1) The following independent events occurred after the balance sheet date of December
31, 2014, but before the issuance of the balance sheet on March 1, 2015, of Polo
Grounds Company:
a. A loss on an account receivable was recorded on the balance sheet at December 31,
2014, as a result of the customers bankruptcy during January 2015.
b. A lawsuit was settled on January 15, 2015, that arose from events occurring before
December 31, 2014.
c. A customer lost two-thirds of its productive capacity as a result of a major hurricane
during October 2014 and files for bankruptcy on February 1, 2015. The customer owed
Polo Grounds for a sale on account that occurred during October 2014.
d. Polo Grounds completed a sale of additional common stock on February 15, 2015.
e. A customer owing Polo Grounds for a sale recorded as a receivable on December 31,
2014, lost two-thirds of its productive capacity as a result of a major fire on February 1,
2015.
Required:
2) In March of 2013, Mars Corp. bought 45,000 shares of Elite Corp.’s listed stock for
$450,000 and classified the shares as available-for-sale securities. The market value of
these shares had declined to $300,000 by December 31, 2013. Mars changed the
classification of these shares to trading securities in June of 2014 when the market
value of this investment in Elite’s stock had risen to $345,000. How much should Mars
include as a loss on transfer of securities in its determination of net income for 2014?
a. $0
b. $45,000
c. $105,000
d. $150,000
3) The assumed continuation of a business entity in the absence of evidence to the
contrary is an example of the accounting concept of
a. accrual
b. consistency
c. comparability
d. going concern
4) Bridge Corporation had two issues of securities outstanding– common stock and a 5
percent convertible bond issue in the face amount of $10,000,000. Interest payment
dates of the bond issue are June 30 and December 31. The conversion clause in the
bond indenture entitles the bondholders to receive 40 shares of $20 par value common
stock in exchange for each $1,000 bond. On June 30, 2014, the holders of $1,800,000
face value bonds exercised the conversion privilege. The market price of the bonds on
that date was $1,100 per bond and the market price of the common stock was $35. The
total unamortized bond discount at the date of conversion was $500,000. What amount
should Bridge credit to the account “Paid-In Capital in Excess of Par” as a result of this
conversion assuming Bridge does not want to recognize any gain (or loss) on the
conversion?
a. $0
b. $270,000
c. $360,000
d. $920,000
5) Consolidated financial statements are typically prepared when one company has
a. accounted for its investment in another company by the equity method
b. significant influence over the operating and financial policies of another company
c. the controlling financial interest in another company
d. a substantial equity interest in the net assets of another company
6) Equal monthly rental payments for a particular lease should be charged to Rental
Expense by the lessee for which of the following?
Capital Lease Operating Lease
a. Yes No
b. Yes Yes
c. No No
d. No Yes
7) If the lessee and the lessor use different interest rates to account for a capital lease,
then
a. the lease will never be accounted for as a capital lease by the lessee
b. total expenses (or revenues) will be equal for both lessee and lessor
c. total expenses (or revenues) will be different for the lessee and the lessor
d. GAAP has been violated since the lessor and the lessee are not allowed to use
different interest rates in accounting for capital leases
8) Richards Company, a calendar-year company, sells magazine subscriptions to
subscribers. The magazine is published semiannually and is shipped to subscribers on
April 15 and October 15. Only one-year subscriptions for two issues are accepted.
Subscriptions received after the March 31 and September 30 cutoff dates are held for
the following publication. Cash is received evenly during the year and is credited to
deferred subscription revenue. During 2013, $3,600,000 of cash was received from
customers. The beginning balance for 2013 of the deferred subscription revenue
account was $750,000. What is Richards December 31, 2013, deferred subscription
revenue balance?
a. $2,700,000
b. $1,800,000
c. $1,650,000
d. $900,000
9) On January 3, 2014, Continental Services, Inc., signed an agreement authorizing
Peen Company to operate as a franchisee over a 20-year period for an initial franchise
fee of $200,000 received when the agreement was signed. Peen commenced operations
on July 1, 2014, at which date all of the initial services required of Continental had been
performed. The agreement also provides that Peen must pay a continuing franchise fee
equal to 6% of the revenue from the franchise annually to Continental. Peen’s franchise
revenue for 2014 was $900,000. For the year ended December 31, 2014, how much
should Continental record as revenue from franchise fees from the Peen franchise?
a. $100,000
b. $106,000
c. $254,000
d. $266,000
10) Adam Corporation owns 1,000 shares of common stock of Rosen, Inc., a large
publicly traded company listed on a major stock exchange. If Rosen issues a 20 percent
stock dividend when the par value is $10 per share and the market value is $70 per
share, how much and what type of income should Adam report?
