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1) Qualified pension plans permit deductibility of the employers contributions to the
pension fund.
2) Companies record corrections of errors from prior periods as an adjustment to the
beginning balance of retained earnings in the current period.
3) Dividends declared on common and preferred stock are subtracted from net income
in the computation of earnings per share.
4) From the lessees viewpoint, an unguaranteed residual value is the same as no
residual value in terms of computing the minimum lease payments.
5) Improvements are often referred to as betterments and involve the substitution of a
better asset for the one currently used.
6) Under IFRS, there is a specific standard that mandates segregation of receivables
with different characteristics.
7) Amortization of a premium increases bond interest expense, while amortization of a
discount decreases bond interest expense.
8) If the market rate is greater than the coupon rate, bonds will be sold at a premium.
9) Gross profit and income from operations are reported on a multiple-step but not on a
single-step income statement.
10) 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 amount of Bishop's working capital at December 31,
2015 is understated by
a.$390,800
b.$306,800
c.$174,800
d.$114,800
11) Which of the following does not demonstrate evidence regarding the ability to
consummate a refinancing of short-term debt?
a.Management indicated that they are going to refinance the obligation
b.Actually refinance the obligation
c.Have capacity under existing financing agreements that can be used to refinance the
obligation
d.Enter into a financing agreement that clearly permits the entity to refinance the
obligation
12) Norling Corporation reports the following information:
Net income$750,000
Dividends on common stock$210,000
Dividends on preferred stock$ 90,000
Weighted average common shares outstanding250,000
Norling should report earnings per share of
a.$1.80
b.$2.16
c.$2.64
d.$3.00
13) Jenks Corporation acquired Linebrink Products on January 1, 2015 for $8,000,000,
and recorded goodwill of $1,500,000 as a result of that purchase. At December 31,
2015, Linebrink Products had a fair value of $6,800,000. The net identifiable assets of
the Linebrink (excluding goodwill) had a fair value of $5,800,000 at that time. What
amount of loss on impairment of goodwill should Jenks record in 2015?
a.$ -0-
b.$500,000
c.$700,000
d.$1,200,000
14) Financial statements in the early 2000s provide information related to
a.nonfinancial measurements
b.forward-looking data
c.hard assets (inventory and plant assets)
d.None of these answer choices are correct
15) According to the FASB, recognition of a liability is required when the projected
benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value
of plan assets exceeds the projected benefit obligation, the Board
a.requires recognition of an asset
b.requires recognition of an asset if the excess fair value of plan assets exceeds the
corridor amount
c.recommends recognition of an asset but does not require such recognition
d.does not permit recognition of an asset
16) The following balance sheet was prepared by the bookkeeper for Kraus Company
as of December 31, 2014 .
Kraus Company
Balance Sheet
as of December 31, 2014
Cash$ 95,000Accounts payable$ 85,000
Accounts receivable (net)52,200Bonds payable100,000
Inventory62,000Stockholders' equity238,500
Investments76,300
Equipment (net)106,000
Patents 32,000
$423,500$423,500
The following additional information is provided:
1>Cash includes the cash surrender value of a life insurance policy $9,400, and a bank
overdraft of $2,500 has been deducted.
2>The net accounts receivable balance includes:
(a)accounts receivabledebit balances $60,000;
(b)accounts receivablecredit balances $4,000;
(c)allowance for doubtful accounts $3,800.
3>Inventory does not include goods costing $3,000 shipped out on consignment.
Receivables of $3,000 were recorded on these goods.
4>Investments include investments in common stock, trading $19,000 and
available-for-sale $48,300, and franchises $9,000.
5>Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used
and is held for sale. Accumulated depreciation on the other equipment is $40,000.
Instructions
Prepare a balance sheet in good form (stockholders' equity details can be omitted.)
17) In consignment sales, the consignee
a.records the merchandise as an asset on its books
b.records a liability for the merchandise held on consignment
c.recognizes revenue when it ships merchandise to the consignor
d.prepares an account report for the consignor which shows sales, expenses, and cash
receipts
18) The acquisition cost of a certain raw material changes frequently. The book value of
the inventory of this material at year end will be the same if perpetual records are kept
as it would be under a periodic inventory method only if the book value is computed
under the
a.weighted-average method
b.moving average method
c.LIFO method
d.FIFO method
19) Tongas Company applies revaluation accounting to plant assets with a carrying
value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is
calculated on the straight-line basis. At the end of year 1, independent appraisers
determine that the asset has a fair value of $1,500,000.
The entry to record depreciation for this same asset in year two will include a
a.debit to Accumulated Depreciation for $400,000
b.debit to Depreciation Expense for $500,000
c.credit to Accumulated Depreciation for $300,000
d.debit to Depreciation Expense for $400,000
20) When preparing a statement of cash flows, the following are used for which method
in determining cash flows from operating activities?
Gross Accounts ReceivableNet Accounts Receivable
a.IndirectDirect
b.DirectIndirect
c.DirectDirect
d.NeitherIndirect
21) Icon Industries, a company who uses IFRS reporting standards, is installing a new
plant. The company has incurred the following costs
1>Consultants used for advice on the acquisition of the plant$245,000
2>Interest charges paid to the supplier of plant for deferred credit$275,000
3>Estimated dismantling cost to be incurred after 8 years$400,000
4>Cost of the plant$2,300,000
Which of these costs can Tram capitalize in accordance with IFRS?
a.1, 2, 3, & 4
b.4 only
c.1 & 4
d.1, 3, & 4
22) For interim financial reporting, an extraordinary gain occurring in the second
quarter should be
a.recognized ratably over the last three quarters
b.recognized ratably over all four quarters with the first quarter being restated
c.recognized in the second quarter
d.disclosed by note only in the second quarter
23) Which of the following is not required when using the retail inventory method?
a.All inventory items must be categorized according to the retail markup percentage
which reflects the item's selling price
b.A record of the total cost and retail value of the goods purchased
c.A record of the total cost and retail value of the goods available for sale
d.Total sales amount for the period
24) If bonds are initially sold at a discount and the straight-line method of amortization
is used, interest expense in the earlier years will
a.exceed what it would have been had the effective-interest method of amortization
been used
b.be less than what it would have been had the effective-interest method of amortization
been used
c.be the same as what it would have been had the effective-interest method of
amortiza-tion been used
d.be less than the stated (nominal) rate of interest
25) Jones, Inc. has net income (30% tax rate) of $1,400,000 for 2015, and an average
number of shares outstanding during the year of 500,000 shares. The corporation issued
$2,000,000 par value of 10-year, 9% convertible bonds on January 1, 2013 at a
$180,000 discount. The convertible bonds are convertible into 70,000 shares of
common stock. Assume the company uses the straight-line method for amortizing bond
discount.
Instructions
Compute the earnings per share data, excluding any notes if required.
26) Milner Co. sold a machine that cost $74,000 and had a book value of $44,000 for
$48,000. Data from Milner's comparative balance sheets are:
12/31/1512/31/14
Machinery$800,000$670,000
Accumulated depreciation190,000136,000
Instructions
What four items should be shown on a statement of cash flows (indirect method) from
this information? Show your calculations.
27) Determine the unit value that should be used for inventory costing following "lower
of cost or market value" as described in ARB No. 43 .
A B C D E F
Cost$2.35$2.47$2.25$2.54$2.34$2.42
Replacement cost2.262.552.202.522.322.46
Net realizable value2.502.502.502.452.502.50
Net realizable value less normal profit2.302.302.302.302.302.30
28) Kroft is involved in a pending court case. Krofts lawyers believe it is probable that
Kroft will be awarded damages of $1,000,000.
Instructions
Discuss the proper accounting treatment, including any required disclosures, for each
situation. Give the rationale for your answers.
29) The following balance sheet has been submitted to you by an inexperienced
bookkeeper. List your suggestions for improvements in the format of the balance sheet.
Consider both terminology deficiencies as well as classification inaccuracies.
Jasper Industries, Inc.
