1) A depreciable asset has an estimated 15 percent salvage value. At the end of its
estimated useful life, the accumulated depreciation would equal the original cost of the
asset under which of the following depreciation methods?
Productive- Sum-of-the- Double-
Output Years’-Digits Declining-Balance
a. Yes No No
b. No No No
c. No Yes No
d. Yes Yes Yes
2) On January 1, 2014, Jameson Company purchased equipment at a cost of $420,000.
The equipment was estimated to have a useful life of five years and a salvage value of
$60,000. Jameson uses the sum-of-the-years’-digits method of depreciation. What
should the accumulated depreciation be at December 31, 2017?
a. $240,000
b. $288,000
c. $336,000
d. $360,000
3) See information for Paper Depot above. If Paper Depot uses a FIFO cost perpetual
inventory system, the ending inventory of Model III calculators at August 31 is reported
as
a. $150,080
b. $150,160
c. $152,232
d. $152,960
4) Which of the following statements concerning the objectives of financial reporting is
correct?
a. The objectives are intended to be specific in nature
b. The objectives are directed primarily toward the needs of internal users of accounting
information
c. The objectives were the end result of the FASB’s conceptual framework project
d. The objectives encompass not only financial statement disclosures, but other
information as well
5) On February 1, authorized common stock was sold on a subscription basis at a price
in excess of par value, and 20 percent of the subscription price was collected. On May
1, the remaining 80 percent of the subscription price was collected. Additional Paid-In
Capital would increase on
February 1 May 1
a. No Yes
b. No No
c. Yes No
d. Yes Yes
6) Which of the following typically is NOT associated with a change in estimate for
accounting purposes?
a. Return on pension fund
b. Useful life of a depreciable asset
c. Bad debt expense
d. Change in calculating depreciation from straight-line to sum-of-the-years’-digit
7) According to the most current FASB standards, intangible assets acquired in a basket
purchase which represents the acquisition of an entire business should be
a. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being recognized as goodwill
b. valued by allocating the total purchase price according to the relative fair values only
of intangible assets that are separately tradable or contract base
c. valued by allocating the total purchase price according to the relative fair values of
all assets acquired, regardless of whether the assets are separately tradable or contract
based
d. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being expensed in the year of
acquisition
8) Information from Osborne Company’s balance sheet is as follows: Current assets:
What is Osborne’s acid-test (quick) ratio?
a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.60 to 1
9) Which of the following changes in accounting principle does not require the
retrospective approach?
a. Change from the percentage-of-completion to the completed-contract method
b. Change of inventory method from LIFO to FIFO
c. Change of inventory method from FIFO to LIFO
d. All of these require retroactive adjustment.
10) The overall objective of financial reporting is to provide information
a. that is useful for decision making
b. about an enterprise’s assets, liabilities, and owners’ equity
c. about an enterprise’s financial performance during a period
d. that allows owners to assess management’s performance
11) Which of the following would NOT be included in the cost of work in process
inventory?
a. Cost of electricity to operate factory equipment
b. Maintenance costs of factory equipment
c. Depreciation on office equipment in the sales manager’s office
d. Depreciation on factory equipment
12) When an investor purchases sufficient common stock to gain significant influence
over the investee, what is the proper accounting treatment of any excess of cost over
book value acquired?
a. The excess remains in the asset account until the investment is sold
b. The excess is immediately charged to expense in the period in which the investment
is made
c. The excess is amortized over the period of time that is reasonable in light of the
underlying cause of the excess
d. The excess is charged to retained earnings at the time the investor resells the common
stock
13) Financial statement elements relating to income are defined in FASB Concepts
Statement 6 as follows:
a. Gains are increases in equity from ongoing major or central operations of an entity
b. Expenses are outflows of assets or liabilities incurred from peripheral or incidental
transactions of an entity
c. Revenues are inflows or other enhancements of assets or settlements of liabilities
from ongoing major or central operations
d. Losses are all decreases in equity other than from transactions with owners
14) The work sheet of PSI Company shows Income Tax Expense of $9,000 and Income
Tax Payable of $9,000 in the Adjustments columns. What will be the ultimate
disposition of these items on the work sheet?
