1) ill in the dollar changes caused in the Investment account and Dividend Revenue or
Investment Revenue account by each of the following transactions, assuming Crane
Company uses (a) the fair value method and (b) the equity method for accounting for its
investments in Hudson Company.
(a) Fair Value Method (b) Equity Method
InvestmentDividendInvestmentInvestment
Transaction AccountRevenueAccount Revenue
1>At the beginning of Year 1, Crane bought 25% of Hudson’s common stock at its book
value. Total book value of all Hudson’s common stock was $800,000 on this date.
2>During Year 1, Hudson reported $60,000 of net income and paid $30,000 of
dividends.
3>During Year 2, Hudson reported $30,000 of net income and paid $20,000 of
dividends.
4>During Year 3, Hudson reported a net loss of $10,000 and paid $4,000 of dividends.
5>Indicate the Year 3 ending balance in the Investment account, and cumulative totals
for Years 1, 2, and 3 for dividend revenue and investment revenue.
2) How can accounting for bad debts be used for earnings management?
a.Determining which accounts to write-off
b.Changing the percentage of sales recorded as bad debt expense
c.Using an aging of the accounts receivable balance to determine bad debt expense
d.Reversing previous write-offs
3) When there is a significant increase in the estimated total contract costs but the
increase does not eliminate all profit on the contract, which of the following is correct?
a.Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods
b.Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods
c.Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
periods
d.No current period adjustment is required
4) In the double-extension method, the value of the units in inventory is extended at:
a.twice the base-year prices
b.twice the current year prices
c.both base-year prices and current-year prices
d.only the base-year prices
5) Depreciation is normally computed on the basis of the nearest
a.full month and to the nearest cent
b.full month and to the nearest dollar
c.day and to the nearest cent
d.day and to the nearest dollar
6) Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
in prior years, net of tax$ 860,000
Dividends declared640,000
Net income2,000,000
Retained earnings, 1/1/14, as reported4,000,000
Moorman should report retained earnings, 1/1/14, as adjusted at
a.$3,140,000
b.$4,000,000
c.$4,860,000
d.$6,220,000
7) In computing depreciation of a leased asset, the lessee should subtract
a.a guaranteed residual value and depreciate over the term of the lease
b.an unguaranteed residual value and depreciate over the term of the lease
c.a guaranteed residual value and depreciate over the life of the asset
d.an unguaranteed residual value and depreciate over the life of the asset
8) A change in accounting principle requires that the cumulative effect of the change for
prior periods be shown as an adjustment to:
a.beginning retained earnings of the earliest period presented
b.net income of the period in which the change occurred
c.comprehensive income for the earliest period presented
d.stockholders equity of the period in which the change occurred
9) On its December 31, 2014 balance sheet, Calhoun Company appropriately reported a
$10,000 debit balance in its Fair Value Adjustment (available-for-sale) account. There
was no change during 2015 in the composition of Calhouns portfolio of equity
investments held as available-for-sale securities. The following information pertains to
that portfolio:
Security CostFair value at 12/31/15
X$125,000$160,000
Y100,00090,000
Z 175,000 125,000
$400,000$375,000
The amount of unrealized loss to appear as a component of comprehensive income for
the year ending December 31, 2015 is
a.$35,000
b.$25,000
c.$15,000
d.$0
10) On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of
$4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and
December 31 . The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6%.627
Present value of 1 for 8 periods at 8%.540
Present value of 1 for 16 periods at 3%.623
Present value of 1 for 16 periods at 4%.534
Present value of annuity for 8 periods at 6%6.210
Present value of annuity for 8 periods at 8%5.747
Present value of annuity for 16 periods at 3%12.561
Present value of annuity for 16 periods at 4%11.652
The present value of the principal is
a.$2,136,000
b.$2,160,000
c.$2,492,000
d.$2,508,000
11) Equipment that cost $525,000 and had a book value of $234,000 was sold for
$270,000. Data from the comparative balance sheets are:
12/31/15 12/31/14
Equipment$3,240,000$2,925,000
Accumulated Depreciation990,000855,000
Equipment purchased during 2015 was
a.$840,000
b.$525,000
c.$315,000
d.$549,000
12) Use of the effective-interest method in amortizing bond premiums and discounts
results in
a.a greater amount of interest income over the life of the bond issue than would result
from use of the straight-line method
b.a varying amount being recorded as interest income from period to period
c. a variable rate of return on the book value of the investment
d. a smaller amount of interest income over the life of the bond issue than would result
from use of the straight-line method
13) To produce an inventory valuation which approximates the lower of cost or market
using the conventional retail inventory method, the computation of the ratio of cost to
retail should
a.include markups but not markdowns
b.include markups and markdowns
c.ignore both markups and markdowns
d.include markdowns but not markups
14) Which basic assumption is illustrated when a firm reports financial results on an
annual basis?
a.Economic entity assumption
b.Going concern assumption
c.Periodicity assumption
d.Monetary unit assumption
15) Dole Company, with an applicable income tax rate of 30%, reported net income of
$350,000. Included in income for the period was an extraordinary loss from flood
damage of $80,000 before deducting the related tax effect. The company’s income
before income taxes and extraordinary items was
a.$430,000
b.$500,000
c.$580,000
d.$406,000
16) On January 1, 2014, Culver Corporation had 110,000 shares of its $5 par value
common stock outstanding. On June 1, the corporation acquired 10,000 shares of stock
to be held in the treasury. On December 1, when the market price of the stock was $10,
the corporation declared a 15% stock dividend to be issued to stockholders of record on
December 16, 2014 . What was the impact of the 15% stock dividend on the balance of
the retained earnings account?
a.$937,500 decrease
b.$150,000 decrease
c.$165,000 decrease
d.No effect
17) The cash account shows a balance of $90,000 before reconciliation. The bank
statement does not include a deposit of $4,600 made on the last day of the month. The
bank statement shows a collection by the bank of $1,880 and a customer’s check for
$640 was returned because it was NSF. A customer’s check for $900 was recorded on
the books as $1,080, and a check written for $158 was recorded as $194. The correct
balance in the cash account was
a.$91,024
b.$91,096
c.$91,456
d.$95,696
18) Big-Mouth Frog Corporation had revenues of $300,000, expenses of $200,000, and
dividends of $45,000. When Income Summary is closed to Retained Earnings, the
amount of the debit or credit to Retained Earnings is a
a.debit of $55,000
b.debit of $100,000
c.credit of $55,000
d.credit of $100,000
19) The Financial Accounting Standards Board employs a “due process” system which
a.is an efficient system for collecting dues from members
b.enables interested parties to express their views on issues under consideration
c.identifies the accounting issues that are the most important
d.requires that all accountants must receive a copy of financial standards
20) When a patent is amortized, the credit is usually made to
a.the Patents account
b.an Accumulated Amortization account
c.a Deferred Credit account
d.an expense account