1) Which of the following is true of accounting for changes in estimates?
a.A company recognizes a change in estimate by making a retrospective adjustment to
the financial statements
b.A company accounts for changes in estimates only in the period of change, even
though it affects the future periods
c.Changes in estimates are not carried back to adjust prior years
d.Changes in estimates are considered as errors or extraordinary items
2) Thompson Company incurred research and development costs of $100,000 and legal
fees of $30,000 to acquire a patent. The patent has a legal life of 20 years and a useful
life of 10 years. What amount should Thompson record as Patent Amortization Expense
in the first year?
a.$ -0-
b.$ 3,000
c.$ 6,500
d. $13,000
3) If the beginning inventory for 2014 is overstated, the effects of this error on cost of
goods sold for 2014, net income for 2014, and assets at December 31, 2015,
respectively, are
a.overstatement, understatement, overstatement
b.overstatement, understatement, no effect
c.understatement, overstatement, overstatement
d.understatement, overstatement, no effect
4) When the sum-of-the-years’-digits method is used, depreciation expense for a given
asset will
a.decline by a constant amount each year
b.be the same each year
c.decrease rapidly and then slowly over the life of the asset
d.vary from year to year in relation to changes in output
5) Portugal, Inc. has the following amounts related to its activities for the year ended
December 31, 2015:
Sales to customers $6,250,000
Gain on sale of equipment $ 450,000
Gain on sale of investments $ 950,000
Loss on sale of land $ 300,000
Portugal, Inc. uses IFRS for its external financial reporting. How much revenue should
Portugal, Inc. report on its income statement for the year ended December 31, 2015?
a.$6,250,000
b.$7,200,000
c.$7,650,000
d.$7,350,000
6) Willy World began using dollar-value LIFO for costing its inventory two years ago.
The ending inventory for the past two years in end-of-year dollars was $180,000 and
$270,000 and the year-end price indices were 1.0 and 1.2, respectively. Assuming the
current inventory at end of year prices equals $387,000 and the index for the current
year is 1.25, what is the ending inventory using dollar-value LIFO?
a.$319,500
b.$335,520
c.$342,000
d.$339,750
7) Typical balance sheet classifications are as follows.
a.Current Assetsg.Long-Term Liabilities
b.Investmentsh.Capital Stock
c.Plant Assetsi.Additional Paid-In Capital
d.Intangible Assetsj.Retained Earnings
e.Other Assetsk.Notes to Financial Statements
f.Current Liabilitiesl.Not Reported on Balance Sheet
Indicate by use of the above letters how each of the following items would be classified
on a balance sheet prepared at December 31, 2014 . If a contra account, or any amount
that is negative or opposite the normal balance, put parentheses around the letter
selected. A letter may be used more than once or not at all.
16> Natural resourcetimberlands
17> Deficit (no net income earned since beginning of company)
18> Goodwill
19> 90 day notes payable
20> Investment in bonds of another company; will be held to 2017 maturity
21> Land held for speculation
22> Death of company president
23> Current maturity of bonds payable
24> Investment in subsidiary; no plans to sell in near future
25> Accounts payable
26> Preferred stock ($10 par)
27> Prepaid rent
28> Copyright
29> Accumulated amortization, patents
30> Earnings not distributed to stockholders
1> Accrued salaries and wages
2> Rent revenues for 3 months collected in advance
3> Land used as plant site
4> Equity securities classified as trading
5> Cash
6> Accrued interest payable due in 30 days
7> Premium on preferred stock issued
8> Dividends in arrears on preferred
stock
9> Petty cash fund
10> Unamortized discount on bonds payable due 2017
11> Common stock at par value
12> Bond indenture covenants
13> Unamortized premium on bonds payable due in 2018
14> Allowance for doubtful accounts
15> Accumulated depreciationequipment
8) Revenue is recognized in the accounting period in which the performance obligation
is satisfied. This statement describes the
a.consistency characteristic
b.expense recognition principle
c.revenue recognition principle
d.relevance characteristic
9) A general description of the depreciation methods applicable to major classes of
depreciable assets
a.is not a current practice in financial reporting
b.is not essential to a fair presentation of financial position
c.is needed in financial reporting when company policy differs from income tax policy
d.should be included in corporate financial statements or notes thereto
10) John won a lottery that will pay him $250,000 at the end of each of the next twenty
years. Assuming an appropriate interest rate is 8% compounded annually, what is the
present value of this amount?
