1) What is a purpose of having a conceptual framework?
a.To enable the profession to more quickly solve emerging practical problems
b.To provide a foundation from which to build more useful standards
c.Neither a nor b
d.To enable the profession to more quickly solve emerging practical problems and to
provide a foundation from which to build more useful standards
2) Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey
Inc. 50,000 additional shares in 2016 if Massey Inc.s net income in 2015 is $600,000 or
more; in 2014 Massey Inc.s net income is $615,000. Colt has net income for 2014 of
$1,000,000 and has an average number of common shares outstanding for 2014 of
500,000 shares. What should Colt report as earnings per share for 2014?
Basic EarningsDiluted Earnings
Per SharePer Share
a.$2.00$2.00
b.$1.82$2.00
c.$2.00$1.82
d.$1.82$1.82
3) Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The
asset given up by Glen Inc. has a book value of $36,000 and a fair value of $45,000.
The asset given up by Armstrong Co. has a book value of $60,000 and a fair value of
$57,000. Boot of $12,000 is received by Armstrong Co.
What amount should Glen Inc. record for the asset received?
a.$45,000
b.$48,000
c.$57,000
d.$60,000
4) On January 3, 2014, Moss Company acquires $300,000 of Adam Companys 10-year,
10% bonds at a price of $319,254 to yield 9%. Interest is payable each December 31 .
The bonds are classified as held-to-maturity.
Assuming that Moss Company uses the straight-line method, what is the amount of
premium amortization that would be recognized in 2016 related to these bonds?
a.$1,925
b.$1,266
c.$1,380
d.$1,506
5) Which of the following statements is incorrect regarding the classification of
accounts and notes receivable?
a.Segregation of the different types of receivables is required if they are material
b.Disclose any loss contingencies that exist on the receivables
c.Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively
d.Valuation accounts should be appropriately offset against the proper receivable
accounts
6) Common stockholders of a business enterprise are said to be the residual owners.
The term residual owner means that shareholders
a.are entitled to a dividend every year in which the business earns a profit
b.have the rights to specific assets of the business
c.bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership
d.can negotiate individual contracts on behalf of the enterprise
7) An inventory loss from market decline of $1,200,000 occurred in May 2015, after its
March 31, 2015 quarterly report was issued. None of this loss was recovered by the end
of the year. How should this loss be reflected in the company’s quarterly income
statements?
Three Months Ended
3/31/15 6/30/15 9/30/15 12/31/15
a.$ -0- $ -0-$ -0-$1,200,000
b.$ -0-$400,000$400,000$400,000
c.$ -0-$1,200,000$ -0-$ -0-
d.$300,000$300,000$300,000$300,000
8) Krause Company on January 1, 2015, enters into a five-year noncancelable lease,
with four renewal options of one year each, for equipment having an estimated useful
life of 10 years and a fair value to the lessor, Daly Corp., at the inception of the lease of
$2,000,000. Krauses incremental borrowing rate is 8%. Krause uses the straight-line
method to depreciate its assets. The lease contains the following provisions:
1>Rental payments of $146,000 including $13,000 for property taxes, payable at the
beginning of each six-month period.
2>A termination penalty assuring renewal of the lease for a period of four years after
expiration of the initial lease term.
3>An option allowing the lessor to extend the lease one year beyond the last renewal
exercised by the lessee.
4>A guarantee by Krause Company that Daly Corp. will realize $100,000 from selling
the asset at the expiration of the lease. However, the actual residual value is expected to
be $60,000.
Instructions
(a)What kind of lease is this to Krause Company?
(b)What should be considered the lease term?
(c)What are the minimum lease payments?
(d)What is the present value of the minimum lease payments? (PV factor for annuity
due of 20 semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due
in 20 interest periods at 8% annual rate, .45639.) (Round to nearest dollar.)
(e)What journal entries would Krause record during the first year of the lease? (Include
an amortization schedule through 1/1/16 and round to the nearest dollar.)
9) To record an asset retirement obligation (ARO), the cost associated with the ARO is
a.expensed
b.included in the carrying amount of the related long-lived asset
c.included in a separate account
d.capitalized over the asset’s useful life
10) On December 1, 2014, Lester Company issued at 103, five hundred of its 9%,
$1,000 bonds. Attached to each bond was one detachable stock warrant entitling the
holder to purchase 10 shares of Lester’s common stock. On December 1, 2014, the
market value of the bonds, without the stock warrants, was 95, and the market value of
each stock purchase warrant was $50. The amount of the proceeds from the issuance
that should be accounted for as the initial carrying value of the bonds payable would be
a.$484,100
b.$489,250
c.$500,000
d.$515,000
11) In a period of rising prices, the inventory method which tends to give the highest
reported net income is
a.base stock
b.first-in, first-out
c.last-in, first-out
d.weighted-average
12) On January 1, 2015, Piper Corp. purchased 40% of the voting common stock of
Betz, Inc. and appropriately accounts for its investment by the equity method. During
2015, Betz reported earnings of $720,000 and paid dividends of $240,000. Piper
assumes that all of Betz’s undistributed earnings will be distributed as dividends in
future periods when the enacted tax rate will be 30%. Ignore the dividend-received
deduction. Piper’s current enacted income tax rate is 25%. The increase in Piper’s
deferred income tax liability for this temporary difference is
a.$144,000
b.$120,000
c.$ 86,400
d.$ 57,600
13) The rate of return on common stock equity is calculated by dividing
a.net income less preferred dividends by average common stockholders equity
b.net income by average common stockholders equity
c.net income less preferred dividends by ending common stockholders equity
d.net income by ending common stockholders equity
14) A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1,
2014 . Interest is paid on June 30 and December 31 . The proceeds from the bonds are
$9,802,072. Using effective-interest amortization, what will the carrying value of the
bonds be on the December 31, 2014 balance sheet?
a.$9,806,321
b.$10,000,000
c.$9,812,563
d.$9,804,155
15) The following information is for the pension plan for the employees of Payne, Inc.
