1) Link Co. purchased machinery that cost $1,800,000 on January 4, 2013 . The entire
cost was recorded as an expense. The machinery has a nine-year life and a $120,000
residual value. The error was discovered on December 20, 2015 . Ignore income tax
considerations.
Link’s income statement for the year ended December 31, 2015, should show the
cumulative effect of this error in the amount of
a.$1,613,333
b.$1,426,667
c.$1,240,000
d.$0
2) Tresh, Inc. had the following bank reconciliation at March 31, 2014:
Balance per bank statement, 3/31/14$37,200
Add: Deposit in transit 10,300
47,500
Less: Outstanding checks 12,600
Balance per books, 3/31/14$34,900
Data per bank for the month of April 2014 follow:
Deposits$43,700
Disbursements49,700
All reconciling items at March 31, 2014 cleared the bank in April. Outstanding checks
at April 30, 2014 totaled $6,000. There were no deposits in transit at April 30, 2014 .
What is the cash balance per books at April 30, 2014?
a.$25,200
b.$28,900
c.$31,200
d.$35,500
3) Which of the following disclosures is required for a change from
sum-of-the-years-digits to straight-line depreciation method?
a.The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b.Restatement of prior years income statements
c.Recomputation of current and future years depreciation
d.All of these are required
4) All of the following are procedures for the computation of deferred income taxes
except to
a.identify the types and amounts of existing temporary differences
b.measure the total deferred tax liability for taxable temporary differences
c.measure the total deferred tax asset for deductible temporary differences and
operating loss carrybacks
d.All of these are procedures in computing deferred income taxes
5) Jump Corporation has $2,500,000 of short-term debt it expects to retire with
proceeds from the sale of 85,000 shares of common stock. If the stock is sold for $20
per share subsequent to the balance sheet date, but before the balance sheet is issued,
what amount of short-term debt could be excluded from current liabilities?
a.$1,700,000
b.$2,500,000
c.$800,000
d.$0
6) Bishop Co. began operations on January 1, 2014 . Financial statements for 2014 and
2015 con- tained the following errors:
Dec. 31, 2014Dec. 31, 2015
Ending inventory$132,000 too high$146,000 too low
Depreciation expense84,000 too high
Insurance expense60,000 too low60,000 too high
Prepaid insurance60,000 too high
In addition, on December 31, 2015 fully depreciated equipment was sold for $28,800,
but the sale was not recorded until 2016 . No corrections have been made for any of the
errors. Ignore income tax considerations.
The total effect of the errors on the balance of Bishop’s retained earnings at December
31, 2015 is understated by
a.$318,800
b.$258,800
c.$174,800
d.$126,800
7) Costs incurred internally to create intangibles are
a.capitalized
b.capitalized if they have an indefinite life
c.expensed as incurred
d.expensed only if they have a limited life
8) Swift Company purchased a machine on January 1, 2012, for $600,000. At the date
of acquisition, the machine had an estimated useful life of six years with no salvage.
The machine is being depreciated on a straight-line basis. On January 1, 2015, Swift
determined, as a result of additional information, that the machine had an estimated
useful life of eight years from the date of acquisition with no salvage. An accounting
change was made in 2015 to reflect this additional information.
Assume that the direct effects of this change are limited to the effect on depreciation
and the related tax provision, and that the income tax rate was 30% in 2012, 2013,
2014, and 2015 . What should be reported in Swift’s income statement for the year
ended December 31, 2015, as the cumulative effect on prior years of changing the
estimated useful life of the machine?
a.$0
b.$40,000
c.$60,000
d.$210,000
9) Wade Company estimates the cost of its physical inventory at March 31 for use in an
interim financial statement. The rate of markup on cost is 25%. The following account
balances are available:
Inventory, March 1$2,000,000
Purchases during March1,000,000
Purchase returns52,000
Sales during March1,700,000
The estimate of the cost of inventory at March 31 would be
a.$1,248,000
b.$1,360,000
c.$1,588,000
d.$1,673,000
10) The following information was derived from the 2014 accounting records of Perez
Co.:
Perez’s Goods
Perez’s Central WarehouseHeld by Consignees
Beginning inventory$130,000$ 14,000
Purchases525,00070,000
Freight-in10,000
Transportation to consignees5,000
Freight-out30,0008,000
Ending inventory145,00020,000
Perez’s 2014 cost of sales was
a.$520,000
b.$550,000
c.$584,000
d.$589,000
11) An available-for-sale debt security is purchased at a discount. The entry to record
the amortization of the discount includes a
a.debit to Available-for-Sale Securities
b.debit to the discount account
c.debit to Interest Revenue
d.None of these answers are correct
12) Hook Company leased equipment to Emley Company on July 1, 2014, for a
one-year period expiring June 30, 2015, for $60,000 a month. On July 1, 2015, Hook
leased this piece of equipment to Terry Company for a three-year period expiring June
30, 2018, for $75,000 a month. The original cost of the equipment was $4,800,000. The
equipment, which has been continually on lease since July 1, 2010, is being depreciated
on a straight-line basis over an eight-year period with no salvage value. Assuming that
both the lease to Emley and the lease to Terry are appropriately recorded as operating
leases for accounting purposes, what is the amount of income (expense) before income
taxes that each would record as a result of the above facts for the year ended December
31, 2015?
Hook Emley Terry
a.$210,000$(360,000)$(450,000)
b.$210,000$(360,000)$(750,000)
c.$810,000$(60,000)$(150,000)
d.$810,000$(660,000)$(450,000)
13) Layne Co. has a machine that cost $510,000 on March 20, 2011 . This old machine
had an estimated life of ten years and a salvage value of $30,000. On December 23,
2015, the old machine is exchanged for a new machine with a fair value of $324,000.
The exchange lacked commercial substance. Layne also received $36,000 cash. Assume
that the last fiscal period ended on December 31, 2014, and that straight-line
depreciation is used.
Instructions
(a) Show the calculation of the amount of gain or loss to be recognized by Layne Co.
from the exchange.
(b) Prepare all entries that are necessary on December 23, 2015 . Show a check of the
amount recorded for the new machine.
14) Garcia Corporation received cash of $36,000 on August 1, 2014 for one year’s rent
in advance and recorded the transaction with a credit to Rent Revenue. The December
31, 2014 adjusting entry is
a.debit Rent Revenue and credit Unearned Rent Revenue, $15,000
b.debit Rent Revenue and credit Unearned Rent Revenue, $21,000
c.debit Unearned Rent Revenue and credit Rent Revenue, $15,000
d.debit Cash and credit Unearned Rent Revenue, $21,000
15) Which of the following statements is correct?
a.For direct-financing leases, initial direct costs are added to the net investment in the
lease
b.For sales-type leases, initial direct costs are expensed in the year of incurrence
c.For operating leases, initial direct costs are deferred and allocated over the lease term
d.All of these answers are correct