Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2013,
options were granted for 60,000 $1 par common shares. The exercise price equals the
$5 market price of the common stock on the grant date. The options cannot be exercised
before January 1, 2016, and expire December 31, 2017. Each option has a fair value of
$1 based on an option pricing model.
Which is the correct entry to record the exercise of 90% the options on April 15, 2016,
when the market price of the stock was $8? A.
B.
C.
D.
Answer:
A sales-type lease differs from a direct financing lease in one respect: A. The lessor
receives a manufacturer’s or dealer’s profit.
B. The lessor receives more interest than on a direct financing lease.
C. The lessor receives less interest than on a direct financing lease.
D. The lessor uses a longer amortization period than on a direct financing lease.
Answer:
On January 2, 2013, L Co. issued at face value $20,000 of 4% bonds convertible in total
into 1,000 shares of L’s common stock. No bonds were converted during 2013.
Throughout 2013, L had 1,000 shares of common stock outstanding. L’s 2013 net
income was $2,000. L’s income tax rate is 50%.
No potential common shares other than the convertible bonds were outstanding during
2013.
L’s diluted earnings per share for 2013 would be: A. $1.00.
B. $1.20.
C. $1.40.
D. $2.00.
Answer:
Distinguish between:
(a) Secured and unsecured bonds.
(b) Coupon and registered bonds.
Answer:
When a company purchases a security it considers a cash equivalent, the cash outflow
is: A. Reported as an operating activity.
B. Reported as an investing activity.
C. Reported as a financing activity.
D. Not reported on a statement of cash flows.
Answer:
Compared to dollar-value LIFO, unit LIFO is: A. Less costly to implement.
B. Less susceptible to LIFO liquidation.
C. More costly to implement.
D. More concerned with cost indexes.
Answer:
A reconciliation of pretax financial statement income to taxable income is shown below
for See Shipping for the year ended December 31, 2013, its first year of operations. The
income tax rate is 40%.
What amount should See report as a current item related to deferred income taxes in its
2013 balance sheet? A. Deferred income tax asset of $12,000.
B. Deferred income tax asset of $2,000.
C. Deferred income tax liability of $12,000.
D. Deferred income tax liability of $10,000.
Answer:
Noncurrent assets include: A. Inventory held for sale.
B. Prepaid rent.
C. Accounts receivable.
D. Land held for a possible future plant site.
Answer:
The Management Discussion and Analysis section of the annual report can best be
described as: A. Frank but objective.
B. Independent but precise.
C. Legalistic and lengthy.
D. Biased but informative.
Answer:
Beresford Inc. purchased several investment securities during 2012, its first year of
operations. The following information pertains to these securities. The fluctuations in
their fair values are not considered permanent.
What would be the balance in Beresford’s accumulated other comprehensive income
with respect to these investments in its 12/31/2013 balance sheet (ignore taxes)? A.
$55,100.
B. $26,500.
C. $10,400.
D. None of the above is correct.
Answer:
Of the following temporary differences, which one ordinarily creates a deferred tax
asset? A. Completed-contract method for long-term construction contracts for tax
reporting.
B. Installment sales for tax reporting.
C. Accrued warranty expense.
D. Accelerated depreciation for tax reporting.
Answer:
Which of the following statements regarding guaranteed residual values is true for the
lessee? A. The asset and liability at the inception of the lease should be increased by the
amount of the residual value.
B. The asset and liability at the inception of the lease should be decreased by the
amount of the residual value.
C. The asset and liability at the inception of the lease should be increased by the present
value of the residual value.
D. The asset and liability at the inception of the lease should be decreased by the
present value of the residual value.
Answer:
Recognizing expected losses immediately, but deferring expected gains, is an example
of: A.Materiality.
B.Conservatism.
C.Cost-effectiveness.
D.Timeliness.
Answer:
Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the
lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000
are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had
constructed the equipment recently for $66,000, and its retail fair value was $100,000.
Under the new ASU, what amount of interest revenue from the lease should SmithCo
report in its December 31, 2013, income statement? A. $12,000.
B. $4,000.
C. $3,400.
D. $5,000.
Answer:
False Value Hardware began 2013 with a credit balance of $32,000 in the allowance for
sales returns account. Sales and cash collections from customers during the year were
$650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be
returned. During 2013, customers returned merchandise for credit of $28,000 to their
accounts. What is the balance in the allowance for sales returns account at the end of
2013? A. $11,000.
