1) Which of the following items is reported only in current and future periods?
a. Prior period adjustment
b. Change in accounting principle
c. Change in estimate
d. Effects of changing prices
2) Which of the following should NOT be reported retroactively?
a. Use of an unacceptable accounting principle, then changing to an acceptable
accounting principle
b. Correction of an overstatement of ending inventory made two years ago
c. Use of an unrealistic accounting estimate, then changing to a realistic estimate
d. Change from a good faith but erroneous estimate to a new estimate
3) Saginaw Inc. decided on August 1, 2014, to dispose of a component of its business.
The component was sold on November 30, 2014. Saginaw’s income for 2014 included
income of $250,000 from operating the discontinued segment from January 1 to the sale
date. Saginaw incurred a loss on the November 30 sale of $220,000. Ignoring income
taxes, what amount should be reported in the 2014 income statement as the net income
or loss under “Discontinued Operations”?
a. $220,000 loss
b. $30,000 loss
c. $30,000 income
d. $250,000 income
4) Which of the following assets generally is required to be tested at least annually for
impairment?
a. Machinery
b. Patent
c. Renewable broadcast license
d. Copyright
5) Ginza Enterprises, a subsidiary of Universal Enterprises based in Dallas, reported the
following information at the end of its first year of operations (all in yen):
assets–110,000,000; expenses–41,000,000; liabilities–97,500,000; capital
stock–5,500,000; revenues–48,000,000. Relevant exchange rates are as follows:
As a result of the translation process, what amount is recorded on the financial
statements as the translation adjustment?
a. $21,000 debit adjustment
b. $76,000 debit adjustment
c. $21,000 credit adjustment
d. $76,000 credit adjustment
6) Sonora Company borrowed $400,000 on a 10 percent note payable to finance a new
warehouse Sonora is constructing for its own use. The only other debt on Sonora’s
books is a $600,000, 12 percent mortgage payable on an office building. At the end of
the current year, average accumulated expenditures on the new warehouse totaled
$475,000. Sonora should capitalize interest for the current year in the amount of
a. $40,000
b. $47,500
c. $49,000
d. $52,250
7) Songbird Corporation’s trial balance included the following account balances at
December 31, 2014:
What amount should be included in the current liability section of Songbirds December
31, 2014, balance sheet?
a. $135,000
b. $153,000
c. $195,000
d. $234,000
8) Using the information above, the actual return on plan assets for the year is
a. $105,000
b. $495,000
c. $503,500
d. $530,000
9) McCabe Institute leased a new machine having an expected useful life of 12 years.
The noncancelable lease term is 10 years, and McCabe may exercise a purchase option
at the end of the noncancelable term. The machine should be capitalized by McCabe
and depreciated over
a. 10 or 12 years at McCabe’s option
b. 12 years
c. 10 years
d. 9 years
10) A company using the group depreciation method for its delivery trucks retired one
of the trucks after the average service life of the group was reached. Cash proceeds
were received from a salvage company. The net carrying amount of these group asset
accounts would be decreased by the
a. original cost of the truck
b. original cost of the truck less the cash proceeds
c. cash proceeds received
d. cash proceeds received and original cost of the truck
11) The following information is from the records of Sumter, Inc. for the year ended
December 31, 2014.
If the basis for estimating bad debts is 1 percent of net sales, the correct amount of
doubtful accounts expense for 2014 is
a. $22,800
b. $23,200
c. $28,880
d. $34,880
12) Which of the following is NOT correct?
a. The operating cycle sometimes is longer than one year in duration
b. The operating cycle always is one year in duration
c. The operating cycle sometimes is shorter than one year in duration
d. The operating cycle is a concept applicable both to manufacturing and retailing
enterprises
13) A restriction of retained earnings is most likely to be required by
a. incurring a net loss in the current year
b. incurring a net loss in the prior year
c. purchasing treasury stock
d. reissuing treasury stock
14) An analysis and aging of accounts receivable of the Gibson Company at December
31, 2014, showed the following:
Compute the net realizable value of the accounts receivable of Gibson Company at
December 31, 2014.
a. $804,000
b. $799,200
c. $723,200
d. $727,200
15) Stanner Company’s 2014 income statement reported cost of goods sold as $135,000.
Additional information is as follows:
If Stanner uses the direct method, what amount should Stanner report as cash paid to
suppliers in its 2014 statement of cash flows?
a. $121,000
b. $134,000
c. $149,000
d. $136,000
16) Vast Ocean Corporation has an incentive compensation plan under which the sales
manager receives a bonus equal to 10% of the companys income after deducting
income taxes but before deducting the bonus. Income before income tax and the bonus
is $80,000. The effective income tax rate is 40%. How much is the bonus?
a. $8,000
b. $5,000
c. $4,800
d. $4,320
17) Current financial accounting standards require
a. the use of the fair value method, but not the intrinsic value method
b. the use of the fair value method and the intrinsic value method to account for each
plan
c. disclosure in the notes to the financial statements of compensation expense under the
fair value method if the intrinsic value method is used
d. disclosure in the notes to the financial statements of compensation expense under the
intrinsic value method if the fair value method is used
18) All other things held constant, which of the following ratios would not be improved
if a company structures a leasing transaction as an operating lease rather than a capital
lease?
a. Debt to equity ratio
b. Quick ratio
c. Price-earnings ratio
d. Return on investment
19) In exchange for the rights inherent in an option contract, the owner of the option
will typically pay a price
a. only when a call option is exercised
b. only when a put option is exercised
c. when either a call option or a put option is exercised
d. at the time the option is received regardless of whether the option is exercised or not
20) On July 1, 2014, Chelsea Company purchased as a long-term investment Soho
Company’s ten-year, 9 percent bonds, with a face value of $100,000 for $95,200.
Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1,
2018. Chelsea uses the straight-line method of amortization. What is the amount of
interest revenue that Chelsea should report in its income statement for the year ended
December 31, 2014?
a. $3,900
b. $4,500
c. $5,100
d. $5,700
21) The responsibility to review the work of the accountants and issue opinions as to
the fairness of the financial statements rests with
a. the external auditor
b. the board of directors
c. the internal auditors
d. management
22) Which of the following is typically associated with cookie jar reserves?
a. Purchased in-process research and development
b. Recognizing very high bad debt expense when earnings are high
c. Recognizing revenue when a contract is signed prior to delivery of goods or
performance of services
d. Proforma earnings
23) Which securities are purchased with the intent of selling them in the near future?
a. Marketable equity securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
24) Which of the following is NOT a short-term convergence topic that the FASB must
address in order to eliminate the reconciliation of accounts prepared under different sets
of standards of different countries?
a. Segment reporting
b. Accounting for income taxes
c. Accounting for research and development costs
d. Accounting for the impairment of assets
25) Fennel owned 40 percent of Actuals common stock, and as a result, accounted for
the investment using the equity method. After the fifth year of owning the stock, the
investment account had a credit balance. This could only happen if Fennel
a. recorded net losses that were more than the net income
b. distributed dividends in excess of the accumulated earnings
c. had accumulated income that was less than the additional depreciation that Fennel
recorded as a result of purchasing the stock when market value of the assets was in
excess of book value
d. experienced any, or a combination, of the conditions described in the three other
responses
26) The following information is available for Jimmy Corporation for the month of
June:
Given this information, the ending inventory balance using the average cost method is
a. $276
b. $302
c. $368
d. $386
27) On December 31, 2013, Freulein Company had 8,000 shares of common stock
issued and outstanding. On April 1, 2014, an additional 1,500 shares of common stock
were issued and on July 1, 500 more shares were issued. On October 1, 2014, Freulein
issued 10, $1,000 maturity value, 8% convertible bonds. Each bond is convertible into
40 shares of common stock. No bonds were converted into common stock in 2014.
Assuming there are no antidilutive securities, what is the number of shares Freulein
should use to compute diluted earnings per share for the year ended December 31,
2014?
a. 9,325
b. 9,475
c. 9,525
d. 9,775
28) The transaction approach to determining income is a concept in which
a. income is measured as the amount that an entity could consume during a period and
be as well off at the end of that period as it was at the beginning
b. the financial statement effects of business events are classified as revenues, gains,
expenses, and losses, which are used to measure and define income
c. market values adjusted for the effects of inflation or deflation are used to calculate
income
d. income equals the change in market value of the firm’s outstanding common stock for
the period
29) The area of accounting that emphasizes developing accounting information for use
within a company is known as __________ accounting.
a. management
b. forensic
c. audit
d. financial
30) Which of the following is the most likely candidate for a contingent liability that
must be accrued?
a. Potential liability for a lawsuit in which the firm is a defendant
b. Property tax payable
c. Potential liability on a product that is still in the planning stages (no items have been
sold)
d. Warranty liability
31) Cultivo Corporation’s capital stock at December 31 consisted of the following:
Cultivos common stock, which is listed on a major stock exchange, was quoted at $4
per share on December 31. Cultivo’s net income for the year ended December 31 was
$50,000. The yearly preferred dividend was declared. No capital stock transactions
occurred. What was the price earnings ratio on Cultivo’s common stock at December
31?
a. 6 to 1
b. 8 to 1
c. 10 to 1
d. 16 to 1
32) With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000. If
FIFO ending inventory is $65,000, how much is FIFO cost of goods sold?
a. $215,000
b. $195,000
c. $175,000
d. $65,000
33) Bonds usually sell at a premium
a. when the market rate of interest is greater than the stated rate of interest on the bonds
b. when the stated rate of interest on the bonds is greater than the market rate of interest
c. when the price of the bonds is greater than their maturity value
d. in none of these cases
34) Use the following information to compute the cash flow from operating activities
under (1) the U.S. approach, and (2) the U.K. approach.
35) On January 1, 2014, J. M. Rodriguez, owner of JMR Sound, sold the building the
studio currently occupies to Rave Up Events Company for the current market value of
the building of $9,000,000. Prior to the sale, the carrying value of the building was
$7,000,000. The estimated remaining useful life of the building is 10 years, with no
residual value at that time. Straight-line depreciation is used to depreciate the building.
On the same day as the sale, January 1, 2014, Rodriguez signed a 10-year
noncancelable leaseback agreement that has a 15 percent implicit rate of return for the
lessor. The lessees incremental borrowing rate also is 15 percent. Annual payments
begin on January 1, 2014. During 2014, Rodriguez will pay $10,000 executory costs if
the transaction qualifies as a direct-financing lease. If the agreement qualifies as an
operating lease, this $10,000 will be paid by the buyer-lessor. For convenience, provide
all amounts in your solution in $000.
Required:
36) The enacted tax rates for this year and the next four years are as follows:
37) The following information has been collected for Lightfoot Company:
Required:
Estimate the price per share for Lightfoot Companys common stock using the
discounted free cash flow model.
38) Diane Singer has just been assigned as the senior accountant on the audit of Pottery
Manufacturing Company. Diane currently is planning the audit and has been
considering what procedures to perform in examining the company’s inventories of raw
materials, work-in-process, and finished goods. She has determined that the calculation
of certain ratios and other financial analysis techniques will prove useful to her in
deciding how to approach the audit of the company’s inventory accounts.
Identify the ratios to be calculated and the factors to be considered in Diane’s analysis
of the company’s inventory accounts.