Balance Sheet
For the Period Ended 12/31/14
Assets
Fixed AssetsTangible
Equipment$110,000
Less: reserve for depreciation (40,000)$ 70,000
Factory supplies22,000
Land and buildings400,000
Less: reserve for depreciation(150,000)250,000
Plant site held for future use 90,000$ 432,000
Current Assets
Accounts receivable175,000
Cash80,000
Inventory220,000
Treasury stock (at cost) 20,000495,000
Fixed Assets--Intangible
Goodwill80,000
Notes receivable 40,000
Patents 26,000 146,000
Deferred Charges
Advances to salespersons60,000
Prepaid rent27,000
Returnable containers 75,000 162,000
TOTAL ASSETS$1,235,000
Liabilities
Current Liabilities
Accounts payable$140,000
Allowance for doubtful accounts8,000
Common stock dividend distributable35,000
Income tax payable 42,000
Sales tax payable 17,000$ 242,000
Long-Term Liabilities, 5% debenture bonds, due 2017500,000
Reserve for contingencies 150,000 650,000
TOTAL LIABILITIES 892,000
Equity
Capital stock, $10 par value, issued 12,000 shares with
60 shares held as treasury stock$150,000
Capital surplus90,000
Dividends paid (20,000)
Earned surplus 123,000
TOTAL EQUITY 343,000
TOTAL LIABILITIES AND EQUITY$1,235,000
Note 1 .The reserve for contingencies has been created by charges to earned surplus and
has been established to provide a cushion for future uncertainties.
Note 2 .The inventory account includes only items physically present at the main plant and
warehouse. Items located at the company's branch sales office amounting to $40,000 are
excluded since the company has consistently followed this procedure for many years.
30) What two assumptions are part of both the IFRS and GAAP conceptual framework?
31) Koch Co. sold convertible bonds at a premium. Interest is paid on May 31 and
November 30 . On May 31, after interest was paid, 100, $1,000 bonds are tendered for
conversion into 3,000 shares of $10 par value common stock that had a market price of
$40 per share. How should Koch Co. account for the conversion of the bonds into
common stock under the book value method? Discuss the rationale for this method.
32) The net changes in the balance sheet accounts of Keating Corporation for the year
2015 are shown below.
Account Debit Credit
Cash$ 72,000
Short-term investments$121,000
Accounts receivable83,200
Allowance for doubtful accounts13,300
Inventory74,200
Prepaid expenses22,800
Investment in subsidiary (equity method)25,000
Plant and equipment220,000
Accumulated depreciation130,000
Accounts payable80,700
Accrued liabilities21,500
Deferred tax liability15,500
8% serial bonds70,000
Common stock, $10 par90,000
Additional paid-in capital150,000
Retained earningsAppropriation for bonded indebtedness60,000
Retained earningsUnappropriated 38,000
$643,600$643,600
An analysis of the Retained EarningsUnappropriated account follows:
Retained earnings unappropriated, December 31, 2014$1,300,000
Add:Net income327,000
Transfer from appropriation for bonded indebtedness 60,000
Total$1,687,000
Deduct:Cash dividends$185,000
Stock dividend 240,000 425,000
Retained earnings unappropriated, December 31, 2015$1,262,000
1>On January 2, 2015 short-term investments (classified as available-for-sale) costing
$121,000 were sold for $155,000.
2>The company paid a cash dividend on February 1, 2015 .
3>Accounts receivable of $16,200 and $19,400 were considered uncollectible and
written off in 2015 and 2014, respectively.
4>Major repairs of $33,000 to the equipment were debited to the Accumulated
Depreciation account during the year. No assets were retired during 2015 .
5>The wholly owned subsidiary reported a net loss for the year of $20,000. The loss
was recorded by the parent.
6>At January 1, 2015, the cash balance was $166,000.
Instructions
Prepare a statement of cash flows (indirect method) for the year ended December 31,
2015 . Keating Corporation has no securities which are classified as cash equivalents.
33) Briefly describe some of the similarities and differences between U.S. GAAP and
IFRS with respect to the accounting for investments.
34) Landmark Book Store uses the conventional retail method.
Instructions
Given the following data, prepare a neat, labeled schedule showing the computation of
the cost of inventory on hand at 12/31/14.
Cost Retail
Inventory 1/1/14$ 28,900$ 40,000
Purchases366,600610,000
Purchases Returns9,00020,000
Purchase Discounts7,000
Sales (Gross)605,000
Sales Returns15,000
Employee Discounts5,000
Freight-in23,500
Freight-out50,000
Loss from Breakage2,500
Markups38,000
Markup Cancellations18,000
Markdowns13,500
Markdown Cancellations8,500
