1) An earthquake destroyed the home office building of a company located in an inland
city. This should be reported as a(n)
a. extraordinary loss
b. prior period adjustment
c. loss from continuing operations
d. loss from discontinued operations
2) Vinny, Inc. has an incentive compensation plan under which the sales manager
receives a bonus equal to 10 percent of the company’s income after deductions for
bonus and income taxes. Income before bonus and income taxes is $400,000. The
effective income tax rate is 30 percent. How much is the bonus (rounded to the nearest
dollar)?
a. $40,000
b. $30,108
c. $28,000
d. $26,168
3) On January 1, Landau Company signed a ten-year noncancelable lease for a new
machine, requiring $45,000 annual payments at the beginning of each year. The
machine has a useful life of 15 years, with no salvage value. Title passes to Landau at
the lease expiration date. Landau uses straight-line depreciation for all of its plant
assets. Aggregate lease payments have a present value on January 1 of $352,000, based
on an appropriate rate of interest. For the first year, Landau should record depreciation
(amortization) expense for the leased machine at
a. $45,000
b. $35,200
c. $23,467
d. $21,533
4) On December 10, Vandalia Co. split its stock 5-for-2 when the market value was $49
per share. Prior to the split, Vandalia had 250,000 shares of $15 par value stock. After
the split, Vandalia’s outstanding shares would be
a. 250,000
b. 225,000
c. 375,000
d. 625,000
5) An operating cycle
a. is twelve months or less in length
b. is the average time required for a company to collect its receivables
c. is used to determine current assets when the operating cycle is longer than one year
d. begins with inventory and ends with cash
6) L. Lane received $12,000 from a tenant on December 1 for four months’ rent of an
office. This rent was for December, January, February, and March. If Lane debited Cash
and credited Unearned Rental Income for $12,000 on December 1, what necessary
adjustment would be made on December 31?
a. Unearned Rental Income …………. 3,000 Rental Income ……………….. 3,000
b. Rental Income …………………. 3,000 Unearned Rental Income ……….. 3,000
c. Unearned Rental Income …………. 9,000 Rental Income ……………….. 9,000
d. Rental Income …………………. 9,000 Unearned Rental Income ……….. 9,000
7) Deferring the recognition of revenue for which the earnings process is complete is an
example of
a. “big bath” accounting
b. a “cookie jar” reserve
c. a change in an accounting estimate
d. strategic matching
8) At the beginning of the year, a firm leased equipment on a capital lease, capitalizing
$60,000 in both its lease liability and leased assets accounts. The contract calls for
December 31 payments of $15,000. The lessees annual reporting period ends December
31 and the contract reflects 10% interest. The lessee made the first payment as required.
The direct method statement of cash flows for the lessee should reflect which of the
following in the first year of the lease contract (ignore noncash disclosures)?
a. $15,000 financing cash outflow
b. $15,000 operating cash outflow
c. $6,000 operating cash outflow; $9,000 financing cash outflow
d. $9,000 financing cash outflow
9) Elder Corporation decided to change its depreciation policy by (1) changing from
double-declining-balance depreciation, and (2) changing the estimated useful life on all
automobiles used in the business from five years to four years.
Which of the following is correct concerning these two changes?
a. Both are changes in accounting principle
b. Both are changes in accounting estimate
c. One is an error correction, and one is change in accounting principle
d. One is a change in estimate effected through a change in accounting principle, and
one is a change in estimate
10) An adjustment to retained earnings as a result of a conversion of preferred stock to
common stock most likely would occur when
a. par value of the preferred stock is high relative to fair value of the common stock
b. par value of the common stock is less than the book value of the preferred stock
c. par value of the common stock exceeds the book value of the preferred stock
d. par value of the preferred stock is low relative to fair value of the common
11) A company changes from an accounting principle that is not generally accepted to
one that is generally accepted. The effect of the change should be reported as a
a. change in accounting principle
b. change in accounting estimate
c. correction of an error
d. change of accounting estimate effected by a change in accounting principle
12) Five years ago, Monroe, Inc., purchased a patent for $110,000. Lower demand for
the product produced under this patent necessitates that an impairment test be made. On
the date of purchase, the patent had an estimated useful life of eleven years. It currently
has a remaining useful life of four years. The current fair value of the patent is $43,000.
