1) Hudson, Inc. is a calendar-year corporation. Its financial statements for the years
2015 and 2014 contained errors as follows:
20152014
Ending inventory$6,000 overstated$16,000 overstated
Depreciation expense$4,000 understated$12,000 overstated
Assume that no correcting entries were made at December 31, 2014 . Ignoring income
taxes, by how much will retained earnings at December 31, 2015 be overstated or
understated?
a.$ 2,000 understated
b.$15,000 overstated
c.$15,000 understated
d.$18,000 understated
2) On January 1, 2010, Goll Corp. issued 2,000 of its 10%, $1,000 bonds for
$2,080,000. These bonds were to mature on January 1, 2020 but were callable at 101
any time after December 31, 2013 . Interest was payable semiannually on July 1 and
January 1 . On
July 1, 2015, Goll called all of the bonds and retired them. Bond premium was
amortized on a straight-line basis. Before income taxes, Goll’s gain or loss in 2015 on
this early extinguishment of debt was
a.$60,000 gain
b.$24,000 gain
c.$20,000 loss
d.$16,000 gain
3) Examples of contingent assets include all of the following except:
a.unrealized gain on the sale of investments
b.pending lawsuit with a probable favorable outcome
c.possible refunds from the government in tax disputes
d.promise of land to be donated by city as an enticement to move manufacturing
facilities
4) Cumulative preferred dividends in arrears should be shown in a corporation’s balance
sheet as
a.an increase in current liabilities
b.an increase in stockholders’ equity
c.a footnote
d.an increase in current liabilities for the current portion and long-term liabilities for the
long-term portion
5) A few years ago, a publishing company in the fourth quarter had a net profit figure
that exceeded sales for that quarter. Such a situation as this suggests that some difficult
accounting issues are involved in interim reporting.
Instructions
(a)What are the major accounting problems related to interim reports?
(b)What problem exists with income taxes in interim reports and how does GAAP
recommend that taxes be reported? What does GAAP require?
(c)Many academicians have attempted to predict the year’s net income after the first
quarter’s income is reported. These attempts are generally unsuccessful, no matter how
sophisticated the prediction model. What might be the reason for this inability to
predict?
6) Which of the following is true about intraperiod tax allocation?
a.It arises because certain revenue and expense items appear in the income statement
either before or after they are included in the tax return
b.It is required for extraordinary items and cumulative effect of accounting changes but
not for prior period adjustments
c.Its purpose is to allocate income tax expense evenly over a number of accounting
periods
d.Its purpose is to relate the income tax expense to the items which affect the amount of
tax
7) Which of the following is not a legal restriction related to profit distributions by a
corporation?
a.The amount distributed to owners must be in compliance with the state laws
governing corporations
b.The amount distributed in any one year can never exceed the net income reported for
that year
c.Profit distributions must be formally approved by the board of directors
d.Dividends must be in full agreement with the capital stock contracts as to preferences
and participation
8) Under IFRS, costs in the development phase are
a.never capitalized, but expensed as they are under U.S. GAAP
b.capitalized if they exceed development phase costs incurred for previously successful
ventures
c.capitalized once technological feasibility is achieved
d.capitalized on an interim basis, but then expensed prior to the end of the company’s
fiscal year
9) Which of the following is not considered a permanent difference?
a.Interest received on municipal bonds
b.Fines resulting from violating the law
c.Premiums paid for life insurance on a companys CEO when the company is the
beneficiary
d.Stock-based compensation expense
10) During 2014, Gates Corp. started a construction job with a total contract price of
$14,000,000. The job was completed on December 15, 2015 . Additional data are as
follows:
2014 2015
Actual costs incurred$5,400,000$6,100,000
Estimated remaining costs5,400,000
Billed to customer4,800,0009,200,000
Received from customer4,000,0009,600,000
Under the completed-contract method, what amount should Gates recognize as gross
profit for 2015?
a.$900,000
b.$1,250,000
c.$1,900,000
d.$2,500,000
11) Chess Top uses the periodic inventory system. For the current month, the beginning
inventory consisted of 360 units that cost $65 each. During the month, the company
made two purchases: 540 units at $68 each and 270 units at $70 each. Chess Top also
sold 900 units during the month. Using the average cost method, what is the amount of
ending inventory?
a.$18,900
b.$60,786
c.$60,120
d.$18,236
12) Yurman Co. sells major household appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts
are credited to unearned service contract revenues. This account had a balance of
$720,000 at December 31, 2013 before year-end adjustment. Service contract costs are
charged as incurred to the service contract expense account, which had a balance of
$180,000 at December 31, 2013 . Outstanding service contracts at December 31, 2013
expire as follows:
During 2014During 2015During 2016
$150,000$240,000$105,000
What amount should be reported as unearned service contract revenues in Yurman’s
December 31, 2013 balance sheet?
a.$540,000
b.$495,000
c.$360,000
d.$330,000
13) Investments in debt securities are generally recorded at
a.cost including accrued interest
b.maturity value
c.cost including brokerage and other fees
d.maturity value with a separate discount or premium account
14) Declaration of a cash dividend on common stock affects cash flows from operating
activities under the direct and indirect methods as follows:
Direct MethodIndirect Method
a.OutflowInflow
b.InflowInflow
c.OutflowOutflow
d.No effectNo effect
15) Heinz Company began operations on January 1, 2014, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory 2014 2015
FIFO$640,000$ 712,000
LIFO560,000636,000
Net Income (computed under the FIFO method)980,0001,130,000
Based on the above information, a change to the LIFO method in 2015 would result in
net income for 2015 of
a.$1,170,000
b.$1,130,000
c.$1,054,000
d.$1,050,000
16) On December 31, 2015, Grantham, Inc. appropriately changed its inventory
valuation method to FIFO cost from weighted-average cost for financial statement and
income tax purposes. The change will result in a $2,500,000 increase in the beginning
inventory at January 1, 2015 . Assume a 30% income tax rate. The cumulative effect of
this accounting change on beginning retained earnings is
a.$0
b.$750,000
c.$1,750,000
d.$2,500,000
17) Qualpoint pays a weekly payroll of $170,000 that includes federal taxes withheld of
$25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is
the effect of assets and liabilities from this transaction?
a.Assets decrease $170,000 and liabilities do not change
b.Assets decrease $128,820 and liabilities increase $41,180
c.Assets decrease $128,820 and liabilities decrease $41,180
d.Assets decrease $110,820 and liabilities increase $59,180
18) On January 2, 2014, Indian River Groves began construction of a new citrus
processing plant. The automated plant was finished and ready for use on September 30,
2015 . Expenditures for the construction were as follows:
Indian River Groves borrowed $2,200,000 on a construction loan at 12% interest on
January 2, 2014 . This loan was outstanding during the construction period. The
company also had $8,000,000 in 9% bonds outstanding in 2014 and 2015 .
The interest capitalized for 2014 was:
a.$360,000
b.$96,000
c.$304,000
d.$120,000
19) Which of the following best describes the IFRS requirement for applying the same
cost formula to all inventories?
a.When they are purchased from different suppliers
b.When they are purchased from the same geographic region
c.When they are similar in nature or use
d.When they sell for the same price