1) balance sheet errors affect only the presentation of an asset or liability account.
2) if a decline in a securitys value is judged to be temporary, a company needs to write
down the cost basis of the individual security to a new cost basis.
3) companies recognize profit under the cost-recovery method only when cash
collections exceed the total cost of the goods sold.
4) the transfer of securities from trading to available-for-sale and from
available-for-sale to trading has the same impact on stockholders equity and net
income.
5) a basket purchase occurs when a company agrees to buy inventory weeks or months
in advance.
6) ifrs bases revenue recognition on the concepts of earned and realized or realizable.
7) gross profit and income from operations are reported on a multiple-step but not a
single-step income statement.
8) paying a current liability with cash will always reduce the current ratio.
9) which of the following transactions would best use the present value of an annuity
due of 1 table?
a.fernetti, inc. rents a truck for 5 years with annual rental payments of $20,000 to be
made at the beginning of each year
b.edmiston co. rents a warehouse for 7 years with annual rental payments of $120,000
to be made at the end of each year
c.durant, inc. borrows $20,000 and has agreed to pay back the principal plus interest in
three years
d.babbitt, inc. wants to deposit a lump sum to accumulate $50,000 for the construction
of a new parking lot in 4 years
10) under the intrinsic value method, compensation expense resulting from an incentive
stock option is generally
a.not recognized because no excess of market price over the option price exists at the
date of grant
b.recognized in the period of the grant
c.allocated to the periods benefited by the employee’s required service
d.recognized in the period of exercise
11) what is the rate of gross profit on the installment sales made by martin corporation
during 2012?
a.30%
b.40%
c.60%
d.70%
12) in the blank to the left of each question, fill in the letter from the following list
which best describes the presentation of the item on the financial statements of helton
corporation for 2013.
a.change in estimate
b.prior period adjustment (not due to change in principle)
c.retrospective type accounting change with note disclosure
d.none of the above
1>in 2013, the company changed its method of recognizing income from the
completed-contract method to the percentage-of-completion method.
2>at the end of 2013, an audit revealed that the corporation’s allowance for doubtful
accounts was too large and should be reduced to 2%. when the audit was made in 2012,
the allowance seemed appropriate.
3>depreciation on a truck, acquired in 2010, was understated because the service life
had been overestimated. the understatement had been made in order to show higher net
income in 2011 and 2012.
4>the company switched from a lifo to a fifo inventory valuation method during the
current year.
5>in the current year, the company decides to change from expensing certain costs to
capitalizing these costs, due to a change in the period benefited.
6>during 2013, a long-term bond with a carrying value of $3,600,000 was retired at a
cost of $4,100,000.
7>after negotiations with the irs, income taxes for 2011 were established at $42,900.
they were originally estimated to be $28,600.
8>in 2013, the company incurred interest expense of $29,000 on a 20-year bond issue.
9>in computing the depreciation in 2011 for equipment, an error was made which
overstated income in that year $75,000. the error was discovered in 2013.
10>in 2013, the company changed its method of depreciating plant assets from the
double-declining balance method to the straight-line method.
13) accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except when the exchange has
a.no commercial substance and additional cash is paid
b.no commercial substance and additional cash is received
c.commercial substance and additional cash is paid
d.commercial substance and additional cash is received
14) on march 1, 2012, newton company purchased land for an office site by paying
$900,000 cash. newton began construction on the office building on march 1. the
following expenditures were incurred for construction:
the office was completed and ready for occupancy on july 1. to help pay for
construction, $1,200,000 was borrowed on march 1, 2012 on a 9%, 3-year note payable.
other than the construction note, the only debt outstanding during 2012 was a $500,000,
12%, 6-year note payable dated january 1, 2012.
the actual interest cost incurred during 2012 was
a.$150,000
b.$168,000
c.$84,000
d.$140,000
15) at the beginning of 2012; elephant, inc. had a deferred tax asset of $8,000 and a
deferred tax liability of $12,000. pre-tax accounting income for 2012 was $600,000 and
the enacted tax rate is 40%. the following items are included in elephants pre-tax
income:
which of the following is required to adjust elephant, inc.s deferred tax asset to its
correct balance at december 31, 2012?
a.a debit of $41,600
b.a credit of $30,400
c.a debit of $30,400
d.a debit of $33,600
16) the recoverability test is used to determine any impairment loss on which of the
following types of intangible assets?
a.indefinite life intangibles other than goodwill
b.indefinite life intangibles
c.goodwill
d.limited life intangibles
17) authoritative standards for ifrs include:
a.international financial reporting standards only
b.international financial reporting standards and international accounting standards only
c.international financial reporting standards, international accounting standards and u.s.
gaap only
d.international financial reporting standards, international accounting standards and any
gaap standard recognized by an organized stock exchange
18) on april 1, 2012, west co. purchased $320,000 of 6% bonds for $332,600 plus
accrued interest as an available-for-sale security. interest is paid on july 1 and january 1
and the bonds mature on july 1, 2017.
instructions
(a)prepare the journal entry on april 1, 2012.