B. $39,000.
C. $43,000.
D. $21,000.
Answer:
Burnet Company had 30,000 shares of common stock outstanding on January 1, 2013.
On April 1, 2013, the company issued 15,000 shares of common stock. The company
had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10
that had not been exercised by its executives. The average market price of common
stock was $9. The company reported net income in the amount of $189,374 for 2013.
What is the effect of the options? A. The options are antidilutive.
B. The options will dilute EPS by $.09 per share.
C. The options will dilute EPS by $.33 per share.
D. The options will dilute EPS by $.17 per share.
Answer:
For its first year of operations, Tringali Corporation’s reconciliation of pretax
accounting income to taxable income is as follows:
Tringali’s tax rate is 40%.
What should Tringali report as its deferred income tax liability as of the end of its first
year of operations? A. $35,000.
B. $20,000.
C. $14,000.
D. $8,000.
Answer:
When you use an aging schedule approach for estimating uncollectible accounts: A.
Bad debts expense is measured indirectly, and the allowance for uncollectible accounts
balance is measured directly.
B. Bad debts expense is measured indirectly, and the allowance for uncollectible
accounts balance is measured indirectly.
C. Bad debts expense is measured directly, and the allowance for uncollectible accounts
balance is measured directly.
D. Bad debts expense is measured directly, and the allowance for uncollectible accounts
balance is measured indirectly.
Answer:
The full disclosure principle requires a balance between: A.Comparability and
consistency.
B.Relevance and cost-effectiveness.
C.Reliability and neutrality.
D.Timeliness and predictive value.
Answer:
Fink Insurance collected premiums of $18,000,000 from its customers during the
current year. The adjusted balance in the Unearned premiums account increased from
$6 million to $8 million dollars during the year. What is Fink’s revenue from earned
insurance premiums for the current year? A. $10,000,000.
B. $16,000,000.
C. $18,000,000.
D. $20,000,000.
Answer:
Which of the following would be an example of an investing activity on a statement of
cash flows? A. Sale of equipment.
B. Issuance of long-term bonds.
C. Receipt of investment revenue.
D. Conversion of a cash equivalent into cash.
Answer:
Which of the following investment securities held by Zoogle Inc. may be classified as
held-to-maturity securities in its balance sheet? A. Long-term debenture bonds.
B. Common stock.
C. Callable preferred stock.
D. All of the above are correct.
Answer:
Which of the following is not included among the assumptions needed to estimate
postretirement health care benefits? A. Employee turnover.
B. Expected retirement age of plan participants.
C. Life expectancy of plan participants.
D. Return on plan assets.
Answer:
The accounting for defined contribution pension plans is easy because each year: A.
The employer records pension expense equal to the amount paid out to retirees.
B. The employer records pension expense based on an amount provided by the actuary.
C. The employer records pension expense equal to the annual contribution.
D. The employer records pension expense based on the earnings of the plan assets.
Answer:
A result of inter-period tax allocation is that: A. Large fluctuations in a company’s tax
liability are eliminated.
B. The income tax expense is allocated among the income statement items that caused
the expense.
C. The income tax expense in the income statement is the sum of the income taxes
payable for the year and the changes in deferred tax asset or liability balances for the
year.
D. The income tax expense shown in the income statement is equal to the deferred taxes
for the year.
Answer:
The following data are for Guava Company’s retiree health care plan for the current
calendar year.
What is the interest cost to be included in the current year’s postretirement benefit
expense? A. $3,600.
B. $720.
C. $768.
D. $4,000.
Answer:
The exclusive right to display a symbol of product identification is a: A. Patent.
B. Copyright.
C. Trademark.
D. Franchise.
Answer:
Cash paid to suppliers under the direct method is computed as: A. Cost of goods sold
plus a decrease in inventory and minus an increase in accounts payable.
B. Cost of goods sold plus an increase in inventory and minus an increase in accounts
payable.
C. Cost of goods sold minus a decrease in inventory and plus an increase in accounts
payable.
D. Cost of goods sold minus an increase in inventory and plus an increase in accounts
payable.
Answer:
Thompson TV and Appliance reported the following in its 2013 financial statements:
Thompson’s 2013 inventory turnover ratio is: A. 3.91.
