According to International Financial Reporting Standards, all research and development
expenditures are expensed in the period incurred.
With an annuity due, a payment is made or received on the date the agreement begins.
Income statements prepared according to both U.S. GAAP and International Financial
Reporting Standards require the separate reporting of discontinued operations.
Companies must always use the equity method when they hold between 25% and 50%
of the common stock of an investee.
Both debt and equity securities can be categorized as trading securities.
Securities classified as held to maturity could be reported as either current or long-term
in a classified balance sheet, depending upon their maturity dates.
Goods and services are distinct if they are either capable of being distinct or are
separately identifiable.
Intangible assets usually are reported in the balance sheet as current assets.
The sale of merchandise on account would be recorded in a sales journal.
Adjusting journal entries are recorded at the end of any period when financial
statements are prepared.
Except for tax considerations the potentially dilutive effect of convertible preferred
stock is handled in EPS calculations in much the same way as convertible debt.
Unlike the Social Security tax there is no maximum wage base for the Medicare portion
of the FICA tax.
The post-closing trial balance contains only permanent accounts.
When accounting for multiple-element software arrangements, the revenue for each
element is based on the separate prices stated for each element in the software contract.
Blue Co. has a patent on a communication process. The company has amortized the
patent on a straight-line basis since 2012, when it was acquired at a cost of $36 million
at the beginning of that year. Due to rapid technological advances in the industry,
management decided that the patent would benefit the company over a total of six years
rather than the nine-year life being used to amortize its cost. The decision was made at
the end of 2016 (before adjusting and closing entries). What is the appropriate patent
amortization expense in 2016?
a. $ 4 million.
b. $ 5 million.
c. $10 million.
d. $20 million.
Archie Co. purchased a framing machine for $45,000 on January 1, 2016. The machine
is expected to have a four-year life, with a residual value of $5,000 at the end of four
years. Using the straight-line method, depreciation for 2017 and book value at
December 31, 2017, would be:
a. $10,000 and $20,000.
b. $10,000 and $25,000.
c. $11,250 and $17,500.
d. $11,250 and $22,500.
An investment product promises to pay $42,000 at the end of 10 years. If an investor
feels this investment should produce a rate of return of 12%, compounded annually,
what’s the most the investor should be willing to pay for the investment? a. $ 15,146.
b. $ 13,523.
c. $ 42,000.
d. $130,446.
Which of the following is reported as an operating activity in the statement of cash
flows?
a. The purchase of long-lived assets.
b. The acquisition of treasury stock.
c. The retirement of bonds.
d. The payment of prepaid insurance.
Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.
HHF’s times interest earned ratio is (rounded):
a. 3.47.
b. 1.73.
c. 2.47.
d. 10.0.
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections
on these sales are not reasonably assured, and bad debt losses cannot be reasonably
predicted. It is unlikely that repossessed merchandise is in condition to be re-sold.
Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was
sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in
2016, and $20,000 in 2017.
In 2017, Reliable would recognize gross profit of:
a. $0.
b. $ 6,000.
c. $ 8,000.
d. $20,000.
To evaluate the risk and quality of an individual bond issue, savvy investors rely
heavily on:
a. Bond ratings provided by financial investment services such as Moody’s.
b. Newspaper articles.
c. Bond interest payments.
d. The company’s audit report.
Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31,
2015 for $106,000. Nickel uses straight-line amortization. On May 1, 2016, $10,000 of
the bonds were redeemed at 110. As a result of the retirement, MSG will report:
a. a $467 gain.
b. a $467 loss.
c. a $1,000 gain.
d. a $5,000 loss.
On January 1, 2016, Ozark Minerals issued $20 million of 9%, 10-year convertible
bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is
convertible into 40 shares of Ozark’s no par common stock. Bonds that are similar in all
respects, except that they are nonconvertible, currently are selling at 99. Ozark applies
International Financial Reporting Standards (IFRS). Upon issuance, Ozark should:
a. Credit bonds payable $19,800,000.
b. Credit premium on bonds payable $200,000.
c. Credit equity $200,000.
d. Credit bonds payable $20,200,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers
pay one-third of the sales price of a jet ski when they initially purchase the ski, and then
pay another one-third each year for the next two years. Because Lake has little
information about the ability to collect these receivables, it uses the cost recovery
method to recognize revenue on these installment sales. In 2015, Lake began operations
and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected
$300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales.
In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000.
Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated
with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in
2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2015, Lake would recognize realized gross profit of:
a. $150,000.
b. $0.
c. $300,000.
d. $450,000.
Assume a contract for the sale of goods specifies that payment is to be made 15 months
prior to delivery of a product. The seller is likely to do which of the following with
respect to the time value of money over the life of the contract?
a. Recognize interest expense.
b. Recognize interest revenue.
c. Recognize additional cost of goods sold.
d. Ignore the time value of money.
“VSOE” is necessary to separately recognize revenue in multiple-element contracts for:
a. All service contracts.
b. All product contracts.
c. All contracts that involve at least one non-software element.
d. Software contracts.
The reporting of earnings per share is required only for:
a. Private companies.
b. Companies with complex capital structures.
c. Publicly traded corporations.
d. Medium-sized and large corporations.
In which of the following is the option described not a performance obligation?
a. Customers accumulate points for every dollar spent at Madeline’s Book Store. The
points can be redeemed for books once certain levels are met.
b. Customers can get 5% cash back for every $100 spent on eco-friendly products.
c. Customers can “buy two, get one free” at a menswear store.
d. Upon purchase of any name-brand TV, customers can purchase a 5-year extended
warranty at a 25% discount.
The December 31, 2016 (pre-closing) adjusted trial balance for Kline Enterprises was
as follows:
Required: Assuming no income taxes, compute the following, and place your answer
in the space provided: Kline’s 12/31/16 total shareholders’ equity:
On March 12, 2016, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for
$10,000, subject to terms 2/10, n/30. Admiral uses the gross method of accounting for
sales discounts.
Required:
1> Prepare the journal entry to record the sale.
2> Prepare the journal entry to record receipt of the payment, assuming the correct
amount was received on March 20, 2016.
3> Prepare the journal entry to record receipt of the payment, assuming the correct
amount was received on April 5, 2016.
The following income statement items appeared on the adjusted trial balance of
Foxworthy Corporation for the year ended December 31, 2016 ($ in 000s): sales
revenue, $22,300; cost of goods sold, $14,500; selling expenses, $2,300; general and
administrative expenses, $1,200; dividend revenue from investments, $200; interest
expense, $300. Income taxes have not yet been accrued. The company’s income tax rate
is 40% on all items of income or loss. These revenue and expense items appear in the
company’s income statement every year. The company’s controller, however, has asked
for your help in determining the appropriate treatment of the following nonrecurring
transactions that also occurred during 2016 ($ in 000s). All transactions are material in
amount. 1> Investments were sold during the year at a loss of $300. Foxworthy also had
unrealized losses of $200 for the year on investments.
2> One of the company’s factories was closed during the year. Restructuring costs
incurred were $2,000.
3> During the year, Foxworthy completed the sale of one of its operating divisions that
qualifies as a component of the entity according to GAAP regarding discontinued
operations. The division had incurred operating income of $800 in 2016 prior to the
sale, and its assets were sold at a loss of $1,800.
4> Foreign currency translation gains for the year totaled $600. Required:
Prepare Foxworthy’s single, continuous statement of comprehensive income for 2016,
including earnings per share disclosures. Use a multiple-step income statement format.
Two million shares of common stock were outstanding throughout the year.
Briefly explain when and why intraperiod tax allocation is necessary.
Veras Bus Transportation provides on-campus bus services for universities. On January
1, it enters into a one-year contract with Moose University to operate five bus lines
traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the
last day of each month. In addition, Veras will receive an additional $120,000 at the end
of each six-month period, provided it remains free of accidents. – On January 1, based
on historical experience, Veras estimated that there is a 75% chance that it will remain
free of accidents for the entire year.
– On March 20, three of the most senior drivers at Veras abruptly left. As a result, Veras
had to hire inexperienced drivers to fill the vacant positions. Consequently, Veras
revised its estimate to a 30% chance that it would earn the semiannual bonus.
– On June 30, Moose confirmed that there was no accident between January and June,
so Veras would be entitled to the semiannual bonus. Veras bases estimates of variable
consideration on the most likely amount it expects to receive.
Prepare Veras’ March 31 journal entry to record the revenue earned from March 1 –
March 31, as well as any appropriate adjustments to the revenue already presumed
recorded as earned from January 1 – February 28.
The trial balance of Rollins Inc. included the following accounts as of December 31,
2016:
Rollins had 100,000 shares of stock outstanding throughout the year. Income tax
expense has not yet been accrued. The effective tax rate is 40%.
Required: Prepare a 2016 separate statement of comprehensive income for Rollins Inc.
Olde Corporation provides an executive stock option plan. Under the plan, the company
granted options on January 1, 2016, that permit executives to acquire 2 million of the
company’s $1 par value common shares within the next five years, but not before
December 31, 2017 (the vesting date). The exercise price is the market price of the
shares on the date of the grant, $14 per share. The fair value of the options, estimated by
an appropriate option pricing model, is $2 per option. No forfeitures are anticipated.
Ignore taxes.
Required:
(1) Determine the total compensation cost pertaining to the options, assuming the fair
value approach has been selected.
(2) Prepare the appropriate journal entry to record the award of the options on January
1, 2016.
(3) Prepare the journal entry to record compensation expense on December 31, 2016.
(4) Prepare the journal entry to record compensation expense on December 31, 2017.
The following information, based on the 12/31/16 Annual Report to Shareholders of
Krafty Foods ($ in millions):
Based on the information presented above, prepare the 12/31/16 Balance Sheet for
Krafty Foods.
Which is the correct entry to record compensation expense for the year 2016?
Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2016,
options were granted for 60,000 $1 par common shares. The exercise price equals the
$5 market price of the common stock on the grant date. The options cannot be exercised
before January 1, 2019, and expire December 31, 2020. Each option has a fair value of
$1 based on an option pricing model.
Listed below are five terms followed by a list of phrases that describe or characterize
each of the terms. Match each phrase with the number for the correct term.
