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1) What is the effect of freight-in on the cost-to-retail ratio when using the conventional
retail method?
a.Increases the cost-to-retail ratio
b.No effect on the cost-to-retail ratio
c.Depends on the amount of the net markups
d.Decreases the cost-to-retail ratio
2) If Jethro wanted to save a set amount each month in order to buy a new pick-up truck
when the new models are next available, which time value concept would be used to
determine the monthly payment?
a.Present value of one
b.Future value of one
c.Present value of an annuity due
d.Future value of an ordinary annuity
3) In a troubled debt restructuring in which the debt is continued with modified terms
and the carrying amount of the debt is less than the total future cash flows, the creditor
should
a.compute a new effective-interest rate
b.not recognize a loss
c.calculate its loss using the historical effective rate of the loan
d.calculate its loss using the current effective rate of the loan
4) When a company sells property and then leases it back, any gain on the sale should
usually be
a.recognized in the current year
b.recognized as a prior period adjustment
c.recognized at the end of the lease
d.deferred and recognized as income over the term of the lease
5) An alternative available when the seller is exposed to continued risks of ownership
through return of the product is
a.recording the sale, and accounting for returns as they occur in future periods
b.not recording a sale until all return privileges have expired
c.recording the sale, but reducing sales by an estimate of future returns
d.All of these answers are correct
6) Which of the following is considered a pervasive constraint by Statement of
Financial Accounting Concepts No. 8?
a.Conservatism
b.Timeliness
c.Verifiability
d.Cost-constraint
7) At the date of declaration of a small common stock dividend, the entry should not
include
a.a credit to Common Stock
b.a credit to Paid-in Capital in Excess of Par
c.a debit to Retained Earnings
d.All of these are acceptable
8) Which of the following methods is also referred as parking transactions?
a.Consignment sales
b.Sales on installment
c.Sales with high rates of return
d.Sales with buyback agreement
9) All of the following are differences between IFRS and U.S. GAAP in accounting for
liabilities except:
a.When a bond is issued at a discount U.S. GAAP records the discount in a separate
contra-liability account. IFRS records the bond net of the discount
b.Under IFRS, bond issuance costs reduces the carrying value of the debt. Under U.S.
GAAP, these costs are recorded as an asset and amortized to expense over the term of
the bond
c.U.S. GAAP, but not IFRS uses the term troubled debt restructurings
d.U.S. GAAP, but not IFRS uses the term provisions for contingent liabilities which are
accrued
10) Masterson Company has 420,000 shares of $10 par value common stock
outstanding. During the year Masterson declared a 15% stock dividend when the market
price of the stock was $36 per share. Three months later Masterson declared a $.60 per
share cash dividend. As a result of the dividends declared during the year, retained
earnings decreased by
a.$2,683,800
b.$2,268,000
c.$ 415,800
d.$ 396,000
11) Which of the following is not a characteristic of a noncompensatory stock option
plan?
a.Substantially all full-time employees may participate on an equitable basis
b.The plan offers no substantive option feature
c.Unlimited time period permitted for exercise of an option as long as the holder is still
employed by the company
d.Discount from the market price of the stock no greater than would be reasonable in an
offer of stock to stockholders or others
12) When investments in debt securities are purchased between interest payment dates,
preferably the
a.securities account should include accrued interest
b.accrued interest is debited to Interest Expense
c.accrued interest is debited to Interest Revenue
d.accrued interest is debited to Interest Receivable
13) Klein Book Store uses the conventional retail method and is now considering
converting to the LIFO retail method for the period beginning 1/1/15. Available
information consists of the following:
20142015
Cost Retail Cost Retail
Inventory 1/1$ 12,500$ 22,500$ ?$ ?
Purchases (net)250,000347,500245,000345,000
Net markups5,00010,000
Net markdowns2,5005,000
Sales (net)323,000333,000
Loss from breakage500-0-
Applicable price index100110
Following is a schedule showing the computation of the cost of inventory on hand at
12/31/14 based on the conventional retail method.
Cost RetailRatio
Inventory 1/1/14$ 12,500$ 22,500
Purchases (net)250,000347,500
Net markups 5,000
Goods available$262,500375,00070%
Sales (net)(323,000)
Net markdowns(2,500)
Loss from breakage (500)
Inventory 12/31/14 at retail$ 49,000
Inventory 12/31/14 at LCM ($49,000 x 70%)$ 34,300
Instructions
(a)Prepare the journal entry to convert the inventory from the conventional retail to the
LIFO retail method. Show detailed calculations to support your entry.
(b)Prepare a schedule showing the computation of the 12/31/15 inventory based on the
LIFO retail method as adjusted for fluctuating prices. Without prejudice to your answer
to (a) above, assume that you computed the 1/1/15 inventory (retail value $49,000)
under the LIFO retail method at a cost of $34,000.
14) Which of the following statements is not valid as it applies to inventory costing
methods?
a.If inventory quantities are to be maintained, part of the earnings must be invested
(plowed back) in inventories when FIFO is used during a period of rising prices
b.LIFO tends to smooth out the net income pattern by matching current cost of goods
sold with current revenue, when inventories remain at constant quantities
c.When a firm using the LIFO method fails to maintain its usual inventory position
(reduces stock on hand below customary levels), there may be a matching of old costs
with current revenue
d.The use of FIFO permits some control by management over the amount of net income
for a period through controlled purchases, which is not true with LIFO
15) How should the following costs affect a retailer's inventory valuation?
Freight-inInterest on Inventory Loan
a.IncreaseNo effect
b.IncreaseIncrease
c.No effectIncrease
d.No effectNo effect
16) On January 2, 2014, Farr Co. issued 10-year convertible bonds at 105. During 2014,
these bonds were converted into common stock having an aggregate par value equal to
the total face amount of the bonds. At conversion, the market price of Farrs common
stock was 50 percent above its par value. On January 2, 2014, cash proceeds from the
issuance of the convertible bonds should be reported as
a.paid-in capital for the entire proceeds
b.paid-in capital for the portion of the proceeds attributable to the conversion feature
and as a liability for the balance
c.a liability for the face amount of the bonds and paid-in capital for the premium over
the face amount
d.a liability for the entire proceeds