12/31/14 12/31/15
Accumulated benefit obligation$2,800,000$3,760,000
Projected benefit obligation3,100,0004,000,000
Fair value of plan assets3,130,0003,630,000
AOCI – Net (gain) or loss (425,000)(480,000)
Settlement rate 8%8%
Expected rate of return7%6%
Payne estimates that the average remaining service life is 15 years. Payne’s contribution
was $520,000 in 2015 and benefits paid were $260,000.
Instructions
(a)Calculate the interest cost for 2015 .
(b)Calculate the actual return on plan assets in 2015 .
(c)Calculate the unexpected gain or loss in 2015 .
(d)Calculate the corridor for 2015 and the amortization of the net gain for 2015 .
16) On May 1, 2014, Marly Co. issued $1,500,000 of 7% bonds at 103, which are due
on April 30, 2024 . Twenty detachable stock warrants entitling the holder to purchase
for $40 one share of Marlys common stock, $15 par value, were attached to each
$1,000 bond. The bonds without the warrants would sell at 96 . On May 1, 2014, the
fair value of Marlys common stock was $35 per share and of the warrants was $2.
On May 1, 2014, Marly should record the bonds with a
a.discount of $60,000
b.discount of $15,000
c.discount of $16,800
d.premium of $45,000
17) On September 1, 2014, Lowe Co. issued a note payable to National Bank in the
amount of $900,000, bearing interest at 9%, and payable in three equal annual principal
payments of $300,000. On this date, the bank’s prime rate was 8%. The first payment
for interest and principal was made on September 1, 2015 . At December 31, 2015,
Lowe should record accrued interest payable of
a.$27,000
b.$24,000
c.$18,000
d.$16,000
18) Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015
for the purpose of leasing a machine to be used in its manufacturing operations. The
following data pertain to the agreement:
(a)The term of the noncancelable lease is 3 years with no renewal option. Payments of
$287,432 are due on January 1 of each year.
(b)The fair value of the machine on January 1, 2015, is $800,000. The machine has a
remaining economic life of 10 years, with no salvage value. The machine reverts to the
lessor upon the termination of the lease.
(c)Alt depreciates all machinery it owns on a straight-line basis.
(d)Alts incremental borrowing rate is 10% per year. Alt does not have knowledge of the
8% implicit rate used by Yates.
(e)Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in
a suit which is sufficiently material to make collectibility of future lease payments
doubtful.
Future Value of Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
11.000001.000001.000001.000001.00000
22.050002.060002.080002.100002.12000
33.152503.183603.246403.310003.37440
44.310134.374624.506114.641004.77933
55.525635.637095.866606.105106.35285
66.801916.975327.335927.715618.11519
78.142018.393848.922809.4871710.08901
89.549119.8974710.6366311.4358912.29969
911.0265611.4913212.4875613.5794814.77566
1012.5778913.1807914.4865615.9374317.54874
Present Value of an Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
1.95238.94340.92593.90909.89286
21.859411.833391.783261.735541.69005
32.723252.673012.577102.486852.40183
43.545953.465113.312133.169863.03735
54.329484.212363.992713.790793.60478
65.075694.917324.622884.355264.11141
75.786375.582385.206374.868424.56376
86.463216.209795.746645.334934.96764
97.107826.801696.246895.759025.32825
107.721737.360096.710086.144575.65022
If Alt accounts for the lease as an operating lease, what expenses will be recorded as a
consequence of the lease during the fiscal year ended December 31, 2015?
a.Depreciation Expense
b.Rent Expense
c.Interest Expense
d.Depreciation Expense and Interest Expense
19) The board of directors of Ogle Construction Company is meeting to choose
between the completed-contract method and the percentage-of-completion method of
accounting for long-term contracts in the company’s financial statements. You have
been engaged to assist Ogle’s controller in the preparation of a presentation to be given
at the board meeting. The controller provides you with the following information:
1>Ogle commenced doing business on January 1, 2015 .
2>Construction activities for the year ended December 31, 2015, were as follows:
Total ContractBillings ThroughCash Collections
Project Price 12/31/15Through 12/31/15
A$ 500,000$ 340,000$ 310,000
B720,000210,000210,000
C475,000475,000390,000
D200,000100,00065,000
E 450,000 400,000 400,000
$2,345,000$1,525,000$1,375,000
Contract CostsEstimated
Incurred ThroughAdditional Costs to
Project 12/31/15Complete Contracts
A$ 424,000$101,000
B195,000455,000
C350,000-0-
D123,00097,000
E 320,000 80,000
$1,412,000$733,000
3>Each contract is with a different customer.
4>Any work remaining to be done on the contracts is expected to be completed in
2016 .
Instructions
(a)Prepare a schedule by project, computing the amount of income (or loss) before
selling, general, and administrative expenses for the year ended December 31, 2015,
which would be reported under:
(1)The completed-contract method.
(2)The percentage-of-completion method (based on estimated costs).
(b)Prepare the general journal entry(ies) to record revenue and gross profit on project B
(second project) for 2015, assuming that the percentage-of-completion method is used.
(c)Indicate the balances that would appear in the balance sheet at December 31, 2015
for the following accounts for Project D (fourth project), assuming that the
percentage-of-completion method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d)How would the balances in the accounts discussed in part (c) change (if at all) for
Project D (fourth project), if the completed-contract method is used?