Company management estimates that the patent will generate future cash flows of
$12,000 per year for the next four years.
The amount of the impairment loss to be recognized is
a. $50,000
b. $60,000
c. $12,000
d. $17,000
13) The lower-of-cost-or-market inventory procedure would be expected to result in the
lowest inventory valuation when applied to
a. individual inventory items
b. groups of similar inventory items
c. total inventory
d. none of these
14) The plan of organization and all the methods and measures adopted within a
business to safeguard its assets, check the accuracy of its accounting data, promote
operational efficiency, and encourage adherence to managerial policies is called
a. accounting control
b. administrative control
c. managerial control
d. internal control
15) Queener Corporation uses a periodic inventory system and neglected to record a
purchase of merchandise on account at year-end. This merchandise was omitted from
the year-end physical count. How will these errors affect Queeners assets, liabilities,
and stockholders equity at year-end and net earnings for the year?
Stockholders
Assets Liabilities Equity Net Earnings
a. Understate Understate No effect No effect
b. Understate No effect Understate Understate
c. No effect Understate Overstate Overstate
d. No effect Overstate Understate Understate
16) A loss contingency that is remote and cannot be reasonably estimated
a. may be disclosed in a note to the financial statements
b. must be disclosed in a note to the financial statements
c. must be reported in the body of the financial statements
d. is permitted to be reported in the body of the financial statements
17) An example of an adjusting entry involving a deferred revenue is
a. Cash …………………………. xxx Unearned Rental Revenue ………. xxx
b. Rental Revenue ………………… xxx Cash ……………………….. xxx
c. Unearned Rental Revenue ………… xxx Rental Revenue ………………. xxx
d. Accounts Receivable ……………. xxx Sales ………………………. xxx
18) A method that ignores salvage value in the early years of the assets life in
calculating periodic depreciation expense is the
a. productive-output method
b. group composite method
c. sum-of-the-years’-digits method
d. double-declining-balance method
19) According to FASB ASC Topic 830 (Foreign Currency Matters – Translation of
Financial Statements), the appropriate method of restatement from a foreign currency to
the U.S. dollar for each of the following is
Remeasurement Translation
a. Current rate Monetary/nonmonetary
b. Monetary/nonmonetary Monetary/nonmonetary
c. Monetary/nonmonetary Current rate
d. Current rate Current rate
20) Information from Caine Company’s balance sheet is as follows:
What is Caine’s current ratio?
a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.78 to 1
21) A contract, traded on an exchange, that allows a company to buy a specified
quantity of a commodity or a financial security at a specified price on a specified future
date is referred to as a(n)
a. interest rate swap
b. forward contract
c. futures contract
d. option
22) According to the FASB conceptual framework, the concept of earnings
a. includes changes in market values of investments in marketable securities classified
as available-for-sale
b. includes foreign currency translation adjustments
c. includes gains and losses resulting from the sale of a productive asset to another party
in an arms-length transaction
d. is the same as comprehensive income
23) In an accrual accounting system,
a. all accounts have normal debit balances
b. a debit entry is recorded on the left-hand side of an account
c. liabilities, owner’s capital, and dividends all have normal credit balances
d. revenues are recorded only when cash is received
24) Crafter, Inc. receives subscription payments for annual (one year) subscriptions to
its magazine. Payments are recorded as revenue when received. Amounts received but
unearned at the end of each of the last three years are shown below:
Crafter failed to record the unearned revenues in each of the three years. As a result of
the omission, 2014 income was
a. overstated by $146,000
b. understated by $146,000
c. understated by $26,000
d. overstated by $26,000
25) Sanborn, Inc., leased equipment from Chase Supply on December 31, 2014. The
lease term is for the 10-year period expiring December 30, 2021. The useful life of the
leased asset is 10 years. Equal annual payments under the lease are $100,000 due on
December 31 of each year. The first payment was made on December 31, 2014.
