1) Cash inflows from investing result from
a. decreases in liabilities
b. increases in liabilities
c. decreases in noncash assets
d. increases in noncash assets
2) Which of the following is not a component of the DuPont Framework?
a. Return on sales
b. Asset turnover
c. Assets to debt
d. Assets to equity
3) Accounting standards help accountants meet the information demands of interested
parties by providing:
a. legislation introduction pertaining to financial reporting
b. limits and guidance for financial reporting
c. improved operating plans to the Board
d. reports to the Media
4) Donated equipment for which the fair value has been determined should be recorded
as a debit to the appropriate equipment account and a credit to
a. Other Income
b. Retained Earnings
c. Capital Stock
d. Revenue or Gain
5) The following transactions relate to the stockholders’ equity transactions of Wagner
Corporation for its initial year of existence.
(a) Feb. 7 Articles of incorporation are filed with the state. The state authorized the
issuance of 10,000 shares of $50 par value preferred stock and 200,000 shares of $10
par value common stock.
(b) Feb. 28 40,000 shares of common stock are issued for $14 per share.
(c) March. 3 80,000 shares of common stock are issued in exchange for land and
buildings that have an appraised value of $250,000 and $1,000,000, respectively. The
stock traded at $15 per share on that date on the over-the-counter market.
(d) March. 24 2,000 shares of common stock are issued to ODell and Reynolds,
Attorneys-at-Law, in payment for legal services rendered in connection with
incorporation. The company charged the amount to organization costs. The market
value of the stock was $16 per share.
(e) Oct. 12 Received subscriptions for 10,000 shares of preferred stock at $53 per share.
A 40 percent down payment accompanied the subscriptions. The balance is due on
November1.
(f) Nov. 1 Received the final payment for 10,000 shares of preferred stock.
Prepare journal entries to record the foregoing transactions. Identify the entries by letter
(a – f).
6) In May 2014, the Sailfish Company became involved in litigation. As a result of this
litigation, it is probable that Sailfish will have to pay $800,000. In July 2014, a
competitor commenced a suit against Sailfish alleging violation of antitrust laws
seeking damages of $1,100,000. Sailfish denies the allegations, and the likelihood of
Sailfish paying any damages is remote. In September 2014, Urchins County brought
action against Sailfish for $900,000 for polluting Lake Kissimmee. It is reasonably
possible that Urchins County will be successful, but the amount of damages Sailfish
will have to pay is not reasonably determinable. What amount, if any, should be accrued
by a charge to income in 2014?
a. $2,800,000
b. $1,700,000
c. $800,000
d. $0
7) For tax purposes, an entry should be made to Bad Debt Expense
a. when an account is determined to be uncollectible
b. in the period in which the sale that created the receivable was made
c. when an account determined to be uncollectible is collected
d. when an account with terms 2/10, n30 is still unpaid after thirty days
8) Which of the following would NOT be reported in the stockholders’ equity section of
the balance sheet?
a. Retained earnings appropriated for future plant expansion
b. Dividends declared on preferred stock
c. Paid-in capital in excess of par value
d. Deficit in retained earnings
9) Which of the following errors will be detected when a trial balance is properly
prepared?
a. An amount that was entered in the wrong account
b. A transaction that was entered twice
c. A transaction that had been omitted
d. None of these
10) At December 31, 2013, the Agricole Company had 600,000 shares of common
stock outstanding. On September 1, 2014, an additional 400,000 shares of common
stock were issued. In addition, Agricole had $20,000,000 of 8 percent convertible bonds
outstanding at December 31, 2013, which are convertible into 400,000 shares of
common stock. No bonds were converted into common stock in 2014. The net income
for the year ended December 31, 2014, was $7,000,000. Assuming the income tax rate
was 40 percent, what should be the diluted earnings per share for the year ended
December 31, 2014?
a. $5.00
b. $5.53
c. $7.02
d. $10.85
11) If an expense has been incurred but not yet recorded, then the end-of-period
adjusting entry would involve
a. a liability account and an asset account
b. a liability account and a revenue account
c. a liability and an expense account
d. a receivable account and a revenue account
12) Brooke Distributing leased a machine for a period of eight years, contracting to pay
$200,000 at the beginning of the lease term on December 31, 2014, and $200,000
annually on December 31 for each of the next seven years. The present value of the
eight rent payments over the lease term, appropriately discounted at 10 percent, is
$1,174,000. On its December 31, 2015, balance sheet, Brooke should report a liability
under capital lease of
a. $871,400
b. $876,600
c. $974,000
d. $1,091,400
13) An accounting change that requires the retrospective approach is a change in
a. the life of equipment from five to seven years
b. depreciation method from straight-line to double-declining-balance
c. he percentage used to determine the allowance for bad debts
d. the specific subsidiaries included in consolidated financial statements
14) For the current year, Southern Cross Company reported income tax expense of
$45,000. Income taxes payable at the end of the prior year were $20,000 and at the end
of the current year were $27,000. The deferred tax liability classified as noncurrent that
resulted from the use of MACRS for tax purposes and straight-line depreciation for
financial reporting purposes increased from $18,000 at the beginning of the current year
to $23,000 at the end of the current year. How much cash was paid for income taxes
during the year?
