1) If a unit of inventory has declined in value below original cost, but the market value
exceeds net realizable value, the amount to be used for purposes of inventory valuation
is
a.net realizable value
b.original cost
c.market value
d.net realizable value less a normal profit margin
2) A series of equal receipts at equal intervals of time when each receipt is received at
the beginning of each time period is called an
a.ordinary annuity
b.annuity in arrears
c.annuity due
d.unearned receipt
3) Murphy Company purchased equipment for $300,000 on January 2, 2014, its first
day of operations. For book purposes, the equipment will be depreciated using the
straight-line method over three years with no salvage value. Pretax financial income
and taxable income are as follows:
2014 2015 2016
Pretax financial income$224,000$260,000$300,000
Taxable income194,000260,000330,000
The temporary difference between pretax financial income and taxable income is due to
the use of accelerated depreciation for tax purposes.
Instructions
(a)Prepare the journal entries to record income taxes for all three years (expense,
deferrals, and liabilities) assuming that the enacted tax rate applicable to all three years
is 30%.
(b)Prepare the journal entries to record income taxes for all three years (expense,
deferrals, and liabilities) assuming that the enacted tax rate as of 2014 is 30% but that in
the middle of 2015, Congress raises the income tax rate to 35% retroactive to the
beginning of 2015 .
4) At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a
deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and
the enacted tax rate is 40%. The following items are included in Elephants pre-tax
income:
What is Elephant, Inc.s taxable income for 2015?
a.$ 750,000
b.$ 630,000
c.$ 870,000
d.$1,130,000
5) Stemway Company requires a new manufacturing facility. It found three locations;
all of which would provide the needed capacity, the only difference is the price.
Location A may be purchased for $500,000. Location B may be acquired with a down
payment of $100,000 and annual payments at the end of each of the next twenty years
of $50,000. Location C requires $40,000 payments at the beginning of each of the next
twenty-five years. Assuming Stemway’s borrowing costs are 8% per annum, which
option is the least costly to the company?
a.Location A
b.Location B
c.Location C
d.Location A and Location B
6) In computing earnings per share, the equivalent number of shares of convertible
preferred stock are added as an adjustment to the denominator (number of shares
outstanding). If the preferred stock is cumulative, which amount should then be added
as an adjustment to the numerator (net earnings)?
a.Annual preferred dividend
b.Annual preferred dividend times (one minus the income tax rate)
c.Annual preferred dividend times the income tax rate
d.Annual preferred dividend divided by the income tax rate
7) On January 15, 2014, Dolan Corp. adopted a plan to accumulate funds for
environmental improvements beginning July 1, 2018, at an estimated cost of
$6,000,000. Dolan plans to make four equal annual deposits in a fund that will earn
interest at 10% compounded annually. The first deposit was made on July 1, 2014 .
Future value factors are as follows:
Future value of 1 at 10% for 5 periods1.61
Future value of ordinary annuity of 1 at 10% for 4 periods4.64
Future value of annuity due of 1 at 10% for 4 periods5.11
Dolan should make four annual deposits of
a.$1,067,426
b.$1,174,168
c.$1,293,103
d.$1,500,000
8) Emley Company has been using the LIFO method of inventory valuation for 10
years, since it began operations. Its 2014 ending inventory was $50,000, but it would
have been $75,000 if FIFO had been used. Thus, if FIFO had been used, Emley’s
income before income taxes would have been
a.$25,000 greater over the 10-year period
b.$25,000 less over the 10-year period
c.$25,000 greater in 2014
d.$25,000 less in 2014
9) Interim financial reporting has become an important topic in accounting. There has
been considerable discussion as to the proper method of reflecting results of operations
at interim dates. Accordingly, the Accounting Principles Board issued an opinion
clarifying some aspects of interim financial reporting.
Instructions
(a)Discuss generally how revenue should be recognized at interim dates and specifically
how revenue should be recognized for industries subject to large seasonal fluctuations
in revenue and for long-term contracts using the percentage-of-completion method at
annual reporting dates.
(b)Discuss generally how product and period costs should be recognized at interim
dates. Also discuss how inventory and cost of goods sold may be afforded special
accounting treatment at interim dates.
(c)Discuss how the provision for income taxes is computed and reflected in interim
financial statements.
10) During 2015, a construction company changed from the completed-contract method
to the percentage-of-completion method for accounting purposes but not for tax
purposes. Gross profit figures under both methods for the past three years appear
below:
Completed-ContractPercentage-of-Completion
2013$ 475,000$ 900,000
2014625,000950,000
2015 700,000 1,050,000
$1,800,000$2,900,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change
on prior periods should be reported by a credit of
a.$660,000 on the 2015 income statement
b.$450,000 on the 2015 income statement
c.$660,000 on the 2015 retained earnings statement
d.$450,000 on the 2015 retained earnings statement
11) On March 1, Imhoff Co. began construction of a small building. Payments of
$400,000 were made monthly for four months beginning March 1 . The building was
completed and ready for occupancy on June 1 . In determining the amount of interest
cost to be capitalized, the weighted-average accumulated expenditures are
a.$200,000
b.$400,000
c.$800,000
d.$1,600,000
12) The amortization of bond premium on long-term debt should be presented in a
statement of cash flows (using the indirect method for operating activities) as a(n)
a.addition to net income
b.deduction from net income
c. investing activity
d.financing activity
13) Loazia Inc. incurred the following costs during the year ended December 31, 2015:
Laboratory research aimed at discovery of new knowledge$230,000
Costs of testing prototype and design modifications75,000
Quality control during commercial production, including routine testing
of products270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use360,000
The total amount to be classified and expensed as research and development in 2015 is
a.$635,000
b.$935,000
c.$665,000
d.$365,000
14) On December 30, 2014, AGH, Inc. purchased a machine from Grant Corp. in
exchange for a zero-interest-bearing note requiring eight payments of $90,000. The first
payment was made on December 30, 2014, and the others are due annually on
December 30 . At date of issuance, the prevailing rate of interest for this type of note
was 11%. Present value factors are as follows:
Present Value of OrdinaryPresent Value of
PeriodAnnuity of 1 at 11%Annuity Due of 1 at 11%
74.7125.231
85.1465.712
On AGH’s December 31, 2014 balance sheet, the net note payable to Grant is
a.$424,080
b.$463,140
c.$471,195
d.$514,080
15) Dole Corp.’s accounts payable at December 31, 2014, totaled $750,000 before any
necessary year-end adjustments relating to the following transactions:
On December 27, 2014, Dole wrote and recorded checks to creditors totaling $350,000
causing an overdraft of $100,000 in Dole’s bank account at December 31, 2014 . The
checks were mailed out on January 10, 2015 .
On December 28, 2014, Dole purchased and received goods for $150,000, terms 2/10,
n/30. Dole records purchases and accounts payable at net amounts. The invoice was
recorded and paid January 3, 2015 .
Goods shipped f.o.b. destination on December 20, 2014 from a vendor to Dole were
received January 2, 2015 . The invoice cost was $65,000.
At December 31, 2014, what amount should Dole report as total accounts payable?
a.$1,312,000
b.$1,247,000
c.$1,000,000
d.$900,000
16) Plant assets may properly include
a.deposits on machinery not yet received
b.idle equipment awaiting sale
c.land held for possible use as a future plant site
d.None of these answers are correct
17) What would you pay for an investment that pays you $30,000 at the beginning of
each year for the next ten years? Assume that the relevant interest rate for this type of
investment is 10%.
a.$184,335
b.$202,771
c.$194,853
d.$214,338