On January 1, 2016, Badger Inc. adopted the dollar-value LIFO method. The inventory
cost on this date was $100,000. The 2016 ending inventory, valued at year-end costs,
was $126,000. The relative cost index for this inventory in 2016 was 1.05. What
inventory balance should Badger report on its 12/31/16 balance sheet?
a. $126,000
b. $121,000
c. $120,000
d. $100,000
Persoff Industries International has a defined benefit pension plan. The company
revised its estimate of future salary levels causing its defined benefit obligation to
increase by $16 million. Also, Persoff’s $25 million actual return on plan assets
exceeded the 5% high-grade corporate bond rate times the $440 million plan assets.
Persoff prepares its financial statements in accordance with International Financial
Reporting Standards (IFRS). The company will:
a. Record a $3 million decrease in its plan assets.
b. Record a $16 million gain-OCI.
c. Change an amount in the equity section of the balance sheet to be subsequently
amortized to pension expense.
d. Change an amount in the equity section of the balance sheet that will never be
amortized to pension expense.
In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract
project. CCC recognizes revenue over time according to percentage of completion for
this contract, and provides the following information (dollars in millions):
What is the amount of gross profit on the project recognized by CCC during 2016?
a. $160 million.
b. $72 million.
c. $48 million.
d. Cannot be determined from the given information.
Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000.
Information pertaining to that inventory is as follows:
What should be the reported value of Montana’s inventory?
a. $600,000.
b. $520,000.
c. $590,000.
d. $620,000.
Regardless of the type of accounting change that occurs, the most important
responsibility is:
a. To properly determine the tax effect.
b. To communicate that a change has occurred.
c. To compute the correct amount of the change.
d. None of these answer choices is correct.
Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for
providing initial training, equipment, and furnishings that together have a stand-alone
selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal
name and for ongoing consulting services (starting on the date the franchise is
purchased). Rachel became a Pita Pal franchisee on March 1, 2016, and on May 1, 2016
Rachel had completed training and was open for business. How much revenue in 2016
will Pita Pal recognize for its arrangement with Rachel?
a. $0
b. $75,000
c. $99,000
d. $111,000
Data for 2016 were as follows: PBO, January 1, $240,000 and December 31, $270,000;
pension plan assets (fair value) January 1, $180,000, and December 31, $230,000. The
projected benefit obligation was underfunded at the end of 2016 by:
a. $30,000.
b. $60,000.
c. $20,000.
d. $40,000.
Software development costs are capitalized if they are incurred:
a. Prior to the point at which technological feasibility has been established.
b. After commercial production has begun.
c. After technological feasibility has been established but prior to the product
availability date.
d. None of these answer choices are correct.
Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements
are presented below:
Hulkster’s 2016 average collection period is:
a. 73 days.
b. 104 days.
c. 109 days.
d. 128 days.
The overriding principle for all depreciation methods is that the method must be:
a. Conservative and economic.
b. Systematic and rational.
c. Consistent and conservative.
d. Significant and material.
In the balance sheet at the end of its first year of operations, Dinty Inc. reported an
allowance for uncollectible accounts of $82,000. During the year, Dinty wrote off
$32,000 of accounts receivable it had attempted to collect and failed. Credit sales for
the year were $2,200,000, and cash collections from credit customers totaled
$1,950,000.
What accounts receivable balance would Dinty report in its first year-end balance
sheet?
a. $196,000.
b. $218,000.
c. $230,000.
d. None of the above is correct.
Of the four criteria for a capital lease, the one that most often is the decisive criteria is:
a. The 75% of economic life test.
b. The transfer of title.
c. The 90% of fair value test.
d. The bargain purchase option.
Prepayments made by the lessee on an operating lease are considered to be:
a. A lease expense.
b. A depreciable asset.
c. Deferred revenue.
d. A prepayment of rent expense.
In February 2016, Despot declared cash dividends of $12 million to be paid in April of
that year. What effect did the April transaction have on Despot’s accounts?