a. $0
b. $2,000 ordinary income
c. $14,000 ordinary income
d. $2,000 ordinary income and $12,000 extraordinary income
11) Generally accepted accounting principles require that certain lease agreements be
accounted for as purchases. The theoretical basis for this treatment is that a lease of this
type
a. effectively conveys all of the benefits and risks incident to the ownership of property
b. is an example of form over substance
c. provides the use of the leased asset to the lessee for a limited period of time
d. must be recorded in accordance with the concept of cause and effect
12) A contingent liability should be recorded when
a. any lawsuit is actually filed against a company
b. it is certain that funds are available to pay the amount of the claim
c. it is probable that a liability has been incurred even though the amount of the loss
cannot be reasonably estimated
d. the amount of the loss can be reasonably estimated and it is probable prior to
issuance of financial statements that a liability has been incurred
13) The Granger Corporation had 200,000 shares of common stock and 10,000 shares
of cumulative, $6 preferred stock outstanding during 2014. The preferred stock is
convertible at the rate of three shares of common per share of preferred. For 2014, the
company had a $60,000 net loss from operations and declared no dividends. Granger
should report 2014 diluted loss per share of (rounded to the nearest cent)
a. $(0.30)
b. $(0.52)
c. $(0.58)
d. $(0.60)
14) Bingo, Inc., enters into a call option contract with Racer Investment Co. on January
2, 2014. This contract gives Bingo the option to purchase 1,000 shares of Saloon stock
at $100 per share. The option expires on April 30, 2014. Saloon shares are trading at
$100 per share on January 2, 2014, at which time Bingo pays $100 for the call option.
Assume that the price per share of Saloon stock is $115 on April 30, 2014, and that the
time value of the option has not changed. In order to settle the option contract, Bingo,
Inc., would most likely
a. pay Racer Investment $15,000
b. purchase the shares of Saloon at $100 per share and sell the shares at $115 per share
to Racer
c. receive $15,000 from Racer Investment
d. receive $400 from Racer Investment
15) Which of the following principles best describes the rationale for matching
administrative and selling expenses with revenues of the current period?
a. Direct matching
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
16) A major difference between the Financial Accounting Standards Board (FASB) and
its predecessor, the Accounting Principles Board (APB), is
a. all members of the FASB serve full time, are paid a salary, and are independent of
any public or private enterprises
b. over 50 percent of the members of the FASB are required to be Certified Public
Accountants
c. the FASB issues exposure drafts of proposed standards
d. all members of the FASB possess experience in both public and corporate accounting
17) Under generally accepted accounting principles, the lower-of-cost-or-market
procedure for assigning a value to inventory can be assigned to
a. total inventory
b. groups of similar inventory items
c. individual inventory items
d. all of these
18) In considering interim financial reporting, how does FASB ASC Topic 270
conclude that such reporting should be viewed?
a. As reporting for a basic accounting period
b. As reporting for an integral part of an annual period
c. As a ‘special” type of reporting that need not follow generally accepted accounting
principles
d. As useful only if activity is evenly spread throughout the year so that estimates are
unnecessary
19) The following information relates to the defined benefit pension plan of the Steamer
Company for the year ending December 31, 2014:
The net periodic pension cost reported in the income statement for 2014 would be
a. $11,500
b. $24,000
c. $36,500
d. $59,000
20) Which inventory costing method would NOT be appropriate for a manufacturer
using a perpetual inventory system?
a. First-in, first-out
b. Last-in, first-out
c. Average cost
d. Dollar-value LIFO
21) Danbury Corporation was involved in a lawsuit with the EPA alleging inadequate
air pollution control facilities at its Lafayette plant site during 2011. At December 31,
2014, it appeared probable that the EPA would settle for approximately $150,000. This
event should be recognized in 2014 as a(n)
a. extraordinary loss
b. disclosure of a contingency loss only in a note
c. should not be disclosed or recognized
d. loss on the lawsuit (operating expense)
22) Azul Incorporated has 3,500,000 shares of common stock outstanding on December
31, 2013. An additional 400,000 shares of common stock were issued April 1, 2014, and
150,000 more on July 1, 2014. On October 1, 2014, Azul issued 5,000, $1,000 face
value, 7 percent convertible bonds. Each bond is convertible into 40 shares of common
stock. No bonds were converted into common stock in 2014. What is the number of
shares to be used in computing basic earnings per share and diluted earnings per share,
respectively?
a. 3,725,000 and 3,750,000
b. 3,725,000 and 3,900,000
c. 3,875,000 and 3,925,000
d. 3,875,000 and 4,125,000
23) Zeus and Company’s income statement for the year ended December 31, 2014,
included the following items:
The office space is used equally by Zeus sales and accounting departments. What
amount of the above-listed items should be classified as general and administrative
expenses in Zeus multiple-step income statement?
a. $1,500,000
b. $975,000
c. $870,000
d. $1,230,000
24) In preparing a statement of cash flows, sale of treasury stock at an amount greater
than cost would be classified as a(n)
a. transfer activity
b. operating activity
c. investing activity
d. financing activity
25) Which of the following generally is considered a limitation of the balance sheet?
a. The balance sheet reflects the current value of a business
b. The balance sheet reflects the instability of the dollar
c. Balance sheet formats and classifications do not vary to reflect industry differences
d. Due to measurement problems, some enterprise resources and obligations are not
reported on the balance sheet
26) The following is a qualitative characteristic of accounting information:
a. timeliness
b. feedback value
c. neutrality
d. decision usefulness
27) Changes in fair value of securities are reported in the income statement for which
type of securities?
