When bonds are sold at a premium and the effective interest method is used, at each
subsequent interest payment date, the cash paid is:
a. Less than the effective interest.
b. Equal to the effective interest.
c. Greater than the effective interest.
d. More than if the bonds had been sold at a discount.
During the current year, East Corporation had 2 million shares of common stock
outstanding. Two thousand 8% convertible bonds, each with $1,000 face value, were
issued at face amount at the beginning of the year. East reported income before tax of
$3 million and net income of $1.8 million for the year. Each bond is convertible into 10
shares of common stock. What is diluted EPS (rounded)?
a. $0.90.
b. $0.95.
c. $0.89.
d. $0.94.
Which of the following changes should be accounted for using the retrospective
approach?
a. A change in the estimated useful life of a depreciable asset.
b. A change from straight-line to declining balance depreciation.
c. A change from completed-contract method of accounting for long-term construction
contracts.
d. A change to LIFO method of costing inventories.
On January 1, 2016, Red Inc. issued stock options for 200,000 shares to a division
manager. The options have an estimated fair value of $6 each. To provide additional
incentive for managerial achievement, the options are not exercisable unless divisional
revenue increases by 6% in three years. Red initially estimates that it is probable the
goal will be achieved. Ignoring taxes, what is compensation expense for 2016?
a. $ 0.
b. $ 200,000.
c. $ 400,000.
d. $1,200,000.
Company A is identical to Company B in every regard except that Company A uses
FIFO and Company B uses LIFO. In an extended period of rising inventory costs,
Company A’s gross profit and inventory turnover ratio, compared to Company B’s,
would be:
Lake Incorporated purchased all of the outstanding stock of Huron Company paying
$950,000 cash. Lake assumed all of the liabilities of Huron. Book values and fair values
of acquired assets and liabilities were:
Lake would record goodwill of:
a. $ 0.
b. $ 75,000.
c. $445,000.
d. $250,000.
The shareholders’ ‘equity section of Time Company”s comparative balance sheets for
the years ended December 31, 2016 and 2015, reported the following data:
($ in millions)
2016 2015
Common stock, $1 par per share $612 $600
Paid-in capital ‘“ excess of par 348 300
Retained earnings 628 600
During 2016, Time declared and paid cash dividends of $90 million. The company also
declared and issued a stock dividend. No other changes occurred in shares outstanding
during 2016. What was Time”s net income for 2016?
a. $ 28 million
b. $118 million
c. $130 million
d. $178 million
Calistoga Produce estimates bad debt expense at ½% of credit sales. The company
reported accounts receivable and allowance for uncollectible accounts of $471,000 and
$1,650, respectively, at December 31, 2015. During 2016, Calistoga’s credit sales and
collections were $315,000 and $319,000, respectively, and $1,720 in accounts
receivable were written off. The balance in accounts receivable at the beginning of 2016
was $300. During 2016, $1,600 of credit sales were recorded. If the ending balance in
accounts receivable was $250 and $100 in accounts receivable were written off during
the year, the amount of cash collected from customers during 2016 was:
a. $1,600.
b. $1,650.
c. $1,550.
d. $1,900.
El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest.
Recently, four of the stores have experienced declining profits due to market saturation
in the area. As a result, management gathered data about possible impairment of the
assets of the stores. The information gathered was as follows: Book value: $17.5
million
Fair value: $14.9 million
Undiscounted sum of future cash flows: $16.5 million Required:
Determine the amount, if any, of the impairment loss that El Dorado must recognize on
these assets.
Eagle Company issued 10-year bonds at 96 during the current year. In the year-end
financial statements, the discount should be:
a. Deducted from bonds payable.
b. Added to bonds payable.
c. Included as an expense in the year of issue.
d. Reported as a deferred charge.
Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016
under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts.
What would be the journal entry made in 2015 to record revenue?
Swift Drug Company is being sued this year for a wrongful death due to violation of
FDA rules. There is no doubt that Swift is guilty and the settlement is reasonably
estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain
how Swift would address this in its current year financial statements.
Littleton Company uses a periodic inventory system and the LIFO retail method to
estimate its ending inventories. The following partial data has been summarized for
December 31, 2016:
Required:
Determine the cost-to-retail percentage used by Littleton. Assume stable retail prices
during the period.
McLean Mfg. Company sold a three-speed lathe for $24,000 cash. The lathe cost
$66,200 and had a book value of $23,200.
Required:
Prepare the journal entry to record the sale.
Calegari Mining paid $2 million to obtain the rights to operate a coal mine in
Tennessee. Costs of exploring for the coal deposit totaled $1,500,000, and development
costs of $5 million were incurred in preparing the mine for extraction, which began on
January 2, 2016. After the coal is extracted in approximately five years, Calegari is
obligated to restore the land to its original condition. The company’s controller has
provided the following three cash flow possibilities for the restoration costs:
The company’s credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends
on December 31.
Required:
1> What is the initial cost of the coal mine? (Round computations to nearest whole
dollar.)
2> How much accretion expense will Calegari report in its 2016 and 2017 income
statements?
3> What is the book value of the asset retirement obligation that Calegari will report in
its 2016 and 2017 balance sheets?
4> Assume that actual restoration costs incurred in 2021 totaled $1,370,000. What
amount of gain or loss will Calegari recognize on retirement of the liability?