1) On January 1, 2014, Amber Inc. purchased 30 percent of the outstanding common
stock of Collar Corporation for $516,000 cash. Amber is accounting for this investment
using the equity method. On the date of acquisition, the fair value of Collar’ net assets
was $1,240,000. Amber has determined that the excess of the cost of the investment
over its share of Collar’ net assets is attributable to goodwill. Collar’ net income for the
year ended December 31, 2014, was $360,000. During 2014, Collar declared and paid
cash dividends of $40,000. There were no other transactions between the two
companies. On December 31, 2014, the investment in Collar should be recorded as
a. $396,000
b. $468,000
c. $612,000
d. $624,000
2) If the combined market value of available-for-sale securities at the end of the year is
less than the market value of the same portfolio of available-for-sale securities at the
beginning of the year, the difference should be accounted for by
a. reporting an unrealized loss in security investments in the stockholders’ equity section
of the balance sheet
b. reporting an unrealized loss in security investments in the income statement
c. a footnote to the financial statements
d. a credit to Investment in Available-for-Sale Securities
3) Winwood Construction purchased a crane on January 1, 2013, for $102,750. At the
time of purchase, the crane was estimated to have a life of six years and a residual value
of $6,750. In 2015, Winwood determined that the crane had a total useful life of seven
years and a residual value of $4,500. If Winwood uses the straight-line method of
depreciation, what will be the depreciation expense for the crane in 2015?
a. $16,000
b. $13,250
c. $9,464
d. $8,000
4) Which of the following is not an issue in accounting for defined benefit plans?
a. The amount of pension expense to be recognized
b. The amount of pension liability to be reported
c. The amount of funding (contributions) required by the plan
d. Disclosures needed to supplement the financial statements
5) Winston Company sells magazine subscriptions for one- to three-year subscription
periods. Cash receipts from subscribers are credited to Magazine Subscriptions
Collected in Advance, and this account had a balance of $9,600,000 at December 31,
2013, before year-end adjustment. Outstanding subscriptions at December 31, 2013,
expire as follows:
In its December 31, 2013, balance sheet, what amount should Winston report as the
balance for magazine subscriptions collected in advance?
a. $2,000,000
b. $3,800,000
c. $7,600,000
d. $9,600,000
6) Entole Company began operations in 2014. During the first two years of operations,
Entole made undiscovered errors in taking its year-end inventories that overstated 2014
ending inventory by $50,000 and understated 2015 ending inventory by $40,000. The
combined effect of these errors on reported income is
2014 2015 2016
a. understated $50,000 overstated $90,000 understated $40,000
b. overstated $50,000 understated $90,000 not affected
c. overstated $50,000 understated $40,000 not affected
d. overstated $50,000 understated $90,000 overstated $40,000
7) Pilsner Company. converts its foreign subsidiary financial statements using the
translation process. The companys subsidiary in the Czech Republic reported the
following for 2014: revenues and expenses of 25,000,000 and 18,500,000 koruna,
respectively, earned or incurred evenly throughout the year, dividends of 1,500,000
koruna were paid during the year. The following exchange rates are available:
Translated net income for 2014 is
a. $148,500
b. $227,500
c. $175,000
d. $195,000
8) On January 1, 2014, Comas Corporation acquired Partly, Inc. as a long-term
investment for $250,000 (a 30 percent common stock interest in Partly). On that date,
Partly had net assets with a book value and current market value of $800,000. During
2014, Partly reported net income of $85,000 and declared and paid cash dividends of
$20,000. What is the maximum amount of income that Comas should report from this
investment for 2014?
a. $25,500
b. $21,000
c. $6,000
d. $33,000
9) On January 2, 2013, Bismark Corporation bought 20 percent of Congeal
Corporation’s capital stock for $60,000 and classified it as available-for-sale securities.
Congeal’s net incomes for the years ended December 31, 2013, and 2014, were $20,000
and $100,000, respectively. During 2014, Congeal declared a dividend of $110,000. No
dividends were declared in 2013. On December 31, 2014, the fair value of the Congeal
stock owned by Bismark had increased to $90,000. How much should Bismark show on
its 2014 income statement as income from this investment?
a. $18,000
b. $20,000
c. $22,000
d. $44,000
10) King Company purchased 30% of Andei Company for $2,500,000 at the beginning
of the current year. Andei earned $400,000 and declared and paid $300,000 of
dividends during the current year. Which of the following correctly describes the effect
of these transactions on the statement of cash flows of King Company prepared under
the indirect method?
Operating Activities Investing Activities
a. $2,530,000 decrease No effect
b. $2,620,000 decrease No effect
c. $30,000 decrease $2,500,000 decrease
d. $120,000 decrease $2,500,000 decrease
11) On a multiple-step income statement, gains or losses on sale of equipment would be
shown
a. before gross profit on sales
b. after gross profit on sales but before income from continuing operations
c. after income from continuing operations but before income from extraordinary items
d. after income before extraordinary items but before net income
12) A machine with an original estimated useful life of ten years is moved to another
location in the factory after it had been in service for three years. The efficiency of the
machine is increased for its remaining useful life. The reinstallation costs should be
capitalized if the remaining useful life of the machine is
Five Years Ten Years
a. No No
b. No Yes
c. Yes Yes
d. Yes No
13) A company owns a piece of land that originally cost $10,000 and has a fair market
value of $8,000. It is exchanged along with $5,000 cash for another piece of land
having a fair value of $13,000. The exchange had commercial substance. The proper
journal entry to record this transaction is
a. Land (new)…………………… 15,000 Land (old)…………………. 10,000
Cash ……………………… 5,000
b. Land (new) ………………….. 13,000 Loss on Exchange …………….. 2,000
Land ……………………… 10,000 Cash ……………………… 5,000
c. Land (new)…………………… 18,000 Land (old) ………………… 10,000
Cash ……………………… 5,000 Gain on Exchange …………… 3,000
d. Land (new)…………………… 13,000 Retained Earnings ……………. 2,000 Land
(old)…………………. 10,000 Cash ……………………… 5,000
14) How would the carrying value of a bond payable be affected by amortization of
each of the following?
Discount Premium
a. No effect No effect
b. Increase No effect
c. Increase Decrease
d. Decrease Increase
15) Tundra Co. incurred research and development costs in 2014 as follows:
The total research and development costs charged in Tundra’s 2014 income statement
should be
a. $425,000
b. $542,500
c. $617,500
d. $925,000
16) On October 31, a flood at Comfort Company’s only warehouse caused severe
damage to its entire inventory. Based on recent history, Comfort has a gross profit of 40
percent of net sales. The following information is available from Comfort’s records for
the ten months ended October 31:
A physical inventory disclosed usable damaged goods which Comfort estimates can be
sold for $70,000. Using the gross profit method, the estimated cost of goods sold for the
ten months ended October 31 should be
a. $680,000
b. $1,080,000
c. $3,120,000
d. $3,640,000
17) The general ledger of the Flybird Corporation as of December 31 includes the
following accounts:
In the preparation of Flybird’s balance sheet as of December 31, what should be
reported as total intangible assets?
a. $68,000
b. $328,000
c. $368,000
d. $380,000
18) Foodmark, Inc., is a large food-marketing company. Footnote information from the
companys 2014 annual report appears below. Independent retailers use funds loaned by
Foodmark to finance the acquisition of property used in retail food operations.
Foodmark records these loans in its long-term notes receivable account. The net balance
of the long-term notes receivable account at the end of 2014 is (in thousands of dollars)
$36,731. The following information is available from the companys footnotes:
Assume the following for purposes of this case:
a. The notes receivable account is comprised of one 8-year, 10 percent note with seven
years remaining in its term at the end of 2014.
b. Foodmark financed 100 percent of the asset acquisitions for the retailer.
c. Annual payments on the note are received at the end of each year, include principal
and interest, and are a constant amount each year.
Required:
Determine the market value of the assets financed by Foodmark at the date of
acquisition by the retailer (debtor).
19) Pretax accounting income is $100,000 and the tax rate is 40%. Included in income
is a $20,000 fine levied for pollution violations and other infractions during the year. In
the reconciliation of the statutory and effective rate (beginning with the statutory rate),
which one of the following amounts would appear?
a. (.08)
b. .08
c. (.20)
d. (.04)
20) Which of the following ratios does NOT measure liquidity?
a. Net cash flow to current liabilities
b. Working capital to total assets
c. Current ratio
d. Quick ratio
21) Lehman Company is considering purchasing some new equipment for its
production operations. The purchase is scheduled to be made on January 1, 2014. The
vendor offers Lehman two financing options:
The market rate of interest for both financing options is 10 percent.