Sanborns incremental borrowing rate was 12% at December 31, 2014. Chases implicit
rate for the lease is 10% and is known by Sanborn. Sanborn appropriately accounts for
the lease as a capital lease.
What is the balance in Sanborns Liability Under Lease Agreements account at
December 31, 2015?
a. $533,492
b. $545,010
c. $643,492
d. $800,000
26) During its fiscal year, Deerborn Distributing had net income of $100,000 (no
extraordinary items) and 50,000 shares of common stock and 10,000 shares of preferred
stock outstanding. Deerborn declared and paid dividends of $.50 per share to common
and $6.00 per share to preferred. The preferred stock is convertible into common stock
on a share-for-share basis. For the year, Deerborn Distributing should report diluted
earnings (loss) per share of
a. $(0.80)
b. $1.00
c. $1.67
d. $2.67
27) Which of the following is not required under current GAAP for disaggregated
information relating to geographic area information?
a. Revenues from external customers from the home country of the firm and from all
foreign countries in total
b. The total of long-lived assets located in the firm’s home country and located in
foreign countries
c. Operating profits from external customers from the home country of the firm and
from all foreign countries in total
d. Revenues for any foreign country for which the revenues from that country are
material to the firm
28) In 2014, a company discovered that $20,000 of equipment purchased on January 1,
2011, was expensed in full. The equipment has a ten-year life, no residual value, and
should have been depreciated on the straight-line basis. The error is corrected. As a
result, the comparative 2013 and 2014 financial statements will show what amounts as
adjustments to the beginning balances of retained earnings dated:
1/1/2013 1/1/2014
a. $14,000 $14,000
b. $16,000 $0
c. $0 $14,000
d. $16,000 $14,000
29) The following data are from a comparison of the balance sheets of Brassie
Company as of December 31, 2013, and December 31, 2012:
The following data are from Brassie’s 2011 income statement:
During 2013:
(a) How much cash was collected from customers?
(b) How much cash was paid for inventory purchases?
(c) How much cash was paid for insurance?
(d) How much cash was paid for wages?
30) Which of the following would NOT be classified as a current liability on a
classified balance sheet?
a. Unearned revenue
b. Mandatory redeemable preferred stock
c. The currently maturing portion of long-term debt
d. Accrued salaries payable to management
31) If convertible bonds are dilutive, the interest expense added back to the numerator
in calculating diluted earnings per share is
a. net of tax, and includes discount and premium amortization
b. net of tax, but does not include discount and premium amortization
c. not net of tax, but includes discount and premium amortization
d. not net of tax, and does not include discount or premium amortization
32) Cartel Inc. owns 35 percent of Elliott Corporation. During the calendar year 2014,
Elliott had net earnings of $300,000 and paid dividends of $36,000. Cartel mistakenly
accounted for the investment in Elliott using the cost method rather than the equity
method of accounting. What effect would this have on the investment account and net
income, respectively?
a. Understate, overstate
b. Overstate, understate
c. Overstate, overstate
d. Understate, understate
33) Seaworthy Company’s gross sales in 2014 were $3,930,000. Assuming sales returns
and allowances were $74,000, sales discounts were $35,000, and freight-out was
$28,000, what were Seaworthys net sales in 2014?
a. $3,793,000
b. $3,821,000
c. $3,856,000
d. $3,930,000
34) The following segments were identified for an enterprise:
Which of the four segments is a reportable segment?
a. 1 and 2 only
b. 1 and 3 only
c. 1, 2, and 3 only
d. all four
35) Which of the following accounts would NOT be affected if a company failed to
report returns of merchandise sold?
