1) Under international accounting standards, cash received from interest (associated
with interest revenue) can be shown on the statement of cash flows as an
a. operating activity only
b. operating or financing activity
c. operating or investing activity
d. investing or financing activity
2) The practice of carefully timing the recognition of revenues and expenses to even out
the amount of reported earnings from one year to the next is called
a. revenue recognition
b. income smoothing
c. restructuring
d. accrual-basis accounting
3) Freddy, Inc. had outstanding 10 percent, $1,000,000 face value, convertible bonds
maturing on December 31, 2017. Interest is paid December 31 and June 30. After
amortization through June 30, 2014, the unamortized balance in the bond premium
account was $30,000. On that date, bonds with a face amount of $500,000 were
converted into 20,000 shares of $20 par common stock. Recording the conversion by
using the carrying value of the bonds, Freddy should credit Additional Paid-In Capital
for
a. $0
b. $85,000
c. $100,000
d. $115,000
4) Which of the following would NOT be considered an element of working capital?
a. Investment securities (current)
b. Work in process inventories
c. Accrued interest on notes payable
d. Organization costs
5) See information for Lantern, Inc.above. Given this information, what is the ending
inventory if the periodic FIFO costing alternative is used?
a. $400
b. $500
c. $1,250
d. $3,100
6) The following note appeared in the 2014 annual report of Edison Company:
Inventories
Inventories valued at LIFO comprised approximately 44% and 42% of inventories at
December 31, 2014 and 2013, respectively.
Required:
7) The gross profit method of estimating inventory would NOT be useful when
a. a periodic system is in use and inventories are required for interim statements
b. there is a significant change in the mix of products being sold
c. inventories have been destroyed or lost by fire, theft, or other casualty, and the
specific data required for inventory valuation are not available
d. the relationship between gross profit and sales remains stable over time
8) Which of the following items would normally be excluded from the computation of
working capital?
a. Advances from customers for goods that will be shipped three months after the
balance sheet date
b. The portion of long-term debt that matures six months after the balance sheet date
and will be paid from the regular cash account
c. Prepaid insurance
d. Cash surrender value of life insurance
9) American Corporation purchased a 3-month U.S. Treasury bill. In preparing
American’s statement of cash flows, this purchase would
a. be treated as an outflow from investing activities
b. be treated as an outflow from operating activities
c. have no effect
d. be treated as an outflow from financing activities
10) Carter Appliance Center sells washing machines that carry a three-year warranty
against manufacturer’s defects. Based on company experience, warranty costs are
estimated at $60 per machine. During the year, Carter sold 48,000 washing machines
and paid warranty costs of $340,000. In its income statement for the year ended
December 31, Carter should report warranty expense of
a. $680,000
b. $960,000
c. $2,200,000
d. $2,880,000
11) The issuance of shares of preferred stock to shareholders
a. increases preferred stock outstanding
b. has no effect on preferred stock outstanding
c. increases preferred stock authorized
d. decreases preferred stock authorized
12) Select the statement that is incorrect concerning the appropriations of retained
earnings.
a. Appropriations of retained earnings reflect funds set aside for a designated purpose,
such as plant expansion
b. Appropriations of retained earnings do not change the total amount of stockholders’
equity
c. Appropriations of retained earnings can be made as a result of contractual
requirements
d. Appropriations of retained earnings can be made at the discretion of the board of
directors
13) On June 30, 2014, Sonata Company’s operating facilities in Nebraska were
destroyed by a flood. The loss of $700,000 was not covered by insurance. Sonata’s tax
rate for 2014 is 40 percent. In Sonata’s income statement for the year ended September
30, 2014, this event should be reported as an extraordinary loss of
a. $0
b. $280,000
c. $420,000
d. $700,000
14) Eric Company reports its income from its investment in Kate Company under the
equity method. Eric recognized income of $150,000 from its investment in Kate during
the current year. No dividends were declared or paid by Kate during the year. Eric
would show the $150,000 in its statement of cash flows for the current year prepared
under the indirect method as
a. cash from investing activities
b. a reduction of the investment account
c. a deduction from net income in the operating activities section
d. a noncash activity
15) Comet Company prepares monthly income statements. A physical inventory is
taken only at year-end; hence, month-end inventories must be estimated. All sales are
made on account. The rate of markup on cost is 50 percent. The following information
relates to the month of May:
The estimated cost of the May 31 inventory is
a. $24,000
b. $28,000
c. $38,000
d. $44,000
16) Which of the following is NOT correct?
a. International accounting standards for pensions (IAS 19) do not include any
provisions for the recognition of an additional minimum liability
b. International accounting standards for pensions (IAS 19) do not allow for the
recognition of a net pension asset in some circumstances
c. International accounting standard for pensions (IAS 19) include the same 10%
corridor amount in calculating the amortization of deferred gains and losses as found in
U.S. GAAP
d. International accounting standards for pensions (IAS 19) recognized pension gains
and losses immediately as part of comprehensive income
17) The following information is available for an enterprises security investments as of
December 31, 2014:
What is the 2014 holding gain or loss recognized in 2014 earnings and directly to
stockholders equity?
a. Earnings: $4,000 loss; Stockholders Equity: $4,000 loss
b. Earnings: $4,000 gain; Stockholders Equity: $4,000 gain
c. Earnings: $4,000 loss; Stockholders Equity: $4,000 gain
d. Earnings: $4,000 gain; Stockholders Equity: $4,000 loss
18) On January 1, 2014, A1A Company leased a warehouse to Elisha under an
operating lease for ten years at $80,000 per year, payable the first day of each lease
year. A1A paid $36,000 to a real estate broker as a finder’s fee. The warehouse is
depreciated at $20,000 per year. During 2014, A1A incurred insurance and property tax
expense totaling $15,000. A1A’s net rental income for 2014 should be
a. $9,000
b. $41,400
c. $44,000
d. $45,000
19) Which of the following should be reported as a change in accounting estimate?
a. Change in the reported beginning inventory amount due to a discovery of a
bookkeeping error
b. Change from the completed-contract method to the percentage-of- completion
method for revenue recognition on long-term construction contracts
c. Increase in the rate applied to net credit sales from 1 percent to 1-1/2 percent in
determining losses from uncollectible receivables
d. Change made to comply with a new FASB pronouncement
20) Which of the following statements is correct regarding FASB ASC Topic 270,
Interim Financial Reporting, and IAS No. 34, Interim Financial Reporting?
a. Both pronouncements view each reporting interval as a separate accounting period
b. Only IAS No. 34 views each reporting interval as a separate accounting period
c. Only FASB ASC Topic 270 views each reporting interval as a separate accounting
period
d. Only IAS No. 34 views each interim period as an integral part of each annual period
21) Pandora Company determined that it has an obligation relating to employees’ rights
to receive compensation for future absences attributable to employees services already
rendered. The obligation relates to rights that vest, and payment of the compensation is
probable. The amounts of Pandora’s obligations as of December 31 are reasonably
estimated as follows:
In its December 31 balance sheet, what amount should Pandora report as its liability for
compensated absences?
a. $190,000
b. $110,000
c. $80,000
d. $0
22) Accountants prepare financial statements at arbitrary points in time during a
company’s lifetime in accordance with the accounting concept of
a. matching
b. comparability
c. accounting periods
d. materiality
23) Which of the following statements characterizes lessor accounting for residual
values?
a. Guaranteed residual values are included in the gross investment amount, but
unguaranteed residual values are excluded from the gross investment
b. Unguaranteed residual values are included in the gross investment amount, but
guaranteed residual values are excluded from the gross investment
c. Guaranteed residual values and unguaranteed residual values are excluded from the
gross investment
d. Guaranteed residual values and unguaranteed residual values are included in the
gross investment
24) When an investor uses the equity method to account for investments in common
stock, cash dividends received by the investor from the investee should be recorded as
a. an increase in the investment account
b. a deduction from the investment account
c. dividend revenue
d. a deduction from the investor’s share of the investee’s profits
25) In a statement of cash flows, payments to acquire bonds or mortgages of other
entities should be classified as cash outflows for
a. lending activities
b. operating activities
c. investing activities
d. financing activities
26) Costs related to a new pension plan that are necessary to catch up for services
rendered prior to the inception of the pension plan are classified as
a. service costs
b. actuarial losses
c. prior service costs
d. retroactive deferred charges
27) The following information is available from Carron Company’s 2014 accounting
records:
Carron’s 2014 cost of goods sold is
a. $465,000
b. $475,000
c. $505,000
d. $585,000
28) On January 2, 2014, the Clapton Studios leased six computers for use in the
engineering department. The lease period is for 13 years and the estimated economic
life of the leased property is 15 years. The lease does not contain automatic title transfer
or a bargain purchase option. Lease payments are $11,000 per year, payable each
December 31. The incremental borrowing rate for Clapton is 12 percent and the implicit
interest rate (known by Clapton) is 10 percent. The company uses straight-line
depreciation for this type of equipment.
Provide the necessary journal entries to record the transactions for Clapton for the
period January 2, 2014 through December 31, 2015.
29) Securitization is a widely-used arrangement for selling receivables. Many
companies use credit card securitization and other forms of securitizations as part of
their overall financing strategies.
Required:
Explain the nature of securitization, how it can be implemented, and the appropriate
accounting procedures related to a securitization. Include in your discussion the effects
of recourse provisions on the securitization.
30) As an incentive, Sport Enterprises awards an annual bonus to its branch managers.
This year, the bonus for the Bridgeport branch was $44,000. The bonus agreement
provides that each branch manager receives a bonus of 14 percent of the branch income
after deductions for the bonus and for income taxes. The income tax rate is 30 percent.
Determine the income for the Bridgeport branch before the deductions for the bonus
and the income taxes.
31) The Simonson Corp. provides the following data for 2014:
The net income for 2014 is $2,300,000. The Simonson’s tax rate is 30 percent. No
conversions or options were exercised during 2014.
32) Audition and Co., CPAs, has just been retained by the Sullivan Company to audit
Sullivans financial statement for the last fiscal year. Sullivan Company shows
substantial amounts of inventory on its balance sheet.
Alex Rodriguez has just joined the staff of Audition and Co. and has been assigned to
assist in the audit of Sullivans inventory.
Required:
Identify the major issues regarding the inventory of Sullivan Company that Alex needs
to consider in determining if Sullivan has properly accounted for and reported its
inventory.
33) The following information has been collected regarding Boonaroo Company:
Estimate a price per share for the stock of Boonaroo using the following equity
valuation models:
1>Constant future dividends
2>Constant dividend growth
3>Price-earnings multiple
34) Business leasing has become a large market. Banks, other lending institutions, and
commercial leasing companies represent the largest share of the business leasing market
with the remainder consisting of manufacturers, dealers, and distributors.
Identify the advantages and disadvantages to lessors of leasing rather than selling
property.
35) On January 1, 2013, Ruben Products issued ten-year convertible bonds of
$1,800,000 at 105. Interest is payable semiannually on June 30 and December 31 at a
rate of 12 percent. On June 30, 2015, the company retired bonds of $150,000 at 102
plus accrued interest. Straight-line amortization is recorded at the end of the calendar
year.
36) Statement of Financial Accounting Concepts No. 1 states that one of the objectives
of financial reporting is to help current and potential investors and creditors (and other
users) in assessing the amounts, timing, and uncertainty of future cash flows such as
dividends or interest payments. Generally Accepted Accounting Principles (GAAP)
require the use of the accrual basis of accounting.
Explain the difference between the accrual basis and the cash basis of accounting and
why GAAP requires the accrual basis.