The 12/31/2016 balance sheet of Despot Inc. included the following:
a. Decreased assets and liabilities.
b. Decreased assets and shareholders’ equity.
c. Increased liabilities and decreased shareholders’ equity.
d. None of these answer choices is correct.
Selected information from Peridot Corporation’s accounting records and financial
statements for 2016 is as follows ($ in millions):
In its statement of cash flows, Peridot should report net cash outflows from investing
activities of:
a. $26 million.
b. $46 million.
c. $72 million.
d. $78 million.
Cash paid to suppliers under the direct method is computed as:
a. Cost of goods sold plus a decrease in inventory and minus an increase in accounts
payable.
b. Cost of goods sold plus an increase in inventory and minus an increase in accounts
payable.
c. Cost of goods sold minus a decrease in inventory and plus an increase in accounts
payable.
d. Cost of goods sold minus an increase in inventory and plus an increase in accounts
payable.
Although the net method is theoretically more sound, most companies use the gross
method of accounting for cash discounts related to sales on account. Explain this
statement.
You recently joined the internal auditing department of Kaitlyn Sportswear Corporation.
As one of your first assignments, you are examining a balance sheet prepared by a staff
accountant. Kaitlyn Sportswear Corporation
Balance Sheet
At December 31, 2016
In the course of your examination you uncover the following information pertaining to
the balance sheet:
1> The land and buildings represent the corporate headquarters and manufacturing
facilities.
2> The note receivable is due in 2018. The balance of $80,000 includes $5,000 of
accrued interest. The next interest payment is due in July 2017.
3> The note payable is due in installments of $50,000 per year. Interest on both the
notes and bonds is payable annually.
4> The company’s investments consist of marketable equity securities of other
corporations. Management does not intend to liquidate any investments in the coming
year.
5> Deferred revenue will be earned ratably (equally) over the next two years.
Required:
Identify and explain the deficiencies in the statement prepared by the company’s
accountant. Include in your answer items that require additional disclosure, either on
the face of the statement or in a note.
Below is a list of accounts in no particular order. Assume that all accounts have normal
balances. Required: In column A, indicate whether a debit will:
1> Increase the account balance, or
2> Decrease the account balance. In column B, classify each account according to the
following scheme. For contra accounts, indicate the classification of the account to
which it relates.
1>A current asset in the balance sheet.
2>A noncurrent asset in the balance sheet.
3>A current liability in the balance sheet.
4>A long-term liability in the balance sheet.
5>A permanent equity account in the balance sheet.
6>A revenue account in the income statement.
7>An expense account shown in the income statement.
8> Account does not appear in either the balance sheet or the income statement.
Short-term notes payable
Companies need to consider GAAP regarding fair value measurements when
determining the fair value of an investment that distinguishes between various levels of
inputs to fair value determination. Required:
Describe the various levels of inputs, explaining key aspects that distinguish them, and
indicate which level is most preferred and which is least preferred.
What is an accrued liability?
Presented below is a partial trial balance for the Messenger Corporation at December
31, 2016.
Additional information:
1> The note receivable, along with any accrued interest, is due on November 1, 2017.
2> The note payable is due in 2021. Interest is payable annually.
3> The marketable securities consist of equity securities of other corporations.
Management does not intend to sell any of the securities in the next year.
4> Deferred revenue will be earned equally over the next 18 months. Required:
Determine the company’s working capital (current assets minus current liabilities) at
December 31, 2016.
In its 2016 annual report to shareholders, Kirby Inc. included the following disclosure
regarding its available for sale investments in securities:
Required:
Prepare the journal entry (in thousands) that Kirby made at the end of 2016 to record
the information disclosed above.
Are sellers ever constrained from including variable consideration in the transaction
price used to estimate revenue? Explain, providing indicators of circumstances that
could require that constraint.
The following is an incomplete pension spreadsheet for the current year for Swiss Mist
Corporation.
Required:
1) Complete the pension spreadsheet.
2) Prepare the journal entry to record pension expense for the year.