a. Sales returns
b. Sales allowances
c. Cost of goods sold
d. Inventory
36) Which of the following independent transactions would cause net income to be
more than cash from operating activities?
a. A decrease in the accounts receivable account
b. An increase in the merchandise inventory account
c. An increase in the accounts payable account
d. An increase in the accrued wages payable account
37) In a lease that is recorded as an operating lease by the lessee, the equal monthly
rental payments should be
a. allocated between interest expense and depreciation expense
b. allocated between a reduction in the liability for leased assets and interest expense
c. recorded as a reduction in the liability for leased assets
d. recorded as rental expense
38) Jefferson Financing, Inc. purchased a packing machine to lease to Puyallup Fruits.
The lease qualifies as a direct financing lease and requires lease payments of $58,860
per year, payable in advance, over a ten-year period. There is no expected residual
value. The fair market value of the packing machine is $330,000–the same amount paid
by Jefferson to purchase the asset. The lease term begins on January 1, 2014.
Provide the journal entries required on Jefferson’s books to
39) The following is information from the books of Gioulis Consulting on September
30:
Balance per bank statement$53,000
Receipts recorded but not yet deposited in the bank 3,800
Bank charges not recorded 75
Note collected by bank and not recorded on books 2,070
Outstanding checks 2,732
NSF checksnot recorded on books nor redeposited 580
Assume no errors exist, compute the cash balance per books on September 30 before
any reconciliation adjustments.
40) On July 15, 2014, American Manufacturing Inc., a Los Angeles based
conglomerate, purchased, Hunan Inc., a Korean-based company. Hunan Inc.’s balance
sheet on the date of purchase is as follows:
The exchange rate for Korean won on July 15, 2014, is $.008.
Prepare a translated balance sheet as of July 15, 2014.
41) The Pistons Company had its entire inventory destroyed when a fire swept through
the company’s warehouse. Fortunately, the accounting records were locked in a
fireproof safe and were not damaged. The following information for the period up to the
date of the fire was taken from the accounting records:
42) Ominous Studios, in an effort to promote the release of their new movie “Dragons
from Space,” began a national sales promotion campaign. Two coupons from specially
marked boxes (one coupon in each box) of “Sweet Pops” cereal are redeemable for one
ticket to the show. Tickets cost Ominous $1.50 each. Ominous estimates that 40 percent
of the coupons will be redeemed. At the end of 2014, the following information is
available:
What is the estimated liability for premium claims outstanding at December 31, 2014?
43) Bayou Inc. leases equipment to its customers under noncancelable leases. On
January 1, 2014, Bayou leased equipment costing $400,000 to Rockwell Co., for nine
years. The rental cost was $44,000 payable in advance semiannually (January 1 and
July 1), plus $2,000 semiannually for executory costs. The equipment had an estimated
life of 15 years and sold for $533,025 with an estimated unguaranteed residual value of
$80,000. The implicit interest rate is 12 percent.
Prepare all journal entries for 2014 on Bayou’s and Rockwell’s books. Round all
calculations to the nearest dollar. Use straight-line depreciation.
44) The records of Majestic Co. showed the following account balances on December
31, 2013:
Assuming that the inventory balance at January 1, 2013, is $152,000, prepare the entry
to adjust the inventory accounts.
45) The Securities and Exchange Commission (SEC) has the right granted to it by
Congress to issue accounting standards. The Commission has exercised this right on a
relatively infrequent basis. The SEC is not a passive observer to the financial
accounting standard setting process, however.
Explain the general mission of the SEC and how the SEC fulfills its mission as regards
financial reporting specifically.
46) The Cleft Music Company was formed on December 1, 2013. The following
information is available from Cleft’s inventory records:
The company uses a periodic inventory system, and a physical inventory on November
30, 2014, shows 9,600 units on hand. Prepare schedules to compute the ending
inventory at November 30, 2014, under each of the following inventory methods:
