1) Companies should accrue an estimated loss from a loss contingency if information
available prior to the issuance of financial statements indicates that it is reasonably
possible that a liability has been incurred.
2) Companies must recognize the entire expected loss on an unprofitable contract in the
current period under the percentage-of-completion method but not the
completed-contract method.
3) Gains or losses on disposals of assets do not distort periodic income when the group
or composite method is used to compute depreciation.
4) A basket purchase occurs when a company agrees to buy inventory weeks or months
in advance.
5) Under IFRS, the rate implicit in the lease is generally used to discount minimum
lease payments.
6) The market value method is used to account for the exercise of convertible preferred
stock.
7) Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
8) An impairment loss is the amount by which the carrying amount of the asset exceeds
the sum of the expected future net cash flows from the use of that asset.
9) Influences in a companys internal environment may relate to industry conditions,
poor internal control systems, or legal and regulatory considerations.
10) Although the FASB has developed a conceptual framework, no Statements of
Financial Accounting Concepts have been issued to date.
11) Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of
$1,800,000. The equipment has an estimated useful life of 5 years and an estimated
salvage value of $150,000. The current year end is 12/31/15. Davis records depreciation
to the nearest month.
If Davis expensed the total cost of the equipment at 7/1/14, what was the effect on 2014
and 2015 income before taxes, assuming Davis uses straight-line depreciation?
a.$1,470,000 understated and $330,000 overstated
b.$1,620,000 understated and $180,000 overstated
c.$1,635,000 understated and $330,000 overstated
d.$1,800,000 understated and $180,000 overstated
12) A variable-interest entity has
a.insufficient equity investment at risk
b.stockholders who have decision-making rights
c.stockholders who absorb the losses or receive the benefits of a normal stockholder
d.All of the above are characteristics of a variable-interest entity
13) Maris Co. purchased a machine on January 1, 2015, for $1,500,000 for the express
purpose of leasing it. The machine is expected to have a five-year life, no salvage value,
and be depreciated on a straight-line monthly basis. On April 1, 2015, under a
cancelable lease, Maris leased the machine to Dunbar Company for $450,000 a year for
a four-year period ending March 31, 2019 . Maris incurred total maintenance and other
related costs under the provisions of the lease of $15,000 relating to the year ended
December 31, 2015 . Harley paid $450,000 to Maris on April 1, 2015 .
Instructions[Assume the operating method is appropriate for parts (a) and (b).]
(a)Under the operating method, what should be the income before income taxes derived
by Maris Co. from this lease for the year ended December 31, 2015?
(b)What should be the amount of rent expense incurred by Dunbar from this lease for
the year ended December 31, 2015?
14) A contingent liability which is normally accrued is
a.notes receivable discounted
b.accommodation endorsements on customer notes
c.additional compensation that may be payable on a dispute now being arbitrated
d.estimated claims under a service warranty on new products sold
15) When a new company is acquired, which of these intangible assets, unrecorded on
the acquired companys books, might be recorded in addition to goodwill?
a.A brand name
b.A patent
c.A customer list
d.All of these answer choices are correct
16) Kennison Company has cash in bank of $15,000, restricted cash in a separate
account of $3,000, and a bank overdraft in an account at another bank of $1,000.
Kennison should report cash of
a.$14,000
b.$15,000
c.$17,000
d.$18,000
17) Reegan Company owns a trade name that was purchased in an acquisition of
Hamilton Company. The trade name has a book value of $1,800,000, but according to
IFRS, it is assessed for impairment on an annual basis. To perform this impairment test,
Reegan must estimate the fair value of the trade name. It has developed the following
cash flow estimates related to the trade name based on internal information. Each cash
flow estimate reflects Reegan’s estimate of annual cash flows over the next 7 years. The
trade name is assumed to have no residual value after the 7 years. (Assume the cash
flows occur at the end of each year.)
Probability AssessmentCash Flow Estimate
30%$240,000
50%365,000
20%425,000
Reegan determines that the appropriate discount rate for this estimation is 6%. To the
nearest dollar, what is the estimated fair value of the trade name?
a.$1,800,000
b.$ 339,500
c.$1,030,000
d.$1,895,218
18) Which of the following is included in comprehensive income?
a.Investments by owners
b.Unrealized gains on available-for-sale securities
c.Distributions to owners
d.Changes in accounting principles
19) A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a.be accrued during the period when the compensated time is expected to be used by
employees
b.be accrued during the period following vesting
c.be accrued during the period when earned
d.not be accrued unless a written contractual obligation exists
20) A correct valuation is
a.available-for-sale at amortized cost
b.held-to-maturity at amortized cost
c.held-to-maturity at fair value
d.None of these answers are correct
21) On January 1, 2014, the Accumulated DepreciationMachinery account of a
particular company showed a balance of $740,000. At the end of 2014, after the
adjusting entries were posted, it showed a balance of $790,000. During 2014, one of the
machines which cost $250,000 was sold for $121,000 cash. This resulted in a loss of
$8,000. Assuming that no other assets were disposed of during the year, how much was
depreciation expense for 2014?
a.$171,000
b.$187,000
c.$50,000
d.$121,000
22) Which of the following ratios is(are) useful in assessing a company’s ability to meet
current maturing or short-term obligations?
Acid-Test RatioDebt to Assets Ratio
a.NoNo
b.NoYes
c.YesYes
d.YesNo
23) The debt to assets ratio is computed by dividing
a.current liabilities by total assets
b.long-term liabilities by total assets
c.total liabilities by total assets
d.total assets by total liabilities