1) The data shown below represent the complete taxable income history for
Confederacy Corporation. The tax rate was 35% throughout the entire period 2008
through 2015:
If the company always chooses the carryback, carryforward option, what is the tax
liability for 2014?
a. $1,750
b. $8,750
c. $5,250
d. $0
2) a. Only 3
b. Only 4
c. 3 and 4
d. 1, 2, 3, and 4
3) Stern Fitness Enterprises uses soybeans to make one of their nutritional supplement
products. Stern anticipates a need of 700,000 pounds of soybeans in January of 2015.
On November 1, 2014, Stern purchased a call option for 700,000 pounds of soybeans
on January 1, 2015, at a price of $0.40 per pound, which is the market price on
November 1. Stern paid $1,300 for the call option and designated this option as a hedge
against price fluctuations for their January purchase of soybeans. On December 31,
2014, and January 1, 2015, the prevailing market price for soybeans is $0.45 per pound.
On January 1, 2015, Stern purchased 700,000 pounds of soybeans.
Make the necessary entries on Stern’s books at
(a) November 1, 2014
(b) December 31, 2014
(c) January 1, 2015
4) Concourse Corporation paid $20,000 in January of 2014 for premiums on a two- year
life insurance policy which names the company as the beneficiary. Additionally,
Concourse Corporation’s financial statements for the year ended December 31, 2014,
revealed the company paid $105,000 in taxes during the year and also accrued
estimated litigation losses of $200,000. Assuming the lawsuit was resolved in February
of 2015 (at which time a $200,000 loss was recognized for tax purposes) and that
Concourse’s tax rate is 30 percent for both 2014 and 2015, what amount should
Concourse report as asset for net deferred income taxes on its 2014 balance sheet?
a. $54,000
b. $57,000
c. $60,000
d. $66,000
5) At December 31, 2014, Strom Corp. owed notes payable of $1,000,000 with a
maturity date of April 30, 2015. These notes did not arise from transactions in the
normal course of business. On February 1, 2015, Strom issued $3,000,000 of ten-year
bonds with the intention of using part of the bond proceeds to liquidate the $1,000,000
of notes payable. Strom’s December 31, 2014, financial statements were issued on
March 29, 2015. How much of the $1,000,000 notes payable should be classified as
current in Strom’s balance sheet at December 31, 2014?
a. $0
b. $100,000
c. $900,000
d. $1,000,000
6) Volta Electronics Inc. reported the following items on its December 31, 2014, trial
balance:
The amount that should be recorded on Voltas balance sheet as total liabilities is
a. $696,000
b. $700,500
c. $703,500
d. $741,000
7) An example of an item that should be reported as a prior period adjustment is the
a. collection of previously written off accounts receivable
b. payment of taxes resulting from examination of prior years’ income tax returns
c. correction of an error in financial statements of a prior year
d. receipt of insurance proceeds for damage to a building sustained in a prior year
8) See information for Paper Depot above. If Paper Depot uses a LIFO periodic
inventory system, the ending inventory of Model III calculators at August 31 is reported
as
a. $146,400
b. $150,080
c. $150,160
d. $152,960
9) The following information is available from the Lyon Company accounting records:
1) Cash account balances: January 1, 2014, $43,000; December 31, 2014, $18,000
2) The balance in accounts receivable decreased by $10,000 during the year from
$60,000.
The company had no short-term investments.
3) Inventory increased $9,000 to $80,000.
4) Accounts payable increased $3,000 during the year to $32,000. Income tax payable
increased $4,000 during the year to $8,000. Wages payable decreased by $5,000 to
$4,000.
There were no other current liabilities.
5) During December 2014, the company settled a $10,000 note payable by issuing
shares of
its own capital stock with equivalent value.
6) Cash expenditures during 2014 were
a. payment of long-term debts, $64,000;
b. purchase of new operational assets, $74,000;
c. payment of a cash dividend, $16,000;
d. purchase of land as an investment, $25,000.
7) Sale and issuance of Lyon Company capital stock for $20,000 cash.
8) Issuance of long-term mortgage note, $30,000.
9) Sale of some old operational assets resulting in the following entry:
Cash 5,000
Accumulated Depreciation 12,000
Operational Assets 15,000
Gain on Sale of Operational Assets 2,000
Total assets at December 31, 2014, equaled $1,000,000.
10) Income statement data:
Sales revenue (net credit sales) $ 295,000
Cost of goods sold (140,000)
Depreciation expense (14,000)
Patent amortization (1,000)
Income tax expense (17,000)
Selling and administrative expenses (42,000)
Gain on sale of operational assets 2,000
Net income $ 83,000
Required:
1> Prepare a statement of cash flows in thousands of dollars using the direct method.
2> Calculate the following ratios:
a. Current ratio
b. Quick ratio
c. Working capital to total assets
d. Accounts receivable turnover
e. Age of accounts receivable
f. Inventory turnover
g. Working capital turnover
h. Net cash flow to current liabilities
i. Profit margin on sales
j. Dividend payout ratio (income based)
10) See Teeming Company information above. If Teeming determines bad debt expense
using 1.5 percent of net credit sales, the net realizable value of accounts receivable on
the December 31 balance sheet will be
a. $738,000
b. $740,000
c. $744,000
d. $750,000
11) The components of net periodic pension expense that involve delayed recognition
are
a. gains and losses, transition cost, and prior service cost
b. service cost, transition cost, and gains and losses
c. interest cost, prior service cost, transition cost, and expected return on plan assets
d. transition cost, prior service cost, and expected return on plan assets
12) From the standpoint of the stockholders of a company, the ratio that measures the
overall performance of a company would be calculated using which of the following?
a. Average total assets and net income
b. Average stockholders equity and net sales
c. Average stockholders equity and net income
d. Net sales and average total assets
13) Which of the following is a counterbalancing error?
a. Understated depletion expense
b. Bond premium underamortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expenses
14) McCartney Corp. reports on a calendar-year basis. Its 2013 and 2014 financial
statements contained the following errors:
As a result of the above errors, 2014 income would be
a. overstated by $4,000
b. overstated by $24,000
c. overstated by $22,000
d. overstated by $16,000
15) Ryan Company purchased a machine on July 1, 2013. The machine cost $250,000
and has a salvage value of $10,000 and a useful life of eight years. The adjusting entry
for the year ending December 31, 2014, would include a debit to Depreciation Expense
of
a. $30,000
b. $15,000
c. $31,250
d. $15,625
16) A gain on the sale of a plant asset should be included in which of the following
sections of a statement of cash flows prepared using the direct method?
a. Investing activities
b. Operating activities
c. Financing activities
d. Any of these, if applied consistently from year to year
17) A conceptual framework of accounting should
a. lead to uniformity of financial statements among companies within the same industry
b. eliminate alternative accounting principles and methods
c. guide the
d. define the basic objectives, terms, and concepts of accounting
18) The inception of a lease is January 1, 2014. A third party guarantees the residual
value of the asset under the lease, estimated to be $12,000 at January 1, 2019, the end of
the lease term. Annual lease payments are $10,000 due each December 31, beginning
December 31, 2014. The last payment is due December 31, 2018. Both the lessor and
lessee use 10% as the interest rate. The remaining useful life of the asset was six years
at the inception of the lease.
What is the net asset balance for the lessor, and net liability balance for the lessee, at the
date of the inception of the lease?
Net Asset (Lessor) Net Liability (lessee)
a. $45,359 $45,359
b. $37,908 $37,908
c. $45,359 $37,908
d. $37,908 $45,359
19) Assuming the straight-line method of amortization is used, the average yearly
interest expense on a $250,000, 11 percent, 20-year bond issued at 94 would be
a. $26,750
b. $27,500
c. $28,250
d. $29,500
20) During a year, Awesome Company reported income tax expense of $300,000. The
amount of taxes currently payable remained unchanged from the beginning to the end
of the year. The deferred tax liability classified as noncurrent that resulted from the use
of MACRS for tax purposes and straight-line depreciation for financial reporting
purposes, increased from $40,000 at the beginning of the year to $44,000 at the end of
the year. How much cash was paid for income taxes during for the year?
a. $256,000
b. $260,000
c. $296,000
d. $206,000
21) Which of the following statements regarding requirements for segment disclosures
is most accurate?
a. Segment disclosures must include most of the items found in financial statements for
the entire enterprise
b. Segment reporting is generally applied in a similar fashion in various companies,
since the requirement are detailed and inflexible
c. Segment reporting requirements are so flexible that firms can often resist disclosing
information they would prefer to keep confidentia
d. Segment reporting is not required for any entities; the standards are concerned with
determination of segment information if a company wishes to disclose it
22) The financial statements of Mannassass Corporation for 2014 and 2015 contained
the following errors:
Assuming that none of the errors were detected or corrected, by what amount will 2014
operating income be overstated or understated?
a. $9,200 overstated
b. $9,200 understated
c. $18,800 understated
d. $18,800 overstated
23) Tammy Corporation leased used equipment to Waller, Inc. The equipment originally
had a 10-year life and the lease to Waller is for the last two of the ten-year life of the
asset. The lease calls for four semiannual lease payments of $2,000 to be made at the
end of each year in the life of the lease. The lease agreement contains no transfer of title
or bargain purchase option provisions.
What is the amount of the leased asset that should be recorded on Wallers books at the
beginning of the lease?
a. $2,000
b. $7,092
c. $4,000
d. $-0-
24) In preparing a bank reconciliation, interest paid by the bank on the account is
a. added to the book balance
b. subtracted from the bank balance
c. added to the bank balance
d. subtracted from the book balance
25) The stockholders’ equity section of Angus Corporation as of December 31, 2014,
contained the following accounts:
Angus’s board of directors declared a 10 percent stock dividend on April 1, 2015, when
the market value of the stock was $7 per share. Accordingly, 1,000 new shares were
issued. All of Angus’s stock has a par value of $3 per share. Assuming Angus sustained
a net loss of $12,000 for the quarter ended March 31, 2015, what amount should Angus
report as retained earnings as of April 1, 2015?
a. $61,000
b. $64,000
c. $68,000
d. $73,000
26) On January 1, 2013, a company purchased four 5%, $1,000 Esso bonds at 103 as an
investment in securities available-for-sale. The bonds pay interest each December 31
and have four years remaining to maturity on the purchase date. The market value of the
bonds on December 31, 2013, was 107, and on December 31, 2014, was 105.
The entry to adjust the carrying value of the securities available-for-sale at December
31, 2014, will include a
a. debit to accumulated gain on securities available-for-sale in the stockholders equity
section
b. credit to the investment account of $30
c. debit to realized loss of $30
d. debit to unrealized loss of $80
27) Cash outflows from investing activities would include payments for all of the
following except
a. operational assets
b. investments in securities-available-for-sale
c. purchase of treasury stock
d. loans to customers
28) Which of the following is true regarding the provisions of IAS 39?
a. IAS 39 does not require unrealized gains and losses on trading securities to be
recognized as part of net income
b. IAS 39 requires gains and losses on available for sale securities to be recognized as
part of net income
c. IAS 39 allows companies to choose between recognizing gains and losses on
available-for-sale securities as part of net income or as part of stockholders’ equity
d. IAS 39 allows companies to choose between recognizing gains and losses on trading
securities as part of net income or as part of stockholders’ equity
29) Thomson Company’s income statement for the year ended December 31, 2014,
reported net income of $360,000. The financial statements also disclosed the following
information:
Net cash provided by operating activities for 2014 should be reported as
a. $84,000
b. $204,000
c. $234,000
d. $324,000
30) What is the effect of the sale of $5,000 worth of cash equivalents at cost in the
statement of cash flows prepared under the direct method?
a. Add $5,000 in the reconciliation
b. $5,000 investing cash inflow
c. $5,000 operating cash inflow
d. No disclosure
31) The allowance for doubtful accounts is an example of a(n)
a. expense account
b. contra account
c. adjunct account
d. control account
32) Sanders Company began business in February of 2013. During the year, Sanders
purchased the three trading securities listed below. On its December 31, 2013, balance
sheet, Sanders appropriately reported a $4,000 credit balance in its Market
Adjustment–Trading Securities account. There was no change during 2014 in the
composition of Sanders portfolio of trading securities. Pertinent data are as follows:
What amount of loss on these securities should be included in Sanders income
statement for the year ended December 31, 2014?
a. $0
b. $3,000
c. $7,000
d. $11,000
33) Under international accounting standards, remote contingent liabilities are
a. not disclosed
b. not disclosed unless a guarantee arrangement (e. g., cosigning the loan of another
party) exists
c. disclosed if the amount of the contingent liability is reasonably estimable
d. treated the same as reasonable possible contingencies
34) The following balances have been excerpted from Edwards’ balance sheets:
Edwards Company paid or collected during 2013 the following items:
The interest revenue on the income statement for 2013 was
a. $90,500
b. $112,700
c. $117,500
d. $156,500
35) Beginning and ending Accounts Receivable balances were $28,000 and $24,000,
respectively. If collections from clients during the period were $80,000, then total
services rendered on account were apparently
a. $76,000
b. $84,000
c. $104,000
d. $108,000
36) The lessor capitalizes and amortizes initial direct costs for all types of leases except
a. sales-type leases
b. operating leases
c. direct-financing leases
d. There are no exceptions
37) Use the provisions of FASB Statement No. 109.
38) Receivables can be used to generate cash through two general categories of
transactions:
1> A secured borrowing
2> A sale of the receivables.
Both of these types of transactions require a transfer of the receivables to a new holder,
typically a financial institution.
A sale of receivables results in the receivables being removed from the books of the
transferor and the recognition of gain or loss. From the transferees standpoint, a sale of
receivables results in the receivables being recorded on its books at their fair value.
Required:
Identify the conditions that must exist for a transfer of receivables to be accounted for
as a sale.
39) Depreciation is the systematic allocation of historical depreciable cost to periods in
which an asset is used. Depreciation is not a cash outflow but does reduce reported
income and thus retained earnings by the depreciable cost of the asset less the tax
savings associated with depreciation.
Required:
40) Mostel Company has each of the following items on its balance sheet at December
31, 2014:
The prepaid expenses have already been deducted for tax purposes. No deductions have
yet been take related to the warranty liability or the postretirement liability other than
pensions. No evidence exists that the goodwill is impaired. The current and future tax
rate is 35 percent.
Required:
41) Arnolds Club is a discount retailer subject to SEC regulation. Arnolds Club charges
its customers an annual membership fee. Although the fee is collected in advance, a
customer can cancel and receive a full refund at any time during the year of
membership.
Should Arnolds Club recognize the entire initial membership fee at the beginning of the
year or on a straight-line basis over the course of the membership year? Explain.
What journal entry should be made to record the initial receipt of the membership fees?
42) Assume R Company has one asset, a V Company bond that Company R purchased
on the date of issuance by Company V, and one liability, one of its own bonds issued to
finance the acquisition of the V Company bond. Both bond have the same terms: $1,000
face value, 20-year life, and a 12% coupon rate, with interest being paid annually. Both
bonds were issued at the market rate of interest of 12%.
Both R Company and V Company have elected to apply the fair value option for their
respective bonds as allowed under the provisions of Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities–Including an amendment of FASB Statement No. 115.
Required:
Assume that the market rate of interest associated with both bonds decreased to 10%.
1>Explain what the financial effects this change in interest rate would have on both
companies if both companies applied the FASBs fair value option. Show
calculations to support your answer.
2>Assume now that A Company is required to report the bond asset at its fair value
of $1,261, but is also required to report the bond liability at its historical issuance
amount of $1,000.
43) Washburn Enterprises acquired Ibarra Company for $850,000 December 31, 2014.
This amount exceeded the recorded value of Ibarra Company’s net assets by $250,000
on the acquisition date. The entire excess of cost over the book value of the net assets
related to a piece of equipment owned by Ibarra that had a remaining life of five years
as of the acquisition date. The companies reported the following amounts for the 2013
and 2014:
Prepare the pro forma information for this acquisition required by ASC Topic 850.
44) Lamonde Corporation has 20,000 shares of common stock and 5,000 shares of
preferred stock outstanding during 2014. Lamonde reported net income of $60,000 for
2014. Each share of preferred stock is convertible into two shares of common stock.
The preferred stock is entitled to a noncumulative annual dividend of $5 per share.
After the common stock has been paid a dividend of $1 per share, the preferred stock
participates in any additional dividends on a 2:3 per share ratio with the common. For
2014, the common shareholders have been paid $25,000 (or $1.25 per share), and the
preferred shareholders have been paid $25,000 (or $5.00 per share).
Required:
Calculate basic earnings per share under the two-class method for 2014.
