cost perpetual
inventory system, the ending inventory of Model III calculators at August 31 is reported
as
a. $146,400
b. $150,080
c. $150,160
d. $152,960
27) In 2014, The Xavier Company, reported pretax financial income of $400,000.
Included in that pretax financial income was $90,000 of nontaxable life insurance
proceeds received as a result of the death of an officer; $120,000 of warranty expenses
accrued but unpaid as of December 31, 2014; and $30,000 of life insurance premiums
for a policy for an officer. Assuming that no income taxes were previously paid during
the year and assuming an income tax rate of 40 percent, the amount of income taxes
payable on December 31, 2014, would be
a. $120,000
b. $150,000
c. $182,000
d. $184,000
28) What is the effect of the collection of accounts receivable on the current ratio and
net working capital, respectively?
Current Ratio Net Working Capital
a. No effect No effect
b. Increase Increase
c. Increase No effect
d. No effect Increase
29) From the following information, determine the amount of freight-in.
a. $1,000
b. $2,000
c. $3,000
d. $4,000
30) The Internal Revenue Code allows a corporation to carry back or carry forward an
operating loss occurring in a given year.
Required:
31) Financial information for Princeton Company at December 31, 2014, and for the
year then ended, are presented below:
Additional information:
Required:
Prepare the statement of cash flows using the indirect method.
32) In 2017, the company discovered errors that had been made in computing the
ending inventories for 2014 and 2015, as follows:
Compute the correct net incomes for (1) 2014, (2) 2015, and (3) 2016.
33) Bailey Company has a deferred tax asset of $1,000,000 at December 31, 2014. This
amount arises from the recording of the company’s liability for postretirement benefits
other than pensions. The company’s CPA has asked management whether a valuation
allowance should be recorded to reduce the deferred tax asset to zero
Required:
34) Managers often are accused of making accounting changes in order to avoid
regulation, to achieve compliance with debt covenants, to increase compensation
through earnings-based bonus plans, or to smooth earnings. Managers may indeed
believe that by increasing earnings, and thus increasing earnings per share, stock prices
will increase.
Explain the relationship between attempts by managers to manipulate earnings through
accounting changes and the efficient market hypothesis.
35) The Albert Corporation sells merchandise on the installment basis, and the
uncertainties of cash collection make the use of the installment sales method of
accounting acceptable. The following data relate to two years of operations.
Record the transactions related to installment sales for 2014 and 2015.