a. $33,000
b. $45,000
c. $38,000
d. $47,000
15) Which of the following is NOT a component of comprehensive income?
a. Asset revaluation reserve
b. Net income
c. Foreign currency translation adjustment
d. Minimum pension liability adjustment
16) When an investor uses the equity method to account for investments in common
stock, the investment account will be increased when the investor recognizes
a. a proportionate share of the net income of the investee
b. a cash dividend received from the investee
c. periodic amortization of an intangible arising from contractual rights acquired in the
purchase
d. depreciation related to the excess of market value over book value of the investee’s
depreciable assets at the date of purchase by the investor
17) How would the declaration of a liquidating dividend by a corporation affect each of
the following?
Contributed Total Stock-
Capital holders’ Equity
a. No effect Decrease
b. Decrease No effect
c. No effect No effect
d. Decrease Decrease
18) Using the information above, what is the employer’s payroll tax expense for the
week, assuming that Gabe Hopen is the only employee?
a. $24.00
b. $40.35
c. $28.00
d. $17.40
19) On January 1, 2014, Gustavo Hospital issued a $250,000, 10 percent, 5-year bond
for $231,601. Interest is payable on June 30 and December 31. Gustavo uses the
effective-interest method to amortize all premiums and discounts. Assuming an
effective interest rate of 12 percent, how much interest expense should be recorded on
June 30, 2014?
a. $11,935.14
b. $12,500.00
c. $13,896.06
d. $14,729.82
20) The responsibility of the Emerging Issues Task Force (EITF) is to
a. issue statements which reflect a consensus of the EITF on how to account for new
financial reporting issues where guidance is needed quickly
b. do research on financial reporting issues that are being addressed by the
c. respond to groups lobbying the FASB on issues that affect a particular industry
d. develop concept statements the
21) Antoine Company began business in February 2013. During the year, Antoine
purchased the three trading securities listed below. On its December 31, 2013, balance
sheet, Antoine appropriately reported a $4,000 debit balance in its Market
Adjustment–Trading Securities account. There was no change in 2014 in the
composition of Antoine’s portfolio of marketable equity securities held as a temporary
investment. Pertinent data are as follows:
What amount should Antoine credit to the Market Adjustment–Trading Securities
account at December 31, 2014?
a. $0
b. $3,000
c. $7,000
d. $11,000
22) Melville Company reported sales of $700,000, bad debt expense of $60,000, and an
increase in net accounts receivable of $150,000 during the current year. What is the
amount of cash collected from customers for the current year if the company did not
record any write-offs during the current year?
a. $550,000
b. $590,000
c. $610,000
d. $640,000
23) Goods on consignment should be included in the inventory of
a. the consignor but not the consignee
b. the consignee but not the consignor
c. both the consignor and the consignee
d. neither the consignor nor the consignee
24) On February 1, 2015, Gaslight Corp. issued 12 percent, $2,000,000 face value,
ten-year bonds for $2,234,000 plus accrued interest. The bonds are dated November 1,
2014, and interest is payable on May 1 and November 1. Gaslight reacquired all of
these bonds at 102 on May 1, 2018, and retired them. Unamortized bond premium on
that date was $156,000. Ignoring the income tax effect, what was Gaslight’s gain on the
bond retirement?
a. $116,000
b. $194,000
c. $234,000
d. $236,000
25) Which of the following is a deduction from net income in reconciling net income to
cash flow from operating activities?
a. Amortization of bond premium
b. Cash dividend declared and paid
c. Collection of an account receivable
d. Write-off of an uncollectible account receivable
26) Under which of the following circumstances is the installment sales method
appropriate for the recognition of revenue in the income statement?
a. For any sales where collection is spread over a reasonable long period of time
b. In any situation where management wishes to delay the recognition of revenue in
order to smooth its income
c. For sales where collection is spread over a reasonable long period of time and
significant doubt exists about the ultimate collection of the receivables
d. For sales where collection is spread over a reasonable long period of time and no
significant doubt exists concerning ultimate collection of the receivables
27) Santos Company allows a liberal return privilege on its normal sales. Products
purchased by customers may be returned within 90 days of purchase if in resalable
condition, for a full refund. The following information relates to 2014:
Average gross profit percentage 25%
Total sales (including actual returns) $100,000
Actual returns $ 15,000
Historical ratio of actual returns to sales 20%
Sales whose return privilege has expired at
the end of 2014 (does not include actual
returns) $ 40,000
Assuming that all criteria of SFAS No. 48, Revenue Recognition When Right of Return
Exists, are not met, what is the gross margin to be reported by the company in 2014?
