1) Companies classify some cash flows relating to investing or financing activities as
operating activities.
2) Prepaid insurance should be included in the numerator when computing the acid-test
(quick) ratio.
3) Employers are at risk with defined-benefit plans because they must contribute
enough to meet the cost of benefits that the plan defines.
4) Avoidable interest is the amount of interest cost that a company could theoretically
avoid if it had not made expenditures for the asset.
5) Insurance on equipment purchased, while the equipment is in transit, is part of the
cost of the equipment.
6) Material, labor, and overhead costs incurred in developing a new product are to be
expensed as these are development costs.
7) IFRS requires segment reporting, and uses the management approach to identify
reportable segments.
8) The components of other comprehensive income can be reported in the statement of
comprehensive income.
9) Discontinued operations, extraordinary items, and unusual gains and losses are all
reported net of tax in the income statement.
10) Due to the importance of earnings per share information, it is required to be
reported by all
Public CompaniesNonpublic Companies
a.YesYes
b.YesNo
c.NoNo
d.NoYes
11) Eilert Construction Company had a contract starting April 2015, to construct a
$21,000,000 building that is expected to be completed in September 2016, at an
estimated cost of $19,250,000. At the end of 2015, the costs to date were $8,855,000
and the estimated total costs to complete had not changed. The progress billings during
2015 were $4,200,000 and the cash collected during 2015 was $2,800,000. Eilert uses
the percentage-of-completion method.
For the year ended December 31, 2015, Eilert would recognize gross profit on the
building of
a.$0
b.$737,917
c.$805,000
d.$945,000
12) Arlington Company is constructing a building. Construction began on January 1 and
was completed on December 31 . Expenditures were $4,800,000 on March 1,
$3,960,000 on June 1, and $6,000,000 on December 31 . Arlington Company borrowed
$2,400,000 on January 1 on a 5-year, 12% note to help finance construction of the
building. In addition, the company had outstanding all year a 10%, 3-year, $4,800,000
note payable and an 11%, 4-year, $9,000,000 note payable.
What is the weighted-average interest rate used for interest capitalization purposes?
a.11%
b.10.85%
c.10.5%
d.10.65%
13) Merritt Equipment Company sells computers for $1,500 each and also gives each
customer a 2-year warranty that requires the company to perform periodic services and
to replace defective parts. During 2014, the company sold 900 computers. Based on
past experience, the company has estimated the total 2-year warranty costs as $40 for
parts and $60 for labor. (Assume sales all occur at December 31, 2014.)
In 2015, Merritt incurred actual warranty costs relative to 2014 computer sales of
$12,000 for parts and $18,000 for labor.
Instructions
(a)Under the expense warranty approach, give the entries to reflect the above
transactions (accrual method) for 2014 and 2015 .
(b)Under the cash-basis method, what are the Warranty Expense balances for 2014 and
2015?
(c)The transactions of part (a) create what balance under current liabilities in the 2014
balance sheet?
14) Presented below is the income statement of Cowan, Inc.:
Sales revenue$380,000
Cost of goods sold 225,000
Gross profit$155,000
Operating expenses 85,000
Income before income taxes70,000
Income taxes 28,000
Net income$ 42,000
In addition, the following information related to net changes in working capital is
presented:
Debit Credit
Cash$12,000
Accounts receivable20,000
Inventories$19,400
Salaries payable (operating expenses)8,000
Accounts payable14,000
Income taxes payable3,000
The company also indicates that depreciation expense for the year was $16,700 and that
the deferred tax liability account increased $2,600.
Instructions
Prepare a schedule computing the net cash flow from operating activities that would be
shown on a statement of cash flows:
(a)using the indirect method.
(b)using the direct method.
15) Which of the following is true of expense classification under IFRS?
a.The nature-of-expense method identifies the major cost drivers of the company
b.The nature-of-expense method does not classify the expenses into various subtotals
c.The function-of-expense method is simple to apply because allocations of expense to
different functions are not necessary
d.IFRS allows only function-of-expense method for expense classification
16) Which of the following differences would result in future taxable amounts?
a.Expenses or losses that are tax deductible after they are recognized in financial
income
b.Revenues or gains that are taxable before they are recognized in financial income
c.Revenues or gains that are recognized in financial income but are never included in
taxable income
d.Expenses or losses that are tax deductible before they are recognized in financial
income
17) In a statement of cash flows, the cash flows from investing activities section should
report
a.the issuance of common stock in exchange for a factory building
b.stock dividends received
c.a major repair to machinery charged to accumulated depreciation
d.the assignment of accounts receivable
18) Recording the adjusting entry for depreciation has the same effect as recording the
adjusting entry for
a.an unearned revenue
b.a prepaid expense
c.an accrued revenue
d.an accrued expense
19) Plank Co. uses the retail inventory method. The following information is available
for the current year.