a.$2,650,900
b.$53,638
c.$2,454,538
d.$11,440,490
11) When computing diluted earnings per share, convertible securities are
a.ignored
b.recognized only if they are dilutive
c.recognized only if they are antidilutive
d.recognized whether they are dilutive or antidilutive
12) Similarities between IFRS and U.S. GAAP requirements for balance sheet
presentation include all of the following except:
a.Both require that changes to the valuation reserve be disclosed in the notes to the
financial statements
b.Both require disclosure of significant accounting policies
c.Both require the preparation of financial statements annually
d.Both generally require the use of the current/ non-current classification for both assets
and liabilities
13) Farr, Inc. is a multidivisional corporation which has both intersegment sales and
sales to unaffiliated customers. Farr should report segment financial information for
each division meeting which of the following criteria?
a.Segment profit or loss is 10% or more of consolidated profit or loss
b.Segment profit or loss is 10% or more of combined profit or loss of all company
segments
c.Segment revenue is 10% or more of combined revenue of all the company segments
d.Segment revenue is 10% or more of consolidated revenue
14) Which of the following is not a retrospective-type accounting change?
a.Completed-contract method to the percentage-of-completion method for long-term
construction contracts
b.LIFO method to the FIFO method for inventory valuation
c.Sum-of-the-years’-digits method to the straight-line method
d.”Full cost” method to another method in the extractive industry
15) Under IFRS, an entity should initially recognize inventory when
a.it has control of the inventory
b.it expects it to provide future economic benefits
c.the cost of the inventory can be reliably measured
d.All of these choices are correct
16) Jill Morris is presently leasing a small business computer from Eller Office
Equipment Company. The lease requires 10 annual payments of $5,000 at the end of
each year and provides the lessor (Eller) with an 8% return on its investment. You may
use the following 8% interest factors:
9 Periods10 Periods11 Periods
Future Value of 11.999002.158922.33164
Present Value of 1.50025.46319.42888
Future Value of Ordinary Annuity of 112.4875614.4865616.64549
Present Value of Ordinary Annuity of 16.246896.710087.13896
Present Value of an Annuity Due of 16.746647.246897.71008
Instructions
(a)Assuming the computer has a ten-year life and will have no salvage value at the
expiration of the lease, what was the original cost of the computer to Eller?
(b)What amount would each payment be if the ten annual payments are to be made at
the beginning of each period?
17) On January 4, 2014, Kiley Co. leased a building to Dodd Corp. for a ten-year term
at an annual rental of $150,000. At inception of the lease, Kiley received $600,000
covering the first two years’ rent of $300,000 and a security deposit of $300,000. This
deposit will not be returned to Dodd upon expiration of the lease but will be applied to
payment of rent for the last two years of the lease. What portion of the $600,000 should
be shown as a current and long-term liability in Kiley’s December 31, 2014 balance
sheet?
Current LiabilityLong-term Liability
a.$0$600,000
b.$150,000$300,000
c.$300,000$300,000
d.$300,000$150,000
18) Gage Co. purchases land and constructs a service station and car wash for a total of
$360,000. At January 2, 2014, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for $400,000 and immediately
leased from the oil company by Gage. Fair value of the land at time of the sale was
$40,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line
depreciation for its other various business holdings. The economic life of the facility is
15 years with zero salvage value. Title to the facility and land will pass to Gage at
termination of the lease. A partial amortization schedule for this lease is as follows:
Payments InterestAmortization Balance
Jan. 2, 2014$400,000.00
Dec. 31, 2014$65,098.13$40,000.00$25,098.13374,901.87
Dec. 31, 201565,098.1337,490.1927,607.94347,293.93
Dec. 31, 201665,098.1334,729.3930,368.74316,925.19
From the viewpoint of the lessor, what type of lease is involved above?
a.Sales-type lease
b.Sale-leaseback
c.Direct-financing lease
d.Operating lease
19) Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation
between pretax financial income and taxable income as follows:
Pretax financial income$ 800,000
Estimated litigation expense2,000,000
Installment sales (1,600,000)
Taxable income$ 1,200,000
The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is
expected to be paid. The gross profit from the installment sales will be realized in the
amount of $800,000 in each of the next two years. The estimated liability for litigation
is classified as noncurrent and the installment accounts receivable are classified as
$800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years.
The deferred tax liabilitycurrent to be recognized is
a.$120,000
b.$360,000
c.$240,000
d.$480,000