Required:
22) In comparing the current ratios of two companies, why is it invalid to assume that
the company with the higher current ratio is the better company?
a. The two companies may be different sizes
b. A high current ratio may indicate inadequate inventory on hand
c. The two companies may define working capital in different terms
d. A high current ratio may indicate inefficient use of various assets and liabilities
23) Historically, the United Kingdom has recognized only those deferred tax liabilities
expected to “crystallize.” The term “crystallize” is most nearly synonymous with the
term
a. amortized
b. realized
c. recognized
d. liquidated
24) Sky Company collected $12,350 in interest during 2013. Sky showed $1,850 in
interest receivable on its December 31, 2013, balance sheet and $5,300 on December
31, 2012. The interest revenue on the income statement for 2013 was
a. $3,450
b. $8,900
c. $12,350
d. $14,200
25) Ingle Company paid $12,960 for a four-year insurance policy on September 1 and
recorded the $12,960 as a debit to Prepaid Insurance and a credit to Cash. What
adjusting entry should Ingle make on December 31, the end of the accounting period?
a. Prepaid Insurance ……………… 810 Insurance Expense ……………. 810
b. Insurance Expense ……………… 1,080 Prepaid Insurance ……………. 1,080
c. Insurance Expense ……………… 3,240 Prepaid Insurance ……………. 3,240
d. Prepaid Insurance ……………… 11,880 Insurance Expense ……………. 11,880
26) Which of the following is a non-cash transaction that should be disclosed in a
schedule accompanying the statement of cash flows?
a. Sale of an investment for cash
b. Purchase of a machine for cash
c. Issuance of common stock in exchange for land
d. Declaration and payment of a cash dividend on common stock
27) Which of the following would NOT be accounted for as a change in accounting
principle?
a. Change from the first-in, first-out method to the last-in, first-out method of inventory
pricing
b. Change from the last-in, first-out method to the first-in, first-out method of inventory
pricing
c. Change from completed-contract accounting to percentage-of-completion
d. Change from straight-line method to accelerated method of depreciation
28) Tarkenton Corporation purchased the following portfolio of trading securities
during 2014 and reported the following balances at December 31, 2014. No sales
occurred during 2014. All declines are considered to be temporary.
The only transaction in 2015 was the sale of security Z for $35,000 on December 31,
2015. The market values for the other securities at December 31, 2015, were the same
as at December 31, 2014. Tarkenton’s entry to record the sale of security Z would
include a
a. credit of 32,000 to Realized Gain on Sale of Trading Securities
b. debit of $3,000 to Realized Gain on Sale of Trading Securities
c. $3,000 debit to Market Adjustment–Trading Securities
d. $4,000 debit to Market Adjustment–Trading Securities
29) On January 1, 2014, Marco Hospital issued a $250,000, 10 percent, 5-year bond for
$231,601. Interest is payable on June 30 and December 31. Marco uses the
effective-interest method to amortize all premiums and discounts. Assuming an
effective interest rate of 12 percent, approximately how much discount will be
amortized on December 31, 2014?
a. $2,230
b. $1,480
c. $1,396
d. $987
30) The following balances have been excerpted from Edwards’ balance sheets:
Edwards Company paid or collected during 2013 the following items:
The salary expense on the income statement for 2013 was
a. $366,500
b. $472,500
c. $489,500
d. $595,500
31) Thompson Company sublet a portion of its office space for ten years at an annual
rental of $36,000, beginning on May 1. The tenant is required to pay one year’s rent in
advance, which Thompson recorded as a credit to Rental Income. Thompson reports on
a calendar-year basis. The adjustment on December 31 of the first year should be
a. Rental Income ………………….. 12,000 Unearned Rental Income ………… 12,000
b. Rental Income ………………….. 24,000 Unearned Rental Income ………… 24,000
c. Unearned Rental Income ………….. 12,000 Rental Income ……………….. 12,000
d. Unearned Rental Income ………….. 24,000 Rental Income ……………….. 24,000
32) On January 1, 2014, Ashton Company purchased equipment at a cost of $570,000.
The equipment was estimated to have a useful life of five years and a salvage value of
$60,000. Ashton uses the sum-of-the-years’-digits method of depreciation. What should
the accumulated depreciation be at December 31, 2016?
a. $340,000
b. $408,000
c. $456,000
d. $510,000
33) The effective interest rate of a 10-year, 8 percent, $1,000 bond issued at 103 would
be approximately
a. 7.6 percent
b. 7.8 percent
c. 8.0 percent
d. 8.2 percent
34) On November 5, 2014, a Longhaul Rental truck was in an accident with an auto
driven by Alana Rodriguez. Longhaul Rental received notice on January 12, 2015, of a
lawsuit for $700,000 damages for personal injuries suffered by Rodriguez. Longhaul
Rental’s counsel believes it is probable that Rodriguez will be awarded an estimated
amount in the range between $300,000 and $550,000, and that $400,000 is a better
estimate of potential liability than any other amount. Longhaul’s accounting year ends
on December 31, and the 2014 financial statements were issued on March 2, 2015.