a. Income Tax Expense will appear as a debit of $9,000 and Income Tax Payable as
credit in the Balance Sheet columns
b. Income Tax Expense will appear as a debit of $9,000 and Income Tax Payable as
credit in the Income Statement columns
c. Income Tax Expense will appear as a debit of $9,000 in the Balance Sheet columns
and Income Tax Payable as credit in the Income Statement columns
d. Income Tax Expense will appear as a debit of $9,000 in the Income Statement
columns and Income Tax Payable as credit in the Balance Sheet columns
15) Using the indirect method, cash flows from operating activities would be increased
by which of the following?
a. Gain on sale of investments
b. Decrease in accounts receivable
c. Decrease in accounts payable
d. Increase in prepaid expenses
16) Panther Company does not want to bear the risk that interest rates may increase in
year two of the loan. Aegean Company believes that rates may decrease and they would
prefer to have variable debt. So the two companies enter into an interest rate swap
agreement whereby Aegean agrees to make Panther’s interest payment in 2015 and
Panther likewise agrees to make Aegean’s interest payment in 2015. The two companies
agree to make settlement payments, for the difference only, on December 31, 2015. If
the interest rate on December 31, 2014 is 12 percent, what amount will Panther report
as the fair value of the interest rate swap at December 31, 2014 (answers rounded to the
nearest dollar)?
a. $0
b. $10,715
c. $12,000
d. $600,000
17) Records for the Bass Corporations defined-benefit pension plan show a net
unrecognized loss at December 31, 2013, of $30,000, after recording the pension
expense for 2013. The average expected service period of the companys employees is
10 years. The actuary notifies Basss management that an actuarial gain of $4,000 is
determined at January 1, 2014. Actual return for 2014 is $2,000, and expected return is
$3,000. The following information also is available for the 2014:
The minimum amortization of unrecognized loss increases 2014 pension expense by
what amount?
a. $2,400
b. $1,700
c. $2,100
d. $2,600
18) When a company replaces an old asphalt roof on its plant with a new fiberglass
insulated roof, which of the following types of expenditure has occurred?
a. Ordinary repairs and maintenance
b. Addition
c. Rearrangement
d. Betterment
19) The __________ of a firm is primarily responsible for the preparation of financial
statements in accordance with GAAP.
a. the internal auditors
b. management
c. the external auditors
d. the board of directors
20) Which of the following is true?
a. The IASB requires eight cash flow categories
b. The Statement of Cash Flows is classified according to three main categories
c. The IASB does not specifically require a Statement of Cash Flows
d. The provisions of IAS 7 are less flexible than the U. S. rules
21) Avionics Inc., a dealer in machinery and equipment, leased equipment to
Benchmark Products on July 1, 2014. The lease is appropriately accounted for as a sale
by Avionics and as a purchase by Benchmark. The lease is for a ten-year period (the
useful life of the asset) expiring June 30, 2021. The first of ten equal annual payments
of $250,000 was made on July 1, 2014. Avionics had purchased the equipment for
$1,337,500 on January 1, 2014, and established a list selling price of $1,687,500 on the
equipment. Assume that the present value at July 1, 2014, of the rent payments over the
lease term discounted at 12 percent (the appropriate interest rate) was $1,582,500. What
is the amount of profit on the sale and the amount of interest income that Avionics
should record for the year ended December 31, 2014?
a. $245,000 and $94,950
b. $245,000 and $79,950
c. $350,000 and $79,950
d. $350,000 and $94,950
22) Which of the following would cause income of the current period to be understated?
a. Capitalizing research and development costs
b. Failure to recognize unearned rent revenue
c. Changing from LIFO to FIFO for merchandise inventory
d. Understating estimates of asset residual values
23) Hawk Corp. prepared a draft of its 2014 balance sheet. The draft statement reported
current liabilities totaling $200,000. However, none of the following items were
included in this preliminary total at December 31, 2014:
At which amount should Hawk’s current liabilities be correctly reported in the
December 31, 2014, balance sheet?
a. $230,000
b. $290,000
c. $296,000
d. $302,000
24) International accounting standards for pensions currently in effect
a. allow only the accrued benefit method
b. allow both the accrued benefit and projected benefit methods
c. allow only the projected benefit method
d. do not allow either the accrued benefit or projected benefit methods
25) Which one of the following is true when the effective-interest method of amortizing
bond discount is used?