(b)the bonds are sold on november 1, 2013 at 103 plus accrued interest. amortization
was recorded when interest was received by the straight-line method (by months and
round to the nearest dollar). prepare all entries required to properly record the sale.
19) which of the following would be classified in a different major section of a balance
sheet from the others?
a.capital stock
b.common stock subscribed
c.stock dividend distributable
d.stock investment in affiliate
20) an accrued expense can best be described as an amount
a.paid and currently matched with earnings
b.paid and not currently matched with earnings
c.not paid and not currently matched with earnings
d.not paid and currently matched with earnings
21) hurst, incorporated sold its 8% bonds with a maturity value of $4,500,000 on august
1, 2011 for $4,419,000. at the time of the sale the bonds had 5 years until they reached
maturity. interest on the bonds is payable semiannually on august 1 and february 1. the
bonds are callable at 104 at any time after august 1, 2013. by october 1, 2013, the
market rate of interest has declined and the market price of hurst’s bonds has risen to a
price of 101. the firm decides to refund the bonds by selling a new 6% bond issue to
mature in 5 years. hurst begins to reacquire its 8% bonds in the market and is able to
purchase $750,000 worth at 101. the remainder of the outstanding bonds is reacquired
by exercising the bonds’ call feature. in the final analysis, how much was the gain or
loss experienced by hurst in reacquiring its 8% bonds? (assume the firm used
straight-line amortization.) show calculations.
22) at 2/1/14, four executives exercised their options. the fifth executive chose not to
exercise his options, which therefore were forfeited.
23) on april 1, 2013 weston, inc. entered into a franchise agreement with a local
business-man. the franchisee paid $300,000 and gave a $200,000, 8%, 3-year note
payable with interest due annually on march 31. weston recorded the $500,000 initial
franchise fee as revenue on april 1, 2013. on december 30, 2013, the franchisee decided
not to open an outlet under weston’s name. weston canceled the franchisee’s note and
refunded $160,000, less accrued interest on the note, of the $300,000 paid on april 1.
what entry should weston make on december 30, 2013?
24) carey company owns a plot of land on which buried toxic wastes have been
discovered. since it will require several years and a considerable sum of money before
the property is fully detoxified and capable of generating revenues, carey wishes to sell
the land now. it has located two potential buyers: buyer a, who is willing to pay
$480,000 for the land now, and buyer b, who is willing to make 20 annual payments of
$75,000 each, with the first payment to be made 5 years from today. assuming that the
appropriate rate of interest is 9%, to whom should carey sell the land? show
calculations.
25) presented below is information related to starr company.
instructions
compute earnings per share for the current year.
26) indicate the principal effects of a stock dividend versus a stock split as they affect
the issuing corporation. respond in the spaces as follows: “c” for change; “nc” for no
change.
27) place t or f in front of each of the following statements.
1>the straight-line method of depreciation is based on the assumption that depreciation
expense can be regarded as a constant function of time.
2>plant assets should be written down (below cost) when their market value has
declined temporarily.
3>the accounting profession has developed specifically recommended procedures for
recording appraisal increases with respect to plant assets.
4>an asset’s cost minus its accumulated depreciation equals its book value.
5>the sum-of-the-years’-digits method of depreciation ignores salvage value in the
computation of an asset’s depreciable base.
6>when using the double-declining balance method of determining depreciation, a
declining percentage is applied to a constant book value.
7>the book value of plant assets initially declines more rapidly under decreasing-charge
methods than under the straight-line method.
8>accounting depreciation is computed by determining the change in the market value
of a company’s plant assets during the period under review.
9>the methods of depreciation based upon output assume that obsolescence will not
significantly affect the usefulness of the asset.
10>the revision of prior periods’ depreciation estimates would be disclosed on the
retained earnings statement.
28) during 2012 and 2013, sawyer corporation experienced several transactions
involving plant assets. a number of errors were made in recording some of these
transactions. for each item listed below, indicate the effect of the error (if any) in the
blanks provided by using the following codes:
o = overstate; u = understate; ne = no effect
if no error was made, write ne in each of the four columns.
2012
2013
net book net book
value of value of
plant 2012
plant 2013
assets at net assets at
net
transaction 12/31/12 income 12/31/13
income
1. the cost of installing a new computer system in 2012 was not recorded in 2012. it
was charged to expense in 2013.
2. in 2013 clerical workers were trained to use the new computer system at a cost of
$15,000, which was erroneously capital-ized. the cost is to be written off over the
expected life of the new computer system.
3. a major overhaul of factory machinery in 2012, which extended its useful life by 5
years, was charged to accumulated depreciation in 2012.
4. interest cost qualifying for capitalization in 2012 was charged to interest expense in
2012.
5. in 2012 land was bought for an employee parking lot. the $2,000 title search fee
was charged to expense in 2012.
6. the cost of moving several manufacturing facilities from metropolitan locations to
suburban areas in 2012 was capitalized. the cost was written off over a 10-year
period beginning in 2012.
29) (all sales and purchases are on credit.)
indicate in each of the spaces provided the effect of the described errors on the various
elements of a company’s financial statements. use the following codes: o = amount is
overstated; u = amount is understated; ne = no effect. assume a periodic inventory
system.