What amount of loss should Longhaul accrue at December 31, 2014?
a. $0
b. $300,000
c. $400,000
d. $550,000
35) The amount of the expected return on plan assets is computed by multiplying the
a. beginning market-related value of the plan assets by the expected long-term rate of
return on plan assets
b. ending market-related value of the plan assets by the expected long-term rate of
return
c. average carrying value of the plan assets by the expected long-term rate of return on
plan assets
d. beginning carrying value of the plan assets by the actuarys interest rate
36) Which of the following earnings management techniques is frequently associated
with start-up companies?
a. Recording immaterial adjustments that cause earnings to meet analysts’ expectations
b. Recording extremely high warranty expense when earnings are high
c. Recognizing revenue when a contract is signed and before goods are delivered or
services are provided
d. Expensing purchased in-process research and development
37) Which of the following is the least likely means a company might choose to meet
the needs of international investors?
a. Translation of financial statements or annual reports into the language of the user
b. Denomination of the financial statements in the currency of the country where the
financial statements will be used
c. Mutual recognition in which one country accepts the financial statements of another
country for regulatory purposes such as listing on stock exchanges or filing annual
reports
d. Partial or complete restatement of financial statements to the accounting principles of
the financial statement users’ country
38) The basic financial statements are listed below:
In which of the following sequences does the accountant ordinarily prepare the
statements?
a. 1, 4, 3, 2
b. 2, 1, 3, 4
c. 3, 2, 1, 4
d. 3, 2, 4, 1
39) Bannister Inc.’s fiscal year ended on November 30, 2013. The accounts had not
been adjusted for the fiscal year ending November 30, 2013. The balance in the prepaid
insurance account as of November 30, 2013, was $35,200 (before adjustment at Nov.
30, 2013) and consisted of the following policies:
The adjusting entry required on November 30, 2013, would be
a. Insurance Expense ………………. 24,000 Prepaid Insurance …………….. 24,000
b. Insurance Expense ………………. 9,600 Prepaid Insurance …………….. 9,600
c. Insurance Expense ………………. 11,200 Prepaid Insurance …………….. 11,200
d. Insurance Expense ………………. 16,400 Prepaid Insurance …………….. 16,400
40) Which of the following elements of financial statements is not a component of
comprehensive income?
a. Revenues
b. Expenses
c. Losses
d. Distributions to owners
41) Large, global enterprises typically have an equity interest in other entities
throughout the world. Some of the interests represent wholly-owned (100%-owned)
subsidiaries, while others represent lesser percentages of ownership. These large global
conglomerates provide information on the percentage ownership of their various
affiliated companies in the notes to the consolidated financial statements.
The following list of companies represents the ownership percentage of selected
companies by a large global company:
Required:
Explain how you would expect the global company holding the indicated interests to
account for each of the companies listed above, based on the percentage ownership
reported.
42) Two reasons often advanced for the adoption of LIFO inventory costing for
financial reporting are the improved matching of current costs with current revenue
during periods of rising prices and the reduction of income tax payments. Nonetheless,
the number of companies using LIFO has not increased over the last several years.
Some companies actually have switched from LIFO to FIFO over the last several years.
Identify reasons why a company would change from LIFO to FIFO for financial
reporting purposes.
43) The following pertains to the Excelsior Corp. for the year ended December 31,
2014.
Prepare a statement of cash flows in good form using the indirect method. Calculate the
cash flow to net income and cash flow adequacy ratios for the company.
44) The following pretax amounts pertain to the Spartan Corp. for the year ended
December 31, 201
The effective corporate tax rate is 30 percent. The company had 10,000 shares of
common stock outstanding for the entire year.
45) A recently issued FASB standard requires that an impairment loss be recognized if
the sum of the expected future net cash inflows (undiscounted and without interest
charges) is less than the carrying value of the asset. The amount of the impairment loss
recognized is the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
Provide examples of events or changes in circumstances that indicate that the
recoverability of the carrying amount of an asset may have been impaired.
Evaluate the recognition criterion proposed by the FASB, specifically addressing the
issue of using the undiscounted sum of the future net cash flows.
46) Baywatch Construction contracted to build a ship over a two year period. The
contract price was $21,000,000 with an estimate total cost of $18,400,000. The
following cost data relate to the construction period.
Prepare the necessary journal entries for 2014, 2015, and 2016 assuming Baywatch uses
the percentage-of-completion method.