a. Marketable equity securities
b. Available-for-sale securities
c. Held-to-maturity securities
d. Trading securities
28) In relation to a set of 2015 basic financial statements, a subsequent event is one that
a. occurs before the 2015 financial statements are issued
b. involves uncertainty as to possible gain or loss that will ultimately be resolved in
2016 or later
c. occurs after the 2015 financial statements are issued
d. requires an appropriate adjusting entry to be made as of the end of 2015
29) The following totals are taken from the December 31, 2014, balance sheet of
Roanoke Company:
Additional information:
(a) A building costing $100,000 was purchased by taking out a $100,000 mortgage.
Since the building serves as collateral on the mortgage loan, both have been excluded
from the financial statements.
(b) Cash in the amount of $45,000 is in a restricted fund for the purchase of equipment.
This cash has been included in Current Assets.
(c) Long-term liabilities include a bank loan of $80,000. Of this loan, $15,000 must be
repaid within the coming year.
(d) Investment securities totaling $27,000 are included in Current Assets. These
securities represent stock purchases made as a long-term equity investment in a major
supplier.
After making any necessary changes, what are the totals for Roanoke’s long-term assets
and long-term liabilities?
30) Neils Company leased an asset for use in its factory. The lease agreement specifies
that Neils is to make annual payments of $2,818 payable at the end of each year. The
lessor classified the lease as a direct-financing lease since Neils was allowed to lease
the asset at its cost of $14,000 (the present value of the lease payments). The lessor
receives a 12 percent rate of return on the lease. The estimated residual value at the end
of the lease term is zero.
If the lease was classified as a capital lease by Neils, how much annual depreciation
would Neils record using the straight-line method?
a. $1,400
b. $1,310
c. $1,750
d. $2,818
31) Failure to record depreciation expense at the end of an accounting period results in
a. understated income
b. understated assets
c. overstated expenses
d. overstated assets
32) On-Call Service Corporation bought a building lot to construct a new corporate
office building. An older home on the building lot was razed immediately so that the
office building could be constructed. The cost of purchasing the older home should be
a. recorded as part of the cost of the land
b. written off as a loss in the year of purchase
c. written off as an extraordinary item in the year of purchase
d. recorded as part of the cost of the new building
33) Kona Medical Center uses the cost recovery method of accounting for recognizing
revenue. The following information is available:
Determine the amount of gross profit to be recognized for 2014, 2015, and 2016.
34) Analysis of the assets and liabilities of Baxter Corp. on December 31, 2014,
disclosed assets with a tax basis of $1,000,000 and a book basis of $1,300,000. There
was no difference in the liability basis. The difference in asset basis arose from
temporary differences that would reverse in the following years:
The enacted tax rates are 30 percent for the years 2014-2017 and 35 percent for
2018-2019. The total deferred tax liability on December 31, 2014, should be
a. $105,000
b. $93,900
c. $90,000
d. $69,000
35) The annual report of McGregor Manufacturing showed the following in the 2014
balance sheet:
Footnote information:
The fair value of the notes receivable was estimated by discounting the future cash
flows using current rates available to similar borrowers under similar circumstances.
All notes receivable bear interest at 5% to 12% and require future principal payments of
approximately $547,000 in 2015, $3,742,000 in 2016, $1,015,000 in 2017, $683,000 in
2018, $661,000 in 2019, and $25,353,000 thereafter. The current portion of these
long-term notes is included in other receivables in the consolidated balance sheets.
Required:
36) The term due process is used in various settings to describe the steps taken to ensure
that an administrative matter receives the consideration required to adequately protect
the interests of those involved. Due process is an integral part of the legal and
legislative processes, for example.
The Financial Accounting Standards Board (FASB) also uses a set of due process
procedures to ensure that the interests of its constituents are considered in the
development of accounting standards.
Required:
Identify the steps in the set of due process procedures used by the FASB.
37) The Rand Company wants to raise additional equity capital. The company decides
to issue 5,000 shares of $25 par preferred stock with detachable warrants. The package
of the stock and warrants sells for $10 Each warrant enables the holder to purchase two
shares of $10 par common stock at $30 per share. Immediately following the issuance
of the stock, the stock warrants are selling at $14 each. The market value of the
preferred stock without the warrants is $96.
38) The forecast of income for future periods begins with a forecast of sales. An
accurate projection of sales is essential to the determination of the amount of assets
needed to do business and the level of financing required.
What factors should be considered in preparing the forecast of sales?
39) In an effort to increase sales, Moore Company began a sales promotion campaign
on June 30, 2014. Part of this promotion included placing a special coupon in each
package of candy bars sold. Customers were able to redeem ten coupons for a baseball.
Each premium costs Moore $50. Moore estimated that 70 percent of the coupons issued
will be redeemed. For the six months ended December 31, 2014, the following
information is available:
What is the estimated liability for premium claims outstanding at December 31, 2014?