a. $4,000
b. $10,000
c. $40,000
d. $2,000
28) Which of the following characteristics may result in the classification of a liability
as current?
a. Short-term obligations expected to be refinanced with long-term debt
b. Debts to be liquidated from funds that have been accumulated and are reported as
noncurrent assets
c. Violation of provisions of a debt agreement
d. Obligations for advance collections that involve long-term deferment of the delivery
of goods or services
29) How should a contingent liability be reported in the financial statements when it is
“reasonably possible” the company will have to pay the liability at a future date?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable with an additional disclosure explaining the nature of the
transaction
30) Which of the following is true regarding the weighted-average cost of capital?
a. The book value of the components of capital should always be used to calculate the
weighted-average cost of capital
b. A company may have two weighted-average costs of capital if the firm’s capital
structure is so large that new common stock must be sold
c. The cost of common equity is lower than the cost of retained earnings
d. The cost of preferred stock is adjusted for the tax deduction associated with preferred
dividends
31) Failure to record the expired amount of prepaid rent expense would not
a. understate expense
b. overstate net income
c. overstate owners’ equity
d. understate liabilities
32) The most likely situation in which reported earnings are positive but operations are
consuming rather than generating cash would be a
a. rapidly growing company
b. company reporting large noncash expenses
c. company using very conservative accounting standards that lower earnings
d. company paying large cash dividends to its shareholders
33) On January 1, 2014, Reds Corporation adopted a defined benefit pension plan. The
plan’s service cost of $140,000 was fully funded at the end of 2014. Prior service cost
was funded by a contribution of $50,000 in 2014. Amortization of prior service cost
was $14,000 for 2014. What is the amount of Reds prepaid pension cost at December
31, 2014?
a. $36,000
b. $60,000
c. $84,000
d. $90,000
34) Conan Corporation had the following transactions in its first year of operations:
What is the cash balance at December 31 of the first year?
a. $170,000
b. $200,000
c. $240,000
d. $290,000
35) The information listed below was obtained from the accounting records of Williams
Company as of December 31, 2013, the end of the companys fiscal year.
(a) On August 1, 2013, the company borrowed $120,000 from the Bank of Wistful
Vista. The loan was for 12 months at 9 percent interest payable at the maturity date.
(b) Finished goods inventory on January 1, 2013, was $200,000, and on December 31,
2013, it was $260,000. Cost of goods sold was $2,400,000. The company uses a
perpetual inventory system.
(c) The company owned some property (land) that was rented to J. McArthur on April
1, 2013, for 12 months for $8,400. On April 1, the entire annual rental of $8,400 was
credited to rent collected in advance, and cash was debited.
(d) .On September 1, 2013, the company loaned $60,000 to an outside party. The loan
was at 10 percent per annum and was due in six months; interest is payable at maturity.
Cash was credited for $60,000, and notes receivable was debited on September 1 for the
entire amount.
(e) Accrued salaries and wages are $18,000 at December 31, 2013.
(f) On January 1, 2013, factory supplies on hand equaled $200. During 2013, factory
supplies costing $4,000 were purchased and debited to factory supplies inventory. At
the end of 2013, a physical inventory count showed that factory supplies on hand
equaled $800..
Prepare journal entries to adjust the books of Williams Company at December 31, 2013.
36) You are auditing a company whose management has intentionally made adjustments
to various financial statement items that are not in accordance with generally accepted
accounting principles. This behavior has occurred over a number of accounting periods.
None of the individual adjustments by itself is material and the aggregate effect on the
financial statements taken as a whole is immaterial. Top management of the client are
aware of these misstatements and consider them part of their strategic management of
earnings.
Explain how you as the independent auditor should respond to this situation.
37) Financial information for Pinnacle Enterprises at the end of 2014 is as follows:
Relevant exchange rates are as follows:
In addition, the computed retained earnings balance from the prior year’s translated
financial statements is $2,405,000 at the end of 2014.
Prepare a translated trial balance for Pinnacle Enterprises.
38) On July 1, 2014, Biplane Aviation leased two company jets from SeeBee Aircraft
for an initial period of 12 months with a provision for a continuation on a
month-to-month basis. The lease is properly classified as an operating lease. Lease
payments are to be made as follows:
After the first year, the rent continues at $6,000 per month. Provide the entries required
to record the lease payments for the first year on the books of
39) The following information is available for the Central Company:
Determine the amount of cash flow associated with each of the following items:
40) Which of the following services offered by investment firms have some states
declared to be incompatible with generating forecasts of company earnings?