a. Interest expense as a percentage of the bonds’ book value varies from period to period
b. Interest expense remains constant for each period
c. Interest expense increases each period
d. The interest rate decreases each period
26) A company enters into an interest rate swap in order to hedge a $5,000,000
variable-rate loan. The loan is expected to be fully repaid this year on June 10. The
contract requires that if the interest rate on April 30 of next year is greater than 11%, the
company receives the difference on a principal amount of $5,000,000. Alternatively, if
the interest rate is less than 11%, the company must pay the difference. Which of the
following statements is correct regarding this contract?
a. The swap agreement effectively hedges the variable interest payments
b. The timing of the swap payment matches the timing of the interest payments and,
therefore, the variable interest payments are hedged
c. The timing of the swap payment does not match the timing of the interest payments
and, therefore, the variable interest payments are not hedged
d. This swap represents a fair value hedge
27) Stellar Corporation sells five different types of products. The company is divided
for internal reporting purposes into five different divisions based on these five different
product lines. The company should prepare the note disclosure for disaggregated
information based upon the
a. five types of products
b. five different divisions
c. materiality of each product line based on the revenue or operating profits generated
by each product line or the assets utilized by each product line
d. geographic areas in which the 5 products are sold
28) Pralow, Inc., leased an asset to Bender Corporation. The cost of the asset to Pralow
was $8,000. Terms of the lease specify four-year life for the lease, an annual interest
rate of 15 percent, and four year-end rental payments. The lease qualifies as a capital
lease and is classified as a direct-financing lease. The asset reverts to Pralow after the
fourth year, when its residual value is estimated to be $1,000. The amount of each rental
payment is
a. $2,000
b. $2,335
c. $2,501
d. $2,602
29) At the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a stock split
b. purchase of treasury stock
c. declaration of a stock dividend
d. payment in full of subscribed stock
30) You are an accounting major who recently completed your masters degree in
accounting and began working in public accounting as of September 1, 2014. Your
younger sister currently is enrolled in a principles of accounting course. Your sister calls
you at your firms offices one day to congratulate you on the purchase of your new
stereo system for your apartment. In the course of the conversation, your sister tells you
that her accounting instructor discussed the installment sales method of recognition in
class recently. Since your sister knows that you are paying for the stereo by making
monthly payments, your sister (in an attempt to impress with her new-found
knowledge) begins to describe the process for accounting under the installment sales
method of revenue recognition. Your sister finds it particularly curious that the store
that sold you the stereo system will be deferring revenue on the sale until cash is
collected.
Required:
How would you respond to your younger sisters comments?
31) Research has shown that numerous companies manage their earnings. A variety of
earnings management techniques are available ranging from income smoothing to
outright fraud.
Define income smoothing and explain how it is implemented.
32) During 2014, Belladonna Corp. had outstanding 125,000 shares of common stock
and 7,500 shares of noncumulative, 8 percent, $50 par preferred stock. Each preferred
share is convertible into 8 shares of common stock. In 2014, net income was $231,500.
33) The Maker Company exchanged 25,000 shares of its own $50 par value common
stock for a turret lathe from Turner Company. The market value of the Maker Company
stock was $68 per share at the date of exchange. The equipment had a carrying value of
$1,625,000.
Record the exchange on the books of Maker Company in general journal form.
34) Springer Inc. carries the following marketable equity securities on its books at
December 31, 2013, and 2014. All securities were purchased during 2013 and there
were no beginning balances in any market adjustment accounts.
The cost method is used in accounting for all investments in securities.
35) Measuring progress toward completion of long-term construction projects can be
accomplished in a number of ways. Nonetheless, all of these measurements can be
classified into two basic groups: input measures and output measures. Input measures
attempt to measure the effort devoted to a project to date compared to the total effort
expected to be required in order to complete the project. A common input measure is
the ratio of costs incurred to date to total estimated costs for the project. Output
measures attempt to measure the results to date compared to total results when the
project is completed. A common output measure would be the number of stories of a
building completed compared to the total number of stories to be built.
Identify the general problems associated with input and output measures in determining
the level of completion of a long-term construction project.
36) Witherfork Company was recently acquired by a new owner who has decided to
correct the prior accounting records during the current reporting period ending
December 31, 20 The accounts have been partially adjusted but have not been closed
for 20 The following items have been discovered:
Required:
Provide the appropriate entry to record any change or correction and give any adjusting
entry needed in each instance at the end of 2014. Show computations for entries made,
and provide explanations for situations for which no entry is required.