Cost Retail
Beginning inventory$ 234,000$366,000
Purchases885,0001,245,000
Freight-in15,000
Employee discounts6,000
Net markups45,000
Net markdowns60,000
Sales revenue1,170,000
The approximate cost of the ending inventory by the conventional retail method is
a.$287,700
b.$284,760
c.$294,000
d.$307,440
20) Gross Corporation adopted the dollar-value LIFO method of inventory valuation on
December 31, 2013 . Its inventory at that date was $550,000 and the relevant price
index was 100 . Information regarding inventory for subsequent years is as follows:
Inventory at Current
DateCurrent PricesPrice Index
December 31, 2014$642,000107
December 31, 2015725,000125
December 31, 2016812,500130
What is the cost of the ending inventory at December 31, 2015 under dollar-value
LIFO?
a.$580,000
b.$578,500
c.$582,100
d.$600,000
21) Which of the following is accounted for as a change in accounting principle?
a.A change in the estimated useful life of plant assets
b.A change from the cash basis of accounting to the accrual basis of accounting
c.A change from expensing immaterial expenditures to deferring and amortizing them
as they become material
d.A change in inventory valuation from average cost to FIFO
22) Sonata Corporation will receive $30,000 today (January 1, 2014), and also on each
January 1st for the next five years (2015 2019). What is the present value of the six
$30,000 receipts, assuming a 12% interest rate?
a.$123,342
b.$138,143
c.$243,456
d.$272,670
23) A company changes from percentage-of-completion to completed-contract method,
which is used for tax purposes. The entry to record this change should include a
a.debit to Construction in Process
b.debit to Loss on Long-term Contracts in the amount of the difference on prior years,
net of tax
c.debit to Retained Earnings in the amount of the difference on prior years, net of tax
d.credit to Deferred Tax Liability
24) Glavine Company issues 6,000 shares of its $5 par value common stock having a
fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having
a fair value of $20 per share for a lump sum of $297,000. The proceeds allocated to the
common stock is
a.$118,800
b.$135,000
c.$150,000
d.$162,000
25) Vanco Company has 35 employees who work 8-hour days and are paid hourly. On
January 1, 2013, the company began a program of granting its employees 10 days of
paid vacation each year. Vacation days earned in 2013 may first be taken on January 1,
2014 . Information relative to these employees is as follows:
HourlyVacation Days EarnedVacation Days Used
YearWagesby Each Employeeby Each Employee
2013$20.50100
201422.50108
201525.501010
Vanco has chosen to accrue the liability for compensated absences at the current rates of
pay in effect when the compensated time is earned.
What is the amount of expense relative to compensated absences that should be
reported on Vancos income statement for 2013?
a.$0
b.$71,400
c.$63,000
d.$57,400
26) Which of the following is not considered a part of the definition of a liability?
a.Unavoidable obligation
b.Transaction or other event creating the liability has already occurred
c.Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services
d.Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities
27) Core Trading Stamp Co. records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Core’s past experience indicates
that only 75% of the stamps sold to licensees will be redeemed. Core’s liability for
stamp redemptions was $5,000,000 at December 31, 2013 . Additional information for
2014 is as follows:
Stamp service revenue from stamps sold to licensees$4,000,000
Cost of redemptions3,320,000
If all the stamps sold in 2014 were presented for redemption in 2015, the redemption
cost would be $3,000,000. What amount should Core report as a liability for stamp
redemptions at December 31, 2014?
a.$8,320,000
b.$5,680,000
c.$3,930,000
d.$4,680,000
28) Presented below is information related to Farr Company.
Retained earnings, December 31, 2014$ 650,000
Sales revenue1,500,000
Selling and administrative expenses240,000
Hurricane loss (pre-tax) on plant (extraordinary item)290,000
Cash dividends declared on common stock33,600
Cost of goods sold880,000
Gain resulting from computation error on depreciation charge in 2013 (pre-tax)520,000
Other revenue120,000
Other expenses100,000
Instructions
Prepare in good form a multiple-step income statement for the year 2015 . Assume a
30% tax rate and that 80,000 shares of common stock were outstanding during the year.
29) Listed below is a selection of accounts found in the general ledger of Marshall
Corporation as of December 31, 2015:
Accounts receivableResearch & development costs
GoodwillInternet domain name
Organization costsInitial operating loss
Prepaid insuranceNon-competition agreement
Radio broadcasting rightsCustomer list
Premium on bonds payableVideo copyrights
Trade nameNotes receivable
Instructions
List those accounts that should be classified as intangible assets.
30) Pasta Inn charges an initial fee of $1,600,000 for a franchise, with $320,000 paid
when the agreement is signed and the balance in four annual payments. The present
value of the annual payments, discounted at 10%, is $1,014,000. The franchisee has the
right to purchase $60,000 of kitchen equipment and supplies for $50,000. An additional
part of the initial fee is for advertising to be provided by Pasta Inn during the next five
years. The value of the advertising is $1,000 a month. Collectibility of the payments is
reasonably assured and Pasta Inn has performed all the initial services required by the
contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in
good form.
31) What are the criteria that must be satisfied for a lessor to classify a lease as a
direct-financing or sales-type lease?
32) Agee Corporation acquired a 35% interest in Trent Company on January 1, 2015,
for $500,000. At that time, Trent had 1,000,000 shares of its $1 par common stock
issued and outstanding. During 2015, Trent paid cash dividends of $160,000 and
thereafter declared and issued a 5% common stock dividend when the fair value was $2
per share. Trent’s net income for 2015 was $360,000. What is the balance in Agees
equity investment account at the end of 2015?
33) Briefly describe some of the similarities and differences between U.S. GAAP and
IFRS with respect to reporting accounting changes.
34) The earning of revenue by a business is recognized for accounting purposes when
the transaction is recorded. Revenue is often recognized at time of sale.
Instructions
At what times, other than at time of sale, may it be appropriate to recognize revenue?
Explain and justify each of these times.
35) Intangible assets have either a limited useful life or an indefinite useful life. How
should these two different types of intangibles be amortized?
36) Cost as a basis of accounting for assets has been severely criticized. What defense
can you build for cost as the basis for financial accounting?
37) Explain corridor amortization.