1) At December 31, 2013, DeSoto Company had 500,000 shares of common stock
outstanding. DeSoto sold 50,000 shares on October 1, 2014. Net income for 2014 was
$2,417,875; the income tax rate was 30%. In addition, DeSoto had the following debt
and equity securities on its books on December 31, 2014:
(a) 18,000 shares of $100 par, 12% cumulative preferred stock.
(b) 28,000 shares of $100 par, 10% cumulative preferred stock, par $100, sold at 110.
Each share of preferred stock is convertible into 2 shares of common stock.
(c) $2,000,000 face value of 9% bonds sold at par.
(d) $3,000,000 face value of 7% convertible bonds sold to yield 8%. Unamortized bond
discount is $100,000 at December 31, 2014. Each $1,000 bond is convertible into 20
shares of common stock.
Options to purchase 10,000 shares of common stock were issued May 1, 2014.
Exercise price is $30 per share; market value at date of option was $29; average market
value May 1 to December 31, 2014, was $40.
Compute the earnings per share amounts for the year ended December 31, 2014.
2) Which of the following causes a change in the amount of cash held by a company?
a. Write-off of a bad debt
b. Declaration of a cash dividend
c. Payment of a cash dividend declared in a previous period
d. Declaration and issuance of a stock dividend
3) Lovejoy Co. purchased a patent on January 1, 2011, for $714,000. The patent was
being amortized over its remaining legal life of 15 years expiring on January 1, 2026.
During 2014, Lovejoy determined that the economic benefits of the patent would not
last longer than 10 years from the date of acquisition. What amount should be charged
to patent amortization expense for the year ended December 31, 2014?
a. $47,600
b. $71,400
c. $81,600
d. $142,800
4) A Company showed a large restructuring charge on its income statement in 2014 and
has experienced a constantly rising earnings trend since that time. This would most
nearly represent an example of
a. cookie jar reserves
b. big bath accounting
c. creative acquisition accounting
d. using immaterial transactions to increase reported earnings to meet analysts’
expectations
5) Which of the following ratios would NOT be positively affected by a change from
LIFO to FIFO, assuming that prices are rising?
a. Current ratio
b. Debt to equity ratio
c. Times interest earned
d. Quick ratio
6) Which of the following is the SEC authorized by Congress to do?
a. Only III
b. I and III
c. I and II
d. I, II, and III
7) Kaye Corporation agreed to lease a computer, at cost, to Lumbar Company for
$36,000 payable each year-end for seven years without a bargain purchase option, or, as
an equivalent alternative, for $33,000 per year with a bargain purchase option, after the
seventh rental. If the lease is a direct financing lease, and Kaye expects to earn a 12
percent return, the amount of cash Lumbar Company would need to pay for the bargain
purchase option is
a. $30,266
b. $26,340
c. $21,000
d. $9,948
8) Which of the following is NOT a change in reporting entity?
a. A company acquires a subsidiary that is to be accounted for as a purchase
b. A company presents consolidated or combined statements in place of statements of
individual companies
c. A company changes the companies included in combined financial statements
d. A company changes the subsidiaries for which consolidated statements are presented
9) Which of the following is an example of a temporary difference that could result in a
deferred tax asset?
a. Gain on disposal of an asset when included in taxable income before it is included in
pretax accounting income
b. Use of straight-line depreciation for accounting purposes and an accelerated rate for
income tax purposes
c. Gross margin on installment sales is recognized for accounting purposes before it is
included in taxable income in the income tax return
d. Prepayments of expenses in year of payment; recognition of expense for accounting
purposes occurs in a later year
10) The amount reported as “Cash” on a company’s balance sheet normally should
exclude
a. postdated checks that are payable to the company
b. cash in a payroll account
c. undelivered checks written and signed by the company
d. petty cash
11) On August 1, Patron Company recorded purchases of inventory of $80,000 and
$100,000 under credit terms of 2/15, net 30. The payment due on the $80,000 purchase
was remitted on August 14. The payment due on the $100,000 purchase was remitted on
August 29. Under the net method and the gross method, these purchases should be
included at what respective net amounts in the determination of cost of goods available
for sale?
Net Method Gross Method
a. $178,400 $176,400
b. $176,400 $176,400
c. $176,400 $178,400
d. $180,000 $176,400
12) See information for Lantern, Inc.above. Given this information, what is the ending
inventory if the periodic LIFO costing alternative is used?
a. $400
b. $500
c. $1,250
d. $3,100
13) Information obtained prior to the issuance of the current periods financial
statements of a company indicates that it is probable that, at the date of the financial
statements, a liability will be incurred for obligations related to product warranties on
products sold during the current period. During the past three years, product warranty
costs have been approximately 1 1/2 percent of annual sales revenue.
An estimated loss contingency should be
a. neither accrued nor disclosed in the financial statements
b. recognized as an appropriation of retained earnings
c. accrued in the accounts and reported in the financial statements
d. disclosed in the financial statements but not accrued
14) If a company anticipates a 40% increase in sales volume, then it is most likely that
the company will need about a 40% increase in
a. property, plant, and equipment
b. accounts payable
c. bank loans payable
d. operating profit
15) Blue Ice Inc. compensates its employees for certain absences. Employees can
receive one day vacation plus one day sick leave for each month worked during the
year. Unused vacation days may be carried forward, but unused sick leave expires
within the year of employment. Employees are compensated according to their current
pay rate. The following data were taken from the records for the year 2014.
Earned Carry
Starting Sick Leave Forward Vacation Days Current Pay
Employee Date Taken 2014 1/1/14 Taken 2014 per Day
A. Alonso 1/6/12 5 0 7 $70
V. Halen 6/2/13 10 6 3 60
C. Chase 11/4/14 5 0 0 48
B. Guy 7/28/14 2 0 1 79
Compute the amount that should be reported as a liability for compensated absences on
December 31, 2014.
16) Which of the following research and development related costs should be
capitalized and amortized over current and future periods?
a. Labor and material costs incurred in building a prototype model
b. Cost of testing equipment that will also be used in another separate research and
development project scheduled to begin next year
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research
project currently in process
17) Goods on consignment should be included in the inventory of
a. the consignor but not the consignee
b. both the consignor and the consignee
c. the consignee but not the consignor
d. neither the consignor nor the consignee
18) Meteor Motor Sales exchanged a car from its inventory for a computer to be used as
a noncurrent operating asset. The following information relates to this exchange that
took place on July 31, 2014:
The exchange has commercial substance.
On July 31, 2014, how much profit should Meteor recognize on this exchange?
a. $0
b. $8,000
c. $10,000
d. $13,000
19) A firm purchased bonds to be classified as an investment in securities
available-for-sale. The bonds were purchased at a premium. Assume the market price of
the bond is volatile. Given these facts, which of the following is correct?
a. Less cash interest is received each year than interest revenue is recognized
b. The ending valuation allowance account balance will depend on ending market value
and original cost
c. The ending valuation allowance account balance will depend on ending market value
and original cost adjusted for amortization of premium
d. The premium is ignored because the bonds are not classified as held-to-maturity
20) Which of the following is NOT a source of support for the realization of a deferred
tax asset?
a. Future taxable temporary differences
b. Future deductible temporary differences
c. Past taxable income within the carryback period
d. Future taxable income
21) Basic earnings per share represents the amount of earnings attributable to
a. all common stock and dilutive securities
b. common stock, preferred stock, and all dilutive securities
c. each share of common stock, and options or warrants which convert to common
stock
d. each share of common stock outstanding, and any non-conditional conversions and
exercises
22) On January 1, 2014, Suppose Company paid property taxes on its plant for the
calendar year 2014 amounting to $70,000. In March 2014, Suppose made its annual
major repairs to its machinery amounting to $210,000. These repairs will benefit the
entire calendar years operations.
How should these expenses be reflected in Supposes quarterly income statements for
2014?
Three Months Ended (2014)
March 31 June 30 September 30 December 31
a. $280,000 $0 $0 $0
b. $130,000 $ 50,000 $ 50,000 $50,000
c. $ 70,000 $ 70,000 $ 70,000 $70,000
d. $ 87,500 $ 87,500 $ 87,500 $87,500
23) Weaver Corporation was organized on January 1, 2013, at which date it issued
100,000 shares of $10 par common stock at $15 per share. During the period January 1,
2013, through December 31, 2015, Weaver reported net income of $450,000 and paid
cash dividends of $230,000. On January 10, 2015, Weaver purchased 6,000 shares of its
common stock at $12 per share. On December 31, 2015, Weaver sold 4,000 treasury
shares at $8 per share. Weaver uses the cost method of accounting for treasury shares.
What is Weaver’s total stockholders’ equity on December 31, 2015?
a. $1,720,000
b. $1,704,000
c. $1,688,000
d. $1,680,000
24) Under international accounting standards, cash received from dividends (associated
with dividend revenue) can be shown on the statement of cash flows as
a. an operating or a financing activity
b. a financing activity only
c. a financing or an investing activity
d. an investing activity only
25) When computing dilutive EPS, the treasury stock method can be used for all of the
following except
a. stock warrants
b. convertible preferred stock
c. stock options
d. stock rights
26) Investment securities held for the purpose of retiring bonds should be classified on
a balance sheet as
a. investments
b. current assets
c. deferred bond liability
d. intangible assets
27) Historical cost has been the valuation basis most commonly used in accounting
because of its
a. timelessness
b. conservatism
c. reliability
d. accuracy
28) Which of the following temporary differences ordinarily creates a deferred tax
asset?
a. Accrued warranty costs
b. Depreciation
c. Installment sales
d. Prepaid insurance
29) Your friend has just purchased one hundred shares of the common stock of the
Davidson Corporation. Your friend notices that the company shows an amount of
$5,000,000 labeled as bond payable in the balance sheet. You have just recently
received your license as a CPA and your friend has come to you for advice. She begins
by asking: What are bonds payable and what should I know about them in terms of my
investment in Davidson Corporation?
Required:
How would you respond to the question posed by your friend?
30) Eastwood Manufacturing planned to claim a $10,000 credit for increasing research
activities (an R & D credit) on its 2014 income tax return. Although some portion of the
credit is at risk, management believes that it is more likely than not that the reporting
entity will qualify for all or a portion of the R & D credit. As a result, recognition will
be limited to only a portion of the amount claimed on the Companys income tax return.
Given that the credit meets the more-likely-than-not threshold, management must
measure
the amount to be recognized. Accordingly, management has estimated the range of
possible outcomes regarding the amount of the credit to be allowed, and the related
likelihoods, as follows:
Required:
1> Determine the amount of the tax position that would be recognized in Eastwood
Manufacturings financial statements.
2> Determine the amount of the liability for unrecognized income tax benefits that
would appear on Eastwood Manufacturings balance sheet.
31) One of the five techniques of earnings management identified by the Securities and
Exchange Commission relates to materiality. Independent auditors have traditionally
used arbitrary quantitative benchmarks to define how large an amount must be to be
considered material.
During the course of auditing the financial statements of a company, an auditor finds
some misstatements in the client’s financial statements. When combined, the
misstatements, result in a 4% overstatement of net income and a $.02 (4%)
overstatement of earnings per share. The auditor’s materiality threshold is 5%, that is,
an item in the financial statements must be misstated by more than 5% to be considered
a material deviation from generally accepted accounting principles. On the basis of the
established materiality threshold, the auditor concludes that the deviation from GAAP is
immaterial and the accounting is permissible.
Define the term “materiality” and explain whether the auditor is justified in the
conclusion that the accounting proposed by the client is permissible.
32) Thunder Cycles Corporation disclosed the following information related to its
selling activities and receivable balances:
Required:
1> Determine the ending gross accounts receivable balance for 2013 and 2014.
2> Did the accounts receivable turnover rise or fall from 2013 to 2014 and by how
much?
3> Compute the age of accounts receivable for 2013 and 2014. Comment on the factors
that might have caused the two ratios to change in 2014.
4> What effect does a significant increase in bad debt expense have on accounts
receivable turnover and age of accounts receivable? Explain the effect in both real and
economic terms.
33) Smart Services computed pretax financial income of $220,000 for its first year of
operations ended December 31, 2014. In preparing the income tax return for the year,
the tax accountant determined the following differences between 2014 financial income
and taxable income:
The temporary difference is expected to reverse in the following pattern:
34) Mayordomo, Inc., has several operating divisions. In September 2014, the
management of Mayordomo decided on a formal plan to sell one of its divisions. This
division is considered a separate component as defined by SFAS No. 144.
The sale was completed on December 10, 2014, at which time the division was sold for
$800,000. The book value of the assets of the division was $1,000,000. The before-tax
operating loss of the division for the period January 1, 2014 to the date of disposal was
$130,000. The companys tax rate is 40%. The after-tax income from continuing
operations for 2014 was $350,000.
Prepare a partial income statement for 2014 beginning with income from continuing
operations. Ignore EPS disclosures.
35) Ondular Technologies is involved in cancer research. Ondular is involved in a
number of lawsuits related to their operations. For each case, indicate the disclosure that
should be provided by Ondular Technologies in the annual financial statement.
36) Rodeo Corporation reported depreciation of $450,000 on its 2014 tax return.
However, in its 2014 income statement, Rodeo reported depreciation of $300,000,as
well as $30,000 interest revenue on tax-free bonds. The difference in depreciation is
only a temporary difference, and it will reverse equally over the next three years.
Rodeo’s enacted income tax rates are as follows:
What amount should be included in the deferred income tax liability in Rodeo’s
December 31, 2014, balance sheet?
a. $52,500
b. $45,000
c. $30,000
d. $37,500
37) The Yoder Supply Company sells maintenance contracts to the purchasers of the
equipment they sell. The cost of the contract is $1,450, payable at the signing of the
contract. The contract covers a three-year period with regularly scheduled inspection
visits (every six months) plus any emergency visits. Experience shows that, on the
average, one emergency visit per contract is required each year. Assume that 2,200
contracts were sold in 2014 and that contract sales were made evenly over the year.
Give the entries required for 2014 and 2015 to account for the 2,200 contracts.
38) The inventory account of Offearl Company at December 31, 2014, included the
following items:
Based on this information, the inventory account at December 31, 2014, should be
reduced by what amount?