1) The first step in the preparation of the statement of cash flows is to determine the net
cash flow from operating activities.
2) Compound interest, rather than simple interest, must be used to properly evaluate
long- term investment proposals.
3) If both purchases and ending inventory are overstated by the same amount, net
income is not affected.
4) If the contract price on a noncancelable purchase commitment exceeds the market
price, the buyer should record any expected losses on the commitment in the period in
which the market decline takes place.
5) Under the cost-recovery method, a company recognizes no revenue until cash
payments by the buyer exceed the cost of the merchandise sold.
6) Both U.S. GAAP and IFRS discuss income statement presentation using either a
single-step or multi-step approach.
7) Earned capital consists of additional paid-in capital and retained earnings.
8) The amount of time that is expected to elapse until an asset is realized or otherwise
converted into cash is referred to as
a.solvency
b.financial flexibility
c.liquidity
d.exchangeability
9) Kane Candy Company offers a coffee mug as a premium for every ten $1 candy bar
wrappers presented by customers together with $2. The purchase price of each mug to
the company is $1.80; in addition it costs $1.20 to mail each mug. The results of the
premium plan for the years 2014 and 2015 are as follows (assume all purchases and
sales are for cash):
2014 2015
Coffee mugs purchased720,000800,000
Candy bars sold5,600,0006,750,000
Wrappers redeemed2,800,0004,200,000
2014 wrappers expected to be redeemed in 20152,000,000
2015 wrappers expected to be redeemed in 20162,700,000
Instructions
(a)Prepare the general journal entries that should be made in 2014 and 2015 related to
the above plan by Kane Candy.
(b)Indicate the account names, amounts, and classifications of the items related to the
premium plan that would appear on the Kane Candy Company balance sheet and
income statement at the end of 2014 and 2015 .
10) Under IFRS, how are convertible debt recorded?
a.Convertible debt is separated into equity component and debt component
b.Convertible debt is recorded under stockholders equity
c.Convertible debt is recorded as long-term liability
d.Convertible debt is added to current liability section, as it will be converted to equity
11) Rogers Company purchased a tooling machine on January 3, 2008 for $700,000.
The machine was being depreciated on the straight-line method over an estimated
useful life of 10 years, with no salvage value. At the beginning of 2015, the company
paid $175,000 to overhaul the machine. As a result of this improvement, the company
estimated that the useful life of the machine would be extended an additional 5 years
(15 years total). What should be the depreciation expense recorded for the machine in
2015?
a.$48,125
b.$58,333
c.$70,000
d.$77,000
12) Mingenback Company has 560,000 shares of $10 par value common stock
outstanding. During the year Mingenback declared a 15% stock dividend when the
market price of the stock was $48 per share. Two months later Mingenback declared a
$.60 per share cash dividend. As a result of the dividends declared during the year,
retained earnings decreased by:
a.$ 386,400
b.$ 528,000
c.$4,032,000
d.$4,418,400
13) Presented below is pension information related to Waters Company as of December
31, 2015:
Accumulated benefit obligation$3,000,000
Projected benefit obligation3,500,000
Plan assets (at fair value)3,750,000
Accumulated OCI (G / L)100,000
The amount to be reported as Pension Asset / Liability as of December 31, 2015 is
a.Pension Liability of $500,000
b.Pension Asset of $750,000
c.Pension Liability of $250,000
d.Pension Asset of $250,000
14) Why is the allowance method preferred over the direct write-off method of
accounting for bad debts?
a.Allowance method is used for tax purposes
b.Estimates are used
c.Determining worthless accounts under direct write-off method is difficult to do
d.Improved matching of bad debt expense with revenue
15) The following accounts were abstracted from Starr Co.’s unadjusted trial balance at
December 31, 2014:
Debit Credit
Accounts receivable$750,000
Allowance for uncollectible accounts8,000
Net credit sales$3,000,000
Starr estimates that 4% of the gross accounts receivable will become uncollectible.
After adjustment at December 31, 2014, the allowance for uncollectible accounts
should have a credit balance of
a.$120,000
b.$112,000
c.$38,000
d.$30,000
16) At December 31, 2014 the following balances existed on the books of Rentro
Corporation:
Bonds Payable$3,500,000
Discount on Bonds Payable280,000
Interest Payable84,000
Unamortized Bond Issue Costs210,000
If the bonds are retired on January 1, 2015, at 102, what will Rentro report as a loss on
redemption?
a.$350,000
b.$472,500
c.$560,000
d.$644,000
17) Orton Corporation, which has a calendar year accounting period, purchased a new
machine for $60,000 on April 1, 2010 . At that time Orton expected to use the machine
for nine years and then sell it for $6,000. The machine was sold for $33,000 on Sept.
30, 2015 . Assuming straight-line depreciation, no depreciation in the year of
acquisition, and a full year of depreciation in the year of retirement, the gain to be
recognized at the time of sale would be
a.$6,000
b.$4,500
c.$3,000
d.$0
18) The actual return on plan assets
a.is equal to the change in the fair value of the plan assets during the year
b.includes interest, dividends, and changes in the fair value of the fund assets
c.is equal to the expected rate of return times the fair value of the plan assets at the
beginning of the period
d.All of these answers are correct
19) Which of following is not a similarity in the accounting treatment for depreciation
and cost depletion?
a.The estimated life is based on economic or productive life
b.Assets subject to either are reported in the same classification on the balance sheet
c.The rates may be changed upon revision of the estimated productive life used in the
original rate computations
d.Both depreciation and depletion are based on time
20) Uncertain tax positions
I.Are positions for which the tax authorities may disallow a deduction in whole or
in part.
II.Include instances in which the tax law is clear and in which the company believes
an audit is likely.
III.Give rise to tax expense by increasing payables or increasing a deferred
tax liability.
a.I, II, and III
b.I and III only
c.II only
d.I only
21) In early January 2013, Lerner Corporation applied for a patent, incurring legal costs
of $60,000. In January 2014, Lerner incurred $9,000 of legal fees in a successful
defense of its patent.
Instructions
(a)Compute 2013 amortization, 12/31/13 carrying value, 2014 amortization, and
12/31/14 carrying value if the company amortizes the patent over 10 years.
(b)Compute the 2015 amortization and the 12/31/15 carrying value, assuming that at the
beginning of 2015, based on new market research, Lerner determines that the fair value
of the patent is $44,000. Estimated future cash flows from the patent are $49,000 on
January 3, 2015 .
22) Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $11,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company
were
a.$11,720,000
b.$11,350,000
c.$11,175,000
d.$11,035,000
23) Accounting for income taxes can result in the reporting of deferred taxes as any of
the following except
a.a current or long-term asset
b.a current or long-term liability
c.a contra-asset account
d.All of these are acceptable methods of reporting deferred taxes
24) A measure of a companys financial flexibility is the
a.cash debt coverage
b.current cash debt coverage
c.free cash flow
d.cash debt coverage and free cash flow
25) In 2014, Bargain shop reported net income of $5.7 billion, net sales of $175 billion,
and average total assets of $70 billion. What is Bargain shop’s asset turnover ratio?
a.0.31 times
b.0.08 times
c.2.5 times
d.12.3 times
26) On January 3, 2013, Salazar Co. purchased machinery. The machinery has an
estimated useful life of eight years and an estimated salvage value of $60,000. The
depreciation applicable to this machinery was $130,000 for 2015, computed by the
sum-of-the-years’-digits method. The acquisition cost of the machinery was
a.$720,000
b.$780,000
c.$840,000
d.$936,000