1) The basic accounting concept that refers to the tendency of accountants to resolve
uncertainty in favor of understating assets and revenues and overstating liabilities and
expenses is known as
a.prudence or conservatism
b.the materiality concept
c.the substance over form principle
d.the industry practices concept
2) On December 31, 2012, Nolte Co. is in financial difficulty and cannot pay a note due
that day. It is a $1,800,000 note with $180,000 accrued interest payable to Piper, Inc.
Piper agrees to accept from Nolte equipment that has a fair value of $870,000, an
original cost of $1,440,000, and accumulated depreciation of $690,000. Piper also
forgives the accrued interest, extends the maturity date to December 31, 2015, reduces
the face amount of the note to $750,000, and reduces the interest rate to 6%, with
interest payable at the end of each year.
Nolte should recognize a gain on the partial settlement and restructure of the debt of
a.$0
b.$45,000
c.$165,000
d.$225,000
3) Adler Construction Co. uses the percentage-of-completion method. In 2014, Adler
began work on a contract for $6,600,000 and it was completed in 2015 . Data on the
costs are:
Year Ended December 31
2014 2015
Costs incurred$2,340,000$1,680,000
Estimated costs to complete1,560,000
For the years 2014 and 2015, Adler should recognize gross profit in 2014 and 2015 of
2014 2015
a.$0$2,580,000
b.$1,548,000$1,032,000
c.$1,620,000$960,000
d.$1,620,000$2,580,000
4) Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000
shares of no-par 8% preferred stock with a stated value of $5. The preferred stock is
cumulative and nonparticipating. Dividends have been paid in every year except the
past two years and the current year.
Assuming that $366,000 will be distributed, and the preferred stock is also
participating, how much will the common stockholders receive?
a.$222,000
b.$180,000
c.$186,000
d.$ 96,000
5) Pye Company leased equipment to the Polan Company on July 1, 2015, for a
ten-year period expiring June 30, 2025 . Equal annual payments under the lease are
$160,000 and are due on July 1 of each year. The first payment was made on July 1,
2015 . The rate of interest contemplated by Pye and Polan is 9%. The cash selling price
of the equipment is $1,120,000 and the cost of the equipment on Pyes accounting
records was $992,000. Assuming that the lease is appropriately recorded as a sale for
accounting purposes by Pye, what is the amount of profit on the sale and the interest
revenue that Pye would record for the year ended December 31, 2015?
a.$128,000 and $100,800
b.$128,000 and $86,400
c.$128,000 and $43,200
d.$0 and $0
6) Contingent assets need not be disclosed in the financial statements or in the notes if
they are:
a.virtually certain to occur
b.probable to occur
c.likely to occur
d.possible but not probable to occur
7) On February 10, 2014, after issuance of its financial statements for 2013, Higgins
Company entered into a financing agreement with Cleveland Bank, allowing Higgins
Company to borrow up to $6,000,000 at any time through 2016 . Amounts borrowed
under the agreement bear interest at 2% above the bank’s prime interest rate and mature
two years from the date of loan. Higgins Company presently has $2,250,000 of notes
payable with Star National Bank maturing March 15, 2014 . The company intends to
borrow $3,750,000 under the agreement with Cleveland and liquidate the notes payable
to Star National Bank. The agreement with Cleveland also requires Higgins to maintain
a working capital level of $9,000,000 and prohibits the payment of dividends on
common stock without prior approval by Cleveland Bank. From the above information
only, the total short-term debt of Higgins Company as of the December 31, 2013
balance sheet date is
a.$0
b.$2,250,000
c.$3,000,000
d.$6,000,000
8) For calendar year 2014, Kane Corp. reported depreciation of $1,200,000 in its
income statement. On its 2014 income tax return, Kane reported depreciation of
$1,800,000. Kane’s income statement also included $225,000 accrued warranty expense
that will be deducted for tax purposes when paid. Kane’s enacted tax rates are 30% for
2014 and 2015, and 24% for 2016 and 2017 . The depreciation difference and warranty
expense will reverse over the next three years as follows:
Depreciation DifferenceWarranty Expense
2015$240,000$ 45,000
2016210,00075,000
2017 150,000 105,000
$600,000$225,000
These were Kane’s only temporary differences. In Kane’s 2014 income statement, the
deferred portion of its provision for income taxes should be
a.$200,700
b.$112,500
c.$101,700
d.$109,800
9) In a period of rising prices which inventory method generally provides the greatest
amount of net income?
a.Average cost
b.FIFO
c.LIFO
d.Specific identification
10) If a business entity entered into certain related party transactions, it would be
required to disclose all of the following information except the
a.nature of the relationship between the parties to the transactions
b.nature of any future transactions planned between the parties and the terms involved
c.dollar amount of the transactions for each of the periods for which an income
state-ment is presented
d.amounts due from or to related parties as of the date of each balance sheet presented
11) Rodd Co. reports a taxable and pretax financial loss of $800,000 for 2015 . Rodd’s
taxable and pretax financial income and tax rates for the last two years were:
2013$800,00030%
2014800,00035%
The amount that Rodd should report as an income tax refund receivable in 2015,
assuming that it uses the carryback provisions and that the tax rate is 40% in 2015, is
a.$240,000
b.$280,000
c.$320,000
d.$360,000
12) Which of the following is a temporary difference classified as a revenue or gain that
is taxable after it is recognized in financial income?
a.Subscriptions received in advance
b.Prepaid royalty received in advance
c.An installment sale accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes
d.Interest received on a municipal obligation
13) When a change in the tax rate is enacted into law, its effect on existing deferred
income tax accounts should be
a.handled retroactively in accordance with the guidance related to changes in
accounting principles
b.considered, but it should only be recorded in the accounts if it reduces a deferred tax
liability or increases a deferred tax asset
c.reported as an adjustment to income tax expense in the period of change
d.applied to all temporary or permanent differences that arise prior to the date of the
enactment of the tax rate change, but not subsequent to the date of the change
14) When a note payable is exchanged for property, goods, or services, the stated
interest rate is presumed to be fair unless
a.no interest rate is stated
b.the stated interest rate is unreasonable
c.the stated face amount of the note is materially different from the current cash sales
price for similar items or from current fair value of the note
d.any of these answers are correct
15) Which of the following disclosures is not required in the financial statements
regarding depreciation?
a.Accumulated depreciation, either by major classes of depreciable assets or in total
b.Details demonstrating how depreciation was calculated
c.Depreciation expense for the period
d.Balances of major classes of depreciable assets, by nature and function
16) Under the cost-recovery method of revenue recognition,
a.income is recognized on a proportionate basis as the cash is received on the sale of the
product
b.income is recognized when the cash received from the sale of the product is greater
than the cost of the product
c.income is recognized immediately after the sale is made
d.None of these answers are correct