What is the effect of the error on Berkshire’s 12/31/2016 balance sheet?
Berkshire Inc. uses a periodic inventory system. At the end of 2015, it missed counting
some inventory items, resulting in an inventory understatement by $600,000. Assume
that Berkshire has a 30% income tax rate and that this was the only error it made.
a. There are no errors in the 12/31/2016 balance sheet.
b. Assets understated by $600,000 and shareholders’ equity understated by $600,000.
c. Assets understated by $420,000 and shareholders’ equity understated by $420,000.
d. Liabilities understated by $180,000 and shareholders’ equity overstated by $420,000.
R Co. has outstanding 100 million shares, $1 par common stock, selling for $8 per
share. After a 1 for 4 reverse stock split:
a. R would have 25 million shares, $4 par per share.
b. The market price per share would be about $2.
c. Fractional shares would be issued.
d. Retained earnings would be reduced.
What is the usual effect of a stock split (effected in the form of a stock dividend) on
each of the following?
The investment category for which the investor’s “positive intent and ability to hold” is
important is:
a. Securities reported under the equity method.
b. Trading securities.
c. Securities classified as held to maturity.
d. Securities available for sale.
Willie Nelson’s Boots uses the conventional retail method to estimate ending inventory.
Cost data for the most recent quarter is shown below:
To the nearest thousand, estimated ending inventory using the conventional retail
method is:
a. $37,000.
b. $32,000.
c. $34,000.
d. $30,000.
Under the net method, purchase discounts lost are:
a. Included in purchases.
b. Added to accounts payable.
c. Included in interest expense.
d. Deducted from discount income.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers
pay one-third of the sales price of a jet ski when they initially purchase the ski, and then
pay another one-third each year for the next two years. Because Lake has little
information about the ability to collect these receivables, it uses the installment sales
method for revenue recognition. In 2015, Lake began operations and sold jet skis with a
total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015,
$300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold
jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected
$500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales.
In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet
skis had a fair value of $75,000 at the time they were repossessed.
In 2015, Lake would recognize realized gross profit of:
a. $150,000.
b. $0.
c. $300,000.
d. $450,000.
Ace Bonding Company purchased merchandise inventory on account. The inventory
costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase?
a. Inventory 2,000 Accounts payable
2,000
b. Cost of goods sold 2,000 Deferred revenue 1,000 Sales in advance
3,000
c. Cost of goods sold 2,000 Inventory payable
2,000
d. Cost of goods sold 2,000 Profit 1,000 Sales payable
3,000
Which of the following is not true when the fair value option is elected for an
investment that would normally be accounted for under the equity method?
a. No journal entry need be made to recognize the investor’s portion of the investee’s net
income.
b. Unrealized gains and losses on that investment are recognized in net income.
c. No journal entry need be made to recognize the investor’s portion of dividends paid
by the investee.
d. All of these answer choices are true.
Which one of the following assumptions is needed to estimate both postretirement
health care benefits and pension benefits?
a. Per capita claims cost.
b. Expected cost trend rate.
c. Benefits provided by other governmental or private plans.
d. Employee turnover.
Accumulated other comprehensive income:
a. is a liability.
b. might include prior service cost from pension plan amendments.
c. includes accumulated pension expense.
d. is reported in the income statement.
On January 1, 2016, Hage Corporation granted incentive stock options to purchase
18,000 of its common shares at $7 each. The options are exercisable after one year. The
market price of common averaged $9 per share during the quarter ending on March 31,
2016. There was no change in the 100,000 shares of outstanding common stock during
the quarter ended March 31, 2016. Net income for the quarter was $8,268. The number
of shares to be used in computing diluted earnings per share for the quarter is:
a. 100,000.
b. 104,000.
c. 106,000.
d. 118,000.
At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in
advance included in its balance sheet. A disclosure note reveals that the entire $400,000
will be earned in the next year. In the absence of other temporary differences, in the
balance sheet one would also expect to find a:
a. Noncurrent deferred tax liability.
b. Noncurrent deferred tax asset.
c. Current deferred tax liability.
d. Current deferred tax asset.
When a material gain contingency is probable and the amount of gain can be reasonably
estimated, the gain should be:
a. Reported in the income statement and disclosed.
b. Offset against shareholders’ equity.
c. Disclosed but not recognized in the income statement.
d. Neither recognized in the income statement nor disclosed.
On January 1, 2016, Shamu Corporation had 100,000 shares of common stock
outstanding. The following transactions occurred during 2016:
March 1: Reacquired 3,000 shares, accounted for as treasury stock.
September 30: Sold all the treasury shares.
December 1: Sold 12,000 new shares for cash.
December 31: Reported a net income of $198,500.
The following transactions occurred during 2017:
January 10: Declared and issued a 25% stock dividend.
December 31: Reported a net income of $268,800.
The income statement of Starboard Industries includes $12 million for the amortization
of a loss resulting from the company’s actuary changing an estimate used in calculating
the obligation for the pension plan. Does Starboard Industries prepare its financial
statements according to U.S. GAAP or IFRS?
Listed below are the reporting classifications for a statement of cash flows using the
direct method for reporting operating cash flows. Indicate the reporting classification
that would apply to each of the five transactions described below by placing the number
of the reporting classification in the space provided by each transaction.
Listed below are five terms followed by a list of phrases that describe or characterize
each of the terms. Match each phrase with the number for the correct term.
Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016
under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts.
For 2016, what is the journal entry to record revenue?
Kentfield Corporation has $260 million of goodwill on its book from the 2013
acquisition of Seaford Shipping. At the end of its 2016 fiscal year, management has
provided the following information for a required goodwill impairment test ($ in
millions):
Required:
Assuming that Seaford is considered a reporting unit for U.S. GAAP and a
cash-generating unit for IFRS, determine the amount of goodwill impairment loss that
Kentfield should recognize according to U.S. GAAP and International Financial
Reporting Standards (IFRS).
Listed below are five terms followed by a list of phrases that describe or characterize
each of the terms. Match each phrase with the number for the correct term.
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