B. 4.00.
C. 4.88.
D. 5.00.
Answer:
Arizona Desert Homes (ADH) constructed a new subdivision during 2012 and 2013
under contract with Cactus Development Co. Relevant data are summarized below:
ADH uses the percentage-of-completion method to recognize revenue.
What would be the journal entry made in 2012 to record revenue?A.
B.
C.
D.
Answer:
Under its executive stock option plan, Q Corporation granted options on January 1,
2013, that permit executives to purchase 15 million of the company’s $1 par common
shares within the next eight years, but not before December 31, 2015 (the vesting date).
The exercise price is the market price of the shares on the date of grant, $18 per share.
The fair value of the options, estimated by an appropriate option pricing model, is $4
per option. No forfeitures were anticipated; however, unexpected turnover during 2014
caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on
earnings in 2015? A. $18.5 million.
B. $18 million.
C. $19 million.
D. $20 million.
Answer:
Reporting comprehensive income according to International Financial Reporting
Standards can be accomplished by each of the following methods except: A. In the
statement of shareholders’ equity.
B. A combined statement of income and comprehensive income.
C. In two separate statements.
D. The entity may choose either a combined statement of income and comprehensive
income or two separate statements.
Answer:
Performance obligations are distinct if: A. The seller regularly sells the good or service
separately.
B. A buyer could use the good or service on its own.
C. A buyer could use the good or service in combination with goods or services the
buyer could obtain elsewhere.
D. All of the other answers is correct
Answer:
When a property dividend is declared, the property to be distributed should be revalued
to fair value as of the: A. Record date.
B. Date of distribution.
C. Date of declaration.
D. Announcement date.
Answer:
How much cash interest does Auerbach pay on March 31, 2014? A. $6.0 million
B. $12.0 million
C. $9.0 million
D. $18.0 million
Answer:
In the current year, Bruno Corporation collected rent of $3,600,000. For income tax
reporting, the rent is taxed when collected. For financial reporting, the rent is
recognized as income in the period earned. At the end of the current year, the unearned
portion of the rent collected in the current year amounted to $400,000. Bruno had no
temporary differences at the beginning of the current year. Assume an income tax rate
of 30%.
Required:The current year’s income tax liability from the tax return is $800,000.
Prepare the journal entry to record income taxes for the year. Show well-labeled
computations.
Answer:
Missoula Inc. reported the following selected financial statement data:
Required: Compute the average collection period (rounded to one decimal place) for
2013.
Answer:
Briefly explain the following statement. Depreciation is a process of cost allocation, not
valuation.
Answer:
The following information, based on the 12/31/13 Annual Report to Shareholders of
Krafty Foods ($ in millions):
Based on the information presented above, prepare the 2013 Income Statement for
Krafty Foods.
Answer:
Presented below is a partial trial balance for the Messenger Corporation at December
31, 2013.
Additional information:
1. The note receivable, along with any accrued interest, is due on November 1, 2014.
2. The note payable is due in 2018. Interest is payable annually.
3. The marketable securities consist of equity securities of other corporations.
Management does not intend to sell any of the securities in the next year.
4. Unearned revenue will be earned equally over the next 18 months.
Required:
Determine the company’s working capital (current assets minus current liabilities) at
December 31, 2013.
Answer:
The December 31, 2013 (preclosing) adjusted trial balance for Kline Enterprises was as
follows:
Required:
Assuming no income taxes, compute the following, and place your answer in the space
provided:
Kline’s 12/31/13 total shareholders’ equity:
Answer:
Trask Inc. uses the average cost retail method to estimate its ending inventory. Partial
information at June 30, 2013, is as follows:
Required:
Assuming Trask’s cost-to-retail = 60%, compute Trask’s beginning inventory at retail.
Answer:
Show the summary journal entry that Goodday recorded for the environmental cleanup
and product liability/tort claim matters, described in the footnote disclosure.
Answer:
Give an example of a noncash financing and investing activity and explain when and
how it would be reported in the financial statements.
Answer:
Arctic Cat Inc., the snowmobile manufacturer, reported the following in its 20X5
annual report to shareholders:
NOTE B – SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of municipal bonds
and money market funds and are classified as follows at March 31:
Trading securities consist of $54,608,000 and $41,707,000 invested in various money
market funds at March 31, 20X5 and 20X4, respectively, while the remainder of trading
securities and available-for-sale securities consist primarily of A-rated or higher
municipal bond investments. The amortized cost and fair value of debt securities
classified as available-for-sale was $3,105,000 and $3,196,000, at March 31, 20X5. The
unrealized gain on available-for-sale debt securities is reported, net of tax, as a separate
component of shareholders’ equity.
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended March 31,
Accumulated Other Comprehensive Income changed by the following amounts:
In its 20X4 annual report, Arctic Cat disclosed, “The contractual maturities of
available-for-sale debt securities at March 31, 20X4, are $3,573,000 within one year
and $3,340,000 from one year through five years.”
How much did Arctic Cat actually receive from the sale of available-for-sale securities
during 20X5?
Answer:
On January 3, 2013, Michelson & Sons acquired a tract of land just outside the city
limits. The land and existing building were purchased for $2.4 million. Michelson paid
$400,000 and signed a noninterest-bearing note requiring the company to pay the
remaining $2,000,000 on December 31, 2014. An interest rate of 7% properly reflects
the time value of money for this type of loan agreement. Transfer taxes, title insurance,
and other costs totaling $24,000 were paid at closing.
During February, the old building was demolished at a cost of $120,000, and an
additional $100,000 was paid to clear and grade the land. Construction of a new
building began on March 1 and was completed on October 30. Construction
expenditures were as follows:
Michelson did not borrow specifically for the construction project, but did have the
following debt outstanding throughout 2013:
$6,000,000, 8% long-term note payable
$2,000,000, 5% long-term note payable
In December, the company purchased equipment and office furniture and fixtures for a
lump-sum price of $800,000. The fair values of the equipment and the furniture and
fixtures were $540,000 and $360,000, respectively. In December, Michelson paid
$340,000 for the construction of parking lots and landscaping.
Required:
1) Determine the initial values of the various assets that Michelson acquired or
constructed during 2013.
2) How much interest expense will Michelson report in its 2013 income statement?
Answer:
On January 1, 2013, Shamu Corporation had 100,000 shares of common stock
outstanding. The following transactions occurred during 2013:
The following transactions occurred during 2014:
Required:
Calculate Shamu’s basic earnings per share (rounded to 2 decimal places) for both years
for presentation in comparative financial statements that will be prepared at the end of
2014.
Answer:
M, Inc., supplies consumer products used in the United States and other markets. In its
2013 Annual Report to Shareholders, M, Inc., disclosed the following note about its
EPS:
Basic earnings per share are computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per common share incorporate
the incremental shares issuable upon the assumed exercise of stock options and upon
the assumed conversion of the Company’s Convertible Notes in fiscal 2013 as if
conversion to common shares had occurred at the beginning of the fiscal year. Earnings
have also been adjusted for interest expense on the Convertible Notes in fiscal 2013.
Explain why M mentioned the adjustment in the last sentence of the disclosure note.
Answer:
Identify and explain the criteria for recognition of revenue added by SEC guidelines for
revenue recognition (e.g., SAB 101). The four criteria identified were:
Answer:
What is the point of the last paragraph of the Goodday disclosure? Explain in terms of
authoritative GAAP.
Answer:
On January 1, 2013, the National Furniture Company adopted the dollar-value LIFO
method of computing inventory. An internal cost index is used to convert ending
inventory to base year. Inventory on January 1 was $200,000. Year-end inventories at
year-end costs and cost indexes for its one inventory pool were as follows:
Required:
Compute inventory amounts at the end of each year.
Answer:
How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with
respect to the interest rate used to discount minimum lease payments?
Answer:
On January 1 of the current reporting year, Coda Company’s projected benefit
obligation was $30 million. During the year, pension benefits paid by the trustee were
$4 million. Service cost was $10 million. Pension plan assets earned $5 million as
expected. At the end of the year, there was no net gain or loss and no prior service cost.
The actuary’s discount rate was 10%.
Required:
Determine the amount of the projected benefit obligation at December
Answer:
Orlando Company has used the average cost method for inventory valuation since it
began business in 2009, but has elected to change to the FIFO method starting in 2012.
Year-end inventory valuations under each method are shown below:
Required:
How would Orlando reflect the change in accounting principle in its financial
statements (ignore income taxes)?
Answer:
If executive stock options or restricted stock are outstanding when calculating diluted
EPS, what are the components of the “proceeds” assumed available for the repurchase
of shares under the treasury stock method?
Answer: