Return on shareholders’ equity is increased if a firm can maintain its return on assets but
increase its leverage.
Material restructuring costs are reported as an element of income from continuing
operations.
A disclosure note is required for all material loss contingencies for which the
probability of loss is reasonably possible.
The FASB’s required accounting treatment for research and development costs often
understates both net income and assets.
The balance of net receivables represents the amount expected to be collected.
On a sale-leaseback transaction, any gain on the ‘sale” portion of the transaction is
recognized immediately.
Restrictions on retained earnings must be disclosed in the body of the balance sheet.
The interest expense on an installment note decreases with each periodic payment.
Under current GAAP, fair value is used to measure the components of all nonmonetary
exchanges.
Subsequent events are significant developments that take place after a firm’s year-end,
and after the financial statements are issued or available to be issued.
A decrease in the receivables turnover ratio indicates a decrease in the time between
credit sales and cash collection.
Under IFRS, revenue from product sales is recognized when the risks and rewards of
ownership have been transferred to the customer.
Under IFRS, the term “probable” indicates a threshold of probability that is
substantially more than a 50 percent chance of occurrence.
If the direct method is used to report cash flows from operating activities in the body of
the statement of cash flows, a reconciliation of net income to net cash flows from
operating activities also is required.
One of the advantages of group and composite methods is that gains and losses on the
disposal of individual assets need not be computed.
Net unrealized holding gains (losses) are reported in the income statement for trading
securities.
FIFO periodic and FIFO perpetual always produce the same amounts for cost of goods
sold.
When the right of return exists, revenue can be recognized at the point of sale if the
seller can make reliable estimates of future returns.
After an unadjusted trial balance is prepared, the next step in the accounting processing
cycle is the preparation of financial statements.
Intraperiod tax allocation is the process of associating income tax effects with the
income statement components that create those effects.
A decrease in cash dividends payable means that dividends declared were less than
dividends paid.
Under IFRS No. 9, debt investments are classified as either “amortized cost” or “fair
value through profit and loss (FVTPL).”
Any method of depreciation should be both systematic and rational.
The first disclosure note to the financial statements is typically the summary of
significant accounting policies.
The post-closing trial balance contains only permanent accounts.
Bentz Corporation bought and sold several securities during 2013. Listed below is a
summary of the transactions:
Required:
Prepare the journal entries for the above transactions. Show calculations.
A net pension asset is the excess of the projected benefit obligation over the plan assets.
Losses on reduction to LCM may be charged to either cost of goods sold or to a current
loss account.
Periodic interest expense is the stated interest rate times the amount of debt outstanding
during the period.
Refer to the following lease amortization schedule. The five payments are made
annually starting with the inception of the lease. A $2,000 bargain purchase option is
exercisable at the end of the five-year lease. The asset has an expected economic life of
eight years.
What would the lessee record as annual depreciation on the asset using the straight-line
method, assuming no residual value? A. $3,325.
B. $6,920.
C. $4,325.
D. $5,320.
Common shareholders usually have all of the following rights except: A. To share in the
profits.
B. To share in assets upon liquidation.
C. To elect a board of directors.
D. To participate in the day-to-day operations.
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book
value and the fair value of the old equipment were $82,000 and $90,000, respectively.
Assuming that the exchange has commercial substance, Alamos would record a gain/
(loss) of: A. $26,000.
B. $8,000.
C. $(8,000).
D. $0.
Which of the following is one of the steps for recognizing revenue? A. Identify the
separate performance obligations of the contract.
B. Determine whether bad debts can be reasonably estimated.
C. Estimate the total transaction price of the contract based on fair value.
D. Allocate all revenue to the performance obligation with the largest standalone selling
price.
In a statement of cash flows using the indirect method, an increase in available-for-sale
securities due to an increase in their fair value should be reported as: A. A deduction
from net income in determining cash flows from operating activities.
B. An addition to net income in determining cash flows from operating activities.
C. An investing activity.
D. Not reported.
Assume a payment is made nine months after 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. Ignore the time value of money.
D. None of the other answers is correct
Colombo Enterprises has a defined benefit pension plan. At the end of the reporting
year, the following data were available: beginning PBO, $75,000; service cost, $14,000;
interest cost, $6,000; benefits paid for the year, $9,000; ending PBO, $89,000; and the
expected return on plan assets, $10,000. There were no other pension-related costs. The
journal entry to record the annual pension costs will include a debit to pension expense
for: A. $20,000.
B. $15,000.
C. $12,000.
D. $10,000.
Which of the following does not apply to secondary markets? A.Transactions are
important to the efficient allocation of resources in our economy.
B.New resources are provided when shares of stock are sold by the corporation to the
initial owners.
C.Transactions help to establish market prices for additional shares that may be issued
in the future.
D.Many investors might be unwilling to provide resources to corporations if there is no
available mechanism for the future sale of their stocks and bonds to others.
Baker Inc. acquired equipment from the manufacturer on 10/1/2013 and gave a
noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2014
to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its
2013 year-end financial statements, what is its imputed annual interest rate? A. 2%.
B. 4%.
C. 6%.
D. None of the above is correct.
The purpose of assigning accounts receivable is to: A. Satisfy a court order.
B. Complete the legal prerequisites to record their sale.
C. Comply with form and content rules of bankruptcy proceedings.
D. Provide collateral for a loan.
Which of the following causes a temporary difference between taxable and pretax
accounting income? A. Investment expenses incurred to generate tax-exempt income.
B. MACRS used for depreciating equipment.
C. The dividends received deduction.
D. Life insurance proceeds received due to the death of an executive.
When the investor’s level of influence changes, it may be necessary to change from the
equity method to another method. When the level of ownership falls from a range of
20% to 50% to less than 20%, the equity method typically would be discontinued and
the investment account balance would be carried over at: A. Amortized cost on the date
of ownership change.
B. Fair value on the date of ownership change.
C. Discounted present value on the date of ownership change.
D. The current balance, and this balance would serve as the new “cost.”
Listed below are 5 terms followed by a list of phrases that describe or characterize each
of the terms. Match each phrase with the correct term. 1)LIFO liquidation
2)Perpetual inventory system
3)Freight-in
4)LIFO pools
5)Physical flow
A. Reduces the quality of current period earnings information
B. Units grouped according to similarities
C. Continuously records changes in inventory
D. Considered a product cost
E. Captured by FIFO for perishable products
The normal treatment of litigation costs to successfully defend an intangible right under
U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:
A. Option a
B. Option b
C. Option c
D. Option d
Wilson Inc. developed a business strategy that uses stock options as a major
compensation incentive for its top executives. On January 1, 2013, 20 million options
were granted, each giving the executive owning them the right to acquire five $1 par
common shares. The exercise price is the market price on the grant date$10 per share.
Options vest on January 1, 2017. They cannot be exercised before that date and will
expire on December 31, 2019. The fair value of the 20 million options, estimated by an
appropriate option pricing model, is $40 per option. Ignore income tax.
What would be the total compensation indicated by these options? A. $3 million.
B. $27 million.
C. $8 million.
D. $35 million.
When bonds are retired prior to their maturity date: A. GAAP has been violated.
B. The issuing company probably will report an ordinary gain or loss.
C. The issuing company probably will report an extraordinary gain or loss.
D. The issuing company will report a non-operating gain or loss.
When an investor classifies an investment in common stock as securities available for
sale, cash dividends are classified by the investor as: A. A return of capital.
B. A loss.
C. A deduction from the investment account.
D. Dividend income.
Using the direct method, cash received from customers is calculated as sales: A. On
account.
B. On account plus cash sales.
C. Plus an increase in accounts receivable.
D. Plus a decrease in accounts receivable.
How is the amortization of patents reported in a statement of cash flows that is prepared
using the direct method? A. Not reported.
B. An increase in cash flows from operating activities.
C. A decrease in cash flows from operating activities.
D. A decrease in cash flows from investing activities.
A firm reported salary expense of $239,000 for the current year. The beginning and
ending balances in salaries payable were $40,000 and $15,000, respectively. What was
the amount of cash paid for salaries? A. $214,000.
B. $289,000.
C. $264,000.
D. $239,000.
Excerpts from Hulkster Company’s December 31, 2013 and 2012, financial statements
are presented below:
Hulkster’s 2013 asset turnover is (rounded): A. 3.73.
B. 2.79.
C. 2.24.
D. 0.46.
Listed below are five terms followed by a list of phrases that describe or characterize
each of the terms. Match each phrase with the most correct term. 1) Additional
conditions for lessor in nonoperating leases
2) Gross method
3) Depreciation period over useful life
4) Requires disclosure only
5) Bargain purchase option
A. Typically used by lessor but not lessee
B. Contingent rentals
C. Title transfers to lessee
D. Consistent with the realization principle
E. Purchase price sufficiently less than the expected fair value when exercised
For its first year of operations, Tringali Corporation’s reconciliation of pretax
accounting income to taxable income is as follows:
Tringali’s tax rate is 40%.
What should Tringali report as its income tax expense for its first year of operations? A.
$120,000.
B. $114,000.
C. $106,000.
D. $8,000.
Listed below are five terms followed by a list of phrases that describe or characterize
each of the terms. Match each phrase with the correct term by placing the letter
designating the best term in the space provided by the phrase. 1) AICPA
2) Accounting Principles Board
3) Securities and Exchange Commission
4) Conservatism
5) Financial Accounting Standards Board
A. Its EITF Issues are GAAP when entered in the Accounting Standards Codification.
B. It established GAAP before the FASB.
C. Undermines representational faithfulness by being inconsistent with neutrality.
D. It is the national organization for CPAs in the United States
E. It has the authority to set U.S. accounting standards.
Which of the following is not among the criteria for classifying a lease as a capital
lease? A. The agreement specifies that ownership of the asset transfers to the lessee.
B. The agreement contains a bargain purchase option.
C. The noncancelable lease term is equal to 90% or more of the expected economic life
of the asset.
D. The present value of the minimum lease payments is equal to or greater than 90% of
the fair value of the asset.
The fair value of debt securities not regularly traded can be most reasonably
approximated by:A. Calculating the discounted present value of the principal and
interest payments.
B. Determining the value using similar securities in the NASDAQ market.
C. Using the relative fair value method.
D. Calling a licensed and registered stockbroker.
Which of the following is typically characterized as a principle, rather than an
assumption? A.Periodicity.
B.Monetary unit.
C.Conservatism.
D.Full disclosure.
On December 15, 2013, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for
$4,500,000. Rigsby appropriately uses the installment sale method of accounting for
this transaction. Terms called for a down payment of $500,000 with the balance in two
equal annual installments payable on December 15, 2014, and December 15, 2015.
Ignore interest charges. Rigsby has a December 31 year-end.
In 2014, Rigsby would recognize realized gross profit of: A. $0.
B. $450,000.
C. $300,000.
D. $400,000.
A net operating loss (NOL) carryforward cannot result in the balance sheet at the end of
the NOL year showing: A. A receivable under current assets for an income tax refund.
B. A current deferred tax asset.
C. A noncurrent deferred tax asset.
D. Both a current and a noncurrent deferred tax asset.
An example of a contra account is: A. Depreciation expense.
B. Accounts receivable.
C. Sales revenue.
D. Accumulated depreciation.
When a business makes an end-of-period adjusting entry with a debit to supplies
expense, the usual credit entry is made to: A. Accounts payable.
B. Supplies.
C. Cash.
D. Retained earnings.
In 2013, Bodily Corporation reported $300,000 pretax accounting income. The income
tax rate for that year was 30%. Bodily had an unused $120,000 net operating loss
carryforward from 2011 when the tax rate was 40%. Bodily’s income tax payable for
2013 would be A. $54,000
B. $42,000
C. $90,000
D. $72,000
In the statement of cash flows, inflows and outflows of cash from buying and selling
trading securities typically are considered: A. Investing activities.
B. Operating activities.
C. Financing activities.
D. Noncash financing activities.
On December 31, 2013, L Inc. had a $1,500,000 note payable outstanding, due July 31,
2014. L borrowed the money to finance construction of a new plant. L planned to
refinance the note by issuing long-term bonds. Because L temporarily had excess cash,
it prepaid $500,000 of the note on January 23, 2014. In February 2014, L completed a
$3,000,000 bond offering. L will use the bond offering proceeds to repay the note
payable at its maturity and to pay construction costs during 2014. On March 13, 2014, L
issued its 2013 financial statements. What amount of the note payable should L include
in the current liabilities section of its December 31, 2013, balance sheet? A. $0.
B. $500,000.
C. $1,000,000.
D. $1,500,000.
The December 31, 2013, balance sheet of MBI Company included the following:
MBI completed the following transactions in 2013 relating to treasury stock:
March 17: Reacquired 2 million shares at $10.
May 17: Reacquired 2 million shares at $9.
August 10: Issued 3 million shares at $12.
Required:
Assuming MBI uses the cost method, prepare journal entries to record the foregoing
transactions on a weighted average basis.
Jmart Corporation included the following disclosure note in a recent annual report:
Required:
1) Based on the information provided in the disclosure note, determine the weighted
average market price of the restricted stock issued.
2) How much compensation expense did Jmart report for the year following the year in
which the restricted stock was issued?
How are donated assets recorded?
Weaver Textiles Inc. has used the straight-line method to depreciate its equipment since
it started business in 2009. At the beginning of 2013, the company decided to change to
the double-declining-balance (DDB) method. Depreciation as reported and as it would
have been reported if the company had always used DDB is listed below:
Required:
What journal entry, if any, should Weaver make to record the effect of the accounting
change (ignore income taxes)? Explain.
