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1) On January 1, 2014, Trent Company granted Dick Williams, an employee, an option
to buy 400 shares of Trent Co. stock for $30 per share, the option exercisable for 5
years from date of grant. Using a fair value option pricing model, total compensation
expense is determined to be $3,600. Williams exercised his option on September 1,
2014, and sold his 400 shares on December 1, 2014 . Quoted market prices of Trent Co.
stock during 2014 were:
January 1$30 per share
September 1$36 per share
December 1$40 per share
The service period is for two years beginning January 1, 2014 . As a result of the option
granted to Williams, using the fair value method, Trent should recognize compensation
expense for 2014 on its books in the amount of
a.$4,000
b.$3,600
c.$1,800
d.$0
2) Which of the following is (are) the proper time period(s) to record the effects of a
change in accounting estimate?
a.Current period and prospectively
b.Current period and retrospectively
c.Retrospectively only
d.Current period only
3) Information about different companies and about different periods of the same
company can be prepared and presented in a similar manner. Comparability and
consistency are related to which of these objectives?
ComparabilityConsistency
a.CompaniesCompanies
b.CompaniesPeriods
c.PeriodsCompanies
d.PeriodsPeriods
4) On July 1, 2014, Nowton Co. purchased machinery for $168,000. Salvage value was
estimated to be $7,000. The machinery will be depreciated over ten years using the
double-declining balance method. If depreciation is computed on the basis of the
nearest full month, Nowton should record depreciation expense for 2015 on this
machinery of
a.$28,980
b.$30,240
c.$30,590
d.$26,880
5) The trial balance before adjustment of Risen Company reports the following
balances:
Dr. Cr.
Accounts receivable$150,000
Allowance for doubtful accounts$ 2,500
Sales (all on credit)850,000
Sales returns and allowances40,000
Instructions
(a)Prepare the entries for estimated bad debts assuming that doubtful accounts are
estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b)Assume that all the information above is the same, except that the Allowance for
Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will
this difference affect the journal entries in part (a)?
(c)What is the theoretical justification for each of the two allowance methods used to
estimate bad debts?
6) Which of the following is a primary quality of useful accounting information?
a.Conservatism
b.Comparability
c.Faithful representation
d.Consistency
7) Financial information demonstrates consistency when
a.firms in the same industry use different accounting methods to account for the same
type of transaction
b.a company changes its estimate of the salvage value of a fixed asset
c.a company fails to adjust its financial statements for changes in the value of the
measuring unit
d.None of these answer choices are correct
8) Which of the following serves as the justification for the periodic recording of
depreciation expense?
a.Association of efforts (expense) with accomplishments (revenue)
b.Systematic and rational allocation of cost over the periods benefited
c.Immediate recognition of an expense
d.Minimization of income tax liability
9) Preparing the statement of cash flows involves all of the following except
determining the
a.cash provided by operations
b.cash provided by or used in investing and financing activities
c.change in cash during the period
d.cash collections from customers during the period
10) A flood damaged a building and contents. Floods are unusual and infrequent in this
area. The receipts from insurance companies totaled $500,000, which was $150,000
less than the book values. The tax rate is 30%.
On the statement of cash flows (indirect method), the flood loss should
a.be shown as an addition to net income of $105,000
b.be shown as an addition to net income of $150,000
c.be shown as an inflow from investing activities of $105,000
d.not be shown
11) Sifton Company reported the following data:
20142015
Sales$3,000,000$3,900,000
Net Income300,000400,000
Assets at year end1,800,0002,500,000
Liabilities at year end1,100,0001,500,000
What is Siftons asset turnover for 2015?
a.1.56
b.1.61
c.1.81
d.2.17
12) Financial accounting standard-setting in the United States
a.can be described as a social process which reflects political actions of various
interested user groups as well as a product of research and logic
b.is based solely on research and empirical findings
c.is a legalistic process based on rules promulgated by governmental agencies
d.is democratic in the sense that a majority of accountants must agree with a standard
before it becomes enforceable
13) The average days to sell inventory is computed by dividing
a.365 days by the inventory turnover ratio
b.the inventory turnover ratio by 365 days
c.net sales by the inventory turnover ratio
d.365 days by cost of goods sold
14) Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible
preferred stock, and $500,000 of 10% convertible bonds outstanding during 2015 . The
preferred stock is convertible into 40,000 shares of common stock. During 2015, Lerner
paid dividends of $.45 per share on the common stock and $1.50 per share on the
preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The
net income for 2015 was $300,000 and the income tax rate was 30%.
Diluted earnings per share for 2015 is (rounded to the nearest penny)
a.$1.14
b.$1.16
c.$1.28
d.$1.33
15) Armstrong Inc. is a calendar-year corporation. Its financial statements for the years
ended 12/31/14 and 12/31/15 contained the following errors:
20142015
Ending inventory$25,000 overstatement$40,000 understatement
Depreciation expense 10,000 understatement 20,000 overstatement
Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income
taxes, by how much will retained earnings at 12/31/15 be overstated or understated?
a.$40,000 overstatement
b.$35,000 overstatement
c.$50,000 understatement
d.$15,000 understatement
16) Discontinued operations of a component of a business are classified as a separate
item in the income statement:
a.after income from continuing operations
b.before income from continuing operations
c.between income from operations and income before income tax
d.immediately after gross profit