Cal Cookie Company (CCC) has 100 million shares of $1 par common stock
authorized. The transactions below caused changes in CCC’s outstanding shares.
January 4, 2013: Repurchased and retired 1 million shares at $8 per share.
June 25, 2013: Repurchased and retired 2 million shares at $2 per share.
Prior to the transactions, CCC’s shareholders’ equity included the following:
Required:
Record entries for the above transactions.
McCombs Contractors received a contract to construct a mental health facility for
$2,500,000. Construction was begun in 2012 and completed in 2013. Cost and other
data are presented below:
Assume that McCombs uses the percentage-of-completion method for revenue
recognition.
Required: Compute the amount of gross profit recognized during 2012 and
Indicate whether each of the actions listed below will immediately increase (I), decrease
(D), or have no effect (N) on the ratios shown. Assume each ratio is greater than 1.0
before the action is taken.
Boston Dollar Store uses the gross method to record purchase discounts and uses a
perpetual inventory system. Boston engaged in the following transactions during April:
Required:
Prepare journal entries to record the above transactions.
In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net
income fell 46% due to losses related to discontinued operations, but earnings from
continuing operations jumped 19% amid a modest increase in sales. The specialty
athletic retailer said net income was $20 million for the quarter ended May 4, compared
with net income of $37 million a year earlier. The latest results included a loss of $18
million from discontinued operations. Last year, the company had earnings of $5
million, or four cents a share, from discontinued operations. Foot Locker said earnings
from continuing operations were $38 million, compared with $32 million a year earlier.
Discuss how Foot Locker’s press release relates to its earnings quality.
The following information comes from the 2013 Annual Report to stockholders of
Composition Inc. (in thousands):
From the Statement of Changes in Stockholders’ Equity:
From the Statement of Cash Flows: In Cash flows from financing activities:
What was the average cost per share of the treasury stock purchased by Composition
during 2012 and 2013, respectively?
Briefly explain how to account for a change in depreciation method.
Spartan Sportswear’s current assets consist of cash, marketable securities, accounts
receivable, and inventories. The following data were abstracted from a recent financial
statement:
Required:
Compute the following for Spartan:
Current assets
On December 31, 2012, Jackson Company had 100,000 shares of common stock
outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding.
On February 28, 2013, Jackson purchased 24,000 shares of common stock on the open
market as treasury stock for $35 per share. Jackson sold 6,000 treasury shares on
September 30, 2013, for $37 per share. Net income for 2013 was $180,905. Also
outstanding during the year were fully vested incentive stock options giving key
personnel the option to buy 50,000 common shares at $40. The market price of the
common shares averaged $39 during
Required:
Compute Jackson’s basic and diluted earnings per share (rounded to 2 decimal places)
for 2013.
Albertson Corporation began a special promotion in July 2013 in an attempt to increase
sales. A coupon was placed in each box of product. Customers could send in five
coupons for a free prize. Each prize cost Albertson Corporation $3.00. Albertson’s
management estimated that 80% of the coupons would be redeemed. For the six months
ended December 31, 2013, the following information is available:
Required:
What is the estimated liability for the premium offer at December 31, 2013?
The December 31, 2013, balance sheet of Springer Company included the following:
Springer completed the following transactions in 2013 relating to treasury stock:
March 17: Reacquired 5 million shares at $10.
May 17: Reacquired 3 million shares at $9.
August 10: Sold 6 million shares at $12.
Required:
Assuming Springer uses the cost method, prepare journal entries to record the foregoing
transactions on a FIFO basis.
Describe the way we account for an error when that error is discovered in a subsequent
reporting period.
What is a valuation allowance for deferred tax assets and when is it used?
As controller for Henderson, you are attempting to reconstruct and revise the following
balance sheet prepared by a staff accountant.
Additional information ($ in 000s):
1. Certain records that included the account balances for the franchise and shareholders’
equity items were lost. However, a complete, preliminary balance sheet prepared before
the records were lost showed a debt to equity ratio of 1.5. That is, total liabilities are
150% of total shareholders’ equity. Retained earnings at the beginning of the year was
$4,300. Net income for 2013 was $2,500 and $800 in cash dividends were declared and
paid to shareholders.
2. The investments represent treasury bills purchased in December that mature in
January. These are considered cash equivalents.
3. Interest on both the note and the bonds is payable annually.
4. The note payable is due in annual installments of $800 each.
5. Unearned revenue will be earned equally over the next 18 months.
6. The common stock represents 500,000 shares of no par stock authorized, 300,000
shares issued and outstanding.
Required:
Prepare a complete, corrected, classified balance sheet. Solve for missing amounts:
